COMMISSIONER OF INCOME TAX Vs. KERALA SPINNERS LIMITED

JUDGEMENT

(1.) THE following questions have been referred by the Income-tax Appellate Tribunal, Cochin Bench (hereinafter referred to as "the Tribunal"), under section 256(1) of the Income-tax Act, 1961 (in short, "the Act"), for the opinion of this court :

(2.) THE background facts, as indicated in the statement of case, are as follows : THE assessee is a public limited company engaged in the business of manufacturing yarn. For the assessment year 1979-80, it was assessed to tax on a total income of Rs. 21,06,690. In appeal, the Commissioner of Income tax (Appeals). Calicut (in short, "the CIT(A)"), reduced the total income to Rs. 14,55,300. Further reduction of Rs. 57,719 was allowed by the Tribunal in second appeal filed by the assessee. Additions in the assessment included a total sum of Rs. 2,28,825 for inflation in claim for consumption of raw materials. THE assessee claimed that raw materials of 2,69,992.3 kgs. valued at Rs. 1.75,62,085 were consumed. On an examina-tion of the books of account and documents maintained by the assessee, the Assessing Officer found that the claim included 5,795 kgs. of polyster fibre given as loan to outside parties. THE assessee's claim was that this 2,330 kgs. from J. C. Mills and 3,465 kgs. from Madura Coats were received back. THE Assessing Officer accepted the claim for a part, i.e., 1,960 kgs. in respect of J. C. Milts on July 31, 1978. But held that still there was a balance of 3,835 kgs. included in the consumption of raw materials and no explanation therefor was given. In its letter dated September 13,1984, the assessee stated that there were receipts to the extent of 4,119.50 kgs. of polyster fibre as per folio 1 of raw materials register and that accounted for the consumption of raw materials received from outside parties. THE aforesaid quantum related to four items, i.e., 683.4 kgs., 676.5 kgs., 650.5 kgs and 2,049.5 kgs. As regards the first two items, the Assessing Officer accepted the claim of receipt from outside parties. But, for the balance, he was of the view that there was no such receipt and the assessee had inflated the consumption account. Accordingly, he made addition of Rs. 2,28,825, which was confirmed in appeal. Penal proceedings under section 271(1)(c) of the Act were initiated on the ground that the assessee had concealed its income by inflating the consumption of raw materials account. In response to the show-cause notice, the assessee explained that there was no inflation in the said account and that two quantities of 2,049.5 kgs. and 650.5 kgs. were actually received from outside parties. THE entries in the registers showing receipts from the processing department and the dyeing department were explained to be wrong entries by clerical error. THE Assessing Officer without accepting the plea of the assessee, levied penalty of Rs. 1,75,000 under section 271(1)(c) of the Act. In the first appeal, the Commissioner of Income-tax (Appeals) held that as regards quantity of 2,049.5 kgs. claimed to have been received from job work, it would not be correct to hold that there was concealment on the part of the assessee. It was observed that in the light of the entries in the register the other quantity of 650.5 kgs. could not be accepted to have been received from outside parties on job work account and there was concealment of income warranting levy of penalty. Accordingly, penalty of Rs. 55,130 was sustained. It was worked out by taking the value of 650.5 kgs. at Rs. 84.75 per kg. In the second appeal, the Tribunal analysed the factual position and observed that the case was one which is encompassed under clause (B) of Explanation 1 to section 271(1)(c). It was held that the case at hand was one where the assessee was not able to substantiate the plea and, therefore, penalty was not imposable and was accordingly cancelled.

(3.) THE adjudication revolves round the core question whether the explanation offered by the assessee was found false or was not substantiated by the assessee, as observed by the Tribunal. It is true that in comparison to the total claim of consumption, a disputed claim may be of a very small percentage. That is not always a determinative factor to decide concealment or otherwise. It would depend on the circumstances of each case. Section 271(l)(c) (with Explanation 1) reads as follows :