1994 (1) TMI 133 - AT - Income Tax

Summary

Issues Involved:
1. Discrepancy in bank balances and income declaration.
2. Unexplained credit purchases and payments.
3. Discrepancy between Income-tax and Sales-tax returns.
4. Imposition of penalty under section 271(1)(c) of the Income-tax Act.
5. Application of Explanation to section 271(1)(c) in penalty proceedings.

Detailed Analysis:

1. Discrepancy in Bank Balances and Income Declaration:
During the assessment proceedings for the assessment year 1986-87, the Assessing Officer (AO) found discrepancies between the bank balances as per the bank statements and those disclosed by the assessee in the documents furnished with the return. For the assessment year 1985-86, the assessee had filed a return showing an income of Rs. 40,540, which was accepted under section 143(1) of the I.T. Act. However, based on the materials available for 1986-87, the AO concluded that the real income for 1985-86 had escaped assessment, leading to the issuance of notices under section 148 read with section 147.

2. Unexplained Credit Purchases and Payments:
The AO discovered that the assessee had shown an opening balance of sundry creditors without providing names and addresses, amounting to Rs. 1,04,853. Payments of Rs. 75,000 were claimed to have been made to these creditors via demand drafts, but without specifying the creditors' names. The assessee later contended that the payments were made in cash, not by demand drafts, but failed to provide details of the creditors. The AO found discrepancies in the purchases and bank withdrawals, leading to further scrutiny.

3. Discrepancy Between Income-tax and Sales-tax Returns:
The AO found discrepancies between the purchases and closing stock reported to the Sales-tax Department and those shown in the income-tax returns. The assessee explained that purchase bills for credit purchases amounting to Rs. 2 lakhs were received after filing the sales-tax return, hence not reflected there. However, this explanation was not accepted by the AO, who noted that the credits at the beginning of the subsequent year were not more by a similar amount. The assessee filed a revised return declaring an additional income of Rs. 2 lakhs, but the AO deemed this offer as non-voluntary and initiated penalty proceedings under section 271(1)(c).

4. Imposition of Penalty Under Section 271(1)(c):
The CIT(Appeals) upheld the penalty, finding the assessee's explanations regarding the discrepancies unconvincing and noting that the revised return was not voluntary. The CIT(Appeals) relied on various judicial precedents to support the imposition of the penalty. The Tribunal noted that the assessee's accounts were unreliable, and the preponderance of probabilities favored the Department's case for imposing the penalty.

5. Application of Explanation to Section 271(1)(c) in Penalty Proceedings:
The Tribunal emphasized that the CIT(Appeals) invoked the Explanation to section 271(1)(c) without the AO having initiated penalty proceedings under this Explanation. The Tribunal referred to the Bombay High Court's decision in CIT v. P.M. Shah, which held that the levy of penalty under the Explanation was not sustainable if the assessee was not informed that the proceedings were initiated under it. The Tribunal also considered conflicting judgments from other High Courts but followed the jurisdictional High Court's decision.

Conclusion:
The Tribunal concluded that although the Department had a strong case for imposing the penalty based on the preponderance of probabilities, the penalty could not be sustained due to procedural lapses in invoking the Explanation to section 271(1)(c). Consequently, the Tribunal canceled the penalty imposed by the AO and confirmed by the CIT(Appeals), allowing the assessee's appeal.