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The Finance Act, 1996
The Income- Tax Act, 1995
Cit, Ernakulam vs P.K. Noorjahan (Smt) on 15 January, 1997
The Taxation Laws (Amendment) Act, 2001
Section 40 in The Income- Tax Act, 1995

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Kerala High Court
Commissioner Of Income-Tax vs K.P. Madhusudanan on 27 January, 2000
Equivalent citations: 2000 246 ITR 218 Ker
Author: A Pasayat
Bench: A Pasayat, K Radhakrishnan

JUDGMENT

Arijit Pasayat, C.J.

1. At the instance of the Revenue, the following' questions have been referred under Section 256(1) of the Income-tax Act, 1961 (in short "the Act"), by the Income-tax Appellate Tribunal, Cochin Bench (in short "the Tribunal") :

"1. Whether, on the facts and in the circumstances of the case, the Tribunal is, right in law and fact, in deleting the penalty levied under Section 271(1)(c) of the Income-tax Act ?

2. Whether, on the facts and in the circumstances of the case, the Tribunal is right in law and fact, in holding that this is an agreed assessment on the basis of which penalty is not levaible ?

3. Whether, on the facts and in the circumstances of the case, the Tribunal is right in law and fact, in holding that penalty cannot be levied as

the Assessing Officer in the proposal under Section 271(l)(c) had not referred to Explanation KB) to Section 271(l)(c) ?"

2. The factual position, as borne out from the statement of case, is as follows : For the assessment year 1986-87, the assessee, a partnership firm, filed its return of income on April 22, 1987, admitting a total income of Rs. 6,76,890. The Assessing Officer completed the assessment determining total income at Rs. 7,90,170 including Rs. 93,000 as income under the head "Other sources". The assessee, in the course of its business, received rice mostly from suppliers from Andhra Pradesh, who sent the goods either directly or by raising hundis. When hundis were raised, the assessee honoured them by making payment through local banks. When goods were sent directly, payments were made either by demand draft or by telegraphic transfers through local banks. During the course of assessment proceedings, the Assessing Officer noticed that some of the demand drafts purchased and telegraphic transfers made by the assessee were not entered in its cash book on the dates on which they were purchased or made, as the case may be. The payments were found to have been accounted by the assessee's suppliers on the respective dates. The assessee purchased a demand draft of Rs. 50,000 on January 27, 1986, from the State Bank of India, Calicut, in favour of Sree Jayalaxmi Enterprises, Byravapatanam, Andhra Pradesh. A copy of the assessee's account furnished by Sree Jayalaxmi Enterprises confirmed this payment. But, in the assessee's accounts, this amount was entered only on February 4, 1986, when there was sufficient cash balance. Similarly, the assessee transferred a sum of Rs. 1 lakh by telegraphic transfer through Andhra Bank, Calicut, on March 24, 1986 to Madavenkataratanam and others, Bhimavaram, Andhra Pradesh. This transaction was found entered only on April 24, 1986, when the assessee had sufficient cash balance. When these discrepancies were pointed out to the assessee, it submitted a letter on August 28, 1989, stating that as sufficient cash balance was not available on the dates of transactions, It had obtained hand loans from a few friends and as it was confident of repaying such loans within a short time, no entries were made in the books of account for such loans. It was stated that being unable to furnish evidence for such loans, it offered the amount as additional income. Taking into account deficiency in cash balance, the assessee agreed for an addition of Rs. 93,000 to cover such deficiency. The assessment was finalised, as indicated above, treating Rs. 93,000 as "unexplained investment". Penalty proceedings were initiated under Section 271(1)(c) of the Act. The Assessing Officer noticed that when the assessee had purchased a demand draft of Rs. 50,000 on January 27, 1986, it had a cash balance of only Rs. 26.876. The transaction was entered on February 4, 1986, when the assessee had sufficient cash balance. In the books of account between January.27, 1986, and February 4, 1986, the lowest cash balance of

