Citation Codes

Equivalent Citations

citation codes

Case Number

I.T.R.C No. 4 of 1997

Judges

H.L Dattu
H.N Nagamohan Das, JJ.

Acts

section 144B of the Income-tax Act, 1961 (the Act, for short), the Income-tax
section 271(1)(c) Explanation 1(B).
provisions of section 271(1)(c)
KERALA MONEY LENDERS ACT
1980-81. Section 271(1)(c)
section 271(1)(c)

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Smart Summary

Structured Summary of the Opinion (H.N. Nagamohan Das, J.)

Factual and Procedural Background

The assessee (a company) filed its return of income on 13 January 1981 for the assessment year 1980-81 declaring an income of Rs. 700 and claiming, inter alia, a deduction of Rs. 12,00,000 as lease rent paid to its licensor.

The Income-tax Officer (ITO) issued a draft assessment order dated 14 March 1983 disallowing the Rs. 12,00,000 claim. Pursuant to directions under section 144B of the Income-tax Act, the ITO completed the assessment on 16 September 1983. The Commissioner of Income-tax (Appeals) confirmed the assessment and the assessment became final.

While completing the assessment, the ITO issued a notice under section 271(1)(c) of the Income-tax Act proposing penalty on the ground that the assessee filed a false return. The assessee filed objections on 13 May 1987. The ITO rejected the objections and by order dated 10 August 1987 imposed penalty under section 271(1)(c). The assessee appealed to the Commissioner of Income-tax (Appeals), which appeal was rejected (order dated 27 February 1989). The assessee then appealed to the Income-tax Appellate Tribunal (ITA Nos. 968, 969 & 970 of 1989) and the appeals were rejected. At the instance of the assessee the Tribunal referred three questions of law to the High Court.

Material factual background relevant to the claimed deduction: the assessee entered into a lease/licence agreement dated 29 December 1979 with M/s. Chabirani Agro Industrial Enterprises Ltd. (the licensor) permitting use of plant and machinery. The assessee ran the factory only between 1 January 1980 and 10 January 1980. The licensor’s assets were taken into possession by a court-appointed receiver on 10/11 January 1980. The assessee alleges that the parties settled the matter and on 30 March 1980 the assessee paid Rs. 12,00,000 to the licensor as lease rent in full and final settlement and claimed the amount as a deduction in its return. The Revenue did not dispute that the Rs. 12,00,000 was paid, but denied that the payment represented an allowable lease-rent obligation under the agreement and therefore treated the amount as income (i.e., disallowed the deduction and assessed it).

Legal Issues Presented

Whether, on the facts and circumstances of the case, the Tribunal was right in holding that the provisions of section 271(1)(c) of the Act are attracted in the instant case and thus the penalty levied is liable to be upheld?
Whether, on the facts and in the circumstances of the case, the Tribunal was right in holding that the claim for deduction made by the applicant was a false claim so as to attract the provisions of section 271(1)(c) of the Act?
Whether, on the facts, the Tribunal was justified in holding that there was no evidence of payment made by the applicant company to the other company to justify the claim, when adequate materials were furnished in the course of the appellate proceedings?

Arguments of the Parties

Assessee's Arguments (appellant)

The assessee contended that it had neither concealed particulars of income nor furnished inaccurate particulars in its return.
There was no mala fide motive or mens rea (intention to evade tax) on the part of the assessee; mere disallowance of a claim by the ITO does not justify imposition of penalty under section 271.
The assessee relied on judicial authority in support (specifically M/s. Shiv Lal Tak v. Commissioner of Income-Tax, Jodhpur and National Textiles v. CIT) to support the proposition that penalty cannot be imposed where the facts are equally consistent with innocence and the assessee has disclosed the transaction.
During proceedings the assessee placed a paper book of documents on record and filed an affidavit in support; the Revenue raised no objection to the production of this material.

Revenue's Arguments (respondent)

The Revenue argued that the assessee failed to justify the claim of Rs. 12,00,000 as lease rent and that this amounted to a false claim, constituting furnishing of inaccurate particulars under section 271(1)(c).
Given the inability to establish entitlement to the deduction, the Revenue treated the amount as income and sought to sustain penalty; it relied on the decision in K.P. Madhusudhanan v. Commissioner of Income Tax, Cochin (Supreme Court).

