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TMI Blog1996 (8) TMI 11X X X X Extracts X X X X X X X X Extracts X X X X ..... tion 271(1)(c) of the Act and then to see, again, the statutory requirements of Explanation 1 thereto. The satisfaction of the Income-tax Officer is necessary that the assessee has concealed the particulars of his income or furnished inaccurate particulars of such income. Concealment and inaccuracy as regards particulars are the statutory requirements. Once these statutory requirements are available, then the Income-tax Officer gets power to direct that the assessee shall pay by way of penalty the amount determined. The method of determination of this amount of penalty with reference to clause (c) of section 271(1) is available in sub-clause (iii) of the said section. We are not really concerned with regard to the method of determination in these proceedings. Explanation 1 refers to two situations and those two situations enact deeming provisions in regard thereto. The first situation is available under clause (A) to Explanation 1. The said clause is reproduced hereunder: "(A) such person fails to offer an explanation or offers an explanation which is found by the Income-tax Officer or the Appellate Assistant Commissioner to be false, or". Another situation is also available ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he 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." The statutory provisions of the said proviso, referable to the deeming situation in clause (B) requires consideration of the explanation offered by the assessee on condition that such explanation is bona fide with a further requirement that all the facts relating to the same and material to the computation of his total income have been disclosed by him. Therefore, the statutory requirements of liability under section 271(1)(c) would necessitate consideration of the two situations. The factual matrix should provide the necessary satisfaction of the Income-tax Officer to decide as to whether there is failure to offer an explanation or, in the alternative, the explanation offered is false. If the material on record enables to provide the necessary matrix for the satisfaction of the officer with regard to these alternative aspects, the situation would obviously be governed by clause (A) of Explanation 1. However, if the officer is unable to reach conclusion that the explanatio ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... on of the materials produced revealed a total sales turnover of Rs. 46,20,860. The account books were in bad shape displaying many defects. The expenses were debited under different heads such as commission, transporting expenses, etc., and were not found supported by necessary contemporaneous vouchers. A sum of Rs. 2,18,079 was shown debited as commission on sales. In addition, the expenditure under the head "Salary" amounted to Rs. 51,705. The assessee did not furnish the names and addresses of sales agents or commission agents, nor the names of the employees to whom salaries were paid. The Income-tax Officer found that the licensee of arrack shops, as per the Abkari Rules, alone could be authorised to sell arrack and appointment of commission agents could not be understood and justified. It was revealed that the so-called commission agents are shown to have been paid commission at Rs. 2 per litre of arrack sold. The officer found that this could not be explained. The particulars of the salaries also were not furnished by the assessee. Therefore, an opportunity was given to the assessee through his representative to produce all the necessary materials to justify and explain all ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... es purchased in the preceding accounting year. There was an opening stock of 148 litres. Considering the situation to the effect that the bottles were found each by 15 to 20 per cent. short of the liquid, he reached the conclusions that due to short-filling 25,724 litres were separated and in regard thereto at the average selling rate of Rs. 30 per litre, calculated the suppression at Rs. 7,71,720. He also referred to the significant introduction of cash credits to the tune of Rs. 5,54,200. He found that there is every reason to believe that this suppressed sale proceeds of arrack were invented and introduced in the books as cash credits in the name of partners, and also has been used by the firm for discharging liabilities or incurring expenses. With the assistance of the assessee's representative the officer also took into consideration the amount of Rs. 48,829 claimed as payment of interest in regard to the delay in the payment of the kist amount and rejected the same as not admissible as it is a penal levy. The officer estimated the income at Rs. 4,54,825 on the basis of total sales. The draft order ultimately completed the assessment as proposed at Rs. 4,98,648 specifying ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... th all the statutory formalities, passed the assessment order dated July 11, 1983 (annexure "D"). Before dealing with the assessment order passed by the Income-tax Officer as stated above, to continue the trend of the attitude of the assessee, it would be proper to refer to the reply of the assessee to the notice under section 271(1)(c). It is dated November 8, 1983 (annexure "M"). The following extract from the reply would display the continuance of the casual attitude of the assessee in not even making an attempt to tender what could be called an explanation in any sense of the term. What is replied is as follows : "The defects have been explained by us in our reply to the draft assessment under section 144B. The details of commission paid with the address of the persons to whom payment was made, details of salary payment and expenses incurred under transporting were furnished and the credits were explained during the course of the proceedings under section 144B. The Inspecting Assistant Commissioner issued summons to a few of the partners in the course of hearing on the draft assessment. On account of the then difficulties in providing evidence, it was submitted before the I ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... to examine the theory of confirmatory