Judgment:
1. These appeals are by the assessee in relation to the assessment years 1979-80 and 1980-81 against the orders of the CIT (Appeals) in sustaining the levy of penalty under Section 271(l)(c) of the Income-tax Act, 1961. The previous year of the assessee is the financial year for each of the assessment years. In the return filed for the assessment year 1979-80 on 27-9-1979, the assessee admitted income totalling Rs. 22,940 from house property, own business in prawn-fishing and share income from the firms in which he was a partner and the assessment was completed under Section 143(1) of the Income-tax Act on 29-9-1979. Subsequently, a notice under Section 143(2) of the Act was issued to the assessee asking for certain details. In the meanwhile, on 29-1-1982 asearch under Section 132 was conducted in the residential and business premises of the assessee and certain documents and books of account were seized. No cash, jewellery or valuable articles or things were found. A letter was issued on 4-2-1982 posting the case for further hearing to 18-3-1982 together with a notice under Section 142(1) of the Act. There were adjournments of the hearing also at the request of the assessee. In the meanwhile, on 18-3-1982 the assessee had filed a return purported to be a revised return showing income from other sources at Rs. 50,000 without any details. The case was finally heard on 23-3-1982 and a draft assessment order was passed.
The assessee filed his objections and the Inspecting Assistant Commissioner after hearing the assessee and the Income-tax Officer issued his directions which were incorporated in the assessment order dated 6-11-1982. This is for the assessment year 1979-80.
2. For the assessment year 1980-81, the assessee had filed a return declaring income of Rs. 16,340 and notice under Section 143(2) was served on the assessee. Certain details were called upon in the course of the personal hearing. In view of the search under Section 132 on 29-1-1982 wherein certain books of account and documents were seized, the assessee was asked to explain the transactions as noticed in the books of account or documents. A draft assessment order dated 22-3-1983 was served on the assessee. The assessee submitted his objections and the Inspecting Assistant Commissioner of Income-tax after hearing the assessee and the Income-tax Officer gave his directions dated 16-8-1983 on the draft assessment order. The directions were incorporated in the final order of assessment dated 16-3-1982. This is for the assessment year 1980-81.
3. In all these assessments, certain additions were made based on the seized materials. The additions that were finally sustained by the Tribunal in the quantum appeal were as follows:in Alwaye range Rs. 2,27,609 Rs. 1,00,822the name of Archana Jewellery Rs. 20,580 Rs. 1,38,348from Silpi Movies.
Rs. 13,333 Rs. 13,333 On the basis of the above, the Income-tax Officer proposed to levy penalty under Section 271(1)(c) to which the assessee objected stating that it has not been established that the assessee had concealed the particulars of income or furnished inaccurate particulars of income in respect of toddy business in Alwaye range and Archana Jewellery. The presumptions available under Section 132(4A) of the IT Act, 1961, cannot be extended to penalty proceedings. As for the non-inclusion of the income of the minor children it was submitted that it was an accidental omission and that Silpi Movies in which the minor children were admitted to the benefits of partnership did not have any taxable income; and the forms prescribed under the IT Act did not provide for columns for inclusion of minors' income. There was an accidental omission to include the notional income on the dwelling house (self-occupied) and that the assessee did not receive any higher income in respect of the property let out than what was admitted. Thus, the assessee contended that penalty under Section 271 (l)(c)was not attracted in his case.
4. The Income-tax Officer overruled the objections of the assessee stating that the Tribunal had confirmed the additions in respect of all the impugned incomes; that it was for the assessee to establish that the toddy business in Alwaye range did not belong to him, that the business of Archana Jewellery did not belong to the assessee; that the assessee had not contested the inclusion of the minors' income in his total income in appeal and that the assessee's argument that the charge of concealment cannot encompass incomes that are includible in the total income of the assessee is not tenable and that there was no justification for not including the property income. For these reasons the Income-tax Officer concluded that the assessee had concealed the particulars of his income inviting the provisions of Section 271 (1) (c) of the Act. In this view of the matter, he levied penalty ofRs. 1,10,000 for the assessment year 1979-80 and Rs. 1,70,000 for the assessment year 1980-81.
5. The assessee carried the matter in appeal. The learned CIT (Appeals) rejected the contentions of the assessee for substantially the same reasons as were adduced by the Income-tax Officer.
7. The arguments of Sri G. Sarangan, the learned counsel for the assessee run as follows : Penalty proceedings are different and distinct from assessment proceedings. Mens rea must be established before the levy of penalty. This has not been done in this case. The presumptions envisaged in Section 132(4A) of the IT Act, 1961, cannot be extended either to assessment proceedings or to penalty proceedings.
The assessment in this case was confirmed by the Appellate Tribunal, not on the basis of any independent evidence adduced by the Income-tax Officer, but only on the basis of the presumptions contained in Section 132(4A) of the Act. Therefore, the assessment proceedings cannot in the facts of the case constitute a good piece of evidence or material relevant for penalty proceedings. The revenue has not established the onus on its part even though the assessee has been insisting to discharge the onus. None of the persons mentioned in the slip (recovered) were examined in spite of the requests made by the assessee. The revenue should have established the identity of the other parties with whom the assessee is said to have carried on toddy business. Those parties were not examined much less identified. From the remarks found in the draft assessment order to the effect that the assessee bid the auction only on 6-3-1980, it can be inferred that the revenue must have made enquiries with the Excise Department in regard to the impugned assessment years also viz., 1978-79, 1979-80 and 1980-81, but as the results of the enquiries were not favourable to it, the same was not brought on record, perhaps that is the reason why the remarks were dropped in the final assessment order itself. In such state of affairs, levy of penalty is totally unjustified. Without prejudice to his stand that the assessee was not involved in the toddy business as alleged in the slip, he submitted, that on the basis of the information found in the slip, the assessment, if at all it is to be made, should have been done in the status of Association of Persons and penalty proceedings should have been initiated on that footing. This has not been done. Therefore, there is no basis at all for levy of penalty in this case.
8. The arguments of Sri C. Abraham, the learned senior departmental representative run as follows: The assessee had not adduced any evidence either in the assessment proceedings or in the penalty proceedings to disprove the information regarding the share of profit in the Alwaye range toddy shops. The slips were recovered from the residential premises of the assessee to which the assessee had access and, therefore, he cannot disown the same. The findings in the assessment proceedings are good piece of evidence as has been held in a number of decisions as follows: The findings can be disturbed only when it is convincingly established that they are either wrong or based on no material or on incorrect appreciation of facts. This has not been done. The presumptions envisaged in Sction132(4A) are legal presumptions and if it is held that such presumptions cannot be made use of either in the assessment proceedings or in the penalty proceedings, the efforts of the revenue to unearth tax evasion would remain frustrated. Therefore, the Courts should lean in favour of the revenue in the application of the presumptions to penalty proceedings. Though he cannot confirm or deny whether the slips and other documents relating to the Alwaye toddy shops were recovered from the bed-room of the assessee, still he would say that they were found in the residential premises to which access was limited. The certificate produced by the assessee in respect of the Abkari contracts in the relevant previous year only contained reference to a few shops and, therefore, it cannot be inferred from it that the assessee was not having toddy shops in the Alwaye range. To a question whether the certificate can be accepted in evidence, the learned departmental representative submitted that even otherwise it can be said that it was for the assessee to adduce evidence that he had not done business in some other shops clandestinely. As for the contention of Sri Sarangan that the assessment of 50% in the hands of the assessee as an individual is erroneous and illegal and the assessment should have been made in the status of Association of Persons, Sri Abraham submitted that it was only a technical lapse or a procedural irregularity but that should not be a ground for the cancellation of the penalty.
9. We have thus heard rival submissions and perused the records. There was a search on 29-1-1982 in the business as well as residential premises of the assessee. Annexure A to the assessment order for the assessment year 1979-80 gives the details of the slips numbered as 20/29 in the Panchnama pertaining to Alwaye Toddy Shop Account, which is as follows:1977-78 a/c profit.
198694.871978-79 a/c profit.
455219.291979-80 a/c profit.
201643.581977-78 a/c 123302.171978-79 a/c 112105.761979-80 a/c 238065.66 Balance 226869.25To cost of shop equipments 319369.90By 50% profit for 3 years 427778.87To Shop equipments.
89803.50To Lorry - 2 numbers.
1,00,000.00To Office equipments.
6,056.20 There were also the profit and loss account and balance-sheet for the assessment year 1980-81 numbered as 20/30 and 20/31 and also a trial balance numbered as 20/33 in the Panchnama. Further, there was a slip numbered as 20/34 containing the details of stock of materials, equipments, lorries etc., which were incorporated in sheet No. 20/29 (pages 126 to 133 of the paper book). Questions Nos. 30 and 31 and the answers thereto in the sworn statement dated 29-1-1982 are relevant in this context: 30. Q: What have you to say about the records now being shown to you numbered as 20/29 to 34 and the Alwaye Toddy Shop Account Summary? 31. Q: In the abovesaid records in the record marked 20/29 against your accounts, it has been mentioned as receipts of 3 years profit as Alwaye Toddy Shop (1977-78 to 1979-80) 50% receipts (Rs. 4,27,778.87) besides this, there is seen receipts of an amount of Rs. 97,729.85 as 50% sale value of Toddy implements. What have you to say about this 10. Sri Abraham, for the revenue, is unable to confirm or deny whether documents numbered as 20/29 to 34 (relating to Alwaye Toddy shops) were recovered from the bed-room of the assessee or not, as he was not having the Panchnama with him. It is unfortunate that in a search and seizure case, the revenue's representative is not fed with all the documents relating to the search. There is force in the contention of Sri Sarangan that whereas in respect of recovery of some documents, as for example, item 26/37 it is stated in the course of the sworn statement itself that it was recovered from the bedroom of the assessee, there is no such indication of the exact location from where the toddy shop documents were recovered and, therefore, we told that the remarks of the authorities about their recovery in the bed-room are not supported by material on record before us.
11. From the answers to questions Nos. 30 and 31 extracted above, it will be seen that the assessee could not remember anything and thus did not explain the slips in his statements. It will also be evident that apart from the question regarding the alleged receipt of three years profit etc., no questtons were asked in regard to M/s. K.S. Chathunni, K.S. Ramakrishnan and K.T. Sreedharan whose names were mentioned in the balance-sheet with figures noted against them. Nor any question was put to the assessee about these persons in the course of the assessment proceedings. There is a remark in the draft assessment order dated 27-3-1987 to the following effect: As far as the department knows (Emphasis supplied) the assessee had taken over the toddy business in Alwaye from 1980-81 onwards. Sri P.K. Narayanan had bid the toddy shops in Alwaye range on 6-3-1980 and this business was taken over along with the office material and equipments and lorries. Viewed from this angle it can be seen that the accounts found in Ext. 20/29 is only the adjustment entries made by the erstwhile partners when the business was taken over by Sri Narayanan in 1980-81. In any case the liability to explain the entries in the document seized from his bedroom was purely on the assessee which he has not discharged.
These remarks are not found in the final assessment order in the form in which it was stated in the draft assessment order. This is a case of search and seizure in which a slip referring to sharing of profits for the assessment years 1978-79, 1979-80 and 1980-1981 (accounting years 1977-78, 1978-79 and 1979-80) were found along with the profit and loss account and balance-sheet for-one of these years. The area in which the toddy shop business was said to have been carried on was writ large on the face of the slips recovered. Certain names were also mentioned in the documents referred. Therefore, it is reasonable to presume that the revenue would have made enquiries with the Excise Department at least with regard to the persons carrying on the toddy shop business in Alwaye range in those years in order to find out whether the assessee was also one among them. The remarks in the draft assessment order extracted above could not have been made unless such an enquiry had been made with the Excise Department. From the remarks it is seen that the revenue knew that the assessee entered the auction only on 6-3-1980 (thereby referring to the accounting year 1980-81 relevant to assessment year 1981-82). The certificate now produced before us also indicated that M/s K.S. Chathunni, K.S. Ramakrishnan and Sri K.T.Sreedharan were the persons who had taken the auction in the impugned years. Therefore, it is surprising that these persons were not examined though their names were found in the balance-sheet (item 20/31), but some how the revenue misdirected itself and proceeded on the basis of the presumptions envisaged in Section 132(4A) of the IT Act. Thus, the vital information provided in the slips was not perused or the pursuit was abandoned for reasons best known to the revenue in spite of repeated requests by the assessee as follows : In its reply dated 19-4-1982 to the draft assessment order it was argued that: I have not done any Abkari business at Alwaye as alleged in your notice. The persons who bid the Alwaye range of toddy shops for the years referred to in your notice may be ascertained from the Excise Department. Before making any addition on the basis of the alleged piece of paper you are referring, you may please call and examine the persons who actually conducted the Alwaye range of toddy shops during the year under the excise records. I may also be given an opportunity to cross-examine them. Without prejudice to my above stand I may submit that you are making use of the alleged slip piece-meal omitting the latter portion where some expenditure are shown resulting the net figure in loss. Further, even on basing your contention, the procedure adopted by you is irregular and unsustainable. If the business at Alwaye is done by a firm having 50% share to me as you allege and 50% share to others, the proper procedure is to make an assessment on the firm, whether registered or unregistered, and add the taxed or untaxed share of income, as the case may be, fixed therein, to my income. It is also surprising how you can add 50% of the remaining share of income to my income simply because of the fact you are unable to trace the person who has really received that income. You have not discharged your burden of proof in this regard. At any rate the addition of Rs. 4,55,219 made under Alwaye toddy shop account is unsustainable and has to be deleted.
Further, before the Inspecting Assistant Commissioner of Income-tax, in connection with 144B proceedings, the assessee has replied as follows: I have not done any Abkari business at Alwaye during the relevant period as alleged in the draft assessment order. The persons who bid the Alwaye range of toddy shop for the year referred to in the draft assessment order may be ascertained from the Excise Department. But the Income-tax Officer has not made any effort to ascertain the correctness of this. Before making an addition on the basis of the alleged piece of paper referred in the order, the ITO should have called and examined the persons who actually conducted the business.
The ITO also should have given an opportunity to cross-examine the persons who actually conducted the Alwaye Range of toddy shops during the relevant period. Without prejudice to my above contentions I may submit that the ITO is making the latter portion where some expenditure are shown resulting the net figures in loss.