Table of Precedents Cited

Precedent	Rule or Principle Cited For	Application by the Court
M/s. Shiv Lal Tak v. Commissioner of Income-Tax, Jodhpur, [2001] 251 ITR 373 (Raj)	Relied upon by the assessee to support the proposition that mere disallowance of a claim does not automatically justify penalty under section 271(1)(c).	The precedent was cited by the assessee; the court noted it as part of the assessee's supporting authorities (the court expressed agreement with the broader line of reasoning favouring the assessee).
National Textiles v. CIT, [2001] 249 ITR 125 (Guj)	States the two-factor approach for imposing penalty under section 271(1)(c): (i) material/circumstances must indicate the amount represents the assessee's income; and (ii) circumstances must show animus (conscious concealment or furnishing of inaccurate particulars). The Explanation affects the second factor.	The court expressly adopted and applied this reasoning: it held that while an assessment may tax an amount, penalty requires evidence of animus; where payment was disclosed and not disputed as paid, mere disallowance did not permit a positive inference of concealment or mens rea.
Commissioner of Income Tax v. Santhosh Financiers, [2001] 247 ITR 742 (Ker)	Holds that concealment for penalty is essentially a question of fact; an explanation offered not to treat an amount as income is not necessarily concealment.	The court cited and followed this approach, treating concealment as a factual question and accepting that the assessee's explanation (that the payment was lease rent) was an explanation rather than proof of concealment.
K.P. Madhusudhanan v. Commissioner of Income Tax, Cochin, [2001] 251 ITR 99 (SC)	Relied upon by the Revenue for sustaining penalty in circumstances of false claims (as argued by the Revenue).	The court held that this Supreme Court decision had no application to the facts of the present case because it post-dated the amendment to Explanation 1(B) of section 271(1)(c) (the amendment occurred in 1986) and the assessment year in the present case is 1980-81; therefore the precedent was not applied.

Court's Reasoning and Analysis

The court proceeded on the basis of the documentary record and the factual narrative: the assessee had entered into a lease/licence agreement (29 December 1979), operated the licensor’s plant for a limited period (1–10 January 1980), the licensor’s assets were taken possession of by a receiver on 10/11 January 1980, and the parties purportedly settled the matter by the assessee paying Rs. 12,00,000 on 30 March 1980 as lease rent in full and final settlement. The Revenue did not dispute that the Rs. 12,00,000 was in fact paid by the assessee.

The central legal question was whether, on these facts, the addition of Rs. 12,00,000 and the consequent imposition of penalty under section 271(1)(c) could be sustained. The court analysed Explanation 1 to section 271(1)(c) as it stood for the relevant assessment year (1980-81) and considered the judicial authorities cited by the parties.

Relying on National Textiles, the court emphasised the two-factor approach required before imposing penalty under section 271(1)(c): (i) there must be material or circumstances leading to a reasonable conclusion that the amount represents the assessee's income; and (ii) the circumstances must show animus—that is, conscious concealment or furnishing of inaccurate particulars. The court noted that Explanation 1 bears on the second factor (animus) and does not convert the assessment order into conclusive proof that the amount is the assessee's income.

Applying these principles to the facts, the court observed that the assessee had disclosed the Rs. 12,00,000 payment in its return and the Revenue did not dispute that the payment was made. The Revenue's position was limited to denying that there was a legal obligation to make the payment under the lease agreement and therefore to denying the entitlement to a deduction. The court held that mere disallowance by the Revenue and treating the amount as income does not, by itself, yield a reasonable and positive inference of concealment or an intention to evade tax. In short, where the facts are equally consistent with the assessee's explanation and with the Revenue's assessment, Explanation 1 cannot be used to justify penalty.

The court also considered the Revenue's reliance on the Supreme Court decision in K.P. Madhusudhanan and concluded that that judgment was not applicable to the present facts because it was rendered after the amendment to Explanation 1(B) of section 271(1)(c) (the amendment occurred in 1986) whereas the assessment year in this case is 1980-81. Therefore the apex court decision was not applied.

