9911796707
TMI Blog1991 (8) TMI 136X X X X Extracts X X X X X X X X Extracts X X X X ..... e income admitted or originally assessed and the income that was finally determined. The figures given in the following Tables are relevant: TABLE "A" (Asst. yr. 1981-82) Item Income Income as per order of CIT(A) . Returned Assessed . . . Rs. Rs. Rs. . Property - - - . Premier Theatre - - - . Murugan Trading Co. - - - . Income from contract 52,200 3,13,356 by estimating 15 per cent on total contract by the cost of materials supplied. 1,00,000 (Departmental appeal dismissed by the Tribunal) National Tyres - - - . M.G. Ice - - - . Royal Bakery - - - . Table "B" (Asst. yr. 1981-82) Item Income admitted in reassessment Income determined by. . . ITO CIT(A) Tribunal . . Rs. Rs. Rs. Property - 250 250 250 Premier - 15,333 15,333 15,333 Murugan Trading Co. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... . ITO CIT(A) Tribunal . Rs. Rs. Rs. Rs. Property Contract Nil 250 250 250 (i) -38,432 -38,432 No appeal . (ii) Sale of cement Nil 1,61,958 1,61,958 80,979 Tea business -967 38,478 38,478 38,478 National Tyres - 19,410 19,410 19,410 Royal Bakery - 20,244 20,244 Set aside but sustained Murugan Cash Credits - 1,74,171 1,74,171 -do- T.A.,D.A. receipts - 12,444 12,444 12,444 M.G. Ice Rent 3,600 1,14,567 1,14,567 1,14,567 4. It may be mentioned that against the original assessments made for the asst. yrs. 1981-82 and 1982-83 it was the Department which went on appeal to the Tribunal but the same was dismissed as infructuous because by the time the matter came up before the Tribunal the reassessments proceedings have begun. Even in the case of reassessment, on certain additions sustained by the CIT(A) the Tribunal had set aside the same and directed fresh consideration and upon such fres ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... and interest as deduction from the gross profit in contract business, the ITO disallowed such items in effect when he estimated the net income from contract business at 15 per cent. On appeal by the assessee, the first appellate authority reduced the estimate from 15 per cent to 10 per cent of the gross receipts and had also allowed depreciation, interest charges and expenditure on medical aid etc. Thus, the variation between the income admitted by the assessee and the income determined by the ITO was only due to the estimate made by the ITO and after disallowing certain expenses. This estimate itself was reduced by the CIT(A) and the disallowances were deleted. Therefore, it cannot be said that the assessee had deliberately concealed the income in the original assessment proceedings. Such being the case, the ITO basing his impression of concealment on the strength of the original assessment and importing that knowledge into the reassessment order purported to initiate penalty proceedings in reassessment. This would show that the ITO had not applied his mind to the facts of the case. In other words, the ITO has not reached the satisfaction so necessary for initiating penalty proce ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... hus the initiation of penalty proceedings for the asst. yr. 1982-83 is likewise bad in law. 8. Turning to the asst. yr. 1981-82, Shri C.K. Nair submitted that the reassessment has resulted in an income of Rs. 1,95,000 from contract business as against Rs. 1 lakh admitted by the assessee in his return in respect to notice under s. 148 of the IT Act. Even this sum of Rs. 1,95,000 was determined only at the appellate stage. The ITO had made a massive addition of Rs. 4,25,049 in the reassessment in his order dt. 22nd Jan., 1987 but then in the appeal before the CIT(A) the ITO himself had admitted in his remand report that the income could be fixed at Rs. 2,69,467. The assessee had objected even to that figure and pointed out certain errors in the computation of the ITO in the remand report. He had also pointed out certain receipts which were found credited in the seized cash book on 4th April, 1981 should properly belong to the succeeding assessment year and not to the asst. yr. 1981-82. However, in order to purchase peace the assessee agreed to be assessed at a figure of Rs. 1,95,000 and it was at that figure the CIT(A) determined the income from contract business. In the face of s ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... registration stands in his name. Though the documents in connection with this business was found with the assessee, it is not very unusual for the accountant to have these books in the premises of the assessee. Shri Balakrishnan though examined was not questioned on the issue whether the business belongs to him or not. The Department's case is that Shri Balakrishnan is a benamidar and the business really belonged to the assessee. Under the Benami Transactions (Prohibition) Act, 1988 no Court or Tribunal could take cognizance of such plea. He relied on the decisions reported in Mithlesh Kumari Anr. vs. Prem Bihari Khare (1989) 76 CTR (SC) 27 : (1989) 177 ITR 97 (SC), C. Narayanan vs. CIT (1988) 72 CTR (Allied laws) (Ker) 17 : (1989) 180 ITR 503 and C.T. Mohanan vs. C. Yesoda (1990) 185 ITR 31 (Ker). Therefore, the charge of concealment cannot be held against the assessee. 