letters himself. In the order the contents of the letter dated May 13, 1983, have been specified with a record that nothing more is to be submitted as no further evidence is available in regard thereto. The Inspecting Assistant Commissioner has further recorded that the firm was also issued with a summons under section 131 of the Income-tax Act, 1961, giving another opportunity to produce the various details. The assessee through his representative was requested to attend on July 2, 1983. What took place is also a part of the above quotation, referred to in the assessment order. It needs to be reproduced hereinbelow for its necessary and desirable emphasis. It is as follows: "On that date they stated that they are agreeable to the proposed additions. They have now produced a letter dated July 4, 1983, in which they stated that they are not in a position to substantiate their objections against the draft assessment order. They also agreed for completing the assessment with the additions proposed." We are emphasising this aspect because, as already observed, much is sought to be made with regard to the contents of the letter dated July 4, 19 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he order under section 271(1)(c) of the Act is at annexure-I. The order itself places on record two reasons in regard thereto in the factual matrix itself. They are as follows : (1) It was found on examination of accounts that the expenses debited under various heads were not supported by any vouchers. (2) The expenses debited under the heads "commission", "salary" and "transporting" were only a few of such items not supported by vouchers. We have already referred to the contents of the reply dated November 8, 1983. The Income-tax Officer has recorded the conclusion that the assessee himself has admitted that he was not in a position to substantiate their objection against the draft assessment order and they also agreed for completing the assessment with the addition proposed by the Income-tax Officer. It must be emphasised that as regards the order of the Income-tax Officer in the proceeding under section 271(1)(c) of the Act is concerned, the officer has observed that as far as the explanation given by the assessee in the letter dated November 8, 1983, it is only to be rejected as irrelevant and immaterial. It is also observed specifically that no assurance regarding levy o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e returned and the income assessed is the result in viewing the situation with a closed mind. The first aspect with regard to the confirmation letters has been considered by the appellate authority in paragraph 9. We have considered the reasoning and found ourselves difficult to agree with it; firstly, the appellate authority has taken up the amount of Sri Ayyappan Nair stating that he has to account for a credit of Rs. 46,000 in his own name and Rs. 15,000 in the name of his son Sri Anilkumar. We find that this is factually incorrect. The amount of credit shown as against Sri Ayyappan Nair is Rs. 79,000 and not Rs. 46,000. Additionally, the appellate authority has ignored that it is this Sri Ayyappan Nair who has placed on record the communication dated May 13, 1982 stating that he has no material to place on record. We have already considered the circumstances taken into consideration by the Inspecting Assistant Commissioner specifying under which Sri Ayyappan Nair has placed this communication on record. The reasoning in regard thereto is more than vulnerable. The appellate authority has considered the other three amounts of Rs. 40,400, Rs. 56,000 and Rs. 23,000 as investment ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... dent. In fact, the following observation would show that the first appellate authority was aware of the requirement of the situation. It is as follows : "The letter dated July 4, 1983, is a fair indication that the agreement must have been prompted by an understanding in the matter of penalty if not an agreement as such." We feel that it is too much to imply either an agreement or an understanding from the facts and circumstances of the situation. Thereafter the appellate authority has considered the question of the remaining amount of Rs. 43,833. It is in this manner the appeal was allowed feeling it unnecessary the imposition of penalty under section 271(1)(c) of the Act. In the further travel the proceedings came before the Income-tax Appellate Tribunal, Cochin Bench, as the second appellate authority. The Tribunal considered the question and with regard to the aspects referred to hereinbefore has considered the matter afresh. With regard to the letter dated July 4, 1983, the Tribunal found it difficult to infer an understanding between the assessee and the Income-tax Officer that no penalty would be imposed, precisely in this connection, after referring to the contents of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... to place the two letters on record. We have also considered in detail hereinbefore the statutory requirements. Although learned counsel for the assessee strenuously urged that all aspects are not taken into consideration, keeping in mind the special feature of the penalty proceedings, we have also given our anxious thought. We find that from the word "go" the assessee was far away from fairness and reasonableness. When the total turnover was Rs. 55 lakhs odd, there was a return showing loss and that too on the basis of showing cash credits in regard to which there was no material enough to raise proper legal inferences. This made the authorities helpless and that is because of non-co-operation of the assessee in the process of assessment. The authority has placed it on record with reference to the dates and events. The material on record also shows that an advantage is sought to be taken of the letter dated July 4, 1983, which was given in a different context and for a different purpose to spell out that it is in the nature of an understanding or an agreement. It is pertinent to note that the letter is addressed to the higher authority--the Inspecting Assistant Commissioner, Inco ..... X X X X Extracts X X X X X X X X Extracts X X X X
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