- Bookmark
- Share
- CaseIQ
Commissioner Of Income-Tax v. Shanta Electrical Industries
Judgment Summary: D.R. Khanna, J. — Shanta Electrical Industries (assessment year 1974–75)
Factual and Procedural Background
The firm, Shanta Electrical Industries, had an accounting year ending on May 31, 1973, which was relevant to assessment year 1974–75. The firm had an extended period (described in the opinion as about 13–14 months up to July 31, 1974, with alternative date annotations in the record) to file its return for that year but did not file within that time or seek an extension. The return was ultimately filed on May 28, 1975, and income for the year was assessed at approximately Rs. 1,34,000.
This was the assessee's second year of business; in the earlier year the return had also been filed late. For the earlier year a penalty under section 271(1)(a) had been levied but was quashed by the Income-tax Appellate Tribunal (ITAT).
For the assessment year 1974–75, the Income-tax Officer issued a show-cause notice under section 271(1)(a) for delay in filing the return. No personal appearance was made before the Officer, and a penalty of Rs. 18,360 was levied at 2% per month for nine months' delay. On appeal the Appellate Assistant Commissioner sustained the penalty, though the assessee maintained that a written reply to the show-cause notice had been submitted at a counter (with a receipt) and was not considered by the Officer at the hearing.
The assessee explained delay in filing on two grounds: (a) inability to finalise accounts because confirmations of balances from Government Departments were not received (affecting transit loss, transit charges and goods returned); and (b) the auditors completed the audit only by May 21, 1975, because the accounts were given to them in April 1975, and the return was subsequently filed on May 28, 1975.
In second appeal the ITAT quashed the penalty (also noting a difference in the correct quantum of the penalty). The Commissioner moved for references under section 256(1) and then under section 256(2) of the Income-tax Act, 1961. The Tribunal refused a reference under section 256(1) on the grounds that the matter was one of fact and that the point had already been dealt with by Delhi High Court decisions. The Commissioner then presented a petition under section 256(2) posing six specific questions of law and seeking the High Court's determination.
Legal Issues Presented
- Whether the Tribunal was correct in holding that it is for the Department to establish that delay in filing the return was without reasonable cause under section 271(1)(a) of the Income-tax Act, 1961.
- Whether the Tribunal was correct in holding that the return could not be filed without the audit having been completed although there is no statutory or other requirement for the firm's accounts being audited.
- Whether the Tribunal was correct in holding that the assessee may not close his accounts till confirmations by the various Government offices were received to whom the goods had been supplied.
- Whether the Tribunal was correct in ignoring that the assessee had not filed any application seeking extension of time for filing the return although he was an existing assessee and aware of the filing obligation.
- Whether the Tribunal was correct in holding that none of the lower authorities had considered the assessee's explanation dated March 6, 1979, and whether that omission made the Tribunal's order perverse for ignoring facts on record.
- Whether the Tribunal was correct in cancelling the penalty as levied by the Income-tax Officer (and confirmed with modifications by the Appellate Assistant Commissioner).
- As ultimately framed by this Court for referral: Whether, on the facts and in the circumstances of the case, the Tribunal was justified in deleting the penalty levied under section 271(1)(a) of the Income-tax Act, 1961?
Arguments of the Parties
Assessee's Arguments
- The firm could not finalise the accounts because confirmations of balances from Government Departments (to whom supplies had been made) had not been received; therefore items such as damages for loss in transit, transit charges and goods returned could not be accounted for.
- The firm's auditors did not complete the audit until May 21, 1975; the accounts had been given to auditors only in April 1975, and the return was filed on May 28, 1975—leading to delay.
- The assessee submitted a written reply to the show-cause notice and possessed a receipt for submission; this reply was not considered by the Income-tax Officer because it had been submitted at the receipt counter rather than produced at the hearing before the Officer.
Revenue's (Commissioner of Income-tax) Position
- The Commissioner challenged the ITAT's quashing of the penalty and contended that the Tribunal adopted an erroneous legal approach—particularly in holding that it was for the Department to establish absence of reasonable cause for delay under section 271(1)(a).
