Income-Tax Officer vs Kabul Hing House.
1986 Latest Caselaw 363 Del

ORDER

Per Shri Ch. G. Krishnamurthy, Senior Vice President -This is an appeal filed by the ITO stating that the Commissioner (Appeals) was not justified in cancelling the penalty of Rs. 1,25,000 levied by the ITO under section 271(1) (c) of the Income-tax Act, 1961 (the Act).

2. The assessed is a registered firm dealing in the purchase and sale of hing. In the year under appeal on a turnover of Rs. 33,20,710 a gross profit of Rs. 85,215 was disclosed, which worked out to 2.5 per cent. The assessment in this case was originally completed on a total income of Rs. 2,67,385 but that assessment was set aside by the AAC on appeal. In the reassessment that was made, the ITO noticed several discrepancies in the stock particulars maintained by the assessed in respect of the hing dealt in. After listing out all the defects that the ITO notice in the maintenance of accounts and the various omissions he found and after considering the assesseds explanation in respect of these omissions, the ITO made an addition of Rs. 2,32,241 to the book results made up of as under :

Rs.

Rs.

Sale of 283.2 kg. Of hing in the price range Rs. 10-20 at the rate of Rs. 15 per kg.

4,248

Sale of 859 kg. of hing in the price range Rs. 41-50 at the rate of Rs. 50 per kg. based on the last sales

42,950

Sale of 426.5 kg.of hing in the price range Rs. 51-60 at the rate of Rs. 60 per kg. based on sale in this range

15,590

Sale of 1,511.8 kg. of hing in the price range Rs. 61 and above at the rate of Rs. 70 per kg. Based on last sales

1,05,826

The assessed also sole hing in excess to the available goods amounting to Rs. 2,359 which is also to be added in the sales.

Sale of 1,755 kg. Of hing in the price range Rs. 21-30 at the rate of Rs. 220 per kg. as per last year

38,632

Sale of 603 kg. of hing in the price range Rs. 31-40 at the rate of Rs. 35 per kg. As per last sales

21,005

2,32,241

Here we may have to mention one factor which has got some relevance. Before the ITO made this addition proposals were sent to the IAC under section 144B of the Act. In response to the notice issued by the IAC, the assessed appeared and submitted varying explanations for the discrepancies pointed out by the ITO. First it was stated that the various varieties of hing which the ITO pointed out as not included in the closing stock, were received earlier and disposed of in respect of which the purchase invoices were received later. When the IAC insisted upon the production of the evidence in support of that contention, the assessed was stated to have changed his stand by stating that in this trade separate stock tally of different types of hing could not be kept. It was then explained that hing through purchased at higher rate was sold at a much lower rate due to deterioration in quality. Here also no evidence was produced. So the IAC held that the assessed had not explained the various omissions pointed out by the ITO in his order. We are not mentioning the various details of the defects pointed out by the ITO in his order because in subsequent proceedings there was some relief given to the assessed, which we will refer to a little later. Thus after obtaining the approval of the IAC, the ITO made the addition of Rs. 2,32,241 to the income disclosed and initiated proceedings for the imposition of penalty for concealment of income. Now this matter was taken up in appeal by the assessed before the Commissioner (Appeals). The Commissioner (Appeals) reduced the addition to Rs. 1 lakh and gave a relief of Rs. 1,32,241. Aggrieved by this relief granted both the assessed and the department came up on further appeals before the Tribunal. The Tribunal while dismissing the departmental appeal confirmed the addition of Rs. 1 lakh with certain observations, which we will refer to a little later. But it is pertinent to mention at this stage that the Tribunal while confirming the addition of Rs. 1 lakh, mentioned it as a fact that the assesseds counsel made a categorical statement that the assessed was unable to explain before the first appellate authority about the various discrepancies and conceded that no proper explanation could be furnished to explain the various discrepancies pointed out by the ITO. We have already mentioned that the ITO initiated penalty proceedings for concealment of income. In those penalty proceedings the assessed again explained that there were no unexplained discrepancies except the misreading and misappreciation of the entries in the stock particular and in respect of additions made on such account, it is unjust and unfair to proceed to levy penalty for concealment of income. Long and detailed explanations were filed before the ITO. Rejecting all those explanations as unsubstantiated and relying on the observations made by the Tribunal while confirming the addition of Rs. 1 lakh, the ITO concluded that the assessed was guilty of concealment of income and levied a penalty of Rs. 1,25,000.

