Citation Codes

Equivalent Citations

citation codes

Case Number

Income-tax Reference No. 464 of 1981

Judges

V.A Mohta
Dr. B.P Saraf, JJ.

Acts

24, 1971, the provisions of the Explanation to section 271(1)(c)
section 256(1) of the Income-tax Act, 1961.
section 271(1)(c) of the Income-tax Act
section 139(5) of the Income-tax Act.
SECTION 119 INCOME TAX ACT
sub-section (2)(a) of section 119.
section 271(1)(c)
section 153(1)(c)
INCOME TAX ACT
WEALTH TAX ACT

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Smart Summary

Structured Summary of the Opinion — V.A. Mohta, J.

Factual and Procedural Background

The reference under section 256(1) of the Income-tax Act, 1961 arose at the instance of the assessee and originally comprised ten questions: seven out of an order relating to penalty imposed by the Inspecting Assistant Commissioner and three out of an order relating to penalty imposed by the Appellate Assistant Commissioner. Several questions were not pressed by the assessee's counsel and one question was reframed by consent, resulting in five renumbered questions for decision.

The assessee, Bombay Cloth Syndicate (a partnership firm, Nagpur), originally filed its return for the assessment year 1970-71 showing total income of Rs. 1,10,339. On January 5, 1971 the Central Board of Direct Taxes (CBDT) published a public notice in The Statesman inviting persons who had filed false returns to file revised returns to avoid consequences of discovery. During scrutiny, the Income-tax Officer (ITO) suspected discrepancies in sales and purchases and, by order dated March 23, 1971, impounded certain books of account under section 131(3). On May 24, 1971 the assessee filed a further return showing income of Rs. 1,40,664. The ITO assessed tax on that basis and initiated penalty proceedings under section 271. Penalty was ultimately imposed applying the Explanation to section 271(1)(c) by both the Appellate Assistant Commissioner and the Inspecting Assistant Commissioner. The assessee's appeal to the Tribunal failed: the Tribunal held the May 24 return was not a revised return under section 139(5) (finding conscious concealment), held that imposition of penalty was a judicial discretion not governed by CBDT instructions so the January 5, 1971 public notice was not binding, and confirmed the application of the Explanation to section 271(1)(c).

Legal Issues Presented

Whether the return filed by the assessee on May 24, 1971 could be treated as a revised return under section 139(5) of the Income-tax Act?
Whether the circular (advertisement) of the Central Board of Direct Taxes amounted to a promise that penalty will not be imposed if an assessee files a revised return offering the concealed income for assessment?
Whether it was open to the Inspecting Assistant Commissioner to impose the penalty despite the advertisement of the Central Board of Direct Taxes dated January 5, 1971?
Whether penalty was imposable by the Inspecting Assistant Commissioner in relation to an income deemed to be income from undisclosed sources?
Whether, having regard to the amount of income declared by the assessee in the return filed on May 24, 1971, the provisions of the Explanation to section 271(1)(c) are not applicable?

Arguments of the Parties

Assessee's Position

The May 24, 1971 return was a valid "revised return" under section 139(5) because the incorrectness in the original return had not been discovered by the Department when the revised return was filed.
The CBDT advertisement dated January 5, 1971 (published in The Statesman) operated as a public circular under section 119 and amounted to a promise that penalty would not be imposed if concealed income was offered by filing a revised return before discovery; therefore departmental officers were bound by it and could not impose penalty contrary to the advertisement.

Revenue's Position (as described in the opinion)

The Department (and the Tribunal) had taken the view that the May 24 return did not qualify as a revised return under section 139(5), treating the omission as conscious concealment rather than inadvertence.
The Department contended that the public notice/advertisement was not binding on departmental officers and that imposition of penalty was a matter of judicial discretion not governed by CBDT instructions.
Learned counsel for the Revenue drew attention to the decision of the Gauhati High Court in F.C. Agarwal v. CIT (1976) 102 ITR 408; the opinion notes that that decision did not support the Revenue's broader contention and left relevant questions undecided in that case.
Before the Court, the Department agreed that the income returned was more than 80% of the income assessed, meaning the Explanation to section 271(1)(c) would not apply in the deeming manner previously invoked.

