BHAILAL MANILAL PATEL V. COMMISSIONER OF INCOME-TAX

ITR/18/1999

AI Insights

The case revolves around the imposition of a penalty under Section 271(1)(c) of the Income Tax Act, 1961, following a protective assessment order concerning unexplained investments in promissory notes. The Income Tax Appellate Tribunal referred the matter to the High Court to determine whether the tribunal was correct in law in holding that the penalty was rightly levied. The assessee, Bhailal Manilal Patel, had declared certain promissory notes as his unexplained income, which were initially assessed protectively. The main legal contention was whether a penalty could be levied on a protective assessment. The High Court, referencing decisions from the Calcutta High Court and its own previous rulings, concluded that while protective assessments may be permissible, the initiation of penalty proceedings based on such assessments is not, as it lacks the requisite satisfaction of concealment of income in the hands of the assessee.

• Counselvise Citation: [2014] 140 COUNSELVISE.COM (IT) 692600 (HC-GUJARAT)
• Appeal Type: Others
• Pronouncement Date: 23-06-2014
• Assessment Year: misc
• Other Referred Cases: Commissioner of Income Tax Vs. Super Steel (Sales) Co., Commissioner of Income Tax Vs. Bankim J. Shah
• Laws Referred To: Income Tax Act, 1961
• Result in Favour of: Others
• Court: HIGH COURT
• Department Lawyers: MANISH BHATT
• Assessee Lawyers: M S WADIA GHANDY CO ADVOCATE
• Keywords: Penalty; Promissory notes; Protective assessment; Substantive assessment; Unexplained investment
• Section: 148; 271(1)(c); 69; 132(1); 132(4); 132(5); 147(a); 132(7)

Judgement Text

"O/ITR/18/1999 JUDGMENT IN THE HIGH COURT OF GUJARAT AT AHMEDABAD INCOME TAX REFERENCE NO. 18 of 1999 FOR APPROVAL AND SIGNATURE: HONOURABLE MR.JUSTICE M.R. SHAH and HONOURABLE MR.JUSTICE K.J.THAKER ====================================== 1 Whether Reporters of Local Papers may be allowed to see the judgment ? YES 2 To be referred to the Reporter or not ? YES 3 Whether their Lordships wish to see the fair copy of the judgment ? NO 4 Whether this case involves a substantial question of law as to the interpretation of the Constitution of India, 1950 or any order made thereunder ? NO 5 Whether it is to be circulated to the civil judge ? NO ====================================== BHAILAL MANILAL PATEL....Applicant(s) Versus COMMISSIONER OF INCOME-TAX....Respondent(s) ====================================== Appearance: M/S WADIA GHANDY & CO, ADVOCATE for the Applicant(s) No. 1 MR MANISH BHATT, ADVOCATE for the Respondent(s) No. 1 ====================================== CORAM: HONOURABLE MR.JUSTICE M.R. SHAH and HONOURABLE MR.JUSTICE K.J.THAKER Date : 23/06/2014 Page 1 of 15 O/ITR/18/1999 JUDGMENT ORAL JUDGMENT (PER : HONOURABLE MR.JUSTICE M.R. SHAH) 1. The present Reference, at the instance of the assessee, has been referred by Income Tax Appellate Tribunal (hereinafter referred to as ‘the tribunal’) to consider the following substantial question of law; “Whether, on the facts and in the circumstances of the case, the tribunal was right in law in holding that the penalty was rightly levied under Section 271(1)(c) of the Income Tax Act, 1961?” 2. That for the Assessment Year 1987-88 the assessee filed the return declaring the income at Rs.78,790/- on dated 15/07/1987 and the same was accepted by the Department in the assessment order dated 18/03/1988. It appears that the Directorate of the Revenue (Intelligence) conducted the search in the premises of one Shri Jitendra R. Patel on 21/03/1988 and during the course of the search a briefcase containing promissory notes of Rs.37,65,000/- was found. Simultaneously, the Department also searched his premises under Section 132(1) of the Income Tax Act (hereinafter referred to as ‘the Act’) and the said promissory notes were seized by the Department. During the course of the search, Shri Jitendra R. Patel claimed that the briefcase containing promissory notes did not belong to him and was claimed to have been given to him for safe custody by Shri Dhanveer J. Patel, his brother-in-law. The Department therefore conducted the search in the premises of Shri Dhanveer J. Patel on Page 2 of 15 O/ITR/18/1999 JUDGMENT 21/03/1988 itself and during the course of the search he admitted that the said briefcase containing promissory notes was given by him to Shri Jitendra R. Patel for safe custody. He also admitted that the said promissory notes belonged to his family consisting of his father, grandfather, uncle etc. The assessse, is the grandfather of Shri Dhanveer J. Patel. The assessee also came to be examined under Section 132(4) of the Act on 22/03/1988 and in the statement recorded he admitted that the said promissory notes worth Rs.37,65,000/- belonged to him individually and the same were given by him to his grandson, Shri Dhanveer J. Patel fifteen days back for safe custody. He also admitted that the entire investment in the said promissory notes was unexplained and