# COMMISSIONER OF INCpME 1AX, MADRAS ' v. MIS. KHODAY ESWA~A & SONS 'September '22, ·197'1

- **Citation:** [1972] 1 S.C.R. 846
- **Court:** Supreme Court of India
- **Decided:** 1972
- **Case number:** Civil Appeal No. 648 of 1967
- **Bench:** C. A. Vaid!Alinga¥, P. !AGANMOHA\" RtooY~
- **Source:** https://unisonlegal.in/judgment/supreme-court-of-india/commissioner-of-incpme-1ax-madras-v-mis-khoday-eswa-a-sons-september-22-197-1-5477
- **Pages:** 8

## Headnote

Income-tax ;J.ct (Il of 1922), s. 2B(-l.)(c)-Levy,of pe11alty-;--Ri!asons
.in assesSment proceedings-Weight to' be, attached to. 1
1
In income-tax. proceedli1gs to_ the tax~ble 'income s.hown <'by the _respondent in its return two items amoitg-Oth~ \Ver& added ton .the .basis
th_at
there were illicit S'af~S of alcohol anQ that -cer.tain.- sales had not· been properly ·accounted 'for:\ Jbereafter, the Income-t4x Officer, Special Investigation Circle, issued notice that ... he proposed
1to h;vy
a penalty
μnder
s. 28(1)(r.) of the lnc'ome-tax Act, 1922, as ,the respondent bad concealed particulars of its income and 'deliberately ~furni~l'led inaccurate parti-·
culars.
He rejected the explanation of th~ ass:!ssee and levied a penalty.
In the order levying penalty the Incorne-tax Offi~er st:1ted that the reasoi1s -
for adding_ the disputed amounts in the total income of the assessee had
been already discussed in the original order 6f assessment and that there
was no need to repeat them.
The AppelJate Assistant Commissioner
in
appeal confirmed the penalty.
His approach to the case \Vas riot different
and was based upon a guess that because there were many contiguous dry
areas the ·respondeht would have surtepti~iously sold alcohol: The APpt;:llatc Tribunal considered the circumstances
under which
the
additions
came to be made by the ·Department in the assyssment J>roceedings. and
the various points which were 'prcsSc'ct hefore it &nd the Appellate Assistant
Commissioner on behalf of the assessee, and held that 'though there might
be certain Poubtfut transactions it could not be stated that asscssec had
made· any deliberate attempt at concealm~nt regarding its pharmaceutical
section, and that, though there might be justification for making additions
in the original assessment order thos·e additions. by themselves Could not
lead to the conclusion that the respondent had concealed its income or
that it h3d furnished deliberately inaccurate particulars.
On the basis of
tho~e findjngs the AppellateL Tribunal set aside the order levying penalty.
TheTeafter, the Appellate Tribunal, holding thit the reasons given by it
for setting aside the penalty proceedings
were all based on findings
of
fact and that no question o.f law' arose out of those findings, rejected an
application by the appellant for re'ferring the question as to whether the
'Appellate Tribunal ·was right in cancelling the oenalty.
The appellant
then filed an application under s. 66(2)> of the Act but the High Court
dismissed it on the same ground.
'
DismiSsing the appeal,
HELD : The penalty, p'roceetjings being penal: in character the Denart-
~ent must es~blish that the receipt of the amOU'Q-t iri dtspute constiiutes
income of the assessee.
Apart from the falsity of any explanation g:iven
by the assessee. the J?epartment must
have before
it, before levying: a
penalty, cogenl ln<l:tenal or evidence from ~ 1hich, it could he inferred that
the· asse~see had consciously concealed the· particulars of his income or
had dehberat_ely
fu~n_ished inaccurate particulars.
The original
asses~~
!'lent proceeding for computing the tax is evidence in the penalty procced1~g, b~t the pe~a~ty cannot be levied solely on the basis
of the reasons
g1ven:.m the original assess{llent order. [853 B-D]
'A
B
c
-
~:: -
D
E
F
G
H
A
II
c
D
E
C.I.T. v. KHODAY & SONS (Vaidialingam, J.)
847
Jn the present case, except the reasons given in the original assessment
order for including the disputed items in the total income, the Department
had no othe'f material or evidence
from which
it could be reasonably
inferred that the assessee had consciously concealed particulars of
his
income or had deliberately furnished inaccurate particulars.