Table of Precedents Cited

Precedent	Rule or Principle Cited For	Application by the Court
Taiyabji Lukmanji v. CIT, [1981] 131 ITR 643 (Gujarat High Court)	The Tribunal should consider legality and propriety of levying penalty in the light of Board's instructions; whether the Board's advertisement created expectations or rights and the effect of credibility of the Department.	Cited to show that the question of giving effect to the advertisement and considering its impact on levy of penalty could not be lightly ignored; used to support the proposition that revenues and tribunals should address the policy and credibility questions raised by the advertisement.
Dattatraya Gopal Shette v. CIT, [1984] 150 ITR 460 (this Court)	Headnote: Circulars of the Central Board of Revenue which confer benefit on the assessee are binding on officers concerned with execution of the Income-tax Act; officers must act in light of such circulars.	Relied upon as authority for the proposition that benevolent departmental circulars conferring benefit bind officers and must be followed in execution of the Act.
CIT v. Punalur Paper Mills Ltd., [1988] 170 ITR 37 (Kerala High Court)	The Board is competent under section 119 to issue circulars; such circulars have force of law and are binding on officers; benevolent circulars afford administrative relief and can deviate from strict terms of the statute to assist assessees.	Adopted to reinforce that CBDT circulars (including public advertisements of relief) bind departmental officers and can provide administrative relief beyond statutory terms; supports the holding that the advertisement had binding effect.
F.C. Agarwal v. CIT, [1976] 102 ITR 408 (Gauhati High Court)	Dealings with the same CBDT advertisement; in that case the court did not decide the question whether the advertisement had status of a circular under section 119 and found the advertisement inapplicable because the revised return there was filed before the advertisement.	Noted by the Court to observe that that decision does not support the Revenue's contention that the advertisement could not have status of a circular; the Gauhati judgment left the central question undecided for the facts there.

Court's Reasoning and Analysis

The court's reasoning proceeds in two main strands: (A) whether the May 24, 1971 filing was a "revised return" under section 139(5), and (B) the legal effect and scope of the CBDT advertisement of January 5, 1971.

(A) On whether the May 24, 1971 return was a "revised return" under section 139(5)

The court found no justification for the Tribunal's conclusion that the May 24 return could not be treated as a revised return. The court emphasized that the incorrectness in the original return had not been discovered by the Income-tax Officer at the time the revised return was filed.
The impounding of books under section 131(3) was characterized as an act to remove suspicion and to enable enquiry, not as an actual discovery of concealment. The revised return was filed before the enquiry had been completed and before any discovery of evasion was made.
Further, the court held that the Department, having assessed the income on the basis of the revised return and having availed itself of the extended assessment period under section 153(1)(c) calculated from the date of filing that return, could not take an inconsistent position (approbate and reprobate) by denying that the return was a revised return for s139(5) purposes.

(B) On the status, scope and effect of the CBDT advertisement of January 5, 1971

The court held that the advertisement was not merely explanatory but benevolent in character, and its source of authority is section 119 of the Act. The advertisement's substance, not its form or manner of issuance, determines its legal effect.
The court concluded that the advertisement had the status of "orders, instructions and directions" under section 119, and such instruments (whether departmental circulars or public notices) can be issued to confer concessions or relax provisions for the proper administration of the Act. Under section 119(2)(a) certain provisions may be relaxed subject to the proviso to sub-section (1) which limits the authority from directing a particular assessment or interfering with appellate discretion.
The advertisement was characterized as a general relaxation in the matter of imposition of penalty under section 271, aimed at incentivizing disclosure of suppressed income to secure revenue that would otherwise be difficult and expensive to discover.
On temporal scope, the court held the advertisement does not operate "in eternity": its applicability must be confined to the original return filed before the advertisement (i.e., it cannot be treated as limitless in time or retrospectively apply in unintended ways).
Reading the advertisement from the perspective of a taxpayer, the court concluded that the wording—speaking of a "false" return and urging filing of a revised return "to avoid the consequences of discovery"—amounted to a promise that penalty would not be imposed where concealed income was offered for assessment before its discovery by the Department. The court regarded this as a clear, practical representation reasonably understood by taxpayers.
The court stressed considerations of departmental credibility and public policy: the Department's reliability in giving such an inducement is important for achieving the administrative objective of voluntary disclosure, and therefore the promise should be honored rather than disregarded by officers imposing penalties.
Applying these principles to the present facts, the court concluded that it was not open to the Inspecting Assistant Commissioner to impose penalty under the circumstances described.

(C) On the Explanation to section 271(1)(c)

After consideration of figures, the Department conceded before the court that the income returned exceeded 80% of the income assessed. On that basis the court recorded that the Explanation to section 271(1)(c) was not attracted and that any penalty proceedings would need to be adjudicated without relying on the deeming provisions of that Explanation.

