JUDGMENT Satish Chandra, J.
1. Messrs U.P. Tannery Company Private Limited, Kanpur, the assessee, carries on the business of tanning raw hides. For the assessment year 1952-53 the Income-tax Officer levied a penalty of Rs. 44,741 under Section 28(1)(c) of the Indian Income-tax Act, 1922, for default of the assessee in furnishing accurate particulars of income in its original return. The penalty was imposed on account of two items, one of Rs. 1,10,088 and the other of Rs. 4,96,868. The finding was that the assessee had deliberately concealed the particulars of its income in respect of these two items. On appeal, the Appellate Assistant Commissioner held that the explanation of the assessee for non-inclusion of the items of Rs. 1,10,088 was plausible and believable. He, therefore, deleted the penalty in relation to this item. With regard to the other item, namely, of Rs. 4,96,868 he confirmed the finding of the Income-tax Officer that the assessee had been guilty of deliberately furnishing incorrect particulars of its income and as such he imposed a penalty of Rs. 37,500 in relation to it. Both sides went up in appeal to the Tribunal. The Tribunal discussed the matter in detail with regard to the item of Rs. 4,96,868. It gave its finding with regard to the method of accountancy adopted by the assessee. Most of the observations made by the Tribunal are applicable to the item of Rs. 1,10,088 as well. The Tribunal held that:
(1) The past record of the assessee was clean;
(2) There was no motive behind not disclosing true profits deliberately;
(3) The assessee was in the bona fide belief that the profits in question should be transferred to the profit and loss account from the personal account of the customer only in the year 1956 ;
(4) The department had not been able to establish unequivocally concealment or furnishing of inaccurate particulars of income on the part of the assessee ;
(5) The omission was caused because of the complicated system of accounting ;
(6) The assessee offered for taxation the said profits as soon as it was pointed out to it by the company's auditors ;
(7) From the statements giving details of purchases and sales furnished by the assessee it was not possible for the Income-tax Officer to find out the said omission; and (8) The report of the auditors on the balance-sheet as on 31st March, 1952, also supported the case of the assessee.
2. At the instance of the Commissioner of Income-tax the Tribunal has referred the following question of law for the opinion of this court:
"Whether, on the facts and in the circumstances of the case, the finding of the Income-tax Appellate Tribunal is in accordance with law that no penalty is called for under Section 28(1)(c) of the Indian Income-tax Act, 1922, in respect of the items of Rs. 1,10,088 and Rs. 4,96,868 ?"
3. It is true that the Tribunal has not discussed separately the item of Rs. 1,10,088 but the above-mentioned findings are equally applicable to this item as well. They are more or less in affirmation of the finding of the Appellate Assistant Commissioner in regard to the item of Rs. 1,10,088. Having heard learned counsel, we are satisfied that the Tribunal, on the findings reached by it, was justified in affirming the deletion of penalty on the item of Rs. 1,10,088.
4. The case with regard to the item of Rs. 4,96,868, however, stands on a different footing. The method of accountancy adopted by the assessee in regard to sales on consignment basis was that when the goods were sent on consignment basis by the assessee to its customers abroad, provisional bills were made and the amounts were debited in the personal account of the customer with corresponding credit to the sales account. The customer was required to sell the goods abroad and to remit the entire sale proceeds to the assessee which were credited as and when received, to the personal account of the customer. Such entries in regard to the consignment of goods continued to be made till the entire goods were sold and a final account was rendered by the customer. After the entire goods have been sold and the accounts of the customers finalised the credit balance in the personal account of the customers was transferred to the profit and loss account of the company. According to the assessee-company the profits were liable to be included in the return of income in the year in which the transfer was made from the personal account of the customers to the profit and loss account of the company. According to the finding of the Tribunal this system of accountancy led the assessee to returning the said sum of Rs. 1 lakh and odd in the subsequent assessment year, namely, 1952-53. Having been advised that this item is really assessable in the year in question the company filed a revised return on its own.
5. But the position with regard to the item of Rs. 4,96,868 was very different. It appears that the entire sale proceeds had been received by the assessee-company in the year 1952-53 but the balance was not transferred to the profit and loss account. This state of affairs continued in the years 1952-53 to 1955-56, although no fresh amount was received by the assessee. It was for the first time in 1956 that the company's auditors pointed out that the sum of Rs. 4,96,868 was liable to be taxed during the assessment year 1952-53 and in pursuance thereof the company filed a revised return surrendering the said amount for taxation during the assessment year 1952-53.
