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Qammar-Ud-Din & Sons v. Commissioner Of Income-Tax, New Delhi
Judgment Summary — Extracted from the Provided Opinion (Ranganathan, J.; D.R. Khanna, J.)
Factual and Procedural Background
The references arise from an order of the Income-tax Appellate Tribunal (the Tribunal) in relation to the assessment year 1965-66 in the case of M/s. Qammar-ud-din and Sons, a registered firm of three partners. The firm filed a return of income on 20 October 1965 declaring income of Rs. 35,000 and stating in the return (para. 7) that the income was "as per the statement of account attached herewith", although no such statement was attached at that time.
Notices under section 143(2) of the Income-tax Act, 1961 were issued (29 November 1965 and 9 December 1966). At some point before the ITO took up the case, the firm filed a profit and loss account showing net profit of Rs. 83,790. The ITO called for a revised return; on 24 December 1966 the assessee filed a revised return showing income of Rs. 83,790. The assessment was completed on a total income of Rs. 89,642 after adjustments. The IAC imposed a penalty of Rs. 10,000 under section 271(1)(c) by order dated 14 October 1968. On appeal the Tribunal found concealment and applied section 271(1)(c) but reduced penalty to statutory minimum of 20% in view of a partner's recent death. Two questions were referred to this Court under section 256 of the Act: (1) whether the original return of 20-10-1965 could be held invalid because it was not accompanied by the profit and loss account; and (2) whether the Tribunal was right in law in holding that there was concealment and that the penalty was validly imposed.
Legal Issues Presented
- Whether, on the facts and in the circumstances of the case, the return filed on 20-10-1965 could be held to be an invalid return by reason of the fact that it was not accompanied by the profit and loss account?
- Whether, on the facts and in the circumstances of the case, the Income-tax Appellate Tribunal was right in law in holding that there was concealment of income by the assessee and that the penalty under section 271(1)(c) was validly imposed?
Arguments of the Parties
Appellant / Assessee (as presented by Shri P. N. Chopra)
- Relied on the Madras High Court decision in CIT v. Ramdas Pharmacy, [1970] 77 ITR 276.
- Conceded that the figure Rs. 35,000 in the original return was incorrect and could not be explained as to its basis.
- Submitted that all circumstances should be taken into account before imposing penalty: the assessee had on its own volition filed a profit and loss account showing about Rs. 83,790; the original return may have been an estimate because accounts were incomplete and one partner had died a few days prior to filing; there was no previous history of concealment or fraud; and for the year in question the assessee's income was substantially accepted.
- Contended that, given these circumstances, imposition of penalty was not justified.
Respondent / Revenue (as presented by Sri Kirpal)
- Contended that the onus is on the assessee to show absence of fraud or gross or wilful neglect.
- Argued that whether the assessee proved absence of fraud/neglect is a pure question of fact and appellate interference should not be made unless the Tribunal's conclusion was perverse or unreasonable.
Table of Precedents Cited
| Precedent | Rule or Principle Cited For | Application by the Court |
|---|---|---|
| CIT v. Ramdas Pharmacy, [1970] 77 ITR 276 (Madras High Court) | That filing of a revised return (or subsequent disclosure) can support a conclusion of no concealment; used to argue that penalty may not be appropriate where corrected information is furnished. | The Court noted that the assessee's counsel relied on this decision; observed that in that case the facts were more adverse to the assessee but still the High Court upheld that there had been no concealment because a revised return was filed. The precedent was used for comparison and to support the assessee's contention that subsequent disclosure can negate concealment. |
Court's Reasoning and Analysis
The Court addressed the two referred questions sequentially.
First question — validity of the original return (20-10-1965):
- The Court held that absence of an attached profit and loss account does not render a return per se invalid. A return filed without the attachment cannot automatically be treated as invalid simply because the stated attachment was not actually appended.
- The Tribunal had rightly rejected the contention that the return should be treated as invalid for want of the profit and loss account. The Court therefore held that the return of 20-10-1965 was a valid return and that subsequent proceedings before the ITO proceeded on the basis of that return.
Second question — concealment and validity of penalty under section 271(1)(c):
- The Court acknowledged that the original return disclosed an income (Rs. 35,000) that had no factual basis on the material before the Court, and that filing a return is a solemn obligation which should not be undertaken lightheartedly.
