1990 (4) TMI 97 - AT - Income Tax

Summary

Issues Involved:
1. Confirmation of penalty levied under section 271(1)(c) of the Income-tax Act, 1961.
2. Assessment of income from undisclosed sources.
3. Validity of the explanation provided by the assessee.
4. Application of legal principles such as de minimis non curat lex.
5. Relevance of the assessee's agreement to the addition of income.
6. Interpretation of judicial precedents and statutory provisions.

Issue-wise Detailed Analysis:

1. Confirmation of Penalty Levied under Section 271(1)(c) of the Income-tax Act, 1961:
The primary issue contested was the confirmation of a penalty of Rs. 3,498 levied under section 271(1)(c) for the assessment year 1980-81. The assessee, a registered firm, filed a return declaring an income of Rs. 97,300, which was assessed at Rs. 1,10,310. The assessment included an addition of Rs. 5,000 in the cloth account on an ad hoc basis and Rs. 4,861 as income from undisclosed sources. The penalty was levied on the latter addition.

2. Assessment of Income from Undisclosed Sources:
The assessment order indicated that the assessee maintained a 'miscellaneous account' for recording credits and debits from various customers. The assessing officer found that certain entries did not contain the names of the customers, making it impossible to verify their genuineness. Consequently, the peak of both credits and debits, amounting to Rs. 4,861, was included in the total income as income from undisclosed sources. The assessee agreed to this addition, resulting in the issuance of a penalty notice under section 271(1)(c).

3. Validity of the Explanation Provided by the Assessee:
The assessee explained that the entries without names related to customers whose names were written on slips but not copied into the ledger. The explanation was not accepted by the assessing officer, who treated the entries as the assessee's own transactions. The Judicial Member believed that the assessee's version should have been accepted, given the consistency of maintaining similar accounts in previous years. The Accountant Member, however, emphasized that the assessee's agreement to the addition negated any defense against the concealment charge.

4. Application of Legal Principles such as De Minimis Non Curat Lex:
The Accountant Member invoked the principle of de minimis non curat lex, noting that a small amount like Rs. 4,861 should not imply concealment given the assessee's total turnover of Rs. 12,91,096. However, the Commissioner (A) invoked Explanation 1 to section 271(1)(c), arguing that the explanation provided by the assessee was neither substantiated nor bona fide.

5. Relevance of the Assessee's Agreement to the Addition of Income:
The Judicial Member argued that the assessee's agreement to the addition was an act of self-restraint to avoid litigation, not an admission of concealment. The Accountant Member, citing Durga Timber Works v. CIT, held that the assessee's agreement to the addition as income from undisclosed sources justified the penalty. The Third Member, agreeing with the Judicial Member, emphasized that the agreement did not necessarily imply an admission of concealment, especially given the small amount and the practice of maintaining a miscellaneous account.

6. Interpretation of Judicial Precedents and Statutory Provisions:
The Third Member referenced several judicial precedents, including CIT v. Bhimji Khanjee & Co. and Sir Shadilal Sugar & General Mills Ltd. v. CIT, to support the view that an agreement to an addition does not automatically indicate concealment. The Supreme Court's ruling in Sir Shadilal Sugar emphasized that agreeing to additions does not absolve the Revenue from proving the mens rea of a quasi-criminal offense. The Kerala High Court in CIT v. M. George & Bros. also held that penalty imposition solely based on the assessee's surrender is not well-founded.

Conclusion:
The Third Member concluded that the penalty was not justified, as the assessee's agreement to the addition was to avoid litigation and not an admission of concealed income. The matter was referred back to the regular Bench for a decision according to the majority opinion, ultimately cancelling the penalty and allowing the appeal in favor of the assessee.