Penalty applicable in case of failure to disclose fully or truly all particulars of income

Penal provision of section 271(1)(c) would operate when there is a failure to disclose fully or truly all the particulars of income

ITAT AHMEDABAD BENCH

Shyourajsingh B Chauhan Vs. ACIT

ITA No. 523/Ahd/2008

Date- May 31, 2010

ORDER

A N Pahuja: This appeal by the assessee is di rected against an order dated 24-12-2007 of the ld. CIT(Appeals) -VI I , Ahmedabad, upholding penalty of Rs.5,52,040/- levied u/s 271(1)(c) of the Income-tax Act,1961[hereinafter referred to as the `Act’]

2. Facts, in brief, as per relevant orders are that return declaring income of Rs.19,72,930/- filed on 31.10.2002 by the assessee, an individual engaged in providing security personnel to various organizations in private and public sector, was processed u/s 143(1) of the Income-tax Act,1961[hereinafter referred to as the `Act’].In this case ,a survey u/s 133A of the Act had been conducted in the premises of the assessee on 24-1-2002. Consequently, the case was selected for scrutiny with the issue of notice u/s 143(2) of the Act on 22-10-2003. During the course of assessment proceedings, the Assessing Officer[AO in short] noticed a wide gap between the receipts shown and the income declared. The AO noticed that even in the earlier years, similar was the position. The relevant details extracted in the order of the AO reveal as under:

3. In the light of aforesaid details of earlier years , during the course of survey, statements of various employees of the assessee were recorded as extracted on page nos.3 to 7 of the assessment order. Shri Subhashbhai Kantilal Dave, cashier in his statements recorded on 24.1.2002 & 25.1.2002 admitted that no books had been written for the year under consideration until the date of survey. The assessee also in his statement recorded on 26.2.2002 admitted that no books of accounts had been written for the year under consideration so far. Shri Kapoorchand Babulal Gupta, ITP also in his statement on 24.1.2002 conceded that he was writing books for the assessee for the last 8 years and for the relevant assessment year, books of a/cs had not been written. It was also stated by him that books of accounts for this financial year were to be written only after completion of March and he also confessed that all the books of the assessee were written after completion of financial year, as regular practice every year. He also stated that for various expenses cash is given. In respect of bonus, overtime, leave encashment, after counting on average basis, he debits these expenses in the books of account without any bills or vouchers for such expenses. He further mentioned that he was not verifying or preparing any vouchers or bills in respect of expenses relating to leave encashment and messing expenses since last eight years and he was debiting these expenses as per the instruction of Shri Shyourajsingh Chauhan – the assessee. Regarding his fees also he mentioned that he had not received Rs.40,000/- which had been shown as debited in petty cash book on 22.12.2001. He had received only Rs.10,000/- as fee for preceding assessment year and had taken advance of Rs.25,000/- in the month of May, 2001 for the marriage of his sister. He also confirmed that the entry of Rs.40,000/- in the petty cash book was not true and was bogus entry. The statements of other employees revealed that they were not receiving bonus or ESI/PF benefit or overtime ,leave encashment or messing charges etc.. When confronted, the assessee explained that sometimes vouchers were not signed by the employees. In the light of facts found during the course of survey and on the basis of statements of various employees, ITP and the assessee, the AO concluded that the assessee suppressed his profit by claiming huge expenses under different heads viz. Bonus, Salary, ESI contribution, PF Contribution, Staff Expenses, Overtime Expenses and Leave Encashment. The AO also observed that overtime and messing charges though claimed in the return, were, in fact, not paid to the employees. Security Guards employed by the assessee were, in fact, getting only consolidated salary and not getting such messing expenses. Not only that, the AO noticed that PF and ESI contribution for the earlier years were not paid in accordance with the relevant provisions of PF and ESI laws. The AO also did not find any evidence in support of the various expenses incurred. In nutshell, the AO summarised the following discrepancies :

vii) In the bonus registers, revenue stamps were affixed and signatures obtained in English, without even mentioning the amount of bonus etc. All the columns in the bonus register were blank;

viii) In the case of overtime register, though the amount of overtime was mentioned, but the signatures of the employees and the date on which the amount was paid, were not obtained against any of the entry in the register;

ix) In the vouchers for the period 5.9.01 to 11.1.01, in the column of the voucher denoting `received by’ has been signed by a single person in some of the vouchers/bills/receipts. In some of the vouchers there were no signatures on the receipts and in some others, the dates of the vouchers were not written.