3. This penalty was cancelled by the Commissioner (Appeals) by his order dated 31-12-1984 by which he held that the addition made and confirmed was eventually on account of low rate of gross profit. For such additions, according to him, the principle of law enunciated by the various High Courts in their judgments was not to levy any penalty holding those additions to be concealment of income. On that view he cancelled the penalty. Against that order of the Commissioner (Appeals) the present appeal is filed by the revenue.

4. The learned departmental representative relying upon the orders of the IAC and the ITO submitted that the Commissioner (Appeals) has not properly appreciated the facts, that he merely accepted what was said before him by way of contentions without calling for any proof for those contentions, that his appreciation that in case an addition was made on account of difference in gross profit, no penalty could be levied was totally incorrect and that proposition was not approved of by the Punjab and Haryana High Court in a series of decisions in Shiv Narain Khanna v. CIT [1977] 107 ITR 542, Kedar Nath Sanwal Dass v. CIT [1978] 111 ITR 440 and New Bijli Foundry v. CIT [1982] 135 ITR 593. He also submitted that the assesseds contention that there was overall stock tally and there was, therefore, no possibility for any sales to take place outside the accounts was incorrect. Overall stock tally was not conclusive proof of the fact that all the stock accounts were proper and correctly mentioned. The assessed itself had stated that high quality of hing was sold as low quality hing but there was no proof in support of that in the stock particulars. This is sufficient to prove that there was any amount of scope for manipulation. With so much of loopholes left in the so-called stock tally, the mere fact that there was overall stock tally could not have been taken as proof that all the stock purchases were truthfully accounted for at least insofar as their sale prices were concerned. Even if the stock was taken as properly accounted for, still the assessed has to prove that the selling rates were properly reflected in the accounts in the sales. It is this aspect that the ITO and the IAC had attempted to show to be falsified. It was because of this falsification that book results were not accepted and addition was made. The addition made in these circumstances should not have been considered as a routine addition made by the ITO for mere low rate of gross profit without any evidence. He should have, therefore, held that the ITO proved to the built the factum of concealment of income by manipulating the accounts and he should have confirmed the penalty. The departmental representative further pointed out that while dealing with the quantum appeal, the Tribunal had categorically pointed out that the assessed was unable to explain the discrepancies and conceded before the Tribunal the incorrectness of the accounts. That being a fact found by the Tribunal, the same should not have been brushed aside by the Commissioner (Appeals) in cancelling the penalty.

5. On the other hand, the learned counsel for the assessed relying upon paragraph 8 of the order of the Tribunal in the quantum appeal submitted that the Tribunal dismissed the departmental appeal which meant that there was no case for addition. The order of the Tribunal should have been read as a whole to appreciate what was found out by the Tribunal and what were the defects in the accounts. He submitted that if books of account were maintained in the proper course of a business peculiar to the nature of business carried on by an assessed, even if an addition was made by rejecting the book results, no penalty could be levied treating the addition so made as a result of concealment of income more so when there was a stock tally and purchases and sales were fully vouched. In support of this proposition very strong reliance was placed upon the judgment in CIT v. Patna Timber Works [1977] 106 ITR 452 (Pat.), CIT v. Devandas Perumal & CO. [1983] 140 ITR 943 (Bom.), CIT v. Mohammed Yakub Mohd. Ibrahim & Co. [1983] 143 ITR 67 (Bom.) and CIT v. Mehar Singh [1985] 154 ITR 637 (Punj. & Har.). He then submitted that all the discrepancies pointed out by the ITO were fully explained to the ITO as well as to the IAC in proceedings under section 144B. By including those explanations and the paper book and by reading out from them to us certain excerpts, the learned chartered accountant submitted that there was no omission or falsification of accounts except misappreciation of the accounts maintained by the assessed and that should not have been made a ground to hold that the assessed was guilty of concealment of income. He further submitted that the assessed carried on the business of purchase of hing. Hing is received in gunny bags containing both good quality as well as bad quality, all mixed up. After the receipt of those bags, the assessed sorts out the hing into different grades and sells them. Even the high quality hing due to passage of time deteriorates and becomes low quality. This often happens. It is, therefore, not possible for the assessed to maintain the stock register in the manner in which department expected. It is, therefore, possible only to maintain overall stock tally, namely, opening stock purchases, sales and closing stock. Such an overall stock tally was to be furnished to the ITO. In the face of such an overall stock tally there being no mistake in it, it is not possible for the assessed to suppress sales nor the closing stock. All the conclusions reached by the department on the assumption that there was suppression of closing stock or suppression of sales are, therefore, unwarranted and unfounded. The learned counsel for the assessed then submitted that if an admission was made before the Tribunal, which heard the quantum appeal, it was because of misunderstanding and a concession made on the basis of misunderstanding should not have been made a reason to hold against the assessed that concealment was established or accepted by the assessed. It is very unfair on the part of the department to rely upon those observations made by the Tribunal. He further pointed out that even then the Tribunal remarked that the assessed contended that the findings of the department were incorrect but was not able to properly explain. This means that the contention of the assessed that the books were properly maintained in the course of the business was not given up. In those circumstances it is very unfair and unjust to levy the penalty. The Commissioner (Appeals) had properly appreciated these facts and then came to the right conclusion that no concealment of income was established even if an addition was made and sustained the quantum appeal. He submitted that in the circumstances the order of the Commissioner (Appeals) should be upheld.

