TaxTMI 
TaxTMI 
1987 (11) TMI 98
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....asstt. of Rs. 49,900 and short levy of tax by Rs. 15,000 approx. in the case of firm and partners. (2) Balance sheet's correct total on asset is Rs. 14,01,609.93 instead of Rs. 13,50,610.23 shown by the assessee. Diff. Rs. 50,999.70. As the asset side's total is more than the liability side's total the above diff. of Rs. 50,999.70 requires to be added into the total income of the assessee. (3) As per details of interest payments furnished by the assessee its total Rs. 34,681 instead of Rs. 94,681 accounted by the assessee. Diff. Rs. 10,000. (4) Total as shown in allocation in the case of Shri M. M. Shah (HUF) partner is incorrect. Correct total is Rs. 29,274 instead of Rs. 19,206 shown in order under section 158. Probable underasstt. in the case of the partner Rs. 10,068. (5) As per notice issued under section 210 dated 26-5-1978 of the Act, assessee has to pay advance tax of an amount of Rs. 26,435 in three equal instalments. In response to the above notice assessee has filed his own estimate, which is a lower one and paid the taxes in 2 instalments at the rate of Rs. 8,300 and Rs. 8,400 on 15-6-1978 and 14-9-1978 respectively. Without filing a revised estimate, assess....
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....alled for the report of the ITO on the aforesaid Audit Objection to be submitted to the concerned IAC along with the records. 5. On 4-7-1981, the ITO wrote to the assessee as under : "On scrutiny of your case file for A. Ys. 1979-80 and 1980-81 relevant to S. Ys. 2034 and 2035 it is noticed that there has been mistakes in preparing your accounts. As I intend to verify certain figures with your books of account I shall be thankful if you will please attend my office on 13-7-1981 at 11.30 A.M. along with the books of account for A. Ys. 1979-80 and 1980-81. A notice under section 142(i) is enclosed." 6. In the meanwhile on 11-7-1981, the assessee moved a rectification application before the ITO which reads as under : "With reference to our above assessments we beg to submit that there is mistake in totalling of closing stock & expenses in Asstt. Year 1979-80 and in totalling of closing stock and consumption of PVC Wire in Asstt. Year 1980-81, we request your honour to rectify our assessments by adding the said amounts. We agree to the same. The mistakes are as under : Asstt. Year 1979-80 : &....
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.... 50,000 -------- Addition 1,50,000 -------- Under the circumstances we request your honour that our assessments be rectified making the said additions." 7. On 5-8-1981, the ITO wrote to the Commissioner of Income-tax, Gujarat-II, Ahmedabad requesting him to take action under section 263(1) of the Act. The contents of the said letter read as under : "In the above case, the as....
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....983. Case records accompany." 8. Thereafter the Commissioner passed orders under section 263(1) of the Act both dated 9-9-1981, after following the procedure laid down in the said section of the Act, setting aside the assessments originally framed with a direction to the ITO "to re-compute the income of 1979-80 / 1980-81 as per law". With a view to complete our order we reproduce the order of the Commissioner for the Asst. Year 1979-80 : "The I. T. assessment for the asstt. year 1979-80 was completed by the ITO, Cir. III, Ward-A, Ahmedabad on 18-10-1979 on a total income of Rs. 2,69,000. On going through the records of Income-tax proceedings for the said year it was noticed that the assessment made by the ITO was erroneous in so far as it was prejudicial to the interests of the revenue for the following reasons : (i) Total of the closing stock account was under casted by Rs. 49,990, (ii) There was a balance sheet difference of Rs. 51,000-assets side being greater than liability side, (iv) Interest u/s 216 had remained to be charged by the ITO. 2. Non-consideration of these items by the ITO in the assessment order passed by him was erroneous and was prejudicial to ....
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....; -------- Asstt. Year 1980-81 : Rs. Understating of Closing Stock 1,00,000 Balance sheet difference as a result of wrong accounting in PVC Wire Account 1,00,000 -------- &....
