1999 (8) TMI 107 - AT - Income Tax

Summary

Issues Involved:
1. Legitimacy of penalty under section 271(1)(c) for concealment of income.
2. Validity of transactions with sister concerns.
3. Applicability of McDowell & Co. Ltd. case.
4. Invocation of Explanation 1 to section 271(1)(c).
5. Alleged double taxation.

Detailed Analysis:

1. Legitimacy of Penalty under Section 271(1)(c) for Concealment of Income:
The appeal was against the confirmation of a penalty of Rs. 2,12,332 levied under section 271(1)(c) for assessment year 1982-83. The Assessing Officer (AO) observed that the assessee-firm had diverted profits through sham transactions with sister concerns. The AO noted that the sales to sister concerns were at prices lower than the market rate, and the goods were delivered directly to third parties, indicating paper transactions. The penalty was confirmed by CIT(A) on the grounds that the assessee systematically concealed income.

2. Validity of Transactions with Sister Concerns:
The AO found that the transactions with sister concerns were sham, with no actual business activity conducted by these concerns. The Tribunal upheld the addition of Rs. 1,61,018 for diversion of profits, noting that the transactions were illusory and merely paper transactions. The Tribunal emphasized that the assessee adopted a device to effect sales at lower prices to sister concerns, which in turn sold the goods at higher prices on the same day. The Tribunal concluded that the transactions were part of a scheme to avoid taxes.

3. Applicability of McDowell & Co. Ltd. Case:
The assessee argued that the case should be governed by CIT v. A. Raman & Co., which allowed tax avoidance through legitimate means. However, the Tribunal held that McDowell & Co. Ltd. v. CTO, which disapproved of tax avoidance through colorable devices, was applicable. The Tribunal noted that McDowell's case emphasized that it is the duty of the court to expose devices intended to avoid tax and refuse judicial approval to such schemes.

4. Invocation of Explanation 1 to Section 271(1)(c):
The Tribunal addressed the contention that Explanation 1 to section 271(1)(c) was invoked by CIT(A) but not by the AO. The Tribunal clarified that Explanation 1, which shifts the burden of proof to the assessee, applies automatically in penalty proceedings for concealment of income. The Tribunal cited various High Court decisions supporting the view that Explanation 1 can be invoked at any stage of the penalty proceedings. The Tribunal concluded that the assessee failed to rebut the presumption of concealment, making the penalty under section 271(1)(c) applicable.

5. Alleged Double Taxation:
The assessee argued that the profits were taxed in the hands of sister concerns, leading to double taxation. The Tribunal rejected this argument, stating that the Revenue is not precluded from taxing the right person even if the income has been assessed in the hands of another. The Tribunal referred to Supreme Court decisions affirming that the AO must tax the right person, irrespective of whether the income has been taxed elsewhere.

Conclusion:
The Tribunal upheld the penalty under section 271(1)(c) for concealment of income, applying both the main provisions and Explanation 1. However, it reduced the penalty to the minimum leviable amount of Rs. 1,06,166. The appeal was partly allowed, confirming the legitimacy of the penalty while addressing the procedural and substantive issues raised by the assessee.