Delhi High Court
Income Tax Officer vs Giggles (P) Ltd. on 29 October, 2003
Equivalent citations: (2004)88TTJ(DEL)38
ORDER
R.M. Mekta, V.P. the revenue is in appeal challenging the action of the Commissioner (Appeals) in cancelling a penalty of Rs. 3,40,832 imposed on the respondent- assessed by the assessing officer under section 271(1)(c).
2. We have heard both the parties and have also perused the orders passed by the tax authorities, both in respect of the penalty proceedings as also the quantum, the latter up to the order passed by the Tribunal. Before we proceed further, we would like to mention that the penalty under section 271(1)(c) has been imposed with reference to two items, the first being an addition on account of unexplained investment in stock amounting to Rs. 2,55,273 and the second being a disallowance of Rs. 1,99,171 on account of commission paid to the directors of the company and its manager. It is a matter of record that both the additions have been confirmed by the Tribunal. In the aforesaid background, the relevant facts pertaining to each of the additions are as under.
3. Coming to the first addition, there was a survey under section 133A at the business premises of the assessed at Delhi on 11-3-1987. In the course of the said survey the relevant details pertaining to the stock inventory were drawn-up as also the trading account on the date of the survey. A shortage of stock to the tune of Rs. 1,09,492 was noticed. Subsequently, while framing the assessment the assessing officer drew the trading account and found excess stock to the tune of Rs. 2,65,273 as per working at pp. 1 and 2 of the assessment order. The assessed was asked to explain the same.
4. The explanation of the assessed was that there were certain goods, which were received before the date of the survey and were lying unsold, but which had been included in the inventory taken and, therefore, appropriate debit in respect of the value of the impugned purchases should be considered since bills had not been received. The further submission was to the effect that the manner in which the closing stock had been arrived at by the assessing officer was improper and further the valuation itself was not acceptable to the assessed. In considering the various objections the assessing officer allowed partial credit in respect of the bills not entered into the purchases register, but in respect of which the goods had been received. The assessing officer found on verification and which he noted as a fact in the assessment order that in respect of silver ornaments purchased from one M/s MK Gems, the explanation offered by the assessed was false and the evidence placed on record had been tampered with ultimately, addition to the tune of Rs. 2,55,273 was made being the value of unexplained investment in the stock and the section which was invoked was 69. It is noted from the assessment order that the assessing officer rejected the books of accounts by applying the provisions of section 145(2) of the Income Tax Act, 1961.
5. The second disallowance, which was made was on account of commission to the directors and the manager of the respondent- company and to appreciate the matter in proper perspective, we reproduce herewith the following observations and reasoning recorded by the assessing officer :
“It is seen that the assessed has paid following emoluments to the directors of the company Salary Commission Total (Rs.) (Rs.) (Rs.) Shri Harjeet Singh Kochar 42,000 85,463 1,27,463 Smt. Peeku Kochar 30,000 58,245 58,245 Manjeet Singh Kochar 30,000 85,463 1,21,463 The assessed was asked to give justification of the commission paid and this is for the first time. Commission paid is to the tune of Rs. 1,99,171 in all. During the course of assessment proceedings the assessed was asked to justify the claim of giving commission to the directors and Shri Manjeet Singh, manager, The assessed has filed a letter dated 24-5-1989, stating that the justification for increase in remuneration is that both the directors are whole time directors having no other source of income, both are highly educated having business experience and both are under-paid right from the beginning and the company earned a reasonable profit to warrant compensate the directors. In this connection, the assessed has also relied on the copy of the resolution of the company which is placed at page No. 131 and the resolution was passed on the Annual General Meeting held on 4-9- 1987 and as per this resolution Smt. Peeku Kochar and Harjeet Singh Kochar were entitled to a commission of 1/2 per cent and 1/1/2 per cent, respectively, from 31-1-1987. In this connection vide this office note dated 18-1-1990, the assessed was asked to give details of additional services rendered in order to qualify for the receipt of the commission. It has reiterated what has been said earlier in the above letter and no evidence has been brought on record to suggest that the additional services were rendered by the directors or the manager of the company. In this connection it is pertinent to pointed out that the assessed has tried to make a case that there was agreement between it and the manager Shri Manjeet Singh which is placed at page No. 204 of the assessment folder wherein appointment letter of Shri Manjeet Singh is discussed. Letter