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.... R. III, Ahmedabad and his approval was accorded vide letter No. R/III/I/Pen. 271(1)(c) /83-84 dt. 6-3-1984." The ITO imposed penalty of Rs. 78,920 in the first year and Rs. 1,10,790 in the second year under appeal. 11. Aggrieved by the orders of the ITO, the assessee preferred appeals before the Commissioner of Income-tax (Appeals) and strongly urged that the penalty imposed by the ITO under section 271(1)(c) of the Act, should be cancelled. During the course of hearing the assessee also filed written submissions dt. 8-4-1985 before the CIT (Appeals), the relevant portion of which is reproduced below : "4.1 In our case there were mistakes in totalling in respect of some accounts for both the years resulting in errors in closing stock for both the years and certain errors in certain expenses accounts, like interest payments for assessment year 1979-80 and similar errors in PVC Wire A/c. for asstt. year 1980-81. It was evident that the said mistakes were bona fide and genuine mistakes in totalling as they were in round figures and much before the ITO pointed out to us the said mistakes we had ourselves discovered the same and voluntarily and bona fide requested the same ITO to....
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....scovery of the said errors in the earlier two accounting years and crediting our account books on that basis long before the ITO issued his letter dt. 4th July, 1981 as aforesaid. Therefore, the discovery of errors and admission of the same on out part has clearly to be accepted as voluntary and bona fide and not one induced after discovery of the said errors by the ITO as alleged. We say that the errors were admitted and pointed out long before the Commissioner of Income-tax took action under sec. 263 as stated above and this shows our complete bona fide in voluntarily coming forward to have the assessments rectified once we discovered that there were mistakes in the total income and the valuation of closing stock in the aforesaid two years. 5. We submit that the legal principles applicable to the levy of penalty for concealment are well established. Every omission does not amount to concealment and every error does not amount to furnishing of inaccurate particulars. The penalty has to be imposed only if mens rea is established and the ITO can definitely come to the conclusion that deliberately and intentionally any income was sought to be concealed by any assessee. It is submi....
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.... filed the necessary returns after the said corrections. This was long before any action was taken by the Commissioner of Income-tax under section 263. As we our selves moved for rectification, we promptly agreed before the Commissioner of income-tax to revise the assessment accordingly. " 12. The Commissioner of Income-tax (Appeals) in his identically worded orders dt. 5-9-1985, upheld the action of the ITO in the following manner : "I have carefully considered the facts of the case. It is manifest from the order passed by the ITO that the mistake was detected in the month of April 1981 whereas the assessee filed letter dated 11-7-1981 accepting the mistake. Under the circumstances, the letter dated 11th July, 1981 was subsequent to the mistakes being found by the ITO. In this view of the matter, the penalty levied by the ITO is confirmed. " 13. Being aggrieved by the orders of the CIT (Appeals), the assessee has come up in appeal before the Tribunal. The learned counsel for the assessee once again strongly urged that since this was not a fit case for imposing penalty under section 271(1) (c) of the Act, the penalty so imposed by the ITO and confirmed by the CIT (A) shoul....
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....d. [1984] (All.) where the penalty imposed under section 271 (1) (c) of the Act was cancelled on the 150 ITR 410 appreciation of the facts obtaining in those cases. He also placed before us copies of the orders of Tribunal in the cases of Hemchand Ashok Kumar Shah [IT Appeal No. 2323 (Ahd.) of 1982 dated 10-10-1983] and Jamin Hussein Abdul [IT Appeal Nos. 785 to 787 (Ahd.) of 1982 dated 1-10-1983] wherein the Tribunal was pleased to uphold the orders of the first appellate authority cancelling the penalty imposed by the Income-tax Officer under section 271(1) (c) of the Act, on the appreciation of the facts and circumstances obtaining in those cases. He therefore urged that the penalty imposed under section 271(1) (c) of the Act, should be cancelled. 14. The learned DR, on the other hand, strongly relied upon the orders of the income-tax authorities and justified their action. Placing before us the following hypothetical case : "Actual position Manipulated position ....
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....nbsp; 75,000 Sale 11,00,000 Purchases 10,00,000 Cl. 1,00,000 Purchases 10,00,000 Cl. Profit 1,00,000 Stock Profit : Stock --------- --------- 12,00,000 12,00,000 (a) 1,25,000 (a) 1,00,000 (b) 1,00,000 (b) 0,75,000 &....