On the totality of facts and authorities, the court found no material circumstances warranting the inference of animus or conscious concealment. The court expressly agreed with the approach in National Textiles and Commissioner of Income Tax v. Santhosh Financiers and held that the addition and penalty could not be sustained.

Holding and Implications

Questions referred to the High Court are answered in the negative and in favour of the assessee; the penalty under section 271(1)(c) is not sustainable on these facts.

Direct consequences for the parties:

The imposition of penalty under section 271(1)(c) in respect of the disallowance of Rs. 12,00,000 is not justified and therefore cannot be upheld on the basis of the material before the Court.
The court held that the Revenue's disallowance of the deduction and assessment of the amount as income does not by itself demonstrate concealment or furnished inaccurate particulars when the payment was disclosed and not disputed as having been made.
The Supreme Court decision relied upon by the Revenue (K.P. Madhusudhanan) was held inapplicable to this assessment year and set of statutory provisions as they stood for 1980-81.

The opinion does not purport to lay down a new broad precedent beyond its application of the established two-factor approach (as articulated in National Textiles) to the particular facts of this case; the court resolved the reference by answering the questions in the negative and ordered accordingly.

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Balaji Vegetable Products P. Ltd. v. Commissioner Of Income-Tax

H.N Nagamohan Das, J.:— The Income-tax Appellate Tribunal, Bangalore Bench, at the instance of the assessee referred the following three questions of law for our opinion:

“I. Whether, on the facts and circumstances of the case, the Tribunal was right in holding that the provisions of section 271(1)(c) of the Act are attracted in the instant case and thus the penalty levied is liable to be upheld?

II. Whether, on the facts and in the circumstances of the case, the Tribunal was right in holding that the claim for deduction made by the applicant was a false claim so as to attract the provisions of section 271(1)(c) of the Act?

III. Whether, on the facts, the Tribunal was justified in holding that there was no evidence of payment made by the applicant company to the other company to justify the claim, when adequate materials were furnished in the course of the appellate proceedings ?”

2. The assessee-company filed a return of income on January 13, 1981, for the assessment year 1980-81 declaring an income of Rs. 700. The assessee claimed deduction of Rs. 12 lakhs being the lease rent paid to its licensor among other deductions. It is the claim of lease rent of Rs. 12 lakhs which is in controversy in this lis. The Income-tax Officer by his order dated March 14, 1983, passed a draft assessment order disallowing the claim of Rs. 12 lakhs under the head Lease rent as the same is not taxable. Following the direction of the Assistant Commissioner of Income-tax under section 144B of the Income-tax Act, 1961 (“the Act”, for short), the Income-tax Officer passed an order of assessment on September 16, 1983. The Commissioner of Income-tax (Appeals) confirmed the assessment order of the Income-tax Officer and the same has become final. The Income-tax Officer while completing the assessment, issued a notice under section 271(1)(c) of the Act to levy penalty on the ground that the assessee has filed a false return of income. The assessee submitted its objections on May 13, 1987, inter alia, contending that they have no mala fide motive in avoiding the payment of legitimate tax dues and therefore requested to drop the penalty proceedings. The Income-tax Officer by rejecting the explanation of the assessee passed an order of penalty under section 271(1)(c) of the Act vide order dated August 10, 1987. Aggrieved by this order of penalty by the Income-tax Officer, the assessee filed an appeal before the Commissioner of Income-tax (Appeals) and the same came to be rejected in so far as levying penalty in the disallowance of Rs. 12 lakhs under the head Lease rent, vide order dated February 27, 1989. Aggrieved by this order of the Commissioner of Income-tax (Appeals), the assessee filed a second appeal before the Income-tax Appellate Tribunal (the “Tribunal” for short) in I.T.A Nos. 968, 969 and 970 of 1989 and the same came to be rejected. Hence, the reference at the instance of the assessee.

3. Sri Parthasarthi, learned counsel for the assessee, contends that the assessee in its return has neither concealed the particulars of the income nor furnished inaccurate particulars. There is no mala fide motive on the part of the assessee in avoiding the payment of legitimate tax dues. Merely because the Income-tax Officer disallowed a claim of the assessee shall not result in levy of penalty under section 271, of the Act. Reliance is placed on the following decisions:

(1) M/S. Shiv Lal Tak v. Commissioner Of Income-Tax, