M/S Devsons Pvt. Ltd. vs Commissioner Of Income Tax & Ors.
2010 Latest Caselaw 5240 Del

                                REPORTED
*   IN THE HIGH COURT OF DELHI AT NEW DELHI

+                     ITA No. 367/2004

M/s. Devsons Pvt. Ltd.                                  ..... Appellant
                  Through:         Mr.O.S. Bajpai, Sr. Advocate, with
                                   Mr. V.N. Jha, Advocate.

             versus

Commissioner of Income Tax and Ors.         ..... Respondents
                 Through: Mr. Sanjeev Sabharwal, Advocate.

                             AND

+                     ITA No. 296/2006

Commissioner of Income Tax                  ..... Appellant
                 Through: Mr. Sanjeev Sabharwal, Advocate.

             versus


M/s. Devsons Logistics Pvt. Ltd.
(earlier known as M/s. Devsons Pvt. Ltd.)       ..... Respondent
                   Through: Mr.O.S. Bajpai, Sr. Advocate, with
                               Mr. V.N. Jha, Advocate.

%                            Date of Reserve : August 17, 2010
                             Date of Decision : November 19, 2010

CORAM:
HON'BLE MR. JUSTICE A.K. SIKRI
HON'BLE MS. JUSTICE REVA KHETRAPAL
1. Whether reporters of local papers may be allowed


ITA No.367/2004 & 296/2006                                    Page 1 of 42
      to see the judgment?

2. To be referred to the Reporter or not?

3. Whether judgment should be reported in Digest?

: REVA KHETRAPAL, J.

1. These appeals relate to the assessment year 1995-96 and was

admitted to hearing on 20th March, 2006 when the following

substantial questions of law were framed for consideration: -

ITA No. 367/2004

"1. Whether the Income-tax Appellate Tribunal was right in law in holding that there was, in the facts and circumstances of the case, a change in the method of accounting introduced by the assessee without any justifiable reasons?

2. Whether finding recorded by the ITAT that there was no evidence regarding payment of ` 36,17,980/- by the assessee to the sub-

contractor in connection with the execution of the garbage collection work is perverse?

ITA No. 296/2006

"1. Whether the ITAT was correct in law in deleting the penalty of ` 36,07,220/- imposed by the Assessing Officer under Section 271 (1)

(c) of the Income Tax Act, 1961?"

2. The necessary facts available on the record are that the

appellant derives income as a contractor with the Jaipur Municipal

Corporation (hereinafter referred to as „the JMC‟) for lifting the

garbage from the walled city of Jaipur and had filed its return of

income on 30th November, 1995 declaring the total income of

`4,50,317/- for the year under consideration. The appellant had

shown gross receipts from JMC at ` 81,90,784/-. From the details of

the bills submitted by the appellant, however, the Assessing Officer

concluded that the total receipts of the appellant from JMC were `

1,17,39,415/- as against ` 81,90,780/- as shown by the appellant.

The Assessing Officer also concluded that the appellant had declared

receipts on the basis of the amount actually received which was

contrary to the system of accounting maintained by the appellant, viz.,

the mercantile system. Accordingly, the Assessing Officer made an

addition of ` 35,39,631/- to the total receipts of the appellants and

enhanced the income of the appellant by such amount as undisclosed

income. The Assessing Officer also made a further addition of `

36,17,979/- on account of sundry creditors appearing in the books of

the appellant. The Assessing Officer noted that the assessee had

engaged the services of petty contractors for clearing the garbage in

the city, but the payments to these contractors, though due, was not

made ,but with respect to these petty contractors, the assessee had

claimed deductions. The Assessing Officer issued notices under

Section 133(6) of the Act to these parties, which were received back

with the remark of "Incomplete address". The Assessing Officer

apprised the appellant of this position on March 17, 1988 and

required the appellant to furnish confirmations from these trade

creditors. Further opportunities were provided to the appellant to

furnish the addresses of the aforesaid sundry creditors on 19th March,

1998 and 24th March, 1998. On 24th March, 1998, the assessee-

company expressed its helplessness to furnish the information given

the paucity of time. The Assessing Officer did not accept the credit

standing in the names of the aforesaid persons and added the same to

the income of the appellant to the extent of ` 36,17,979/-.

3. In first appeal, the Commissioner of Income Tax (Appeals)

deleted the addition of ` 35,39,631/- and found that the appellant had

been maintaining the accounts of income receivable from JMC on the

basis of the bills submitted and approved by JMC after making

various deductions as per the contract. This system of accounting had

been regularly followed by the appellant and accepted by the

Department since 1990. The CIT(A) also observed that there was a

dispute between the appellant and the JMC on account of the non-

determination of the amounts due to the appellant and on the writ

petition of the appellant such matter had gone up to the Rajasthan

High Court, which eventually was decided against the appellant. On

facts, the CIT(A) found that on an accrual basis the appellant had

actually overstated rather than understated its income for the period

under consideration.

4. On the second issue of the non-confirmation of the sundry

creditors, the CIT(A) was pleased to delete the addition of

` 36,17,979/- on the basis that the factum of rendering of services by

the sub-contractors was not in dispute and the appellant had

meticulously maintained log books for each sub-contract, which were

duly verified and authenticated by JMC. These log books were

shown to the A.O. during the assessment and produced before the

C.I.T. The latter accordingly held that the onus that lay on the

appellant had been discharged and therefore the addition of

` 36,17,979/- was totally unwarranted.