- Given the ITO's assessment at Rs. 89,642 and the Explanation introduced to section 271(1)(c) in 1964, the statutory deeming/probative provision operates to start from the presumption that the assessee had concealed particulars or furnished inaccurate particulars.
- The onus to prove absence of fraud or gross or wilful neglect lies on the assessee; ordinarily this is a question of fact and appellate interference is limited.
- However, on the facts the Court found that the Tribunal's conclusion of concealment was vitiated because it failed to consider certain material facts: (a) a partner had died a few days before the original return; (b) the assessee explained that final accounts were not ready and hence no statement was attached; and (c) crucially, the assessee had filed a profit and loss account showing a significantly higher income (Rs. 83,790) which was before the ITO when the case was first taken up on 22 December 1966.
- The Court emphasised that the profit and loss account was before the ITO at the time the ITO first considered the return and that the assessee provided a revised return two days after being called upon—facts showing the assessee came forward with the correct disclosure before the department had uncovered any discrepancy by investigation.
- Because the Tribunal had relied heavily on the lack of basis for the original return while failing to take adequate account of the assessee's subsequent conduct (voluntary filing of the profit and loss account and the context of the partner's death), the Tribunal's finding of concealment was held to be erroneous.
- The Court stressed that all circumstances up to completion of assessment must be considered and, if collectively they show absence of fraud or gross or wilful neglect, penalty should not be imposed.
- Concurring judgment (D.R. Khanna, J.) agreed with conclusions but emphasised the seriousness of filing returns and noted facts that could suggest mala fides (e.g., inconsistent statement about an attached account, the low figure being far removed from prior trends). Nevertheless, he concurred in quashing the penalty due to the combined circumstances (voluntary filing of profit and loss account and death of a partner).
- The opinion also contains an express observation about the Explanation to section 271(1)(c) (effective 1 April 1964): it does not create a separate offence but is a rule of evidence shifting onus to the assessee to prove the understatement was not due to fraud or gross/wilful neglect; the burden is akin to civil preponderance, not criminal standard.
Holding and Implications
Holding:
- First question: The return dated 20-10-1965 was held to be a valid return (answer given in favour of the revenue on the narrow point of validity of the return form).
- Second question: The Tribunal's finding of concealment and the resulting penalty under section 271(1)(c) were set aside; the second question was answered in the negative and in favour of the assessee. The Court made no order as to costs.
Implications:
- Direct effect on the parties: the penalty imposed by the IAC (Rs. 10,000, reduced by Tribunal to statutory minimum) is quashed in final result by this Court's conclusion; the assessment proceeds from a valid original return and the penalty is not sustainable on the facts before the Court.
- The Court emphasised evidentiary and procedural considerations: the Explanation to section 271(1)(c) shifts the evidentiary onus to the assessee to disprove fraud/gross neglect, but that onus is civil in nature (preponderance of probabilities). The Court applied that standard in assessing whether the assessee's subsequent conduct negated intent to conceal.
- The opinion does not purport to lay down a broad new precedent beyond its factual conclusions; it treats the subsequent voluntary disclosure and contextual facts (partner's death, timing of filing) as sufficient to negate requisite culpability on these facts. The Court compared a prior cited decision (CIT v. Ramdas Pharmacy) and explained its relevance to the assessment of concealment where revised disclosure is made.
Note: This summary strictly reflects only the facts, arguments, reasoning, and holdings contained in the provided opinion text. No external facts or inferences beyond the text have been introduced.
Ranganathan, J.:— Both these references can be disposed of by a common judgment. They arise out of the order of the Income-tax Appellate Tribunal in relation to the assessment year 1965-66, in the case of Qammar-ud-din and Sons, Delhi. One of the references, namely, I.T.R No. 30/72, was made by the Tribunal under s. 256(1) of the I.T Act, 1961 (“the Act” in short), referring the following question for the decision of this court i
“Whether, on the facts and in the circumstances of the case, the return filed on 20-10-1965 could be held to be an invalid return by reason of the fact that it was not accompanied by the profit and loss account?”
2. Subsequently, under s. 256(2) of the Act, this court directed the Tribunal to refer also the following question for decision:
“Whether, on the facts and in the circumstances of the case, the Income-tax Appellate Tribunal was right in law in holding that there was concealment of income by the assessee and that the penalty was validly imposed?”