- The Commissioner sought that legal questions (as listed in the petition under section 256(2)) be referred to the High Court for decision, asserting that the Tribunal's approach raised questions of law.
Table of Precedents Cited
| Precedent | Rule or Principle Cited For | Application by the Court |
|---|---|---|
| CIT v. Gujarat Travancore Agency, [1976] 103 ITR 149 (Ker) | Cited among authorities recognising that mens rea, in the criminal-law sense, is not an essential ingredient for levy of penalty under section 271(1)(a). | Used to support the proposition that absence of criminal mens rea is not required for imposing penalty under s.271(1)(a). |
| Additional CIT v. Dargapandarinath Tuljayya & Co., [1977] 107 ITR 850 (AP) | Referenced both for the point that mens rea is not essential and for the observation that the Commissioner must reach satisfaction about existence or absence of reasonable cause, but the assessee must place matters within his exclusive knowledge. | Cited to show nuanced positions: (a) mens rea is not required; (b) while the Commissioner must be satisfied, the assessee has to produce facts peculiarly within his knowledge to discharge any onus. |
| CIT v. Gangaram Chapolia, [1976] 103 ITR 613 (Orissa) [Full Bench] | Held that the burden of proof of reasonable cause is on the assessee as the matter is within his special knowledge; the burden may be discharged by preponderance of probabilities. | Referred to demonstrate authority that the assessee bears an initial burden (by preponderance) in establishing reasonable cause when matters are peculiarly within his knowledge. |
| V.L. Dutt v. CIT, [1976] 103 ITR 634 (Madras) | Where a person has no explanation to offer, that absence may be treated as circumstantial evidence of acting without reasonable cause; an explanation prima facie unreasonable permits levy of penalty. | Cited to illustrate that an absence or prima facie unsatisfactory explanation may justify imposition of penalty by the Income-tax Officer. |
| Smt. Kamla Vati v. CIT, [1978] 111 ITR 248 (P&H) | Negative applicability of doctrine of mens rea in cases under section 271(1)(a); if failure to furnish return without reasonable cause is shown, that suffices for penalty. | Used to reinforce that mens rea is not a prerequisite and that proof of absence of reasonable cause suffices for penalty imposition. |
| H.H. Maharani Sharmishthabai Holkar v. Addl. CIT, [1981] 129 ITR 13 (M.P.) | Affirmed positions (similar to other courts) regarding penalty imposition under section 271(1)(a). | Cited as supporting authority consistent with the view that mens rea is not essential and that reasonable cause is a civil-standard inquiry. |
| CIT v. M. Farahatullah, [1985] 151 ITR 763 (AP) | Held that the Tribunal's legal reasoning that the Revenue must establish the absence of reasonable cause was illegal and erroneous; the assessee must satisfactorily explain the delay. | Relied upon to show that a tribunal's conclusion placing the onus entirely on Revenue can be held legally erroneous. |
| Venkateswara Power Rolling Mills v. CIT, [1974] 97 ITR 168 (Mysore) | Cited in context on issues of account finalisation and treatment of losses across years (supporting the view that losses may be claimed in the ensuing year rather than delaying closure). | Used to support the proposition that an assessee should not necessarily delay closing accounts pending confirmations and could claim loss in a subsequent year. |
| CIT v. Asiatic Trade Combine, [1977] 108 ITR 75 (Orissa) | Also cited on questions of account finalisation and the propriety of depending on confirmations from other departments before closing accounts. | Referred to back the Court's view that the assessee's dependence on confirmations did not automatically constitute reasonable cause for delay in filing. |
Court's Reasoning and Analysis
The Court began by examining whether the ITAT's treatment of the allocation of onus—specifically the Tribunal's statement that the Revenue must establish the absence of reasonable cause—raised a question of law. The Court observed that while it may superficially appear that the Revenue being required to establish the negative (absence of reasonable cause) is unsustainable, there is an evidentiary principle (cited from section 106 of the Evidence Act) that when facts are within a particular person's knowledge, it is generally for that person to produce them.
The Court explained the analytical balance: where an assessee has come forward with some reasons for delay, the Revenue must then demonstrate that those reasons are unacceptable. The evaluation is by preponderance of probabilities; ipse dixit or fanciful explanations will not suffice.
