TaxTMI 
TaxTMI 
1988 (7) TMI 101
X X X X Extracts X X X X
X X X X Extracts X X X X
....is was the arrangement arrived at under an agreement entered into between the assessee-company and the firm on18th September, 1968. It is necessary to refer to the relevant clauses of the agreement having a bearing on the payment of remuneration: "10. In consideration of the services to be rendered by the Consultants hereunder, the Corporation shall pay to the Consultants a remuneration equal to 10 per cent of the net profits of the Corporation : Provided, however, that the minimum remuneration payable shall not be less than Rs. 60,000 per annum which minimum payment shall if required by the Consultants, be paid in equal monthly installments. Explanation : For the purpose of this agreement the term 'net profits' shall be the profits of the Corporation ascertained after provision for depreciation at the rate prescribed under the Income-tax Act, 1961 or any statutory modification or re-enactment thereof for the time being in force, but the tax payable by the Corporation on its income or assets shall not be deducted for the purpose of computing such net profits. 11. (a) Subject to the provisions of the foregoing clause relating to payment by monthly installments, the Corpo....
X X X X Extracts X X X X
X X X X Extracts X X X X
....by the Commissioner (A), who held that the cumulative effect of these events went to show that the assessee-company had a very bona fide reason to believe that it would not be able to receive the commission in toto form the firm and that since all the material facts for non-declaration of this income were fully disclosed and since the inclusion of the same income in the assessment of the assessee-company was upheld not for non-disclosure of any material fact but by interpreting those events in a different manner, which implied a change of opinion, the assessee could not be said to be guilty of any concealment of income within the meaning of section 271(1)(c) of the Income-tax Act and the Explanations added thereto. It was aggrieved by these orders of the Commissioner (A), that the present appeals were filed by the revenue. 4. Now let us look at the events. A dispute arose between the partners of the firm as to its working, as a result of which some partners of the firm filed a suit (bearing no. 851 of 1975) in the High Court of Bombay. On3-9-1975a motion was moved before the High court for the appointment of a Receiver. TheBombayappointed a Receiver on28-11-1975to take possessio....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... advance tax on that basis on June 15, September 15 andDecember 15, 1976. For want of the details from you we have been unable to comply with any of the above requirements. We would therefore request you to kindly treat this matter urgent and make some payment at least. It would also be pointed out that even out of the last year's commission certain amount has not yet been paid which has put us in great difficulty. This may also be remitted without delay." In reply to this letter Sri Satish Kumar Modi, partner of the firm, replied to the assessee-company on21-8-1976, inter alia, as follows : "I would like to clarify that the accounts of the firm for the year endedAugust 31, 1975have been prepared on provisional basis. The accounts cannot be finalised for various reasons which are beyond the control of the firm. In the absence of the finalised accounts it is not possible for us to communicate to you the amount of commission. Again it may be pointed out that on the very question of payment of commission to your company there are difference of opinion between the partners. Some of the partners feel that in the circumstances and facts provisions of clause 16 are attracted and theref....
X X X X Extracts X X X X
X X X X Extracts X X X X
....by the High Court wrote to M/s Modipon Ltd. demanding the payment of the commission due to firm. On2-11-1977M/s Modipon Ltd. replied stating that nothing was payable by them to the firm and that they had in turn claimed damages from the firm. 8. Sometime thereafter the differences amongst the partners of the firm were compromised and as a result an order was passed by the High Court of Bombay on10-11-1978whereby the partners withdrew the suit filed and the Court Receiver was discharged. He was directed to hand over all the assets, documents and keys to the partners. On24-5-1979the firm wrote a letter to the assessee-company informing them as follows : "We have credited a sum of Rs. 2,94,235.47 (Rs. two lacs ninety four thousand two hundred thirty five and paise 47 only) in your account on account of consultants remuneration for the period1-9-1974to31-8-1975." Thereafter the assessee-company credited the said commission to its accounts and disclosed it for the accounting period ending on30-4-1980corresponding to the assessment year 1981-82. In other words, what was not disclosed in the assessment years 1977-78 and 1978-79 was disclosed in the assessment year 1981-82 and was as....
X X X X Extracts X X X X
X X X X Extracts X X X X
....of the assessee-company showed that in the past the commission was being accounted for on accrual basis and it was only in this year that it sought to disclose it on cash basis. The Income-tax Officer further held in his order as under : "The assessee-companies submission that it was not within their knowledge that the firm had debited such remuneration in its accounts is not borne out by facts, since Shri Satish Kumar Modi, a Director of the company and also a partner in the firm, signed the final accounts of a firm on 15-9-1976 and was also present in the Board meeting held on 30-9-1976. The Board of di rectors of the company is alleged to have taken a decision in this meeting held on30-9-1976that such remuneration may not be accounted for in the year under consideration. The fact that the accounts of the firm for the year under consideration were finalised by the auditors on 15-9-1976 together with the fact that at least Shri Satish Kumar Modi a partner in M/s Synfibre Sales Corporation and also one of the Directors in the assessee-company signed the accounts of the firm and was also present in the Board's meeting, clearly prove that the assessee's contention is patently false a....