The Appellate Tribunal made a correct and judicial
approach in considering
the
question whether the penalty provisions were attracted as against the respondent.
The conclusions drawn by the Appellate Tribunal \Vere findings
of fact recorded against the Department.
Since on those

## Text

846
COMMISSIONER OF INCpME 1AX, MADRAS
'
V.
MIS. KHODAY ESWA~A & SONS
'September '22, ·197'1
[C. A. VAID!ALINGA¥ AND P. !AGANMOHA\" RtooY~ JJ.]
Income-tax ;J.ct (Il of 1922), s. 2B(-l.)(c)-Levy,of pe11alty-;--Ri!asons
.in assesSment proceedings-Weight to' be, attached to. 1
1
In income-tax. proceedli1gs to_ the tax~ble 'income s.hown <'by the _respondent in its return two items amoitg-Oth~ \Ver& added ton .the .basis
th_at
there were illicit S'af~S of alcohol anQ that -cer.tain.- sales had not· been properly ·accounted 'for:\ Jbereafter, the Income-t4x Officer, Special Investigation Circle, issued notice that ... he proposed
1to h;vy
a penalty
μnder
s. 28(1)(r.) of the lnc'ome-tax Act, 1922, as ,the respondent bad concealed particulars of its income and 'deliberately ~furni~l'led inaccurate parti-·
culars.
He rejected the explanation of th~ ass:!ssee and levied a penalty.
In the order levying penalty the Incorne-tax Offi~er st:1ted that the reasoi1s -
for adding_ the disputed amounts in the total income of the assessee had
been already discussed in the original order 6f assessment and that there
was no need to repeat them.
The AppelJate Assistant Commissioner
in
appeal confirmed the penalty.
His approach to the case \Vas riot different
and was based upon a guess that because there were many contiguous dry
areas the ·respondeht would have surtepti~iously sold alcohol: The APpt;:llatc Tribunal considered the circumstances
under which
the
additions
came to be made by the ·Department in the assyssment J>roceedings. and
the various points which were 'prcsSc'ct hefore it &nd the Appellate Assistant
Commissioner on behalf of the assessee, and held that 'though there might
be certain Poubtfut transactions it could not be stated that asscssec had
made· any deliberate attempt at concealm~nt regarding its pharmaceutical
section, and that, though there might be justification for making additions
in the original assessment order thos·e additions. by themselves Could not
lead to the conclusion that the respondent had concealed its income or
that it h3d furnished deliberately inaccurate particulars.
On the basis of
tho~e findjngs the AppellateL Tribunal set aside the order levying penalty.
TheTeafter, the Appellate Tribunal, holding thit the reasons given by it
for setting aside the penalty proceedings
were all based on findings
of
fact and that no question o.f law' arose out of those findings, rejected an
application by the appellant for re'ferring the question as to whether the
'Appellate Tribunal ·was right in cancelling the oenalty.
The appellant
then filed an application under s. 66(2)> of the Act but the High Court
dismissed it on the same ground.
'
DismiSsing the appeal,
HELD : The penalty, p'roceetjings being penal: in character the Denart-
~ent must es~blish that the receipt of the amOU'Q-t iri dtspute constiiutes
income of the assessee.
Apart from the falsity of any explanation g:iven
by the assessee. the J?epartment must
have before
it, before levying: a
penalty, cogenl ln<l:tenal or evidence from ~ 1hich, it could he inferred that
the· asse~see had consciously concealed the· particulars of his income or
had dehberat_ely
fu~n_ished inaccurate particulars.
The original
asses~~
!'lent proceeding for computing the tax is evidence in the penalty procced1~g, b~t the pe~a~ty cannot be levied solely on the basis
of the reasons
g1ven:.m the original assess{llent order. [853 B-D]
'A
B
c
-
~:: -
D
E
F
G
H
A
II
c
D
E
C.I.T. v. KHODAY & SONS (Vaidialingam, J.)
847
Jn the present case, except the reasons given in the original assessment
order for including the disputed items in the total income, the Department
had no othe'f material or evidence
from which
it could be reasonably
inferred that the assessee had consciously concealed particulars of
his
income or had deliberately furnished inaccurate particulars.