3. This is how these two references are before us. M/s. Qammar-ud-din and Sons (hereinafter referred as “the assessee”) is a registered firm consisting of three partners. For the assessment year 1965-66, it filed a return of income on October 20, 1965, declaring an income of Rs. 35,000. In para. 7 of the return it was stated that the income was: “as per the statement of account attached herewith”. No such statement of account was, however, attached.
4. On November 29, 1965, a notice under s. 143(2) of the Act was issued. Again, on December 9, 1966, another notice under s. 143(2) was issued fixing the case for hearing on December 22, 1966. It appears that, in the meanwhile, on some date (which is not known) the firm had filed before the ITO a profit and loss account pertaining to the above year. On looking into this account, the ITO found that the net profit of the firm was Rs. 83,790 as against Rs. 35,000 returned by the assessee. He, therefore, called upon the assessee to file a revised return along with an explanation.
5. On December 24, 1966, the assessee filed a revised return showing an income of Rs. 83,790. The assessment was completed on a total income of Rs. 89,642 after making certain minor adjustments. Thereafter, the ITO initiated penalty proceedings and these culminated in an order of the IAC dated October 14, 1968, imposing a penalty of Rs. 10,000 on the assessee under s. 271 (1)(c) of the Act.
6. The assessee preferred an appeal to the Tribunal. The Tribunal came to the conclusion that the assessee was guilty of concealment of income and that the provisions of s. 271(1)(c) were attracted. But, having regard to the fact that one of the partners had died only a few days before the date of the original return, the Tribunal took a lenient view and restricted the penalty to the statutory minimum of 20%. It is out of this order of the Tribunal dated August 11, 1970, that these references have come up before us.
7. So far as the first question set out earlier is concerned, we do not think that the position admits of any doubt. Merely because, the assessee filed a return which was not accompanied by a statement of profit and loss account, it cannot be stated that the return itself was invalid. The contention of the assessee that because of this defect, the return itself should be treated as an invalid return was, in our opinion, rightly rejected by the Tribunal. The return filed on October 20, 1965, was certainly a valid return and the proceedings before the ITO were only on the basis of that return.
8. In regard to the second question, Shri P.N Chopra who appeared for the assessee based his arguments on the decision of the Madras High Court in CIT v. Ramdas Pharmacy, [1970] 77 ITR 276. Shri Chopra conceded that the figure of Rs. 35,000 returned by the assessee on October 20, 1965, was an incorrect figure and that he was not in a position to explain the basis therefor. His submission was, however, that before imposing a penalty in the case, all the circumstances should be taken into account. He pointed out that the assessee had filed a profit and loss account showing an income of about Rs. 83,790 on his own volition and that at first an estimate had to be filed as the accounts were not complete and as one of the partners died a few days prior to the filing of the return and that the assessee did not have any previous history of concealment or fraud and that even for the year in question the income as shown by the assessee was practically accepted. He, therefore, contended that, in the circumstances, the imposition of a penalty was not justified.
9. To start with, there is no doubt that the return filed by the assessee on October 20, 1965, did not have any factual basis. The obligation of filing of a return is a solemn and important one and should not be undertaken in a lighthearted and careless manner. It may be that, in some circumstances, an assessee may have to estimate its income, but if so, such estimate should have some basis therefor. An assessee cannot escape its responsibility or escape penal action merely by filing a return showing an estimated income but without there being any real basis for that income. In the present case, the return filed on October 20, 1965, was stated to be based on a statement of account. But it is quite clear that there was no such statement in existence at that time. Having regard to the fact that the income returned has not been accepted but has been assessed at Rs. 89,642 and having regard to the Explanation introduced to s. 271(1)(c) in 1964, the deeming provisions come into operation and we have to start with the presumption that the assessee had concealed particulars of the income or furnished inaccurate particulars thereof.
10. It is, however, contended on behalf of the assessee that in the circum--stances of the present case the failure to return the correct income did not arise from any fraud or gross or wilful neglect on it part.
11. Sri Kirpal, learned counsel for the respondent, vehemently contended that the onus is on the assessee to show that there has been no fraud or gross or wilful neglect and further that the question whether he has so proved is also a pure question of fact and that we should not interfere with a finding on this matter unless the conclusion of the Tribunal can be said to be perverse or unreasonable.
