(2001) 251 ITR 373 (Raj)

IN THE HIGH COURT OF RAJASTHAN

Shiv Lal Tak

Vs

CIT

Dated 5/2/2001

JUDGMENT

The judgment of the court was delivered by

RAJESH BALIA J-Heard learned counsel for the parties

This reference has been made, at the instance of the assessee, by the Income-tax Appellate Tribunal, jaipur Bench, jaipur, for the opinion of this court on the fallowing questions of law, said to be arising out of the appellate order dated November 19, 1984, in ITA No 798/JP/83 relating to the assessment year 1978-79 :

"Whether, on the facts and in the circumstances of the case, the concealment of income by the assessee could be taken at Rs 28,520 within the meaning of clause (c) of Explanation 4 to section 271(1)(c) of the Income tax Act and consequently the minimum amount of penalty to be levied would come to Rs 19,629?"

The brief facts of the case are that the assessee is a building contractor and is being assessed in the status of a registered firm The assessee submitted its return for the assessment year 1978-79 showing total income at Rs 99,164 The ITO noticed various defects in the maintenance of accounts After discussion with the Assessing Officer and finding unvouched nature of expenses, the assessee agreed for application of gross profit at the rate of 12 per cent on contract receipts so declared by the firm, to be taken as assessable income and, accordingly, the assessee's income came to Rs 1,27,680

In respect of the said additions, the Assessing Officer, taking support from Explanation 1 appended to section 271(1)(c)(iii), initiated penalty proceedings against the assessee for levying penalty, by raising the presumption under the explanation that the additions made in the total income returned, represent the income in respect of which particulars have been concealed and ultimately levied penalty on finding that some of the expenses, referred to in the order, having been not properly explained equal to the amount of income, held to be such in respect of which particulars have been concealed

The said order has been affirmed by the CIT (Appeals) as well as by the Tribunal, by holding that Explanation 1 to section 271(1)(c), as amended with effect from April 1, 1976, apply to the facts of the present case

Before further examining the contours of the controversy it would be appropriate to reproduce the relevant portions of section 271 as they existed at the relevant time, covering assessment year 1978-79 :

"271 (1) If the ITO or the Appellate Assistant Commissioner or the Commissioner (Appeals) in the course of any proceedings under this Act, is satisfied that any person-

(c) has concealed the particulars of his income or furnished inaccurate particulars of such income,

(iii) in the cases referred to in clause (c), in addition to any tax payable by him, a sum which shall not be less than, but which shall not exceed twice, the amount of tax sought to be evaded by reason of the concealment of particulars of his income or the furnishing of inaccurate particulars of such income :

Provided that, if in a case falling under clause (c), the amount of income (as determined by the ITO on assessments in respect of which the particulars have been concealed or inaccurate particulars have been furnished exceeds a sum of twenty-five thousand rupees, the ITO shall not issue any direction for payment by way of penalty without the previous approval of the Inspecting Assistant Commissioner

Explanation 1-Where in respect of any facts material to the computation of the total income of any person under this Act,

(A) such person fails to offer an explanation or offers an explanation which is found by the ITO or the Appellate Assistant Commissioner or the Commissioner (Appeals) to be false, or

(B) such person offers an explanation which he is not able to substantiate,

then, the amount added or disallowed in computing the total income of such person as a result thereof shall, for the purposes of clause (c) of this sub-section, be deemed to represent the income in respect of which particulars have been concealed :

Provided that nothing contained in this Explanation shall apply to a case referred to in clause (B) in respect of any amount added or disallowed as a result of the rejection of any explanation offered by such person, if such explanation is bona fide and all the facts relating to the same and material to the commutation of his total income have been disclosed by him"

The facts noticed above go to show that at the time of assessment also, the assessee was not possessed of full verificatory vouchers as necessary proof by which the expenses entered in the books of account could be vouched and verified It was precisely for that reason that assessment was made by applying the agreed rate of 12 per cent on gross receipts by the assessee under the contract, in order to avoid any further investigation and verification of the receipts and expenses in detail

Explanation 1: to section 271(1)(c), which was amended with effect from April 1, 1976, in the above form, goes to show that-to discharge the Revenue of its initial burden to establish that there was concealment of particulars of income, when additions are made in the income or any disallowance of expenses claimed by the assessee has been made It is to be noticed in the present case that the result of the business as disclosed in the books of account having not been accepted, instead the assessing authority accepted and adopted gross receipts by the assessee as basis for applying flat profit rate, for making the assessment That resulted in addition of Rs 28,520 in the income of the assessee and the ITO was justified initially for holding satisfaction that the assessee has concealed the particulars of his income in respect of the said additions made in the income and initiated penalty proceedings for that purpose