Holding and Implications

Holding (core rulings recorded by the Court):

Question (i): Whether the May 24, 1971 return was a revised return under section 139(5) — Answered in the affirmative and in favour of the assessee.
Question (ii): Whether the CBDT circular/advertisement amounted to a promise that penalty will not be imposed if a revised return is filed offering concealed income — Answered in the affirmative and in favour of the assessee.
Question (iii): Whether it was open to the Inspecting Assistant Commissioner to impose penalty despite the advertisement — Answered in the negative and in favour of the assessee.
Questions (iv) and (v): The Explanation to section 271(1)(c) does not apply (on the agreed figures before the Court).

Implications (direct consequences as stated or necessarily arising from the opinion):

The May 24, 1971 return is treated as a valid revised return under section 139(5), and the Department cannot repudiate that status after having assessed on the basis of that return and availed itself of the extended assessment period under section 153(1)(c).
The CBDT advertisement of January 5, 1971 has the character of a departmental instruction/circular issued under section 119 and, insofar as it promised that penalty would not be imposed if concealed income was offered by filing a revised return before discovery, departmental officers were bound by that promise; therefore the Inspecting Assistant Commissioner ought not to have imposed penalty in the circumstances of this case.
Because the Department agreed that the income returned exceeded 80% of the assessed income, the deeming Explanation to section 271(1)(c) was not attracted and the penalty proceedings must be adjudicated without applying that deeming provision.
No costs were ordered by the Court ("No order as to costs").

This summary is confined to and derived solely from the content of the provided opinion and does not add factual or legal material beyond the opinion's text.

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Bombay Cloth Syndicate v. Commissioner Of Income-Tax.

V.A Mohta, J.:— At the instance of the assessee as many as ten questions were referred to this court under section 256(1) of the Income-tax Act, 1961. Seven questions arise out of the order passed by the Tribunal relating to penalty imposed by the Inspecting Assistant Commissioner and three out of the order relating to penalty imposed by the Appellate Assistant Commissioner.

2. Shri L.S Dewani, learned counsel for the assessee, has not pressed questions Nos. 1 and 2 arising out of the order relating to penalty imposed by the Inspecting Assistant Commissioner, and any of the three questions arising out of the order relating to penalty imposed by the Appellate Assistant Commissioner. Question No. 3 is reframed by consent of the parties. Thus, the following renumbered questions need to be answered in this reference:

“(i) Whether, on the facts and in the circumstances of the case, the return of income filed by the assessee on May 24, 1971, could be treated as a revised return under section 139(5) of the Income-tax Act?

(ii) Whether, on the facts and in the circumstances of the case, the circular of the Board amounted to a promise that penalty will not be imposed if an assessee should file a revised return offering the concealed income for assessment?

(iii) Whether, on the facts and in the circumstances of the case, it was open to the Inspecting Assistant Commissioner to impose the penalty in spite of the advertisement of the Central Board of Direct Taxes issued on January 5, 1971?

(iv) Whether, on the facts and in the circumstances of the case, penalty was imposable by the Inspecting Assistant Commissioner in relation to an income deemed to be income from undisclosed sources?

(v) Whether, on the facts and in the circumstances of the case and having regard to the amount of income declared by the assessee in the return filed by it on May 24, 1971, the provisions of the Explanation to section 271(1)(c) are not applicable?”

3. The basic facts are:

The assessee, Bombay Cloth Syndicate, Nagpur, is a partnership firm. For the assessment year 1970-71 it had originally filed a return of income showing a total income of Rs. 1,10,339. On January 5, 1971, the Central Board of Direct Taxes (CBDT) published in the national daily “The Statesman” a public notice to the effect that if the original return filed by the assessee is false, he may file a revised return to avoid the consequences of discovery. During the course of scrutiny of the account books, the Income-tax Officer suspected that the figures of sales and purchases were not entered properly in the books of account and, hence, certain books of account of the assessee were impounded by the Income-tax Officer under section 131(3) of the Act by an order dated March 23, 1971. On May 24, 1971, the assessee filed a revised return showing an income of Rs. 1,40,664. On the basis of the said return, the Income-tax Officer assessed the tax and initiated penalty proceedings under section 271. Penalty was ultimately imposed, applying the Explanation to section 271(1)(c) on the basis that the returned income was less than 80 per cent. of the assessed income, by the Appellate Assistant Commissioner as well as by the Inspecting Assistant Commissioner. The assessee's appeal before the Tribunal was unsuccessful. The Tribunal held that the return dated May 24, 1971, could not be treated as a “revised return” under section 139(5) because it was not a case of inadvertent omission but of conscious concealment of particulars of income in the original return. It further held that imposition of penalty is a matter of judicial discretion which could not be governed by the Central Board of Direct Taxes instructions and hence the public notice dated January 5, 1971, was not binding on the Departmental officers. The Tribunal also confirmed the application of the Explanation to section 271(1)(c).