X X X X Extracts X X X X
X X X X Extracts X X X X
....hat the Income-tax Officer did not agree with the view of the assessee-company. In this view of the matter, he cancelled the penalties. The department is in appeal against that order of the Commissioner (A). 10. We have heard at length the learned Departmental Representative Shri O. S. Bajpai and Shri Ajay Vohra for the assessee and perused the documents placed before us in the form of paper book, to those papers to which our attention was drawn. The Departmental Representative submitted that there were three important dates, one was the date when the return was filed for the assessment year 1977-78 i.e. 16-7-1977; the second important date was 15-9-1976 when the accounts of the firm were finalised showing a debit of the commission in question to the profit and loss account to its account and the third important date was said to be 30-9-1976 when the accounts of the assessee-company were finalised. Laying stress upon these three dates and drawing support from the conclusions reached by the Tribunal in the quantum appeal sustaining these additions, the learned Departmental Representative emphasised that the assessee-company deliberately and with a view to defeat the provisions of....
X X X X Extracts X X X X
X X X X Extracts X X X X
....s' meeting of the assessee-company on 30-9-1976, he must be deemed to have had the knowledge of what happened in the case of the firm and that knowledge must be presumed to have been conveyed to the other directors and still when all the directors put together passed a resolution that it would be still difficult to receive the income from the firm, it only meant a device to postpone the payment of income-tax. This is more so when the assessee is adopting mercantile system of accounting. The argument of the assessee-company that it changed the method of accounting in respect of this sum from mercantile to cash having been rejected by the Tribunal, cannot any more be offered as a ground to observe itself of the charge of concealment of income. So proceeded the argument of the learned Departmental Representative. 11. The learned Chartered Accountant for the assessee, on the other hand, strongly refuted these inferences and submitted that what amounts to concealment of income under the Income-tax Act was the non-disclosure of facts of a particular item of income or when inaccurate particulars were furnished. The charged of the Department was not that inaccurate particulars were furn....
X X X X Extracts X X X X
X X X X Extracts X X X X
....ry case also held that the assessee company did hold this belief bonafidely. The Income-tax Appellate Tribunal did not decide upon the question of bonafides. The assessee particularly furnished all the particulars. It cannot therefore be said that the assessee was guilty of concealment of income and the levy of penalty was highly unjust and the Commissioner (A) had rightly deleted it. In support of the various propositions urged before us the learned Chartered Accountant for the assessee relied upon a decision of the Supreme Court in CIT v. Mussadilal Ram Bharose [1987] 165 ITR 14 and on a decision of the Calcutta High Court in the case of Burmah-Shell Oil Storage & Distributing Co. of India Ltd. v. ITO [1978] 112 ITR 592 and on a decision given by the Tribunal, Ahmedabad Bench in ITO v. Dilipkumar Manharlal & Co. [1987] 22 ITD 344 and also a decision of the Punjab and Haryana High Court in CIT v. Anand Water Meter Mfg. Co. [1979] 117 ITR 866 and a decision of the Madras High Court in CIT v. Jayashankar Traders [1983] 144 ITR 208. As the alternative, he submitted that the issue of the notice suffered from infirmity because it did not specify which of the Explanations would apply. I....
X X X X Extracts X X X X
X X X X Extracts X X X X
....fter the firm had debited the commission in its accounts as due to the assessee-company. It was wrong to suggest that two opinions were available in this case as to the accrual of the income or to holding the belief bona fide. He also submitted that it was incorrect to state that the Tribunal had not adjudicated upon the point as to whether the assessee-company held the belief bona fide or not. Merely because the interest had been waived u/s 215, it did not mean that the department had accepted the position that the assessee had established a bona fide belief. Rule 40 of the Income-tax Rules provided for the mitigation of interest. If that rule was invoked and interest was waived, it did not imply that there was no offence committed. On the contrary it implied that the offence was committed and that a lenient view was taken in respect of that offence. If the commission had been shown as income, the assessee-company would have to pay more tax and by not paying this tax, the assessee-company had had the advantage of user of the Government's money without interest, which under the income-tax parlance was described as concealment of income. The Departmental Representative then submitte....
X X X X Extracts X X X X
X X X X Extracts X X X X
....e is no reason why the Income-tax Officer cannot rely on that finding in the penalty proceedings and call upon the assessee as to why in view of that, penalty should not be levied. In the penalty proceedings the authorities are expected to consider afresh all the materials available including those available at the assessment stage or those adduced later, the consideration of all of which should lead to a conclusion that the assessee is guilty of conscious concealment - see CIT v. Raja Mohd. Amir Ahmad Khan [1975] 100 ITR 433 (All.). But penalty cannot be imposed solely on the basis of the findings arrived at during assessment proceedings unless there is abundant evidence justifying the penalty. These are the basic settled principles with the help of which we have now to find out whether the assessee in this case had concealed its income. 14. The expression 'conceal' has been judicially noticed in several cases by the High Courts and the Supreme Court. In its plain meaning, the word 'conceal' means to hide, to keep secret. The phrase 'concealed the particulars of his income' would therefore involve a knowledge on the part of the assessee of income which though real is not shown.....