Even in the reply to the penalty notice, the assessee had in his letter dated 27-1-1987 reiterated as follows: I wish to bring to your notice that the Abkari business is not a business which can be done freely by any person. It can be done only in accordance Abkari Act and rules made thereunder. The Records of the Excise Department clearly shows that the Abkari business at Alwaye was done by someone other than me. The department has not made any attempt to verify this fact. It is illegal to presume on the mere strength of the alleged slips that I had done Abkari business of the Alwaye Range contrary to the provisions of law. In the absence of tangible and corroborative proof particularly in view of the contrary facts evidenced by the Excise records of Alwaye range, the Department is duty bound to discharge its burden. By the mere fact that a share of income of a toddy business at Alwaye has been assessed in my hands by a fiction created by the provisions of the Act does not prove that I conducted the toddy business at Alwaye.
The revenue was rest content with hauling up the assessee on the mat on the basis of the presumptions contained in Section 132(4A). In our considered opinion, the presumptions contained in Section 132(4) has got only limited applications and cannot be extended to penalty proceedings. Whereas Section 132(4) mentions that a statement taken in the course of the search can be used in evidence in any proceedings under the IT Act, 1922 or under the 1961 Act, there is no mention of such proceedings in regard to the presumptions envisaged in Section 132(4A). The Allahabad High Court in the case of Pushkar NarainSarrqf v. CIT[1990] 183ITR388, at page 392, held as follows: The presumption under Section 132(4A) does not override or exclude Section 68, that is, it does not obviate the necessity to establish by independent evidence the genuineness of the cash credits under Section 68. Further, the presumption under Section 132(4A) is available only in regard to the proceedings for search and seizure and for the purpose of retaining the assets under Sub-section (5) of Section 132 and their application under Section 132B of the Act. The presumption is relevant and limited only to the summary adjudication contemplated under subsection (5) of Section 132. Neither more nor less.
Applying the ratio laid down by the Allahabad High Court, we hold that in the case of the assessee, the findings in the assessment order which were themselves based on the presumptions cannot constitute a good piece of evidence for purpose of levy of penalty. Therefore, the case relied on by the learned senior departmental representative referred to in the preceding paragraph do not come to the rescue of the revenue.
Penalty proceedings are distinct and different from assessment proceedings. It is for the revenue to discharge its initial onus by independent enquiries read with information provided in the slip pointing to the possibility of guilty frame of mind in concealment proceedings. This has not been done. The nexus between the assessee and M/s. K.S. Chathunni, K.S. Ramakrishnan and K.T. Sreedharan, whose names are found in the document 20/31 and who carried on toddy business in Alwaye range in these years as seen from the Excise certificate is not established. In this view of the matter, we hold that the levy of penalty in relation to the alleged income from toddy shop business is not justified. The same is deleted.
12. In another view of the issue, we find force in the alternative argument of Sarangan that in the absence of information about the individual shares of other parties to whom 50% share was allotted, the assessment should have proceeded only on the basis of Association of Persons. This has not been done. What was done was to include 50% of the share of profit in the individual assessment of the appellant, as if the other beneficiaries or parties are known and their shares are determinate. From the information found in the slip there is no specific allotment of shares individually to other parties. Therefore, the inclusion of 50% share of profit in the individual assessment of the appellant is itself open to challenge. We reject the contention of Sri Abraham that the failure to make the assessment in the status of Association of Persons was only a technical lapse or a procedural irregularity. In our considered opinion, it is neither a technical nor a procedural lapse or irregularity. The deficiency or defect goes to the root of the matter. The status in which a person is to be assessed is very material for assessment. A wrong status will result in an assessment being made against a wrong "person" as defined in the Income-tax Act. Unless an assessment is made in accordance with the "status" of the "person" - whether individual, AOP, Registered Firm, Unregistered Firm, HUF, Company etc., and unless the person responsible is shown to have concealed the income or furnished inaccurate particulars of such income, the charge of concealment cannot be upheld.In this case, since the assessment was not made on the AOP we hold that there is no basis for levy of penalty under Section 271(l)(c) of the Income-tax Act. This is only our alternative view without prejudice to our earlier conclusion that the nexus between the assessee and the toddy shop business had not been established.
13. The next ground of appeal is against the levy of penalty under Section 271(l)(c) 6f the IT Act on the income of Archana Jewellery not admitted in the tax return furnished by the appellant. In the course of the search under Section 132 of the Act, the following documents were recovered: 1. A lease agreement in writing between Sri A.N. Chellappan Achari, the assessee, and presumably one A.G. Ramesh residing at Sadanam Road, Ernakulam. The lease agreement was for the purpose of doing gold business at Door No. 919-A/3 in Ward No. XXXVI in the name of "Archana Jewellery".
2. The papers recovered from the bed-room of the assessee showed that 15134.40 grams of gold were purchased at the rate of Rs. 124 per gram and Pagadi of Rs. 6 lakhs was paid and the document showed certain receipts and disbursement of Rs. 6,11,293.97 by cheques.
When confronted with the papers recovered from the bed-room of the assessee, the appellant had stated that his nephew Sathyan, an employee of Archana Jewellery was staying with him and thus the papers were entrusted to the assessee by his nephew. He had also stated that his wife, Smt. K.T. Dayavathy had advanced some amounts to Sri Chellappan Achari of Archana Jewellery. It may be pointed out at this stage that no question was put to the appellant about the lease agreement found in his premises. However, subsequently, the assessee had explained that Sri Ramesh did not know Sri Chellappan Achari and, therefore, he intervened on his behalf. In the course of assessment proceedings, the Assessing Officer called for the records of Sri Chellappan Achari of Archana Jewellery from the Income-tax Officer, B-Ward, Ernakulam, and on scrutinising the same noticed that Sri Chellappan Achari had filed an affidavit on 15-7-1978 and had made depositions before the Income-tax Officer, B-Ward, Ernakulam, on 18-9-1981. From these records he drew an adverse inference that Sri Chellappan Achari was a man of straw and had no capacity to contribute any capital for doing gold business in the name of Archana Jewellery. In support of such inference it was pointed out that enquiries revealed that bank records showed that the bank account of Archana Jewellery was originally opened and operated by the assessee (but details for this were not given) and that his wife and other relatives had offered securities for the bank loans obtained by Archana Jewellery. Initially, the bank had granted loan on the securities of 19 persons and subsequently all the 18 persons other than the assessee had withdrawn from the guarantee leaving the assessee as the sole guarantor. Lastly, it was seen from such records that on 8-8-1978 a sum of Rs. 1,00,000 was withdrawn from the firm M/s P.K. Narayanan & Co., and given to Archana Jewellery. Therefore, the Income-tax Officer concluded that Archana Jewellery was only a benami business of the assessee in the name of Sri Chellappan Achari. This was deleted in appeal by the CIT (Appeals) and but confirmed in the revenue's appeal by the Tribunal.
On the basis of the assessment, penalty was levied under Section 271(l)(c) of the IT Act and this was confirmed on appeal. The assessee is on second appeal.
(1) The assessee had explained the possession of the stock details by stating that his nephew, Sri Sathyan was in the employment of Archana Jewellery owned by Sri Chellappan Achari and that he had entrusted the papers to him. But Sri Sathyan was not examined by the Income-tax Officer. The assessee had also stated that his wife had advanced moneys to Archana Jewellery. He had not denied the monetary transactions between him and Archana Jewellery. All the transactions were admitted in his return as well as in the return of Archana Jewellery whose assessment was completed under Section 143(3) of the Act. Thus, the revenue has treated Archana Jewellery as one belonging to Sri Chellappan Achari and it cannot now turn round and say that because there were monetary transactions between the assessee and Archana Jewellery the entire business belonged to the assessee.
