ANALYSIS OF SUPREME COURT CASE
CIVIL APPEAL NO. 6110 OF 2009 dated 24th April 2020.
The referred judgment of Supreme Court is one of its kind wherein the deletion of penalty has led to deletion of quantum addition. The important facet their lordships observed was fundamental tenet of taxation that tax proceedings are not adversary proceedings. Further, the aspect that Supreme Court observed that taxpayer who had failed to bring on records during the assessment proceeding and that he brings during the course of the penalty proceeding would be an important piece of admissible evidence during the curse of the assessment proceedings.
Facts of the Case.
The facts related to the case for the assessment year 1998-99. In connection to assessment proceeding under Section 143(2) of the Act was served upon the assessee. Pursuant to which the Assessing Officer has passed the assessment order on 30-11-2000.
The primary addition that is under consideration before the supreme court was that the Ld. Assessing Officer while relying on the Balance Sheet and the books of account, took note that it had purchased on credit from 15 different parties that aggregated to Rs. 2,26,000/-. The Ld. Assessing Officer treated that amount as “Cash credits”under Section 68 of the 1961 Act and added the same in declared income of the assessee.
The observation made by the Ld. Assessing Officer in assessment order is reproduced herein below:
“Credits:
On examining the balancesheet and accounts books of assessee, it is apparent that the assessee has shown credit amount of Rs.2,26,000/ in the names of the following 15 persons:
… … …
Accordingly, sufficient time and opportunity was granted to prove the veracity of credits of Rs. 2,26,000/ as shown by assessee. However false/wrong particulars or explanation were submitted with respect to credits shown by assessee. In this manner, the credits of Rs.2,26,000/ shown in the name of 15 persons, is not correct and any correct proof/evidence has not been produced by assessee with respect to income of creditors and source of income. Besides this, the credits of Rs.2,26,000/ as shown in the name of 15 persons is held as unexplained under Section 68 and added in declared income of assessee.
Thereafter, the appeal was preferred before the First Appellate Authority (for short “FAA”) wherein other additions / disallowance were partly allowed but the addition in the nature of credit made under Section 68 of the Act aggregating to Rs. 2,26,000/- was upheld. The FAA order was passed on 09-01-2003.
The appeal against CIT(A) / FAA was preferred by Assessee and Department. The Hon’ble ITAT had passed its order dated 04-11-2004 wherein it had partly allowed but the addition made under Section 68 of the Act was upheld.
Being aggrieved to the Order of Second Appellate Authority, the Assessee had filed an appeal before the Hon’ble High Court under Section 260A of the Act. The same was admitted on 27.04.2006 on the following substantial question of law:
“Whether claim to purchase of goods by the assessee could be dealt with under Section 68 of the Income Tax as a cash credit, by placing burden upon the assessee to explain that the purchase price does not represent his income from the disclosed sources?”
6.1 The Hon’ble High Court had dismissed the appeal of the Assessee observing that it was devoid of merits. Also, The Hon’ble High Court opined that the amount shown as credits was nothing but bogus entries and was justly added to the income of the Assessee. The Observation from the judgement is reproduced herein below:
“In our view, none of the submissions advanced by the learned counsel for the appellant has force. Learned counsel has proceeded on the basic assumption, about the factum of purchase of goods, having accepted by the authorities below, while the categorical finding of the Assessing Officer, which has not been disturbed in appeal is, that regarding this purchase from unregistered dealer assessee was called upon during the course of assessment proceedings to prove the correctness and genuineness of his claim, but he completely failed, and therefore, the purchase cannot be accepted. In our view, this finding, rather is clear and categoric, that no purchase was affected by the assessee, and amount was shown in a bogus manner, shown to be standing to credit of alleged purchasers, who could not be shown, to be either existent, or to be the creditors of the assessee, much less for the consideration alleged by the assessee. It is clear from the assessment orders and the finding affirmed in the appeals, that opportunity was given to the assessee to substantiate the genuineness of the alleged transactions, but the assessee failed, and efforts made by the Revenue, to investigate the correctness of the alleged transaction also could not yield any results, in favour of the assessee.
