9911796707
TMI Blog2003 (1) TMI 272X X X X Extracts X X X X X X X X Extracts X X X X ..... n by the Ld. Assessing Officer and consequently the penalty proceedings were not attracted in case of the assessee." 3. The brief facts of the case are that the assessee derives income from export of garments in the status of Individual. The return of income was filed on 29-10-1997 along with audit report under section 44AB declaring a loss of Rs. 36,80,600 as under:-- Net loss from Kiran Modes Rs. 37,49,739 Income from other sources Rs. 69,138 ------------- Rs. 36,80,601 or Rs. 36,80,600 ------------- In the computation of income, the assessee has also given following notes: (1) Loss carry-forward to be set off in future profit. (2) The assessee made export sales but deduction under section 80HHC is not applicable due to losses. He fulfils other conditions entitled under section 80HHC benefits. 4. During the course of assessment proceedings, the assessee has offered to surrender the loss claimed at Rs. 36,80,600 and agreed to complete the assessment at nil income, Accordingly, the AO has completed the assessment at nil income vide order dated 15-2-2000 passed under section 143(3) and has also initiated penalty proceedings under section 271(1)(c). 5. In reply to t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ion does not result in the levy of penalty. There was no specific enquiry into the correctness, truthfulness or accuracy of the particulars furnished by the assessee and concealment was not proved. It was, therefore, submitted that the penalty levied deserves to be deleted. The reliance was placed on the following decisions: (a) CIT v. Vidyagauri Natverlal [1999] 238 ITR 91, 95, 95-96 (Guj.) (b) Addl CIT v. Aggarwal Misthan Bhandar [1981] 131 ITR 619 (Raj.) (c) CIT v. N. Krishnan [1999] 240 ITR 47 (d) Bhagwanji Bhawanbhai & Co. v. CIT [1983] 141 ITR 640 (e) Ram Saran Gupta v. Asstt. CIT [1997] 20 Tax World 196 (Jp. Trib.) (f) Rajasthan Vanaspathi Products (P.) Ltd. v. Dy. CIT [1997] 20 Tax World 266 (Jp. Trib.) (g) ITO v. Chiranjilal Tak [1997] 20 Tax World 367 (Jp. Trib.) (h) Asstt. CIT V. Bansiwala Iron & Steel Re-Rolling Mills [1998] 21 Tax World 533 (Jp. Trib.) (i) Assam Roller Flour Mills v. ITO 22 Tax World 621 (Jp. Trib.) ITO v. Manjit Singh Baldev Singh Commission Agents [1999] 69 ITD 197 (Asr.) (k) Dy. CIT v. Smt. Pannaben P Desai [2000] 112 Taxman 84 (Ahd.)(SMC) (Mag.) (l) Shivam Art Processors (P.) Ltd. v. Asstt. CIT [2000] 69 TTJ (Ahd.) 600 (m) Dy. CIT v. Ma ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ncealment stands changed after insertion of Explanation to section 271(1)(c). Therefore, in view of decision in the case of B.A. Balasubramanian and Bros. v. CIT 236 ITR 977, the earlier decision in the case of Anwar Ali is no longer good law and Assessing Officer is not required to prove mens rea on the part of the appellant. Since it has become clear that assessee claimed a loss which it was not in position to substantiate nor was there any verifiable evidence in support of the claim, there is no doubt that appellant has furnished inaccurate particulars of income and concealed income in that year to the extent of such excessive loss claimed. It is not a justified argument that the claim of the assessee has been disallowed but that assessee does not have any evidence to support the claim made. Under the circumstances, the imposition of penalty was justified and the same is confirmed being reasonable at the minimum amount imposed." 9. Now, the assessee is in appeal before us. 10. The ld. A/R, besides reiterating the same arguments/pleas which were taken before the CIT(A), further submitted that since the assessee has furnished complete details of his accounts and expenses, purcha ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ITAT, Jaipur Bench), Rani Sati Coal Suppliers v. ITO [2001] 26 Tax World 440 (ITAT, Jaipur Bench), CIT v. Aggarwal Pipe Co. [1999] 240 ITR 880, 882 (Delhi), CIT v. Mecon Builders & Engineers [2001] 117 Taxman 246 (Delhi), CIT v. C.J. Rathnaswamy [1997] 223 ITR 5, 11 (Mad.), S. Sankaran, CIT v. Prithipal Singh & Co. [2001] 249 ITR 670 (SC), Asstt. CIT v. Smt. Geeta Devi [2001] 79 ITD 347 (Delhi) (SMC-II), ITO v. Gurcharan Singh & Co. [2001] 72 TTJ (Chd.) 774, Dy. CIT v. Aditya Chemicals Ltd. [2001] 70 TTJ (Delhi) 953, CIT v. Saran Khandsari Sugar Works [2002] 120 Taxman 319 (All.) and Southern Gas Fittings (P.) Ltd. v. Dy. CIT [2002] 80 ITD 202 (Chennai). 11. On the other hand, the ld. D/R, while strongly relying upon the orders of the AO and the CIT(A), submitted that since the assessee was not able to substantiate his claim of loss, therefore, he agreed to be assessed at nil income before the AO and for the reasons mentioned in the order of the AO and the CIT(A), the penalty was rightly imposed by the AO and confirmed by the CIT(A) which should be upheld. 12. We have carefully considered the rival submissions of the parties, perused the material available on record and the decis ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... cumstances stated in the Explanation, that his failure to return his correct income was not due to fraud or neglect, he shall be deemed to have concealed the particulars of his income or furnished inaccurate particulars thereof, and, consequently be liable to the penalty under the section. No express invocation of the Explanation to section 271 in the notice under section 271 is necessary before the provisions of the Explanation are applied." It was also held that the law laid down in the case of Sir Shadilal Sugar & General Mills Ltd. is not a good law after addition of the Explanation to section 271. Therefore, both these cases are in favour of the revenue and against the assessee. 