is dated 15-12-1981 and this letter bears telephone Nos. 3328189 and 3324916. On confronting the assessed that this telephone No. was not in existence at the time of execution of the so-called agreement in the year 1981, the assessed came out with another copy of the letter dated 14-2-1990. It has also stated that earlier letter filed was only a copy of this original now produced. The minutes book was not produced before the undersigned inspite of repeated opportunities. In addition there is another document on record, copy of the special resolution passed on 23-2-1983, wherein salary to Shri Harjeet Singh, Peeku Kochar and Manjeet Singh was to be increased. There is no mention of payment of commission to the directors, in the above copy of special resolution. The resolution which has been passed in September, 1987 had to grant a commission to the directors and also the fact that no additional services were rendered by the directors were confronted to the assessed. In reply the assessed has vide its letter dated 6-2-1990, at p. 5 stated that commission paid to the directors is very reasonable and also further stated that fundamental rule of law is that unless otherwise expressly provided the income cannot be taxed twice and have relied on the plathora of judgments to support its case. In the instant case, individuals have received commission and the maximum rate at which the individuals are charged to tax is 50 per cent whereas the company is chargeable to tax @ 65 per cent and as such the law quoted on the facts of the instant case the assessed- company by diverting its income to the hands of the individuals is benefited and reliance is placed on the case of McDowell & Co. Ltd. v. CTO (1985) 154 ITR 148 (SC), wherein it has been held that device cannot be brought to tax planning and it is Hon’ble to avoid payment of tax by dubious method. It is obligatory for every citizen to pay the tax honestly without resorting to subterfuges. Moreover, during the course of survey statement of Smt. Peeku Kochar, one of the directors, was recorded. She in her statement state that she is in receipt of salary only to the tune of Rs. 2,500 per month and she has no other income other than this. Moreover, the assessed in her statement also stated that she was looking after the affairs such as controlling the staff and supervision and purchasing if the supplier have articles, etc. She has nowhere in her statement stated that she was looking after the sales. Therefore, from the statement recorded it is clear that she was only in receipt of salary and she was not looking after the sales but by the resolution of the company in September, 1987, six months after the close of the financial year, it is seen that the commission is said to have been debited to her account. Therefore, commission payment to Peeku Kochhar is excessive and unreasonable and is a device to escape income-tax and not for business needs. Similarly, in regard to payment to other directors also no additional evidence has been brought on record to suggest the payment of such huge commission and also no additional services being rendered by the above persons. One more issue in this regard is that the commission has been paid this year for the first time where sales is over 50 lakks. But from the assessed’s letter dated 20-2-1989, it has stated that previous year sale was to the tune of Rs. 54,29,365 which shows that in the earlier year also sales were more than Rs. 50,00,000 but no commission was debited or paid to the directors. Therefore, this was also justifiable of payment of commission would also be engraved out. Moreover, the assessed has paid commission to Harjeet Singh Kochar, Peeku Kochar @ 1/1/2 per cent and 1/2 per cent of the sales as commission has been calculated for total sales made in Delhi, Calcutta and Bangalore branches. The Calcutta branch is managed by M/s Sahni Sons who are the agents of the company and the sales made by the Calcutta branch during the year is Rs. 17,87,442. Similarly, Bangalore has made a sales of Rs. 6,81,388. Even if you go through the computation made it is clear that commission is highly excessive as the above persons cannot render services in respect of sales in the above branches, i.e., Calcutta and Bangalore. Therefore, this commission paid to the directors and the manager amounting in all to Rs. 1,99,171 is disallowed as unreasonable in disproportionate of the services rendered for which they have already got salary. Reliance is placed on the case of Vishwanath Seth v. CIT (1980) 123 ITR 29 (All) and Lakshmiratan Cotton Mills Co. Ltd. v. CIT (1969) 73 ITR 634 (SC), wherein it has been held that the burden to prove that the services rendered for earning commission lay on the assessed and if no reliable evidence is forthcoming the Tribunal was competent to infer that the payment was not an admissible deduction. In view of the facts that no evidence has been brought on record to show any additional services have been rendered and are entitled for payment of the above commission. In the light of the facts mentioned above it is apparent that the idea of payment of commission to the directors was an after thought i.e., resolution dated September, 1987 after the close of financial year. Accordingly, the payment of commission paid is disallowed.”