Thus it is clear, that the amounts shown to be standing to the credit of the persons, which had been added to the income of the assessee, was clearly a bogus entry, in the sense that it was only purportedly shown to be the amount standing to the credit of the fifteen persons, purportedly on account of assessee having purchased goods no credit from them, while since no goods were purchased, the amount did represent income of the assessee from undisclosed sources, which the assessee had only brought on record (books of accounts), by showing to be the amount belonging to the purported sellers, and as the liability of the assessee.
That being the position, the contention about impermissibility of making addition under this head, in view of addition of Rs.10,000/ having been made in trading account, cannot be accepted, as books of accounts has been rejected for the purpose of assessing the gross profit, as the gross profit shown in the books has not been accepted, on the ground, that the assessee had not maintained day to day stock registers, nor has produced or maintained other necessary vouchers, but then, IF THOSE BOOKS OF ACCOUNTS DID DISCLOSE CERTAIN OTHER ASSETS, WHICH ARE WRONGLY SHOWN TO BE LIABILITIES, AND FOR ACQUISITION OF WHICH THE ASSESSEE DID NOT SHOW THE SOURCE, IT CANNOT BE SAID THAT THE ASSESSING OFFICER WAS NOT ENTITLED TO USE THE BOOKS OF ACCOUNTS FOR THIS PURPOSE.”
(emphasis supplied)
6.2 Here, it is imperative to submit that the principal argument of the Assessee was that once the books of account have been rejected and an assessment order has been passed, the same books of account cannot be then relied upon by the Officer to impose consequent addition(s). This has been rejected on the basis of the above observation.
The Assessee had thereafter filed case before the Hon’ble Supreme Court against the High Court Order.
SUBMISSION OF ASSESSEE.
First and foremost argument that was that having made the addition under Section 144 of the 1961 Act being “best judgment assessment”, had invoked powers under sub Section (3) of Section 145. It was submitted that the condition to carry out the assessment under Section 144 of the Act is when the Books of Account is rejected. Therefore, in the instant case, the Ld. Assessing Officer relying on the same books of account to impose subsequent addition is not permissible.
To support above contention, the Assessee had adopted three prolonged contention that are submitted herein below:
(i) Assessment Order refers to Section 145(2) of the 1961 Act. It should have mentioned Section 145(3) of the 1961 Act. Reliance was placed on the amendment that came to effect from 01-04-1997. Further that it was submitted that Section 145(2) prior to 1.4.1997 (pre amendment) is akin to Section 145(3) post 1.4.1997 (post amendment). It is thus urged that the Department committed error in mentioning Section 145(2) and not Section 145(3).
(ii) That, the assessment order in reference to the addition other than Section 68 Credit, has incorrectly mentioned the term “NOT”. Accordingly the prefix of the paragraph and the language used, makes it abundantly clear that the Department had relied upon Section 145(3) of the 1961 Act to impose the addition.
(iii) That, the assessment was made under Section 144 as the same refers to Section 145(3). Under Section 144, the Officer has to make “best judgment assessment”. In support of that it was submitted that the purport of the stated provision is that the Officer reassesses the entire accounts and makes the assessment of total income and thereafter computes the income tax liability. Resultantly, the Officer (after rejecting the books of account) cannot then rely on the same books of account to make any subsequent addition(s). The approach adopted by the Officer would have the effect of taxing the same transaction twice.
In support of the above contention, the Assessee had relied on the following judgment:
(a) Maddi Sudarsanam Oil Mills Co. v. CIT, Hyderabad and Andhra[1959] 37 ITR 369 (AP).
(b) CIT v. Aggarwal Engg. Co. (Jal.)(2006) 206 CTR (P&H) 648
(c) CIT v. G.K. Contractors(2009) 19 DTR (Raj) 305 (IT Appeal No. 13/2009, decided on 28.1.2009
Revenue Submission.