12.3 In the case of Shiv Lal Tak, the Hon'ble Jurisdictional High Court, while cancelling the penalty under section 271(1)(c) has held that the enhancement in the income is neither of addition or disallowance but a case of substitution. Whereas in the case before us, the loss claimed was such as could not be substantiated. Explanation given in this regard was only general, stock register was not maintained and, therefore, it was not possible to verify the claim of damaged stock and also no material w ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of D.N. Ghiya, it was found by the Tribunal that the surrender was made prior to detection of any concealment and to buy peace and also to avoid litigation. Whereas in the case before us, the loss claimed was such as could not be substantiated. Explanation given in this regard was only general, stock register was not maintained and, therefore, it was not possible to verify the claim of damaged stock and also no material was produced to disapprove the finding of the CIT(A). Hence, the facts of the cited case are distinguishable and not applicable to the facts of the present case. 12.8 In the case of Bansiwala Iron & Steel Re-Rolling Milts, there was a trading addition by application of higher gross profit rate on which the penalty for concealment of income was imposed and the same was deleted. Whereas in the case before us, the loss claimed was such as could not be substantiated. Explanation given in this regard was only general, stock register was not maintained and, therefore, it was not possible to verify the claim of damaged stock and also no material was produced to disapprove the finding of the CIT(A). Hence, the facts of the cited case are distinguishable and not applicable ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d was such as could not be substantiated. Explanation given in this regard was only general, stock register was not maintained and, therefore, it was not possible to verify the claim of damaged stock and also no material was produced to disapprove the finding of the CIT(A). Hence, the facts of the cited case are distinguishable and not applicable to the facts of the present case. 12.14 In the case of Kejriwal Bros., the penalty was deleted as it was found that the same was imposed only on the basis of admission made by the partner and no other material was brought on record regarding the concealment of income. Whereas in the case before us, the loss claimed was such as could not be substantiated. Explanation given in this regard was only general, stock register was not maintained and, therefore, it was not possible to verify the claim of damaged stock and also no material was produced to disapprove the finding of the CIT(A). Hence, the facts of the cited case are distinguishable and not applicable to the facts of the present case. 12.15 In the case of Prabhat Oil Traders, the penalty was deleted on the ground that the assessee's explanation had not been disproved. Whereas in the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e to the facts of the present case. 12.19 In the case of Rani Sati Coal Suppliers, the penalty was deleted on the addition of cash credit. Whereas in the case before us, the loss claimed was such as could not be substantiated. Explanation given in this regard was only general, stock register was not maintained and, therefore, if was not possible to verify the claim of damaged stock and also no material was produced to disapprove the finding of the CIT(A). Hence, the facts of the cited case are distinguishable and not applicable to the facts of the present case. 12.20 In the case of Aggarwal Pipe Co., the penalty was deleted as the Tribunal has found as a fact that the surrender of credit by the assessee during the course of assessment proceedings was bona fide. Whereas in the case before us, the loss claimed was such as could not be substantiated. Explanation given in this regard was only general, stock register was not maintained and, therefore, it was not possible to verify the claim of damaged stock and also no material was produced to disapprove the finding of the CIT(A). Hence, the facts of the cited case are distinguishable and not applicable to the facts of the present cas ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... regard was only general, stock register was not maintained and, therefore, it was not possible to verify the claim of damaged stock and also no material was produced to disapprove the finding of the CIT(A). Hence, the facts of the cited case are distinguishable and not applicable to the facts of the present case. 12.24 In the case of CIT v. Prithipal Singh & Co. [1990] 183 ITR 69 (Punj. & Har.), it was held by the Hon'ble High Court that in the case of loss, penalty cannot be imposed. The Hon'ble Supreme Court in Prithipal Singh & Co.'s case [2001] 249 ITR 671 has affirmed the said decision. However, it has been held in the case of P.R. Basavappa & Sons v. CIT [2000] 243 ITR 776 (Kar.) that the decision in Prithipal Singh & Co.'s case [1990] 183 ITR 69 is in respect of the assessment year 1970-71, i.e., before insertion of the Explanation. Therefore, keeping in view the law laid down by the Hon'ble Supreme Court in K.P. Madhusudhanan's case [2001] 251 ITR 99, the case relied upon by the ld. A/R, with due respect, is not applicable to the facts of this case as the present case is after the addition of Explanation to section 271. 