6. On further appeal, the Commissioner (Appeals) confirmed both the additions and insofar as the addition under section 69 was concerned, the relevant observations are as under :
“However, this does make a difference to the extent that the assessed is trying to explain away the.shortage found at the time of survey with some explanation but the evidence produced in support of this explanation is found to be false. It is obvious that the assessed’s explanation that though bills have been received prior to 11-3-1987, they were not entered in the books of accounts cannot be accepted because it is found that in the case of M/s M.K. Gems, the goods have been received much later than the date of survey. Though the trading account as on 11-3-1987, drawn by the officer is based on estimate from the evidence gathered by him on enquiries and the shortage of stock found as on the date of survey by survey team, it is evident that the assessed is not disclosing the true trading results. The assessed’s argument that books of accounts are maintained regularly, the trading results are better than the earlier year and hence addition made in the results is not justified cannot be accepted in view of the above facts. The addition made by the officer in this respect is, therefore, confirmed.”
7. As regards the disallowance on account of commission, the same was confirmed by the Commissioner (Appeals) as follows:
“The arguments of the assessed have been considered. The claim of commission to the three directors is made for the first time and earlier no such payment has been made to these persons. Therefore, the officer is justified in asking the assessed to prove that the payment is justified and that the persons have rendered any services to justify the payment of commission. No evidence has been filed before the officer to show that additional services are rendered by these three in order to justify the payment of commission, except a copy of the resolution. The Tribunal, C-Bench, New Delhi, in their order No. ITA No. 5602/Del/1984, dated 30-7-1986, in the case of M/s Gayways Publicity (P) Ltd., New. Delhi v. Income Tax Officer has held that “Remuneration paid by the assessed-company, solely on the authority of the resolutions passed by the directors cannot be allowed in the absence of evidence of services rendered and the nature of duties assigned to him.”
The directors are in a position to vote to themselves or else to any of their own close relative any remuneration, hence simply passing of resolution cannot be relied upon. Therefore, it is clear that a mere passing of resolution does not justify the claim for payment of commission to the directors. Further, the payment of commission is made on the total sales not only in Delhi but also in Calcutta and Bangalore branches. The officer has observed that the Calcutta branch is maintained by M/s Sahni Sons who are the agents of the assessed-company. Further, on the date of the survey the statement has been taken from Smt. Peeku Kochar who has categorically stated that she is in receipt of salary of Rs. 2,500 only and she has no other sources of income. The resolution is dated 31-3-1987 and, therefore, it is clear that entire thing is an afterthought in order to divert the income. No justification is offered for the payment of commission except that they had put in number of years of service and are looking after the affairs of the company. Under the circumstances the disallowance of the entire commission made by the officer is confirmed.”
8. The matter travelled to the Tribunal and by means of a detailed order, a copy thereof being appended at pp. 26 to 38 of the assessed’s paper book, both the additions were confirmed. In respect of the addition under section 69 the Tribunal recorded the following facts and line of reasoning :
“On going through the entire material and considering the submissions, in our opinion, the addition is required to be confirmed. On 11-3-1987, the stock found under section 133A was as per the physical inventory prepared on the same date for which there cannot be any dispute. The stock belonged to the assessed and, therefore, the ownership is established. It is also a fact that assessed has not maintained quantitative stock records, item-wise of opening stock plus quantity inward less quantities outward, so as to give position of actual stock on any given point of time. In the absence of any records, therefore, whole quantity of stock attracts section 69. Only that part of the funds invested is required to be deleted for which satisfactory explanation is offered. It is for the assessed to explain what amount of stock was on hand on the day when stock was taken by the survey party and that part of the stock had to be co-related with the items lying in opening stock and purchases unsold. But the assessed has failed on this score obviously because the assessed has no quantitative records. Therefore, to find out whether any amount of stock could have come out of the opening stock and purchases the assessing officer had to prepare the trading account as on 11-3-1987 and this method is correct. The assessing officer accordingly has given appropriate deduction in respect of the stock which the assessed could hold and which could be fairly taken as having come out of opening stock and purchases and deducted the same from the value of the stock. This method adopted by the assessing officer is quite correct because the same is prepared on the basis of details of turnover, percentage of gross profit, etc. shown by the assessed. Therefore, there is no defect in the working.
