COMMISSIONER OF INCOME-TAX Vs. SARDAR STORE

JUDGEMENT

(1.) IN compliance with the orders of this court, in Income-tax Case No. 80 of 1977 decided on July 25, 1977, the Income-tax Appellate Tribunal, Amritsar, has referred the following two questions for the opinion of this court: " (i) Whether, on the facts and in the circumstances of the case, the Appellate Tribunal was right in law in holding that the onus placed by the Explanation to Section 271 (1) (c) of the Income-tax Act, 1961, was discharged ? (ii) Whether, on the facts and in the circumstances of the case, the Appellate Tribunal was right in law in holding that no penalty was exigible ?"

(2.) THE aforesaid questions arise from the following facts. M/s. Sardar Store (hereinafter called "the assessee") is a registered firm and carries on retail business in cloth. For the period which ended on March 31, 1971, relevant to the assessment year 1971-72, return was filed on October 4, 1971, declaring a total income of Rs. 54,726. During the assessment proceedings, the Income-tax Officer found that cash credits amounting to Rs. 65,000 was shown in the books of account in the name of four different persons and since the assessee was not able to explain the said amount, the same was added as the assessee's income from undisclosed sources. The interest which was shown to have been paid pertaining to the credits was also disallowed because the genuineness of the credit was not accepted. On the assessee's appeal, the Appellate Assistant Commissioner allowed a deduction of Rs. 10,000 out of the assessment in respect of the credit shown in the name of one of the persons but confirmed the addition of Rs. 55,000 and held that the credits were not proved to be genuine. The disallowance of the interest was also confirmed. On further appeal by the assessee to the Tribunal, the Tribunal accepted the three cash credits shown in the names of Naginder Singh, Sher Singh and Kartar Singh as genuine and deleted those additions but in regard to the 4th cash credit entry in the name of Karnail Singh for the sum of Rs. 37,500, the deletion of Rs. 10,000 made by the Appellate Assistant Commissioner was accepted and an addition of Rs. 27,500 along with interest of Rs. 1,674 was confirmed, after recording a finding that Karnal Singh was not in a position to advance the said loan. In the assessment proceedings, it was categorically found by the Tribunal that Karnail Singh owned agricultural land which yielded income of Rs. 12,000 to Rs. 13,000 (p. a.) as stated by him and had seven children and his family expenses were Rs. 13,000 to Rs. 14,000. He was not able to give any other source of income and it was, therefore, concluded that whatever he earned by way of agricultural income was spent for household expenses. It was also found that he was not able to tell the rate of interest nor did he remember the details of interest paid to him. Since there was no evidence available on the record except the statement of Karnail Singh, it was concluded that he was not in a position to advance the loan of Rs. 27,500 to the assessee and for that reason the addition of this amount and interest on that amount amounting to Rs. 1,674 was confirmed. That matter became final between the parties.

(3.) WHILE completing the assessment, the Income-tax Officer simultaneously initiated penalty proceedings under Section 271 (1) (c) of the Income-tax Act and since the concealed income exceeded Rs. 25,000, the case was referred to the Inspecting Assistant Commissioner. In response to the show-cause notice, the assessee produced an affidavit of Karnail Singh on January 23, 1976, and got his statement recorded on February 28, 1976, and March 9, 1976. The Inspecting Assistant Commissioner held that the assessee was guilty of concealment of income to the extent of Rs. 27,500 and claimed false interest in the sum of Rs. 1,674. The statements of Karnail Singh Were discarded since no other evidence was produced. It was held that the assessee failed to rebut the presumptions arising under the Explanation to Section 271 (1) (c) of the Act and by an order dated March 17, 1976, levied penalty of Rs. 29,200, The assessee went up in appeal before the Income-tax Appellate Tribunal and the Tribunal by an order dated July 14/1976, allowed the assessee's appeal and cancelled the penalty imposed by the Inspecting Assistant Commissioner after recording findings that the onus lay on the Department to prove that the receipt of the amount in dispute constituted the income of the assessee and merely for the falsity of the assessee's explanation, no penalty for concealment of income could be imposed. In this behalf, it relied on CIT v. Anwar Ali [1970] 76 ITR 696 (SC ). It also relied on CIT v. Khoday Eswarsa and Sons [1972] 83 ITR 369 (SC), wherein it was further held that before levying penalty, the Department must have produced before itself any cogent evidence to prove that the assessee had consciously concealed the particulars of his income or had deliberately furnished inaccurate particulars. It also concluded that the original assessment proceedings may be a good item of evidence in penalty proceedings but penalty cannot be levied solely on the basis of the reasons given in the original order of assessment. It was finally held that the onus that lay on the Department was not discharged by it.