12.25 In the case of Smt. Geeta Devi, the penalty w ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... o penalty would be imposed, was a finding of fact. Similarly, the finding that no actual concealment was established was also a finding of fact and, therefore, the assessee would be held to have discharged the onus under the Explanation to section 271(1)(c). Accordingly, the Tribunal was justified in cancelling the penalty. Whereas in the case before us, the loss claimed was such as could not be substantiated. Explanation given in this regard was only general, stock register was not maintained and, therefore, it was not possible to verify the claim of damaged stock and also no material was produced to disapprove the finding of the CIT(A). Hence, the facts of the cited case are distinguishable and not applicable to the facts of the present case. 12.29 In the case of Southern Gas Fittings (P.) Ltd., it was held that simply on the basis of assessee's agreeing to addition, penalty cannot be sustained, revenue must prove mens rea. Whereas in the case before us, the loss claimed was such as could not be substantiated. Explanation given in this regard was only general stock register was not maintained and, therefore, it was not possible to verify the claim of damaged stock and also no ma ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... result, the appeal filed by the assessee is dismissed. Per Shri B.R. Jain.--Unable to concur with the finding and conclusion arrived at by my ld. brother I record my dissent and proceed to pass a separate order as under:-- 2. The assessee is an exporter and his income is exempt under section 80HHC of the Act. Accounts of the assessee are duly audited. The return is accompanied with the report of auditors under sections 44AB and 80HHC of the Act. The assessee returned loss of Rs. 36,80,600. The assessment was completed after examination of books of account. The Assessing Officer was also satisfied that required details have been filed by the assessee and finding to this effect has been recorded in the assessment order. However, the assessee agreed to complete the assessment at nil income. It is pertinent to mention here that the loss of Rs. 36,80,600 was returned by the appellant after claiming set off for an income of Rs. 69,138 from other sources. It is thus the assessment at nil income was a result of net loss of Rs. 69,138 as against returned loss of Rs. 37,40,738 under the head income from business or profession. This amount of loss finally came to be set off against the inc ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nting, bank interest etc. also jumped and reduced the profit. To increase the production capacity, company began to use the imported machinery. Therefore, the company had to employ some additional staff. It resulted the adverse effect on profit. Salary expenses: 1995-96 1996-97 2.01 lakhs 5.40 lakhs 5. The goods exported under L/c No.: Once stood still at Singapore during the transaction. We had to air lift the cargo (under invoice No. KM/58) from Singapore to New York. In this case, company had to pay 3 + lakhs as air freight otherwise according to clause in above L/c. The freight was liable to pay at destination (buyer) Our company had lodged a case against the freight carrier company (M/s. Natvar Pareekh Industries, Jaipur) for the default in services and asked to return the amount with interest. The case is yet to be decided by the Hon'ble Court. Freight expenses: 1995-96 1996-97 0.81 lakhs 4.15 lakhs 6. It was our misfortune that all bulk orders procured were in stock fabrics with waifer thin margin. As the fabric was not fresh, production and finishing time got doubled and on the other hand, labour cost, factory overheads, bank interest burden diminished our profit m ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the profits from business. No defects were pointed out nor any deviation found in the method of accounting employed during the year. No sale or purchase were doubted. Complete quantitative tally was available on record. No enquiry was made neither in the assessment proceedings nor in penalty proceedings for alleging the claim as fraudulent. Stating fraudulent claim as a fact in her penalty order is absolutely wrong, contrary to the facts and without any basis or material on record. I have also perused the show-cause notice issued by the Assessing Officer. At no stage of the proceedings the assessee was asked to explain the manufacturing defect. Holding that the assessee could not even explain the manufacturing defect is therefore without any basis or material on record and is thus erroneous. I am therefore satisfied that there was no such basis for formation of any opinion by the Assessing Officer in penalty proceedings that the assessee had not filed the true particulars of his income. 