x) For the wages for May 2001, some of the payments did not bear any signature nor revenue stamp affixed though the salary exceeds more than Rs.1000/-;

xi) Similar instances were also noticed for wage bills for period April, June, July, September and November, 2001;

xii) In the salary statements from April 2001 to December, 2001, there were no signatures of the employees to whom salary was paid.

4. The AO further noticed that for the year under consideration, the assessee reflected gross receipts of Rs. 3,26,65,319/- and net profit of Rs. 15,69,062/-, which included other income of Rs.1,60,279/-. Excluding other income, net profit worked out o 4.34% of the receipts. In the light of statements of the assessee and his employees that books of accounts had not been written until the date of survey and on the basis of enquiries made in consequence of survey, especially when genuineness of various expenses was no proved while the assessee had declared additional income before the settlement Commission in the preceding assessment years, the AO rejected the book results for the year under consideration, having recourse to provisions of sec. 145(3) of the Act and estimated 10% of the receipts amounting to Rs. 32,48,902 as net business income for the year under consideration. Inter alia, penalty proceedings u/s 271(1)(c) were also initiated. On appeal, the findings of the AO were upheld by the ld. CIT(A). After receipt of order of the ld. CIT(A), in response to a showcase not ice issued by the AO on 15/03/2007 before levy of the penalty, the assessee submitted that (i) all the documents / papers required for making the assessment were available on record.

(ii) the estimation of net profit @ 10% of the receipt is arbitrary and without considering the facts and details, without verifying the documentary records and papers submitted during the course of assessment proceedings. The assessee has neither concealed any particulars of income nor has furnished any inaccurate particulars of income.

(iii ) in view of the above, penalty u/s 271(1) (c) of the Act was not leviable.

5 However the AO did not accept the aforesaid submissions of the assessee on the ground that dur ing the course of survey it was found that the assessee had debited expenditure/payment on account of overtime expenses, leave encashment expenses, salary, messing expenses, bonus, PF contribution etc. in the income and expenditure statement and the assessee was not making payments for these expenses and had inflated the expenses as admitted by various persons working for the assessee. In fact, the assessee was not writing his books of accounts regularly and the same were also not reliable. Accordingly, books of the assessee were rejected and the net Profit was estimated @ 10% of the gross receipts i.e. at Rs.32,48,902/-,resulting in addition of Rs.18,40,137/-. Thus, the assessee suppressed his income by claiming inflated expenses. Had the survey u/s. l33A of the Act not been carried out, the assessee definitely would have evaded the tax on the income of Rs.18,40,137/-. Accordingly, the AO imposed penalty of Rs.5,52,040/- u/s 271(1)(c) of the Act @ 100% of the tax sought to evaded on the aforesaid income since the assessee concealed the income to the aforesaid extent by deliberately furnishing inaccurate particulars thereof.

6. On appeal, the assessee contended that the Settlement Commission, Additional Bench, Mumbai for the AY 1999-2000 to AY 2001-02 in their case directed to assess the income @ 7% of the gross receipts from the security business. It was submitted that not a single deficiency in the books of accounts was pointed out by the AO and that the AO over assessed the income. Moreover, the AO while applying net profit rate of 10% had not given any comparable case. The AO had initiated penalty proceedings for concealment of income whereas penalty has been levied for furnishing inaccurate particulars of income and as such on this ground alone penalty so levied needs to be quashed, it was argued. However, the ld. CIT(A) after considering the submissions of the assessee, upheld the findings of the AO in the following terms:

