K. Ramulu And Bros. v. Commissioner Of Income-Tax.

S. Parvatha Rao, J.:— In this writ petition, the petitioner, a partnership firm, questions the order, Hqrs. No. 1/59/83-84 dated March 12, 1985, of the Commissioner of Income-tax, Visakhapatnam, rejecting its petition under section 273A of the Income-tax Act, 1961 (hereinafter referred to as “the Act”), and declining to reduce/waive the penalties levied under section 271(1)(c) and (iii) of the Act. The petitioner prays for a writ of mandamus, etc., directing the Commissioner of Income-tax, Visakhapatnam, to waive under section 273A the penalties levied by the Income-tax Officer, A ward, Rajahmundry, for concealment of income under section 271(1)(c) of the Act for the assessment years 1972-73 to 1976-77, as the petitioner had satisfied all the conditions prescribed in section 273A of the Act.

2. The petitioner-firm filed returns of income for the assessment years 1972-73 to 1976-77 and the assessments in respect of the said years were completed by the Income-tax Officer by December 31, 1976. The total income originally assessed for the assessment years 1972-73 to 1976-77 aggregated to Rs. 60,000. After the completion of the said assessments, the partners of the petitioner-firm felt that the incomes returned by them were low and did not represent the actual income earned by them for each of the above years and, therefore, filed revised returns on May 2, 1977, declaring fresh income for each of the years. Under the revised returns, the petitioner declared an additional income of Rs. 2,35,000 for the said five years. According to the petitioner, prior to the filing of the said revised returns, the partners met the Commissioner and explained to him the complete position, and he agreed that if the petitioner filed returns declaring the correct income, the department would not levy any penalties or interest amounts under the various provisions of the Act and that he would waive all penalties by taking recourse to section 273A of the Act. Thereafter, on May 2, 1977, the petitioner-firm delivered in the office of the Commissioner revised returns of income for the five assessment years, i.e, 1972-73 to 1976-77. The petitioner also paid the additional tax as per the revised returns in the month of May, 1977, itself. The petitioner, in its covering letter dated May 1, 1977, requested the Commissioner to take the revised returns on record and waive the penalties and interest under the various sections of the Act. In order to regularise the revised returns filed by the petitioner, the Income-tax Officer, A-Ward, Rajahmundry, issued notices under section 147 of the Act reopening the assessments, entertained the said revised returns forwarded by the Commissioner, and completed the revised assessments on March 9, 1982, accepting in toto the revised returns. In between May 2, 1977 and March 19, 1982, the petitioner addressed several reminders to the Commissioner dated March 28, 1978, June 8, 1978, September 24, 1978, January 1, 1979 and April 6, 1979 requesting him to see that the assessments were completed and praying for the waiver of penalties and interest.

3. After completing the revised assessments on March 19, 1982, the Income-tax Officer initiated proceedings for penalty under section 271(1)(c) of the Act for concealment of income and levied the following penalties after issuing notices to the petitioner:

“Assessment year Amount 1972-73 12,420 1973-74 19,560 1974-75 26,460 1975-76 30,510 1976-77 32,900”

4. After the initiation of the penalty proceedings, the petitioner filed a petition dated February 4, 1984 under section 273A of the Act addressed to the Commissioner requesting him to intervene and waive the said penalties and interest charged under sections 139(8) and 217 of the Act. However, the Income-tax Officer passed orders as stated above levying penalties and interest for the five assessment years by his order dated March 20, 1984, because by that time the Commissioner did not pass any orders on the petitioner's application under section 273A of the Act. Thereafter, the Commissioner rejected the said application of the petitioner by his order dated March 12, 1985, which is impugned in the present writ petition.