5. Against the order of the First Appellate Authority, the

Department preferred an appeal before the Income Tax Appellate

Tribunal (for short „ITAT‟). The ITAT reversed the order of the

CIT(A) on both counts by its order dated 4th February, 2004. As

regards the addition of ` 35,39,631/- the ITAT held that during the

period under consideration, the appellant had changed its method of

accounting and such change was not bonafide. The Tribunal found

that the appellant, despite the fact that that he had been maintaining

the accounts on mercantile system, had declared the receipts from the

JMC on the basis of the amounts actually received. The Tribunal

observed that though it is the prerogative of a party to maintain

accounts in the manner it likes, but the assessee cannot be at liberty to

change his system of accounting at the drop of the hat, at his whims

and fancies.

6. As regards the addition of ` 36,17,980/- on account of sundry

creditors, the Tribunal observed that it was unable to agree with the

findings of the CIT(A) which had deleted the addition on the ground

that the onus cast upon the appellant of proving the factum of

rendering services by the 8 sundry creditors of the appellant stood

discharged. The Tribunal observed that from the judgment of the

Rajasthan High Court passed by the Division Bench in Special

Appeal (Writ No. 686/1995) arising from the order dated 20th

September, 1995 passed by the Single Bench in Civil Petition No.

2816/1995, the facts that emerged are that there was not only a

dispute between the JMC and the appellant with regard to the

execution of the works but also with regard to the plying of the

requisite number of trucks for the removal of garbage. This led the

Tribunal to conclude that there was a dispute in respect of the services

having been rendered by such contractors and if there was a dispute

with regard to the execution of the work, the only thing the appellant

was required to do was to prove it by cogent evidence, "which in this

case could be either persons who had executed the works or officers

of the Jaipur Municipality." The mere filing of a log book, the

Tribunal observed, was not sufficient to discharge the onus laid upon

the appellant and, therefore, the CIT(A) had committed a serious

mistake by deleting the additions made by the Assessing Officer. The

Tribunal, therefore, set aside the order of the CIT(A) and restored the

order of the Assessing Officer.

7. The appellant filed an appeal before this court sometime in

January‟04 against the order of the ITAT which was dismissed for

non-prosecution on 16th July, 2004.

8. By an order dated 30th September, 2004, passed under Section

271 (1) (c) read with Section 274 of the Income Tax Act, 1961, the

Assessing Officer imposed a penalty of ` 33,07,220/- by invoking

the provisions of Explanation 1 to Section 271 (1) (c) on the ground

that the assessee had concealed the particulars of his income and

furnished inaccurate particulars. The CIT(A) by an order dated 30th

December, 2004 confirmed the penalty imposed by the Assessing

Officer. However, on second appeal the ITAT by its order dated 29th

July, 2005 deleted the penalty imposed by the Assessing Officer on

the ground that no "satisfaction" was recorded by the AO in the

assessment order before initiating penalty proceedings. On facts, the

ITAT held that the assessee could not be said to have concealed its

income or furnished inaccurate particulars thereof. The assessee had

itself placed the details of the total bills raised against the Jaipur

Municipal Corporation, according to which the total receipts of the

assessee company for the financial year 1994-95 was ` 11,73,945/-.

The amount deducted from this amount by the JMC as not payable to

the appellant was, however, not declared by the appellant as its

income. The non-acceptance of these particulars stated by the AO

did not amount to concealment of income. Regarding penalty in

respect of the balance outstanding in favour of the sundry creditors,

the ITAT observed that the addition was made by the AO on the

ground that the appellant was not able to prove the same. However,

the credit outstanding against the same creditors was accepted by the

AO in subsequent years and therefore no penalty could be levied.

Since the additions were made only on account of divergent views

taken with regard to the material on record, it was unsafe to conclude

that the appellant was guilty of concealment of income or of

furnishing inaccurate particulars thereof.

9. Argument at the Bar were addressed by Mr. O.S. Bajpai, the

learned senior counsel on behalf of the appellant-M/s. Devsons Pvt.

Ltd. and Mr. Sanjeev Sabharwal, the learned counsel for the

respondent-Commissioner of Income-tax.

10. Mr. O.S. Bajpai, the learned Senior counsel appearing for the

appellant, at the threshold assailed the findings of the Tribunal as set

out in paragraph 12 of its order dated 4th February, 2004, wherein the

ITAT observed that the appellant had without justification and at the

drop of the hat changed its method of accounting from mercantile to

cash, which was unacceptable. Mr. Bajpai contended that what the

appellant did was to take credit for income in respect of the bills that

were accepted by the JMC without any deductions and wherever there

were deductions, it was only the balance amount, which was taken as

credit for as income, on the footing that it was only the balance that

had actually accrued to the appellant. This did not amount to

following the cash system of accounting but only indicated the basis

on which the assessee considered income as having accrued. It only

meant that the assessee did not consider the amounts, which were

deducted by the JMC from its bills as having accrued to it. The

ITAT, therefore, rightly observed in its order dated 29th July, 2005:

"If this basis has been consistently followed as it appears to be, the assessee could not be said to have changed its method of accounting from mercantile to cash and cannot be charged with suppressing the receipts to the extent of `35,39,635/-."