unaccounted. The assessee thereafter on 30/03/1988 made a disclosure petition to the Commissioner of Income Tax, Ahmedabad offering the entire amount of unexplained investment in promissory notes to be treated as income under Section 69 of the Act, which aggregates to Rs.37,65,000/- and sought immunity from penalty under Section 271(1)(c) of the Act as per Explanation 5 to that Section. Subsequently, the assesse claimed that one promissory note dated 20/05/1982 of Rs.2 lakhs belonged to M/s. J.D. Patel & Co. and, therefore, he offered the balance amount of Rs.33,65,000/-. The assessee then filed the return for the Assessment Year 1986-87 disclosing the income of Rs.5,60,677/-, (inclusive of Rs.5,00,000/- on account of investment in promissory notes) on 22/08/1988. Similarly, for the Assessment Year 1987-88 the assessee filed the return on 02/09/1988 declaring the income at Rs.23,28,793/-, inclusive of the amount of Rs.22,50,000/- invested in the promissory notes. Consequently, the Assessing Officer took action under Section 147(a) and issued notices Page 3 of 15 O/ITR/18/1999 JUDGMENT under Section 148 of the Act for the Assessment Year 1986-87 on 09/09/1988 and for the Assessment Year 1987-88 on 13/10/1988. The same was replied by the assessee vide letter dated 21-09-1988 / 27-09-1988 stating that the returns filed by him disclosing the said amount be treated as the return filed in compliance with the notices issued under Section 148. Thereafter, the Assessing Officer passed protecting assessment order. (There is a serious dispute whether the original order passed by the Assessing Officer can be said to be a protective assessment order or a substantive assessment order, which shall be dealt with hereinafter). However, it is required to be observed that the assessment order, during the course of the assessment proceedings, specifically noted that the said promissory notes were found and seized from the residence of Shri Jitendra R. Patel but on account of the claim made by him about its ownership and the statement recorded during the search of Dhanveer J. Patel and the assessee, there was found to be inconsistency and variation in respect of the ownership of the said promissory notes. According to the Assessing Officer, proper verification in respect of correct ownership was not possible because the promissory notes did not show the name of the real owner. By observing so, the Assessing Officer observed that the income by way of unexplained investment in the promissory notes is assessable under Section 69 of the Act and the same be assessed in the hands of the assessee as a protective measure. The Assessing Officer further observed that the said protective assessment shall be treated as substantive assessment if and when the income by way of unexplained investment in promissory notes worth Rs.37,65,000/- is finally excluded from the income of Shri Jitendra R. Patel. The Assessing Officer also further Page 4 of 15 O/ITR/18/1999 JUDGMENT observed that similarly if the said unexplained investment in the promissory note is included in the income of Shri Jitendra R. Patel, it will accordingly be excluded from the income of the assessee-Shri Bhailal M. Patel. The Assessing Officer computed the income of the assessee accordingly and passed an order to initiate the proceedings for penalty under Section 271(1)(c) of the Act in respect of the income of Rs.5 lakhs. 2.1. It appears that thereafter proceedings under Section 271(1)(c) of the Act came to be initiated treating the assessment order passed by the Assessing Officer as substantive assessment order. The Assessing Officer vide order 28/03/1990 levied the penalty on the aforesaid amount of Rs.5 lakhs under Section 271(1)(c) of the Act. 2.2. Being aggrieved and dissatisfied with the order of penalty levied/imposed by the Assessing Officer, the assessee preferred appeal before the Commissioner of Income Tax (Appeals) and the Commissioner of Income Tax (Appeals) allowed the appeal by quashing and setting aside the order imposing penalty under Section 271(1)(c) of the Act for both the years i.e. Assessment Years 1986-87 and 1987-88. 2.3. Being aggrieved and dissatisfied with the order passed by the Commissioner of Income Tax (Appeals) in deleting the penalty imposed by the Assessing Officer, the revenue preferred appeal before the tribunal and prayed to treat the order of assessment passed by the Assessing Officer as substantive assessment order. The tribunal vide impugned judgment and order quashed and set aside the order passed by the Commissioner of Income Tax (Appeals) deleting the Page 5 of 15 O/ITR/18/1999 JUDGMENT penalty and restored the order passed by the Assessing Officer imposing penalty/levying the penalty under Section 271(1)(c) of the Act. Thereafter, at the instance of the assessee, the present Reference is referred by the tribunal to consider the aforesaid question of law. 3. Ms. Gargie Vyas, learned advocate appearing on behalf of the assessee has vehemently submitted that