2001 (7) TMI 81 - HC - Income Tax

Seized records and estimated unaccounted purchases and sales: penalty u/s271(1)(c) set aside for weak inferences

Penalty under s.271(1)(c) was examined where additions were sustained by the tax authority through multi-stage estimates drawn from seized material, ... Levy of penalty - Explanation to section 271(1)(c) - Concealment of Income - Seizure of Documents - HELD THAT:- The Income-tax Officer has made estimates in three stages which tantamounts to rewriting seized material. After working out the unaccounted purchases of Rs.1,74,475 an estimate of 10 per cent. thereof has been made in the first stage for similar unaccounted purchases; thereafter this figure has further been enhanced by estimating unaccounted purchases on account of tins, etc., and thereafter the rough estimated figure has been rounded off up to Rs.2,10,000. In the third stage, it is stated that such concealed purchases of Rs.2,10,000 would roughly involve sales of Rs.2,60,000. It is settled legal position that the seized material has to be read and accepted as a whole and it is not permissible to pick and choose or make further estimates there from unless and until there is cogent material in support of undertaking such an exercise. In the present case as was pointed out to us the Income-tax Officer has after processing the seized material made further estimates therefrom and hence the addition made and sustained on the basis of such estimate cannot be said to result in a situation where it would be possible to ascribe the failure to return the correct income to the assessee on account of any fraud, or any gross or wilful neglect. If that be the case, the Explanation to section 271(1)(c) cannot be invoked against the assessee and penalty levied cannot be sustained. Even if the Explanation to section 271(1)(c) of the Act is held to be applicable on arithmetical difference arising, it can be said that in such circumstances the assessee has rebutted the presumption, i.e., discharged the burden. We hold that the Tribunal was not justified in holding that the penalty imposed under section 271(1)(c) of the Act was justified on the basis of the Explanation to section 271(1)(c) of the Act. The assessee having rebutted the presumption, by pointing out the facts forming part of the assessment record, which arises under the Explanation to section 271(1)(c) of the Act, it is not possible to hold that the penalty levied under section 271(1)(c) of the Act is sustain able on the facts and circumstances of the case. Issues Involved:1. Justification of penalty u/s 271(1)(c) of the Income-tax Act, 1961.2. Invocation of Explanation to section 271(1)(c) and its applicability in relation to section 145 of the Act.Summary:Issue 1: Justification of Penalty u/s 271(1)(c)The Tribunal confirmed the levy of penalty of Rs. 10,400 imposed u/s 271(1)(c) of the Income-tax Act, 1961. The assessee's return showed an income of Rs. 27,213, but the assessment was framed on a total income of Rs. 60,214, including additions for concealed capital and probable profit. The Appellate Assistant Commissioner partly allowed the appeal, reducing the addition to Rs. 10,400. The Tribunal upheld this order, and the Income-tax Officer levied the penalty, invoking the Explanation to section 271(1)(c), stating the assessee failed to prove the failure to return correct income was not due to fraud or wilful negligence. The Tribunal noted a more than 20% difference between returned and assessed income, justifying the penalty under the Explanation to section 271(1)(c).Issue 2: Invocation of Explanation to Section 271(1)(c)The Tribunal distinguished the current year's facts from the previous year, where penalty was canceled. The Tribunal held that the clandestine activity of purchase and sale of groundnut oil was established, and the assessee's explanation was not accepted. The Tribunal's order for the preceding year, where penalty was deleted, was confirmed by the High Court. The Revenue argued that the Explanation to section 271(1)(c) raised a statutory presumption of concealment if the difference between returned and assessed income exceeded 20%, which the assessee failed to rebut.Court's Analysis and Decision:The court held that the Explanation to section 271(1)(c) raises a rebuttable presumption against the assessee if the returned income is less than 80% of the assessed income. The onus shifts to the assessee to prove the failure to return correct income was not due to fraud or wilful neglect. The court found that the Income-tax Officer made multiple estimates from the seized material, which could not conclusively prove fraud or gross neglect by the assessee. The court emphasized that the seized material should be read as a whole and not selectively. The court concluded that the assessee had rebutted the presumption under the Explanation to section 271(1)(c) by pointing to the assessment record, and thus, the penalty was not sustainable.Conclusion:The court answered the first question in the negative, in favor of the assessee, and against the Revenue. The second question was not pressed by the assessee's counsel and thus was not answered. The reference was disposed of with no order as to costs.