5. The Assessing Officer in para 3 of the penalty order has also observed that since the assessee had furnished inaccurate particulars of income, penalty proceedings 271(1)(c) of the I.T. Act, 196 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tracted proceedings and to purchase peace, particularly when no financial burden was to come. It has further been deposed that he attended the proceedings without the company of his legal advisor and could not even remotely envisage any penalty situation in the circumstances, particularly when every fine details were submitted during the earlier hearings by his counsel. The said affidavit appears to have been sent to the Assessing Officer for obtaining a remand report but no contrary material thereto has been brought by the Assessing Officer in the remand report dated 7/9-2-2001 sent to the ld. Commissioner of Income-tax (Appeals) under her letter No. 1157. The Assessing Officer in the remand report merely expressed her opinion which was not a result of any material available on record nor found from any of the enquiry conducted by her or her predecessor. This was her subjective opinion and not satisfaction as required under section 271(1)(c) of the I.T. Act, 1961 for imposing the penalty. Since complete details were available and assessee did not agree of concealed income, nor that he had furnished inaccurate particulars, the assessee appears to have been persuaded to have agreed ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... The following further question of difference may also be referred to the Hon'ble President, ITAT in terms of section 255(4) of the Income-tax Act, 1961:-- "Whether while deciding this appeal, reasons of loss as mentioned in the assessee's letter dated 210-9-T999 can be considered as good reasons which could not be substantiated by the assessee at any stage of hearing either before the A.O., CIT(A) or before the Tribunal and to avoid deep scrutiny/investigation he offered to surrender the loss in the assessment proceedings. REFERENCE UNDER SECTION 255(4) OF THE INCOME-TAX ACT, 1961 As there is a difference of opinion between the Members, the same is required to be resolved by one or more Members of the Tribunal as nominated by the Hon'ble President, ITAT in terms of section 255(4) of the I.T. Act. Accordingly, the question on which the Members have unanimity is referred as under:-- "Whether on the facts, findings and in law there was any justification in confirming the penalty of Rs. 14,45,240 imposed under section 271(1)(c) of the I.T. Act, 1961?" 2. The -Members, however, do not have unanimity on the following question, which the ld. Judicial Member also refers in terms of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... other sources Rs. 69,138 ------------- Rs. 36,80,600 ------------- The Assessing Officer took assessment and raised several queries which I shall refer to in detail a little later. Ultimately, the assessee agreed that income be taken at nil. The Assessing Officer accordingly, vide order dated 15-2-2000 took the income at nil. The assessment order is a brief order and is reproduced here in below:-- "Return of income was filed on 29-10-1997 declaring loss of Rs. 36,80,600. Notice under section 143(2) of the Income-tax Act issued and served upon the assessee in response to which V.K. Gupta, CA and A.R. of the assessee attended from time to time. Books of account produced which have been examined on test check. Required details have also been filed and case has been discussed, The assessee is deriving income from export of garments. During the course of assessment proceedings, the assessee has offered to surrender the loss claimed at Rs. 36,80,600 and agreed to complete the assessment on nil income. Therefore, the assessment is completed on nil income. Assessed. Issue necessary forms. Give credit of prepaid taxes, if any, after due verification. Penalty proceedings under sectio ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... roceedings before the Commissioner of Income-tax (Appeals). It is noted that the assessee had contended that except for rejection of explanation of the assessee, no specific enquiry into the correctness, truthfulness, accuracy of particulars furnished by the assessee was gone into nor any concealment proved. The penalty was sought to be cancelled on the basis of decisions of different High Courts and of various Benches of Tribunal as are noted at pages 4 to 5 of his order. The assessee further filed an affidavit before the Commissioner of Income-tax (Appeals) stating therein that in response to a telephonic call, the assessee agreed to make a surrender to be assessed at nil income in order to avoid protected proceedings and to purchase peace particularly when no financial burden was involved. The attendance of the assessee was without his legal advisor and so he could not visualize the situation when he would have to face penalty. The learned Judicial Member then noted the following findings of the learned Commissioner of Income-tax (Appeals) in paras 2.8 and 2.9 of the order reproduced as below:-- "2.8 In view of the above position, I do not find the argument given to be acceptab ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ission of the assessee and that of learned Departmental Representative, considered and discussed the following cases:-- Suresh Chandra Mittal [2000] 241 ITR 124 (MP) Affirmed by Hon'ble Supreme Court in Suresh Chandra Mittal [2001] 251 ITR 9 (SC). The said case was distinguished as revised return was filed in that case, whereas no revised return was filed in this case by the assessee. K.P. Madhusudhanan [2001] 251 ITR 99. The above case was held to be in favour of the Revenue and not of the assessee. Shivlal Tak's case [2001] 251 ITR 373 (Raj.) This case was also distinguished on the ground that claim