the tribunal has materially erred in treating the order passed by the Assessing Officer as substantive assessment order. It is further submitted that as such in the assessment order itself the Assessing Officer has specifically mentioned that the order of assessment is a protective assessment order. It is submitted that in fact in view of the different stand taken by different persons with respect to ownership of the promissory notes worth Rs.37,65,000/-, the Assessing Officer specifically observed that assessee is assessed by the protective assessment measure. It is further submitted that in the operative portion of the order, while passing the order to initiate the proceedings under Section 271(1)(c) of the Act, the Assessing Officer specifically observed that the penalty proceedings under Section 271(1)(c) of the Act are to be initiated in respect of the amount of Rs.5 lakhs, which has been assessed as protective measure. It is submitted that therefore when the assessment order was passed by the Assessing Officer as protective assessment, in that case, initiation of the proceedings under Section 271(1)(c) of the Act itself was bad in law and not permissible. It is submitted that therefore when the protective assessment order was passed by the Assessing Officer no order of penalty can be levied as it is not certain that the amount on which the penalty is sought Page 6 of 15 O/ITR/18/1999 JUDGMENT to be levied would be in the hands of the assessee or not. It is submitted that therefore, on facts, the tribunal has materially erred and has committed a grave error of law in treating the assessment order as substantive assessment order and not treating it as protective assessment order. 3.1. In support of her above submission, Ms. Vyas, learned advocate appearing on behalf of the assessee has heavily relied upon the decision of the Calcutta High Court in the case of Commissioner of Income Tax Vs. Super Steel (Sales) Co. reported in (1989) 178 ITR 451. 3.2. She has also heavily relied upon the unreported decision of this Court in the case of Commissioner of Income Tax Vs. Bankim J. Shah rendered in ITR No. 117/1979 by which a view has been taken by this Court that no penalty proceedings under Section 271(1)(c) can be initiated in the protective assessment order. By making the above submissions, it is requested to quash and set aside the order passed by the tribunal and to answer the question in favour of the assessee and against the revenue. 4. Shri Manish Bhatt, learned Counsel appearing on behalf of the revenue has submitted that in the facts and circumstances of the case the tribunal has not committed any error in treating and/or considering the assessment order as substantive assessment order and not accepting the case on behalf of the assessee that the order passed by the Assessing Officer was a protective assessment order. It is submitted that in the present case, though the Assessing Officer might have observed loosely in the order that the assessee is protectively Page 7 of 15 O/ITR/18/1999 JUDGMENT assessed, however, in substance, the order of assessment was a substantive assessment order. It is submitted that as such as per the assessment order, the assessee paid the tax treating the unexplained promissory notes worth Rs.37,65,000/- in his income. It is further submitted that the assessee himself after the search admitted that the said promissory notes were belonging to him and in fact he requested to include the same in his income in different years. It is submitted that not only that subsequently he also made a statement to reduce Rs.2 lakhs, which belonged to some other person. It is submitted that therefore when the assessee himself asked to treat the promissory notes in his income, the assessment order is a substantive assessment order. It is submitted that therefore on the facts and in the circumstances of the case, the decision of this Court as well as the Calcutta High Court relied upon by the learned advocate appearing on behalf of the assessee would not be of any assistance to the assessee and the same would not be applicable to the facts of the case on hand. Making the above submissions, it is requested to dismiss the present Reference and answer the question in favour of the revenue and against the assessee. 4.1. In the alternative, Shri Bhatt, learned Counsel appearing on behalf of the revenue has requested to remand the matter to the tribunal by submitting that nothing is on record whether the amount of promissory notes, which were found from the premises of Shri Jitendra R. Patel was included in the income of Shri Jitendra R. Patel or not. It is submitted that therefore unless and until the said factual aspects comes on record that in fact the amount of promissory notes were considered, included and/or excluded in the income of Shri Jitendra R. Patel Page 8 of 15 O/ITR/18/1999 JUDGMENT or not, as per the assessment order passed by the Assessing Officer and unless the said amount is included in the hands of Shri Jitendra R. Patel the assessment order is to be treated as substantive assessment order. By making the alternative submission, it is requested to remand the matter to the tribunal so that the aforesaid factual aspects can be considered. 