12. The next addition was in respect of income from Premier Theatre. It was really a case of joint venture in which for a period of 9 months there was a total profit of Rs. 17,249 spread over two assessment years. The ITO took the view that the assessee should have similar profits and estimated the same on a p ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ced in the reassessment proceedings and that was the sale of cement. From the materials seized, the Revenue has taken the view that the assessee had clandestinely sold the unused cement that was in his possession as contractor and the profit on the sale of such cement was estimated at Rs. 6,19,300. On appeal, the Tribunal found that the assessee could not have done such a malpractice without the connivance of the authorities and in that view of the matter, the Tribunal gave a deduction of 50 per cent of the sale proceeds. It is not the case of the Revenue that the cement belonged to the assessee. It is an admitted position that the cement which remained with the assessee and which was subsequently sold by him was the property of the Government and if the assessee had sold such cement, in law he is accountable to the authorities for the sale proceeds of such cement. The assessee's position is that of a trustee and if the trustee has committed misfeasance or breach of trust, he is always accountable to the beneficiary. In law it cannot be held that the profit estimated by the Revenue really belonged to the assessee. If, on the other hand, it is so held, the matching liability to pay ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d Rs. 12,240 being the cost of cement used for household purposes. This was confirmed in appeal but the Tribunal gave 50 per cent deduction in respect of sale of cement and deleted the sum of Rs. 12,240 and thus has given relief. However, the cost of cement was not considered at all for deduction in the quantum appeal and that should be a proper deduction at least for penalty purposes. One more item of addition which is not there in the earlier years is in respect of the alleged surplus in reimbursement of travelling allowance and daily allowance. There cannot be any surplus because it was only a question or reimbursement of the expenses. Though that sum was sustained in appeal, it cannot be said to be really the income of the assessee that was concealed. Regarding M.G. Ice Product the addition was sustained in this case on the ground that there waqs intermingling of funds and the capital had come from the assessee. Shri Nair submitted that even if the capital had been given by the assessee it does not mean that it is assessee's business. It is not unusal because the business was intended to be that of this son. It is not unusal for a father to look after the business of his son an ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... original assessment proceedings. The ITO could have expressed himself in clearer terms when he proposed to initiate penalty proceedings. But all the same it cannot be said that he had not initiated proceedings against the assessee for levy of penalty in the facts and circumstances of the case. 19. The learned Senior Departmental Representative further submitted that the reassessments were in consequence of the materials discovered in the course of the proceedings under s. 132 of the Act. On the basis of the materials the ITO had entertained the reasonable belief that income had escaped assessment on account of omission or commissions on the part of the assessee. This belief was the basis for the reassessment under s. 147(a) of the IT Act. When the assessments were completed by him making substantial additions to the income of the assessee, the belief which he originally entertained was found to be in order. In the circumstances even if the ITO has just remarked to the effect that action under s. 271(1)(c) is being initiated separately, it would be enough for valid initiation. Such being the case, merely because the ITO had referred to the earlier proceedings initiated by him on ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tmental representative, submitted that such a plea should not be entertained. Income-tax is not concerned with whether the income is earned in a rightful manner or in a wrongful manner; it is not concerned with whether the income is tainted with illegality. All that is necessary to tax a person is that the assessee should have earned the income. The means are irrelevant so far as the income-tax is concerned. Even a deceit can be assessed to tax if he comes forward to be assessed. Addressing himself to the plea of the assessee that the cost of the cement should be given as a deduction Shri Abraham submitted that there was no need to make any such deduction in the penalty proceedings. The Tribunal had already granted 50 per cent deduction. Moreover, the assessee has not paid anything towards the cost of the cement which was clandestinely sold. Even if the cost of the materials which included the cement was recovered from the assessee, it was all taken care of either in the accounts or when the estimate was made. Further, the assessee has not placed any material as to the cost of the cement sold surreptitiously. Therefore, the plea of the assessee should not be allowed. 