The Department submitted that it was preposterous of the Assessee to assume that the assessment order had rejected the books of accounts under Section 145(3) of the 1961 Act. Since the Assessment was made under Section 143(3) and not under Section 144. Thus, the Officer was justified in relying upon the said books for making addition(s).
The Department argued that in connection to making the gross profit addition (additions other than Section 68), the Ld. Assessing Officer has not rejected the books of account but only that part which pertained to assessing the gross profit, as the assessee had not maintained day to day stock registers, nor had produced or maintained other necessary vouchers while determining the gross profits.
In connection to the Section 68 addition, the Department submitted that the amount mentioned under“Credits” in the Balance Sheet is incorrect and qualifies as “Cash Credits” under Section 68 of the 1961 Act, as stated in the assessment order.
The Ld. Assessing Officer had given several opportunities to prove the authenticity of the entries in question. As a matter of fact, summon notices were issued to the named fifteen creditors, but noevidence/explanation was forthcoming. The finding of fact sorecorded by the Officer is unexceptionable. The Department stated that, thus, it does not give rise to any question of law in connection to addition made under Section 68 of the Act.
Finding – Judgment of Supreme Court.
The Hon’ble Court while dealing with the instant case the Assessee to consider the additional facts and evidence that were filed vide Interim Application No. 57442 of 2011. By such application the Assessee had succeeded in getting admission of the order passed by the FAA in the connection with the Penalty Proceeding that was passed on 13-01-2011.
The Hon’ble Court had observed that the penalty proceeding was initiated on account of various addition/disallowance made to the returned income in the assessment order. The Ld. Assessing Officer had passed the penalty order on 17-11-2006 levying penalty on the each count of the addition/disallowance respectively. The Income Tax Officer had passed the said order as a consequence of the conclusion reached in the assessment order which had by then become final upto the stage of ITAT vide order dated 27-4-2006 to the effect that the stated purchases by the assessee from unregistered dealers were bogus entries effected by the assessee.
Aggrived by the Penalty Order of the Assesseeing Officer, the Appeal was preferred before the FAA, who vide his order dated 13-01-2011 deleted the penalty observing that assessee had not made any concealment of income or furnished inaccurate particulars of income.
The Hon’ble Court had also taken into account the fact that even criminal proceedings initiated against the Assessee have been dropped/terminated and stands acquitted of the charges under Section 276(C)(D)(1)(2) of the 1961 Act vide judgment and order dated 06-06-011 passed by the Court of Additional Chief City Magistrate (Economic Offence), Jodhpur City in proceedings No. 262 of 2005.
The emphasis the Hon’ble Court has given to the finding of the First Appellate Authority Order dated 13-01-2011 viz is summarized as under:
5.1 The Assessee had filed application under Section Rule 46A of the Income Tax Rules (vide letter dated 16-10-2008). Against the said application, it was remanded back to the Income Tax Officer [ITO Ward – 1 Makrana] (vide letter dated 28-01-2009).
5.2 Vide Application referred above, the Assessee had filed following
(i) affidavits from 13 creditors (from whom purchase were made),
(ii) sales Tax Order for the Financial Year 9798 showing purchases from unregistered dealer to the tune of Rs.2,28,900/,
(iii) cash vouchers duly signed on the revenue stamp for receipt of payment by the unregistered dealers and
(iv) copy of Rasan Card/Voter Identity Card to show identity of the unregistered dealer.
5.3 In connection to such Additional Evidence Application made under Section 46A made and that was sent to the ITO. The Assessing Officer recorded statements of 12 unregistered dealers out of 13.
5.4 The most important part, that is emphasis by the Hon’ble Court that, in the report given by the Assessing Officer stated that statements of above 12 persons were recorded on 15/16.12.2010 and in respect of identify, the unregistered filed photo copies of their Voter Identity Cards and all of them have admitted that they have sold marble on credit basis to Sh. Bashir AhmedSisodia, the appellant, during the Financial Year 9798 and received payments after two or three years.