However, it is settled that Explanation 1 to section 271(1)(c) only provides a rule of evidence for raising a rebuttable presumption in favour of the Revenue and does no more It can be rebutted by learning new material as well as from existing material on record The presumption is not carried to height of a conclusive proof Once jurisdiction has been assumed and the matter has to be decided in terms of evidence that has come before the assessing authority and it must depend upon dealing with such matters by the Assessing Officer thereof

In the present case, while the presumption has been raised in respect of the additions made in the returned income of the assessee by applying flat profit rate on gloss receipts by the assessee, the assessment order reveals that the enquiry has proceeded on the basis of finding whether the claim of deductions against the income had rightly been disclosed in the books of account and the same has been rightly rejected

On the merits of the case, two items of expenditure which have been picked up by the Assessing Officer are in respect of hire of two trucks Truck No RRQ 6065 had been hired for three months, from October, 1977 to December 1977, and Rs 22500 have been debited in the books of account, at the rate of Rs 350 per day Another truck No RJJ 1114, was hired by the assessee for the period from June 1, 1977, to July 15, 1977 The hire charges in respect of thereof have been debited at Rs 4,500 at the rate of Rs 100 per day The diesel expenses in respect of these vehicles, according to the assessee were borne by the assessee and the expenses in respect thereof have been debited in the books of account

The fact of hiring of these two trucks during the period in question has not been doubted The explanation furnished by the assessee in respect of difference in rate of hiring of the two trucks has been that Truck No RJJ 1114 was much smaller in size than Truck No RRQ 6065 and, therefore, less rental was paid in respect of the smaller truck This fact has not also been found to be incorrect However, solely on the basis of the fact that Truck No RRQ 6065 belonged to one of the partners of the assessee-firm, the assessing authority has assumed that hiring charges in respect thereof have been inflated In respect of Truck No RJJ 1114, it has been found that some diesel expenses in respect of the said truck, which belong to the sister concern of the assessee, have been debited in the books of account even during the period when the truck was not hired with the assessee and on that basis, the Assessing Officer has not found the explanations furnished by the assessee in respect of particular expenses in respect of which explanation was sought from the assessee, to have been substantiated by the assessee It has also been stated in the order of the learned Tribunal that the explanation furnished by the assessee cannot also be considered to be bona fide in terms of the second proviso to Explanation 1 read with clause (B) The findings of the Assessing Officer have been affirmed by the appellate authorities, namely, the CIT (Appeals) as well as the Tribunal

Having considered the facts arid circumstances as emanating from the statement of case and contentions raised before us, we are of the opinion that the learned Tribunal has misdirected itself in considering the ambit arid scope of the said Explanation arid also in dealing with the case-where additions have been made not on any specific count but by applying a gross profit rate while rejecting the result shown in the books of account, that is to say, not on the basis of entries made in the books of account Once the books of account were rejected and the income was assessed by applying gross profit rate which resulted in addition of income, though the provisions of Explanation 1 to section 271(l)(c) of the Act may be attracted for the purpose of initiating penalty proceedings by raising presumption under the Explanation 1 but the same by itself could not take place of conclusive proof so as to discard the evidence and attending circumstances on that basis alone

It is not the case in the present context that the assessee has offered an explanation which has been found by the Assessing Officer or the assessing authority to be false It is a case, and findings are also to that effect, that the explanation was offered by the assessee but he has not been able to substantiate the same To us, it appears that the authorities below have ignored that it was precisely for non-availability of necessary material to verify the expenses incurred and so entered in the books of account that the assessee has agreed for assessment at a flat profit rate on gross receipts resulting in addition of income Thereafter, to put the assessee at the altar to satisfy the very same entries which during the assessment proceedings could not be verified for want of necessary material to be proved to the hilt, when admittedly no evidence existed even at the time of assessment Obviously in such circumstances, if enquiry was to be held for verification of expenses entered in the books of account, it would result in reaching a dead-end where the explanation furnished by the assessee cannot be substantiated but that alone could not have been the reason to draw any inference of lack of bona fides on the part of the assessee No deliberate, false entry has been found to have been made in the books of account, which could detract from the bona fide failure on the part of the assessee to substantiate his explanation in respect of two of the entries of expenditure, entered in the books of account because of lack of verifying material with him As would turn out from the petty nature of expenses referred to in the order of Rs 40, Rs 80, Rs 1,480, etc, we are of the opinion that the findings of the learned Tribunal, that the explanation furnished by the assessee is not bonafide in the facts and circumstances of the present case, is not based on any material and is an inference which no reasonable person instructed in law would draw, particularly in cases where the asses see bas agreed for applying of gross profit rate, precisely for the reason that he was not in position to vouch for each and every detail of the expenses entered in the books of account, to substantiate the result shown by him