Similarly, with regard to the goods received, for which the bills were received subsequently the assessed had asked for the deduction of an amount of Rs. 1,09,000 plus. After considering the relevant evidence the taxing authorities have taken into consideration part of the amount and the balance was rejected justifiably because the assessed had not been able to lead the necessary evidence to prove that the goods were received earlier and still remained in the stock. Besides, even where some evidence was given in the form of two invoices for purchase of silver ornaments from M.K. Gems, the explanation was found to be false. Though the assessed submitted that there was a mistake on the part of the assessed and, therefore, it was subsequently admitted so, yet this fact throws ample light on conduct of the assessed. It was further stated that purchases of other parties should have been verified by assessing officer from the records of the other parties, but in our opinion, it was not necessary for the assessing officer to undertake such exercise since it was for the assessed to lead the clear evidence so as to enable the assessing officer to record clear findings and draw correct inferences from the direct as well as circumstantial evidence.”
(emphasis, italicised in print, supplied by us)
9. As regards the assessed’s submission about the improper valuation undertaken by the assessing officer, the Tribunal observed that the assessed’s grievance was without substance since no evidence had been led to prove the point. As regards the submission made on behalf of the assessed that even if it was admitted that a part of the stock was not disclosed, but since subsequently the gross amount of sales were reflected no addition could be made since no deduction was claimed for the cost of sales, for the value of purchases, and for the aforesaid reasons the percentage of GP during the assessment year under consideration had increased to 31.42 per cent as against 27 per cent in the earlier assessment year. Further, according to the assessed this was, moreso, when no dispute had been raised with regard to the closing stock shown by the assessed on the last day of the accounting period. A number of decisions of the Tribunal were pressed into service for the aforesaid proposition, but which came to be rejected by means of the observations in para 8.1 of the order of the Tribunal. In effect the view of the Tribunal was that in the absence of relevant data it could not be said that gross sales stood reflected in the sales turnover and further the assessed had not been able to place even a-single, instance of such co-relation.
10. The further submission before the Tribunal was to the effect the since the book results had been rejected by invoking the provisions of section 145, but inasmuch as the percentage of GP rate increased as compared to preceding years there was no scope for enhancement of the income. This contention was rejected by the Tribunal on the ground that the issue under consideration was the addition under section 69 on account of undisclosed investment in stock. The other legal contention raised on behalf of the assessed, i.e., the non-applicability of section 69 to stock-in-trade also came to be rejected.
11. Coming to the addition on account of commission, the Tribunal confirmed the view taken by the tax authorities, observing as under:
“Considering the entire material and the findings recorded by the tax authorities, we are of the view that disallowance is Justified. The disallowance is not made on the basis of either section 40A(5) or section 40(c), but on account of the factual finding that the claim was for non-business consideration. Considering the principle laid down in the two cases cited by Mr. Gupta, where the controversies were identical, we do not find any reason to interfere with the appellate order. We, therefore, uphold the same.”
12. In arguing the appeal of the revenue, the learned departmental Representative, at the outset, supported the penalty order passed by the assessing officer emphasising that the assessed did not care to attend before the assessing officer or respond to the penalty notice as also the subsequent reminders issued. Further, according to the learned departmental Representative, the Commissioner (Appeals) while cancelling the penalty had erroneously observed in para 13 at p. 19 of his order that the books of accounts had not been rejected whereas it was quite clear from the reading of the order of the assessing officer on assessment that provisions of section 145(2) had been applied and the books had been rejected.
13. The further submissions were to, the effect that explanations had been tendered before the Commissioner (Appeals) for the first time and whereas on the date of survey the calculation led to a shortage, but detailed examination later on revealed excess stock and, therefore, the applicability of section 69. In reverting back to the erroneous observation on the rejection of books of accounts the stand of the learned departmental Representative was that the subsequent reasoning recorded by the Commissioner (Appeals) was bound to fail. The learned departmental Representative also referred to the non- availability of any material on record, which would prove any of the explanations tendered by the assessed before the CIT(A) in respect of the appeal on penalty and also highlighted the complete absence of evidence even in the quantum proceedings right up to the Tribunal. According to her, challans which had been placed before the various authorities pertained to the “current year” and not the relevant -previous year viz., 1987-88.
