THE COMMISSIONER OF INCOMETAX vs. M/S.BACHU & CO., CALICUT

The assessee filed return declaring income of Rs.1,32,227/- and Rs.3,80,000/- for the assessment years 1988-89 and 1990-91 respectively. The business premises of the assessee, who was engaged mainly in distribution of edible oil, was searched on 18/08/1990. During the course of search, the authorised officer seized a sum of Rs.8,35,000/- and issued prohibitory order under Section 132(3) for freezing the bank deposits totaling Rs.12,25,000/-. Even though, originally, after search, income for -2- the assessment year 1988-89 was determined at Rs.19,83,770/-, the same was set aside by the Commissioner of Income Tax (Appeals) and the assessment was remitted back for re- assessment. The Assessing Officer appointed an auditor, and got the assessee's accounts audited by him, under Section 142(2A) of the Act. In the audit report submitted by the said auditor, he had brought out some points of discrepancies, suppressions and defects in the accounts. The Assessing Officer, on the basis of the audit report, refixed the income at Rs.28,56,700/-. However, in the appeal filed by the assessee, the Commissioner of Income Tax (Appeals) reduced the estimation of income at Rs.6,00,000/- as against Rs.1,32,227/- returned by the assessee.

For the assessment year 1990-91, the return itself was filed after the date of search and assessee has returned an income of Rs.3,80,000/-. According to the report of the auditor appointed by the Assessing Officer under Section 142(2A) of the IT Act, the taxable income of the assessee should be Rs.9,00,833. 36. However, the Assessing Officer, based on the materials available, such as investments, difference in credit balance in the account etc. estimated the income at Rs.1,36,69,740/-. The appeal filed against -3- the assessment was substantially allowed by the Commissioner of Income Tax (Appeals) by re-fixing the income at Rs.10,00,000/-.

The assessee as well as the Department accepted the assessment modified by the CIT(Appeals) in first appeal, whereunder he refixed the income at Rs.6,00,000/- and Rs.10,00,000/- respectively for the assessment years 1988-89 and 1990-91 as against the income returned at Rs.1,32,227/- and Rs.3,80,000/-. It is seen that the income re-fixed by the Commissioner (Appeals) for the assessment year 1988-89 is over four times the income returned by the assessee and for the assessment year 1990-91 it is about three times the income returned by the assessee. It is pertinent to note that the return for the year 1990-91 was filed after the search wherein irregularities were noticed and the Assessing Officer took action for seizure of cash and freezing the bank account. Assessee raised objection against notice issued under Section 271(1)(c) proposing to levy penalty for the concealment of income. However, the Assessing Officer overruled the objection and imposed penalty of Rs.1,40,000/- and Rs.2,00,000/- for the assessment years 1988-89 and 1990-91 respectively. The penalty levied is not in excess of the -4- minimum penalty that could be levied under Section 271(1)(c) of the Income Tax Act. The appeals filed by the assessee against imposition of penalty were allowed by the CIT(Appeals) holding that no concealment was established when assessments were modified by the CIT (Appeals) by estimating income. The appeals filed by the Revenue before the Income Tax Appellate Tribunal against the above CIT (Appeal)'s order were unsuccessful and hence these Income Tax Appeals are filed by the Revenue before this Court under Section 260A of the Income Tax Act.

Even though several questions are raised in the appeals, we find the substantial question arising from the order of the Tribunal is whether the Tribunal was justified in confirming the order of the CIT(Appeals) in cancelling the penalty. Penalty is imposed on the basis that there was difference between income assessed and the income returned which is concealed income by virtue of operation of Explanation 1B to Section 271(1)(c) of the Act if the assessee fails to offer any explanation.

Learned senior counsel for the revenue relied on the decisions of the Supreme Court in K.P.Madhusudhanan Vs. Commissioner of Income Tax, reported in 251 ITR 99, and that -5- between the income assessed and the income returned by the -6- assessee, even though Explanation 1B to Section 271(1)(c) is not specifically referred to by him. As per the decision above referred, the Supreme Court has clearly stated that the explanation is part of the Section and when notice is issued proposing penalty, it is for the assessee to defend the case with reference to the provisions of the section under which penalty is proposed, which includes explanation IB to Section 271(1)(c). Admittedly, assessee's accounts were unreliable and the same rather stands accepted by the assessee itself. During search, the Assessing Officer has established bogus credit entries and suppression of accounts and the same were re- confirmed in the audit report obtained by the Assessing Officer by appointing an auditor under Section 142(2A) of the Act. Similarly, the Assessing Officer established a case of unexplained investment in the name of the partners, relatives and unexplained expenditure by them. Even though the assessments were modified in appeal by cancelling the specific additions but by estimating income, the net