(2) Sri Chellappan Achari is the neighbour of the assessee and the assessee wanted to help him. Therefore, he stood as guarantor or offered securities to enable Sri Chellappan Achari to obtain loans from the bank. This is only a private decision to help a neighbour.
Merely because he stood as a guarantor or had offered securities to the bank in connection with the loans taken by Archana Jewellery, the ownership of the business cannot be traced to the appellant. It is not unusual for a person to help others either out of love and affection or out of good neighbourliness or out of idiosyncrasies.
If the assessee is the real owner of Archana Jewellery, certainly the books of account belonging to the jewellery must have been found with the assessee in the course of the search, with or without the trial balance or the profit and loss account. Nothing was found except a few details of value of stock and certain payments and that was explained as to the entrustment of the same by his newphew.
Therefore, the authorities erred in concluding that Archana Jewellery is the benami business of the assessee in the name of Sri Chellappan Achari. Legally speaking the plea of benami cannot be taken cognizance of by any Court under the provisions of section 4 of the Benami Transactions (Prohibition) Act, 1988. Further, the statement that the bank account of Archana Jewellery of Sri Chellappan Achari was initially operated by the assessee is an erroneous statement as would be evident from the certificate furnished by the banker. Sri Sarangan submitted that nowhere in the draft assessment order there is an allegation that the bank account was initially operated by the appellant. However, in the Tribunal's order there is a mention that the bank account of Archana Jewellery was initially operated by the assessee. He wonders on what basis such a mention was made. It is for the revenue to prove that the assessee had initially operated the bank account of Archana Jewellery if it had any material with it.
15. The arguments of Sri Abraham read as follows: Slips containing the valuation of stock of gold were recovered from the bed-room of the assessee. There are monetary transactions between the assessee, his wife and Archana Jewellery. Sri Chellappan Achari was a man of straw.
Loans were advanced to him only on the strength of the guarantees or securities offered by the assessee. Non-examination of Sri Sathyan is not a fatal defect as to dislodge the findings recorded in the quantum appeals. Benami Transactions (Prohibition) Act, 1988 only prohibited the remedies as between real owner and benamidar and it cannot extend to third parties like IT Department treating a transaction a benami transaction. The contentions which are raised now were all raised before the authorities in the quantum appeals and stood rejected.
Therefore, the levy of penalty is justified.
16. Having regard to rival submissions and on a perusal of the materials before us, we cancel the penalty in relation to the income from Archana Jewellery. The following questions and answers emerged in the course of the sworn statement given at the time of search: 34. Q: At the time of inspection of your house, many papers connected with gold dealing were found which were seized by the Central Excise Authorities. What have you to say regarding these pieces of papers? A: My brother's son Sri Sathyan is working in the Establishment, Archana Jewellery, Ernakulam. These pieces of papers were brought and kept by him. He is residing in my house.
25. Q: Do you know what transactions are connected with the abovesaid pieces of papers 26. Q: What is the interest you have in the establishment Archana Jewellery? A: My wife has given a sum of about Rs. 1,00,000 as loan to this Establishment. I don't know the exact amount at this time.
27. Q: What have you to say about the marked item 26/37 shown by me now, seized from your bed-room 'beginning price of gold total 1, A: I have been keeping some papers of Archana Jewellery of Sri Sathyan mentioned earlier.
From the answers given it is seen that the assessee has explained how he came to possess the papers belonging to Archana Jewellery through Sri Sathyan, an employee of Archana Jewellery, who was residing with the assessee. Sri Sathyan is his nephew. The revenue has not placed any material before us to say that Sri Sathyan was either examined at the time of the search or at any time thereafter. Therefore, we hold that he was not examined. His non-examination is in a way fatal as the explanation of the assessee as to how he came to possess those documents stands unrebutted in evidence.
17. From the order of the authorities, it is seen that Sri Chellappan Achari of Archana Jewellery is assessed to income-tax under the jurisdiction of the Income-tax Officer, B-Ward, Ernakulam. Therefore, even the presumption initially available to the revenue under Section 132(4A) of the IT Act in respect of the papers containing the stock details and payments pertaining to Archana Jewellery recovered from the assessee stood rebutted in evidence by the assessment made on Sri Chellappan Achari of Archana Jewellery. The CIT (Appeals) deleted the income from Archana Jewellery against, which the department had appealed before the Tribunal and submitted a paper book in the quantum appeal as follows: 2. English translation of material seized and marked as item 20/29 7 3. Extracts from ITO's letter date 10-2-1983 to the assessee 8 4. Extracts from assessee's letter dated 26-2-1983 to the ITO 9 5. Extracts from the sworn statement of Sri P.K. Narayanan given before the ITO 10 6. Photostat copy of the lease agreement dated 5-9-1978, marked as item 20/14 seized at the time of search 11 to 14 8. Photostat copy of documents marked as item 20/ 37, seized at the time of search (please refer to para 8 of assessment order) 16 9. Photostat copy of the affidavit filed by Sri A.N. Chellappan before the ITO 17 10. English translation of the sworn statement by Sri Chellappan Achari before the ITO 18 11. Photostat copy of letter dated 23-8-1982 from Bank of Cochin to the ITO, Spl. Cir., Ernakulam 19 12. Photostat copy of letter dated 20-8-1982 from Bank of Cochin to the ITO, Spl. Circle 20&21 13. Copy of statement dated 1 -7-1981 filed in the case of Archana Jewellery (please refer to para 8(iv) of the assessment order) 22 14. Points to indicate that Sri A.N. Chellappan Achari is a benami of Sri P.K. Narayanan 23&24 The Tribunal after referring to the points made by the Income-tax Officer held as follows: In fact the bank account of Archana Jewellery CD-14 was operated by P.K. Narayanan, the assessee. The assessee's counsel could not also satisfy us as to how and why P.K. Narayanan operated this bank account of Archana Jewellery if he had no connection with the same.
To cap all these, the paper containing transactions of gold running to Rs. 18,76,628. Pagady of Rs. 6,00,000 issue of cheque of Rs. 6,11,293 was found in the bedroom of the assessee at the time of search. It is inconceivable as to how this paper found its way to the bed room of the assessee if the assessee was not in any way connected with the business of Archana Jewellery. In our opinion, the ITO had brought out sufficient materials and convincing reasons in coming to the conclusion that the assessee is the real owner of the business of Archana Jewellery and that A.N. Chellappan is only a name-lender.
Sri Sarangan vehemently contends that the observations of the Tribunal that Sri P.K. Narayanan had, in fact, opened and operated the bank account of Archana Jewellery viz., CD-14 was based only on the submission of the learned departmental representative before the Tribunal and the learned departmental representative had not placed any material before the Tribunal to warrant such a finding as will be evident from the papers filed before it in the quantum appeal by the learned departmental representative (page 125 of the paper book).
18. We have carefully considered this submission. The assessee in the paper book furnished before us has included a copy of the paper book furnished by the revenue before the Tribunal in the quantum appeal, the index of which is contained in page 125 of the paper book, extracted in para 17 above. A photostat copy of the letter dated 13-8-1982 from Bank of Cochin Ltd., to the Income-tax Officer, Special Circle, Ernakulam, Cochin-16 is found at page 19 and it is as follows: Income-tax assessment of Sri A.N. ChellappanAchari-Your letter PA. No. 16014-PV-0735 dated 7-8-1982.
