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TMI Blog2006 (10) TMI 68X X X X Extracts X X X X X X X X Extracts X X X X ..... n at the time of hearing of the appeal." 3 At the time of hearing before us learned counsel for the assessee argued at length. He stated that before initiating the penalty proceeding under section 271(1) (c) the satisfaction of the Assessing Officer is necessary. In the assessment order no satisfaction is recorded by the Assessing Officer for initiation of penalty proceeding and, therefore, the initiation and consequently the levy of penalty under section 271(1) (c) is not warranted. In support of his contention he has relied upon the following decisions: (1) CIT v. Ram Commercial Enterprises Ltd. [2000] 246 ITR 568 (Delhi) (2) Diwan Enterprises v. CIT [2000] 246 ITR 571 (Delhi) (3) CIT v. Vikas Promoters P. Ltd. [2005] 277 ITR 337 (Delhi); and (4) Kshetra Mohan Roy v. ITO [1983] 139 ITR 441 (Cal). 4 With regard to the merit of the levy of penalty for concealment of income he stated that the assessee has furnished the confirmation of the creditors before the Assessing Officer. The Assessing Officer has asked the assessee to produce the creditors. Since the assessee was unable to produce the creditors, he surrendered the cash credit as income of the assessee. H ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of both the parties and perused the material placed before us. The assessee has challenged the validity of the penalty order on the ground that the Assessing Officer has not recorded the satisfaction in the assessment order for initiation of penalty proceedings. In support of his contention he has relied upon the three decisions of the hon'ble Delhi High Court and one decision of the hon'ble jurisdictional High Court. We find that in the case of CIT v. Ram Commercial Enterprises Ltd. [2000] 246 ITR 568 (Delhi) their Lordships held as under (headnote) "The satisfaction as to the assessee having concealed the particulars of his income or furnished inaccurate particulars of such income is to be arrived at by the Assessing Officer during the course of any proceedings under the Act, which would mean the assessment proceedings, without which, the very jurisdiction to initiate the penalty proceedings is not conferred on the assessing authority by reference to clause (c) of sub-section (1) of section 271 of the Income-tax Act 1961. A bare reading of the provisions of section 271 and the law laid down by the Supreme Court makes it clear that, it is the assessing authority who has to ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Lordships of the hon'ble Allahabad High Court in the case of Shyam Biri Works P. Ltd. v. CIT [2003] 259 ITR 625 dissented from the decision of the hon'ble Delhi High Court in the case of Ram Commercial Enterprises Ltd. [2000] 246 ITR 568 and held as under (headnote): "Whenever the Assessing Officer has to record his satisfaction under the Income-tax Act, 1961, it is specifically mentioned, e.g., in section 148(2) of the Act which states that 'the Assessing Officer before issuing any notice under this section will record the reason for doing so'. Section 273 does not have a similar provision requiring the recording of the reason or satisfaction. Hence, it has to be inferred that Parliament never intended that before initiating penalty proceedings and issuing notice under section 273, the Assessing Officer must record his reasons in writing for doing so. Although the Assessing Officer must have satisfaction as required under section 273 of the Act, it is not necessary for him to record that satisfaction in writing before initiating penalty proceedings under section 273." 13 The hon'ble jurisdictional High Court in the case of Becker Gray and Co. (1930) Ltd. v. IT ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ection 271(1) (c) of the Act, after calling for explanation from the assessee, as the assessee failed to offer any convincing explanation and unless it was demonstrated that such indication by the Assessing Officer to initiate penalty proceedings was mala fide, perverse, based on no evidence, a misreading of evidence or which a reasonable man could not form or that the person concerned was not given due opportunity resulting in prejudice, the said proceedings needed no interference. The imposition of penalty was valid." 15 From the perusal of above decisions, it is clear that the hon'ble Delhi High Court on the one hand and the hon'ble Allahabad and Madras High Courts on the other hand has taken the contrary decisions. It is also interesting to note that the hon'ble Delhi High Court in the case of Ram Commercial Enterprises Ltd. [2000] 246 ITR 568 and the hon'ble Madras High Court in the case of M. Sajjanraj Nahar v. CIT [2006] 283 ITR 230 has considered and relied upon the same decision of the hon'ble apex court in the case of CIT v. S. V. Angidi Chettiar [1962] 44 ITR 739. Therefore, it would be useful to refer to the above decisions of the hon'ble apex court. In ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ep for imposing penalty is a condition for the exercise of the jurisdiction. There is no evidence on the record that the Income-tax Officer was not satisfied in the course of the assessment proceeding that the firms had concealed its income. The assessment order dated the November 10, 1951, and there is an endorsement at the foot of the assessment order by the Income-tax Officer that action under section 28 had been taken for concealment of income indicating clearly that the Income-tax Officer was satisfied in the course of the assessment proceeding that the firm had concealed its income." 16 We find that the hon'ble Delhi High Court in the case of Ram Commercial Enterprises Ltd. [2000] 246 ITR 568 has considered the observation of their Lordships of the apex court with regard to the necessity of satisfaction of the Income-tax Officer before the penalty proceedings are initiated and held that the satisfaction of the Assessing Officer is must before initiating the penalty proceedings Therefore, they relied upon the finding of fact arrived at by the Tribunal that no satisfaction was recorded by the Assessing Officer before initiating the penalty proceedings. There fore, their ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... there is difference amongst the opinion expressed by their Lordships of different High Courts. However, we find that the hon'ble apex court in the case of CIT v. S. V. Angidi Chettiar [1962] 44 ITR 739 has considered this issue. In that case also the counsel for the assessee has challenged that the Income-tax Officer was not satisfied during the course of the assessment proceedings that the firm had concealed the particulars of its income. Their Lordships of the hon'ble apex court accepted the legal contention of the assessee that the power to impose the penalty depends upon the satisfaction of the Income-tax Officer in the course of proceedings under the Act. However, after examining the facts, their Lordships held as under (page 745) "The assessment order dated the November 10, 1951, and there is an endorsement at the foot of the assessment order by the Income- tax Officer that action under section 28 had been taken for concealment of income indicating clearly that the Income-tax Officer was satisfied in the course of the assessment proceeding that the firm had concealed its income." 