12. We agree with Sri Kirpal that normally it would be a question of fact as to whether the assessee is guilty of fraud or neglect. In the present case, however, we are of the opinion that, though the assessee has not disclosed the clear basis for a return of the income at Rs. 35,000, there was no fraud or gross or wilful neglect on its part and that the Tribunal's finding to the contrary is vitiated by failure to consider certain material facts. At the time when the original return was filed one of the partners of the firm had just died as mentioned in the order of the Tribunal. The assessee had explained both at the time of the assessment and in reply to the penalty notice that the final accounts had not been prepared as some adjustments were yet to be made and so the statement of account could not be attached with the return filed on October 20, 1965. But the most important fact in the case is that as soon as the ITO issued the notice under s. 143(2), the assessee filed a profit and loss account which showed the income of Rs. 83,790, very much more than the income shown in the return. The exact date when this account was prepared or filed is not clear. But there is no doubt that this profit and loss account was before the ITO on December 22, 1966, when he took up the consideration of the return for the first time. It was only in view of the discrepancy between the returned income and the income according to the profit and loss account filed by the assessee that the ITO called upon the assessee to file a revised return which was filed two days later. In other words, this is a case in which the assessee, on account of certain handicaps, was not able to set out the correct income in its return. But before the ITO investigated the matter or discovered anything wrong with the assessee's accounts or return the assessee itself came forward with a correct profit and loss account (which has been also subsequently accepted with only slight adjustments). If, on December 22, 1966, when the case had been fixed for hearing by the ITO, the assessee had filed a voluntary return on its own, then, in all probability, no penalty proceedings would have been initiated against the assessee. But though no revised return as such was filed, the assessee did give the ITO an information regarding the correct income voluntarily. We think that these facts show that the failure to return the correct income in the first instance did not arise from fraud or gross or wilful neglect. In this context, it should be appreciated that the onus cast on an assessee by this section is to prove a negative and all that is possible for him to do is to indicate certain circumstances on the basis of which the absence of fraud or gross or wilful neglect can be reasonably inferred.
13. We find that the Tribunal has based its conclusion essentially on the ground that the return filed on October 20, 1965, was not shown to have had any basis. In regard to the subsequent circumstances, the Tribunal has observed that no attempt has been made by the assessee to correct the originally returned figures on its own. This statement is not correct. While it is true that the revised return was not filed by the assessee until the officer called for it, the Tribunal has itself found that the assessee had voluntarily filed the profit and loss account showing the higher income of Rs. 83,790. The Tribunal has, in our opinion, erred in failing to take into account the subsequent conduct of the assessee by which it came forward to set right the mistake or under statement in the original return. Sri Kirpal contends that this was done by the assessee not voluntarily but only in response to a notice under s. 143(2). This is no doubt technically correct. But the notice under s. 143(2) is only a formal notice calling upon the assessee to produce evidence to enable the officer to verify the correctness of the return. There is nothing on record to indicate that prior to the issue of this notice the ITO had carried out any investigations or discovered the understatement made by the assessee. In the case decided by the Madras High Court the facts were much more adverse to the assessee but still the conclusion of the Tribunal that there had been no concealment because the assessee had filed a revised return was upheld by the High Court. In the present case, there was no doubt a certain amount of carelessness on the part of the assessee while filing the return but, before the department discovered anything remiss therewith, the assessee came forward with a true disclosure. Such subsequent conduct is very relevant to the issue and the failure to take it into account has vitiated the Tribunal's conclusion.
14. We should not be understood as minimising the importance of filing a correct return. The obligation of filing a return should be discharged scrupulously and sincerely. But at the same time before an assessee is mulcted with penalty, all the circumstances and developments till the assessment is completed should be taken into account and if the collective effect of the situation is to show that the failure to return the correct income was not on account of gross or wilful neglect, the assessee should not be penalised.
15. For the reasons discussed above, we answer the first question in favour of the revenue, by saying that the return dated October 20, 1965, was a valid return. The second question is answered in the negative and in favour of the assessee. We, however, make no order as to costs.