“5 I have considered the submissions made. I find that at the time of survey a lot of discrepancies were noted by the AO because it was found that expenditure claimed by the assessee under different heads were not at all proved and it was also admitted that accounts of the assessee was not being written properly and it was confessed that all the books of accounts of the assessee were written after the close of the financial year i.e. previous year. Apparently, entire books of account of the assessee are unreliable and if income is worked out in such a situation, it would be clear that the assessee is liable to penalty for concealment. This is for the simple reason that the assessee manipulated the entire books of account by writing the books as per its whims and fancy after the close of the previous year. It would be relevant to note the facts which has been incorporated in the penalty order that for various expenses, cash amount was given and on an average basis expenses were debited in the books of account. In fact, the AO has recorded statement of various persons which shows that there was vide variation between the expenses debited in the books and expenses actually claimed. All this shows that the assessee had deliberately manipulated its books of account in such a fashion that there was no other way but to estimate the income of the assessee. However, this is not a case of pure and simple estimation but a case of estimation for the reason that the expenditure claimed was deliberately inflated and there were various wrong claims. Thus, this is a case which is fit for levy of penalty for concealment because even the survey took place during the previous year relevant to this assessment year. I, therefore, find no merit in the explanation of the assessee and penalty levied is confirmed.”

7. The assessee is now in appeal before us against the aforesaid findings of the ld. CIT(A) .The learned AR on behalf of the assessee reiterated their submissions before the ld. CIT(A) while relying upon the decisions in the case of Shivlal Tak vs. CIT, 251 ITR 373, CIT vs. Shivnarayan Jamnalal & Co. , 232 ITR 311(MP), CIT Vs. Reliance Petro Products,322 IT 158(SC), CIT vs. Indian Metal & Ferro Alloys Ltd. ,211 ITR 35(Orissa). The learned DR, on the other hand, supported the impugned orders of the AO and the ld. CIT(A).

8. We have heard both the parties and gone through the facts of the case as also the decisions relied upon on behalf of the assessee. At the outset , we may have a look at the relevant provisions of section 271(1)(c) of the Act, which read as under:

“271.Failure to furnish returns, comply with notices, concealment of income, etc.

(1) If the Assessing Officer or the Commissioner (Appeals) or the Commissioner in the course of any proceedings under this Act, is satisfied that any person-

(c) has concealed the particulars of his income or furnished inaccurate particulars of such income, he may direct that such person shall pay by way of penalty,- (iii) in the cases referred to in clause (c) , in addition to any tax payable by him, a sum which shall not be less than, but which shall not exceed three times, the amount of tax sought to be evaded by reason of the concealment of particulars of his income or the furnishing of inaccurate particulars of such income Explanation 1.-Where in respect of any facts material to the computation of the total income of any person under this Act,- (A) such person fails to offer an explanation or offers an explanation which is found by the Assessing Officer or the Deputy Commissioner (Appeals) or the Commissioner (Appeals) to be false, or

(B) such person offers an explanation which he is not able to substantiate and fails to prove that such explanation isbonafide and that all the facts relating to the same and material to the computation of his total income have been disclosed by him, then, the amount added or disallowed in computing the total income of such person as a result thereof shall, for the purposes of clause (c) of this sub-section, be deemed to represent the income in respect of which particulars have been concealed. As is evident from the aforesaid cl. (c) of s. 271(1) of the Act, the words used are ‘has concealed the particulars of his income’ or furnished ‘inaccurate particulars of such income’. Thus, both in case of concealment and inaccuracy, the phrase ‘particulars of income’ has been used. The legislature has not used the words ‘concealed his income’. From this it would be apparent that penal provision would operate when there is a failure to disclose fully or truly all the particulars. The words ‘particulars of income’ refer to the facts which lead to the correct computation of income in accordance with the provisions of the Act. So when any fact material to the determination of an item as income or material to the correct computation is not filed or that which is filed is not accurate, then the assessee would be liable to penalty under s. 271(1)(c) of the Act. If the income had to be assessed under section 145 of the Act, then the presumption would be that the income was not properly returned, as held by Hon’ble jurisdictional High Court in CIT vs. Chandra Vilas Hotel,291 ITR 202(Guj). In this decision the Hon’ble High Court found that the assessee was not maintaining its account for six years and every year assessments were framed with the help and assistance of section 145(1) of the Act. Accordingly, the Hon’ble jurisdictional High Court observed that at least some order should have worked as an eye-opener for the assessee and that every year the assessee was repeating the same trend and still it wanted to say that it had not concealed the income or there was no fraud or gross or wilful neglect on its part. In the instant case also , the assessee was not maintaining the accounts during the course of the business year after year and in fact, the assessee was writing the accounts after the close of the year and inflating the expenses so as to show the income at his will. In these circumstances, it does not lie in the mouth of the assessee that it was not concealing his income by furnishing inaccurate particulars thereof, as concluded by the AO and the ld. CIT(A).