4. We begin with the reproduction of the public notice dated January 5, 1971:

“Filing false tax returns:

Do you know the consequences?

Beware:

Filing of false tax returns is severely punishable under the Income-tax, Wealth-tax and Gift-tax Acts. It may cost you more than what you have concealed.

Under the Income-tax Act, a minimum penalty equal to the amount of the concealed income and a maximum penalty equal to twice that amount, is prescribed. Besides, there can also be prosecution and conviction—rigorous imprisonment for not less than six months which can be extended to two years.

Similarly, evasion of wealth-tax is also severely punishable under the Wealth-tax Act. A minimum penalty of an amount equal to the value the asset so concealed or to the extent of understatement in the value of an asset or overstatement in the value of any debt, is prescribed. This penalty can be as high as twice this amount. In addition, there can be prosecution and conviction with rigorous imprisonment for not less than six months extendable to two years.

Furnishing inaccurate particulars of any gift is punishable with a sum not less than 20. per cent. but not more than one and half times the tax which would have been avoided if the return had been accepted as correct. Apart from this, you can be prosecuted. Conviction can mean simple imprisonment extendable to one year or with fine up to Rs. 1,000 or both.

If the original return filed by you is false why not file a revised return to avoid the consequences of discovery.

Central Board of Direct Taxes,

(Department of Revenue and Insurance),

Ministry of Finance,

Government of India.”

5. We see no justification for the conclusion that the return dated May 24, 1971, is not a “revised return” as contemplated under section 139(5) of the Income-tax Act. The incorrectness in the original return had not been discovered by the Income-tax Officer. The account books were impounded by him merely to remove the suspicion which arose in his mind due to some discrepancies and to find out the truth. Much before the enquiry was completed and any discoveries of evasion were made the return was filed. That apart, the Department, having assessed the income of the assessee on the basis of that return and taken advantage of extended period of one year for completion of assessments under section 153(1)(c) from the date of its filing, cannot be allowed to take a stand that it was not a revised return under section 139(5). The Department's stand amounts to “approbate and reprobate” which is not permissible in law.

6. The character of the public advertisement issued by the Central Board of Direct Taxes is not explanatory, but benevolent in character. The source of authority to issue it is to be found in section 119 of the Act and no other. What is decisive is not its form or nature but its substance. Equally insignificant is the manner of its issuance. Its authenticity is not disputed. Hence, it has the status of “orders, instructions and directions” contemplated under section 119. Such orders, instructions and directions can either be issued by the Departmental circulars or by notice to the persons responsible for the execution of the Act, or by notice to the public, if concessions are meant for the public and Department upon certain actions on their part. Such public advertisements amount to notice to the public as well as circulars to the officers. Their object is proper administration of the Act and efficient management of the work of assessment and collection of revenue. For such purposes even the provisions of several sections (which includes section 271) can be relaxed, under sub-section (2)(a) of section 119. This is subject to two riders contained in the proviso to sub-section (1): They are (a) no authority can be required to make a particular assessment or to dispose of a case in a particular manner, (b) the appellate discretion of the Deputy Commissioner (Appeals) or Commissioner (Appeals) cannot be interfered with.

7. The advertisement was a general relaxation in the matter of imposition of penalty imposable under section 271. Its clear object was to collect more revenue by giving an incentive to the public to disclose their suppressed income, discovery of which has been found by practical experience to be an extremely difficult job for the Department. It did not deal with any particular case or appeal.

8. It is unfortunate that having issued such a public advertisement, the Department should take a stand that it has no binding effect on the officers responsible for the execution of the Act and that they are free to exercise their discretion in the matter contrary to the letter and spirit of the relaxation announced. In this context useful reference may be made to the following observations of the Gujarat High Court pertaining to this very advertisement in the case of Taiyabji Lukmanji v. CIT, [1981] 131 ITR 643 (at page 646):

“In our opinion, the Tribunal ought to have considered the question as regards the legality and propriety of levying penalty under section 271(1)(c) of the Act in the light of the instructions given by the Board in the advertisement referred to above. Whether or not it amounted to promis-sory estoppel and created a legal right apart, the question was required to be examined from the standpoint of the credibility of the Department. Would it not cause greater harm to the Department itself if assessees who respond to its appeals and desire to cleanse themselves of past sins are deterred from doing so? In a way, in the long run, it might be counter-productive to do so. All these questions cannot be elbowed aside. They have to be met squarely in the face by the Revenue authorities and the Tribunal by addressing themselves to it and answering the same in the manner considered right by them on policy and principle.”