5.5 The FAA observed and that is considered by the Hon’ble Court that, it is further emphasis the fact that “It is therefore, observed that the Assessing Officer has neither doubted their identity nor any adverse comments in respect of purchase of marble slabs in the Financial Year relevantat AY 9899 has given in the remand report”.
5.6 The FAA in its order went on to observe at Para no. 19 that In respect of addition of Rs.2,26,000/, it would be pertinent to note here that there is no denial of purchase of marble slabs worth Rs.4,78,900/and sale of goods worth Rs.3,57,463/ and disclose of closing stock of Rs.2,92,490/ as disclosed in the trading account for the year ended on 31.3.98. The FAA also observed that without purchases of marbles, there could not have been sale and disclosure of closing stock in the trading accountand it suggests that the appellant must have purchased marble slabs from unregistered dealers.
5.7 The First Appellate Authority dealing the penalty aspect, had categorically observed that “explanation given by the appellant in respect of purchases from the unregistered dealer and their genuineness are substantiated by filing of affidavits, producing before the Assessing Officer in the course of remand report and the Assessing Officer did not find any objectionable in respect identity of the unregistered dealers and claim made for sale of marble slabs to the appellant in the Financial Year relevant to AY 9899”
5.8 The FAA observed that there was no justification for not to accept the purchase made from the unregistered dealers. IF SUCH ADDITION IS MADE IT WOULD GIVE UNRESONABLE RATE OF PROFIT.
5.9 At Para no. 20 the FAA has observed as below:
“20. Under the above facts and circumstances, I am of the view that there was no either concealment of income or furnishing any inaccurate particulars of income and accordingly, the penalty order dated 17.11.2006 passed by the Assessing Officer is cancelled. The grounds of appeal allowed”.
Supreme Court Decision.
In backdrop of the above finding, the Hon’ble Court, observed that Department had refunded the penalty that was collected and that has not been challenged and thus, FAA Order becomes final.
The Hon’ble Court has observed that during the course of the Assessment Proceeding, the reasons for making addition of Rs. 2,26,000 under Section 68 of the Act, observed by AO and CIT(A) upheld by ITAT and High Court, that since Assessee despite being given sufficient opportunity, failed to prove the correctness and genuineness of his claim in respect of purchases of marbles from unregistered dealers. Resultantly, the said transactions were ASSUMED as bogus entries(standing to the credit of named dealers who were non existent creditors of the assessee).
The Court observed that penalty proceedings Assessee has offered explanation and caused to produce affidavits and record statements of the concerned unregistered dealers and establish their credentials.That explanation has been accepted by the CIT(A) vide order dated 13-01-2011.
The Hon’ble Court has upheld the observation of the FAA that without any purchase there cannot be any sale and closing stock as on the date disclosed by the Assessee in the trading account. In other words
The Court observed that, what needs to be noted is that the stated penalty proceedings were the outcome of the assessment order in question concerning assessment year 1998-1999. Further at Para no. 15, the Hon’ble Court as observed that the factual basis on which the Officer formed his opinion in the assessment order dated 30-11-2000 in regard to addition stands dispelled by the affidavits and statements of the concerned unregistered dealers in penalty proceedings. This supports the claim of the Assessee.
The Court has emphasized the fact that the appellate authority (FAA) vide order dated 13-01-2011, had not only accepted the explanation offered by the Assessee but also recorded a clear finding of fact that there was no concealment of income or furnishing of any inaccurate particulars of income by the Assessee for the assessment year 1998-1999. That now being the indisputable position, it must necessarily follow that the addition of amount of Rs.2,26,000/cannot be justified, much less, maintained.
The Hon’ble Court has deleted made under Section 68 of the Act.
Our View.