8.1 As mentioned already ,n the case under consideration, during the course of survey, statements of various employees of the assessee were recorded as extracted on page nos.3 to 7 of the assessment order. It was found that books of accounts for the year under consideration year were to be written only after completion of March and even the books of the assessee for the preceding years were written after completion of financial year by way of regular practice. It was also noticed that inflated expenses were debited to accounts under the instructions of Shri Shyourajsingh Chauhan – the assessee even when payment for such expenses was not being made. In the light of facts found during the course of survey and on the basis of statements of various employees, ITP and the assessee, the AO concluded that the assessee suppressed his profit by claiming huge expenses under various heads. As a result books of accounts were rejected and net profit was estimated @10% in the year under consideration. The ld. CIT(A) also upheld the rejection of books and rate applied by the AO while the Tribunal reduced the rate to 7% on the basis of rate adopted by the Settlement Commission in the period relevant to the assessment years 1999-2000 to 2001-02. Had there been no survey operations in the premises of the assessee, the particulars which were made the basis of addition in the assessment would not have come to the notice of the Assessing Officer. In fact, the material particulars were not disclosed .The expression ”conceal” as defined in Dilip N Shroff case,291 ITR 519(SC) means to hide or keep secret. The word conceal is con plus celare which implies to hide. It means to hide or withdraw from observation; to cover or keep from sight; to prevent the discovery of; to withhold knowledge of. The assessee having claimed inflated expenses in the books written well after the close year and that too year after year, leads to only one conclusion that the income was not properly returned and therefore levy of penalty has to be upheld, as concluded by Hon’ble jurisdictional High Court in CIT vs. Chandra Vilas Hotel,291 ITR 202(Guj) in similar circumstances. Resorting to estimate in this case was not an estimate without basis but with a clear cut background of material, wherefrom it was noticed that the assessee was inflating expenses year after year. The explanation of the assessee could not be verified from its own records and apparently, the assessee failed to discharge the onus placed on it regarding profit reflected in its books written well after the survey and close of the year. As a result, addition @7% of the receipts from security services has been sustained by the Tribunal, following the basis adopted by the Settlement Commission in the preceding years. In the course of penalty proceedings also, the assessee has not brought any material before the Assessing Officer to rebut the inferences drawn by the Assessing Officer in the course of assessment proceedings. So in our considered view, the provisions of Explanation 1 to section 271(1)(c), when the assessee failed to substantiate his own explanation , get attracted. We find that after the insertion of Explanation 1 to section 271(1)(c) of the Act by the Taxation Laws (Amendment) Act, 1975, if the explanation offered by the assessee regarding the additions is either found to be false and remained unsubstantiated, the additions so made are deemed to be the concealed income, and therefore, the penalty provisions are attracted. Hon’ble Supreme Court in the case of B.A. Balasubramaniam & Bros. Co. v. CIT [1999] 157 CTR 556, held that penalty can be imposed even on estimated addition also. Relevant head notes and conclusion as drawn by the Hon’ble Supreme Court are reproduced as under “Penalty under section 271 (1)(c), Explanation – Burden of proof – Difference between income assessed and income returned was more than 20 per cent – Assessee not able to discharge the onus which was on it under the Explanation to section 271(1)(c) – ITO justified in imposing penalty, notwithstanding the fact that income was assessed on estimate basis – CIT v. B.A. Balasubramaniam & Bros. [1984] 40 CTR (Mad.)/[1985] 152 ITR 529 (Mad.) affirmed; CIT v. Mussadilal Ram Bharose [1987] 60 CTR (SC) 34/[ 1987] 165 ITR 14 (SC); TC 50 R. 474; CIT v. K.R. Sadayappan [1990] 86 CTR (SC) 120; [1990] 185 ITR 49 (SC); TC 50 R. 795 and Addl. CIT v. Jeevan Lal Sah [1994] 117 CTR (SC) 130; [1994] 205 ITR 244 (SC); TC 50 R. 973 followed. Conclusion Difference between the income assessed and the income returned being more than 20 per cent, the Explanation to section 271 (1)(c) became applicable and the ITO was justified in imposing penalty because the assessee had not been able to discharge the onus which was on it under the said Explanation, notwithstanding the fact that income was assessed on estimate basis.”