The Appellate Tribunal made a correct and judicial
approach in considering
the
question whether the penalty provisions were attracted as against the respondent.
The conclusions drawn by the Appellate Tribunal \Vere findings
of fact recorded against the Department.
Since on those findings of fact
no question of law arose the High Court \\1as
justified in rejecd ng
the
application filed by the appellant under s. 66(2) of the Act. [852 B-E]
853 E-F]
Conunissioner of lnco111e-tax West Bengal-I v. Anwar Ali, [1970] 76
l.T.R. 696, followed.
CIVIL APPELLATE JURISDICTION:
Civil Appeal No. 648 of
1967.
Appeal by .special leave from the judgment and order dated
October 3, 1966 of the Mysore High Court in Civil Petition No.
10 of 1966.
R. H. Dhebar and J. Ramamurthi, for the appellant.
The respondent did not appear.
The Judgment of the Court was delivered by
Vaidialingam, J.
This appeal, by special leave, by the
Commissioner of Income-tax, Madras, is against the judgment and
order dated October 3, 1966 of the High Court otMysore, rejecting th.~ appellant's application filed under s. 66 (2) of the Jncometax Act, 1922 (hereinafter to be referred as the Act) for directing
the Income-·tax AppelJate Tribunal, Madras Bench to refer the
question of law to the High Court.
The question of law, which the appellant wanted to be referred
F
was:
G
H
"Whether on the facts and in the circumstances of
the case the Appelhrte Tribunal was right in cancelling
the penalty of Rs. 35,000 levied under section 28 ( 1) ( c)
of the Indian Income-tax Act, 1922."
Tb~ respondent was a firm carrying on business of manufacturing silk, carbon papers, type-writer ribbons, liquor, spiriturous drugs and chemicals etc.
In respect of the assessment year
1955-56, •the respondent had sent a return showing Rs. 51,214 as
taxable income.
On looking into the accounts and other records,
the Income-tax Officer made sevei:al additions to the amount shown
in the return and ultimately fixed the total assessable income in
the 'sum of Rs. 3,30,474.
On ap~al, the amount was reduced
and the taxable income was fixed in the sum of Rs. 2,09,575.
In
the further appeal by the assessee to the Appeliate Tribunal, there
848
SUPREME COURT REPORTS
[1972] 1 s.c.R.
was no alteration in this figure.
Only two items which were added
A
to the income and which have been accepted by all the authorities
required to be nO'ticed.
They are :
Pharmaceuticals, section-Rs. 77,518.00
Chemicals section-Rs. 9,900.00.
Relating to the pharmaceuticals section, it is the view of the
Income-tax Officer that some of the sale bills produced by the respondent were found to be forged ones and some of the purchasers
of tincture were also fictitious persons.
Th~re was no evidence
produced by the assessee to show that the Kolae powder, which
was very essential for the manufacture of tincture had been purchased by it.
Hence the Income-tax Officer drew an inference
that the respondent had not really manufactuf"A tincture and that
on the other hand the firm must have sold all alcohol i!licitly.
lt was on 1this basis that the Income-tax Officer held that the
assessee must be considered to have omitted to show the sum of
B
c
Rs. 77,588.
Similarly, regarding chemical section, the Income0
tax Officer found that the respondent has not accounted for a part
of sale of Bthyl Acetate and tha1 on verification it was found that
there has been a large deficit of rectified spirit.
On this basis the
Income-tax Officer drew an inferehce that the firm has' again secreted a large quantity of rectified spirit under the cloak of manufacture of chemicals.
On the ground tha't certain sales had not
been properly ac:counted for, the sum of Rs. 9,900 was added to
E
the taxabfo income of the assessee. It was on the above basis that
the two items were included in rthe total assessable income of the
assessee firm.
These reasons given by the Income-tax Officer have been, by
and large, accepted by the Appellate Assistant Commissioner and
the Income-tax Appellate Tribunal.
The Income-tax Officer, SpeF
cial Investigation Circle A, Bangalore issued a notice under s.
28 ( 1) to the respondent that it has concealed the particulars of
its income and deliberately furnished inaccurate particulars in respect of the above amounts added 1to the. total income and that the
Income-tax Officer proposed to levy a penalty under s. 28 (l)(c)
of the Act.