of loss made in the return was not substantiated here. The Explanation given by the assessee in this regard was only general. The stock register was not maintained and claim of damaged stock could not be verified. Ess Ess Marbles (India) (P.) Ltd's case Rama Saran Gupta's case [1997] 20 Tax World 196 (Jp.) Rhone Poulenc Ltd's case D.N. Ghiya's case Bansiwala Iron & Steel Re-rolling Mills's case Manjit Singh Baldev Singh Commission Agent's case Rajasthan Vanaspati Products (P.) Ltd.'s case Chiranjilal Tak's case Ramsaran Gupta's case [1997] 20 Tax World 76 (Jp.) Abril P ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... represent the income in respect of which particulars have been concealed. In this case, the Assessing Officer found that the assessee has not substantiated his claim of loss and proceeded to impose the penalty which was upheld by the Commissioner of Income-tax (Appeals). Since the assessee was unable to furnish any evidence in support of his claim of loss and without filing any revised return of income, he offered to be assessed at nil income, therefore, keeping in view that the loss claimed was such as could not be substantiated and in the absence of any contrary material against the finding of the Commissioner of Income-tax (Appeals) and also respectfully following the decision of Apex Court in [2001] 251 ITR 99 no error is found in the order of the Commissioner of Income-tax (Appeals) confirming the levy of penalty under section 271(1)(c) and, accordingly, the order of the Commissioner of Income tax (Appeals) is upheld." 11. The learned Accountant Member did not concur with the finding of the learned Judicial Member. After noting briefly the facts of the case, the reply of the assessee and the fact that the assessee surrendered the loss to avoid litigation, it is noted that pen ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ices and asked to return the amount with interest. The case is yet to be decided by the Hon'ble Court. Freight expenses: 1995-96 1996-97 0.81 lakhs 4.15 lakhs 6. It was our misfortune that all bulk orders procured were in stock fabrics with waifer thin margin. As the fabric was not fresh, production and finishing time got doubled and on the other hand, labour cost, factory overheads, bank interest burden diminished our profit margin." "4. The assessee again filed a letter stating further reason for loss as under:-- (i) "There is gross loss of Rs. 19.89 lakhs in trading account. Major loss is loss in trading. As given earlier point 6 of reason of losses the loss is due to defective fabrics. The fabric was got doubled in production and was rejected, this caused in gross loss. (ii) Bank interest during current year is Rs. 7.26 lakh instead of Rs. 2.48 lakh in previous year." 12. The learned Accountant Member further observed that in the assessment order, the Assessing Officer did not hold that the assessee did not substantiate the claim of loss. Saying so in the penalty order did not advance the case of the Revenue. It is further observed that none of the reasons given by the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tisfaction as required under the statutory provisions. The learned Accountant Member concluded as under:-- "Since complete details were available and assessee did not agree of concealed income nor that he had furnished inaccurate particulars, the assessee appears to have been persuaded to have agreed to be assessed at nil income, this too because he entertained a bona fide that there will be no financial burden on him and could not seven remotely envisage any penal situation. Under such glaring facts and circumstances, there was no necessity or occasion nor any time available with him to file a revised return. I am, therefore, satisfied that the assessee entertained a bona fide belief that mere agreeing to be assessed at nil income would not amount to concealment of income or furnishing of inaccurate particulars of such income by him besides his explanation being bona fide and all the facts relating to the same and material to the computation of income have been disclosed by him and also that the failure to return the correct income did not arise from any fraud or neglect on his part. The surrender of loss appears to be under a good faith and the same cannot, therefore, be equate ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 130. 16. The learned counsel also assailed levy of penalty as no tax was found to be payable on nil assessed income. In this connection, reliance was laced on decision of Rajasthan High Court in the case of CIT v. Harshvardhan Commercials & Minerals Ltd., 28 TW 374 (Raj.), as also on the decision of Punjab & Haryana High Court in the case of Prithipal Singh & Co., [1990] 183 ITR 69 which was confirmed on appeal by the Hon'ble Supreme Court in the case of Prithipal Singh & Co. [2001] 249 ITR 670. The assessee also relied upon several other decisions including the decision of Hon'ble Madras High Court in the case of N. Krishnan and also on the decision of Rajasthan High Court in the case of Rajasthan State Electricity Board v. Dy. CIT [1993] 200 ITR 434. It was further contended by the learned counsel that if two reasonable views of the matter are possible, the view favourable to the assessee has to be adopted. Reliance in this connection was placed on the decision of Hon'ble Supreme Court in the case of CIT v. Vegetable Products Ltd. [1973] 88 ITR 192. The learned counsel also tried to distinguish