8.2 Hon’ble Supreme court in the case of K.P.Madhusudanan vs. CIT,251 ITR 99(SC) held that :

“We find it difficult to accept as correct the two judgments aforemeiitioned. The Explanation to section 271(1)(c) is a part of section 271. When the Income-tax Officer or the Appellate Assistant Commissioner issues to an assessee a notice under section 271, he makes the assessee aware that the provisions thereof are to be used against him. These provisions include the Explanation. By reason of the Explanation, where the total income returned by the assessee is less than 80 per cent. of the total income assessed under section 143 or 144 or 147, reduced to the extent therein provided, the assessee is deemed to have concealed the particulars of his income or furnished inaccurate particulars thereof, unless he proves that the failure to return the correct income did not arise from any fraud or neglect on his part. The assessee is, therefore, by virtue of the notice under section 271 put to notice that if he does not prove, in the circumstances stated in the Explanation,, that his failure to return his correct income was not due to fraud or neglect, he shall be deemed to have concealed the particulars of his income or furnished inaccurate particulars thereof and, consequently, be liable to the penalty provided by that section. No express invocation of the Explanation to section 271 in the notice under section 271 is, in our view, necessary before the provisions of the Explanation therein are applied. The High Court at Bombay was, therefore, in error in the view that it took and the Division Bench in the impugned judgment was right.”

8.3 Therefore, in view of the facts and circumstances and in the light of above noted authoritative pronouncements, when the assessee failed to discharge the onus laid down upon him in terms of explanation 1 to section 271(1)(c) of the Act, the order of the CIT(A) is upheld to the extent penalty is imposable in this case on the difference between the income worked out @ 7% of the receipts from security services and that returned by the assessee in its profit and loss account. Even otherwise it is a settled law that in economic offences, the statutory liability to pay either duty or tax is nothing but a strict liability where the question of proving beyond the shadow of doubt one’s existence of bona fide belief that such duty or interest is not taxable does not arise. It goes without saying that any violation of the law or rules relating to economic offences, either relating to the payment of duty or tax as the case may be, the theory of mens rea is not attracted. In such matters, the rules of interpretation contemplate a strict interpretation rather than a liberal and wider interpretation.

8.31 The rule of mens rea has to be established beyond all reasonable doubt in criminal cases, but it is not so in the case of an economic offence. The classical view that “no mens rea, no crime” has long ago been eroded, especially regarding economic crimes. In economic offences, the notion that a penalty or a punishment cannot be cast in the form of an absolute or no fault liability but must be preceded by mens rea must be rejected. A rule of strict liability or absolute liability should be imposed without insisting mens rea to deal with such socio economic crimes, vide S. Bagavathy v. State of Tamil Nadu [2007] 1 LW 892.