5. The reasons given by the Commissioner for rejecting the application of the petitioner under section 273A are stated in his order dated March 12, 1985, as follows:

“The assessee which was fully aware of its real income did not care to disclose the real incomes when it filed the original returns under section 139(1)/139(4). It chose to file the revised returns after the completion of the original assessments on the basis of the original returns with the sole motive of explaining the purchase of a house for which purpose cash of Rs. 2,20,000 was brought into the books of account by crediting each partner's account with Rs. 44,000 on May 11, 1977. The agreement for the purchase of the house for Rs. 3,25,000 was entered into on February 12, 1977. One of the conditions to be satisfied for the purpose of invoking the powers of waiver or reduction under section 273A is that the disclosure must be in good faith. In the instant case, the assessee deliberately filed returns originally declaring very small incomes compared to the incomes disclosed later and allowed itself to be assessed on small incomes in spite of the fact that all along the assessee was fully aware of its real income because the income as claimed was available with the assessee in the form of cash. Three of the assessments, namely, 1974-75, 1975-76 and 1976-77, were completed on November 30, 1976, December 31, 1976, and December 31, 1976, respectively, by which time the assessee must have already been on the look out for investment in purchase of a house and yet it did not choose to place the same facts before the Income-tax Officer. After the investment was made, the assessee became aware that the Department would have knowledge of the transaction as under the provisions of section 230A of the Income-tax Act, 1961, the seller who would be presenting the sale deed for registration had to obtain a tax clearance certificate from the Income-tax Officer. Also, under section 269P of the Income-tax Act, 1961, the registering officer has necessarily to forward a statement of the transaction in the prescribed form setting out certain particulars which include the names of the transferee and the purchase consideration. Therefore, the assessee came forward by filing the so-called revised returns spreading the investment over the assessment years under consideration after the assessments had already been completed on the basis of the returns filed by the assessee. Under the circumstances and facts stated above, the assessee's disclosure of the incomes by filing the so-called revised returns cannot be considered to have been made in good faith. As one of the conditions for invoking the powers under section 273A is not satisfied, I decline to reduce/waive the interest charged under sections 139(8) and 217 and the penalties levied under section 271(1)(c). The petition is accordingly rejected.”

6. In the present writ petition, the petitioner questions the said order only to the extent of the Commissioner declining to exercise his powers under section 273A as regards the penalties levied under section 271(1)(c) of the Act and not as regards the interest charged under section 139(8) and section 217 of the Act. The petitioner contends that it satisfied all the conditions specified under section 273A(1) and that the Commissioner acted arbitrarily in rejecting its application for waiver. According to the petitioner, it made a full and true disclosure of its income voluntarily and in good faith and the Income-tax Officer accepted the revised returns and completed the assessments without adding even a single rupee for any of the five assessment years. According to the petitioner, the Commissioner misunderstood the scope and meaning of the expression “good faith” and erroneously came to the conclusion that the revised returns were not filed in good faith, even though full disclosure of income for all the five assessment years was made and they were accepted by the Income-tax Officer. The petitioner submits that if the assessee honestly disclosed all its income liable to tax, the requirement of “good faith” under section 273A of the Act was satisfied and, therefore, the Commissioner was duty bound to consider the petitioner's application under section 273A by waiving the penalty imposed on it. The petitioner further submits that the fact that before making the disclosure, the petitioner's conduct was dishonest and that it did not act in good faith is irrelevant for purpose of applying the provisions of section 273A of the Act.

7. In the counter-affidavit given by the Commissioner himself, he denied that any assurance was given by him to the petitioner to the effect that levy of penalties and interest would be waived under section 273A of the Act. He also denied that he acted arbitrarily in rejecting the petitioner's waiver petition. It was asserted by the Commissioner that, for the reasons stated by him in his order dated March 12, 1985, he came to the conclusion that the petitioner did not satisfy one of the conditions laid down in section 273A(1), viz., the assessee made in good faith a full and true disclosure of its income, and that the said conclusion was based on proper appreciation of the facts and circumstances of the case.

8. We have heard counsel for the petitioner and for the Revenue and we are satisfied that the order of the Commissioner to the extent impugned in the present writ petition is liable to be set aside.

