1984 (11) TMI 85 - AT - Income Tax

Summary

Issues Involved:
1. Imposition of penalty for concealment of income.
2. Applicability of Explanation to Section 271(1)(c) of the Income Tax Act, 1961.
3. Retrospective application of the Explanation to Section 271(1)(c).
4. Validity of evidence and explanations provided by the assessee.

Detailed Analysis:

1. Imposition of Penalty for Concealment of Income:
The case revolves around the imposition of a penalty under Section 271(1)(c) of the Income Tax Act, 1961, for concealment of income. The assessee, a partner in a Bombay firm, retired on 18th June 1958, and filed a return for the assessment year 1959-60, disclosing only the share income from the firm up to the retirement date. The assessment was completed on 27th March 1961. In 1963, during a raid on the Bombay firm, a balance sheet was found showing the assessee's capital in a Hong Kong business at 3,57,000 HK Dollars. The Income Tax Officer (ITO) reopened the proceedings for the year by a notice dated 31st December 1968. The assessee filed a return showing income from the Bombay firm but did not disclose the Hong Kong business. The ITO disbelieved the assessee's explanation and treated the entire credit in the capital account as income from undisclosed sources. The Tribunal confirmed this addition.

2. Applicability of Explanation to Section 271(1)(c) of the Income Tax Act, 1961:
The Departmental Representative argued that the explanation to Section 271(1)(c) is a rule of evidence and should be applicable in the assessee's case. The Tribunal considered the explanation in detail and concluded that the assessee's explanation was not satisfactory. The Tribunal noted, "The explanation of the assessee is not only unsatisfactory but is unbelievable." The positive evidence in the shape of the balance sheet disclosing the capital amount of 3,57,000 HK Dollars was owned up by the assessee. The Tribunal held that the difference between the returned income and the assessed income was significant enough to place the burden of proof on the assessee to show there was no concealment.

3. Retrospective Application of the Explanation to Section 271(1)(c):
The Accountant Member disagreed with the retrospective application of the Explanation to Section 271(1)(c). He noted, "The ITO was incompetent to invoke the Explanation to Section 271(1)(c) when the said Explanation was not on the Statute Book at the time when the default was committed by the assessee with the filing of his return for the assessment year 1959-60 on 26th February 1960." He argued that the law applicable at the time of filing the original return should be applied, which was Section 28(1)(c) of the 1922 Act. The Accountant Member emphasized that penalty could not be imposed merely because the assessee's explanation was not found to be satisfactory.

4. Validity of Evidence and Explanations Provided by the Assessee:
The assessee argued that the balance sheet as of 31st March 1959 was prepared only for obtaining bank facilities and that the amount shown did not represent his capital but was the expected price of goods purchased. The Tribunal noted discrepancies in the evidence, such as the late production of the balance sheet as of 30th April 1959 and the reversed order of loan amounts in the statements. The Tribunal found the assessee's explanation regarding the capital account to be "not very satisfactory." However, the Accountant Member pointed out that the Tribunal's order did not conclusively establish that the explanation was false, only that it was not satisfactory.

Conclusion:
The Third Member, Vice-President, agreed with the Accountant Member, emphasizing that there was no concealment of income by the assessee. He stated, "There is no circumstantial situation which holds up the assessee's conduct as contumacious." The penalty could not be levied merely because the assessee's explanation was not found satisfactory. The Third Member also noted that the Explanation to Section 271(1)(c) could not be applied retrospectively. Consequently, the CIT(A)'s order canceling the penalty was upheld, and the appeal was dismissed.

Final Order:
Based on the majority decision, it was held that the CIT(A) was justified in canceling the penalty imposed by the ITO under Section 271(1)(c) of the Act. The appeal was dismissed.