1987 (11) TMI 98 - AT - Income Tax

Issues Involved:

1. Penalty under section 271(1)(c) of the Income-tax Act, 1961
2. Bona fide mistakes in totalling of accounts
3. Procedure under section 263 of the Income-tax Act, 1961
4. Voluntary disclosure vs. detection by the department
5. Legal effect of setting aside assessments under section 263

Issue-wise Detailed Analysis:

1. Penalty under section 271(1)(c) of the Income-tax Act, 1961:

The primary issue in this case is whether the penalty under section 271(1)(c) of the Income-tax Act, 1961, for concealment of income or furnishing inaccurate particulars, is leviable on the assessee. The Income Tax Officer (ITO) imposed penalties for the assessment years 1979-80 and 1980-81, which were confirmed by the Commissioner of Income-tax (Appeals). The Tribunal had differing opinions on this matter.

2. Bona fide mistakes in totalling of accounts:

The assessee claimed that the discrepancies in the accounts were due to bona fide mistakes in totalling. The mistakes included an understatement of closing stock and errors in totalling expenses. The assessee argued that these mistakes were inadvertent and not deliberate attempts to conceal income. The Tribunal examined whether these errors were genuine mistakes or manipulations intended to defraud the revenue.

3. Procedure under section 263 of the Income-tax Act, 1961:

The Commissioner of Income-tax (CIT) invoked section 263 to set aside the original assessments and directed the ITO to recompute the income. The Tribunal considered the legal implications of this action. The Judicial Member argued that once the assessments were set aside under section 263, the ITO had to consider the assessee's letter dated 11-7-1981, which disclosed the mistakes voluntarily. Therefore, no penalty could be imposed.

4. Voluntary disclosure vs. detection by the department:

A crucial point of contention was whether the assessee's disclosure of mistakes was voluntary or prompted by the department's detection. The assessee claimed to have discovered and disclosed the mistakes independently while preparing the return for the assessment year 1981-82. The department argued that the disclosure was not voluntary but motivated by the ITO's letter dated 4-7-1981. The Tribunal examined the timing and nature of the disclosure to determine its voluntariness.

5. Legal effect of setting aside assessments under section 263:

The Tribunal considered the legal effect of the CIT's action under section 263. The Judicial Member argued that once the assessments were set aside, there was no existing assessment to impose a penalty on. The reassessment had to consider the assessee's voluntary disclosure, making the penalty under section 271(1)(c) inapplicable. The Accountant Member, however, believed that the penalty could still be imposed as the disclosure was not genuinely voluntary.

Separate Judgments Delivered:

Judicial Member's Judgment:

The Judicial Member held that the mistakes were bona fide, and the assessee voluntarily disclosed them before any action was taken by the ITO. He emphasized that the reassessment should consider the assessee's letter dated 11-7-1981, making the penalty under section 271(1)(c) inapplicable. He concluded that the penalty should be canceled.

Accountant Member's Judgment:

The Accountant Member disagreed, arguing that the mistakes were not bona fide and were part of a deliberate attempt to manipulate accounts. He believed the assessee's disclosure was prompted by the department's detection, not voluntary. He upheld the penalty imposed by the ITO and confirmed by the CIT (Appeals).

Third Member's Judgment:

The Third Member agreed with the Judicial Member, concluding that the mistakes were bona fide and corrected voluntarily by the assessee. He emphasized that the reassessment process should consider the voluntary disclosure, making the penalty under section 271(1)(c) inapplicable. The Third Member's decision resulted in the cancellation of the penalty.

Final Order:

The Tribunal, based on the majority decision, concluded that the penalty under section 271(1)(c) was not leviable on the assessee. The appeals were allowed, and the penalties imposed by the income-tax authorities were canceled.

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