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....by Rs. 25(000) at Rs. 75(000) income concealed Rs. 25,000. 2. (a) In second year if the assessee was to disclose the correct stock, i.e., Rs. 1 lakh there would have been no concealment. On the contrary he would have paid tax on total income of Rs. 75,000 + Rs. 1,25,000, i.e., total Rs. 2,00,000 for the two years equal to actual position. 3. (b) In the second year if the assessee was to disclose closing stock of Rs. 75,000, the profit would have Rs. 1,00,000, i.e., equal to actual position and no concealment for this year. 4. (c) Since the assessee intended to pay tax on lesser income this year also, the closing stock was placed at Rs. 50,000. Thereby declaring profit at Rs. 75,000 only ". The learned DR strongly argued that in the instant case there was no question of any bona fide mistake as contended by the assessee but the assessee had manipulated the accounts deliberately with a view to defraud the revenue. According to him, but for the letter of the ITO dated 4-7-1981 (reproduced above), the assessee would not have come forward with the application for rectification of the asstt. orders. In other words, he wanted to impress upon us that it was only on detection by....
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.... of filing the return for the asstt. year 1981-82, it found certain mistakes in opening balance which had relation with the opening/closing balances of the years under consideration. 16. We have carefully considered the rival submissions of the parties and the material on record to which our attention was drawn at the time of hearing. At the outset, we would like to record that both the learned counsel for the assessee as well as the learned DR have argued their respective case very commendably, swinging the balance in their favour. This has made our task all the more difficult that too, in a matter of penalty where the entire case rests on the appreciation of facts and circumstances. 17. The facts obtaining in the case are not in dispute and in nutshell they are : (a) along with the returns of income the assessee had filed all the relevant accounts/documents; (b) based on the above, the ITO framed the assessments u/s 143(3) of the Act; (c) the internal audit took up the assessments for checking and found certain mistakes in totalling; (d) these were intimated to the revenue; (e) meanwhile, the ITO wrote a letter to the assessee on 4-7-81 without indicating wha....
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.... stage of audit objection to the framing of the assessments in compliance with the orders of the CIT passed u/s 263 of the Act, there is not a whisper about any "manipulation" done by the assessee in the accounts. The case has all along proceeded on the basis that there were some totalling mistakes in the accounts. It is pertinent to note that the expression "manipulation" has acquired a specific meaning over years. The manipulation of accounts means that they are deliberately and with intention prepared with a view to avoid paying tax which is legitimately due to the Exchequer. On the other hand, mistakes in the accounts can be of two types, namely, an inadvertent mistake or a mistake with some ulterior motive. On the proper appreciation of facts and circumstances obtaining in the instant case, we are of the view that the assessee's case falls within the first category of "mistake". We have come to this conclusion, as it cannot be denied that the assessee had filed all the relevant accounts along with the returns of income, knowing fully well that they are likely to be scrutinised. 22. Further, it cannot be presumed that the ITO had framed the assessments originally without con....
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....e facts and circumstances obtaining in the instant case would clearly show that the assessee wrote its letter dated 11-7-1981 on its own being totally ignorant of what had transpired or was transpiring in the department. It appears that the assessee was obliged to take this step as it was necessary to correct the totalling mistakes in the accounts of the years under consideration as they had bearing on the process of preparing the return for the A. Y. 1981-82 which was actually filed on 23-7-1981. In this view of the matter, even on merits of the case, we are of the opinion that this is not a fit case where the penalty could be imposed under section 271(1) (c) of the Act. We would therefore cancel the penalty so imposed by the income-tax authorities. 24. In the result the both appeals are allowed. Per Shri R. M. Mehta, Accountant Member - I have perused the order of my learned brother but express my inability to agree with his finding that no penalty can be imposed u/s. 271(1) (c) in this case. 2. Before I proceed further I would like to state that I do not propose to express my views on the legal aspects of levy of penalty since the matter has not been argued from this an....
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.... detected at the trial balance stage itself. The assessee's version of mistakes being bona fide accordingly lacks credibility. 9. Another aspect of the matter which invites comment is the continuation of the "mistakes" over a period of two years. As already mentioned earlier the wrong totalling of the stock could remain undetected but not the so called wrong totalling of the balance sheets. The mistake for 1979-80 could have been detected while carrying forward the balances to A. Y. 1980-81. 10. In the preceding paras I have tried to discuss the nature of the mistakes alleged to have occurred in the accounts with a view to show that a mistake in the totalling of the stock accounts can remain undetected but not the mistakes in wrong totalling of expense accounts and balance sheets. These if repeated from year to year can only lead to one inference and, i.e., manipulation of accounts with a deliberate intention. Under these circumstances it could not be held in the present case that even the wrong totalling of stock accounts was unintentional since both the mistakes have to be taken together and treated as manipulation of accounts. 11. The assessee's counsel has repeatedly u....