It is maiden judicial precedent outset by the Hon’ble Court wherein the converse logic is applied and addition has been deleted. It is seen from that considering the facts of penalty proceeding led to deletion of quantum proceeding. This being unprecedented and maiden judgement wherein the addition made in quantum proceedings gets deleted by the Apex Court for the reason that additional evidence has been brought on record during the course of penalty proceeding.
The Apex Court has rightly observed that penalty proceedings were the outcome of the assessment order in question. Further, we are aware that Quantum Proceeding and Penalty Proceeding are different and distinct and the outcome of Quantum Proceeding would not automatically be applied to penalty proceeding and that the AO has to bring out own satisfaction for levying penalty.
As we are aware that that assessment proceedings precede penalty proceedings. There is accepted position of the law that finding in the assessment proceedings constitute good evidence, they do not constitute conclusive evidence in penalty proceedings. Also we are aware of the celebrated case law of Supreme Court Reliance Petro products (P.) Ltd. [2010] 322 ITR 158 (SC) that merely because an assessee has made a particular claim, which was not accepted by the revenue, that, by itself, would not attract imposition of penalty under section 271(1)(c) of the Act. Also we have observed that deletion of quantum addition could obviously result in deletion of penalty K.C. Builders [2004] 165 ITR 562 (SC). This is one of the rare and exceptional cases where the deletion of penalty and findings in penalty proceedings have been used by an assessee to succeed against the quantum addition.
One of the important aspect that indirectly eminent out of this judgment that forced the CBDT Circular no. 14(XL-35) dated 11-04-1955 wherein it has been stated that AO cannot not take advantage of ignorance of an assessee as to his rights.Apart from that it upholds the Article 265 of the Constitution of India provides that “no tax shall be levied or collected except by the authority of law“. Therefore, no tax can be levied or collected in India, unless it is explicitly and clearly authorised by way of legislation.It is submitted that order of the Income-tax Officer which did not take note of the law deemed to be in force must be regarded as defective as it was held by the Hon’ble Supreme Court in the case of SAL Narayan Row v. Ishwarlal Bhagwandas [1965] 57 ITR 149. Therefore, in the instant the court upheld the same observation that assessment order need to take every law deemed to be force and that includes the judiciary position settled by court from time and again.
Therefore, taking legal argument that even if during the penalty proceeding certain facts / evidence came is brought on record then the quantum proceeding pending at any level is required to consider the same in deciding the appeal. Since this judgement has uphold Circular no. 14 (XL-35) and Art. 265 of Constitution of India. Thus, the current judgement emphasis the important aspect that is coming out is that “Real Income” is required to be taxed even if evidence that is brought during the penalty proceeding and not in quantum proceeding.
In addition to that one may argue that Department had not considered the their own judgement of NRA Iron & Steel (P) Ltd. [2019] 412 ITR 161 (SC) and per incuriam. Then it would be emphatically submitted that in the original assessment proceeding when Section 68 of the Act the Assessee had failed to provide all details as required. And in the penalty proceeding the Assessee submitted all the details and that the Department had carried out own investigation and reached conclusion and therefore the judgment of NRA Iron & Steel (P) Ltd stands applied and therefore such judgment would not be per incuriam.
Lastly, this judgement would be much useful for the various cases that are pending before the various forum and that any evidence brought during the course of proceeding is required to be admitted and considered by the various forum. And the Appellate Forum is required to take cognizance of the same evidence as per the current judgement.This judgement of the Supreme Court gives hope to assessees who think they have missed the bus in bringing on record all facts by filing adequate evidence in the assessment proceedings or to those assessees who have been able to belatedly obtain evidence to justify their claims.
However, here it is important to understand that various facts that are not considered by Hon’ble Supreme Court or never raised by the Department.