11. It was further observed as follows: -

"It is also noteworthy that the figure of ` 1,17,39,415/- which represented the amount for which bills were raised by the assessee on JMC during the year, was furnished by the assessee itself. The further contention was that whatever has been deducted from the amount as not payable to the assessee was not taken as having accrued to the assessee. In our opinion, when all the facts have been placed by the assessee itself before the AO and a particular legal stand is taken by the assessee, which is not accepted by the AO, it cannot be said that the assessee is guilty of concealment of income. The first page of the assessment order records that "details of the total bills raised against the JMC were also furnished by the assessee according to which the total

receipts of the assessee company for the FY 1994-95 arrive at ` 1,17,39,415/-. When these facts have been placed before the AO by the assessee itself as income, the assessee can be said to have taken a legal stand on the facts disclosed by it and, if such a stand is not accepted by the AO, there is no question of concealment by the assessee. Reference may be made in this connection to the following judgments:

1. ITO vs. Burmah Shell Oil Storage Co. Ltd., 163 ITR, 496 (Cal.)

2. CIT vs. Late G.D. Naidu & Others, 165 ITR 63 (Mad.)

3. Cement Marketing Co. of India Ltd. ACIT, 124 ITR 15 (SC)."

12. The learned Senior counsel for the appellant was also at pains

to point out that as regards the second issue, viz., addition of

` 36,17,980/- as well, contradictory findings had been rendered by the

ITAT in its order dated 4th February, 2004 passed in quantum

proceedings and its order dated 29th July, 2005 passed in the penalty

proceedings. In the former order, the ITAT observed that there was

no evidence on record to show, except the logbook maintained by the

appellant, that the amounts were payable to the contractors for the

services rendered by them during the relevant accounting year. The

Tribunal observed that the appellant should have obtained the

evidence of the persons who had executed the work or of the officers

of the JMC to prove that the work was actually carried out and the

amounts were payable. In the latter order, i.e. in the order in penalty

proceedings dated 29th July, 2005, the ITAT after referring to page 33

of the Paper Book-II and the columnar statement filed by the

appellant giving the names of the creditors (in dispute) and the

balances outstanding to them as on 31st March, 1995 to 31st March,

1998 (at page 267 of the paper book) and also referring to the ledger

accounts of the sundry creditors placed at pages 70-109 of paper book

No.-I observed that "....the addition appears to have been made only

because the assessee was unable to prove the balances in the manner

required by the Department, though there were other material

embedded in the record itself and accepted in the subsequent

assessment proceedings, to the effect that the outstanding were

genuine".

13. The Tribunal noted that from the columnar statement in Paper

Book No.-II, it emerged that there were a total of 8 persons to whom

the appellant owned ` 36,17,979/- for the year under appeal. The

amount outstanding to these very same persons as on 31st March,

1996, 31st March, 1997 and 31st March, 1998 was ` 49,93,063/-. It

further noted that it was not disputed on behalf of the Department that

in the subsequent assessments, the Assessing Officer had not made

any additions of the balances, despite the fact that the balances were

outstanding in favour of the very same persons whose names

appeared in the balance-sheet as on 31st March, 1995, which the AO

had added in the year under consideration. This was evident from the

assessment order for the year 1998-99, which was one passed under

Section 143 (3) of the Act, after scrutiny. In this order, the following

observations appear: -

"The assessee has shown in the balance sheet under the Schedule III as details of sundry creditors - hire charges of ` 58,55,005, but during the course of hearing it was intimated by them that it was only the payments to be made to the contractors who were plying the trucks on behalf of the company and the company had hired them for the Jaipur Municipality for removing the garbage. The list of these creditors to

whom the amount is payable have been filed and affidavits to the effect for the person concerned have been filed statement thereby the amounts receivable by them from M/s. Devsons Pvt. Ltd. (sic) The total amount of ` 58,55,005 consists of sundry creditors of ` 49,93,063 and other creditors for hire charges of ` 8,61,942. Thus, there has been a scrutiny of the amount outstanding towards these 8 persons in the subsequent years and at least in one of the assessment orders there is a finding that the amounts were actually due to them and that some of them have filed affidavits also to the effect that the amounts are due to them. At our instance, the learned counsel for the assessee pointed out to the ledger accounts of the sundry creditors placed at pages 70-109 of the paper book No.1. The account of Morari Lal to whom an amount of ` 4,71,658 is outstanding as on 31.3.95 is at pages 71A to 73A. The account shows that several payments were made during the year under appeal to this contractor and there has been no disallowance of the amounts so paid. This indicates that the AO has no objection to allowing the actual amounts paid to these persons, which could have been only on his being dissatisfied that such a person actually existed, that he has done work for the assessee company during the year and the payments was otherwise genuine and bonafide incurred for the purpose of the business. It is not, therefore, understood as to how the balance outstanding to such persons at the end of the year can be considered to be non genuine. The ledger account also shows that the assessee has deducted tax on the hire charges paid to Morari Lal. The ledger accounts of all the other 7 creditors have also been placed in the paper book and these also exhibit the same position."

