2000 (10) TMI 19 - HC - Income Tax

Penalty under s.271(1)(c) cannot be sustained where cash credits treated as income but records don't justify Explanation 1

National Textiles Versus Commissioner Of Income-Tax

HC held that penalty under s.271(1)(c) could not be sustained. Though cash credits were treated as income in quantum proceedings due to inadequate ... Imposition of penalty u/s 271(1)(c) - Concealment Of Income - Cash Credits - whether addition of cash credits to the income of the assessee by recourse to section 68 would justify imposition of penalty with the aid of Explanation 1 as it stood in the relevant assessment year or as it exists on the statute book at the time of passing the order of penalty u/s 271(1)(c) of the Act. - HELD THAT:- In the instant case, the cash credits were not satisfactorily explained by evidence and documents. The parties who had advanced the alleged temporary loans were neither disclosed with their particulars nor any supporting documents were on record. Only two entries were explained. The accountant who had arranged the loan was not produced stating that he had left the service and relations with him are strained. On this state of accounts and evidence in the quantum proceedings, the Department was justified in treating the cash credits as income of the assessee but merely on that basis by recourse to Explanation 1, penalty under section 271(1)(c)could not have been imposed without the Department making any other effort to come to a conclusion that the cash credits could in no circumstances could have been amounts received as temporary loans from various parties. The assessee in the quantum proceedings failed to produce the accountant but the Department also in penalty proceedings made no effort to summon him. Therefore it was a case where there was no circumstance to lead to a reasonable and positive inference that the assessee's case-that the cash credits were arranged as temporary loans, was false. The facts and circumstances are equally consistent with the hypothesis that it could have been sundry loans in small amounts obtained from different parties. In our opinion, therefore even taking recourse to Explanation 1, the same circumstances or state of evidence on which the cash credits were treated as income, could not by themselves justify imposition of penalty without anything more on record produced by the assessee or the Department. In the conclusion, all the questions posed, which are interrelated to the main question of imposition of penalty under section 271(1)(c) of the Act, are answered in favour of the assessee and against the Revenue. Issues Involved:1. Justifiability of penalty u/s 271(1)(c) of the Income-tax Act.2. Applicability of the Gujarat High Court judgment in CIT v. Lakhdhir Lalji.3. Evaluation of the assessee's explanation.4. Appreciation of different ratios of Gujarat High Court judgments.5. Basis of Tribunal's findings.6. Adverse inference regarding non-contesting of additions.7. Furnishing of inaccurate particulars of income.Summary:1. Justifiability of Penalty u/s 271(1)(c):The Tribunal confirmed the penalty of Rs. 90,000 imposed u/s 271(1)(c) for furnishing inaccurate particulars of income. The penalty was based on unexplained cash credits of Rs. 90,000. The assessee's explanation was deemed a 'convenient excuse' rather than the truth. The Tribunal relied on the material gathered during assessment proceedings unless rebutted by the assessee.2. Applicability of Gujarat High Court Judgment in CIT v. Lakhdhir Lalji:The Tribunal held that the ratio in CIT v. Lakhdhir Lalji was not applicable. The Commissioner of Income-tax (Appeals) had telescoped the two additions in question in the quantum appeal, but the Tribunal distinguished the situation from the present case.3. Evaluation of the Assessee's Explanation:The assessee failed to substantiate the genuineness of cash credits amounting to Rs. 90,000, claiming they were temporary loans arranged by an accountant with whom relations had strained. The Tribunal found this explanation unconvincing and unsupported by evidence.4. Appreciation of Different Ratios of Gujarat High Court Judgments:The Tribunal compared the cases of Vinaychand Harilal and Kantilal Manilal, concluding that the latter's principles applied due to the presence of account manipulation, which suggested fraudulent intent.5. Basis of Tribunal's Findings:The Tribunal noted that the assessee did not contest the addition seriously during the quantum appeal. The Tribunal emphasized that the Department needed to prove concealment with cogent evidence, and the assessee's conduct indicated a deliberate attempt to conceal income.6. Adverse Inference Regarding Non-Contesting of Additions:The Tribunal justified drawing an adverse inference due to the assessee's failure to contest the additions effectively in penalty proceedings, referencing Supreme Court decisions in Anwar Ali and Khoday Eswarsa and Sons.7. Furnishing of Inaccurate Particulars of Income:The Tribunal upheld the finding that the assessee furnished inaccurate particulars of income, leading to the concealment of Rs. 90,000. The explanation provided by the assessee was not substantiated, and the Tribunal found no material difference between the original and new Explanation 1 u/s 271(1)(c).Conclusion:The High Court concluded that the same circumstances or state of evidence used to treat cash credits as income could not justify the imposition of penalty u/s 271(1)(c) without additional evidence. All questions were answered in favor of the assessee, and the reference was answered accordingly.