Rs. 10,568 was on January 30, 1986. On that basis, deficiency of cash balance was worked out at Rs. 39,432. So far as telegraphic transfer of Rs. 1 lakh on March 24, 1986, is concerned, the cash balance on that date was Rs. 67,967. The said transaction was entered on April 24, 1986. Taking" into account the cumulative minimum balance available with the assessee, deficiency was worked out at Rs. 36,519. The total deficiency on January 27, 1986 and March 24, 1986, thus arrived at was Rs. 75,951. The Assessing Officer noticed that the assessee had no explanation for the deficit except stating that it had taken hand loans from a few friends and proper entries were not made in the books of account. It was observed that if in reality the assessee had taken hand loans, it would not have been difficult to identify such persons and to produce them for examination. The assessee's explanation was, therefore, clearly untenable and the assessee accepted it to be "unexplained investment" and offered for addition of Rs. 93,000 by its letter referred to above. Applying Explanation 1(B) of Section 271(1)(c), penalty of Rs. 37,975 i.e., the minimum penalty leviable, was levied. In appeal before the Commissioner of Income-tax (Appeals), Calicut (in short "the CIT(A)"), the assessee contended that it had agreed for addition of the amount in question as it was not able to prove the credits and since the assessment has been completed on agreed basis, penalty was not leviable. The Commissioner of Income-tax (Appeals) did not accept this contention. In second appeal before the Tribunal, the stand of the assessee was that since an addition was made on agreement, penalty under Section 271(1)(c) was not leviable. Reference was made to a decision of the apex court in Sir Shadilal Sugar and General Mills Ltd. v. CIT [1987] 168 ITR 705. It was also submitted that the assessee was not intimated about the Assessing Officer's proposed action to apply Explanation 1(B) to Section 271(1)(c) and, therefore, levy was improper. Reliance was placed on the decision of the Bombay High Court in CIT v. P. M. Shah [1993] 203 ITR 792 to substantiate this stand. Accepting the assessee's plea, penalty was cancelled by the Tribunal. The Revenue moved for a reference which was accepted and the questions have been referred as indicated above.

3. In support of the application, counsel for the Revenue submitted that in Sir Shadilal's case [1987] 168 ITR 705 (SC), it has not been laid down as a general proposition of law that whenever an addition has been made "on agreement", penalty cannot be levied. On the contrary, that is a factor which goes to show that true and correct accounts have not been maintained and there has been concealment. Additionally, there is no requirement in law to intimate the assessee that Explanation 1(B) to Section 271(1)(c) was to be applied. Counsel for the assessee, on the other hand, submitted that merely because the assessee had offered an amount to be added as income from other sources, that does not necessarily bring in application of Section 271(1)(c) of the Act and the ratio in Sir Shadilal's

case [1987] 168 ITR 705 (SC) has been rightly applied. Further, it is submitted that in order to justify initiation of penalty proceedings with reference to Explanation 1(B) to Section 271(l)(c), a clear indication has to be given to the assessee in that regard and, therefore, the decision of the Bombay High Court in CIT v. P. M. Shah [1993] 203 ITR 792 has been rightly applied.

4. The first question that needs to be adjudicated is whether any penalty can be levied in a case where assessment has been made by accepting the stand of the assessee that it was unable to explain sources and the amount offered may be added as income from other sources. In Sir Shadilal's case [1987] 168 ITR 705 (SC) what the apex court observed was that there may be several reasons for which the assessee may have offered the amount for addition, but that itself is not sufficient to infer concealment. It has not laid down as a rule of general application that whenever such is the case, penalty cannot be imposed. On the contrary, in such cases also the assessee is required to discharge the burden placed by the Explanation appended to Section 271(1)(c). In case an explanation is offered, the Assessing Officer has to examine it and find out whether the assessee has been able to establish that there was no concealment. The presumption that arises in view of the introduction of the Explanation is a rebuttable presumption that there was concealment of income ; if the materials placed in support of the explanation are acceptable, then presumption would not stand. As observed by the apex court in CIT v. Mussadilal Ram Bharose [1987] 165 ITR 14 and CIT (Addl.) v. Jeevan Lal Sah [1994] 205 ITR 244, if the returned income is less than 80 per cent, of the assessed income, a presumption is raised against the assessee that it is guilty of fraud or wilful neglect as a result of which it was concealed income. But, this presumption can be rebutted. The same can be done by placing on record materials relevant and cogent. It is for the fact finding body to judge the relevancy and sufficiency of the materials.