8.32 Mens rea is not an essential ingredient for contravention of the provisions of the civil Act. Unless the language of the statute indicates the need to establish the element of mens rea, it is generally sufficient to prove that a default in complying with the statute has occurred and it is wholly unnecessary to ascertain whether such a violation was intentional or not.

8.33 The breach of civil obligation which attracts a penalty under the provisions of an Act would immediately attract the levy of penalty irrespective of the fact whether the contravention was made by the defaulter with any guilty intention or not, vide Chairman, SEBI v. Shriram Mutual Fund [2006] 131 Comp Cas 591 (SC) ; [2006] 5 SCC 361. This view has been reiterated by the Hon’ble Supreme Court in their decision dated 29.9.2008 in the case of Union of India and others Vs. Dharmendra Textile Processors and others, in civil appeal nos.10289 –10303 of 2003.

8.4 In the light of provisions of sec. 271(1)(c) of the Act read with explanation 1 thereto and the aforesaid judicial pronouncements, it is well established that whenever there is difference between the returned and assessed income, there is inference of concealment. The explanation 1 to sec. 271(1)(c) of the Act raises a presumption that can be rebutted by the assessee with reference to facts of the case. Thus, the onus is on the assessee to rebut the inference of concealment. The absence of explanation itself would attract penalty. The explanation offered by the assessee should not be false. If the assessee is not able to substantiate its explanation, penalty would not be attracted automatically if such explanation is bonafide and all the material facts to the computation of income have been disclosed by the assessee. The onus laid down upon the assessee to rebut the presumption raised under explanation 1 would not be discharged by any fantastic

or fanciful explanation. It is not the law that any and every explanation has to be accepted while mere offer of income by the assessee can not justify cancellation of penalty.

8.5 In the case under consideration the desire to conceal is apparent when the assessee was not maintaining the accounts in the course of business and inflated expenses were being debited year after year in the books written well after the close of the year even when payments for such expenses was not being made. The assessee failed to substantiate the expenditure debited in his own accounts. A very heavy onus was placed on the assessee to explain the difference between the assessed income and returned income and the assessee did not substantiate the expenditure debited in his books of accounts at any stage. In view of the foregoing, the decisions relied upon on behalf of the assessee do not support the assessee. The ld. AR on behalf of the assessee merely relied on certain decisions without demonstrating as to how these decisions help the assessee. In Shivlal Tak(supra) rel ied upon on behalf of the assessee , the assessee submitted its return for the assessment year 1978-79 showing total ITA No.523/Ahd/2008 Shyourajsingh B Chauhan 13 income at Rs. 99,164. The Income-tax Officer noticed various defects in the maintenance of accounts. After discussion with the Assessing Officer and finding unvouched nature of expenses, the assessee agreed for application of gross profit at the rate of 12 per cent on contract receipts so declared by the firm, to be taken as assessable income and, accordingly, the assessee’s income came to Rs. 1,27,680.In respect of the said additions, the Assessing Officer, taking support from Explanation 1 appended to section 271(1)(c)(iii), initiated penalty proceedings against the assessee for levying penalty, by raising the presumption under the explanation that the additions made in the total income returned, represent the income in respect of which particulars have been concealed and ultimately levied penalty on finding that some of the expenses, referred to in the order, having been not properly explained equal to the amount of income, held to be such in respect of which particulars have been concealed. In the light of these facts, the Hon’ble High Court cancelled the penalty since from the petty nature of expenses referred to in the order of Rs. 40, Rs. 80, Rs. 1,480, etc., the Tribunal was held to be not justified in holding that the explanation furnished by the assessee was not bonafide, the same being not based on any material particularly when the assessee agreed for applying of gross profit rate, precisely for the reason that he was not in position to vouch for each and every detail of the expenses entered in the books of account, to substantiate the result shown by him. Hon’ble High Court observed that it was not permissible for the Assessing Officer to initiate penalty proceedings for one specific breach and directing enquiry to another set of circumstances, which were not the foundation for initiating penalty proceedings. But such are not the facts in the present case .In the instant case, as already stated, the assessee was year after year inflating expenses in the books written well after the close of the year and not writing the books in the course of his business. If the income had to be assessed under section 145 of the Act, then the presumption would be that the income was not properly returned, as held by Hon’ble jurisdictional High Court in CIT vs. Chandra Vilas Hotel,291 ITR 202(Guj) and levy of penalty has to be upheld. In view thereof, reliance on behalf of the assessee on the decision in Shivlal Tak(supra) is totally misplaced.