As required vide your letter cited, the following particulars regarding Sri A.N. Chellappan Achari, Archana Jewellery, M.G. Road, Ernakulam, are furnished below: Mr. A.N. Chellappan Achari is the proprietory of M/s. Archana Jewellery, M.G. Road, Ernakulam. The party has availed an open cash credit facility from us in the name and style of Archana Jewellery.
The account is operated by Mr. A. N. Chellappan Achari, as Proprietor.
The account is introduced by Mr. A.C. Mohan, Proprietor, Anupama Jewellery, Ernakulam.
The limit of the open cash credit facility sanctioned is Rs. 2 lakhs which is secured by hypothecation of stock-in-trade and equitable mortgage of real estate. In 1978, when the advance was granted, it was also guaranteed by 19persons namely: (l)Mr. P.K. Narayanan, (2)Mr. A.S. Gangadharan, (3) Mr. T.A. Premanandan, (4) Mr. K.A. Krishna Kumar, (5) Mr. P. Prakash, (6) Mr. K.K. Lokanathan, (7) Mr.
P.K. Kumar, (8) Mr. K.P. Baburajan, (9) Mr. P.T. Sankaranarayanan, (10) Mr. P.D. Dinesan, (11) Mr. C.R. Gopalan, (12) Mr. P.K. Sunil, (13) Mr. K.V. Harikrishnan, (14) Mr. K.R. Pushpangadan, (15) Mr.
K.P. Surendranathan, (16) Mr. Sarojini Krishnan, (17) Mrs.
Bhanumathy Krishnan, (18) Mr. C.K. Valsan, (19) Mr. K.A. Venugopalan.
Also be noted that the present guarantor of the facility, that offered by the bank is Mr. P.K. Narayanan, Polakulath, Edappally, Cochin-24.
From a photostat copy of another letter dated 20-8-1982 from Bank of Cochin Ltd., to the Income-tax Officer, S pecial Circle, Cochin-16, it is seen that the Bank by way of clarification, had stated that "In 1978 when the advance was granted, it was secured by equitable mortgage of real estate in addition to the guarantee of 19 persons as mentioned in our previous letter. Mr. K. Krishnan, Mrs. Sarojini Krishnan, Thazhathaveetil, Kattoor P.O., Trichur Dt. and Mr. P.K. Narayanan, Polakulath, Edappally are the three persons, who offered property as security for the said advance. The property of Mr. & Mrs. T.K. Krishnan that held as security is already released where it is approximately valued to 3.24 lakhs", (page 20 of the department's paper book - p. 147 of the assessee's paper book). In these communications from the bank, there is no mention that the Account No. CD-14 was opened and operated by the assessee, in the name of or for and on behalf of Archana Jewellery. On the other hand, the evidence is that the loan was granted to Sri Chellappan Achari of Archana Jewellery on the security of certain people. It is only in the statement of points furnished by the departmental representative that there is a mention "that the bank account of the business was originally in the assessee's name" (page 23 - p. 18 of the paper book). However, in a communication to the Inspecting Assistant Commissioner of Income-tax, under a copy to the assessee, there is a remark at para 10(ii) that enquiries showed that the bank account of the business in the Bank of Cochin was originally opened and operated by the assessee and the temporary overdrawals were allowed in the said account against personal guarantee. Neither the Income-tax Officer's order nor the Inspecting Asstt. Commissioner's order under Section 144B(4) of the IT Act, reveals what enquiries were made with the Bank of Cochin, with whom they were made and what information was obtained in connection with what account. Only general observations were passed. In these orders there was no reference to the bank account No. CD-14 which is alleged to have been opened and operated by the assessee initially in the name of or on behalf of Archana Jewellery. The result was that the assessee could not effectively frame his defence before the authorities. The mention of this particular bank account No. CD-14 as having been opened and operated by the assessee appears to have been made only at the time of the hearing before the Tribunal by the learned departmental representative. Copy of the communication from the Bank of Cochin regarding the operation of this particular bank account No. CD-14, if there was any, was not included in the list of papers furnished by the learned departmental representative before the Tribunal in the quantum appeal. However, the Tribunal has accepted the contention of the departmental representative on this issue. We do not find any material for this conclusion from the copies of the departmental paper book furnished at the time of quantum appeal. At this stage of the proceedings also, when the finding of the Tribunal on this is challenged by the assessee's counsel, the learned departmental representative has not furnished before us the material on the basis of which the Tribunal has reached the conclusion that account No. CD-14 was initially opened and operated by the assessee in the name of Archana Jewellery or on behalf of it. In the course of penalty proceedings no opportunity would appear to have been given to the assessee to controvert the above findings recorded. We, therefore, hold that no mileage can be made out of the findings of the Tribunal in the quantum proceedings as regards the opening and operation of the bank account No. CD-14 by the assessee insofar as penalty proceedings are concerned. There is force in the contention of Sri Sarangan that there is failure of natural justice on this Count.
19. The other circumstance pointed out by the Income-tax Officer and accepted by the Tribunal in the quantum appeal is the recovery of the unsigned lease agreement, a copy of which has been furnished at pages 138 to 141 of the paper book. No doubt, the lease agreement is purported to have been executed on 5-9-1978 by Sri Chellappan Achari residing with Sri P.K. Narayanan, for and on behalf of Sri P.K.Narayanan, aged 46, in favour of Sri A.G. Ramesh. The lease agreement is for the lease of property belonging to Sri Ramesh. It is on stamped paper. It was initialled or signed only by SriChellappan Achari. Sri Ramesh had not signed the document. Thus, it is an incomplete document which has no validity in law. From the observations of the Income-tax Officer in the assessment order, it is seen that Sri Chellappan Achari was residing elsewhere and therefore not with the assessee, but the narration in the lease deed states that he was residing with the assessee. So the contents of the document at the very beginning is contrary to facts. The assessee in the sworn statement made at the time of search, had explained that he wanted to help Sri Chellappan Achari and as Sri Ramesh would not lease out the property to him, the lease agreement was initially drafted in the manner in which it was found.
This explanation was only rejected without any enquiries being made either with Sri Ramesh or with Sri Chellappan Achari. At any rate this incomplete document does not confer any right on the assessee over the business of Archana Jewellery nor does it have the effect that the jewellery business belonged to the assessee. At the worst it can only create suspicion. But suspicion however great cannot take the place of proof.
20. Yet another circumstance that was relied on in the assessment proceedings to hold that the assessee was the real owner of Archana Jewellery and Sri Chellappan Achari was only a benami was that there were monetary transactions between the assessee and Sri Chellappan Achari. These transactions are found to have been reflected in the books of the assessee. The loans obtained by Sri Chellappan Achari from the assessee and his wife etc., and the repayments thereof are found in the assessment records of Sri Chellappan Achari. In fact, the assessment of Sri Chellappan Achari of Archana Jewellery was made only after scrutiny and upon depositions made by him before the Income-tax Officer, B-Ward, Ernakulam. Such assessment was made prior to the search. From the records it is seen that Sri Chellappan Achari did not bring any capital of his own but had started the business with heavy borrowings or guarantees from several persons including the assessee and his wife as can be seen from his deposition and also in the assessment records with the Income-tax Officer, B-Ward, Ernakulam. The assessee had also stated that he, his wife and his firm have assisted Sri Chellappan Achari by granting loans etc., and such transactions are found in the assessment records of Sri Chellappan Achari also.