9. Section 273A was inserted in the Act by the Taxation Laws (Amendment) Act, 1975, with effect from October 1, 1975. Section 273A, as it was at the relevant time, in so far as it is relevant for the consideration of the questions involved in the present case, was as follows:

“Section 273A. (1) Not withstanding anything contained in this Act, the Commissioner may, in his discretion, whether on his own motion or otherwise,—…

(ii) reduce or waive the amount of penalty imposed or imposable on a person under clause (iii) of sub-section (1) of section 271; or…

if he is satisfied that such person…

(b) in the case referred to in clause (ii), has, prior to the detection by the Income-tax Officer, of the concealment of particulars of income or of the inaccuracy of particulars furnished in respect of such income, voluntarily and in good faith, made full and true disclosure of such particulars;…

and also has, in all the cases referred to in clauses (a), (b) and (c), co-operated in any inquiry relating to the assessment of his income and has either paid or made satisfactory arrangements for the payment of any tax or interest payable in consequence of an order passed under this Act in respect of the relevant assessment year.”

10. Penalties under clause (iii) of section 271(1) are attracted in the cases referred to in clause (c) of section 271(1), i.e, when the authority mentioned therein is satisfied that any person has concealed the particulars of his income or furnished inaccurate particulars of such income.

11. One important feature of section 273A is that it begins with the non obstante clause “Notwithstanding anything contained in this Act” and, therefore, its operation is untrammelled by any other provisions of the Act. This section in terms confers discretion on the Commissioner and that discretion is to reduce or waive the amount of penalty, etc. Before exercising the said discretion, the Commissioner has to be satisfied, among others, that the person disclosing the particulars of income has voluntarily and in good faith, made a full and true disclosure of such particulars. A Division Bench of this court considered at length section 273A(1) in Seetha Maha-lakshmi Rice and Groundnut Oil Mill Contractors Co. v. CIT, [1981] 127 ITR 579, 583, and observed as follows:

“Further, this provision would come into play only when the liability of the assessee to pay penalty is established. If there is no case for the imposition of penalty or that it is not a case where the penalty is imposable under clause (a) of section 271(1), this provision will not be attracted-at all. Having found that there is a liability for the assessee to pay penalty under section 273A(1)(i), the Commissioner under the special circumstances indicated therein may exercise his power to either reduce or waive the amount of penalty imposed or imposable on the assessee. This power is a discretionary one to be exercised in appropriate cases judiciously and fairly and in the interest of justice.”

12. In that case, the Division Bench was considering reduction/waiver of penalty under section 271(1)(a) and the discretion of the Commissioner under section 273A(1)(i). The same considerations apply equally to a case of penalty under section 271(1)(c) and discretion of the Commissioner under section 273A(1)(ii).

13. In the impugned order dated March 12, 1985, the only reason given by the Commissioner for not exercising the discretion under section 273A(1)(ii) of the Act was that the petitioner's disclosure of income by filing the revised returns could not be considered to have been made in good faith. The expression “good faith” is not defined in the Act. Under sub-section (22) of section 3 of the General Clauses Act, 1897, “a thing shall be deemed to be done in ‘good faith’ where it is in fact done honestly, whether it is done negligently or not”. According to the Oxford Companion to Law, “an act is done in good faith if done honestly, even though negligently”. That is how “good faith” is ordinarily understood. In the absence of a definition in the Act, “good faith” in section 273A(1) is to be interpreted as defined in the General Clauses Act, 1897. Thus, if the element of honesty is present, the requirement of “good faith” is satisfied. This view of ours is supported by a long catena of cases. This court in the decision in Seetha Mahalakshmi Rice and Groundnut Oil Mill Contractors Co. v. CIT, [1981] 127 ITR 579, 584, held:

“The expressions ‘good faith’ and “full and true disclosure of his income” used in section 273A(1)(a) reveal that the assessee, in the circumstances, must have felt that he has filed the return voluntarily and in good faith and, according to him, has made a full and true disclosure of his income.”

14. A Division Bench of the Bombay High Court in Laxman v. CIT, [1988] 174 ITR 465, 472, held as follows:

“Either under the General Clauses Act or in ordinary parlance, an act done in good faith means an act done honestly even if it is tainted with negligence or mistake. All that is required is that disclosure of income must be full and true according to the honest belief of the assessee.”