5. Heard the learned advocates appearing on behalf of the respective parties. The short question, which is posed for consideration of this Court is, whether the Assessing Officer was justified in imposing/levying penalty under Section 271(1) (c) of the Act? It is the case on behalf of the assessee that the assessment order passed by the Assessing Officer was a protective assessment order and, therefore, the Assessing Officer as such could not have passed an order to initiate the penalty proceedings under Section 271(1)(c) of the Act and the Assessing Officer could not have levied the penalty under Section 271(1)(c) of the Act on the basis of the protective assessment order. On the other hand, it is the case on behalf of the revenue that, as such and so held and observed by the tribunal that the assessment order passed by the Assessing Officer was in substance a substantive assessment order and not protective assessment order as contended by the assessee, the Assessing Officer was justified in levying/imposing the penalty under Section 271(1)(c) of the Act and, therefore, while considering the aforesaid question, it is required to be considered whether the assessment order passed by the Assessing Officer was in substance a substantive assessment order as held by the tribunal or a protective assessment order as contended by the assessee. Page 9 of 15 O/ITR/18/1999 JUDGMENT Therefore, the entire issue will be based upon the fact whether the assessment order was protective assessment order or substantive assessment order. From the assessment order, it appears that the Assessing Officer has specifically observed as under; “The unexplained and unaccounted promissory notes under consideration were found and seized from the residence of Shri Jitendra R. Patel who had claimed that these promissory notes belong to Shri Dhanveer J. Patel, who had given these to him for safe custody. It was confirmed by Shri Dhanveer J. Patel that he gave the said promissory notes to Shri Jitendra R. Patel but he had stated that the promissory notes belong to his father, mother, grandfather and uncles etc. The assessee, Shri Bhailal M. Patel had subsequently claimed that he was the individual owner of all the promissory notes worth Rs.37,65,000/-. This version has also been amended and it has been claimed that M/s. J.B. Patel & Co. in which he has 1/8 interest and remaining promissory notes worth Rs.35,65,000/- belong to him. Thus, there has been considerable inconsistency and constant variation in respect of ownership of unaccounted for and unexplained promissory notes. Proper verification regarding correct ownership is not possible because the promissory notes worth Rs.35,65,000/- do not show who is the real owner. An order under Section 132(5) was passed in respect of above promissory notes in the case of Shri Jitendra R. Patel in which unexplained investment in promissory notes was held to be assessable as income of Shri Page 10 of 15 O/ITR/18/1999 JUDGMENT Jitendra R. Patel. An order under Section 132(5) read with Section 132(7) has been passed in the case of Shri Bailal M. Patel on 15/07/1988 in which income under Section 69 of the Act by way of unexplained investment in promissory notes has been held to belong to Shri Bhailal M. Patel as a protective measure. Considering various aspects of the case, the income by way of unexplained investments in promissory notes, assessable under Section 69 of the Income Tax Act, is assessed in the hands of the present assessee as a protective measure. This protective assessment shall be treated as substantive assessment if an when income by way of unexplained investment in promissory notes worth Rs.37,65,000/- is finally excluded from income of Shri Jitendra R. Patel. Similarly, if such income is finally sustained in the assessment of Shri Jitendra R. Patel it will be accordingly excluded from the income of Shri Bhailal M. Patel” 5.1. It is also required to be noted at this stage that while passing the order to initiate the penalty proceedings under Section 271(1)(c) of the Act the Assessing Officer specifically observed that the penalty under Section 271(1)(c) of the Act be initiated in respect of income of Rs.5 lakhs, which has been assessed as protective measure. 5.2. Under the circumstances, we are of the view that the assessment order passed by the Assessing Officer was as such a protective assessment order and the same cannot be termed as substantive assessment order as observed and held by the Page 11 of 15 O/ITR/18/1999 JUDGMENT tribunal. 