Citation Codes

Equivalent Citations

citation codes

Case Number

Income-tax References Nos. 1 and 9 of 1972

Judges

Hon'ble Sh. Justice Syed Murtaza Fazl Ali
Hon'ble Sh. Justice Devi Dass Thakur

Acts

section 28 of the previous Act or section 271(1)(c) of the present Act.
section 271(1)(c) of the new Act and section 28 of the old Act.
1964. Section 271(1)(c) of the Income-tax Act,
section 271(1)(c) of the Income-tax Act
section 271(1)(c) of the amended Act.
SECTION 271 I INCOME TAX ACT
INCOME TAX ACT
provision of the Income-tax Act,
provisions of section 271(1)(c)
Finance Act of 1964,
section 271(1)(c)

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Smart Summary

Case Summary — Two Income-tax References (Bakshi Mohd. Yusuf & Bakshi Mohd. Shafi)

Factual and Procedural Background

These proceedings comprise two income-tax references to this Court arising from penalty orders confirmed by the Income-tax Appellate Tribunal (the Tribunal). The office had registered four references in error; in substance there were only two references (one in the case of Bakshi Mohd. Yusuf and the other in the case of Bakshi Mohd. Shafi), dealt with together by a common judgment.

Bakshi Mohd. Yusuf: For assessment year 1962-63 the assessee, a working partner in Messrs. Fairdeal Motors (Indore), filed a return showing salary of Rs. 500 but did not show his share of profits in the firm. Particulars of the share income were provided to the department subsequently. The Income-tax Officer issued a show-cause notice on 27 March 1967; after hearing, the matter was referred to the Inspecting Assistant Commissioner (IAC), who imposed a penalty of Rs. 3,550 on 10 March 1969. The Tribunal affirmed the IAC's order, holding that although there was no concealment (the Income-tax Officer knew of the omitted income), the assessee had deliberately furnished inaccurate particulars; the Tribunal stated that an amendment to the relevant provision required strict construction and favored imposition of penalty. The assessee sought a reference to this court and the Tribunal posed two questions for opinion.

Bakshi Mohd. Shafi: For assessment year 1962-63 the assessee, a partner in M/s. Fairdeal Motors (Indore) and J.K. Timbers Traders (Srinagar), did not show any share of profits from these firms in his return. The IAC imposed a penalty of Rs. 11,750 on 10 March 1969. The Tribunal confirmed the penalty and referred two questions to this court, analogous to those referred in Yusuf's case.

The Tribunal's two questions in each case asked (1) whether the assessee had "deliberately furnished inaccurate particulars" so as to attract section 271(1)(c) of the Income-tax Act, and (2) whether penalty procedure was legally compliant when the IAC did not issue a notice under section 274 before assessment completion. The parties withdrew reliance on question No. 2 in both cases; the court confined its consideration to question No. 1.

Legal Issues Presented

Whether, on the facts and in the circumstances of each case, the assessee had "deliberately furnished inaccurate particulars of his income" (by omitting share of profits from returns) so as to attract the penalty provision of section 271(1)(c) of the Income-tax Act?
Whether the procedure for the levy of penalty was legally complied with when the Inspecting Assistant Commissioner did not issue a notice under section 274 before completion of the assessment? (This procedural question was expressly withdrawn and was not pressed before the Court.)

Arguments of the Parties

The opinion does not contain a detailed account of the parties' legal arguments.

Table of Precedents Cited

Precedent	Rule or Principle Cited For	Application by the Court
Additional Commissioner of Income-tax v. Sadiq Ali & Bros, I.T. Reference No. 4 of 1972; [1973] 92 I.T.R. 276 (J. & K.)	Interpreting section 271(1)(c) (and analogous provisions of the old Act): where return filed and amounts appear in books/accounts, the case may not amount to "concealment"; the qualifier "satisfied" requires cogent materials to infer deliberate concealment or culpable negligence; absent such materials, penalty should not be imposed.	The Court treated the present cases as on all fours with Sadiq Ali & Bros, relied on its construction of section 271(1)(c), and concluded that, similarly, absent materials showing deliberate or culpable conduct, penalty was not exigible.
Commissioner of Income-tax v. Anwar Ali; [1970] 76 I.T.R. 696; [1971] 1 S.C.R. 446 (Supreme Court)	Authority relied upon by the Division Bench decision cited above for the proposition that sufficient materials are required to raise an inference of deliberate concealment or culpable negligence before imposing penalty.	The Court noted it had relied on this Supreme Court decision in construing the penalty provision and used its observations as supporting the requirement of cogent materials before attracting penalty under section 271(1)(c).

Court's Reasoning and Analysis

The Court's analysis proceeded in identifiable steps, tied closely to admitted facts and to statutory text as it stood at the relevant time:

Identification of admitted facts: both assessees were partners; one had shown salary but not profit-share, the other showed neither; after filing returns the assessees produced copies of the firms' accounts showing the profits, so the Income-tax Officer was aware of the omitted income; returns were signed and verified by the assessees.
Determination of applicable statutory text: section 271(1)(c) of the Income-tax Act had been amended by the Finance Act 1964 (deleting the word "deliberately"), but the assessments in question were for 1962-63 and thus governed by the pre-1964 wording which read "Has concealed the particulars of his income or deliberately furnished inaccurate particulars of such income." The Court therefore applied the pre-amendment text containing the word "deliberately."
Interpretation of "deliberately": the Court emphasized that the legislature intentionally used the word "deliberately" before "furnished inaccurate particulars," demonstrating that not every inaccuracy attracts penalty; rather, the conduct must be deliberate and wilful to fall within section 271(1)(c) as it then stood.
Reliance on precedent: the Court relied on a Division Bench decision (Additional Commissioner v. Sadiq Ali & Bros) and, through it, on the Supreme Court decision in Commissioner v. Anwar Ali, which established that the satisfaction required under the section must be based on "cogent and proper materials" and that absent sufficient materials to infer deliberate concealment or culpable negligence, penalty cannot be imposed.
Examination of Tribunal's reasoning and rejection of its bases: the Court identified two principal bases for the Tribunal's conclusion and rejected both:
- First, the Tribunal's view that the Finance Act amendment required stricter construction was incorrect for these cases because the amendment (and deletion of "deliberately") post-dated the assessments; moreover, the change was numerical (section numbering) and did not alter the relevant statutory content applicable to these assessments.
- Second, the Tribunal's inference that a signed and verified return necessarily implies deliberate furnishing of inaccurate particulars was unsound. The Court reasoned that the legislature was aware returns must be signed and verified, and if signing alone sufficed to infer deliberateness, the deliberate-omission requirement would be rendered meaningless. The Court recognized the possibility of errors or omissions due to negligence, oversight or forgetfulness despite signature and verification.
Application to the facts: given that the assessees filed returns (signed and verified), later produced books/accounts showing the profits, and the Income-tax Officer was aware of the omitted items, the Court found no cogent materials pointing to wilful or culpable conduct sufficient to satisfy the statutory threshold for penalty under the pre-1964 section 271(1)(c).
Conclusion of analysis: absent circumstances establishing deliberate or culpable negligence on the part of the assessees, penalty under section 271(1)(c) could not be sustained; the Tribunal's imposition of penalty was legally erroneous.

Holding and Implications

Holding: The Court answered the references to question No. 1 in both cases by holding that penalty under section 271(1)(c) of the Income-tax Act (as it stood prior to the 1964 amendment) was not exigible and must be deleted.

Direct consequences for the parties: The penalties imposed by the Inspecting Assistant Commissioner and confirmed by the Tribunal in each case are set aside (deleted). The Court ordered that there will be no order as to costs.

Wider implications: The opinion explains and applies the principle that, under the pre-1964 wording of section 271(1)(c), an omission or inaccuracy in a tax return attracts penalty only if the omission is deliberate (wilful) or there is culpable negligence supported by cogent materials. The judgment does not purport to pronounce on the effect of the 1964 deletion of the word "deliberately" for assessments occurring after that amendment; the Court expressly stated it would "express no opinion" on that later amendment's effect because it was not relevant to the cases before it.

Judge Jaswant Singh concurred with the judgment.

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Bakshi Mohd. Yusuf And Bakshi Mohd. Shafi v. Commissioner Of Income-Tax, Jammu And Kashmir And Punjab.

S.M.F Ali, C.J:— These are two income-tax references. In fact the office has wrongly registered four references, when actually there are only two, made by the Income-tax Appellate Tribunal (hereinafter to be referred to as “the Tribunal”) to this court, one arising out of the case of Bakshi Mohd. Yusuf and the other arising out of the case of Bakshi Mohd. Shafi. We propose to deal with both the references by one common judgment.