the decision of Karnataka High Court in the case of P.R. Basavappa & Sons by pointin ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ra 2), the Hon'ble Member has observed that the income of the assessee is exempt under section 80HHC of the Act, accounts are duly audited, the return is accompanied auditors' report under sections 44AB and 80HHC and assessment was completed after examination of books of account. The assessee claimed loss of Rs. 36,80,600. All these facts were also verified by the assessee while signing the verification in the return of income on 25-10-1997 (copy enclosed). He also made specific notes below the computation of total income. (i) Loss carried forward to set-off in future profit Rs. 36,80,600. (ii) The assessee made export sales but deduction under section 80HHC is not applicable due to assessee. He fulfils other conditions entitled under section 80HHC benefits. (iii) However, the assessee ignoring all the veracity of the accounts, surrendered the entire loss claim to nil after attending certain hearings before the Assessing Officer (evident from the copies of order sheet entries enclosed) and furnishing certain details. This raises following issues to be looked into- (a) Why the assessee surrendered the loss claim of Rs. 36,80,600 when he claimed and verified in the Return of Inco ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... f satisfaction by the Assessing Officer in the course of the assessment proceedings, before initiating proceedings under section 271(1)(c) of the Income-tax Act. The learned Accountant Member had made a reference to the fact that the satisfaction in accordance with law has not been recorded. The learned counsel for the assessee further argued that initiation of penalty proceedings was bad in law as the Assessing Officer failed to record satisfaction about concealment of income or furnishing of inaccurate particulars of income. He referred to two decisions, one of Hon'ble Delhi High Court and another of Punjab & Haryana High Court, referred to hereinbelow. The learned Accountant Member has not said anything on this aspect of the matter, nor the learned Departmental Representative. The learned Departmental Representative also did not address on this aspect of the matter. 21. In the case of Ram Commercial Enterprises Ltd., their Lordships of Delhi High Court, after considering decision of their Lordships of Hon'ble Supreme Court in the case of D.M. Manasvi v. CIT, [1972] 86 ITR 557, observed as under:-- "Having heard learned counsel for the parties and having given our anxious consi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... confirmed the decision of Hon'ble Punjab & Haryana High Court in the case of Prithipal Singh & Co. [1990] 183 ITR 69. Their Lordships of Punjab & Haryana High Court upheld the cancellation of penalty in a case where there was no assessed income, nor any tax was found to be payable on assessment with the following remarks:-- "Penalty imposed in paid in addition to the tax payable. When there is no tax payable, the question of any penalty does not arise. In fact, evasion of tax is the sine qua non for imposition of penalty. Clause (iii) deals with cases referred to in clause (c) under sub-section (1) of section 271 of the Act and it clearly provides therein that the penalty or further sum payable by a person would be in addition to any tax payable by him. Explanations 3 and 4 annexed to the said provision of law also presuppose taxable income with regard to the assessment year in question. If there is no taxable income or tax assessed for payment during a particular year, the question of evasion and consequently penalty do not arise. As is obvious from annexure "B', the assessee was assessed finally at a loss figure amounting to Rs. 34,164 as pointed out at page 333 of the record. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... xercise of its jurisdiction under article 136 of the Constitution. That certainly, could not be so when an appeal is dismissed though by a non-speaking order. Here the doctrine of merger applies. In that case, the Supreme Court upholds the decision of the High Court or of the Tribunal from which the appeal is provided under clause (3) of article 133. This doctrine of merger does not apply in the case of dismissal of a special leave petition under article 136. When an appeal is dismissed, the order of the High Court is merged with that of the Supreme Court." Thus, order of Hon'ble Punjab & Haryana High Court merged with the order of Hon'ble Supreme Court and became law of land under article 141 of the Constitution. As per the law laid down, penalty under section 271(1)(c) can be recovered in addition to tax found payable on assessment. In case no tax is found to be payable, no penalty can be imposed. There is no dispute that in case in hand no tax was payable and, therefore, question of levy of penalty would not arise. The above position was also recognized by the Legislature and clause (iii) to section 271(1)(c) was amended by Finance Act, 2002 w.e.f. 1-4-2003. The corresponding ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... acts and judicial pronouncements cited before him and after making particular reliance on the decision of Hon'ble Supreme Court in the case of K.P. Madhusudhanan [2001] 251 ITR 99 confirmed the action of the ld. CIT A and proposed to dismiss the appeal of the assessee. 