5.3. The contention on behalf of the revenue that the assessee himself accepted that the seized promissory notes worth Rs.37,65,000/- belonged to him and the same may be included in his income is neither here nor there. What is required to be considered is how the Assessing Officer has considered the same and whether he has accepted the case of the assessee or not and whether he has passed the substantive assessment order or not. As observed hereinabove, it appears that the Assessing Officer has not accepted the statement of the assessee in toto. From the assessment order, it appears that as such the Assessing Officer was not sure with respect to the ownership of the promissory note worth Rs.37,65,000/- and, therefore, he has specifically observed that the income by way of unexplained investment in the promissory note is assessed in the hands of the assessee as protective measure. It is further observed that the said protective assessment shall be treated as substantive assessment if and when income by way of unexplained investment in promissory note worth Rs.37,65,000/- is finally excluded from the income of Shri Jitendra R., Patel and vice versa makes it very much clear that the assessment order passed by the Assessing Officer was a protective assessment order and the same cannot be termed and/or treated as substantive assessment order as observed by the tribunal. 5.4. Under the circumstances, we are of the opinion that the tribunal has materially erred in treating the assessment order as substantive assessment order without properly appreciating the order passed by the Assessing Officer and it is to be held Page 12 of 15 O/ITR/18/1999 JUDGMENT that the assessment order as such was a protective assessment order. 5.5. Now in view of the aforesaid finding that the assessment order passed by the Assessing Officer was a protective assessment order, whether the Assessing Officer was justified in directing to initiate the penalty proceedings under Section 271(1)(c) of the Act and consequently was justified in levying the penalty under Section 271(1)(c) of the Act is concerned, there can be protective assessment but there cannot be protective penalty. It cannot be disputed that before any penalty can be levied the income has to be assessed as concealed income in the hands of the assessee. Where there is dispute as to whether such income allegedly concealed would be assessed in the hands of the assessee, unless the determination is made by the Assessing Officer, no charge of concealment can be made against the person in whose hands income is added on protective basis and the assessee is liable only if it is his income, which has been concealed. In other words the only person upon whom the substantive assessment is made would be liable for penalty, provided the conditions precedent for the imposition of the penalty are satisfied. 5.6. Under the circumstances, unless and until the substantive assessment is made and final assessment order is passed in case of the assessee adding the income in the hands of the assessee, even the initiation of the penalty proceedings are not permissible. There cannot be any initiation of the penalty proceedings with respect to the protective assessment order. The aforesaid is supported by the decision of this Court in the case of Bankim J. Shah (Supra). In the said case also Page 13 of 15 O/ITR/18/1999 JUDGMENT penalty was sought to be levied under Section 271(1) of the Act on the protective assessment and to that it is held that there cannot be any protective initiation of the penalty proceedings. It is further observed and held that in a given case a particular income belong to A or B and although the Income Tax Officer reaches to the conclusion that the said income belongs to one of them, he may make protective assessment on the other hearing regard to the fact that the matter was likely to be carried in appeal. It is observed that such a protective assessment may be permissible under the law but there cannot be protective initiation of the penalty proceedings. It is further observed that as such the basis or foundation for initiation of the penalty proceedings is the requisite satisfaction as provided in Section 271(1) of the Act and as such satisfaction could not be reached when the Income Tax Officer himself believes that the income for which the assessee is charged for concealment or furnishing of inaccurate particulars does not belong to him and he is assessed only as a protective measure. 5.7. Even the same view has been taken by the Calcutta High Court in the case of Super Steel (Sales) Co. (Supra). 6. Under the circumstances, the tribunal has materially erred in in treating the order passed by the Assessing Officer as substantive assessment order. 7. Now so far as the prayer to remand the matter to the tribunal to assess the factual aspects whether the promissory notes are to be included and/or excluded in the income of Shri Jitendra R. Patel or not, as per the assessment order passed Page 14 of 15 O/ITR/18/1999 JUDGMENT by the Assessing Officer is concerned, the same is rejected and consequently the question referred to this Court is held in favour of the assessee and against the revenue. (M.R.SHAH, J.) (K.J.THAKER, J) Siji Page 15 of 15 "