Confirmation letters were also filed before the Income-tax Officer assessing Sri Chellappan Achari and the assessment was completed on that basis. Such being the case, without conducting any further investigation, the learned Income-tax Officer dealing with the case of the assessee, had come to a totally different conclusion on the basis of the same material that were before the officer having jurisdiction over Sri Chellappan Achari. The only additional materials that were not before the officer assessing Sri Chellappan Achari are: (i) slips containing the details of yaluation of stock and certain payments; The first two materials viz., the lease agreement and the papers containing valuation of stock, and payments etc., are not sufficient to point to the benami nature of the transactions. The payments are cheque payments of Archana Jewellery and the payees were not examined to indicate the complicity of the assessee. The books of account pertaining to Archana Jewellery were not found with the assessee. Nor the profit and loss account or balance-sheet of Archana Jewellery. The possession of papers relating to stock etc., have been properly explained by the assessee. No worthwhile enquiry was made either with Sri Sathyan or Sri Ramesh or with Sri Chellappan Achari or with the parties to whom some payments were alleged to have been made. No cheque book belonging to Archana Jewellery - unused cheque leaves or signed cheque leaves were recovered from the possession of the assessee. No unexplained cash, jewellery, valuable article or thing was seized. It is seen from the records (page 146 of the paper book) that the account with Bank of Cochin was opened with the introduction by Sri A.C. Mohan of Anupama Jewellery. It is not shown that Sri Mohan is a relative of the assessee. Nor Sri Mohan was examined. The guarantees were given by 19 persons including the assessees. These 18 persons are not shown to be the assessee's relatives or employees. No enquiry was conducted with such persons. The licence stands in the name of Sri Chellappan Achari, being a goldsmith. The fact that the assessee had given guarantee or offered securities for the loans taken by Sri Chellappan Achari or that he had advanced loans to Sri Chellappan Achari can also be viewed as a normal attitude of a friendly person. Therefore, we hold that even though the addition was sustained in the hands of the assessee with regard to the income from Archana Jewellery, the revenue has not discharged its onus that the business of Archana Jewellery really belonged to the assessee, even if these materials are taken into account cumulatively. For these reasons, we cancel the penalty on the income attributable to Archana Jewellery.
21. Sri Sarangan contended that with the coming into force of the Benami Transactions (Prohibition) Act, 1988 (in short the 'Act'), no plea of benami can be taken by the revenue and no Court or Tribunal can take cognizance of such plea. Sri Abraham contends that the prohibition contained in the above Act is against entering into benami transactions and against the plea by any person claiming to be the real owner under him. This prohibition does not extend to declaring a transaction as a benami transaction in tax proceedings and the right of the revenue to proceed against the real owner is not, in any way, impaired by the provisions of the Act. We uphold the contentions of Sri Abraham as they are well-founded on the provisions of the Act. Thus, we reject the argument of Sri Sarangan on this aspect of the issue.
22. The next ground of appeal is against the levy of penalty for the non-inclusion of minors' income. The facts of the case are as follows: Income from 'Silpi' Theatre, Kodungaloor: At the time of search at the residence of the assessee on 29-1-1982, the Ineome-tax Department had found account books relating to Silpi Theatre, Kodungaloor. As per this office letter dated 4-3-1982, the assessee was asked to furnish the profit and loss account and balance-sheet of this business for the period from 1-4-1978 to 31-3-1979 and asked to state why the income from this business was not shown in the return filed. The assessee's representative appeared and also filed a written reply as under: The firm M/s Silpi Movies is owning the Silpi Theatre. The firm was constituted in June 1978. The minor children Krishnadas, Krishnalal, Krishnalalji, Krishnaleela and Krishnan Unni are admitted to the benefits of the partnership firm. Sri P.K. Narayanan was representing them as their legal guardian. The minors have their own independent source of funds. Hence he has not included any income from this business in this return. The theatre was taken over by this firm by the end of October 1978'.
In the course of assessment, a copy of the partnership deed of Silpi Movies was filed by the assessee. The Income-tax Officer noticed that the assessee's five minor children were admitted to the benefits of partnership and each one of them was entitled to 1/9th share in the profit. Initially in the draft assessment order, the Income-tax Officer had estimated the income of the firm itself at Rs. 24,000 as the assessee's own business since the assessee had not filed the profit and loss account or any statement showing the income on the basis of the books. The estimate was made at 12% of the collections recorded in the books. The successor Income-tax Officer took only the proportionate share of the minor children and thus Rs. 13,333 was included on estimate basis under Section 64 of the Income-tax Act, 1961. It would appear that the assessee has not contested the addition in appeal. This addition became concluded on which penalty was levied.
23. We have heard rival submissions. As the books of the firm, M/s.
Silpi Movies were impounded by the Income-tax Officer, the assessee could not comply with the insistence of the Income-tax Officer to file a statement of profit and loss account of Silpi Movies. From the report sent by the Income-tax Officer to the Inspecting Assistant Commissioner of Income-tax, under copy to the assessee (page 51 of the paper book) it is seen that the assessee had filed a copy of the partnership deed of the firm, M/s. Silpi Movies and it was observed by the Income-tax Officer : In the draft order a sum of Rs. 24,000 is proposed to be assessed as income from Silpi Theatre, Kodungaloor. The assessee's contention is that Silpi Theatre is not owned by him, but by the firm, M/s. Silpi Movies. This firm was constituted in June 1978 and the assessee's five minor children, Krishnalal, Krishnalalji, Krishnaleela, Krishnan Unni and Krishnadas, had been admitted to the benefits of partnership. The assessee is representing the minors as legal guardian. Further, the business was a loss and subsequently wound up. (ii) A copy of the partnership deed of the firm M/s. Silpi Movies has been filed by the assessee's representative. The stand of the assessee, that this business is run by a firm seems acceptable and hence only the share income of the assessee's minor children has to be included in his hands. As regards the quantum, the assessee has not filed any statements. Nor the books of account maintained are complete and reliable. In the circumstances, the income has to be estimated. The estimate of Rs. 24,000 made in the draft order is fail' and hence no modification to this is necessary. The share of five minor children of the assessee in this would be Rs. 13,333 and this is includible in his total income.
24. We uphold the contention of Sri Sarangan that once it is found to be a firm and the firm had not applied for registration and had not filed return of income, the proper course would be not only to estimate its income, as has been done by the Income-tax Officer, but also to treat the firm as an unregistered firm by passing an order to that effect, or treating such unregistered firm as a registered firm under Section 183(b) of the Act, again, we emphasise by passing an order to that effect. The ITO has not followed either course of action, but has simply included the proportionate share of the minors' income from the estimated income of the firm. This is a serious flaw in the assessment.
Therefore, the inclusion of the minors' income in the hands of the assessee has no legal legs to stand upon, unless it is preceded by the assessment of the firm, as a registered firm or as an unregistered firm treated as registered firm. Sri Abraham wants us to infer that the ITO had treated the firm as registered firm under Section 183(b) of the Income-tax Act and had proceeded to include the minors' income in the hands of the appellant. Such an inference is not possible because to confer the status of registration on a firm, which is otherwise to be treated as an unregistered firm, there should be a finding that to do so is advantageous to the revenue and such a finding, can be reached only after considering the tax effect on all partners and in the absence of such a finding, no such inference can be drawn. Therefore, the inclusion itself is bad in law and it is immaterial whether the assessee had agitated the issue in the quantum appeal. In penalty proceedings such a stand is taken before us and, in our opinion, it is validly taken. Further the books were with the Department, and the assessment was on estimate basis. Hence the levy of penalty on the inclusion of minors' income is deleted.