6. We have considered carefully these submissions and perused the record and the relevant orders. We have already adverted to the fact that assessment made on the assessed originally was set aside on appeal and the main reason for the setting aside of the assessment was the view taken that there was non-disclosure of 4,890 kg. of hing in the closing stock. The AAC while setting aside the assessment directed the ITO to examine whether the quantitative accounts furnished by the assessed was defective, to examine the chart showing the rates of 4,890 kg. of hing and to consider whether there was any possibility of sales being outside the account. In response to the enquiries made by the ITO while making the reassessment, the assessed submitted two lists giving the picture of sales and purchases one up to 28-2-1971 and the other from 28-2-1971 to 31-3-1971. The assessed also submitted that in order to improve the inferior quality of hing, hing of superior quality was mixed with the inferior quality but no record of it was kept because it was not practicable. The assessed submitted that it maintained quantitative particulars but not quality-wise. But the ITO on verification found that in the opening stock hing was shown at the value of Rs. 17 per kg. (there was 90,022 kg. of hing valued at Rs. 15.30 lakhs). While the entire opening stock was shown as Rs. 17 per kg., sales were shown at the rate of the price range from Rs. 21 to Rs. 30, Rs. 31 to Rs. 40, Rs. 51 to Rs. 60 and Rs. 61 and above, all amounting to 792 kg. but all before any purchase of higher garden of hing was made. The ITO examined in depth the purchases and sales made in different price ranges and eventually came to the conclusion that there was excess sales over purchases. He has given different figures which led him to this conclusion on page 4 of his assessment order. The ITO also with reference to the accounts found that 4,890 kg. of hing claimed to have been sold and accounted for in the books was not proved in the statement made before him by way of annexures and held them to be totally unreliable and unacceptable. The ITO also examined the closing stock and found that 859 kg. of hing was not accounted for. It was after referring to all these instances, the ITO arrived at the conclusion that a sum of Rs. 2,32,241 could be added to the book results, the details of which were extracted above. Then we have already referred to in the earlier portion of this order, varying explanations given by the assessed at different times in order to explain the discrepancies pointed out. The same explanations were offered before the Commissioner (Appeals) also. He also examined these explanations with reference to the books of account maintained and the charts prepared by the assessed and produced before the ITO. After through examination of these charts the Commissioner (Appeals) had recorded his findings thus :

"12. As stated by the IAC, Central Range II, the appellant had been changing its stand from time to time in regard to the sale of goods purchased under various price ranges. When confronted with the fact that the higher price goods purchased in January and February 1971 neither find place in the sale nor in the closing stock, he stated that the goods were received in the earlier months and were disposed of before the purchase invoices were received. When this statement of the appellant was disproved by the ITO he came out with the explanation that the hing purchased at the higher rates were sold at the lower rates due to deterioration in quality. Having failed to establish this also, the appellant stated that he had mixed the higher price goods with the lower price ones and sold them as such. In support of this, he contended that sale of the higher price goods is more in quantity than the purchased one. This statement of the appellant is also not fully corroborated. As per para 11(v), it is evident that the appellant had not accounted for the sale of 859 kg. of hing purchased in the price range of Rs. 41-50 which according to the appellants own statement remained unsold in the months of February and March. The latest explanation of having mixed the goods of various quality cannot be verified from any contemporary records. It is also worth mentioning that the appellant is a manufacturer of synthetic hing as well. One irresistible conclusion from the facts and circumstances of the case is that the appellant had understand the sale price of the goods though he had at the end tried to give a quantitative tally. The excess sales in the higher price ranges than the purchases clearly indicate that the appellant had earned a much higher margin of profit. The margin of profit would not be less than as returned in the assessment year 1969-70.