14. In reverting to the order of the Commissioner (Appeals) in the quantum proceedings, the learned departmental Representative invited our attention to the specific observations about the evidence placed on record as also the explanation tendered being false and a similar view being echoed by the Tribunal in the quantum appeal. It was submitted by the learned departmental Representative that each explanation of the assessed had been rejected initially by the Commissioner (Appeals) and thereafter by the Tribunal in the quantum proceedings.
15. In support of the arguments advanced with reference to the addition under section 69, the learned departmental Representative placed reliance on the judgments in A.M. Shah & Co. v. CIT (1999) 108 Taxman 137 (Guj); Smt. Kamla Devi Bishnoi v. Income Tax Officer (1991) 36 ITD 471 (Del), CIT v. B. Ramanujam Thampi & Ors. (1997) 143 CTR (Ker) 90. CIT v. P.K. Narayanan (1999) 238 ITR 909 (Ker) and 242 ITR 228 (Ker) (sic).
16. Coming to the addition on account of commission as also the consequential penalty under section 271(1)(c) the learned departmental Representative as in the earlier item referred at length to the orders passed by the tax authorities both on the quantum and the penalty proceedings and thereafter referred to the observations of the Tribunal in deciding the quantum appeal. According to her, the assessed had not been able to prove the extra services rendered by the directors and the manager as compared to the preceding assessment years and emphasised that the documents filed in support of the claim were found to be false and an “afterthought”. Further, according to the learned departmental Representative the tax authorities as also the Tribunal had discussed the matter at length and the reasoning which emerged was that the claim was not bona fide, it was an after-thought and the relevant evidence placed on record was false.
17. In conclusion, it was urged that the penalty under section 271(1)(c) having erroneously been cancelled by the Commissioner (Appeals) the Tribunal be pleased to restore the penalty order passed by the assessing officer. The learned counsel for the respondent, on the other hand, vehemently supported the order passed by the Commissioner (Appeals) cancelling the penalty and subsequent arguments advanced by him were a reiteration of those tendered before the Commissioner (Appeals) and which had led him to cancel the penalty. The following were highlighted :
(i) The rejection of books of accounts under section 145(2) and the applicability of provision of section 69 did not go hand in hand;
(ii) The assessed dealt in thousands of small items and it was not practicable to maintain relevant stock records;
(iii) The assessed’s income is not computed on the date of survey, but on the closing date viz., 31-3-1987 and the letter had been accepted by the department
(iv) That in respect of the quantum proceedings questions of law on both the issues had been referred under section 256(1) to the Hon’ble High Court and this would mean that the matter was not free from doubt and debate and under these circumstances penalty provisions of section 271(1)(c) would not be attracted;
(v) The Commissioner (Appeals) had sustained the addition on the basis that there was a shortage of stock whereas the assessing officer had made an addition under section 69 which was an entirely different aspect of the matter and even on this ground the penalty would not survive;
(vi) Any alteration in the basis for levy of penalty vis-a-vis the assessing officer, the Commissioner (Appeals) and lastly, the Tribunal would render the levy invalid in law;
(vii) No satisfaction had been recorded by the assessing officer with, reference to the penalty under section 271(1)(c)l-
(viii) The books of accounts of the assessed had been impounded on the date of survey and there was, therefore, no question of any interpolation being made in such books;
(ix) The stock inventory prepared by the tax authorities was on an estimated basis taking into account the sale price and which could not be taken into account for purposes of making the addition itself;
(x) The rejection of books of accounts was not relevant since the addition had been made under section 69 of the Income Tax Act; and
(xi) Sustenance of the addition by the Commissioner (Appeals) and subsequently by the Tribunal was not relevant since the question was one of penalty under section 271(1)(c) and which had to be decided independent of the quantum proceedings.