8.51 Likewise in Shivnarayan Jamnalal & Co.(supra) Hon’ble MP High Court held that that there was no fraudulent attempt on the part of the assessee and the assesse had not withheld or concealed any material or made any deliberate attempt to defraud the authorities. In Reliance Petro Products(supra),penalty was imposed for claiming expenditure on account interest on the loans incurred by the assessee by which amount the assessee purchased some IPL shares by way of its business policies. Hon’ble Apex Court held that merely because the assessee had claimed the expenditure, which claim was not accepted or was not acceptable to the Revenue, that by itself would not attract the penalty under Section 271(1)(c). In Indian Metal & ferro Alloys Ltd(supra) , the assessee claimed depreciation and development rebate etc., in year before commencement of production. Hon’ble Orissa High Court held that the Tribunal was justified in deleting penalty under s. 271(1)(c) levied for making a wrong claim , the claim being bona fide. As is apparent from the facts in the cited decisions, these decisions are not of any help to the assessee since facts in the case under consideration are quite at variance with the facts in the cited decisions. In the instant case,the assessee was year after year inflating expenses in the books written well after the close of the year and not writing the books in the course of his business. Had there been no survey, true income would have not come to light .This is not a case of mere omission or negligence. Thus, reliance on the said decisions is totally misplaced. Moreover, in this connection observations of the Hon’ble Supreme Court in the case of CIT Vs. Sun Engineering Works Pvt. Ltd. , 198 ITR 257 are relevant when the Hon’ble Supreme Court observed:

“It is neither desirable nor permissible to pick out a word or a sentence from the judgment of this court, divorced from the context of the question under consideration and treat it to be the complete ” law ” declared by this court. The judgment must be read as a whole and the observations from the judgment have to be considered in the light of the questions which were before this court. A decision of this court takes its colour from the questions involved in the case in which it is rendered and, while applying the decision to a later case, the courts must carefully try to ascertain the true principle laid down by the decision of this court and not to pick out words or sentences from the judgment, divorced from the context of the questions under consideration by this court, to support their reasonings. In Madhav Rao Jivaji Rao Scindia Bahadur v. Union of India [1971] 3 SCR 9; AIR 1971 SC 530, this court cautioned (at page 578 of AIR 1971 SC).”

8.52 In view of the aforesaid decision, the reliance by the ld. AR on various decisions referred to above is totally misplaced.

8.6 In the case of CIT v. Prathi Hardware Stores [1993] 203 ITR 641 (Ori.), Hon’ble Orissa High Court have laid down the following proposition of law:

i). explanation to section 271(1)(c) is the rule of evidence.

ii) . the initial burden of rebuttal is on the assessee because the basic facts are within the special knowledge of the assessee. Section 106 of the Indian Evidence Act., 1872 gives statutory recognition to this universally accepted rule of evidence.

iii) there is no discretion on the Assessing Officer as to whether he can invoke the Explanation or not.

8.7 In the case of Usha Fertilisers vs. CIT,269 ITR 591(Guj), while upholding

the levy of penalty, Hon’ble jurisdictional High Court observed that

“…….The Supreme Court in the case of Mussadilal Ram Bharose [1987] 165 ITR 14 has specifically laid down the scope of the Explanation in the following words:

“The position, therefore, in law is clear. If the returned income is less than 80 per cent, of the assessed income, the presumption is raised against the assessee that the assessee is guilty of fraud or gross or willful neglect as a result of which he has concealed the income but this presumption can be rebutted. The rebuttal must be on materials relevant and cogent.”