14. The learned counsel for the Revenue, Mr. Sanjeev Sabharwal,

to rebut the contentions of Mr. Bajpai, relied upon the following

observations in the assessment order of the Assessing Officer: -

"....Not even a single confirmation has been furnished by the assessee. On the basis of the address furnished by the assessee, notices u/s 133 (6) of the Income Tax Act were sent to them to confirm their credit balances. All the letters have been received back with the postal remarks "Incomplete address". The assessee was apprised of the position on 17.03.98 and he was again provided an opportunity to furnish the confirmation of these trade creditors. Thereafter, another opportunity was provided to him on 19.03.98 and 24.03.98. However, on the last date of hearing Sh. S.P. Patnaik, Manager Taxation, of the assessee company expressed his helplessness to furnish this information. Under the circumstances, the credits standing against the following names are not accepted and added to the income of the assessee company as income from undisclosed sources

Ved Prakash 4,40,758

Murari Lal 4,71,658

Nafai Singh 4, 41,005

Ashok Kumar 3,90,576

Gurdyal Singh 4,16,581

Surjit Singh 5,15,866

Madan Lal 4,90,247

Bhule Ram 4,51,288

------------

36,17,979"

------------

15. The contention of Mr. Sabharwal is that there was a dispute

between the appellant and the JMC with regard to the execution of the

work. The appellant had raised bills upon the basis of the certificates

issued by the JMC for work executed, but lost sight of the fact that

under the mercantile system of accounting, it was bound to show the

bills on accrual basis. Mr. Sabharwal contended that the appellant

could have claimed bad debts in the subsequent years but could not

have changed its system of accounting. He further contended that

note of the accounts attached with the audited accounts also showed

that the appellant was adopting the accrual system of accounting - the

income and expense has been accounted for in the mercantile method.

Thus, the difference of ` 35,39,631/- in the receipts on accrual basis

and receipt basis was unexplainable. Mr. Sabharwal, in this context,

placed reliance upon the matching concept of accounting.

16. On the second issue it was contended by Mr. Sabharwal that

with regard to the issue whether the sundry creditors were genuine or

not, it was not open to a coordinate Bench of the Tribunal to set aside

the findings of fact arrived at by an earlier Bench in quantum

proceedings. Mr. Sabharwal was, however, not in a position to

dispute that there was a total of 8 persons to whom the assessee owed

` 36,17,979/- from the year under appeal and that during subsequent

years there had been a scrutiny of the amounts outstanding towards

these 8 persons, and at least in one of the assessment orders there is a

finding that the amounts were actually due to them and that some of

them have filed affidavits also to the effect that the amounts were due

to them. Mr. Sabharwal also did not dispute on behalf of the

department, that in the subsequent assessment, the Assessing Officer

has not made any addition of the balances despite the fact that the

balances were outstanding in favour of the very same 8 creditors

whose names appeared in the balance sheet as on 31st March, 1995.

17. We propose first to examine the aspect as to whether the

Tribunal was right in holding that in the facts and circumstances of

the instant case, there was a change in the method of accounting

introduced by the assessee without any justifiable reason. As noticed

above, Mr. Bajpai on behalf of the assessee, urged that the assessee

had consistently followed the mercantile system of accounting and

merely because the assessee took into account the deductions made

by the JMC, wherever there were such deductions, this did not

amount to the assessee changing its method of accounting from

mercantile to cash method.

18. It is no doubt well settled that it is not open to an assessee to

adopt a hybrid system of accounting. It is also trite law that where a

method of accounting has been consistently followed in the past, it

may still be rejected by the Department. In Commissioner of

Income-tax vs. British Paints (1991) 188 ITR 44, the Supreme

Court observed that there was no estoppels in the matter of method of

accounting consistently followed by the assessee and the Assessing

Officer is not bound by the method followed in the earlier years, if

correct profits cannot be deduced therefrom. However, it is also well

settled that the Department should not ordinarily depart from its

earlier decision, more so, where such departure would result in

injustice to the assessee, and the Department is bound to treat the

accounts of a continuing business in a consistent manner. Even in the

mercantile system of accounting it is the real income which has

accrued in a practical sense that is to be brought to tax. In CIT vs.

Shoorji Vallabhdas and Company (1959) 36 ITR 25, the Bombay

High Court held that the question whether the income accrued or not

is not a mere matter of cogency of the entries made in the account

books of the assessee, but is essentially one of substance and of the

real nature of what happened. A mere book entry is not conclusive of

the question whether the assessee had become entitled to the sums or

not and whether the income is assessable.

"Income-tax is a levy on income. No doubt, the Income-tax Act takes into account two points of time at which the liability to tax is attracted, viz., the accrual of the income or its receipt; but the substance of the matter is the income. If income does not result at all, there cannot be a tax, even though in book-keeping, an entry is made about

a 'hypothetical income', which does not materialize."

19. Where income has, in fact, been received and is subsequently

given up in such circumstances that it remains the income of the

recipient, even though given up, the tax may be payable. Where,

however, the income can be said not to have resulted at all, there is

obviously neither accrual nor receipt of income, even though an entry

to that effect might, in certain circumstances, have been made in the

books of account. See, CIT, Bombay City I vs. M/s. Shoorji

Vallabhdas and Company, (1962) 46 itr 144, 148 (S.C.)"