5. At this juncture, it is necessary to refer to the legislative history so far as Section 271(l)(c) is concerned. There are three stages of amendment of Section 271(l)(c) till the period with which this case is concerned. The periods are (a) prior to April 1, 1964, (b) April 1, 1964 to March 31, 1976, and (c) after April 1, 1976. Originally, the word "deliberately" existed, which was omitted by the Finance Act, 1964, with effect from April 1, 1964. An Explanation was inserted at the end of Sub-section (1) of Section 271 by the said Finance Act (Section 40 of the Finance Act, 1964). In between by the Finance Act, 1968, the base for levy of penalty became the amount of concealment as against the quantum of tax sought to be avoided under the then existing provisions. Subsequently, further amendments were brought by the Taxation Laws (Amendment) Act, 1975 (Section 61 of the said amending Act). Four Explanations were submitted for the Explanation introduced by the Finance Act, 1964. The effect of the said amendment is that where, in respect of the facts material to the computation of total income of the assessee, he furnishes no explanation, or he cannot substantiate the explanation offered by him, or the explanation offered by him is found to be false, relevant income shall be deemed to be his concealed income. Another change was the base for levy of penalty for concealment. The base which was made, viz., the concealed income, was again changed to tax sought to be evaded. We are not very much concerned with other changes. The effect of the amendment with effect from April 1, 1976, is that a deeming provision was introduced. At the relevant time, Section 271(1)(c), so far as relevant, reads as follows :

"271. (1) If the Income-tax Officer or the Appellate Assistant 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 twice 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 : Provided that, if in a case falling under Clause (c}, the amount of income (as determined by the Income-tax Officer on assessment) in respect of which the particulars have been concealed or inaccurate particulars have been furnished exceeds a sum of twenty-five thousand rupees, the Income-tax Officer shall not issue any direction for payment by way of penalty without the previous approval of the Inspecting Assistant Commissioner.

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 Income-tax Officer or the Appellate Assistant Commissioner to be false, or

(B) such person offers an explanation which he is not able to substantiate,

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 :

Provided that nothing contained in this Explanation shall apply to a case referred to in Clause (B) in respect of any amount added or disallowed as a result of the rejection of any explanation offered by such

person, if such explanation is bona fide and all the facts relating" to the same and material to the computation of his total income have been disclosed by him."

6. The question of onus is of primary and added importance in legal acrimony. In CIT v. Anwar Ali [1970] 76 ITR 696, the apex court laid down that, before a person could be visited with a penalty for concealment, etc., the Revenue must prove that the amount in question was the income of the assessee and that he had concealed it with a motive. It was further held that penalty could not be imposed merely because any explanation given by the assessee in regard to the items in question was not believed to be true. The position of law on or after April 1, 1976, is that where, in respect of any item of credit, (a) the assessee fails to offer an explanation, or (b) the assessee offers an explanation which the taxing officer considers to be false, or (c) the assessee offers an explanation but no material or evidence to substantiate it, he shall be deemed to have concealed such income within the meaning of Section 271(1)(c). What Sections 68, 69, 69A. 69B and 69C deem for the purpose of assessment was injected for the purpose of penalty by operation of a deeming provision. A proviso was added to the new Explanation. It concerns cases where the assessee offers an explanation which he is not able to substantiate. Consequentially, the provision is intended to save such amount from imposition of penalty, although the same had been added to the assessee's income in the assessment, if the assessee's explanation is found to be bona fide and all the facts relating to the same and material to the computation of his total income have been disclosed by him.

7. Section 271(1)(c) is attracted where, in the course of any proceedings under the Act, the Assessing Officer or the first appellate authority is satisfied that (a) any person has concealed the particulars of his income, or (b) has furnished inaccurate particulars of such income. The expressions "has concealed" and "has furnished inaccurate particulars" have not been defined either in the section or elsewhere in the Act. However, notwithstanding differences in the two circumstances, they lead to the same effect, viz., keeping off a certain portion of income. The former is direct while the latter may be indirect in its execution. The word "conceal" is derived from Latin word "concelare" which implies "to hide". In Webster's New International Dictionary, the word has been equated "to hide or withdraw from observation ; to cover or keep from sight; to prevent discovery of ; to withhold knowledge of". There may be cases where the facts may attract both the offences, and in some cases there may be overlapping of the two offences.

8. If in the facts and circumstances of a particular case and on the materials before it, the Tribunal reaches a conclusion that concealment was not proved, it is a question of fact and no question of law arises from such

order. Similarly, whether the burden in a given case has been discharged on a set of facts or not is a question of fact. Where a finding of fact arrived at by the Tribunal is based on no material or is perverse or is based on irrelevant, extraneous or inadmissible considerations or is arrived at by application of wrong principles of law, a question of law arises. Where the Tribunal fails to arrive at its own conclusion of fact after due and proper consideration of the entire materials for and against the assessee and cancels penalty, a question of law arises. Similar is the case where the conclusions of the Tribunal suffer from infirmity on account of relevant materials and evidence being ignored.

