Full Judgment Text
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CASE NO.:
Appeal (civil) 6465 of 2000
PETITIONER:
M/S. K.P. MADHUSUDHANAN
Vs.
RESPONDENT:
COMMISSIONER OF INCOME TAX, COCHIN
DATE OF JUDGMENT: 21/08/2001
BENCH:
S.P. Bharucha, Y..K. Sabharwal & Brijesh Kumar
JUDGMENT:
Bharucha, J.
The High Court answered in the negative and in favour of
the Revenue the following questions :
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 I.T. 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
leviable?
3. Whether, on the facts and in the
circumstances of the case, the Tribunal is right
in law and facts, in holding that penalty cannot
be levied as the assessing officer in the proposal
under Section 271(1)(c) had not referred to
Explanation (1B) to Section 271(1)(c)?
The assessee is in appeal by special leave.
For the assessment year 1986-87 the assessee, which is a
partnership firm, filed a return of income which stated that its
total income was Rs.6,76,890/-. The assessment was completed
determining the total income of the assessee at Rs.7,90,170/-. This
included a sum of Rs.93,000/- assessed as income from other
sources.
The assessee purchased rice from suppliers in Andhra
Pradesh. The rice was some times sent directly and payment
therefor was made by demand draft or telegraphic transfer.
During the course of the assessment proceedings the Assessing
Officer noticed that a demand draft and a telegraphic transfer
were not entered by the assessee in its cash book on the dates on
which the same were purchased and made, respectively. A
demand draft of Rs.50,000/- had been purchased on 27th January,
1986 in favour of M/s. Sree Jayalaxmi Enterprises,
Byravapatanam, Andhra Pradesh, but, in the assessees accounts,
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this amount was entered only on 4th February, 1986. The assessee
had made a telegraphic transfer through the Andhra Bank,
Calicut on 24th March, 1986 to Madavenkataratanam & Others,
Bhimavaram, Andhra Pradesh; this transaction again was entered
only on 24th April, 1986, when these were pointed out to the
assessee, it submitted a letter dated 28th August, 1989 stating that
as sufficient cash balance was not available to it on the dates of the
transactions, it had obtained hand loans from friends and, as it
expected to repay such loans within a short time, no entries were
made in the books of accounts in respect thereof. The letter also
stated that since it was unable to furnish evidence for such loans,
it offered the amount of Rs.93,000/- as additional income. The
assessment was accordingly made treating the sum of Rs.93,000/-
as unexplained investment.
Penalty proceedings were then initiated against the assessee
under Section 271(1)(c) of the Income Tax Act, 1961. The
Assessing Officer found the assessees explanation in regard to the
loans to be unacceptable and noted that it had itself offered the
addition of Rs.93,000/-. Applying Explanation (1B) of Section
271(1)(c), the Assessing Officer imposed upon the assessee the
penalty of Rs.37,975/-.
The appeal filed by the assessee was dismissed. The assessee
then preferred an appeal to the Income Tax Tribunal. The
Tribunal allowed the appeal. Arising out of the order of the
Tribunal the questions noted above were placed for the
consideration of the High Court. The High Court was not
persuaded to agree with the view that had been taken by the High
Court at Bombay in Commissioner of Income-Tax vs. P.M. Shah
(203 ITR 792) in regard to the Explanation to Section 271(1)(c),
and that this is the principal question that we are called upon to
consider.
The relevant portion of Section 271 reads thus :
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 sun 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.
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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 bonafide and all the facts relating
to the same and material to the computation of
his total income have been disclosed by him.
In Commissioner of Income-Tax Vs. P.M. Shah (203 ITR
792) the High Court at Bombay observed that the Explanation to
Section 271(1)(c) created a legal fiction. It was that the assessee
would be deemed to have concealed the particulars of his income
or furnished inaccurate particulars thereof in the circumstances
set out in the Explanation. But for such legal fiction, it could
never have been said that there was any concealment or
furnishing of inaccurate particulars of income simply because the
returned income was less than 80 per cent of the assessed income.
The Explanation shifted the burden of proof on the assessee.
Therefore, it said, when the Explanation is being resorted to by
the Income-tax Officer or by the Inspecting Assistant
Commissioner in penalty proceedings, it is essential that the
assessee must be informed that penalty proceedings against him
are being commenced under the Explanation to Section 271(1)(c).
It added, The Inspecting Assistant Commissioner could not have
proceeded to levy the penalty under the Explanation to Section
271(1)(c) in the absence of any initiation of penalty proceedings
under the Explanation to Section 271(1)(c). These are penalty
proceedings and the section must be strictly construed. The
assessee, in our view, had no opportunity of meeting the case
under the Explanation to Section 271(1)(c).
The Bench of the High Court at Bombay that delivered the
judgment in the case of P.M. Shah followed it in the case of
Commissioner of Income-Tax Vs. Dharamchand L. Shah (204 ITR
462). It said, . in the absence of invoking the
Explanation specifically, the burden would remain on the Revenue
to bring the assessees case within the mischief of the main
provisions of Section 271(1)(c) of the Act.
We find it difficult to accept as correct the two judgments
aforementioned. The Explanation to Section 271(1)(c) is a part of
Section 271. When the Income-tax Officer or the Appellate
Assistant Commissioner issues to an assessee a notice under
Section 271, he makes the assessee aware that the provisions
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thereof are to be used against him. These provisions include the
Explanation. By reason of the Explanation, where the total
income returned by the assessee is less than 80 per cent of the total
income assessed under Sections 143 or 144 or 147, reduced to the
extent therein provided, the assessee is deemed to have concealed
the particulars of his income or furnished inaccurate particulars
thereof, unless he proves that the failure to return the correct
income did not arise from any fraud or neglect on his part. The
assessee is, therefore, by virtue of the notice under Section 271 put
to notice that if he does not prove, in the circumstances stated in
the Explanation, that his failure to return his correct income was
not due to fraud or neglect, he shall be deemed to have conceal the
particulars of his income or furnished inaccurate particulars
thereof and, consequently, be liable to the penalty provided by
that Section. No express invocation of the Explanation to Section
271 in the notice under Section 271 is, in our view, necessary
before the provisions of the Explanation therein are applied. The
High Court at Bombay was, therefore, in error in the view that it
took and the Division Bench in the impugned judgment was right.
Learned counsel for the assessee then drew our attention to
the judgment of this Court in Sir Shadilal Sugar and General
Mills Ltd. & Anr. Vs. Commissioner of Income-Tax, Delhi (168
ITR 705). He submitted that the assessee had agreed to the
additions to his income referred to hereinabove to buy peace and
it did not follow therefrom that the amount that was agreed to be
added was concealed income. That it did not follow that the
amount agreed to be added was concealed income is undoubtedly
what was laid down by this Court in the case of Sir Shadilal Sugar
and General Mills Ltd. and that, therefore, the Revenue was
required to prove the mens rea of a quasi-criminal offence. But it
was because of the view taken in this and other judgments that the
Explanation to Section 271 was added. By reason of the addition
of that Explanation, the view taken in this case can no longer be
said to be applicable.
The appeal is, therefore, dismissed with costs.
..J.
(S.P. Bharucha)
..J.
(Y.K. Sabharwal)
..J.
(Brijesh Kumar)
August 21, 2001