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.... taken place in the accounts. There is no reference as to how the assessee stumbled on to the so called mistakes in the letter dt. 11-7-1981 although subsequently it was argued in the penalty proceedings; before the CIT (A) and before us that the mistakes were detected in May 1981 when the return for the subsequent asstt. year viz., 1981-82 was under preparation. However no evidence was brought on record to show the nature of checking done by the assessee whereby the mistakes were said to have been detected in May 1981. This explanation according to me is only a feeble attempt by the assessee to escape the charge of concealment. 16. The assessee's case is that its letter dt. 11-7-1981 is independent of the ITO's letter dt. 4-7-1981 and accordingly the disclosure is voluntary. I am however of the view that this is not so since the letter dt. 11-7-1981 was personally handed over to the ITO on 13-7-1981 which was the date fixed by the ITO in his letter 4-7-1981 for examining the books of account. The assessee has also attempted top lend a colour of 'voluntary disclosure' to its action by reframing from making any reference to the ITO's letter dt. 4-7-1981 in its letter dt. 11-7-198....
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....r sec. 27(1) (c) of the IT Act, 1961 was leviable on the assessee ?" THIRD MEMBER ORDER Per Shri. Y. Upadhyaya, Vice President (WZ)-A common question for the assessment years 1979.80 and 1980.81 has been referred to the Third Member u/s 255(4) of the IT Act, 1961. The question referred is as follows : "Whether, on the facts and in the circumstances of the case, the penalty under sec. 271(1) (c) of the IT Act, 1961 was leviable on the assessee ?" 2. The returns for the assessment years 1979-80 and 1980-81 were filed by the assessee on 6-6-1979 and 13-5-1980 showing the income of Rs. 2,55,529 and Rs. 3,00,880 respectively. The assessments were completed on 18-10-1979 and 12-2-1981 respectively. Subsequently memos of objections were received by the Income-tax Officer from the Internal Audit on 18-4-1981 and 14-7-1981 respectively that there are errors in the totalling of the assessee. The Income-tax Officer, on 4-7-1981 issued a notice to the assessee indicating that there were certain errors in the accounts of the assessee for the assessment years 1979-80 and 1980-81. The assessee, on 11-7-1981, wrote a letter to the Income tax Officer indicating that there was a mistake ....
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....alment. The Hon'ble Judicial Member deleted the penalty whereas the Hon'ble Accountant Member was of the opinion that the penalty imposed by the ITO should be sustained. Accordingly the question mentioned above has been referred to the Third Member for opinion. 5. Shri Kaji, the learned counsel for the assessee, referred to various papers in the paper book to indicate the mistakes which were committed by the assessee in the assessment year 1979-80 and 1980-81. He very strongly supported the order of the Hon'ble Judicial Member and indicated that the mistake committed by the assessee was only bona fide which is clear from the conduct of the assessee. The assessee filed all the papers before the ITO in which totalling mistakes were found by the Internal Audit Party. He further indicated that the assessee, without having knowledge of this fact, wrote a letter to the ITO on 11-7-1981 for the correction of the mistake u/s 154. the Commissioner of Income-tax set aside the assessments agreeing with the assessee that there were totalling mistakes in the documents of the assessee. Every one authority, starting from the ITO to the CIT and the Internal Audit, only pointed out the totalling....
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....sp; Rs. Totalling mistakes including stock 50,000 Totalling mistakes in five expenses account 51,000 -------- TOTAL 1,01,000 -------- Mistakes for A.Y. 1980-81 ....
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....l mistakes took place in the balance sheets for the assessment years 1979-80 and 1980-81. It is correct that the ITO vide his letter dated 4-7-1981 asked the assessee to appear on 13-7-1981 because there were certain mistakes in the accounts of the assessee. But before 13-7-1981, the assessee filed a letter on 11-7-1981 indicating the same mistakes and requesting the ITO to rectify the assessments u/s 154. However, the ITO wrote to the CIT to take action u/s 263 and the Commissioner, after taking into consideration the letter of the assessee accepting the mistakes, set aside the assessments and directed the ITO to include the mistakes in the total income of the assessee. On these facts the finding of the learned Judicial Member appears to be correct. The first reasoning is that all papers were filed by the assessee before the assessing officer and the assessing officer being satisfied with the papers completed the original assessments. The second reasoning is that the mistake was only in the totalling of the accounts. Whether it was in the closing stock or expenses account, the consequential mistakes took place in the balance sheets of both the years. Thirdly, the assessee ordinari....