It may be noticed that in Explanation 1 to section 271(l)(c), as recast, while the expression "failure to return the total assessed income as not arising on account of any fraud or wilful negligence on the part of asses see" does not find place but clause (B) read with the proviso (ii) makes it abundantly clear that where the difference in the assessed income and the returned income is not arising on account Of any gross or wilful negligence on the part of assessee, still no penalty is leviable The statute bas clearly drawn a distinction between furnishing a deliberate false explanation by the assessee and an explanations which may not be false but is not accepted because the assessee was not able to substantiate it While there is no relaxation in the rigour of the Explanation in raising a presumption against the assessee in the former case, in the latter class of cases, the statute itself relaxes its rigour by directing that where in respect of any amount added or disallowed and any explanation is offered by such per son (assessee) which is not accepted because the assessee has failed to substantiate the same, but such explanation is bona fide and all the facts relating to the same and material to the commutation of the total income have been disclosed by him, the Explanation shall not apply In other words, cases under clause (A) of Explanation 1 are those where the explanation furnished by the assessee falls in the category of a fact "disproved" whereas cases where an explanation so furnished falls in the category of fact "not proved" The expressions, "proved", "disproved" and "not proved" have well known distinct connotation in legal terminology, as may be apparent from the provisions of the Indian Evidence Act As per the interpretation clause, a fact is said to be "disproved" when after considering the matter before it, the court either believes that it does not exist or considers its non-existence so probable that a prudent man ought under the circumstances of the particular case, to act upon the supposition that it does not exist In contrast, a fact is said to be "proved" when after considering the matter before it, the court either believes it to exist or considers its existence so probable that a prudent man ought under the circumstances in a particular case, to act upon the supposition that it exists In juxtaposition, the expression "not proved" denotes a fact is said to be "not proved" when it is neither proved nor disproved

With this, it is of significance that while with the addition of income or disallowance of expenses is attached, the presumption about non-disclosure or concealment of particulars of such additions or expenses, no such presumption about existence of lack of "bona fides" of the assessee is raised in a case falling under clause (B) of the Explanation On the contrary, on finding an explanation as was existent (sic) or disproved, a reasonable inference of lack of bona fides can be drawn, mere failure to substantiate the explanation as a fact not proved, cannot raise a presumption about deliberate concealment and lack of bona fides In such events, the question of bona fides has to be proved as a fact like any other fact on preponderance of probability uninfluenced with any presumption In the first place, we find in the present case that even during the course of assessments it was not a case of rejecting the explanation furnished by the assessee, before making any additions in its income Once no explanation was said to be tested and rejected by the Assessing Officer before convening, the question of invoking Explanation 1 itself would not have arisen however Explanation 1 was attracted for the purpose of giving jurisdiction to the Assessing Officer for initiating the proceedings It could not have further taken place of conclusive proof so as to discard the explanation furnished by the assessee for the very same reason for which the result shown by him in the books of account has been rejected, not by rejecting the explanation furnished by the assessee but by accepting the explanation furnished by the assessee that he does not have necessary material to verify each and every detail of the expenses and, therefore, gross profit rate on the receipts has been taken by the assessee Once the plea of the assessee has been accepted during the course of assessment and additions have been made at his behest, the question of making additions by rejecting explanation, which was not sustainable or could not be substantiated, would not arise and in that event, the question of bona fides of the assessee could not be doubted

We are not able to comprehend as to on what basis the learned Tribunal has repeated the provisions of the Act ad verbatim that explanation furnished by the assessee cannot be accepted as bona fide because additions were made at the behest of the assessee, by accepting his inability to furnish details of expenses during the assessment proceedings itself

Apart from the aforesaid, the order of the learned Tribunal shows another error of law in perceiving provisions of section 271, Explanation 1 to section 271 While penalty proceedings were initiated in respect of the additions made, the enquiry has been directed in respect of expenses which could have been disallowed in the course of assessment proceedings, had the same been not substantiated But the fact remains that no deductions were disallowed and penalty proceedings have not been initiated for disallowance of any expenses claimed by the assessee It was not permissible for the Assessing Officer to initiate penalty proceedings for one specific breach and directing enquiry to another set of circumstances, which were not the foundation for initiating penalty proceedings

In this connection, the language of the statute suggests that recourse to the Explanation can be had on specific addition of income of any particular sum or disallowance of any particular deduction on account of expenses claimed against gross income The language of the Explanation uses two expressions as independent-any amount "added" or "disallowed" It postulates addition of specific amount in the income as income not disclosed or a specific amount claimed as deductions has been disallowed In making computation of total income where the income returned has been rejected by rejecting the trading results, finding some discrepancy in the books of account and substituting the same by an estimated figure, in the strict sense, can neither be said to be addition of any amount in - the returned income nor disallowance of any amount as deductions claimed The word "amount" of which additions made or deductions disallowed also denotes reference to specific item of amount added or disallowed as deduction in contrast to substitution of altogether a new estimated sum in place of the income returned It is a case neither of addition or disallowance but a case of substitution

For the aforesaid reasons, we are of the opinion that the question refer-, red to us should be answered in the negative, that is to say, in favour of the assessee and against the Revenue There shall be no order as to costs