The Court surveyed a line of authorities showing differing emphases: several decisions repeatedly held that mens rea (criminal intention) is not required for penalties under section 271(1)(a); other decisions placed initial evidential responsibility on the assessee to produce matters peculiarly within his knowledge, to be judged on civil standards. The Court also referred to decisions which found it illegal for a tribunal to shift the entirety of the onus to the Revenue.
Applying these principles to the facts, the Court noted that it was not obligatory for the firm to have its accounts audited (particularly given the income shown) and observed that the firm could, in any case, have engaged professional help in time to enable return filing by the due date. The Court emphasised that correct and complete maintenance of accounts is the assessee's responsibility and that the assessee could not be entirely dependent on confirmations from Government Departments to ascertain the position of goods returned or damaged. The Court further noted that, given the 13–14 months' period available between closing of accounts and the return due date, the assessee could have ascertained matters such as goods returned or damaged and, if necessary, claim losses in a subsequent year rather than delay closure.
Although the Court acknowledged that normally the existence of reasonable cause is a question of fact, it found a prima facie erroneous approach by the Tribunal in assessing absence or existence of reasonable cause in this case and in its treatment of whether any reasonable cause existed on the facts. The Tribunal had also observed an apparent inconsistency relating to whether the Appellate Assistant Commissioner had considered the assessee's explanation; the Court perceived that this factual/legal assessment merited judicial scrutiny.
For these reasons, the Court concluded that a question of law arose for reference and directed the Tribunal to refer an overall question of law to the High Court concerning whether the Tribunal was justified in deleting the penalty under section 271(1)(a).
Holding and Implications
Holding: The Court directed that the following question of law should be referred by the Tribunal to the High Court for determination:
“Whether, on the facts and in the circumstances of the case, the Tribunal was justified in deleting the penalty levied under section 271(1)(a) of the Income-tax Act, 1961?”
Direct Effect on the Parties: The immediate consequence is that the Tribunal is to make a reference of the above-stated question of law to the High Court (i.e., the matter is not finally disposed of by this Court but is to be examined by the High Court on the framed legal question). The Court did not itself finally decide whether the penalty should stand or be sustained; instead it required a formal legal determination by the High Court on the referred question.
The opinion does not purport to lay down a novel or definitive new precedent on all aspects of burden of proof in such penalty cases; rather, it identified a prima facie erroneous approach by the Tribunal in the present facts and ordered a reference of the legal question to the High Court.
D.R Khanna, J.:— The accounting year of the firm, Shanta Electrical Industries which has been supplying electrical goods mainly to the Railways, ended for the year relevant to the assessment year 1974–75, on May 31, 1973.
2. It had 14(13?) months at its disposal up to July 31, 1974 (30-6-74?) to file its return for this year. This was not done, nor any application seeking extension of time was moved. The return was filed on May 28, 1975, and the income assessed has been around Rs. 1,34,000.
3. This was the second year of the assessee's business and in the earlier year also the return was filed on August 23, 1974, instead of the due date of July 31, 1973 (30-6-73?). A penalty for this delay was levied under section 271(1)(a) of the Income-tax Act, 1961, but the same was quashed by the Income-tax Appellate Tribunal. For the present assessment year 1974–75, the Income-tax Officer again commenced penalty proceedings for the delay in filing the return under section 271(1)(a) and issued a show-cause notice to the assessee, requiring it to appear on a particular date before him. No appearance was made and as such a penalty of Rs. 18,360 was levied at the rate of 2% per month of tax for nine months' delay. In appeal, the Appellate Assistant Commissioner sustained this penalty. During the course of the proceedings, the assessee brought out that it had, in fact, submitted a reply to the show-cause notice and possessed a receipt for the same, but the same had not been taken into account by the Income-tax Officer. It appeared that the reply had been submitted at the counter with the receipt clerk and not before the Income-tax Officer at the time of the hearing.