9. A conspectus of the Explanation added by the Finance Act, 1964, and the subsequent substituted Explanations makes it clear that the statute visualised the assessment proceedings and penalty proceedings to be wholly distinct and independent of each other. In essence, the Explanation (both after 1964 and 1976) is a rule of evidence. Presumptions which are rebuttable in nature are available to be drawn. The initial burden of discharging the onus of rebuttal is on the assessee. The rationale behind this view is that the basic facts are within the special knowledge of the assessee. Section 106 of the Indian Evidence Act, 1872, gives a statutory recognition to this universally accepted rule of evidence. There is no discretion conferred on the Assessing Officer as to whether he can invoke the Explanation or not. Explanation 1, which primarily concerns the case at hand, automatically comes into operation when, in respect of any facts material to the computation of total income of any person, there is failure to offer an explanation or an explanation is offered which is found to be false by the Assessing Officer or the first appellate authority, or an explanation is offered which is not substantiated. In such a case, the amount added or disallowed in computing the total income is deemed to represent the income in respect of which particulars have been concealed. As per the provisions of Explanation 1, the onus to establish that the explanation offered was bona fide and all facts relating to the same and material to the computation of his income have been disclosed by him will be on the person charged with concealment. Mere failure to substantiate the explanation is not enough to warrant penalty. The Revenue has to establish that the explanation offered was not substantiated. The provisions of Explanation 1 are concerned only with cases coming under Clause (B) of the Explanation, where the assessee offered an explanation which he was not able to substantiate. The explanation of the assessee for the purpose of avoidance of penalty must be an acceptable explanation ; it should not be a fantastic or fanciful one. As indicated above, the consequence follows as a matter of law. The burden is on the assessee. If he fails to discharge that burden, the presumption that he had concealed the income or furnished inaccurate particulars thereof is available to be drawn.

10. The principal logical import of the Explanation is to shift the burden of proof from the Revenue on to the assessee. The rebuttal must be on materials relevant and cogent. It is for the fact-finding body to judge the relevancy and sufficiency of the materials. If such a fact-finding body, bearing the aforesaid principles in mind, comes to the conclusion that the asssessee has discharged the onus, it becomes a conclusion of fact, and no question of law arises. As observed earlier, the initial burden is on the assessee. Once the initial burden is discharged, the assessee would be out of mischief unless further evidence is adduced. It is plain on principle that it is not the law that the moment any fantastic or unacceptable explanation is offered, the burden placed would be discharged and the presumption rebutted. As pointed out by the apex court in Mussadilal Ram Bharose's case [1987] 165 ITR 14, the burden placed upon the assessee is not discharged by any fantastic explanation. It must be an explanation acceptable to the fact finding body.

11. The position on and after April 1, 1976, is clear that where, in respect of any item of credit, the assessee has offered an explanation which the Taxing Officer has considered to be false or the assessee has offered an explanation but no material or evidence to substantiate it, he shall be deemed to have concealed such income within the meaning of Section 271(l)(c). In the case at hand, no explanation worth the name was offered by the assessee. The statement was to the effect that hand loans were obtained which were intended to be refunded immediately and, therefore, the entries were not made. But, later on, the arrangement did not work out and, therefore, the amount was offered for taxation. There was a clear admission that the entries were not made on the relevant dates. It is not a case where entries were made on the relevant dates, and the source of money was omitted. The entries on the contrary were made on dates when there was sufficient cash balance. The intention to hide the actual state of affairs is clear. The explanation offered had no semblance of acceptability, was fanciful and vague. The Tribunal clearly erred in law by misreading the position of law stated in Sir Shadilal's case [1987] 168 ITR 705 (SC). Its conclusion that the assessment having been made on the basis of addition offered by the assessee, no penalty is imposable is indefensible.

12. In the aforesaid background, the Assessing Officer is not obliged to intimate the assessee that Explanation 1 to Section 271(1)(c) is proposed to be applied. The scheme of the provisions does not provide for such a requirement either directly or inferentially. With great respect, we are unable to agree with the view expressed in P. M. Shah's case [1993] 203 ITR 792 (Bom). The Tribunal was, therefore, not justified in its conclusion that the order imposing penalty was vitiated because the Assessing Officer did not bring to the notice of the assessee that he proposed to rely on Explanation 1 to Section 271(1)(c). The provision raises only a rebuttable

presumption which the assessee is required to rebut by placing materials on record.

13. Since both the grounds on which the Tribunal relied to cancel penalty are unsustainable, the inevitable conclusion is that the Tribunal was not justified in directing cancellation of penalty.

14. The questions are, therefore, answered in the negative, in favour of the Revenue and against the assessee.