15. We are in agreement with this view. “Honestly” means without fraud or falsehood; sincerely, fairly, frankly (Shorter Oxford English Dictionary). Therefore, for the exercise of the discretion under section 273A(1)(ii) of the Act, the Commissioner has to be satisfied that the petitioner voluntarily and honestly, i.e, fairly, frankly and without falsehood, made a full and true disclosure of the particulars of income which were concealed or earlier inaccurately furnished.

16. In arriving at the conclusion that the petitioner's disclosure of the income was not in good faith, the Commissioner mainly took into consideration the fact that the petitioner did not disclose its full income in its original returns and that it came forward to disclose the concealed income only after the assessments based on the original returns were completed. This cannot be a valid basis for not being satisfied that the petitioner made the said disclosures in May, 1977, in good faith. It is not disputed that the said revised returns were accepted in full without any further additions when the revised assessments were finally made on March 19, 1982, after a lapse of nearly five years. This is a pointer to the fact that the disclosures made by the petitioner in respect of the said five assessment years were honest and frank. As observed by the Allahabad High Court in Radhey Shyam Chandrika Prasad v. CIT, [1983] 139 ITR 274, 282:

“In a case where the income ultimately assessed is the same as that returned or disclosed by the assessee, it is apparent that the assessee has made a full and true disclosure of income and no question of lack of good faith can possibly arise. In such a case, the assessee will be deemed to have made a full and true disclosure of his income in a bona fide manner and if other conditions under section 273A are satisfied, the Commissioner would have jurisdiction to consider the assessee's application for waiver of penalty imposed or imposable…”

17. The satisfaction of the Commissioner as regards the good faith or honesty of the assessee in making full and true disclosure of the particulars of his income is to be arrived at in an objective manner on a consideration of the facts and circumstances relating to the disclosures referred to in that sub-section. The conduct of the petitioner in filing the original returns is a relevant circumstance for the purpose of imposing penalty under section 271(1) of the Act but not for ascertaining whether the disclosures in question were made honestly for the purpose of section 273A(1). The Commissioner failed to see that section 273A(1)(ii) can be invoked by the assessee only when the circumstances for the imposition of penalty under section 271(1)(c) exist, i.e, when there is concealment of income or furnishing inaccurate particulars of income. The following observations of the Allahabad High Court in Jakhodia Brothers v. CIT, [1978] 115 ITR 61, 67, while dealing with the exercise of discretion under section 273A(1)(iii), are apposite for rejecting the approach of the Commissioner in the present case:

“It may be true that the object of the petitioner-firm for making disclosure was to get round the difficulty of introducing secret cash but that is not a ground on which the benefit of section 273A(1)(iii) could be denied to him. The good faith which is required to be established for invoking the aforesaid provision is that in making the disclosure the petitioner must have acted honestly. In other words, he should not have been guilty of having acted dishonestly in making the disclosure. The fact that before making the disclosure his conduct had been dishonest or that he did not act in good faith is irrelevant for the purposes of applying these provisions. This disclosure is made by an assessee under this section for the purposes of getting the benefits provided therein. The fact that in the past the assessee did not make a full disclosure of his income and concealed the same is immaterial.”

18. The other aspect taken into consideration by the Commissioner in arriving at the conclusion that the petitioner's disclosures could not be considered to have been made in good faith was that the said disclosures were made after entering into an agreement for the purchase of a house for Rs. 3,25,000 on February 12, 1977, for which purpose cash of Rs. 2,20,000 was brought into the books' of account by crediting each partner's account with Rs. 44,000 on May 11, 1977. It is an admitted fact that, as on the date when the disclosures were made in May, 1977, there was no sale deed executed in respect of the said purchase and in fact even subsequently the said agreement was not pursued further and there was no investment made. We are constrained to observe that the Commissioner was carried away by hyphothetical and imaginary considerations in observing that:

“after the investment was made, the assessee became aware that the Department would have knowledge of the transaction as under the provisions of section 230A of Income-tax Act, 1961, the seller who would be presenting the sale deed for registration had to obtain a tax clearance certificate from the Income-tax Officer. Also under section 269P of the Income-tax Act, 1961, the registering officer has necessarily to forward a statement of the transaction in the prescribed form setting out certain particulars which include the names of the transferees and the purchase consideration.”