No doubt, in the notice certain other items, which G
had already been added 1o the total income were also referred to.
But those items have been deleted from the penalty proceedings
by the
App·~llate Assistant Commissioner.
Therefore,
we are
only concerned with the two items, referred 'to earlier.
The assessee sent a reply stating that it has not concealed the
particulars of its income nor has it deliberately furnished inaccuH
rate particulars of such income.
The explanation offered by the
assessee was not accepted by the Income-tax Officer, and the latter .
A
B
c
D.
E
F
G
H
C.I.T. v. KHODAY & SONS (Vaidialingam, J.)
849
by his order dated February 15, 1963 imposed a penalty of
Rs. 35,000 on the ground that the r.espondent had concealed the
particulars of i'ts income.
That amount of penalty was levied by
the Income-tax Officer on the ground that over and above· the two
items .:dating to the Pharmaceuticals and Chemical sections, there
has been a concealment of three more items totalling Rs. 32,267.
They were:
Silk. business; shortage in twisted silk yarn-Rs. 14,545.00
Shortage in Artificial silk
Rs.
3,434.00
Carbons; Unaccounted consumption
Rs. 14,288.00
It was on this basis that the to'~al penalty was levied.
On appeal to the Appellate Assistant Commissioner, the latter,
no doubt deleted these 'ihree i~~ms totalling Rs. 32,267 from the
penalty proceedings, but confirmed the order of the Income-tax
Officer regarding the two other items holding 'that the omission by
the assessee to include the said two items amounted to the firm
concealing particulars regarding its income und·~r s. 28 (1 )( c) of
the Act.
The penalty amount levied by the Income-tax Officer
was also confirmed.
Though the Appellate Assistant Commissioner reduced the quantum of concealment-even assuming 'that
there has been a concealment-he did not make any P~duction
in the penalty actually levied by the Income-tax Officer.
The assessee carried the matter in appeal bdore the Incometax Appellate Tribunal, Madras 13.'!nch.
The main grievance
made by the assessee was that there has been no independent consideration by the Income-tax Officer or the Appellate Assistant Commissioner whether even on the basis that •there has bo~en an Omission by it to include certain items in its return, such omission came
within s. 28 ( 1) ( c) of •the Act, so as to attract the levy of penalty.
The assessee also contended that both the Income-tax Officer and
the Appellate Assistant Commissioner hav·~ mainly relied on the
reasons given
in the order of
assessment for
adding these
two items in the total income.
According to the assessee there
has been no proper exercise of jurisdiction under s. 28 of the
Act.
The Income-tax Appellate Tribunal by its ord·~r dated November 13, 1964 set aside the order of the Income-tax Officer as confirmed by the Appella•te Assistant Commissioner levying penalty
on the respondent.
The Commissioner of Income-tax filed an application under s.
66 (1) of the Act, requiring th.e Appellate Tribunal to draw up
850
SUPREME COURT REPORTS
[1972] l S.C.R.
a statement of <the case and refer the question extracted in the ·~ar
lier part of the judgment, to be referred to the High Court.
The
Appellate Tribunal by its order dated June 7, 1965 ro~jected the
said application on the ground •that the ri;asons given by it for setting aside the penalty proceedings were all based on findings of
fact and that no question of law arose out of those findings.
The appellan~ filed an application before the High Court of
Mysore, under s. 66(2) for directions being issued to the Appellate Tribunal to state the case and refer the question of Jaw, which
the Appellate Tribunal has refused to refer.
A Division Bench
of the High Court by its order dated October 3, 1966 dismissed
-the appellanfs application on ,he ground that the finding of the
Appellate Tribunal that the Income-tax D.~partment had failed to
prove that the assessee had concealed its income or that it had
delibi;rately furnished inaccurate par1iculars of its income are ati
on facts and that no question of law arises from the order of the
Appellate Tribunal.
Mr. Dhebar, teamed counsel for the appellant, urged that the
order or the High Court is erroneous. ,\ccording to him the view
of the High Court that the conclusions arrived at by the Appellate
Tribunal are all on facts and that no question of law arises, is
•?:-roneous.
The counsel urged that there has been an omission
by the respondent to include in particular two items which are the
subject of penalty proceedings and the order of assessment in that
regard has become fi:'l'al.
Hence it follows that this is a case where
the assessee has concealed the particulars of its income or has
deliberately furnished inaccurate particulars of its income.
Both
the Income-tax Office·· as well as the Appellate Tribunal have in
the penalty proceedings gone elaborately into this asptct before
levying penalty.
The approach made by the AppeJlate Tribunal
when it set aside the orders levying penalty is not justified in law.
·Therefore, he urged tha:t the High Court should have directed the
Appellate Tribu1nal to state a case and refer the question of law
as prayed for by the Appellant.
·
The respondent has not entered appearance before us.
We
have been taken through the e.ntire proceedings leading up to the
order levying penalty.
We have also gone through the reasons
given by the Income-tax Officer for levyi:ng penalty as well as the
order of the Appellate Assistant Commissioner confirming the
same.
We cannot accept the contention of Mr. Dhebar that the
Appellate Tribual has summarily interfered with the orders levying
penalty. We have gone through the order of the Appeilate Tribunal and we find that it has considered the circumstances under
which the additions came to be made by the Department in the
assessment proceedings as well as the points that were pressed
before it, on behalf of the assessee as well as the Appelate As~istant
A
B
c
D
E
F
G
H
A
B
c
D
E
F
C.l.T. I'. KHODAY & SONS (Vaidialingam, J.)
851:
Commissioner. It is the view of the Appellate Tribunal that the·
Department has not established that the, assessee has not manufactu;cd tincture and that il had sold only' alcohol.
This conc:usion
arrive::l at by the Income-tax Officer in the penalty proc~.::dings is,
according to the Appellate Tribunal, purely one of conjecture or
surmise.
The Appellate Tribunal, no doubt, was ptepared 10
<:cccpt ;he contention of the Department that there wetc a lot of
doubtful circumstances.
Notwithstanding· these circunbtances the
Appeiiate Tribunal is of the view that when admitted,y there me
Excise au:horities in the. premises of the respondent, it is very.
dift1cuit to hold that those officers would have permitted the assessee
1.0 utilise the alcohol for other purposes. The Appellate Tribunal
has also hc:d that even the sale bills produced by the respondent,
contain the proper permit numbers given by the Excise autlmrities
and th.u the Income-tax Department have not made any inquiries
from ;he Excise authorities whether those reievant sales luvc been
maclc without their authorisation.
The Appe:late Tribuna! has
further held that th.~re is no stock discrepancy in Kola Liquidum
if the transactions ar-~ considered as a whole for the entire period.
Therefore, regarding Pharmaceuticals section the Appellate Tribunal finally held that though ·there may be certain doubtful transactions. it cannO't be stated that th.~ assessee has made any deliberate
attempt at concealment. Regarding ·the Chemical section. the Appeliate Tribunal is of the view that though there may be justification
for making additions in the original assessm·~nt order to ·the amount
shown in the return. those additiom by themselves cannot lead to
the cone lusion that the respondent has concealed its income or •that
it has furnished deliberately inaccurate particulars.
It was on 'the basis of these findings that the Appellate Tribunal
has se·~ aside the order ].~vying penalty.
One thing that strik·~s us when going through the order of the
Income-tax Officer levying penalty and the or<le.r of the Appellate
Assistant Commissioner confirming the said levy, is that there is
not much of an ind.~pendent discussion regarding the material
question that has to be considered, namely, whether the firm has
G
concealed the particulars of rts income or whether it has deliberately furnished inaccurnte particulars of sucb_ incom~. On the other
hand, the Income-tax Officer after refering to the explanation furnished by the assessee to the show cause notice, clearly says that
the facts rela._ting to the unaccounted items have been fully discussed
already in the relevant assessm~nt orders for the concerned assessH
ment year and that the reasons given therein need not be repeated
again.
Then there is only a very summary disposal of •the plea
raised by the respondent that he has not concealed the particulars
of his income, nor has it delibertely furnished inaccurate particulars
852
SUPREME COURT REPORTS
[1972] I S.C.R.
<>fits income. The approach made by the Appellate Assistant Commissioner is not far different from that of the Income-tax Officer.