6. The Appellate Assistant Commissioner had found that the company filed the revised return only after it felt that the Income-tax Officer had discovered an omission of this amount in its original return on an inspection of the whole record. The Tribunal upset this finding on the view that it was not possible for the Income-tax Officer to find out the said omission because the said omission could not be detected from the details of the various items of trading and profit and loss account but only from a comparison of the balance-sheet of a number of years. The Tribunal observed that there was nothing on record to show that the Income-tax Officer compared the balance-sheet of the year under consideration with the balance-sheets for earlier years and found that this balance was being carried forward from year to year in the account of the said customer at London. In this connection, our attention was invited by the learned counsel appearing for the department to the finding of the Appellate Assistant Commissioner. It appears that while scrutinising the accounts of the assessee the Income-tax Officer made the following note on the back of the cover of the balance-sheet:
"Detailed lists of advances from customers to be obtained. It is suspected that constant balances in some accounts have been carried forward representing suppression of sales as was found in Indian National Tannery, a sister concern, under similar circumstances."
7. In view of this, the Income-tax Officer issued notice dated 23rd March, 1956, asking for the details of sales of Rs. 20,000 and the names and addresses of the persons to whom such sales were made. It is not disputed on behalf of the assessee that the Income-tax Officer had made such a note on the balance-sheet of the company. In this view, it cannot be said that there was nothing on the record to show that the Income-tax Officer compared the entries in the present balance-sheet with the balance-sheet of the earlier year. The Income-tax Officer could not have suspected the maintenance of consistent balances unless he had looked into the balance-sheets of more than one year. The Tribunal was in error in holding that there was nothing on record to show that the Income-tax Officer had compared the balance-sheets of more than one year. A perusal of the Tribunal's order shows that this was one of the predominant features which influenced the mind of the Tribunal in coming to the conclusion that the assessee had not submitted inaccurate particulars of its income.
8. The other important matter which influenced the Tribunal related to the auditor's report. In the revised return filed on 6th July, 1956, the assessee gave an explanation that the omission with regard to the sum of Rs. 4,96,868 came to light when the same was pointed out by the auditors. According to the auditors this amount in fact related to the assessment year 1952-53, and, therefore, the assessee-company filed a revised return including this amount in its income although till then it had not been transferred from the personal accounts of the customers to the profit and loss account of the assessee. This explanation proceeded upon the auditor's pointing out the mistake in the return filed by the assessee. The Income-tax Officer asked the assessee to prove its explanation. He asked whether any letter or correspondence was exchanged between the assessee-company and the auditors in this regard. The assessee-company was unable to furnish any such information. When the Income-tax Officer wanted to examine the chartered accountant and ask him whether he had pointed out this defect, the accountant refused to answer on the ground that any correspondence between him and his client was privileged. The position is that the assessee failed to lead evidence to establish its explanation. It was on its being pointed out by the Income-tax Officer that the assessee-company hastened to include this amount in its revised return. In this view, the Appellate Assistant Commissioner found that it was a case of deliberately furnishing inaccurate particulars of income in the return because there was three years' delay in surrendering these profits. The Tribunal, on the other hand, omitted to consider these various aspects of the matter relating to the auditor. It straightaway accepted the asses-
see's contention that, as soon as the auditors pointed out this mistake, it immediately filed a revised return surrendering the sum of Rs. 4,96,868.
On the other hand, we find that the Tribunal had referred to the auditor's report dated 31st March, 1952. That report has nothing to do with regard to the transaction of Rs. 4,96,868. That report would be material, if at, all, to the item of Rs. 1,10,088. The balance of Rs. 4,96,868 remained as such for more than three years and so, even according to the system of accounting adopted by the assessee, it was liable to be transferred to the profit and loss account of the assessee in the year 1952-53. This finding being based on a consideration of irrelevant material and non-consideration of relevant material is in law vitiated.
9. In view of these special features, the fact that the past record of the assessee-company was clean or that there was no motive at all in not dis closing the true profits because the assessee-company had been disclosing its profits for a number of years in the past as well as in the subsequent years in one year or the other became immaterial and irrelevant. In regard to this item it cannot be said that the omission to include it in the original return was because of the complicated system of accounting adopted by the assessee-company or that the assessee knew of this only when the auditor pointed it out.
10. In the result, our answer to the question referred to us is that the find ing of the Tribunal that penalty is not called for under Section 28(1)(c) of the Indian Income-tax Act, 1922, in regard to the item of Rs. 1,10,088 was in accordance with law but the finding with regard to the item of Rs. 4,96,868 was not in accordance with law. In view of divided success we make no order as to costs.