D.R Khanna, J.:— I am inclined to concur with the conclusions arrived at by my learned brother. As observed by my lord, the obligation of filing a return is a solemn and important one and should not be taken in a lighthearted and careless manner. The prescribed return-form too enjoins verification of the correctness of the income and the particulars furnished. In the present case, the narration of the facts by the Tribunal had brought out how the assessee had without any basis filed the original return disclosing an income of Rs. 35,000. In this return, it was mentioned that a statement of account was attached therewith. This tends to show that the assertion made later by the assessee that accounts were not complete, was not correct. What has happened to that statement of account is not known. Whether it was lost in the I.T office or done away with, or was erroneously so stated, while in reality no such statement was filed, is difficult to say. In the last eventuality, in case the assessee wanted to negative the presumption created by the categorical mention in the return that the statement of account had been attached, the proper course was to have filed an affidavit clarifying the entire position.
16. In case, as later asserted by the assessee, the accounts were not complete and the return was simply filed on estimate basis, the income disclosed should have had some relevance or close proximity to the extent of business undertaken in the previous year. The assessee knew very well the nature and extent of that business. The same had shown an upward trend from the preceding year. At least, therefore, the assessee could have filed the return keeping in view the income disclosed and assessed in the preceding year which was around Rs. 83,000. None of this was done. Instead, an extremely low figure of Rs. 35,000, which had little bearing on or nexus with the business results, was mentioned in the return.
17. The practice of accepting returns as they are, under the assumption they should not be taken with suspicion and invite investigation, is being progressively adopted in India. This is a healthy sign. The same, at the same time, casts a corresponding duty on the assessees also that they should as well, like gentlemen, display a conduct which is honest, straight forward and above board. Now, in the present case, had the original return filed by the assessee been accepted, considerable income assessable to tax would have been evaded. The assessee further managed to escape with much less deposit of advance tax by representing that low figure of its income. Its contention, therefore, that no mala fides were involved from its side and its conduct was throughout above board does not appear to be correct.
18. The necessity of issuing a notice under s. 143(2) of the Act arises where the ITO is not satisfied with the correctness of the income returned, and wants to verify and probe into the affairs by looking into the account books and otherwise. Two such notices had been issued to the assessee and it was then found that the assessee had filed a profit and loss account showing an income of Rs. 83,790. As to when this profit and loss account was prepared, or when the same was filed, is not clear. The assessee should have come out with a clear stand about this. Even at the stage of the hearing of this reference, all that was stated was that this account was filed before the assessment was actually taken up in pursuance of the notice under s. 143(2) of the Act. As to when that profit and loss account had been prepared was still not clarified. In case it had been prepared before the second notice under s. 143(2) of the Act, it has remained unexplained why the assessee did not hasten to file the revised return on its basis instead of waiting for the ITO to require it to do so. This revised return was itself an admission on its part of the incorrectness of the original return.
19. A profit and loss account can only be a supplement to the return. It is corroborative and a sort of evidence supporting the version of income disclosed in the return. It, however, cannot in any circumstance take the place, of the return itself, nor can be attached to it a greater sanctity than to the return. Section 271(1)(c) of the Act, when it provides for penalty, refers to the concealment or suppression effected in the return. At the same time there can be cases of bona fide errors where some mistakes by inadvertence creep into the returns although the profit and loss accounts stand already attached with the returns or are filed before the assessments are taken up. No menswear in such cases need essentially be imputed. The question to be considered is in which of the categories the present case falls. My learned brother has in this regard observed that the filing of the profit and loss account was a voluntary act of the assessee, and this negatived any intention on its part to conceal income, as it had substantially brought out the true income. The misfortune of the death of one of the partners before the filing of the return has also been taken note of. Con- sidering these circumstances, I am inclined to concur with the final conclusion that the penalty be quashed.
20. Before concluding I may add that so far as the Explanation added to s. 271(1)(c) of the Act with effect from April 1, 1964, is concerned, the same on its own did not create any independent offence. This Explanation only embodies a rule of evidence and places the onus on the assessee of proving that the understatement of income in the return, where such income falls short of 80 per cent, of the assessed income, was not on account of any fraud or any gross or wilful neglect on his part. This burden, however, is not of the same nature which rests on the prosecution in a criminal case. It is a burden akin to that in a civil case, where the determination is made on the preponderance of probability.
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