COMMISSIONER OF INCOME TAX Vs. K P MADHUSUDANAN

JUDGEMENT

(1.) AT the instance of the Revenue, the following' questions have been referred under Section 256(1) of the Income-tax Act, 1961 (in short "the Act"), by the Income-tax Appellate Tribunal, Cochin Bench (in short "the Tribunal") :

(2.) THE factual position, as borne out from the statement of case, is as follows : For the assessment year 1986-87, the assessee, a partnership firm, filed its return of income on April 22, 1987, admitting a total income of Rs. 6,76,890. THE Assessing Officer completed the assessment determining total income at Rs. 7,90,170 including Rs. 93,000 as income under the head "Other sources". THE assessee, in the course of its business, received rice mostly from suppliers from Andhra Pradesh, who sent the goods either directly or by raising hundis. When hundis were raised, the assessee honoured them by making payment through local banks. When goods were sent directly, payments were made either by demand draft or by telegraphic transfers through local banks. During the course of assessment proceedings, the Assessing Officer noticed that some of the demand drafts purchased and telegraphic transfers made by the assessee were not entered in its cash book on the dates on which they were purchased or made, as the case may be. THE payments were found to have been accounted by the assessee's suppliers on the respective dates. THE assessee purchased a demand draft of Rs. 50,000 on January 27, 1986, from the State Bank of India, Calicut, in favour of Sree Jayalaxmi Enterprises, Byravapatanam, Andhra Pradesh. A copy of the assessee's account furnished by Sree Jayalaxmi Enterprises confirmed this payment. But, in the assessee's accounts, this amount was entered only on February 4, 1986, when there was sufficient cash balance. Similarly, the assessee transferred a sum of Rs. 1 lakh by telegraphic transfer through Andhra Bank, Calicut, on March 24, 1986 to Madavenkataratanam and others, Bhimavaram, Andhra Pradesh. This transaction was found entered only on April 24, 1986, when the assessee had sufficient cash balance. When these discrepancies were pointed out to the assessee, it submitted a letter on August 28, 1989, stating that as sufficient cash balance was not available on the dates of transactions, It had obtained hand loans from a few friends and as it was confident of repaying such loans within a short time, no entries were made in the books of account for such loans. It was stated that being unable to furnish evidence for such loans, it offered the amount as additional income. Taking into account deficiency in cash balance, the assessee agreed for an addition of Rs. 93,000 to cover such deficiency. THE assessment was finalised, as indicated above, treating Rs. 93,000 as "unexplained investment". Penalty proceedings were initiated under Section 271(1)(c) of the Act. THE Assessing Officer noticed that when the assessee had purchased a demand draft of Rs. 50,000 on January 27, 1986, it had a cash balance of only Rs. 26.876. THE transaction was entered on February 4, 1986, when the assessee had sufficient cash balance. In the books of account between January.27, 1986, and February 4, 1986, the lowest cash balance of Rs. 10,568 was on January 30, 1986. On that basis, deficiency of cash balance was worked out at Rs. 39,432. So far as telegraphic transfer of Rs. 1 lakh on March 24, 1986, is concerned, the cash balance on that date was Rs. 67,967. THE said transaction was entered on April 24, 1986. Taking" into account the cumulative minimum balance available with the assessee, deficiency was worked out at Rs. 36,519. THE total deficiency on January 27, 1986 and March 24, 1986, thus arrived at was Rs. 75,951. THE Assessing Officer noticed that the assessee had no explanation for the deficit except stating that it had taken hand loans from a few friends and proper entries were not made in the books of account. It was observed that if in reality the assessee had taken hand loans, it would not have been difficult to identify such persons and to produce them for examination. THE assessee's explanation was, therefore, clearly untenable and the assessee accepted it to be "unexplained investment" and offered for addition of Rs. 93,000 by its letter referred to above. Applying Explanation 1(B) of Section 271(1)(c), penalty of Rs. 37,975 i.e., the minimum penalty leviable, was levied. In appeal before the Commissioner of Income-tax (Appeals), Calicut (in short "the CIT(A)"), the assessee contended that it had agreed for addition of the amount in question as it was not able to prove the credits and since the assessment has been completed on agreed basis, penalty was not leviable. THE Commissioner of Income-tax (Appeals) did not accept this contention. In second appeal before the Tribunal, the stand of the assessee was that since an addition was made on agreement, penalty under Section 271(1)(c) was not leviable. Reference was made to a decision of the apex court in Sir Shadilal Sugar and General Mills Ltd. v. CIT, 1987 168 ITR 705. It was also submitted that the assessee was not intimated about the Assessing Officer's proposed action to apply Explanation 1(B) to Section 271(1)(c) and, therefore, levy was improper. Reliance was placed on the decision of the Bombay High Court in CIT v. P. M. Shah, 1993 203 ITR 792 to substantiate this stand. Accepting the assessee's plea, penalty was cancelled by the Tribunal. THE Revenue moved for a reference which was accepted and the questions have been referred as indicated above.

(3.) AT this juncture, it is necessary to refer to the legislative history so far as Section 271(1)(c) is concerned. There are three stages of amendment of Section 271(1)(c) till the period with which this case is concerned. The periods are (a) prior to April 1, 1964, (b) April 1, 1964 to March 31, 1976, and (c) after April 1, 1976. Originally, the word "deliberately" existed, which was omitted by the Finance Act, 1964, with effect from April 1, 1964. An Explanation was inserted at the end of Sub-section (1) of Section 271 by the said Finance Act (Section 40 of the Finance Act, 1964). In between by the Finance Act, 1968, the base for levy of penalty became the amount of concealment as against the quantum of tax sought to be avoided under the then existing provisions. Subsequently, further amendments were brought by the Taxation Laws (Amendment) Act, 1975 (Section 61 of the said amending Act). Four Explanations were submitted for the Explanation introduced by the Finance Act, 1964. The effect of the said amendment is that where, in respect of the facts material to the computation of total income of the assessee, he furnishes no explanation, or he cannot substantiate the explanation offered by him, or the explanation offered by him is found to be false, relevant income shall be deemed to be his concealed income. Another change was the base for levy of penalty for concealment. The base which was made, viz., the concealed income, was again changed to tax sought to be evaded. We are not very much concerned with other changes. The effect of the amendment with effect from April 1, 1976, is that a deeming provision was introduced. AT the relevant time, Section 271(1)(c), so far as relevant, reads as follows :