X X X X Extracts X X X X
X X X X Extracts X X X X
....s support to the view that it is possible for an income-tax authority to add an amount or disallow an expenditure by rejecting the explanation of feed for the purpose of assessment but when it comes to the levy of penalty, that authority must consider whether the explanation, which was offered was bonafides made though rejected and whether all the facts relating to the addition of the income or disallowance of the facts relating to the made though rejected and whether all the facts relating to the addition of the income or disallowances of the expenditure were disclosed. The area of dispute in the use before us as we analysed, fell with in the four corners of this area. It is not doubt true that the sum in question was added by there Income-tax Officer as income occurred to the assessee mainly on three grounds (a) that the firm had made a provision for the commission in its books, (b) that under the mercantile system of accounting the assessee acquired a right to receive that income, and (c) that the assessee had knowledge of such accrual of income. This view in a very elaborate discussion was also upheld by the Income-tax Appellate Tribunal. We have now just seen that mere holding....
X X X X Extracts X X X X
X X X X Extracts X X X X
....n be no dispute about it, i.e., even by the accounting year of the assessee-company had come to a close, the business of the firm had come to a stand still and its agency also was terminated. Naturally this would create a situation of panic in the minds of the assessee-company as to the capacity of the firm to make payment due to the assessee-company. It was on account of this fear that on17-8-1976the assessee wrote a letter to the firm to pay the commission due to it for the year ending on31-8-1975with immediate effect. In reply thereto the firm on21-8-1976stated that (a) its accounts were not finalised and therefore it was not possible to communicate the amount of commissions, and (b) it was doubtful whether the firm would be able to meet its commitments. It is no doubt try that this letter was written by one of the partners of the firm would be able to meet its commitments. It is no doubt true that this letters written by one of the partners of the firm albeit he is a responsible man and the assessee-company is entitled to rely upon that letter and it has got both civil and criminal consequence. One of the pints made in this letter was that some of the partners of the firm held ....
X X X X Extracts X X X X
X X X X Extracts X X X X
....the material facts and some more facts necessary and they were not disclosed; indeed there was no reference to any such material facts. We are therefore to conclude that all the material facts were fully disclosed to the department, e.g., it is seen from the paper book that all these facts were submitted to the Inspecting Asstt. Commissioner in writing on18-1-1980vide copy enclosed in the paper book at pages 23 and 32 and again on4-2-1980vide pages 33 and 36 of the paper book. In the meantime Shri. K. K. Modi, the Chairman of the assessee-company was also examined. He also testified to these facts, whose deposition was even to us vide pages 43 and 45 of the paper book. The directors' export was available and furnished. The annual accounts and the Auditors' report contained these facts. Now once the full disclosure of these material facts were mentioned, the next question is whether assessee held this belief bona fide or it is only subterfuge. We have gone through the order of the Tribunal very carefully. Nowhere it mentioned that the belief held by it assessee was not bona fide. The learned Department Representative laid greatest stress on the last sentence of para 21.3 vide page 1....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... the recovery and in any case take credit for the income. We think it is prudent on the part of any businessman in these circumstances appraise the situation and to take a decision to postpone the receipt rather than to take the steps of going to a Court of law. The cautious approach adopted by the Board of Directors cannot be said to be male fide. 16. Now on26-11-76the Court Receiver wrote a letter to M/s. Modipon Ltd. to pay the dues of the firm which was duly rejected. As if this is not enough a notice was received by the firm from Modipon Ltd.2-11-1977claiming a compensation of Rs. 24.91 lacs. Though this claim was made after the resolution of the Board of directors on30-9-1976resolving to account for this income only when received, this letter does justify the apprehensions entertained by the Board of Directors at the time when it made the resolution. What we mean to say is that the subsequent events justified the conclusion reached by the Board of Directors and that is also an additional factor or to say that the belief held by the Board of Directors was bona fide. As soon as the differences were composed, disputes settle, the firm intimated the assessee-company about the ....
X X X X Extracts X X X X
X X X X Extracts X X X X
....decision of the Supreme Court in the case of Cement Marketing Co. of India Ltd. v. Asstt. CST [1980] 124 ITR 15. Though, this relates to a penalty imposed under the Central Sales-tax Act, 1956, the principle laid down here appear to us to be of universal application, i.e., in income-tax proceedings also. Here in this case the Supreme Court held : "A return cannot be 'false' unless there is an element of deliberations in it. It is possible that even where the incorrectness of there turn is claimed to be due to want of care on the part of the assessee and there is no reasonable explanation forthcoming from the assessee for such want of care, the court may, in a given case, infer deliberation and the return may be likable to be branded as a false return. But where the assessee does not include a particular item in the table turnover under a bona fides belief that he is not liable so to include it, it would not be right to condemn the return as a 'false' return inviting imposition of penalty. Held, accordingly, that where he assessee did not include in its return o turnover the amount of freight included in the price of sugar in the bona fide belief that it was not liable to be incl....