28. The learned Accountant Member dissented from the above order and held that penalty imposed should be deleted. The learned Departmental Representative has also emphasized the two factors (i) loss of Rs. 36,80,600 was claimed and verified in the return and (ii) why the assessee had not relied upon his audited books of account and audit report. The onus lies on the assessee to prove that act of surrender did not tantamount to concealment of income or furnishing of inaccurate particulars of income. The learned Departmental Representative further argued that decision ill the case of Suresh Chandra Mittal [2001] 251 ITR 9 was not applicable to the facts of the case as no revised return was filed by the assessee. The other decision of the Supreme Court was applicable. The learned Departmental Representative also placed copy of verification of return by the assessee and copy of order-sheet entries made during the course ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the claim of loss made in the return and, therefore, levy of penalty was justified. He has also approved the levy as no revised returns were filed by the assessee. These findings are sought to be supported by the ld. Revenue authorities. In the following paras, I consider this aspect of the matter. This is without prejudice to the earlier finding on additional evidence. 31. The learned Commissioner of Income-tax (Appeals) in his order confirmed the levy of penalty purportedly referring to what happened before the Assessing Officer during the course of assessment proceedings although the Assessing Officer did not record such a finding in the assessment order as requested under the law. 32. The learned Judicial Member has repeatedly held in his proposed order that the loss claimed in the return could not be substantiated. The explanation given in this regard was only general. Stock register was not maintained and, therefore, it was not possible to verify the claim of damaged stock and also no material was produced to disprove the finding of learned Commissioner of Income-tax (Appeals). The learned Judicial Member further observed that the assessee failed to prove that the loss suf ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... purpose. (2) Details of salary-Names and addresses of new employees Mode of payment and proof. (3) Explain point No. 6 of reason for loss. (4) Details of increase in freight. (5) Explain clearly as to why loss incurred and substantiate it with proof and in figures. (6) Balance, confirmation. Case adjourned for 27-10-1999." (ix) It is again not recorded as to what happened on 27-10-1999, the date fixed for hearing. (x) The next entries dated 2-11-1999 and 15-11-1999 are to the following effect:-- "2-11-1999-Sh. V.K. Gupta, CA attended, Adj. for 11-12-1999 to bring books of account for checking. (xi) There is no record as to what happened on 11-12-1999. In fact, no proceedings are recorded for 21 days till 21-12-1999. (xii) The entry dated 21-12-1999 records presence of Sh. V.K. Gupta along with the presence of Accountant of the assessee. It is recorded that books of account were produced by the assessee. The Assessing Officer asked the assessee to furnish the further following details/explanation:-- "21-12-1999 (1) Stock Tally. (2) To substantiate as to which stock got damaged and proof of the same. (3) As to what was ultimately done with the rejected stock. (4) In pr ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ntry upto 31-1-1997. No details or- correspondence with the erring party given. (2) Books of account to verify instances of sale on cheaper rates. (3) Why salary is almost three times when production is less? Also summons issued to members remained unserved with remarks unverifiable unknown. Hence this expenditure is not fully verifiable. (4) The damaged stock was sold in the local market or exported. Normally foreign buyers reject sick stock. Adjourned for 25-1-2000." (xvii) No entry of the adjourned date i.e. 25-1-2000 is recorded in the order-sheet, nor it is clear as to what happened on the above date. (xviii) The next entry is of dated 27-1-2000. The presence/attendance of the assessee and Sh. V.K. Gupta is noted but what happened on that date is not mentioned except that the case is adjourned to 31-1-2000. (xix) The next entry in the order-sheet is of dated 31-1-2000 where it is recorded "none attended". (xx) The next entry is dated 14-2-2000 recording that Sh. Subhash Gupta, proprietor attended and offered to surrender the loss claimed. Hence, the assessment is being completed on nil income to which the assessee had agreed. (xxi) The next entry is of dated 15-2-2000 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n inference can be drawn that the above query was not answered to. Would it follow that claim of loss was not substantiated? 