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TMI Blog1988 (6) TMI 67X X X X Extracts X X X X X X X X Extracts X X X X ..... ed that the wages paid depended on the quality of output and that although the processing was entrusted to certain private parties, the wages were paid by the assessee directly to the workers depending on the quality and quantity of the output. When the Income-tax Officer inquired whether there was any agreement between the assessee and these private parties, the assessee replied that there was no written agreement with these six parties and that in order to honour its sales commitments, it had to get that in order to honour its sales commitments, it had to get the work done expeditiously and therefore the assessee entrusted these six parties with this work on good faith on the understanding that the wages would be paid by them directly to the workers. The Income-tax officer pointed out to the assessee a few other cases of cashew processors who got their proceedings done at Rs. 35 per bag. When this was put to the assessee, the assessee filed a revised return on 7-2-1979 declaring a loss of Rs. 1,82,804. The statement accompanying the return showed that the processing charges for 9,630 bags had been reduced to Rs. 3,37,050, i.e., at Rs. 35 per bag. Thus, there was a variation of Rs ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... appellate authorities and therefore there was no basis at all for the finding of the Income-tax Officer that the assessee had inflated its expenses. It was next pleaded that when the assessee paid processing charges at a flat rate to outside agencies it did not have to made separate provision for (1) fuel for roasting, (2) rent or depreciation for shed, etc., and (3) expenditure on E. S. I., Provident Fund, gratuity, etc., of labourers and similar other expenses. It was argued that the rates paid at the same time to such agencies depended on (1) the quality of the products obtained, (2) the amount of wastage, and (3) the stage up to which the processing was done, etc. It was argued that the processing could be up to roasting or up to shelling, or up to grading and packing stages also. Accordingly, wages paid to each of these outside agencies was bound to very depending on the experience of the workmen available and the facilities available for different stages of work. It was submitted that since the assessment was dragging on for a considerable period, the partners of said assessee firm were anxious to close the issue as they found that even by agreeing to the proposed disallowanc ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of which is at page 4 of the department's paper book, in which he called upon the assessee to furnish the names and addresses of the persons to whom the said processing charges were paid. A reminder was also sent to the assessee on 27th July, 1983, a copy of which is at page 5. The assessee's reply is available at page 6. In this reply the assessee stated that it was not possible for it to furnish the present addressed of the parties as nearly eight years had elapsed and the whereabouts of those parties were not ascertainable by them. Shri Subramanian relied on the Notice Server's statement dated 26-8-1983 at page 7 of the department's paper book and also the statement recorded by the Income-tax Officer from M. R. Kamath, Managing partner of the assessee-firm on 26-8-1983. On these materials, the learned departmental representative argued that it was clearly established that the assessee had furnished inaccurate particulars of its income by inflating a portion of its expenditure, that this was clear from its admission in the revised return of income filed before the ITO and that there was no further onus on the department to prove any concealment of income. He submitted that the de ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Hamsa of Chennapetta had appeared before the Income-tax Officer, as mentioned in the assessment order. The learned Chartered Accountant further submitted that the partners of the assessee-firm agreed to this disallowance as they were anxious to complete the assessment which was dragging for a long time and even after the disallowance the result was only a loss, there being no liability to pay tax either by the firm or by its partners. The learned counsel further relied on the order of the Appellate Tribunal, Calcutta Bench-C, Camp : Trivandrum, in the case of L. Kunju Kunju v. ITO [IT Appeal No. 174 (Coch.) of 1976 and C. O. No. 12 (Coch.) of 1979, dated 15-6-1981] to point out that the disallowance made by the ITO by restricting the processing charges at Rs. 35 per bag was clearly unsustainable as the Appellate Tribunal had confirmed the orders of the CIT (A) in the said case deleting the disallowance of Rs. 3,62,238 made by the Income-tax Officer by restricting the expenses to Rs. 35 per bag. He therefore contended that there was no basis for the disallowance made by the Income-tax Officer in the assessment and that the assessee had agreed to the disallowance under a misapprehens ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... refully considered the submissions urged on both sides in the light of the materials placed before us and in the light of the authorities relied on by them. 10. We are concerned in the present appeal with the levy of penalty under section 271(1)(c) of the Income-tax Act, 1961 for the assessment year 1976-77. By the Taxation Laws (Amendment) Act of 1975 clause (iii) and Explanations 1 to 4 were substituted for the original clause and its Explanation with effect from 1-4-1976. As a result of these amendments, penalties have to be levied with result of these amendments, penalties have to be levied with reference to the amount of tax sought to be evaded by reason of the concealment of particulars of income or the furnishing of the inaccurate particulars of such income by the assessee with the previous approval of the IAC. There is no dispute that the penalty in the present case has been levied under the provisions of section 271(1)(c) as amended by the Taxation Laws (Amendment) Act of 1975 which came into force from 1-4-1976. We set out below the relevant portion of section 271(1)(c) and clause (iii) together with its proviso and Explanation 1 as they are material for the purpose