Further, the Tribunal, Delhi Bench A in IT Appeal No. 2184 (Delhi) of 1977-78 dated 21-3-1979, in the case of the appellant for the assessment year 1972-73 held that the provisions of section 145 of the Income-tax Act are applicable.

Considering the facts and circumstances of the case I, therefore, hold that neither the sales nor the book results of the appellant can be accepted. I estimate the addition of Rs. 1 lakh to the sale to the trading account. In view of this addition, the gross profit comes to Rs. 1,85,216 giving the average of gross profit of about 5.4 per cent. Thus the addition of Rs. 2,32,241 is reduced to Rs. 1 lakh. The appellant gets a relief of Rs. 1,32,241."

It was after considering these facts that he came to the conclusion that the addition made by the ITO was on the high side and it should be reduced to Rs. 1 lakh in order that the gross profit rate as disclosed in the assessment year 1969-70 was reached. It was against this order of the Commissioner (Appeals) that a further appeal was filed before the Tribunal. While disposing of the appeal the Tribunal held that the addition sustained by the Commissioner (Appeals) was correct and affirmed it with the following observations :

"6. The learned counsel for the assessed has specifically asked to pinpoint the incorrectness, if any, found out by the learned Commissioner (Appeals) vis-a-vis the above facts but he pleaded his inability or to put it in plain language, the learned counsel for the assessed conceded the correctness of these facts, however, with a rider, that goods purchased in price range of Rs. 41-50 weighing 859 kg. being neither in the closing stock nor specifically sold out as has been found out as a finding of fact by the learned Commissioner (Appeals) in (v) above was not correct. The learned counsel made a categorical statement that it was correct that the assessed has failed to explain this aspect of the case before the learned first appellate authority and when asked to explain it at our level, he conceded that it was hard to explain.

7. In view of above finding of fact which go unrebutted and uncontroverter to, we see no reason to warrant and cause any inteference in the impugned order of the learned Commissioner (Appeals) vis-a-vis the stand of the assessed and the grounds of appeal taken before us by the assessed, with the result, that assesseds appeal, viz, IT Appeal No. 4307 (Delhi) of 1982 stands rejected."

It will be seen from the above that the concurrent finding recorded by the AAC, who heard the appeal originally, by the IAC (Assessment) under section 144B, and the Commissioner (Appeals), who heard the quantum appeal and the Tribunal was that the accounts maintained by the assessed were defective and that there was not only suppression of closing stock to some extent, be it even 859 kg. of hing, and ample scope for manipulation of selling prices existed. Moreover, for the assessment year 1972-73 also the Tribunal held that the proviso to section 145 of the Act was applicable. Even for the assessment year 1971-72 the book results were not accepted and addition was made. We may also state that the assessed did not maintain any stock register but only prepared quantitative particulars from the purchase invoices and sale bills. Before the Commissioner (Appeals) against imposition of penalty under section 271(1) (c) the assessed stated as under :

"The assessed had recorded the purchases and sales in the purchase bahi and sale bahi respectively on the basis of the invoices and bills from day-to-day as and when these were effected. Hing was purchased on bags containing 40-80 kgs. of hing. The purchase bahi, therefore, revealed the value of hing giving the rate per kg. charged and its quality both in bags and kgs. while the partys account was credited. All purchases of raw hing so made were then posted to a single hing account in the ledger except that hing specifically purchased fro manufacturing was debited to the hing compound account in the ledger.

Hing purchased in bags is not of a homogeneous quality. The bags were opened and sorted out. From these lots good quality of hing was sorted out and sold at higher prices. The quality of hing and therefore the price it fetches depends on innumerable factors like its colour, size and smell, etc., and thus the sale of hing is effected by inspection by the buyer of the mixture. Similarly good quality of hing was mixed with the remnants to improve its quality. The process of mixing various lots of hing purchased is a continuous process for sale and thus it is neither feasible nor practical for us to maintain a qualitative record.

