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TMI Blog1989 (5) TMI 118X X X X Extracts X X X X X X X X Extracts X X X X ..... the show-cause notice, he levied a penalty of Rs. 11,658 u/s 271(1)(c). 3. In appeal the learned CIT(A) noticed that in the assessee's appeal only an addition of Rs. 27,552 on account of low gross profit had been sustained and that the explanation of the assessee regarding the difference in the sales to M/s Lalji Mentha (P.), Ltd. was accepted. The learned CIT(A) held that the nature of the addition being related to estimates, the case did not call for the imposition of any penalty u/s 271(1)(c). Accordingly, he cancelled the penalty. 4. We have heard the learned representatives on both the sides. The contention raised on behalf of the department was that in terms of the Explanation to section 271(1)(c) as applicable for the assessment year 1978-79 in question, the penalty had been rightly levied by the ITO. Reliance was also placed by him on the decision of the Hon'ble Punjab & Haryana High Court in the case of New Bijli Foundry v. CIT [1982] 135 ITR 593 wherein it was held that the findings in the assessment proceedings are relevant and that the imposition of penalty u/s 271(1)(c) based upon the finding in the assessment proceedings that the sale proceeds had been concealed, wa ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... te Tribunal (ITA No. 2124/Del/82) and the Appellate Tribunal vide its order dated7-7-1983upheld the order of the learned CIT(A). Therefore, so far as the addition of Rs. 84,940 is concerned, it was completely knocked out. So far as the extra profit addition is concerned, as against the estimate of Rs. 14,951 made by the ITO, the CIT(A) and the Appellate Tribunal took it at Rs. 27,552. Although there was enhancement in the estimated rate of G.P., there is no finding in the assessment order or in the orders of the first or second appellate authorities that there was any suppression or concealment. The assessee had given an explanation for the discrepancy in the sales namely that it arose on account of the fact that the assessee had shown advances in a subsequent year. No doubt there is no bar to the imposition of penalty u/s 271(1)(c) in cases of estimate. But as we have already observed above, each case has to be seen with reference to its own facts. Normally penalty could not be levied for additions made on estimate unless it could be shown that an element of concealment was positively involved. In terms of clause (B) of Explanation 1 to section 271(1)(c) as applicable for the asse ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... z. M/s Ishrat Chemicals in July 1977 for which price had been received by him as under ; partly in advance and partly after goods had been delivered Date Amount Rs.20-6-197710,000 1-7-19775,000 18-7-19777,000 1-8-19775,000 ----------------- 27,000 ------------------ 4. The aforesaid amount of Rs. 27,000 which was received by the assessee from M/s Ishrat Chemicals Industries,Rampurwas not credited to the sales account but was shown by him as liability due to M/s Ishrat Chemicals,Rampur. On being given an opportunity to explain why he had shown the said liability when the goods had been sold and delivered to said M/s Ishrat Chemicals, the assessee replied inter alia that he did not know English or Urdu and it appears that due to certain confusion it had been recorded and that the goods were also not included in the stocks of 31-3-1978. It was later pleaded by the assessee that 'since some dispute had arisen with the purchaser, bill against him was not drawn in the previous year under consideration and, therefore, it should not be treated as sale of this year. This plea was rejected by the ITO by observing "This is untenable and unacceptable, No evidence in respect of this ex ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... results. While estimating the sales at Rs. 1,70,000, the ITO included the sales of Rs. 27,000 to M/s. Ishrat Chemicals referred above. 8. The matter was carried in appeal to the CIT (Appeals) by the assessee, who agreed with the ITO that the assessee's books of account had to be rejected, but, at the same time, held that there was no justification for separately making an addition in respect of sales to M/s Lalji Mentha (Pvt.) Ltd. and the same should not be included in the estimate of sales, as was done with the sales of Rs. 27,000 to M/s. Ishrat Chemicals. He accordingly estimated the sales at Rs. 2.50 lakhs as against sales estimated by the ITO at Rs. 1.70 lakhs and applied g.p. rate of 20 per cent. 9. The assessee accepted the above order of the CIT (Appeals) but the Department appealed against it to the Tribunal, who, after noting the facts as stated above confirmed the action of the CIT (Appeals) viz. estimating the sales at Rs. 2.50 lakhs (i.e. increasing it by approx. Rs. 80,000 as against estimate of Rs. 1.70 lakhs made by the ITO) and did not accept the departmental contention that, while rejecting the assessee's books of account specific addition on account of undiscl ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of the present case, it can be said that, there is concealment of income, and, if so, whether imposition of penalty for concealment is justified ?" 2. The assessee in this case is an individual, running a mechanical workshop undertaking fabrication and repair work atRampur. For the year under appeal, a return was filed disclosing an income of Rs. 22,270. In this year, he was found to have started a Mentha Plant for distillation of Mentha Oil but during the year itself sold off building, machinery and plant to M/s. S.S. Industries,Moradabad. This fact is relevant only for the purpose of showing that he was trying to experiment in the field of diversification of his activities. The ITO having become curious as to the magnitude of the activities conducted by the assessee made an attempt to confirm the closing balances shown by the assessee in Ms books of the debtors and creditors with their corresponding balances and found some discrepancies. In the account of M/s Lalji Mentha Pvt. Ltd., Khempur, the assessee showed an advance of Rs. 80,106.25 as received from him but the copy of the account received from that party showed 'nil' balance. The said party placed an order with the assess ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ces, notwithstanding the delivery of the goods, delivery of the bills and the completion of the sales, thereby resorted to suppression of the turnover, sales and profits thereon. He, therefore, came to the conclusion that the sales disclosed by the assessee would have to be estimated. The sales disclosed were about Rs. 1,35,500 as against the estimated turnover of Rs. 1,70,000, He also found that the gross profit rate disclosed was lower and he enhanced it to 22 per cent thereby he made an addition of Rs. 14,951 to the G.P. disclosed. The entire amount of concealed sales of Lalji Mentha Co. (P.) Ltd. was added back as income of the assessee i.e. Rs. 84,940. Thus the income was computed at Rs. 1,05,137. 