4. The former failed to lay that before the Income-tax Officer. The Appellate Assistant Commissioner, therefore, considered that reply and explanation of the assessee and after providing a hearing, maintained the penalty. Two reasons were given by the assessee. One was that there was delay in finalisation of the accounts as confirmations of the balances from the Government Departments had not been received. In this manner, damages paid for loss in transit, transit charges and goods returned could not be accounted for. The other reason was that the auditors of the assessee did not complete the audit till May 21, 1975, and as such the return was filed on May 28, 1975. It was admitted that the accounts were given for audit to the auditors only in April, 1975.
5. In second appeal, the Income-tax Appellate Tribunal, quashed the penalty. It was first noted that the quantum of penalty, even if exigible, would work out to Rs. 14,042 as against Rs. 18,360 imposed by the Income-tax Officer. The Tribunal next observed that, according to the reported case law, it was for the Department to show absence of reasonable cause on the part of the assessee before any penalty was exigible under section 271(1)(a) of the Act. It was also accepted that the assessee could not finalise its accounts and arrive at correct figures of profit and loss unless confirmations were received from the Government Departments and the accounts too had been audited. The penalty imposed was, therefore, set aside.
6. The Commissioner of Income-tax then moved a petition under section 256(1) of the Income-tax Act, 1961, for reference of a number of questions, said to be of law, to the High Court. The same, however, was rejected by the Tribunal, firstly, on the ground that what had been decided was a question of fact and, secondly, because there were already decisions of the Delhi High Court covering the subject, and any further reference of the same point would be wasting the judicial time of the court.
7. Feeling aggrieved, the Commissioner of Income-tax has now moved the present petition under section 256(2) of the Income-tax Act, 1961, in which reference has been sought of the following questions:
“1. Whether, on the facts and in the circumstances of the case, the Tribunal is right in holding that it is for the Department to establish that delay in filing the return was without reasonable cause under section 271(1)(a) of the Income-tax Act, 1961?
2. Whether, on the facts and in the circumstances of the case, the Tribunal was correct in holding that the return could not be filed without the audit having been completed although there is no statutory or other requirements for the accounts of the assessee-firm being audited?
3. Whether, on the facts and in the circumstances of the case, the Tribunal was legally correct in law in holding that the assessee may not close his accounts till confirmations by the various Government offices were received to whom the goods have been supplied?
4. Whether, on the facts and in the circumstances of the case, the Tribunal was legally correct in ignoring the fact that the assessee had not filed any application seeking extension of time for filing the return although he was an existing assessee and was conscious of the fact of filing the return?
5. Whether, on the facts and in the circumstances of the case, the Tribunal was legally correct in holding that none of the lower authorities, in fact, considered the explanation of the assessee dated March 6, 1979, and none of them have recorded whether the grounds recorded in the explanation constitute reasons for the delay in filing the return although the Appellate Assistant Commissioner has specifically recorded the full facts in his order and came to the conclusion that the penalty was exigible in this case? Is not the order of the Tribunal perverse as it has ignored a fact on record?
6. Whether, on the facts and in the circumstances of the case, the Tribunal was correct in cancelling the penalty as levied by the Income-tax Officer (and confirmed by the Appellate Assistant Commissioner with certain modifications in the quantum)?”
8. At the time of the hearing of this petition, none appeared from the side of the assessee. We have, therefore, heard the learned counsel for the Commissioner.