(i) The Tax Effect involved in the penalty matter – that restrained the Department not filing case before the higher authority regarding monetary limit set out by CBDT. Therefore, due to low tax-effect involved, the Revenue could not have filed an appeal against the order dated 13th January 2011 passed by the CIT (A)
(ii) However, the Judgement does not throw any light on this aspect regarding the comment mentioned by the Principal Commissioner of Income Tax. As per the referred instruction in a case where appeal before the Tribunal was not filed only on account of the tax-effect being less than the monetary limit of Rs. 2,00,000/-, it was directed that the Pr. Commissioner of Income-tax should specifically record that “even though the decision is not acceptable, appeal is not being filed only on the consideration that the tax effect is less than the monetary limit specified in this instruction”. Thus, one of the possibilities was that the order dated 13th January 2011 was not acceptable to the Revenue but it could not have challenged the said order
(iii) Also, the Supreme Court has observed that since the refund is made to the Assessee for penalty, that could not have legal basis for the simple reason that since monetary limit set out by the CBDT the Revenue was under compulsion to repay the refund on account of CIT(A) Order and that such argument may not be tenable in to hold good.
In addition to the above, though Hon’ble Court has not deliberated on the issue of whether books of account rejected, can there be any additional addition considering same books of account. This argument was of the Assessee since the beginning from CIT(A) to before the this Court and that was the main and only argument until penalty proceeding are not brought on record.
For the ready reference few of them are cited below:
(i) CIT v. Banwari Lal Banshidhar [1998] 229 ITR 229 (All)No disallowance could have been made in view of the provisions of section 40A(3), read with rule 6DD(j) as no deduction was allowed to and claimed by the assessee in respect of the purchases. When the gross profit rate was applied, that would take care of everything and there was no need for the Assessing Officer to make scrutiny of the amount incurred on the purchases by the assessee
(ii) CIT v. Aggarwal Engg. Co. [2008] 302 ITR 246/156 Taxman 40 (Punj. &Har.), where it was observed that once the net profit rate was applied, no further addition was called for in respect of purchase and introduction of cash
(iii) CIT v. Raghvendra Pratap Singh 14 MTC 415 (All), where ex-parte assessment under Section 144 of the Income Tax Act was made. In such situation, the AO cannot make addition under Section 68 which has to be necessarily on the basis of entries in the books which not are rejected. It was further observed that when the books are not maintained, then 8% net profit can be computed on the gross receipts in the case of civil contractor.
(iv) Deepak Mittal Vs. ACIT (Delhi – Tri) ITA. No. 4709/Del./2017 S. 145(3): Entire law explained explained on whether if the AO rejects the books of account, he can rely on the entries in the books to make disallowances u/s 40A(3) and s. 68 and also make additions for “peak credit”. (All judgements on the point considered).
9.2 Therefore, here, many court have delivered judgment that once the books of account is rejected then there cannot be any addition and for which the Assessee has made reliance onto few of the judgement. But here, it is important to draw attention on the Hon’ble Supreme Court decision in the case of Kale Khan Mohammad Hanif [1963] 50 ITR 1 (SC). The judgment do state that any credit entry appearing in the books of account can be added to the returned income even in those condition when the income has been estimated. But this judgement would not hold good for the simple reason that it was fact based and that can be distinguished from case to case, one can clearly appreciate from the fact. Apart from that this Kale Khan Judgment, their lordships themselves have stated that few question that were not answered by the Tribunal has been accepted and that if he not accepted then this court would have deliberated.
Conclusion.
This judgement opens the new area for deliberation wherein it settles the fact that evidence can be brought at any point of time against the addition/disallowance in question. And that if Assessee has failed at any time and bring subsequently then cognizance need to be taken.
Further, to my knowledge, this judgment importantly emphasis on the fact that income that are not required to be taxed for any reason is inadvertently or for any other reason taxed, then, if Assessee can bring any evidence on record then it must be considered by taking cognizance and unwanted addition should be deleted. The proceeding does not depend into which the evidence is brought by the Assessee, what important is evidence is brought and that requires adjudication.
This particular judgment also upholds the fundamental principle of taxation that tax proceedings are not adversary proceedings and authorities are engaged not only in the administrative act of adjusting taxpayer’s liability. They are quasi judicial proceeding and are required to be provide proper taxation to real income.
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