(emphasis supplied)

20. The Bombay High Court in the case of H.M. Kashi Parekh &

Co. Ltd. vs. Commissioner of Income-tax (1960) 39 ITR 706 (Bom)

reiterated if the accounts are maintained under the mercantile system,

what has to be seen is as to whether the income can be said to have

really accrued to the assessee-company.

"The two rules that income-tax is annual in its structure, meaning thereby that for computation

each year is a distinct self-contained unit, and the other that the income to be taxed is the real income of the assessee are not incompatible or irreconcilable : they permit of harmonious application.

The principle of real income is not to be so subordinated as to amount virtually to a negation of it when a surrender or concession or rebate in respect of managing agency commission is made, agreed to or given on grounds of commercial expediency, simply because it takes place some time after the close of an accounting year. In examining any transaction and situation of this nature the court would have more regard to the reality and specialty of the situation rather than the purely theoretical or doctrinaire aspect of it. It will lay greater emphasis on the business aspect of the matter viewed as a whole when that can be done without disregarding statutory language."

21. The aforesaid view of the Bombay High Court was approved

by the Supreme Court in a number of subsequent decisions including

Commissioner of Income-tax, West Bengal II vs. Birla Gwalior

(P.) Ltd. (1973) 89 ITR 266. In the said case the Supreme Court after

referring to its earlier decision in Morvi Industries Ltd. vs.

Commissioner of Income-tax (1971) 82 ITR 835, which was also a

case where the mercantile system of accounting was being followed

by the assessee, observed (89 ITR page 273) :

"Hence it is clear that this court in Morvi Industries case did emphasise the fact that the real question for decision was whether the income had really accrued or not. It is not a hypothetical accrual of income that has got to be taken into consideration but the real accrual of the income."

22. In Godhra Electricity Co. Ltd. vs. Commissioner of Income-

tax (1997) 225 ITR page 746, the Supreme Court reiterated the

concept of „real income‟, emphasizing that even under the mercantile

system, a mere claim by the assessee is not sufficient to make income

accrue on the basis of „hypothetical income‟ - the income must

actually become due. In the said case the Supreme Court inter alia

examined the cash system and mercantile system of accounting in the

context of „hypothetical income‟. Considering the facts before it, the

Court said that although the assessee company was following the

mercantile system of accounting and had made entries in the books

regarding enhanced charges for the supply of electricity made to its

consumers, no real income had accrued to the assessee-company in

respect of those enhanced charges in view of the representative suits

filed by the consumers which were decreed by the court and

ultimately, after various proceedings which took place, the assessee-

company had not been able to realize the enhanced charges. No real

income having accrued, it was held, the amount due on enhancement

was not assessable.

23. In a subsequent decision rendered in CIT vs. Bokaro Steel

Limited (1999) 236 ITR 315, the Supreme Court, following its earlier

decision in Godhara Electricity case (supra) affirmed the decision of

the Patna High Court wherein it was held that the entry in the books

of account shown as income from Hindustan Steel Ltd. for the 8

locomotives supplied by the assessee-company to them could not be

brought to tax as income since this entry reflected „hypothetical

income‟ and only the real income could be brought to tax.

24. This court in CIT V vs. Modi Rubber Ltd. (1998) 230 ITR

817, following the decisions of the Supreme Court in Godhara

Electricity Co.Ltd. (supra) and Shoorji Vallabhdas and Co. (supra),

held that a mere unilateral act of the assessee debiting the books of

accounts, the liability for payment whereof was not accepted or

agreed to by the debtor, did not amount to income accrued to the

assessee.

25. It may be noted at this juncture that the reliance placed by

Mr.Sanjeev Sabharwal, the learned counsel for the Revenue on the

decision of the Supreme Court in State Bank of Travancore vs.

Commissioner of Income-Tax, Kerala (1986) 158 ITR 889 wherein

the effect of the decision of State Bank of Travancore's case (supra)

was specifically considered and explained by the Court.

26. In our considered view, therefore, the Tribunal was not right in

holding that there was a change in the method of accounting by the

assessee company. The assessee company had submitted the details

of all the bills to the Assessing Officer. The Assessing Officer as

well as the Tribunal, in our view, erred in holding that the appellant

had declared receipts on the basis of the amount actually received

which was contrary to the system of accounting maintained by the

assessee company, viz. the mercantile system. We are, therefore, of

the view that the Tribunal in the penalty proceedings has rightly

observed in its order dated 29th July, 2005 that the assessee could not

be said to have changed its method of accounting from mercantile to

cash and cannot be charged with suppressing the receipts to the extent

of ` 35,39,631/-.

27. Adverting to the second issue, the finding recorded by the

Tribunal is that there was no evidence regarding payment of `

36,17,986/- by the assessee to the sub-contractors in connection with

the execution of the garbage collection work and, as such, the deletion

made by the C.I.T.(A) of the aforesaid sum of ` 36,17,980/- was

unsustainable. We are of the view that the Tribunal failed to take

note of three very vital aspects of the matter. The first was the

finding of the CIT(A) that the factum of rendering of services by the

sub-contractors was not in dispute as the appellant had meticulously

maintained log books for each sub-contract, which were duly verified

and authenticated by the JMC. The Tribunal casually brushed this

aside by stating that mere filing of a log book was not sufficient to

discharge the onus laid upon the appellant. The log book was a

contemporaneous document maintained by the assessee company on a

day-to-day basis and it was on the basis of the said log book that the

claims of the assessee-company were accepted and/or rejected by the

JMC, whose officials were verifying and authenticating the log

books. The second was that the Tribunal altogether lost sight of the

fact that the appellant had duly deducted tax at source in respect of

the entire amount credited in the favour of these parties. Thirdly, it is

also not disputed by the Revenue that in the assessment order for the

assessment year 1998-99, the list of these sundry creditors to whom

the amount was payable had been filed and their affidavits to this

effect had also been filed. It is also not in dispute that the entire

payment has been made to all the 8 sub-contractors as on date.

