Additional Commissioner Of ... vs Motorlite Mfg. Co.
2000 Latest Caselaw 1229 Del

JUDGMENT

Arijit Pasayat, C.J.

1. All these three reference applications involve identical questions which have been referred in terms of the direction of this court under Section 256(2) of the Income-tax Act, 1961 ('in short "the Act") by the Income-tax Appellate Tribunal, Delhi Bench "A", (in short, "the Tribunal"), for the assessment years 1962-63,1964-65 and 1965-66 :

"(i) Whether, on the facts and in the circumstances of the case, the Tribunal was legally correct in cancelling the penalty of Rs. 4,194, Rs. 65,000 and Rs. 62,000 levied by the Inspecting Assistant Commissioner under Section 271(1)(c) for the assessment years 1962-63, 1964-65 and 1965-66 ?

(ii) Whether, on the facts and in the circumstances of the case, the Tribunal was legally correct in holding that no penalty is exigible even by taking recourse to the Explanation to Section 271(1)(c) of the Income-tax Act, 1961 ?"

2. The background facts in a nutshell are as follows :

The assessed was originally a partnership evidenced by an instrument of partnership dated September 12, 1960, which was subsequently amended and modified by another deed dated November 21, 1963. There were two partners, Mohinder Singh and Richpal Singh and each had a 50 per cent, share in profit and loss. The business consisted of manufacture of steel utensils, auto parts and accessories under the name and style of Motorlite Mfg. Co. In January, 1965, some unadjusted and unclosed books of account were seized by the police from the custody of Mohinder Singh. He disowned ownership over them. On the basis of these books and certain others surrendered by Jagdish Lal, accountant, proceedings were initiated under sections 147 and 148 of the Act for the assessment years 1962-63 to 1965-66. Notices were served on Mohinder Singh who with effect from January 3, 1965, had become a sole proprietor. No returns were filed. After August, 1966, he became untraceable. Meanwhile Richpal had left the country in May, 1965, after executing a general power of attorney in favor of Jagat Singh. Richpal Singh and his attorney started correspondence with the Income-tax Officer. Some returns were filed. The Income-tax Officer was requested to summon the firm's books from the police and verify them. It was stated that there were huge losses and they held a decree for consideration of Rs. 33,000 from Mohinder Singh, he could not realise any part thereof. Returns were filed for the assessment years 1962-63, 1964-65 and 1965-66 on various dates. Most of the returns disclosed income as nil. Assessments were made on total income of Rs. 37,500, Rs. 65,000 and Rs. 62,000. The aforesaid figures were arrived at by estimate of sales and application of a gross profit rate of 15 per cent, for 1962-63 and 16 per cent, for 1964-65 and 1965-66. The total income fell short of the limit prescribed and, accordingly, proceedings were initiated under Section 271(1)(c), and later referred to the Inspecting Assistant Commissioner (in short "the IAC") under Section 274. After verification of material on record penalties were levied. These were assailed before the Tribunal in three appeals, i.e., I. T. A.s Nos. 3978 of 1973, 3981 of 1974 and 3982 of 1974. The Tribunal recorded the following finding to hold that penalty was not leviable :

"It is surprising that the Income-tax Officer made no mention of the sales disclosed in the assessed's books, which were stated to be unclosed and unadjusted. It is, therefore, absolutely clear that the Income-tax Officer was not even in a position to charge the assessed of having suppressed its sales to the Income-tax Department far less was he in a position to establish that the assessed had actually made certain profits and that it had concealed the same from the Income-tax Department. As such, we have to hold that the charge of

concealment of income must fail. We may in this connection record an important aspect in which the assessments for the assessment years 1962-63, 1964-65 and 1965-66 differ from that for the assessment year 1963-64. For the 1st named year, the Income-tax Officer has been able to correlate the entries in the diary seized by the police with those made in the books of account produced before the Income-tax Department. It is clear from the assessment orders for the other three years that there was no such correlation.

The next point for consideration is whether in view of the applicability of the proviso to Section 271(1)(c), the assessed should be deemed to have concealed its income. In this respect the significant points to notice are that the books of account were unclosed and unadjusted, the managing partner, who knew anything about the books, had not filed any return and became untrace-able. In this position, the other partner, Shri Richpal Singh who had evidently not been taking active part in the running of the firm's business, filed some returns estimate and made no secret of how he had arrived at those figures. As Shri Mohinder Singh, the managing partner, had made himself scarce, the Inspecting Assistant Commissioner could naturally not make any attempt to give him an opportunity of being heard. So, a probe into his conduct was just not possible. In this context, it will be quite impossible to hold that the failure to return the correct income did arise out of any fraud or gross or willful neglect, calling for the levy of penalty under Section 271(1)(c). On the facts of the case, we are of the view that the ratio of the Kerala High Court's decision in CIT v. Sankarsons and Co. [1972] 85 ITR 627 is clearly applicable and no penalty is exigible, even by taking recourse to Explanation to section 271(1)(c)."

3. Applications for reference under Section 256(1) were not entertained and on being moved under Section 256(2), the questions have been referred. We have heard counsel for the Revenue. There is no appearance on behalf of the asses-see.

4. Counsel for the Revenue submitted that the true import of the Explanation to Section 271(1)(c) which was added from April 1, 1964, was not noticed. We find that the Tribunal was conscious of the Explanation. But on the facts of the case came to hold that the concealment was not proved. The order passed by the Inspecting Assistant Commissioner does not form part of the paper book. The same has also not been filed by the Revenue at the time of hearing. In these circumstances, it is not possible to know as to what weighed with the Inspecting Assistant Commissioner. But in view of the factual conclusions arrived at by the Tribunal, we find no question of law arises and, therefore, we decline to answer the questions referred.