of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... " 11. The finding of the Income-tax Officer in the penalty order is that the assessee-firm had furnished inaccurate particulars which had resulted in concealment of income to the extent of Rs. 1,70,279 which would justify the imposition of the minimum penalty of Rs. 1,07,675 under section 271(1)(c) read with its Explanation 4(a) of the Act. A perusal of the final assessment order passed on 26th April, 1979 for this assessment year 1976-77 shows that the Income-tax Officer felt that there was reason to suspect inflation in proceeding charges of raw cashew-nuts. He found that the assessee had processed a total quantity of 9,630 bags of raw cashew-nuts through six parties and that the total processing charges paid by the assessee to these parties amounted to Rs. 5,07,328, which worked out to an average rate of about Rs. 51.50 per bag. As against this the average rate of processing charges paid by other exporters came to Rs. 35 only per bag for this assessment year, according to the Income-tax Officer. The ITO further referred to the fact that the Income-tax Officer B-Ward, Quilon had summoned and examined one of the processors Shri Hamsa, who was not able to give convincing answers ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 79 to substantiate its claim of payment of processing charges to the six parties at the varying rates, which ranged from Rs. 38.80 per bag in the case of Chadayamangalam and Velamannoor factories and Rs. 60.90 per bag in the case of Nilamel Factory, the assessee stated as follows in its letter dated 5-2-1979 to explain the variation in the rates paid to the six factories : "With reference to your letter dated 16-1-79, and the discussions our representative has had with you on 1-2-79, we give below the information called for : (1) Process of 9,630 bags of raw cashew-nuts through private parties : (a) The variation in the total wages of each bag paid to each person is mainly due to the quality output of the nuts that was produced by the workers. Wages are paid according to the output of each worker. Further in most of the cases we had to pay the usual wages paid to the workers in factories except PF, ESI, leave with wages, etc. We were in urgent need of the processing being done quickly so as to meet the commitments of sales and the labour leaders helped to get things done for the of sales and the labour leaders helped to get things done for the purpose of getting the work d ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e contends that since the assessee had itself agree to the addition by offering the said amount in the revised return, there was no further onus cast on the department to prove concealment of income on the part of the assessee before levy of penalty. To this, the assessee's answer is that its explanation is a bonafide one and that it had disclosed all the facts relating is the same and that it was a case of rejection of a bonafide explanation within the meaning of the proviso to Explanation 1 to section 271(1)(c) of the Act. 15. On an examination of the materials placed before us, we are inclined to accept the contentions of the assessee's learned Chartered Accountant, that it is a case of rejection of a bona fide explanation offered no the assessee, for want of satisfactory evidence or material in support of the same and that the assessee's case comes within the proviso to Explanation 1 to section 271(1)(c) of the Act. At the outset we must point out that the department does not dispute the fact that the assessee had actually got 9,630 bags of raw nuts processed through the sex outside parties, whose names and addresses were furnished by the assessee in the course of the assess ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of the above rates, the claim of the present assessee for processing charges for the six outside factories which ranged from Rs. 38.80.per bag to Rs. 60.90 per bag and which worked out to an average rate of Rs. 51.50 per bag cannot be considered to be either excessive or unreasonably high. In fact the assessee had offered an explanation for the varying rates in its letters which we have quoted above and no material has been placed before us to prove that this explanation is untrue or improbable. There is one more fact which should be noted, namely, the average cost of processing raw cashew-nuts in the assessee's factories, which worked out to Rs. 72.66 per bag in this year and this has been accepted by the revenue. Judged in the light of this average rate in the assessee's own factory also, it cannot be held that the processing charges paid by the assessee were excessive and inflated. 16. We have looked into the Notice Server's statement as well as the statement of M. R. Kamath, Managing Partner of the assessee, which were relied on by the learned departmental representative in the course of his arguments to contend that the assessee has been unable to prove its case in spite of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... facts and circumstances discussed above. We are supported in our conclusion by the decision of the Supreme Court in the case of Sir Shadilal Sugar General Mills Ltd. at pp. 713 and 714 wherein it has been held as follows : "In this case, the Tribunal had taken into consideration the fact that the assessee had admitted the additions as its income when faced with non-disclosure in assessment proceedings. The High Court accused the Tribunal of not considering the time when the assessee admitted the additions. We find that it was duly considered by the Tribunal. We find that the assessee admitted that these were the incomes of the assessee but that was not an admission that there was deliberate concealment. From agreeing to additions, it does not follow that the amount agreed to be added was concealed income. There may be a hundred and one reasons for such admission, i.e., when the assessee realises the true position it does not dispute certain disallowances but that does not absolve the revenue from proving the means of quasi-criminal offenses. ** ** ** It is for the income-tax authority to prove that a particular receipt is taxable. If, however, the receipt is accepted and ..... X X X X Extracts X X X X X X X X Extracts X X X X
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