28. Another contention of the learned counsel for the Revenue is

that this issue whether the sundry creditors are genuine or not could

not have been re-examined by a co-ordinate Bench of the Tribunal in

penalty proceedings to arrive at a contrary conclusion by relying upon

the assessment order of the 1998-99 passed under Section 143(3) of

the Act after scrutiny and in particular on the following observation

made therein:

"The assesse has shown in the balance sheet under the schedule-III as details of sundry creditors - hire charges of ` 58,55,005/- but during the course of hearing it was intimated by them that it was only the payments to be made to the contractors who were plying the trucks on behalf of the company and the company had hired them for the Jaipur Municipality for removing the garbage. The list of these creditors to whom the amount is payable have been filed and affidavit to the effect for the person concerned have been filed stating thereby the amounts receivable by them from M/s. Devsons Pvt. Ltd.

The total amount of ` 58,55,005/- consists of sundry creditors of ` 49,93,063/- and other creditors for higher charges of ` 8,61,942. Thus, there has been a scrutiny of the amount outstanding towards these 8 persons in the subsequent years and at least in one of the assessment orders there is a finding that the amounts were actually due to them and that some of them have filed affidavits also to the effect that the amounts are due to them. At our instance, the learned counsel for the assessee pointed out to the ledger accounts of the sundry creditors placed at pages 70-109 of paper book No.1. The account of Morari lal to whom an amount of ` 4,71,658 is outstanding as on 31.3.95 is at pages 71A to 73A. The account shows that several payments were made during the year under appeal to this contractor and there has been no disallowance of the amounts so paid. This indicates that the AO has no objection to allowing the actual amounts paid to these persons, which could have been only on his being satisfied that such a person actually existed, that he has done work for the assessee

company during the year and the payment was otherwise genuine and bonafide incurred for the purpose of the business. It is not, therefore, understood as to how the balance outstanding to such persons at the end of the year can be considered to be non-genuine. The ledger account also shows that the assessee has deducted tax on the higher charges paid to Morari Lal. The ledger accounts of all the other 7 creditors have also been placed in the paper book and these also exhibit the same position."

29. We find no substance in the aforesaid contention as it is well

settled that though assessment and penalty proceedings are distinct,

and the findings recorded in the assessment proceedings may

constitute evidence in the course of penalty proceedings, but they

cannot be regarded as conclusive. This is the law enunciated by the

Supreme Court in the following cases:

1. CIT & Anr. vs. Answar Ali, 761 ITR 696;

2. CIT vs. Khoday Eswarsa & Sons, 831 ITR 369 and

3. Anantharam Veersinghaiah & Co. vs. CIT, 123 ITR

30. In the present case, the Tribunal in assessment proceedings

has restored both the additions made by the Assessing Officer, but the

question arises as to whether the said findings of the Tribunal in

assessment proceedings must be regarded as conclusive and binding

on a coordinate bench of the Tribunal in penalty proceedings. The

answer to the aforesaid must, in our considered opinion, be in the

negative. The Supreme Court in the decisions referred to in the

preceding paragraphs has categorically held that it is incumbent upon

the Tribunal in penalty proceedings to independently examine the

evidence and the material on record for the purpose of judging

whether the penalty proceedings are justified on account of

concealment of income or furnishing of inaccurate particulars thereof.

This, we find is precisely what has been done by the tribunal in the

instant case and we cannot therefore fault the Tribunal for doing so.

Even otherwise, we are in agreement with the Tribunal that the

assessee is not guilty of concealment of income. We say so for the

following reasons:

(i) The first page of the assessment order itself

records that details of the total bills raised against

the JMC were furnished by the assessee, according

to which, the total receipts of the assessee

company for the assessment year in question, i.e.,

the financial year 1994-95 was ` 1,17,39,415.

After disclosing the total receipts a particular legal

stand was taken by the assessee. The contention

of the assessee was that whatever had been

deducted by the JMC as not payable to the

assessee was not and could not be taken as income

accruing to the assessee. This stand was not

accepted by the Assessing Officer and, in our

opinion, incorrectly so. Assuming however that

the Assessing Officer was justified in not

accepting the aforesaid legal stand taken up by the

assessee, when all the facts were placed before the

Assessing Officer by the assessee itself, by no

stretch of imagination it can be said that the

assessee had concealed the same.

(ii) As regards the addition in respect of the balance

outstanding to the sundry creditors for hire

charges, the addition, as held by the Tribunal,

appears to have been made only because the

assessee was unable to prove the balances in the

manner called upon by the department, possibly

due to paucity of time, but there was ample

material embedded in the record itself which was

accepted by the department in subsequent

assessment proceedings, to the effect that the

outstandings were genuine.