9. This court in the case of Dattatraya Gopal Shette v. CIT, [1984] 150 ITR 460 has held that (headnote):

“It is now well-settled that even if the contents of a circular may amount to a deviation of a point of law, a circular of the Central Board of Revenue which confers some benefit on the assessee is binding on all officers concerned with the execution of the Income-tax Act; and they must carry out their duties in the light of the circular.”

10. The Kerala High Court in the case of CIT v. Punalur Paper Mills Ltd., [1988] 170 ITR 37 held that (at page 40):

“The Board of Revenue is competent to issue circulars under section 119 of the Income-tax Act. The circulars so issued have got the force of law. All officers of the Department are bound by the said circulars. The benevolent circulars issued by the Board are in the nature of administrative relief. They really ‘supplant’ the law. The circular can afford administrative relief even beyond the relevant terms of the statute. It can deviate from the provisions of the Act. The courts have held that such circulars are binding on the officers of the Department. It is not open to the Department to contend, even in cases where the circular goes beyond the terms of the section, that the circular has no legal effect or should not be given effect to. The circulars would go to the assistance of the assessees. It is settled law that the circulars cannot impose any burden on the taxpayer. But, by the issue of a circular, the rigour of the law can be relaxed by giving administrative relief. Apart from the fact that such circulars are binding on the officers of the Department, even if the circulars are relied on for the first time in the High Court during the course of hearing, the assessee will be entitled to the benefit afforded by the circular.”

11. Our attention was invited by Shri P.N Chandurkar, learned counsel for the Revenue, to the decision of the Gauhati High Court in the case of F.C Agarwal v. CIT, [1976] 102 ITR 408 dealing with the very circular we see nothing in the said judgment in support of the view that the said advertisement could not have the status of a circular issued under section 119 of the Act. The question has been left undecided by the Gauhati High Court and the advertisement was held not applicable to that case since the revised return in that case was filed long before the issue of the advertisement.

12. Does the advertisement in question operate in eternity is the next question posed before us. We do not think so. Its applicability must be confined to the original return filed before the advertisement.

13. We now turn to the next facet of the controversy, viz., whether it contains a promise that penalty will not be imposed in case the revised return offering concealed income is filed before its discovery to avoid the consequences of discovery. The relaxation is worded thus:

“If the return filed by you is false, why not file a revised return to avoid the consequences of discovery.”

14. The above representation was for direct consumption of a taxpayer and hence must be read in a manner he would understand it. It speaks not of “inaccurate” return, but of “false” return. The advertisement thus amounted to a promise that penalty would not be imposed for concealing income, in case it was offered for assessment to tax before its discovery by the Department. Considerations in such disclosures by the assessees are rarely moral. Always the motive is to escape paying the higher cost of suppression, viz., heavy penalties; and considerations are practical. The circumstance that some enquiry was contemplated by the Department and that enquiry may be the motive behind filing the revised return is not decisive in the matter. The point to be noted is that at that stage no actual discovery was made by the Department.

15. There can be no manner of doubt that even the Central Board of Direct Taxes was practical in issuing the advertisement. Unearthing the suppressed income was and is becoming an extremely difficult, if not an impossible, task. The price for discovery of such income was too heavy in terms of time and money. Economy demanded the urgent netting of maximum revenue.

16. The message to the public was clear. The reasons behind the message were obvious. Under the circumstances, there is no justification—legal or moral—to run away from the consequences of such a message. The reliability of the Department is more important than some revenue here and there, even from the larger and long-term point of view of tax collection. The promise was clear, it had to be kept and hence, it was not open to the Inspecting Assistant Commissioner to impose penalty under the circumstances.

17. After studying the figures and making calculations the Department agrees before us that the income returned is more than 80 per cent. of the income assessed and, therefore, the Explanation to section 271(1)(c) is not attracted and, hence, the question of penalty will have to be enquired into and adjudicated upon without the deeming provisions of the Explanation. Under the circumstances, we record our answers as under:

Question No. (i).— In the affirmative and in favour of the assessee.

Question No. (ii).— In the affirmative and in favour of the assessee.

Question No. (iii).— In the negative and in favour of the assessee.

Question No. (iv) and Question No. (v).— Explanation to section 271(1)(c) of the Income-tax Act does not apply.

18. No order as to costs.

Bombay Cloth Syndicate v. Commissioner Of Income-Tax.

Structured Summary of the Opinion — V.A. Mohta, J.

Factual and Procedural Background

Legal Issues Presented

Arguments of the Parties

Assessee's Position

Revenue's Position (as described in the opinion)

Table of Precedents Cited

Court's Reasoning and Analysis

Holding and Implications

Bombay Cloth Syndicate v. Commissioner Of Income-Tax.

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