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Commissioner Of Income-Tax, Lucknow v. Swarup Cold Storage And General Mills.

Allahabad High Court

Apr 16, 1982

Judgment

Subsequent
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Structured Summary of the Opinion (Rastogi, J.)

Factual and Procedural Background

The assessment year concerned is 1966-67. The assessee operated a cold storage and ice factory at Moradabad and filed a "duplicate" return on 26 December 1970 declaring a loss of Rs. 51,942. The Income-tax Officer (ITO) had no record of an earlier return and, after issuing a notice under section 142 on 1 September 1970 and calling for books on 15 September 1970, the assessee filed the return only on 26 December 1970. The assessee failed to appear before the ITO on several subsequent notices, and the ITO made an ex parte assessment at a total income of Rs. 85,000. The Appellate Tribunal reduced that assessed income to Rs. 6,700.

Because the income returned was less than eighty percent of the income assessed, the ITO initiated penalty proceedings under section 271(1)(c) read with the Explanation to that sub-section. The Inspecting Assistant Commissioner (IAC) held that the assessee had failed to discharge the onus under the Explanation and levied a penalty of Rs. 60,000. On appeal the Appellate Tribunal deleted the penalty. The Revenue referred two questions to this Court (the High Court) for opinion.

Legal Issues Presented

Whether, on the facts and circumstances of the case, the assessee could be said to have discharged its onus under the Explanation to section 271(1)(c) of the Income-tax Act, 1961?
Whether the Tribunal was justified and had material in deleting the penalty levied by the Inspecting Assistant Commissioner of Income-tax under section 271(1)(c) read with the Explanation thereto?

Arguments of the Parties

Assessee's Arguments

The assessee denied fraud, gross neglect or wilful neglect in filing the return.
It asserted that the return was filed on the basis of the regular books of account maintained by it.
The assessee contended that the difference between the returned income and the ITO's estimate arose because the ITO had made an estimated assessment, and penalties should not be levied in respect of such an estimate.
Before this Court, counsel for the assessee (Sri B.C. Dey) additionally contended that the penalty under clause (iii) of s.271(1)(c) is leviable "in addition to any tax payable by him", and where no tax is payable (as occurred after the Tribunal's determination) the penalty cannot be imposed. The Court declined to decide that question because it was beyond the scope of the referred questions and left it open for the assessee to raise before the Tribunal on remand.

Revenue / Tax Authorities' Position

The IAC held that the assessee failed to discharge the onus placed upon it by the Explanation to section 271(1)(c) and therefore was guilty of concealing particulars of income or furnishing inaccurate particulars; accordingly a penalty was levied.
The Revenue challenged the Tribunal's deletion of the penalty by referring the two specified questions to the High Court.

Table of Precedents Cited

Precedent	Rule or Principle Cited For	Application by the Court
Data Ram Satpal (CIT v. Data Ram Satpal), [1975] 99 ITR 507	The law in force on the date of default is applicable to penalty proceedings.	The Court applied this principle to treat the date of default as the date the return was filed (26 December 1970) and therefore applied the version of s.271(1)(c) and its Explanation as it stood on that date.
Additional Commissioner of Income-Tax, Kanpur v. Swatantra Confectionery Works, [1976] 104 ITR 291 (All.)	The Explanation to s.271(1)(c) applies even where the difference between returned income and assessed income arises from an estimate.	The Court relied on this authority to reject the Tribunal's reasoning that an estimate necessarily precluded penalty; the Court held that an estimate does not prevent the Explanation from operating and that the assessee must still discharge the onus.
Commissioner of Income-Tax, U.P. v. Kedar Nath Ram Nath, [1977] 106 ITR 172 (All.)	Same or similar proposition as Swatantra Confectionery Works: estimates do not prevent applicability of the Explanation to s.271(1)(c).	The Court noted this authority alongside Swatantra Confectionery Works and applied the combined principle to hold that the Tribunal erred in treating an estimate as insulating the assessee from the Explanation's consequences.

Court's Reasoning and Analysis

The Court proceeded systematically:

It first determined the applicable law by applying the principle in CIT v. Data Ram Satpal that the law in force on the date of default governs penalty proceedings. The Court identified the date of default as the date the return was filed — 26 December 1970 — and accordingly applied s.271(1)(c) and its Explanation as they stood then.
The Court examined the text and purpose of the Explanation to s.271(1)(c) (inserted by the Finance Act, 1964). That Explanation creates a deeming consequence where total income returned is less than eighty per cent of the income assessed: the assessee is deemed to have concealed particulars or furnished inaccurate particulars unless the assessee proves that the shortfall did not arise from fraud or gross or wilful neglect. The Court emphasized that the onus is on the assessee and the standard of proof is civil (preponderance of probabilities).
The Court addressed the Tribunal's reasoning. Although the Tribunal found the assessee's conduct in withholding account books was improper (and appropriate for action under s.271(1)(b)), it nevertheless deleted the penalty under s.271(1)(c) on two main bases: (a) no specific instance of concealment had been pointed out at the assessment stage, and (b) since the ITO's additions were estimates (reduced drastically on appeal), there was scope for an honest mistake (a "bona fide" error), and therefore penalty should not follow.
The High Court rejected the Tribunal's approach. First, the Court observed that the Tribunal did not address the fact that the assessee failed to produce books during assessment and thus could not substantiate its claim that the return was based on regular accounts. Second, the Court explained that the Tribunal incorrectly focused on "consciousness" of concealment: the statutory provision does not require conscious or deliberate concealment, because the word "deliberately" had been deleted by the Finance Act, 1964. Instead, the statutory scheme places the onus on the assessee to prove absence of fraud, gross or wilful neglect.
The Court reiterated that estimates do not prevent the Explanation's operation (citing Swatantra and Kedar Nath) and, given the assessee's failure to discharge the onus and the absence of material before the Tribunal justifying deletion of the penalty, the Tribunal's deletion could not be sustained.
Finally, the Court declined to adjudicate the separate contention raised by the assessee's counsel concerning the interaction of clause (iii) (penalty "in addition to any tax payable") with the fact that no tax remained payable after the Tribunal's order; it held that this question lay outside the scope of the referred questions and left it open to be argued before the Tribunal on remand.

Holding and Implications

Holding:

Both questions were answered in the negative — in favour of the department and against the assessee. The Court held that the assessee had not discharged the onus placed upon it by the Explanation to section 271(1)(c), and there was no material before the Tribunal justifying deletion of the penalty.

Implications and immediate consequences:

The Tribunal's order deleting the penalty was not supported by material or correct application of the law and, accordingly, cannot stand in light of the High Court's answers to the referred questions.
The Court did not decide whether a penalty may be imposed where no tax is payable (the "in addition to any tax payable" contention); that issue is left open for consideration by the Appellate Tribunal when the case is remitted for conformity with the High Court's answers.
No broader new legal precedent beyond the application and reaffirmation of existing principles was created; the Court applied established principles (including those in the cited authorities) to the facts and remitted proceedings for further action consistent with its answers.
The Court directed that the parties bear their own costs.

Show all summary ...

Rastogi, J.:— The Income-tax Appellate Tribunal, Delhi Bench ‘B’, New Delhi, hereafter “the Tribunal”, has referred the following two questions for the opinion of this court:

“1. Whether, on the facts and circumstances of the case, the asses-see could be said to have discharged its onus under the Explanation to section 271(1)(c) of the Income-tax Act, 1961?

2. Whether the Tribunal was justified and had material in deleting the penalty levied by the Inspecting Assistant Commissioner of Income-tax under section 271(1)(c) read with the Explanation thereto?”

2. The reference relates to the assessment year 1966-67.

3. The assessee ran a cold storage and ice factory at Moradabad. For the assessment year 1966-67 it filed its return on December 26, 1970, declaring a loss of Rs. 51,942. It was mentioned in the return that it was a duplicate return. According to the ITO there was no such previous return on record and it was only after the service of a notice under s. 142 on September 1, 1970, when the assessee was called upon to produce its account books on September 15, 1970, that the appellant filed the return on December 26, 1970. Even after the filing of the return several notices were issued to the assessee but it did not appear before the ITO. Consequently, the ITO made an ex parte assessment on a total income of Rs. 85,000. Ultimately, that income was reduced by the Tribunal to Rs. 6,700. Since the income returned fell short of eighty per cent. of the income assessed, the ITO initiated penalty proceedings under s. 271(1)(c) read with the Explanation thereto of the Act. As the minimum penalty imposable exceeded Rs. 1,000, the case was referred to the IAC. The assessee was served with a show-cause notice. In reply thereto it submitted that it was not guilty of any fraud, gross or wilful neglect and had filed its return on the basis of the regular books of account maintained by it and, secondly, that the difference between the income returned and the income assessed was as a result of an estimate of the income and no penalty could be levied in respect of such estimated income.

4. The IAC did not accept these contentions and held that the assessee had failed to discharge the onus which lay upon it under the Explanation to s. 271(1)(c) and, hence, it was guilty of concealing its income or furnishing inaccurate income in respect thereof. The IAC hence levied a penalty in the sum of Rs. 60,000 which was almost equal to the minimum penalty leviable.

5. Aggrieved, the assessee took up the matter in appeal before the Appellate Tribunal. The Tribunal agreed that the conduct of the assessee had not been above board, in withholding the account books from scrutiny by the I.T authorities. However, for that default, action could be taken under s. 271(1)(b) of the Act. As for action under s. 271(1)(c) no specific finding had been given of concealment nor any adverse comment had been made by the I.T authorities at the assessment stage and taking into consideration the fact that the additions had been made in the trading account merely on the basis of an estimate and there was scope for error in good faith, penalty could not be levied. The Tribunal took note of the decisions of this court in Additional Commissioner Of Income-Tax, Kanpur v. Swatantra Confectionery Works., [1976] 104 ITR 291 and Commissioner Of Income-Tax, U.P v. Kedar Nath Ram Nath., [1977] 106 ITR 172, but taking into account the totality of the circumstances of the case, it felt inclined to delete the penalty. The Tribunal also noted that under the Explanation to s. 271(I)(c) the onus is on the assessee but the quantum of proof to discharge the onus is as in a civil case and it is to be decided by the rule of preponderance of probability. Taking the facts and circumstances of the case cumulatively, the Tribunal felt itself unable to affirm the penalty. In the result the penalty was deleted. Now, at the instance of the revenue, the questions mentioned above have been referred to this court.