9. At the outset, it must be said whether the Tribunal's adopting a legal approach in observing that it lay upon the Department to show absence of reasonable cause on the part of the assessee before any penalty under section 271(1)(a) of the Act could be exigible, gives rise to a question of law. Ex facie, the approach that the Revenue, must establish the negative, may not be sustainable inasmuch as when some facts are within the knowledge of a particular person, it is generally for that person to bring them out. Section 106 of the Evidence Act contains this salutary principle and even though the technical rules of evidence are not essentially applicable to income-tax proceedings, it cannot be ignored that the rule has sound practical basis. Once, however, such person has come out with some reasons, it is then for the Revenue to show that they are not acceptable. The appraisement may then be by way of preponderance of probabilities. Any ipse dixit or fanciful explanation may not stand this test. It has been now recognised in a number of decisions that mens rea in the sense in which the same is required for an offence under the criminal law is not an essential ingredient for levy of penalty under section 271(1)(a) of the Act. (See in this regard CIT v. Gujarat Travancore Agency, [1976] 103 ITR 149 (Ker) [FB] and Additional CIT v. Dargapandarinath Tuljayya & Co., [1977] 107 ITR 850 (AP) [FB]). The Orissa High Court in another Full Bench decision in CIT v. Gangaram Chapolia, [1976] 103 ITR 613 [FB], observed that taxing authorities must be satisfied that the failure to furnish the return in time was without reasonable cause and that the burden of proof of reasonable cause is on the assessee as the matter is within his special knowledge and this burden can be discharged by preponderance of probabilities as in a civil case and not necessarily by proof beyond reasonable doubt. The Madras High Court too in V.L Dutt v. CIT, [1976] 103 ITR 634, observed that where a person has no explanation to offer, it may be treated as circumstantial evidence to show that he had acted without reasonable cause and further where the explanation is so prima facie unreasonable, it would be open to the Income-tax Officer to levy penalty on the ground that the assessee had no reasonable cause for delay in submission of the return. In Addl. CIT v. Dargapandarinath Tuljayya & Co., [1977] 107 ITR 850 (AP), a Full Bench of the Andhra Pradesh High Court also observed that though the burden is on the Commissioner to reach the satisfaction as to existence or absence of reasonable cause for delay in filing the returns, the assessee must place before the appropriate authority, matters which are within his exclusive knowledge and that the mere saying that they were prevented by family troubles without any elaboration of the same, or their duration was not enough. The Punjab and Haryana High Court has in Smt. Kamla Vati v. CIT, [1978] 111 ITR 248, negatived the applicability of the doctrine of mens rea in cases falling under section 271(1)(a) and observed that where it was shown that the assessee had failed to furnish the return without reasonable cause, that was sufficient for imposition of penalty. Similar has been the view of the Madhya Pradesh High Court in the decision reported as H.H Maharani Sharmishthabai Holkar v. Addl. CIT, [1981] 129 ITR 13 and of the Andhra Pradesh High Court in the case CIT v. M. Farahatullah, [1985] 151 ITR 763. In the latter decision, the Tribunal's legal reasoning in arriving at the conclusion that there was no justification for the levy of penalty under section 271(1)(a) because the Revenue had not established the absence of reasonable cause, was held to be illegal and erroneous in law. It was held that the assessee had to satisfactorily explain the delay in filing the return and it was not for the Revenue to establish its failure.
10. Ex facie, it was not obligatory for the firm to get its accounts audited, more so considering the income shown. In any case, it would appear that they could have availed of the services of a professional expert in this regard well in time to enable the filing of the return by due date. Moreover, the correct and complete maintenance of accounts was the responsibility of the assessee and they prima facie could not be dependent upon confirmations, if any, from the Government Departments. After all, the assessee knew what supplies had been effected and considering the 14(13?) months' period available between the closing of the accounting year and the due date for the filing of the return, it could be said that it could well ascertain the position of the goods returned or damaged. Loss suffered in any ensuing year could as well be claimed as such in that year instead of delaying the closure of the earlier year's accounts. (See in this regard two decisions of the Mysore High Court and Orissa High Court, reported as Venkateswara Power Rolling Mills v. CIT, [1974] 97 ITR 168 and CIT v. Asiatic Trade Combine, [1977] 108 ITR 75 respectively.
11. We are conscious that normally it is a question of fact whether there existed reasonable cause or not for non-filing of the return by due date. However, in view of the prima facie erroneous approach adopted by the learned Tribunal in the assessment of absence or existence of reasonable cause and further whether there could at all be said to exist any reasonable cause in the present case, we are inclined to direct the Tribunal to refer the following overall question of law in the facts and circumstances of the present case to the High Court. This is all the more so as the Tribunal observed that the Appellate Assistant Commissioner had not taken into consideration the explanation submitted by the assessee while in fact he had considered the same:
“Whether, on the facts and in the circumstances of the case, the Tribunal was justified in deleting the penalty levied under section 271(1)(a) of the Income-tax Act, 1961?”
Alert