24. Address ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the learned counsel for the assessee, reiterated his arguments and also made a fervent plea that even if penalty is to be levied it is to be within the reasonable limits. In this case penalty was levied at the maximum-200 per cent of the tax sought to be evaded. The assessee is no more. The business is in shambles. The legal representatives are finding it difficult to run the business and to have a decent living. Whatever might have been the guilt of the assessee it is the legal representatives who have to face the music. Therefore, he made a fervent appeal for deleting the penalty or at least to reduce the penalty if at all leviable. 28. Shri Abraham, the learned Senior Departmental Representative, while reiterating that the levy of penalty was justified did not dispute the circumstances in which the legal representatives are placed. 29. Thus we heard rival submissions and perused the records. The first point to be resolved is whether the penalty proceedings for the impugned assessment years were validly initiated or not. There was a search in the residential premises and the business premises of the assessee. As a result of the search, certain documents were seized. On a s ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 982-83 he had stated as follows in the penultimate para of the order: "Penalty proceedings under s. 271(1)(a), 273(1)(b) and 271(1)(c) have been initiated in connection with the original assessment and are pending. These will hold good for the reassessment as well." These observations are found in the order of reassessment dt. 22nd Jan., 1987. At that point of time the departmental appeals against some relief granted by the CIT(A) were pending before the Tribunal in respect of the asst. yrs. 1981-82 and 1982-83. In other words, the penalty proceedings which were validly initiated in the course of the original assessment proceedings in respect of all these years were also pending before the ITO. It is in this context that the ITO had stated that the proceedings which have been initiated were equally applicable to the reassessments also. From this it can be reasonably inferred that the ITO had intended to continue the proceedings from at the stage where he had left. In other words, the satisfaction of the ITO that the case of the assessee called for levy of penalty is implicit though not manifest in the impugned observation. For these reasons we reject contention of the learned ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... at this was agreed to in order to purchase peace by avoiding litigation." It is against this background, Shri Nair contends that no penalty is leviable for the difference of Rs. 1,95,000 (being the income determined in the reassessment) and Rs. 52,200 (being the income originally admitted). Alternatively he contends that if at all penalty is leviable, it is to be on the difference between Rs. 1,95,000 minus Rs. 1,00,000 which was the income that was returned in response to the notice under s. 148. 31. First we take up for the consideration the alternative submission of Shri Nair. In our considered opinion, the issue is squarely governed against the assessee in the Full Bench decision in the case of CIT vs. C.P. Antony (1985) 49 CTR (Ker) 149 (FB) : (1985) 155 ITR 467 (Ker)(FB). Their Lordships held as follows: "If an assessee who was bound to disclose his real total income in the return filed by him under s. 139 of the IT Act, 1961, fails to do so, the offence of concealment or furnishing of inaccurate particulars with respect to his income in that return, becomes complete. It might be that where the ITO invokes the provision under s. 147(a) and issues a notice under s. 14 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Court in Sir Shadilal General Mills Ltd. Anr. we cancel the levy of penalty on the sum of Rs. 1,42,800. Asst. yr. 1982-83 33. In the original return of income the assessee admitted Rs. 78,348 as income from contract business. The ITO estimated the income at Rs. 5,94,564 and did not allow certain deductions claimed by the assessee. On appeal, the income was determined at Rs. 1,60,000 and the Department's appeal against the relief granted was dismissed by the Tribunal on 8th Oct., 1988. Thus, in the original assessment proceedings it was a case of one estimate as against another estimate with disputes over the allowability of certain expenditure. In the reassessment proceedings the ITO took the figure of Rs. 1,60,000 as originally assessed and added to it the same proceeds of 7,000 bags of cement on the basis of material found during the course of search. Besides, there were certain miscellaneous additions to the cement business in a sum of Rs. 15,182. On appeal, the Tribunal gave 50 per cent deduction on Rs. 6,19,300 being the sale proceeds of cement clandestinely sold by the assessee. Thus, the income came to be determined at Rs. 4,84,833. The ITO levied penalty on a sum ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... aggregating to Rs. 6,19,300 was added. To quote the assessment order— "There is no purchase of cement by the assessee from the open market for the contracts, for, there is no such purchase as per the daily statements and cash books. Many of the daily statements also do contain workings of savings of cement by the assessee in concreting etc. i.e. by how much the actual quantity of the PWD cement utilised by the assessee fell short of the accepted consumption as per which standards the PWD had supplied the cement