25. Sri Abraham for the revenue submitted that if the Tribunal is inclined the penalty in respect of an addition of Rs. 89,019 which was telescoped into the other additions sustained by the Tribunal should be upheld. He then took us through the assessment orders and appellate orders and submitted that at any rate the penalty must be sustained on such sum. Sri Sarangan for the assessee submitted that this is only a plea based on hypothetical consideration and the department has also not filed any ground of appeal in this regard and, therefore, such a plea should be rejected outright. He submitted that in estimating the undislosed income in a sum of Rs. 89,019, the Income-tax Officer has not given any credit for the cash balance available with the assessee and also had gone on estimated figures.
26. Having regard to rival submissions, we overrule the objection of Sri Sarangan. A sum of Rs. 89,019 was added by the Income-tax Officer under other sources as follows : house (vide para No. 2) .. Rs. 21,719(ii) Unexplained credit in the account with and South Indian Bank (vide para No. 4) .. Rs. 49,300 Rs. 89.019 The assessee had appealed against such addition, but the CIT (Appeals) held that the assessee had not disputed the quantum of Rs. 89,019 determined by the Income-tax Officer, but what he wanted was that it should be treated as coining from the addition to the business income, if any, sustained. In other words, the assessee had wanted only telescoping of this addition into any other addition that may be sustained. This plea was rejected by the CIT (Appeals). In the appeal before the Tribunal similar plea was taken and the Tribunal accepted the contention of the assessee that in view of their sustaining an addition of Rs. 1,12,105, no separate addition was called for under the head other sources. Thus, the addition Was deleted. Therefore, this addition was not considered in quantifying the amount of penalty. Now that we have cancelled the levy of penalty in respect of the income from toddy shop business in Alwaye range, income from Archana Jewellery and income from M/s. Silpi Movies in the preceding paragraphs, the plea raised before us by Sri Abraham can no longer be considered as a plea on hypothetical consideration. The plea has sprung into life and gets activated. Further a plea not taken before can be entertained in the ratio laid down in 193 ITR 624. Therefore, we proceed to decide the issue on the merits of the case.
27. Of the three items, the first one is in relation to the addition made on the basis of valuation report. The genesis of this addition is given in the draft assessment order dated 27-3-1987 and is as follows : The income assessed in respect of the assessment years 1976-77 to 1979-80 comes to Rs. 78,852. When taxes paid thereon viz., Rs. 7,216 is deducted, the available income would only be Rs. 71,636 and if the agricultural Income at the rate of Rs. 3,000 for 4 years Is added, the income would be increased to Rs. 83,636. If this income is adjusted towards the loss of Rs. 68,918, arrived at for the period up to 1975-76, the balance left will be only Rs. 14,718 which will be hardly sufficient for payment of compulsory deposit, Life Insurance Premia, other Kuri payments etc. Thus, as borne out by records, the assessee does not have anything left with him from the declared and assessed income before the Department for meeting his personal and household expenses, not to speak of any investments in movable or immovable properties.
5. Thus, it is evident that the assessee had not available source of income for investment of Rs. 60,000 alleged tohave been made from 1975-76 to 1979-80. Since the assessee has no accounts to rely upon the investments spread over from 1975-76 to 1978-79 and in view of the fact that the valuer was also unable to give details of the date on which the construction started and when it was completed, I would be justified in adding the entire investment in the residence as income of the previous year and assessing under Section 69 of the Income-tax Act. But to extremely fair to the assessee I propose to consider the investments pertaining to the previous year ended 31 -3-1979 as mentioned in valuer's report alone for this assessment year and in fixing that value the assessee's representative has not raised any objection. The point that was stressed by the assessee's representative is that the investment of Rs. 20,000 shown in the wealth-tax return for 1979-80 should be given credit in the valuation made by the valuer. For reasons discussed in para (3) and (4) mentioned above, I hold that the assessee had no accumulated savings from his business or agricultural income up to 1979-80. So, the entire investments made during the year ended 31 -3-1979 as shown by valuer is to be treated as the unexplained investments of the assessee of this year and assess it under Section 69 of the Income-tax Act. So, for the year ended31-3-1979, the sum of Rs. 41,719 alone is considered as mentioned in para (2) above, and assessed under Section 69 of the Income-tax Act as the deemed income of the assessee of this year.
The assessee in his reply to the draft assessment order dated 19-4-1982 stated as follows : The assessee did not construct a new building at Idappally as stated by you in paragraph one of your draft assessment order. The assessee only made some improvements, to the alleged building which stood in the name of the assessee's wife in the plot belonging to her. The improvement works were started during the year 1974-75 and what was stated in the wealth-tax statement for the wealth-tax assessment year 1976-77 was that on the valuation date as on 31 -3-1976 the value of the improvement made by the assessee stood at Rs. 12,000.
It is not the investment for improvement made for the previous year ending 31 -3-1976 but the value of improvement as on 31 -3-1976 and as stated earlier the improvements started from 1974-75. The renovation work is spread over from 1974-75 to 1978-79 and the investment made during the year 1978-79 is only Rs. 20,000. The assessee did not go for a valuation as the department asked for a valuation report of its own valuer and under such circumstances the absence of filing a valuation report by the assesse is of no significance. The assessee could not file an objection to the valuation proposed by the departmental valuer because soon after the receipt of the proposed valuation there was a search and seizure of documents from the assessee's residence, office and business premises and in the confused situation he misplaced the report and did not remember about the filing of the objection. The Valuation Officer has valued the property after more than three years of construction at the rate prevalent on the valuation date and deducted depreciation. This is not a correct method for determining the actual investment. Anyhow the total investment as estimated by the valuer is Rs. 41,719 and deducting Rs. 20,000 as investment admitted by the assessee the deficiency is only Rs. 21,719. It is not necessary to go into the details of earlier years' income returned or savings as the wealth increase for the period ended 31-3-1979 after giving credit to the investment of Rs. 20,000 is only about Rs. 8,000 and it shows that addition in wealth by way of investment is set off by additional liabilities. Inthatview addition under investmentin buildings, even if necessary, has to be restricted to Rs. 21,719.
From the assessee's letter it is seen that the assessee did not object to the valuer's report as it was misplaced pursuant to a search.
However, after recording his objection to the method of valuation done after three years of completion of construction etc., he had, in fact, agreed for the proposed addition of Rs. 21,719. Thus, it is a case of agreed addition and in terms of the decision of the Supreme Court in the case of Sir Shadilal Sugar & General Mills Ltd. and Anr. v. CIT reported in 168 ITR 705 no penalty is leviable on the same.