4. Thereafter, there was an appeal before the Commissioner of Income-tax. On appeal, the CIT found that the ITO when he proposed additions on account of the concealed sales to both Ishrat Chemicals and Lalji Mentha (P.) Ltd., in the proceedings u/s 144B, the addition account of sales to M/s Ishrat Chemicals was directed to be merged to the trading account and sales were directed to be adopted at Rs. 1,70,000 as against declared sales of Rs. 1,35,500 and separate addition on account ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... turnover of two separate amounts of Rs. 14,951 and Rs. 84,940, both the additions were deleted and they were substituted by another addition of Rs. 27,552 which represented only a difference in gross profit by estimating a higher turnover and the enhancement of turnover was not regarded in the assessment order as suppression or concealment of income and the assessee's explanation that these advances were shown as sales in the next year was genuine one and factually correct. Further there was no bar to the imposition of penalty u/s 271(1)(c) in cases of estimate but they should have material to come to the conclusion that the estimate was as a result of concealment of income. In terms of clause (B) of Explanation 1 to section 271(1)(c) as applicable for the assessment year in question, the assessee did offer an explanation which was only rejected by the ITO but the explanation offered was not held to be mala fide and there was nothing on the record to establish that the assessee had not disclosed all the relevant facts and, therefore, the mere disbelief of the explanation of the assessee could not be regarded as equating the amount added as concealment of income. Ultimately he obser ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ress the profit thereon. The fact that the turnover was shown in the next year was not relevant inasmuch as we have to look to the facts of this year as to whether there was any concealment of income and not to be guided by what was shown in the next year. At one stage the assessee even tried to manipulate the explanation by contending that the goods were not delivered and they were included in the closing stock. When the turnover involved in both these transactions was of the order of about Rs. 1,20,000 the closing stock of Rs. 70,000 disclosed by the assessee would not have included these finished products even if the margin of profit was deducted from the gross amount of turnover involved in both the transactions. The explanation that the closing stock included these undelivered goods was, therefore, a false explanation. The assessee could not, therefore, be said to have offered a bona fide explanation while disclosing all material facts. The explanation on which the learned J.M. relied upon cannot, therefore, be of any avail to the assessee. The Tribunal also confirmed the assessment made by the CIT by adding the suppressed turnover to the book turnover. Thus in a case where th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... . did not confirm positively with reference to any particular date the delivery of the goods. They only went by surmises and suppositions. It must have suited them to claim depreciation. That may be a wrong claim in their books but that does not mean that they received the goods in the accounting year from the assessee, unless they commit to a particular date of delivery. In the absence of such a commitment how can it be said that they received the goods or they claim a depreciation thereon. Since the assessee had shown, issued bills next year, showed the advance faithfully in his books of account, disclosed the turnover in the next year, there was no concealment of income at all except wrong accounting or misinterpretation of the accounts. Therefore, the levy of penalty holding the assessee to be guilty of concealment of income, was unjust and unwarranted. 11. In my opinion, the claim made on behalf of the assessee ought to be accepted. It is no doubt true that the department made the estimate of turnover only with reference to the turnover said to have been suppressed by adding the entire amount of suppressed turnover to the book turnover, but in a case where there was a genuine ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... view of the total picture and the totality of circumstances. That was a reason why the clause (B) of Explanation 1 to sec. 271(1)(c) provided in clear terms : "Explanation 1: Where in respect of any facts material to the computation of the total income of any person under this Act,--- (A) such person fails to offer an explanation or offers an explanation which is found by the Income-tax Officer or the Appellate Asstt. Commissioner or the Commissioner (Appeals) to be false, or (B) such person offers an explanation which he is not able to substantiate, then, the amount added or disallowed in computing the total income of such person as a result thereof shall, for the purpose of clause (c) of this sub-section, be deemed to represent the income in respect of which particulars have been concealed : Provided that nothing contained in this Explanation shall apply to a case referred to in clause (B) in respect of any amount added or disallowed as a result of the rejection of any explanation offered by such person, if such explanation is bona fide and all the facts relating to the same and material to the computation of his total income have been disclosed by him." There is nothing in t ..... X X X X Extracts X X X X X X X X Extracts X X X X
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