2. Bakshi Mohd. Yusuf was a working partner in the firm, Messrs. Fairdeal Motors, Indore. While submitting his return for the assessment year 1962-63, the assessee showed a salary of Rs. 500, which he was receiving from the firm but did not show the share of profits received by him, although the particulars of the income from his share in the said firm were furnished by the assessee to the department later. It appears that the Income-tax Officer concerned issued on March 27, 1967, a notice to the assessee to show cause why an order imposing penalty be not made against him. After hearing the assessee he referred the case to the Inspecting Assistant Commissioner who levied a penalty of Rs. 3,550 on March 10, 1969. The order of the Inspecting Assistant Commissioner is filed as annexure “A”. The assessee preferred an appeal before the Tribunal against the decision of the Inspecting Assistant Commissioner (for the sake of brevity, hereinafter to be referred to as “the IAC”) but the Tribunal confirmed the order of the IAC imposing penalty. The order of the Tribunal is filed as annexure “B”. The Tribunal was of the opinion that although there was no concealment because the Income-tax Officer knew about the income which was not shown by the assessee, yet the assessee was guilty of deliberately furnishing inaccurate particulars of his income which was sufficient to attract the penalty imposed on the assessee. The Tribunal appears to have been swayed by the fact that, in view of the amendment to the relevant provision of the Income-tax Act, the intention of the legislature was that the provision should be strictly construed and penalty should be imposed whenever there was a lapse on the part of the assessee. On these findings the Tribunal rejected the contention of the assessee and confirmed the order of penalty. Thereafter, the assessee filed an application before the Tribunal for making a reference to this court. The Tribunal has accordingly made a reference to this court and has referred the following questions for our opinion:

“(i) Whether, on the facts and in the circumstances of the case the assessee had deliberately furnished inaccurate particulars of his income when he did not show the share income from M/s. Fairdeal Motors, Indore, in the return so as to attract the provision of section 271(1)(c)?

(ii) Whether the procedure for the levy of penalty was legally complied with when the Inspecting Assistant Commissioner did not issue a notice under section 274 before the completion of the assessment?”

3. These are the facts of the case of Bakshi Mohd. Yusuf.

4. As regards the case of the assessee, Bakshi Mohd. Shafi, the facts are similar. His case also pertains to the assessment year 1962-63. This assessee was not only a partner in the firm of M/s. Fairdeal Motors, Indore, but also in the firm of J.K Timbers Traders, Srinagar. The assessee did not show any share of profit in any of these firms in the return of income which he submitted to the income-tax department and accordingly the Inspecting Assistant Commissioner levied a penalty of Rs. 11,750 on March 10, 1969. An appeal against the order of the Inspecting Assistant Commissioner to the Tribunal failed inasmuch as the order of penalty was confirmed by the Tribunal. Thereafter, the assessee applied to the Tribunal for a reference to this court, and accordingly the Tribunal has referred the following questions for our opinion:

“1. Whether, on the facts and in the circumstances of the case, the assessee had deliberately furnished inaccurate particulars of his income when he did not show the share income from M/s. Fairdeal Motors, Indore, and J.K Timber Traders in the return so as to attract the provisions of section 271(1)(c)?

2. Whether, on the facts and in, the circumstances of the case, the procedure for the levy of penalty was legally complied with when the Inspecting Assistant Commissioner did not issue a notice under section 274 before the completion of the assessment?”

5. We might mention at the very inception that out of the two questions referred by the Tribunal, question No. 2 in both the cases (supra) relating to the point as to whether or not the procedure for levy of penalty was legally complied with has been specifically withdrawn, and the learned counsel has made a statement that no opinion need be given on this question, which he did not press. Our order, therefore, will be confined only to question No. 1, referred to by the Tribunal in both these cases, and which is as to whether or not the assessee had deliberately furnished inaccurate particulars of his income so as to fall within the ambit of section 271(1)(c) of the Income-tax Act. Before answering the references, it may be necessary to mention a few admitted facts as adverted to by the Tribunal in its order of reference.

(1) That both the assessees were partners of a particular firm or firms.

(2) That in one case the assessee showed his salary but not the share of his profit in the firm, while in the other case the assessee did not show his income from the share in the firm of which he was a partner.

(3) That the assessees after having filed their returns produced copies of accounts in the books of the said firms which clearly show the profits which they had obtained and, therefore, the Income-tax Officer was aware of the income which is said to have been left out in the returns.

(4) That all the returns were filed by the assessees after being duly signed and verified by them.

6. On these admitted facts it is to be seen whether the assessees can be held to be guilty of deliberately furnishing inaccurate particulars to the income-tax department. We might further mention that section 271(1)(c) of the Income-tax Act was amended by the Finance Act of 1964 by which the word “deliberately” was deleted and this amendment took place on April 1, 1964, that is to say a year after the assessments in question. It is, therefore, manifest that the cases of the assessees would have to be governed not by section 271 as amended by the Act of 1964, but as they stood prior to 1964. section 271(1)(c) of the Income-tax Act, before the amendment, ran as follows:

“Has concealed the particulars of his income or deliberately furnished inaccurate particulars of such income.”