19. It is not in dispute that the disclosures in question were made by the petitioner prior to any detection by the Department.

20. Sri M. Suryanarayana Murthy, standing counsel for the Income-tax Department, tried to justify the impugned order of the Commissioner on the ground that the petitioner did not make the disclosures in question voluntarily. In the impugned order, there was no finding that the said disclosures were not made voluntarily. Even in the counter-affidavit given by the Commissioner, the reason stated for the non-exercise of the discretion under section 273A of the Act was that the disclosures were not made in good faith and not that the disclosures were not made voluntarily. It is not open to Sri Murthy to try to justify the impugned order on the ground that the disclosures in question were not made voluntarily which was not at all adverted to by the Commissioner either in the impugned order or in his counter-affidavit. Sri Murthy next relied upon two decisions of the Kerala High Court in P.D Varghese and E.J Davis v. CIT, [1989] 180 ITR 187 and Associated Traders v. ITO, [1989] 180 ITR 406 and contended that this court, in exercise of its jurisdiction under article 226, should not interfere with the findings arrived at and the discretion exercised by the Commissioner under section 273A of the Act. We are not persuaded. In the decision in Associated Traders v. ITO, [1989] 180 ITR 406 (Ker), it was in fact observed that “the exercise of the powers of the Commissioner under section 273A cannot be ordinarily interfered with unless there be a jurisdictional deficiency or other vitiating circumstances.” In P.D Varghese and E.J Davis v. CIT, [1989] 180 ITR 187 the learned single judge of the Kerala High Court observed that if two views were possible and one view had been taken by the Commissioner, the High Court would not be justified in exercising its jurisdiction, and expressed his disagreement with the decision of a Division Bench of this court in Seetha Mahalakshmi Rice and Groundnut Oil Mill Contractors Co. v. CIT, [1981] 127 ITR 579, 583. However, we prefer to follow the decision of the Division Bench of this court and it is observed therein as follows:

“The very fact that Parliament designedly empowered the Commissioner to exercise the power suo motu, indicates that this power has to be exercised to do real and substantial justice wherever possible and the discretion vested in him under the section must be exercised judiciously, fairly, reasonably and objectively and to meet the ends of justice, and not arbitrarily or capriciously. The satisfaction of the requirements of the power to be exercised under the section must be an objective satisfaction and not a subjective satisfaction. This satisfaction intended being statutory it can be tested by the courts under article 226 of the Constitution of India. This satisfaction can, by no stretch of imagination, be considered to be a subjective one depending upon the view of an individual Commissioner.”

21. We are, therefore, satisfied that the conclusion of the Commissioner that the petitioner did not make the disclosure in question in good faith is without any valid basis and is vitiated by extraneous considerations. The Commissioner is not justified in holding that the petitioner did not act in good faith in making the disclosures in question. As this is the only reason given by him for not exercising the discretion vested in him under section 273A(1)(ii) of the Act, we set aside the impugned order of the Commissioner in Hqrs. No. 1/59/83-84 dated March 12, 1985. Once the preconditions for the exercise of the discretion are satisfied, the Commissioner is bound to exercise his discretion, keeping in view the following observations of the Supreme Court in I. Hirday Narain v. Income Tax Officer, Bareilly† , [1970] 78 ITR 26, 31.

“If a statute invests a public officer with authority to do an act in a specified set of circumstances, it is imperative upon him to exercise his authority in a manner appropriate to the case when a party interested and having a right to apply moves in that behalf and circumstances for exercise of authority are shown to exist. Even if the words used in the statute are prima facie enabling, the courts will readily infer a duty to exercise power which is invested in aid of enforcement of a right—public or private —of a citizen.”

22. We accordingly direct the Commissioner of Income-tax, Visakapatnam, to reconsider the petitioner's application dated February 15, 1984 under section 273A of the Act as it then existed and exercise his discretion in accordance with law and in the light of the observations made in the judgment. The writ petition is, accordingly, allowed with costs.