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TMI Blog1974 (8) TMI 7X X X X Extracts X X X X X X X X Extracts X X X X ..... of contract businesses as Rs. 12,45,000 resulting in a net profit of Rs. 42,209. The Income-tax Officer proceeded to make the assessment under section 143(3) of the Income-tax Act. He thought that the amount of profit disclosed by the assessee, which came to slightly more than 3.3% of the total receipts, was very low. Accordingly, he scrutinized the books of the assessee and found that neither the cash book had been written from day to day, nor had the daily balance been struck. Although the assessee had mentioned that it had furnished the particulars of its closing stock in its trading account, yet that had not been done. Subsequently, the assessee estimated its closing stock at Rs. 1,549, but did not disclose the basis for estimating or valuing the same. The expenses claimed by the assessee were mostly unvouched and they had not been debited correctly. Some of the car expenses which should not have been debited in the material account were found debited therein. He, accordingly, found the account books of the assessee to be unreliable and after rejecting them proceeded to make the assessment on the basis of the material available on the record. In respect of the business rela ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... directed that notice under section 271(1)(c)/274 of the Income-tax Act be issued to the assessee requiring it to show cause why a penalty for concealing and for furnishing wrong particulars of its income be not imposed upon it. As the minimum penalty imposable exceeded Rs. 1,000, the Income-tax Officer referred the penalty proceedings to the Inspecting Assistant Commissioner. The assessee submitted to the assessment order but it appeared before the Inspecting Assistant Commissioner to contest the penalty notice. It was urged on its behalf that, according to the view expressed by some of the Income-tax Appellate Tribunals, in cases where additions are made on estimate basis, no penalty under section 271(1)(c) read along with the Explanation thereto, can be imposed. The Inspecting Assistant Commissioner rejected the explanation offered by the assessee and observed : "Those decisions of the Appellate Tribunal referred to by the learned Attorney have not been accepted by the department and with due respect I must differ from the view of the Tribunal." Thereafter, he went on to observe that the assessee was a well-known firm of contractors and year after year its accounts were ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... to penalty under section 271(1)(c) of the Act read with the Explanation thereto ?" Relevant portion of section 271(1) of the Income-tax Act reads thus : (1) If the Income-tax Officer or the Appellate Assistant Commissioner in the course of any proceedings under this Act, is satisfied that any person (a) has without reasonable cause failed to furnish the return of total income......... or, (b) has without reasonable cause failed to comply with a notice under sub-section (1) of section 142 or sub-section (2) of section 143, or (c) has concealed the particulars of his income or furnished inaccurate particulars of such income ; he may direct that such person shall pay by way of penalty-- (i) in the cases referred to in clause(a)......... (ii) in the cases referred to in clause (b) ......... (iii) in the cases referred to in clause (c) ......... Explanation.--Where the total income returned by any person is less than eighty per cent. of the total income (hereinafter in this Explanation referred to as the correct income) as assessed under section 143 or section 144 or section 147 (reduced by the expenditure incurred bona fide by him for the purpose of making o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the normal course of business and that it could not be anticipated that the Income-tax Officer will find them to be defective and estimate the income, was sufficient to discharge the burden cast upon the assessee and that onus shifted to the department which had to establish the fact of concealment by independent evidence. In such cases no question of shifting of burden of proof arises. In the instant case apart from urging that in a case where the assessment had, after rejecting the assessee's books, been made on estimate basis, the provisions of the Explanation to section 271(1)(c) are not attracted, the assessee did not lead any evidence whatsoever to show that there was no fraud or wilful neglect on its part in returning the incorrect income. Accordingly, the Inspecting Assistant Commissioner was justified in applying the Explanation to section 271(1)(c) of the Act and in proceeding on the basis that the assessee had, for the purposes of section 271(1)(c) of the Act, concealed or furnished wrong particulars. The entire chain of argument built up by the learned counsel for the revenue, as also the reasoning adopted by the Inspecting Assistant Commissioner for holding that the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ely assessed but the amount assessed as reduced by the expenditure bona fide incurred by the assessee and disallowed by the Income-tax Officer. Sri Deokinandan Agarwal, learned counsel appearing for the revenue, contends that, according to the Explanation to section 271(1)(c), the total income is to be reduced by the expenditure incurred bona fide by the assessee for the purpose of making or earning any income included in the total income. The expenditure referred to in the Explanation which has to be taken into consideration is the expenditure of the nature which can be claimed as a deduction under sections 30 to 43 of the Income-tax Act. He emphasised that sections 30 to 43 are the sections which specifically provide for deduction of expenses in computing the profits and gains of business or profession. In the instant case the assessee did not claim that any deduction claimed by it under sections 30 to 43 had been disallowed and as such no question of reducing the total income assessed arose. The Inspecting Assistant Commissioner was, therefore, quite justified in applying the Explanation to section 271 (1)(c) of the Act. We are unable to accept this submission. While it is tr ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... total receipts in connection with its business in relation to the Kanpur and the Lucknow sets of business as disclosed by it was Rs. 6,29,554 and Rs. 6,18,145, respectively, has been accepted as correct by the Income-tax Officer. The assessee claimed that the net profit from its Kanpur business was Rs. 27,765. In other words it claimed that Rs. 6,01,789 had been spent by it in connection with that business. The Income-tax Officer by applying a rate of profit of 8%, determined the net profit of that business as Rs. 50,364. In other words, he accepted the assessee's claim for expenses amounting to Rs. 5,79,190 only as against the sum of Rs. 6,01,789 claimed by it, and disallowed the expenses amounting to Rs. 22,599. The Income-tax Officer did not go into the question whether any particular item of expense claimed by the assessee was fictitious or that the same had not been actually spent bona fide for purposes of its business. Merely because it found the books of the assessee to be unreliable and estimated the assessee's income by applying a profit rate of 8%, it does not mean that he either found that the expenses to the extent they were disallowed were either not incurred in fact o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... racted unless the Inspecting Assistant Commissioner further went into the question whether any portion of the amount of expense claimed by the assessee and disallowed, was actually incurred or not, and if incurred whether it was bona fide incurred for purposes of earning the income. It is only after reducing the assessee's income with the expenditure bona fide incurred for earning the same that the Income-tax Officer and the Inspecting Assistant Commissioner could possibly determine whether the returned income was less than 80% of such reduced amount. Since this part of the case was never investigated by the Inspecting Assistant Commissioner, the very basis for the applicability of the Explanation to section 271(1)(c) of the Act was not there and the very foundation of the penalty order disappears. As the very condition precedent for the applicability of the Explanation to section 271(1)(c) was not there, no question of requiring the assessee to prove that the failure on its part to return the correct income was not on account of any fraud or wilful or gross neglect on its part arose. The Explanation to section 271(1)(c) not being applicable to the facts of the case, it was f ..... X X X X Extracts X X X X X X X X Extracts X X X X
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