(iii) Divergent views amongst departmental authorities

in respect of both the additions positively indicate

that it would be unsafe to infer that the assessee

was guilty of concealment of income or furnishing

of inaccurate particulars thereof. It is trite law that

where divergent views exist either within the

department itself or such divergent views are

expressed by different High Courts and there is no

uniformity or consensus of opinion of any aspect

of law, the assessee cannot be faulted for taking a

particular stand. The caveat, of course, is that the

assessee must have placed all his cards on the

table by disclosing each and every fact to the

departmental authorities or the court concerned. If

the assessee does so then merely because the

departmental authorities concerned or the High

Court concerned does not concur with the legal

stand adopted by the assessee will not be reason

enough to hold that the assessee is guilty of

concealment of income or of furnishing inaccurate

details. Thus, the questioner whether the

assessee has invited upon himself the penalty

sought to be imposed on him by the authority

concerned is really a question of fact and has to be

decided keeping in mind the entire gamut of

events and circumstances.

31. In the instant case, it cannot be said that the assessee withheld

any relevant information regarding his income and receipts from the

Assessing Officer. It bears repetition that the figure arrived at by the

Assessing Officer pertaining to the income of the assessee was a

figure disclosed by the assessee himself. Similarly, with regard to the

addition made in respect of the sundry creditors, the very same

creditors were subsequently found by the Department itself to be

genuine creditors of the assessee. It is also on record that the said

creditors were paid their entire outstanding amounts by the assessee

and this fact has been verified by the Department from the creditors

themselves. It also stands established on record that the assessee‟s

claim against the JMC for deductions made by the JMC from the bills

of the assessee was dismissed by the High Court of Rajasthan and

hence the stand adopted by the assessee that no real income had

accrued to him was also proved to be true.

32. With regard to the provisions of Section 271 (1) (c) of the Act

pertaining to penalty, the Supreme Court has authoritatively laid

down that making of a claim by the assessee which is not sustainable

will not amount to furnishing inaccurate particulars. Thus, in CIT vs.

Reliance Petro Products Pvt. Ltd. (2010) 322 ITR 158, the Court

held as follows:

"A glance at this provision would suggest that in order to be covered, there has to be concealment of the particulars of the income of the assessee. Secondly, the assessee must have furnished inaccurate particulars of his income. The present is not a case of concealment of the income. That is not the case of the Revenue either. However, the learned counsel for the Revenue suggested that by making incorrect claim for the expenditure on interest, the assessee has furnished inaccurate particulars of the income. As per Law Lexicon, the meaning of the word "particular" is a detail or details (in plural sense); the details of a claim, or the separate items of an account. Therefore, the word "particulars" used in the section 271 (1)

(c) would embrace the meaning of the details of the claim made. It is an admitted position in the present case that no information given in the return was found to be incorrect or inaccurate. It is not as if any statement made or any detail supplied was found to be factually incorrect. Hence, at least, prima facie, the

assessee cannot be held guilty of furnishing inaccurate particulars. The learned counsel argued that "submitting an incorrect claim in law for the expenditure on interest would amount to giving inaccurate particulars of such income." We do not think that such can be the interpretation of the concerned words. The words are plain and simple. In order to expose the assessee to the penalty unless the case is strictly covered by the provision, the penalty provision cannot be invoked. By any stretch of imagination, making an incorrect claim in law cannot tantamount to furnishing inaccurate particulars. In CIT vs. Atul Mohan Bindal (2009) 9 SCC 589, where this court was considering the same provision, the court observed that the Assessing Officer has to be satisfied that a person has concealed the particulars of his income or furnished inaccurate particulars of such income. This court referred to another decision of this court in Union of India vs. Dharamendra Textile Processors [2008] 13 SCC 369 as also, the decision in Union of India vs. Rajasthan Spg. & Wvg. Mills [2009] 13 SCC 448 and reiterated in paragraph 13 that (page 13 of 317 ITR):

"13. It goes without saying that for applicability of section 271(1)(c), conditions stated therein must exist."

33. In the case of Commissioner of Income-tax vs. Bacardi

Martini India Ltd. (2007) 288 ITR 585 (Delhi), a Division Bench of

this Court held that merely because there was a difference of opinion

between the assessed and the Assessing Officer, it cannot be said that

the assessed had intention to conceal his income. The relevant portion

of the judgment is as under :

"13. We have heard the counsel for the parties and perused the record. It has been observed by the Supreme Court in K.C. Builders and Anr v.

Assistant Commissioner of Income Tax [2004]265ITR562(SC), that concealment inherently carries with it the element of means rea. It is implied in the word 'concealment' that there has been a deliberate act on the part of the assessed. The meaning of word 'concealment' as found in Shorter Oxford Dictionary III Edition, Vol-I is "in law the intentional suppression of truth or fact known, to the injury or prejudice of another". Supreme Court further observed that mere omission from the return of an item of receipt does neither amount to concealment nor deliberate furnishing of inaccurate particulars of income, unless and until there is some evidence to show or some circumstances found from which it can be gathered that the omission was attributable to an intention or desire on the part of the assess to hide or conceal the income so as to avoid imposition of tax thereon. In order that a penalty under Section 271(1)(iii) may be

imposed, it has to be proved that assessed has consciously made the concealment or furnished inaccurate particulars of his income.