Like the purchases, all sales effected from day-to-day were recorded in the sale bahi giving the name of the buyer, the quantity of goods sold in kgs. and its value determined on the above factors. The sales of raw hing so recorded, irrespective of their price, were transferred to the credit of hing account in the ledger showing the quantity sold and its value. The hing account in the ledger, therefore, gives a complete quantitative tally of opening stock purchases, sales and closing stock of all hing purchased and sold irrespective of its purchase price or sale price. The purchases and sales thus were fully vouched and, therefore, there was no question of any hing being sold outside the book accounts or for that matter remaining unaccounted for more particularly when the assessed maintained a total stock tally in the above manner."

This shows that it is impracticable for the assessed to maintain stock register and the stock particulars filed before the ITO by extracting them from the purchase vouchers and bills cannot be said to be correct and complete in the absence of a stock register. If only a regular stock register is maintained, it is possible to verify whether the excess shown or the shortages are properly accounted for or not. Otherwise the stock particulars disclosed by the assessed cannot be said to be fool-proof. The non-maintenance of the stock register must be seen in the light of the various discrepancies found by the ITO and the finding of the Commissioner (Appeals) that there was suppression of closing stock. The varying explanations offered by the assessed at various times also assumes importance and relevance to judge whether the assessed offered truthful explanations or not. Therefore, if in this state of accounts the book version was rejected and in order to make an addition the gross profit rate shown in the assessment year 1969-70 was taken as a guide, it cannot be said that the addition was made only on account of gross profit in a routine way without there being any discrepancy in the accounts as if the addition was made only on account of the lowness of gross profit. The addition made in this case is not of such an addition. This is an addition made to cover up the suppression in the closing stock and the unrecording or improper recording of sales by manipulating the selling prices. That was the reason why the learned counsel for the assessed, who appeared before the Tribunal, pleaded his inability to explain the discrepancies, more so with regard to the suppression of closing stock of 859 kg. of hing. This is not a question of one particular item being pointed out as suppression of closing stock and confining the addition to that extent. It is a question whether the account books maintained by the assessed are true and reliable showing the correct income. It is enough if the department is able to point out a single mistake in the accounts to give them the power to apply the provisions of section 145 unless the single mistake pointed out was due to a stray instance or negligence, which is not the case here. Therefore, the Tribunal was forced to confirm the addition with the observation that the assessed had conceded that it was hard to explain the omission. This statement cannot, therefore, be taken to mean as a statement made without understanding or appreciating the significance of it or the importance of it. This cannot, therefore, be attributed as now explained before us was due to a misunderstanding nor can it be argued that for penalty proceedings one cannot rely on those statements which are findings of facts and are relevant.

7. The Commissioner (Appeals) who dealt with this penalty appeal did not discuss these matters. He proceeded on the basis that the addition was eventually made on account of gross profit and, therefore, no penalty should have been levied treating such an addition as concealment of income. This in our opinion is not correct appreciation of the facts. As we have mentioned earlier it is only after proving to the hilt that the method of accounting employed by the assessed was defective and the defective nature not being attributable to innocence, the proviso to section 145 was applied so as to make an addition to cover up the deficiency in the income the gross profit rate was only adopted as a measure. In these circumstances the Commissioner (Appeals) should not have held that the assessed was not guilty of concealment of income and cancelled the penalty. The reliance placed by the Commissioner (Appeals) on the decision in the case of Mohammed Yakub Mohd. Ibrahim & Co. (supra) is not at all apposite. The fact that the AAC for the assessment year 1973-74 had cancelled the penalty levied under section 271(1) (c) is not of material consequence because it is not known on what grounds the addition for that year was made and on what grounds the AAC had cancelled the penalty and whether that cancellation of penalty was accepted by the revenue or not. We are, therefore, of the opinion that the Commissioner (Appeals) is not justified in cancelling the penalty more particularly when the assessed had conceded before the Tribunal that it was not possible to explain the discrepancies found out by the revenue which explicitly meant that the discrepancies pointed out by the revenue were real and genuine. We, therefore, reverse the order of the Commissioner (Appeals) and restore that of the ITO.

8. Since we have dealt with on the facts of this case, we found it proper to deal with the case law cited both for and against the assessed that when an addition on account of gross profit was made, no penalty should be imposed. At the cost of repetition we may point out that there is a difference between an addition made on account of gross profit being lower from an addition made taking gross profit as a measure when substantial omissions were found in the accounts. The latter would amount to concealment of income for there was no explanation and the former may be routine addition.

9. In the result, the appeal is allowed.