1973 (2) TMI 42 - HC - Income Tax

Penalty proceedings - Whether materials produced at assessment stage can be acted upon in penalty proceedings - Whether the reasons recorded in assessment order can form basis of penalty order

Issues Involved:
1. Addition of Rs. 52,070 to the assessee's income for the assessment year 1961-62.
2. Levy of penalty of Rs. 40,000 under section 271(1)(c) of the Income-tax Act, 1961.

Issue-wise Detailed Analysis:

1. Addition of Rs. 52,070 to the Assessee's Income:
The assessee, a registered firm involved in the manufacture and sale of handloom goods, reported an income of Rs. 73,519 for the assessment year 1961-62. The Income-tax Officer (ITO) noted discrepancies in the assessee's accounts, particularly regarding the purchase of 3,700 pieces of handloom goods valued at Rs. 52,070 from 31 weavers. These purchases were unsupported by independent vouchers and the weavers could not be traced. The ITO added Rs. 52,070 to the assessee's income, rejecting the assessee's offer to spread this amount over four years.

The Appellate Assistant Commissioner (AAC) upheld the addition, citing two grounds: a shortage of 40,000 yards of cloth in production and the improbability of credit purchases from the weavers. The AAC highlighted four suspicious circumstances: (1) inability to produce weavers for examination, (2) suspicious ledger entries, (3) improbability of weavers waiting two years for payment, and (4) absence of receipts for payments.

The Appellate Tribunal confirmed the AAC's decision, noting the assessee's failure to reconcile its sales and closing stock and the improbability of the credit purchases. The Tribunal inferred that the 3,700 pieces were likely produced by the assessee itself, based on the yardage per lb. of yarn used. The Tribunal rejected the argument that a higher gross profit rate disproved the addition.

The High Court found no merit in the assessee's contention that the addition was unsupported by material. The court noted several defects in the assessee's accounts, including the lack of quantitative tally, unsupported issue of yarn, abnormal credit purchases, and suspicious ledger entries. The court concluded that the purchases from the 31 weavers were fictitious and represented undisclosed income. The court upheld the Tribunal's inference that the assessee had produced the 3,700 pieces and shown them as purchases to disguise profits. The court answered the question in T.C. No. 114 of 1967 in the affirmative, supporting the addition of Rs. 52,070 to the assessee's income.

2. Levy of Penalty of Rs. 40,000 under Section 271(1)(c):
Following the addition of Rs. 52,070, the ITO initiated penalty proceedings under section 271(1)(c) of the Income-tax Act, 1961, and levied a penalty of Rs. 40,000 for deliberate concealment of income. The assessee's appeal against the penalty was dismissed by the Tribunal.

The High Court considered the assessee's argument that the penalty could not be sustained solely based on the findings in the assessment proceedings. The court referred to several precedents, including Commissioner of Income-tax v. Gokuldas Harivallabhdas, Commissioner of Income-tax v. Anwar Ali, and Commissioner of Income-tax v. Khoday Eswarsa and Sons, which emphasized that penalty proceedings are penal in nature and require cogent evidence of deliberate concealment.

The court found that the Tribunal's conclusion of deliberate concealment was based on positive and definite material from the assessee's own accounts, not merely on the falsity of the assessee's explanation. The court noted that the materials from the assessment stage constituted relevant evidence and could be considered in the penalty proceedings. The court observed that the assessee's conduct, including its agreement to the inclusion of the amount and its avoidance of an enquiry, indicated suppression of income.

The court concluded that the Tribunal's decision to uphold the penalty was justified based on concrete and positive materials. The court answered the question in T.C. No. 115 of 1967 in the affirmative, supporting the levy of the penalty of Rs. 40,000.

Conclusion:
The High Court upheld both the addition of Rs. 52,070 to the assessee's income and the levy of a penalty of Rs. 40,000 for deliberate concealment of income. The court found that the decisions of the Appellate Assistant Commissioner and the Tribunal were supported by consistent and tenable reasons based on positive and definite material. The revenue was entitled to its costs from the assessee in both cases.

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