28. There was a deposit of Rs. 20,000 in Parur Central Bank on 6-5-1978. On that date there was only a drawing of Rs. 2,000 from the firm of M/s. P.K. Narayanan & Co. It was explained by the assessee that the balance of Rs. 18,000 came from cash in his hands. The Income-tax Officer also noticed deposits in bank account No. 5804/1 with Bank of Cochin on different dates amounting to Rs. 28,500 and noticed that they were not disclosed in the wealth-tax return. He also noticed deposits in bank account No. 88 with South Indian Bank, Palarivattom, on various dates from 8-9-1978 to 31-3-1979 amounting to Rs. 20,800. He held that these amounts were not properly explained and therefore, he proposed an addition of Rs. 67,300 under the head other sources in the draft assessment order. The assessee in his reply to the draft assessment order stated as follows : The remittance to the bank account on 6-5-1978, as already stated, is met by withdrawing Rs. 2,000 from M/s. P.K. Narayanan & Company, cash temporarily diverted from prawn fishing business, wherein an income of Rs. 15,000 is returned and the usual cash balance available with me. As on the valuation date 31 -3-1979,1 have shown a fairly good cash balance in my wealth-tax return. I request that the addition proposed Rs. 18,000 may be deleted. Deposits in bank account No. 5804/1 at Bank of Cochin and Account No. 88 in South Indian Bank: As already submitted by me the remittances in the above accounts were made from the income earned by me during the period and out of some withdrawals made from the firm M/s. P.K. Narayanan & Company I was the custodian of the cash of the firm, M/s. P.K. Narayanan & Company and the daily cash balance I could temporarily divert to other purposes. The recurring deposit account was closed on 31 -3-1979 and hence it was not shown in the wealth-tax statement.
The Income-tax Officer was not prepared to give credit for the cash balance as according to him the assessee might have invested his savings in the renovation of the building. Further, the assessee was not maintaining account books. Therefore, the additions were maintained as proposed in the draft assessment order.
29. On a careful consideration of the genesis of the additions, we are of the view that this is not a case where there was no explanation for the investment. Nor is it a case that the explanation was found to be false. It cannot be said that the assessee is a man of straw. This is a case of an assessee having different sources of income on his own as well as the income from the firm. The income of his wife and minor children are also included in the hands of the assessee under the provisions of the Income-tax Act. From the assessment records it is seen that he is being assessed from the assessment year 1967-68 onwards and that he was also doing prawn business for which no accounts were maintained. He was also said to be not having personal accounts, but was having control over the firm of M/s. P.K. Narayanan and Company as well. From the draft assessment order it is also seen that the income for the assessment years 1976-77 to 1979-80 amounted to Rs. 83,636.
Except the deposit of Rs. 20,000 with Parur Central Bank, all other deposits are in small sums. Therefore, it is reasonable to hold in the preponderance of probabilities that the assessee could have effected these deposits out of his own funds, the funds of the firm under his control, funds of his wife and children. In such background, we hold that there is no case for levy of penalty.
30. Sri Sarangan for the assessee contended that the levy of penalty for the omission to show the income from house property was unjustified. He submitted that the income from house property was admitted by the assessee only in a sum of Rs. 720 as in the preceding year, but the Income-tax Officer estimated the gross rental income at Rs. 16,080 and after allowing 1 /6th for repairs determined the income from the let out property at Rs. 13,400. Since the residential house was constructed only for three months in an year, he estimated the annual letting value at Rs. 800 and determined the income at Rs. 14,200. These were hts proposals in the draft assessment order for 1979-80. The assessee objected to the proposal as follows: It is surprising to note, that you have taken the rent paid by the firm, P.K. Narayanan & Company to all its shops as the rent paid to me. I own only 2 sheds bearing door Nos. 16 in Ward No. III and 1911 in Ward No. XL.Only these two sheds were let out by me during the relevant period to M/s. P.K. Narayanan & Company, Abkari Contractors, Ernakulam, and the net income received from these sheds is shown as Rs. 720.
In the final order of assessment, the income from the let out property was reduced to Rs. 2,700 as against Rs. 13,400 accepting the contention of the assessee that only two sheds were let out and not all the sheds to M/s. P.K. Narayanan & Co., in which the assessee is a partner. Thus, the final assessment was only a change of figure on the assessee agreeing to be assessed at Rs. 2,700 as against Rs. 720 declared in the return of income. Hence no penalty is leviable on such agreed addition.
As a matter of fact in the subsequent assessment year, that is, for the assessment year 1980-81, the revenue has accepted the income from these very sheds at Rs. 720. Therefore, the enhanced value of Rs. 2,400 in the first assessment year itself is erroneous but that was made on agreed basis. Thus he argued that no penalty is leviable. As a matter of fact, no penalty was levied for the assessment year 1980-81 on this income.
31. As far as the income from self-occupied property was concerned, Sri Sarangan submitted that the house was completed at the fag end of the year and was occupied for a period of three months and the assessee's omission to include the notional value of the self-occupied property was only accidental and unintentional and, therefore, penalty for the non-inclusion of the notional value in a very small sum of Rs. 800 would be highly harsh and unjustifiable. In the assessment year 1980-81 no penalty was levied in this respect of this amount. Therefore, he pleaded that the levy of penalty on the income from the let out property and self-occupied property be cancelled.
32. Sri Abraham for the revenue objected that the assessee has not filed any ground of appeal before the Tribunal and, therefore, the Tribunal should not interfere. On merits he relied on the orders of the authorities.
33. In the light of the decision of the Kerala High Court in the case of CIT v. Kerala State Co-operative Marketing Federation Ltd. [1992] 193 ITR 624, the Tribunal is empowered to permit the appellant to urge any ground not set forth in the memorandum of appeal. It has the jurisdiction to permit the appellant to raise any ground which has not been raised before the assessing authority or the CIT (Appeals). Even those pleas which were not before the CIT (Appeals) can be entertained by the Tribunal. As this is a case of penalty involving mens rea, leading to dire consequences, and as sufficient materials are already on record, we overrule the objection of Sri Abraham and proceed to consider the plea raised by Sri Sarangan. In this case, penalty was levied only for one of the two assessment years in respect of the income on the let out property and the notional income in relation to the self-occupied property. The assessee has admitted Rs. 720 as income from the let out property. This income was proposed to be determined at Rs. 13,400, but later on reduced to Rs. 2,700 on agreed basis. The income from this very same property for the succeeding assessment year was finally determined only at Rs. 720 as admitted by the assessee. In the circumstance, as it is an agreed addition no penalty is leviable on the addition in the light of the decision of the Supreme Court cited supra.
34. Regarding the notional income on the self-occupied property it is seen that the construction of the house was completed only at the fag end of the year. The omission to include the notional value would appear to be accidental. Even the Income-tax Officer has taken the notional income only for a period of three months at a figure of Rs. 800 adopting the gross annual value at Rs. 6,000 as against the municipal valuation of Rs. 3,620. The omission, in our opinion, may be treated as accidental having regard to the late completion of the construction. In this view of the matter, we hold that no penalty is leviable on the above two additions.
35. For the assessment year 1980-81, penalty was levied on the following items :(i) Income from toddy business in Alwaye Range Rs. 1,00,822(ii) Income from Archana Jewellery Rs. 1,38,348(iii) Share income of minor children Rs. 13,333 The above additions were made substantially for the same reasons mentioned in the appeal for the assessment year 1979-80 and we have already discussed in great detail that even though these additions were sustained in the quantum appeal, no case has been made out by the revenue to show that the assessee has concealed the income or the particulars of such income and it was held that the department has not discharged the onus on its part in the penalty proceedings. We adopt the same reasoning for the assessment year 1980-81 also.