6. Before referring to the submissions made before us we may read the relevant provision. It is now settled after the decision of this court in CIT v. Data Ram Satpal, [1975] 99 ITR 507, that the law as in force on the date of default would be applicable to penalty proceedings. Since this is a case of concealment and of furnishing inaccurate particulars, the default occurred when the return was filed on December 26, 1970. At that time s. 271(1)(c), in so far as it is relevant for the present purpose, read as under:

“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—……

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 the income in respect of which the particulars have been concealed or inaccurate particulars have been furnished.

Explanation.—Where the total income returned by any person is less than eighty per cent. of the total income (hereinafter in this Explanation referred to as the correct income) as assessed under section 143 or section. 144 or section 147 (reduced by the expenditure incurred bona fide by him for the purpose of making or earning any income included in the total income but which has been disallowed as a deduction), such person shall, unless he proves that the failure to return the correct income did not arise from any fraud or any gross or wilful neglect on his part, be deemed to have concealed the particulars of his income or furnished inaccurate particulars of such income for the purpose of clause (c) of this sub-section.”

7. This Explanation was inserted by the Finance Act, 1964, with effect from 1st April, 1964. It enacted that where the total income returned was less than eighty per cent. of the total income assessed (reduced by the revenue or capital expenditure incurred bona fide but disallowed as deduction) the assessee will, unless he proved that the failure to return the correct income did not arise from any fraud, or any gross or wilful neglect on his part, be deemed to have been guilty of concealment or of furnishing inaccurate returns. The nature of proof is certainly as in a civil suit and for the degree of proof necessary to dislodge this presumption, preponderance of probabilities of a case ought to be examined. Even if the difference between the income returned and that assessed has been due to an estimate, the applicability of the Explanation will not be affected (see the decision in Swatantra Confectionery Works, [1976] 104 ITR 291 (All.) and Kedar Nath Ram Nath, [1977] 106 ITR 172 (All)). The Appellate Tribunal did note these decisions but tried to get over them by taking into consideration the fact that no specific instance of concealment had been detected during the assessment proceedings nor had any adverse comments been made against the assessee and further that the estimate of income at Rs. 85,000 made by the ITO was reduced to Rs. 6,700 by the Appellate Tribunal, there was thus a scope open for error in good faith and it is difficult to categorically hold that there was a conscious concealment of income. We do not agree with the reasoning given by the Tribunal. The assessee had given a written explanation before the IAC. That explanation was that the return had been filed on the basis of the account books maintained by it and that the ITO had not pointed out any concealment and had determined the income on the basis of an estimate only and no penalty could be levied in respect of such an estimate. The assessee did not produce the account books during the assessment proceedings and thus could not justify its assertion that the return of income was on the basis of the regular accounts. The Tribunal did not refer to this aspect of the case at all and merely for the reason that no specific concealment had been pointed out and that a bona fide mistake is possible in the estimate of income, held that there was no conscious concealment of income. The import of “consciousness” was absolutely beside the point. The provision does not require that there should be a conscious concealment of income. The word “deliberately” in cl. (c) of sub-s. (1) was deleted by the Finance Act, 1964. The effect of that amendment is that even if the furnishing of inaccurate particulars is not deliberate but is the result of gross or wilful neglect, a penalty may still be attracted. There is no onus on the department to show that there was gross or wilful neglect on the part of the assessee in the furnishing of inaccurate particulars. The onus is on the assessee to prove that the omission to return the correct income was not due to any fraud, gross or wilful neglect on his part. It will be seen, therefore, that the assessee failed to discharge the onus placed under the Explanation to s. 271(1)(c) of the Act and there was no material before the Tribunal which could justify the deletion of the penalty.

8. It was, however, contended before us by Sri B.C Dey, learned counsel for the assessee, that though the assessee was in default, penalty could not be imposed on him because under cl. (iii), which has been reproduced above, the amount of penalty which can be levied shall be “in addition to any tax payable by him”. In the present case the income as finally determined after the Tribunal's order was below the minimum taxable limit. In other words, there was no tax payable by the assessee and, therefore, no penalty could be levied on the assessee. We are afraid we cannot go into this question because it is beyond the scope of the two questions referred to this court. However, it shall be open to the assessee to urge this question before the Appellate Tribunal when the case goes back to it for passing an order in conformity with our answers to the questions referred to this court.

9. In the result we answer both the questions in the negative, in favour of the department and against the assessee. However, in the circumstances, we direct the parties to bear their own costs.