14. It is clear from the law laid down by the Supreme Court that concealment must be accompanied with the intention of the assessed to evade his tax liability. The assessed in this case had uniformly claimed expenditure against four heads in three assessment years. When the appeal against the order of Assessing Officer before CIT (A) in respect of assessment order 1998-1999 failed the assessed instead of preferring appeal considered it proper not to litigate further as it was running into heavy losses and even if the appeal had been allowed, the assessed would not have paid any tax. The assessed in any case would have remained in heavy losses. The assessed therefore thought it proper not to prefer an appeal and after receipt of order, assessed made an application on 4.2.2003 to correct the income returns of subsequent years in accordance with order of CIT for the year 1998-1999. The assessed, therefore, filed revised returns deleting the expenses which were disallowed by the CIT (A). In the relevant year assessed had also claimed expenses of ` 2 crores paid by the assessed in terms of the agreement entered into by the assessed with the leasing Lesser. The assessed claimed the entire amount of ` 2 crores as deduction since the assessed had paid this amount of ` 2 Crores to the Lesser. There is no dispute that the assessed had disclosed all particulars. It was only difference of opinion between the assessed and the Assessing Officer and the assessed accepted the opinion of

the Assessing Officer instead of preferring an appeal.

15. It is not a case where assessed had not been able to explain any expenditure or had failed to give any details and the Assessing Officer had added the same into the income. In Durga Timber v. CIT 197 ITR 63, relied upon by the appellant, during the course of the assessment proceedings the Income Tax Officer had noticed cash credits and investments shown in the books of account and asked the assessed to give Explanationn. The assessed could not give Explanationn of entires nor could explain the source of income and admitted that the two amounts be treated as his concealment. Under these circumstances court observed that there was concealment of income and penalty was justified. In the present case assessed had explained all the expenditure and had actually incurred the expenditure but the expenditures were disallowed because of difference of opinion between the assessed and the Assessing Officer. This is not a case where revised return was filed as a result of discovery of some facts by the Assessing Officer or inability of the assessed to explain the expenditure. The revised return was filed because some of the expenditure were disallowed by the CIT (A) appeal for year 1998- 99 although the expenditure were not doubted. There are cases where an expenditure is disallowed by the Assessing Officer and it is allowed by the CIT (A). It is again disallowed by the ITAT and in appeal allowed by the High Court and may be disallowed by the Supreme Court. Merely because there is difference of

opinion for allowing or disallowing the expenditure between the assessed and Assessing Officer, it cannot be said that assessed had intention to conceal the income. The filing of the revised return excluding some of the disallowed expenditure and claiming expenditure of ` 2 crores which was actually spent by the assessed in the relevant assessment year as deduction, does not amount to concealment or furnishing inaccurate particulars. The assessed had given all particulars of expenditure and income and had disclosed all facts to the Assessing Officer. It is not the case of the Assessing Officer or the appellant that in reply to the questionnaire of the Assessing Officer, some new facts were discovered or Assessing Officer had dug out some information which was not furnished by the assessed."

34. Further in the case of Commissioner of Income Tax vs.

Nath Bros. Exim International [2007] 288 ITR 670 (Delhi) it was

reiterated that:

"5. What is required to be considered is whether there was any enquiry that was required to be made by the AO before concluding that the assessed had furnished inaccurate or false particulars. In this case, we are of the view that no such enquiry was required to be made but there was only the need for application of the law. On the legal position, the AO was not satisfied and did not agree with the assessed but

that by itself is not a ground to invoke the penalty provision of the statute.

6. Learned Counsel for the Revenue relied upon CIT v. Vidyagauri Natverlal and Ors. [1999] 238 ITR 91(Guj). In that case the question that arose was of unexplained cash credit. The Gujarat High Court made a distinction between a wrong claim as opposed to a false claim. In that case, the AO needed to make an enquiry as to whether the claim of the assessed was right or not. Insofar as the present case is concerned, the decision cited by learned Counsel for the Revenue is clearly distinguishable."

7. We find that there was full disclosure of all relevant material. It cannot be said that the conduct of the (assessed) attracted the provisions of Section 271(1)(c) of the Act."

35. In view of the aforesaid we have no hesitation in concluding

that the Income Tax Appellate Tribunal was not right in law in

holding that there was change in the method of accounting introduced

by the assessee without any justifiable reason. The further findings

recorded by the ITAT that there was no evidence regarding the

payment of ` 36,17,980/- by the assessee to the sub-contractors in

connection with the execution of the garbage work is also perverse.

Questions no.1 and 2 in ITA No. 367/2004 are accordingly decided in

favour of the assessee.

36. In so far as the penalty proceedings are also concerned, we find

that the ITAT was correct in law in upholding the deletion of the

penalty imposed by the Assessing Officer under Section 271(1) (c) of

the Act and we accordingly answer the question of law framed in ITA

No. 296/2006 in the affirmative, i.e. in favour of the assessee and

against the Revenue.

37. ITAs No. 367/2004 and 296/2006 stand disposed of

accordingly.

REVA KHETRAPAL (JUDGE)

A.K. SIKRI (JUDGE) November 19, 2010 sk