18. In support of the aforesaid arguments, the learned counsel placed reliance on the decisions reported as under :
(i) Ashok Kumar Rastogi v. CIT (1991) 100 CTR (All) 204;
(ii) CIT v. Lakhdhir Lal Ji (1972) 85 ITR 77 (Guj),
(iii) Padma Ram Bharali v. CIT (1977) 110 ITR 54 (Gau),
(iv) CIT v. Manu Engineering Works (1980) 122 ITR 306 (Guj)
(v) AIR 1972 Guj 115;
(vi) (1999) 238 ITR 415 (Guj) (supra);
(vii) CIT v. C.K. Naha & Bros. (1979) 117 ITR 19 (Cal);
(viii) Addl. CIT v. Kejriwal Iron Stores (1987) 168 ITR 715 (Raj);
(ix) T.A. Lokhandwala v. CIT (1982) 135 ITR 543 (MP)1
(x) K.G. Nariman Alias N.K. Gajwani v. Income Tax Officer (1989) 33 TTJ (Bom) 565
(xi) 106 Taxman 123 (Del) (sic)
(xii) CIT v. Ram Commercial Enteiprises Ltd. (2001) 167 CTR (Del) 321 (2000) 246 ITR 568 (Del);
(xiii) Roshan Lal Madan v. Asst. CIT (2000) 245 ITR 36 (Chd)(TM)(AT)-1 (ixv) Income Tax Officer v. Oswal Emporium (1989) 30 ITD 241 (Del)(TM); and
(xv) CIT v. Ramakrishna Mills (Coimbatore) Ltd. (1974) 93 ITR 49 (Mad).
19. As regards the addition/disallowance on account of commission, the submissions of the learned counsel were that the payment was not in dispute, the books had not been rejected, the persons to whom the payments had been made had not denied the same and the payments of salaries to such persons had been allowed in full. According to the learned counsel the department had not brought any evidence on record to show that the payments had not been made and it was not a case of a device as alleged by the department. Further, according to the learned counsel, the Calcutta branch was not looked after by an agent as alleged by the department and further the year under appeal was the fourth year of the assessed’s business and there was a desire on its part to reward its employees as also the directors who had been working on meagre salaries all along.
20. The learned counsel further stated that vis-a-vis the statement recorded in respect of Smt. Peeku Kochhar, she no doubt had mentioned salary, but this included commission as well. As regards the allegation of the department that the evidence was concocted and false, the submission of the learned counsel was that the copy provided pertained to the letterhead of the current date and this did not mean that it was the original document, which was being produced and it was in fact a copy thereof. Further, according to the learned counsel, the recipients had shown the commission in their hands and a reference was also made by the learned counsel to the observations of the Tribunal while deciding the quantum appeal. It was highlighted by the learned counsel that the Tribunal had granted a reference inspite of the fact that the addition had been sustained by it on the ground that the payment was for non-business consideration.
21. In support of the aforesaid arguments, reliance was placed on the decision of the Hon’ble Delhi High Court in CIT v. Smt. Rita Melhotra (1985) 154 ITR 550 (Del), as also the judgment of the Hon’ble Supreme court reported in 1961 AIR (SC) 136. We may mention that in the course of his detailed arguments, the learned counsel referred at length to the paper book filed.
22. In reply the submissions of the learned Departmental Representative were as follows : (All
(i) An inventory at the time of survey was always prepared with the assistance of the assessed;
(ii) The rates placed on various items were not in round figures as alleged on behalf of the assessed, but these were exact figures;
(iii) The assessed at no stage of the proceedings had countered the inventory prepared by the department and the person, who had signed the same was the managing director of the company, who knew his job fully well;
(iv) The assessed did not maintain any stock register and bills had been entered in the books of accounts only uptill 5-3-1987. The stand of the assessed about the stock inventory being an estimate was not correct since p. 244 of the paper book was the stock list for the assessed’s godown and this represented exact figures-,
(v) There was no change in the basis for levy of penalty at any stage of the proceedings since the assessed had given relevant explanations with reference to “excess stock” and not anything else. That the detailed discussion in the order of the Commissioner (Appeals) while deciding the quantum appeal had to be seen and individual observations were not to be picked out;
(vi) The assessed was fully aware as to what was in the mind of the assessing officer and on which aspect of the matter, queries had been raised and explanations sought;
(vii) The bills mentioned at p. 2 of the assessment order by the assessing officer were not found at the assessed’s premises on the date of survey-,
(viii) The detailed discussion in the order of the assessing officer could lead to no conclusion other than the one that proper satisfaction had been recorded with reference to the penalty under section 271(1)(c);
(ix) Penalty proceedings were entirely different and there would be no difference in case reference under section 256(1) was allowed in the quantum proceedings; and
(x) In the assessment of Smt. Peeku Kochhar, there was a specific assertion about the receipt of salary only and there was no mention of commission.
23. As regards the question of satisfaction the learned Departmental Representative placed reliance on the judgment of the Hon’ble Supreme Court in K.P. Madhusudhnan v. CIT (2001) 251 ITR 99 (SC) as also an unreported decision of the Tribunal bearing ITA No. 3696 (Del) of 1994, dated 19-2-2002, being the case of M/s M.S. Kold Hold Inds. (P) Ltd. v. Assistant Commissioner New Delhi.
24. In re-reply on the ground that a decision had been cited by the learned Departmental Representative for the first time, the learned counsel once again reiterated reliance on CIT v. Ram Commercial Enterprises Ltd. (supra); D.M. Manasvi v. CIT (1972) 86 ITR 557 (SC) and CIT v. S.V. Angidi Chetbar (1962) 44 ITR 739 (SC). As regards the unreported decision of the Tribunal (supra), the submission of the learned counsel was that the judgment of the Hon’ble Delhi High Court in CIT v. Ram Commercial Enterprises Ltd. (supra) had not been considered.
25. We have examined the rival contentions and would, at the outset, observe that some of the arguments advanced on behalf of the revenue have substantial merit. As rightly contended by the learned Departmental Representative, the Commissioner (Appeals) proceeded on wrong premises when he observed that the books of accounts of the assessed had not been rejected. The factual position is otherwise since books of accounts came to be rejected by the assessing officer by making specific observations in the assessment order. This would mean that the further reasoning of the Commissioner (Appeals) vis-a-vis the rejection of books of accounts would not advance the assessed’s case and connected observations would, therefore, have to be removed from the order of the first appellate authority.
26. A number of judgments have been relied upon by the learned counsel during the course of the hearing and these were in the direction of contending that the facts and circumstances of the case did not warrant any penalty, but in our opinion, these decisions would not be applicable to the facts of the present case inasmuch as right up to the Tribunal findings of fact have been recorded about non-placing on record of relevant evidence, the material available on record being inadequate and explanations tendered being false. We have in the earlier part of the present order reproduced relevant observations of the Commissioner (Appeals) as also the Tribunal while disposing of the quantum appeals and emphasis has been offered wherever relevant. The Tribunal in considering the addition on account of stock treated the assessed’s explanation to be false and there was also a reference to the “conduct of the assessed”.
27. The position in respect of commission is also somewhat identical inasmuch as right at the assessment stage the assessing officer expressed strong doubts about the nature of evidence/material being placed on record and we would specifically refer to the purported agreement between the assessed and its manager, Manjeet Singh. The assessing officer specifically brought to the notice of the assessed that the telephone numbers mentioned on the letter did not pertain to the period during which the agreement was supposed to have been entered into. The assessed’s argument before the assessing officer as it is before us was that it was only a copy of the earlier agreement which had been filed on the letterhead pertaining to the current date, but in our opinion, a copy has to be of the original of document and not something which is typed out in the current date. Then again, the minutes book of the assessed was not produced before the assessing officer, who categorically observes in the assessment order that a number of opportunities were given for doing so.
28. The learned counsel has also argued before us during the course of the present hearing that the basis of penalty has changed from stage to stage and, therefore, the initiation and the levy itself was invalid. Reliance was placed on a number of decisions including AIR 1972 Guj 115, but a perusal thereof shows that this was a case where a show-cause notice was issued on one ground, but subsequently the facts were found to be somewhat different and the court was dealing with the question of prejudice caused to a person, who was deprived of sufficient opportunity to defend himself. The further observations of Their Lordships were to the effect that the grounds on which it was proposed to confiscate the goods or to impose a penalty must indicate precisely and clearly the facts, which constitute the offence. In our opinion, the aforesaid judgment would not help the respondent since the penalty under section 271(1)(c) did not arise at the stage of the survey, but the same came about pursuant to the addition made by the assessing officer and which revealed a difference in the stock,
29. Another argument, which was advanced by the learned counsel was that vis-a-vis the quantum proceedings the reference has been granted by the Tribunal and the matter is pending before the Hon’ble High Court and which would mean that the matter is debatable and not free from doubt and, therefore, provisions of section 271(1)(c) would not stand attracted. In our opinion, the filing of a reference application or for that matter acceptance of the same under section 256(1) of the Income Tax Act, 1961, by the Tribunal would not lead to the disturbance of the view expressed by the Tribunal and it is well-known that quantum proceedings and penalty proceedings in respect of the same assessed for the same assessment year as also for the same identical items go side by side. The arguments of the learned counsel are, therefore, found to be without merit.