35. It is further pertinent to note that the assessee was directed to remain present in assessment proceedings along with books of account right from 28-12-1999 till 27-1-2000. Several dates were fixed in the abovementioned period, some of dates were not even noted in the order-sheet and other dates though noted, the detail of proceedings is not recorded. Why assessee's presence/attendance was necessary in those proceedings is not clear. Why he was summoned by the Assessing Officer to come to his office on 14-2-2000 when he surrendered the loss? If he had failed to attend on 31-1-2000, the Assessing Officer was required to pass ex parte order on the basis of material on record. Why this was not done? What difficulty the Assessing Officer had faced? The above background and the affidavit of the assessee is to be taken into account for determining whether Explanation 1 to section 271 (1)(c) is applicable or not. 36. Before coming to the conclusion whether Explanation 1 to section 271(1)(c) is applicable, the following further circumstances are to be borne in ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ere not sufficient to carry on investigation and verification or did not contain names and particulars of the buyers or did not show whether it was export sale or local sale. In the above situation how it could be said that the loss was not substantiated. It is stated that the stock register was not produced to show that the goods were damaged and defective. No such finding is recorded in the assessment order. If such a finding is recorded in some secret note, then it is of no help. Further I do not know-how stock register will contain entry of damaged and defective goods which were claimed and noted by the Assessing Officer to have been sold at cheaper rates and, therefore, loss was suffered. Is there any material on record that this claim was false and fictitious? On the other hand, entries in the order-sheet do suggest that the assessee did whatever was possible by producing details from the entries in the books of account and other material as required by the Assessing Officer. It is evident that fresh and new query was raised by the Assessing Officer every time when the case was taken up for hearing. Even the proprietor of the assessee was summoned to be present in proceeding. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... sioner (Appeals) or the Commissioner to be false or (B) such person offers an explanation which he is not able to substantiate and fails to prove that such explanation is bona fide and that all the facts relating to the same and material to the computation of his total income have been disclosed by him, then, the amount added or disallowed in computing the total income of such person as a result thereof shall, for the purposes of clause (c) of this sub-section be deemed to represent the income in respect of which particulars have been concealed." On analysis of above provisions particularly Explanation 1, it is clear that the explanation would be applicable and the Assessing Officer have to examine the following circumstances: (a) Whether the assessee has offered no explanation on facts material to his computation of income? (b) Whether the explanation offered as above is found to be false? (c) Whether the explanation offered by the assessee is not substantiated by him? (d) Whether there is failure to prove that such explanation was bona fide and that all facts relating to the same and material to the computation of his total income were disclosed by the assessee. Only on sa ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ly the explanation. In the penalty order, the Assessing Officer did observe that the assessee could not substantiate the claim of loss and had no explanation to offer. It is further observed that the loss was fraudulently claimed and manufacturing defect could not be explained. I have also noted the observations of learned Commissioner of Income-tax (Appeals) on further appeal and that of learned Judicial Member in appeal carried by the assessee to the Tribunal. It has been held that the assessee could not substantiate the claim of loss and, therefore, is liable to be penalized in terms of Explanation 1 to section 271(1)(c). The learned Commissioner of Income-tax (Appeals) has tried to elaborate how explanation was not substantiated. The finding which was required to be recorded in the assessment order relating to satisfaction of the Assessing Officer are attempted to be recorded by the learned Commissioner of Income-tax (Appeals) in the impugned penalty order. This is not permissible and reference can be made to the decision of the Hon'ble Delhi High Court referred to earlier. The satisfaction and finding required to be recorded in assessment proceedings cannot be recorded for the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... g to compute his income were not disclosed by the assessee. I have already discussed in great details material facts and background of the case. On above facts, it is not possible for me to hold that explanation furnished by the assessee was not bona fide and material facts relating to computation of his total income were withheld by the assessee. It is clear on record that assessment is totally based on the offer of the assessee to get assessed at nil income with a view to put an end to litigation and to buy piece of mind. The finding as required by clause (B) of above referred to Explanation 1, could not be recorded in the present case. The facts here are quite akin to the facts in the case of Suresh Chandra Mittal [2000] 241 ITR 124 which has been affirmed by the Hon'ble Supreme Court in the case of Suresh Chandra Mittal [2001] 251 ITR 9. It is a case where the assessee acted bona fidely and in good faith and furnished all the information material for the assessment of the assessee. Nothing has been established to be concealed. No claim has been found to be wrong or false and, therefore, question of furnishing inaccurate particulars of income did not arise. The ratio of the oth ..... X X X X Extracts X X X X X X X X Extracts X X X X
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