As to what could be the explanation by which the assessee can rebut the

presumption raised against it, is stated by the apex court in the same decision in the following words while confirming the view expressed by the Full Bench of the Patna High Court in the case of CIT v. Nathulal Agarwala and Sons [1985] 153 ITR 292:

“The Patna High Court emphasised that as to the nature of the explanation to be rendered by the assessee, it was plain on principle that it was not the law that the moment any fantastic or unacceptable explanation was given, the burden placed upon him would be discharged and the presumption rebutted we agree. We further agree that it is not the law that any and every explanation by the assessee must be accepted. It must be an acceptable explanation, acceptable to a fact finding body. We are aware that it would not be possible for the High Court to enter into a fact finding exercise or reappreciate the evidence and we do not propose to do so. However, at the same time, it is apparent that the burden which is cast on the assessee remains undischarged when one applies the principles laid down by the apex court. As observed, the explanation has to be one which is not fantastic or unacceptable. It is not the law that any and every explanation by the assessee must be accepted. ………………….”

8.8 There is no substance in the contention that penalty under section 271(1)(c) of the Act cannot be imposed in all circumstances whenever the income is assessed on estimate rejecting the explanation of the assessee. Even on estimated additions, levy of penalty has been upheld.[CIT Vs. Warast Hussain,171 ITR 405(Patna), Commissioner Of Income-Tax, Tamil Nadu I, Madras. vs E. V. Rajan,151 ITR189(Mad), Commissioner Of Income-Tax.vs Hoshiarpur Express Transport Co. Limited.,162 ITR 393(Punjab & Haryana), Commissioner Of Income-Tax.vs Fazilka Dabwali Transport Co. Pvt. Limited,178 ITR 656, (Punjab & Haryana), Addl. CIT vs. Chndrakantha & another,205 ITR 607(MP) ,AM Shah & Co. vs. CIT,238 ITR 415(Guj),CIT Vs. Krishnaswamy & Sons,219 ITR 157(Mad.),Addl. CIT Vs. Lakshmi Industries & Cold Storage Co. Ltd.,146 ITR 492(All) and CIT Vs. Swarup Cold Storage & general Mills,136 ITR 435(All.)].

8.9 Even the feeble plea on behalf of the assessee that penalty has been initiated for concealment of income while has been levied for furnishing inaccurate particulars of thereof is not correct since both the AO and the ld. CIT(A) have levied penalty because the assessee concealed his income by claiming inflated expenditure i. e furnishing inaccurate particulars of such claim of expenditure. The ld. CIT(A) held that the assessee had deliberately manipulated its books of account in such afashion that there was no other way but to estimate the income of the assessee and that the assesseee concealed his income by claiming the inflated expenditure in his books of accounts. We agree with the ld. CIT(A) that this was not a case of pure and simple estimation but a case of estimation for the reason that the expenditure claimed was deliberately inflated and there were various wrong claims.

8.10 In the light of the discussion made above, it is thus clear that all the material facts and particulars relating to the assessee’s computation of income were never disclosed by the assessee, and it is further clear that the explanation offered by the assessee has not been substantiated and as well as it is not found to be plausible and bona fide one and it is against all human probabilities, especially when the conduct of the assessee shows that he has been inflating expenses and had been writing books well after the close of the year not only in the year under consideration but even in the preceding three assessment years also. In this view of the matter and in the light of decisions of the Hon’ble Supreme Court and jurisdictional High Court referred to above, we are of the opinion that the assessee has not been able to discharge the burden that lay upon him by Explanation 1 to s. 271(1)(c) of the Act. We, therefore, have to uphold the order of the CIT(A) in confirming the penalty imposed by the AO under s. 271(1)(c) of the Act and we accordingly uphold the same. However, quantum of penalty may be reworked in the light of our decision dated 24.3.2009 in ITA no.545/Ahd./2006.

9. In the result, appeal is dismissed. Order pronounced in the open court today on 31-05-2010