30. There is, of course, one argument of the learned counsel for the respondent which has to find favor with the Tribunal and the point is in fact covered by the judgment of the Hon’ble Delhi High Court in CIT v. Ram Commercial Enterprises Ltd. (supra). The question is as to whether satisfaction has been recorded by the assessing officer during the course of the assessment proceedings vis-a-vis the penalty under section 271(1)(c). We do not find a single line in the entire assessment order and which, in our opinion, would lead us to conclude that satisfaction has not been recorded by the assessing officer vis-a-vis the additions/ disallowances on account of stock and commission, Their Lordships of the Hon’ble Delhi High Court which is the jurisdictional High Court in the present case observed as follows while dealing with the question of levy of penalty under section 271(1)(c) vis-a-vis the petition filed by the Commissioner (Appeals) under section 256(2):
“Having heard learned counsel for the parties and having given our anxious consideration to the material available on the record, in the light of the law laid down by Their Lordships of the Supreme Court, we are of the opinion that no fault can be found with the judgment of the Tribunal and, therefore, the question suggested by the revenue does not arise as a question of law from the order of the Tribunal. The law is clear and explicit. Merely because this Court while hearing this application may be inclined to form an opinion that the material available on record could have enabled the initiation of penalty proceedings that cannot be a substitute for the requisite finding which should have been recorded by the assessing authority in the order of assessment but has not been so recorded.
A bare reading of the provisions of section 271 and the law laid down by the Supreme Court makes it clear that it is the assessing authority, which has to form its own opinion and record its satisfaction before initiating the penalty proceedings. Merely because the penalty proceedings have been initiated, it cannot be assumed that such a satisfaction was arrived at in the absence of the same being spelt out by the order of the assessing authority. Even at the risk of repetition we would like to state that the assessment order does not record the satisfaction as warranted by section 271 for initiating the penalty proceedings. ”
31. The learned Departmental Representative with a view to counter the aforesaid judgment placed reliance on (2001) 251 ITR 99 (SC) (supra), but which in ouf opinion, is not at all applicable as the point at issue was entirely different. Their Lordships took the view that Explanation to section 271(1)(c) was a part of section 271 and when the tax authorities issued a notice under section 271 they made the assessed aware that the provisions thereof were to be used against him and the said provisions included the Explanations. In other words, the view of the Hon’ble Supreme Court was that express invocation of the Explanation to section 271 in the notice under the said section was not necessary before the provisions of the Explanation were applied. It is apparent that the issue in the appeal before us is entirely different.
32. The learned Departmental Representative has also placed reliance on the unreported decision of the Delhi Bench of the Tribunal in the case of M.S. Kold Hold Industries (P) Ltd. v. Asstt. CIT (supra), but a perusal thereof shows that the judgment of the Hon’ble Delhi High Court (supra) relied upon before us in the present appeal does not appear to have been considered although cited. We need not say anything more on this aspect of the matter.
33. In conclusion, we have to hold that although the basis for the cancellation of the penalty on the part of the Commissioner (Appeals) is not found to be valid both on facts and in law, we are still inclined to uphold his conclusion to cancel the penalty on the legal issue of non-recording of satisfaction on the part of the assessing officer on both the additions/disallowances. In opining so, we respectfully follow the judgment of the Hon’ble Delhi High Court (supra) in the case cited by the learned counsel for the respondent. The order of the Commissioner (Appeals) would, therefore, stand confirmed on a ground different to the one on which he had cancelled the penalty.
34. In the result, the appeal of the revenue is dismissed.