In fact the Apt:iellate Assistant Commissioner makes a further guess
that in view of the fact that there wern very many dry ,areas bordering Mysore, the respondent would have surreptitiously sold alcohol
that was supplied to it without using it for the purpose of makmg
tincture. It is 1he view of the Appellate Assistant Commissioner
that the mere fact that there are Excise authorities 'to control the
activities of persons like 1he assess.~e, is of no material consequence.
From what we have stated above, it is clear that while there has
been no proper approach made by either the Income-tax Officer
wh~n he levied penalty or by the Appellate Assistant Commissioner
when he confirmed •the order levying penalty, the Appellate TribuC
nal, on the o•ther hand, has made a very correct
~nd judicial
approach in co.nsidering the question whether the penalty provisions
are attracted as against the respondent. After a very fair and full
consideration of the ma•terial circumstances, 1thc Appellate Tribunal
B
has set aside th~ order kvying penalty. As rightly pointed out by
the High Court, the conclusions drawn by the Appellate Tribunal
are all on findings of fact recorded against •the Department. On
those findings of fact, there was no question of law arising for
reference being made to th·~ High Court. Under those circum-.
stances, the High Court was perfoctly justified in rejec•ting the
applica'tion filed by the appellant under s. 66(2) of the Act.
Before we conclude we may refer to the decision of this Court
in Commissioner of Income-tax West Bengal I, and Another v.
Anwar Ali('), wherein it has been held that one of the principal
objects in enacting s. 28 is to provide a deterrent against recurrence
of default on the part of the assesse.~ and th~t s. 28 is penal in the
sense that its conseque.nces are intended to be effective deterrent
which would put a Stop to the practices which the legislatur.~ considers to b~ against rthe public interest.
11 has been· further held
that the Deparcment must establish that the receipt of the amount
in dispU'te constitu'tes the income of the assessee and if there is
no evidence .on record except the explanation given by the assessee,
which exp1anation has been found to be false, it do·~s not follow
that the receipt constitutes its taxable income. It has been further
held that as the proceedings under s. 28 are of a penal nature and
the burden is on th.~ Department •that a particular amoun1t is revenue
receipt, it is leg_itimat·~ to say that the mere fact that the explanation
of the assessee is false, does not necessarily give rise to the inference
that the dispu'ted amount represents the income. It has been pointed
•out in the said decision that the finding given in the assessment pro-
·ceeding for det•~rmining or compu1ing the tax is not conclusive
[l970J 761.T.R. 696.
D
E
F
G
H
\
A
B
c
D
E
F
- '
G
C.I.T. v. KHODAY & SONS (Vaidialingam, !.)
853
though it may be good evidence.
~t has been further held by this
Court in the a.bove decision :
"Before penalty can be imposed the entirety of circumstanc~s must reasonably point to the conclusion that
the disputed amount represented income and that the
assessee J;iad consciously concealed the particulars of his
income or had deliberately furnished inaccurate particulars."
From the above it is clear that penalty proceedings being penal
in character, th<~ Department must establish that the receipt of the
amount in dispute constitutes income of the assessee. ApaL1 from
the falsity of the explanation given by the assessec, 'the Department
must have before it before levying penalty cogent material or evidence from which it could be inferred that tire assessee has consciously concealed the particulars of his income or had deliberately
furnished inaccurn,e particulars in respect of the same and that
the dispu1ed amount is a revenue receipt. No doubt the original
assessment proceedings, for computing the tax may be a good il•~m
of evidence in the penalty proceedings; but th.e penalty cannot be
levied solely on 'the basis of the reasons given in the original order
of assessment.
In the caso~ before us we have already pointed out that in the
order levying penalty the Income-tax Officer has categ9rically stated
that the reasons for adding the dispu'ted amounts in the total income
of the assessee have been already discussed in 1he original order
<;if assessment and that they need not be repeated again.
Tm~ Appellate Assistant Commissioner, we have already pointed out, has
made only a guess work. Th<it clearly shows that except the re_asons
given in the original assessment order for including the disputed
items in the total income, the Department had no other material
or evidence from which it could be reasonably inferred that the
assessee had consciously concealed ithe particulars of his income
or had deliberately furnished inaccurate particulars.
For all the reasons given above, it follows that there is no merit
in the appeal and it is accordingly dismissed.
As the respondent
has not appeared, th·~re will be no order as to costs.
V.P.S.
Appeal dismissed.