7. A perusal of this section clearly shows that the legislature had intentionally used the word “deliberately” before the word “furnished inaccurate particulars of such income” and thereby intended that every furnishing of inaccurate particulars would not attract levy of penalty unless the conduct of the assessee is deliberate and wilful. In a recent Division Bench decision of this court in I.T Reference No. 4 of 1972, Additional Commissioner of Income-tax v. Sadiq Ali & Bros [1973] 92 I.T.R 276, 279, 288 J. & K.., we construed section 271(1)(c) and observed as follows:

“In the instant case the assessee's conduct falls within the second part of section 271(1)(c) and not the first part, that is to say, the assessee is alleged to have deliberately furnished inaccurate particulars of his income. As the assessee had filed its income-tax return and had already shown these amounts in his books of account, it cannot be said that the assessee had concealed the particulars of its income so as to bring its case within the four corners of the first part of section 271(1)(c). Similarly, the word ‘satisfied’ appearing in section 271(1) which qualifies both the clauses of section 271 is a very strong term and suggests that the satisfaction must be based on cogent and proper materials….

Although this decision was given with respect to the interpretation of section 28 of the old Act, yet the provisions of section 271 of the Act are exactly the same as those of section 28 of the old Act.

In view of the observations of the Supreme Court it is clear to us that unless there are sufficient materials to raise an inference of deliberate concealment or culpable negligence on the part of the assessee, he cannot be liable to penalty.”

8. In this case we relied on a decision of the Supreme Court in Commissioner of Income-tax v. Anwar Ali [1970] 76 I.T.R 696, 700; [1971] 1 S.C.R 446 S.C..

9. The facts of the present case appear to be on all fours with the facts of the case before the Division Bench and unless the department was able to point out any circumstances from which wilful or culpable negligence on the part of the assessee can be proved, penalty under section 271(1)(c) would not be exigible.

10. In the instant cases we find that the assessees merely committed the error of not showing their share of profits in the firms. Nevertheless, the returns were duly signed and verified by the assessees. It also appears that the assessees had produced all the books of account before the Income-tax Officer who detected the default committed by the assessees. The learned Tribunal appears to have been carried away by two important circumstances. In the first place they thought that by virtue of the amendment of section 271 of the Income-tax Act which replaced the old section 28, the statute had to be construed more strictly and differently. This reasoning of the Tribunal is not at all supported by the language of section 28 of the previous Act or section 271(1)(c) of the present Act. By virtue of the amendment only the numbers of the sections have been changed but the contents remain the same. Therefore, we do not see any reason why the principles enunciated by the authorities on the interpretation of section 28 of the old Act would cease to apply to section 271(1)(c) of the amended Act. It is true that the legislature did amend section 271(1)(c) specifically by dropping the word “deliberately” but that was long after the assessment of the assessees was over and the assessees could not be governed by that provision. As to what is the effect of the deletion of the word “deliberately” by the Finance Act of 1964, we express no opinion, because that is not relevant for our purpose in the two cases.

11. The second ground taken by the Tribunal is that since the assessees had duly verified and signed the returns, they must be deemed to have deliberately furnished inaccurate particulars. We are, however, unable to agree with this line of reasoning. When the legislature framed the relevant provision, it was fully aware of the other provisions of the Income-tax Act by which a return had to be fully verified and signed by the assessee. In these circumstances if the reasoning of the learned Tribunal is accepted, there would be no case at all under the Income-tax Act wherein the furnishing of particulars would not be deliberate because there would be no case where the return is not verified and signed by the assessee. Thus, the interpretation put by the Tribunal would set at naught the intention of the legislature and render the provisions of section 271(1)(c) nugatory. It seems to us that the legislature did contemplate cases wherein, in spite of the fact that the returns are duly verified and signed by the assessees, they may contain certain errors and omissions due to neligence, oversight, forgetfulness and such other reasons and it was to meet such a situation that the word “deliberately” was inserted in section 271(1)(c) of the new Act and section 28 of the old Act. It is well-settled that a fiscal statute must be strictly construed to give every benefit of doubt to the subject. When, therefore, the legislature intended that no penalty should be imposed on the assessee unless his omission is deliberate, the court must carry out the object and the intention of the legislature. For these reasons we think that the reasoning given by the learned Tribunal is legally erroneous and cannot be sustained. In the instant cases, as already stated, there is hardly any circumstance which goes to prove culpable negligence or wilful omission on the part of the assessees so as to suggest that their conduct in not giving correct particulars in their returns was deliberate. The Income-tax Officer could himself have detected the omission, which in fact he did, but the assessees could not be saddled with penalty unless the omission was deliberate.

12. For the reasons given above, our answer to question No. 1 in both the cases on the facts and circumstances is that penalty under section 271(1)(c) of the Income-tax Act is not exigible and must be deleted. The references are answered accordingly. In the circumstance there will be no order as to costs.

Jaswant Singh, J.:— I agree.

Bakshi Mohd. Yusuf A... v. Commissioner Of Inco...