to the assessee. From the daily reports of the assessee's Manager, Sri A. Balakrishnan to the assessee, it is seen that the PWD cement after the assessee takes delivery of the same from the respective PWD stores, are sold in lorry loads of 200 bags to the local cement dealers or in certain instances utilised from his own personal and domestic purposes, without taking the cement to the work site at all. In such cases of sales in the black, the assessee has not accounted the unloading charges for cement, as there are evidently incurred by the clandestine buyers. Nowhere in these accounts or daily statements can be found any indication of the assessee having incurred any ex ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... on. In the case of the assessee, the original assessment has proceeded on an estimate basis; the cost of cement was recovered from him from the final bill. Therefore, on a proper view of the accounting techniques we hold that the cost of cement siphoned off and sold had not been allowed as a deduction in the estimate made by the ITO or by the CIT(A). Now the question before us is did the Tribunal by its order dt. 4th April, 1989 in the second appeal had allowed anything towards the cost of cement? The findings of the Tribunal are found in para 3(3) as follows: "However, in fairness to the submission of Sri Ramamani, it should be pointed out that collusion with the Officers have been accepted as a fact by the ITO himself. He refers to certain reports in Malayala Manorama highlighting Malpractices done by the contractors in collusion with PWD Engineers. Again he states "When the assessee's own accounts, the genuineness of which he does not question, show that the assessee did sell in black a good portion of PWD cement, it is unnecessary, and against common logic to investigate the matter with the concerned Executive Engineers, in collusion with whom the assessee naturally sold the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... on of Shri Nair for granting some deduction towards the cost of clandestine sale of cement. There is no material to show the exact cost of 7,000 bags of cement which were sold by the assessee. However, in the assessment order for the asst. yr. 1984-85 the ITO had estimated the cost at the rate of Rs. 60 per bag. It is common knowledge that the price of cement is normally on the increase year after year. In the absence of material we estimate the cost at 30 per cent of the sale proceeds on a conservative basis. We resort to the estimate in view of practical difficulty in ascertaining the cost due to efflux of time and the death of the assessee. The ITO is directed to quantify the amount exigible for penalty by granting, in addition to the relief granted by the Tribunal in the quantum proceedings, a further deduction of 30 per cent on the sale proceeds of cement. Thus, we modify the order of the CIT(A) and sustain the levy of penalty on the concealment of income from cement. 37. Asst. yr. 1984-85: This is not a case of reassessment. The ITO accepted the net profit shown in the accounts from cement. To this, he added the sale proceeds of cement not disclosed to the Department. T ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... onship of a trustee when one commits theft of another's property or deprive person of his possessions and thereby enriches himself. For a trustee to be appointed there should be a conscious act overt or covert on the part of the author of the trust. There is no such thing in this case. May be, breach or the misfeasance committed by him, the assessee will be answerable to the Government, but so long as the money was retained and enjoyed by him, he cannot escape taxation. The definition of 'income' is an inclusive definition. In this view of the matter, we reject Shri Nair's contention. 40. We turn to other items on which the change of concealment is levelled against the assessee. The issues are common for all the assessment years. 41. Income from Tea Business: There was variation between the amount disclosed by the assessee and the amount finally determined. During the search statement showing the correct profit earned for the impinged year was found in the possession of the assessee. As a result, the additions were made and sustained in appeal. 42. We have heard rival submissions. From the facts of the case it would be evident that the assessee had not disclosed the real p ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... als on record, we uphold the levy of penalty. It is not the case of the Department that the business known as National Tyres is the benami business of the assessee. All that the ITO had stated was that the account books were with the assessee, there was mixing of funds and the business was run by the staff of the assessee. From the above, it will be evident that this is a case of sham transaction in contra-distinction to benami transaction. The assessee is really the owner of the business though for some purpose or other, the sales-tax registration stood in the name of Shri Balakrishnan. It was never the case of the assessee before the authorities that the business of National Tyres was the benami business. Therefore, we cannot accept the plea of Shri Nair that the business really belonged to Shri Balakrishnan or that the business is the benami business of the assessee. The provisions of s. 4 of the Benami Transactions (Prohibition) Act, 1988 would not apply as this is a simple case of sham transaction and the suppression of the source of income. The levy of penalty is upheld. 47. Income from Royal Bakery: The assessee did not disclose any income from the business known as Royal ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tter, we deleted the levy of penalty. 49. Income from M.G. Ice Products: The assessee did not disclose any income from this source. The ITO made an addition of Rs. 21,574 for the asst. yr. 1981-82, Rs. 13,468 for the asst. yr. 1982-83 and Rs. 1,14,567 for the asst. yr. 1984-85. The Tribunal at paras 10 and 11 of its order dt. 4th Oct., 1988 for the asst. yr. 1981-82 discussed the background of the addition. It is seen that the assessee is a partner of the firm known as M.G. Ice Products. From the seized cash books it was seen that there were credits and debits in the account of M.G. Ice Products showing a net balance of Rs. 21,754. But in the books of the firm the balance stood at Rs. 22,931 and no withdrawal was shown against the assessee. Hence, the ITO made the addition. The Tribunal felt that the secret books of the assessee are not intended for scrutiny by the Department, but are meant for the information of the assessee only and, therefore, the entries found in the seized books should reveal the real state of affairs, nor it could be assumed that the assessee had not accounted for his share income in the secret books. In this view of the matter it deleted the addition. Sin ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... y and start a business of his own. In this case, it has not been admitted by the assessee's son that he did it in the above manner. In fact, he had stated that he has not invested any capital, but all the capital had come from his father; nor is it a case of the coparcener of the HUF taking away part of the money belonging to the joint family for starting a separate business of his own. Thus the facts are different. The materials found by the Revenue in the course of the search really lead to the conclusion that the business belonged to the assessee in that it was run in his premises with the employment of his own staff and with the intermingling and intertwining of funds and accounts. The transactions have not been done at arm's length. It is a case of sham transaction and, therefore, the defence that the provisions of the Benami Transactions (Prohibition) Act would apply cannot be availed of. The profits were rightly assessed in his hands and the assessee having failed to disclose the income should face the consequences for the same. The levy of penalty is confirmed. 52. Murugan Cash Credits : The assessee is a partner in the firm M/s Murugan Trading Co., doing abkari business ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... orded in the accounts of the firm, etc. In the light of the above, the TIO incorporated the additions once again. Shri Nair's contention is that even after the matter was set aside by the Tribunal, the Department has not improved its case. Shri Abraham, on the other hand, contended that the ITO had clearly stated that it is the usual practice with any abkari firm that there would not be any diversion of funds in favour of one partner as against others and no material was placed before the ITO to disprove the statement of the managing partner of the firm. Therefore, the addition was made again. The assessee had not gone on appeal. Levy of penalty was thus justified. 54. Having heard the submissions and materials on record, we delete the levy of penalty in respect of the amounts added to the income of the assessee under the caption Murugan Cash Credits. Even after the additions were set aside by the Tribunal, the position remained the same. The Department has not brought on record any material to show that the entries in the books of the firm are correct and complete and it is only the assessee's books that suffered from defects. It should be understood that the credits were notic ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the instance of the CIT(A) the ITO has verified with the firms and found that they have not paid any money to the assessee towards T.A. and D.A. 57. We have heard rival submissions. The entries are found in the secret books of account. The details as to from whom the impugned amounts were received and for what purpose they were received were also noted in the secret books of account. At the instance of the CIT(A) it was ascertained from the firms that no payment was made to the assessee towards T.A. and D.A. However, it is not in dispute that the assessee had got business connections with those parties. The assessee's explanation that he had drawn these amounts from the two firms and that they were meant for expenses to be incurred by him in their behalf and as such he was under a bona fide impression that the amounts need not be shown as his income was only rejected by the CIT(A). Rejection of an explanation cannot automatically lead to levy of penalty. More reliance can be placed on the entries in the secret books. Merely because there was denial on the part of Sree Krishna Trading Co. and Sri Murugan Trading Co. about the payments, in the absence of a proper scrutiny of their ..... 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