22 Thus the endorsement at the foot of the assessment order by the Income-tax Officer ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of two addition (i) unexplained cash credit added under section 68 of Rs. 8,70,000 and (ii) unexplained difference between the closing stock shown in the trading account/balance-sheet of Rs. 87,510. We will deal with both the above items separately. 26 Regarding addition of unexplained cash credit under section 68 of the Act. 27 There was credit of Rs. 8,70,000 in the assessee's books of account being unsecured loans. The assessee has furnished loan confirmation of the creditors before the Assessing Officer on November 27, 2002. On November 7, 2003, the assessee again filed details of loan taken. There after, Assessing Officer asked the assessee to produce the loan creditors in person immediately. On November 11, 2003, the assessee appeared before the Assessing Officer and stated that no loan creditor is ready to depose before the Assessing Officer and therefore, he is forced to offer the whole amount for taxation. The above facts are evident from the order sheet entry made by the Assessing Officer, copy of which is placed before us. On December 30, 2003, the Assessing Officer completed the assessment making the addition of Rs. 8,70,000. He has also levied the penalty unde ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e Tribunal was justified in treating, it to be a case covered by clause (B) of Explanation 1 to section 271(1)(c) and cancelling the penalty. The Tribunal had based its conclusion on the factual aspects and hence no interference was called for." 31 From the above it is evident that their Lordships upheld the factual finding of the Tribunal that the clause (B) of Explanation was applicable and since the assessee's explanation was found to be bona fide and all facts relating to the same were disclosed the assessee was held to be not liable for the penalty. 32 In the case of K. R. Chinni Krishna Chetty [2000] 246 ITR 121 (Mad), relied upon by learned counsel, the facts were altogether different. In the above case the assessee has constructed a building. The Assessing Officer estimated higher cost of construction on the basis of valuer's report. He added the difference between the cost of construction shown by the assessee and estimated by him and also imposed penalty under section 271 (1) (c) thereon. The Tribunal cancelled the penalty and held that there was no concealment of income at all. On reference their Lordships upheld the order of the Tribunal and held as under (h ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... husudhanan v. CIT [2001] 251 ITR 99. The facts of that case are that the assessee had taken certain bank drafts for payment to suppliers of rice. It had made entries in its account not on the dates on which drafts were obtained but a few days later. The explanation of the assessee was that sufficient cash balance was not available on those dates, therefore, it had obtained loans from friends and had expected to repay such loans within a short time but no entries were made in its books of account in respect of such loans. The assessee also stated that since it was unable to furnish evidence for such loans, it offered the amount of Rs. 93,000 as additional income. The Assessing Officer levied the penalty under section 271(1) (c) applying Explanation 1(B). The Income- tax Appellate Tribunal cancelled the penalty but the hon'ble Kerala High Court on a reference held that the imposition of penalty was valid. On appeal by the assessee to the Supreme Court their Lordships affirmed the decision of High Court and held as under (headnote) "The Explanation to section 271(1)(c) is a part of section 271. When the Assessing Officer or the Appellate Assistant Commissioner issues a notice unde ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... r disallowed in computing the total income, of the assessee represents the income in respect of which particulars have been concealed 40 Part A of the Explanation would be applicable in circumstances (i) where a person fails to offer an explanation; (ii) where a person offers an explanation which is found by the Assessing Officer or by the Com missioner of Income-tax (Appeals) to be false. 41 Part B of the Explanation would be applicable (i) where a person offers an explanation but he is unable to substantiate the same; and (ii) he also fails to prove that such explanation is bona fide and that all the facts relating to the same which are material to the computation of the total income have been disclosed by him. 42 Part B of the Explanation would be applicable only if both the above conditions are satisfied i.e. where the assessee is unable to substantiate his explanation and also unable to prove that the explanation is bona fide. If the assessee is able to prove that the explanation is bona fide and all the facts relating to the same has been disclosed, the assessee's case would not fall within Part B of the Explanation even if he is unable to substantiate the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... closing stock in the trading account and balance-sheet at different figures. He asked the assessee to explain the discrepancy. Since the assessee was unable to explain the discrepancy, he offered the income of Rs. 87,500 in this regard. The Assessing Officer made the addition of Rs. 87,500 and has also levied the penalty under section 271(1)(c) which is upheld by the Commissioner of Income-tax (Appeals). 48 At the time of hearing before us, learned counsel for the assessee was fair enough to admit that the assessee has no explanation for the discrepancy in recording the closing stock which shows at different figures in the trading account and balance-sheet. In view of above position, Part A of the Explanation i.e. "the assessee fails to offer explanation" would be satisfied. Therefore, as per Explanation 1 Part A, the assessee shall be deemed to have concealed the particulars of income of P.s. 87,500. We, therefore, uphold the levy of penalty for concealment of income in respect of addition of Rs. 87,500 and direct the Assessing Officer to recompute the penalty on the above amount. 49 In the result, the assessee's appeal is partly allowed. - - TaxTMI - TMITax - Income ..... X X X X Extracts X X X X X X X X Extracts X X X X
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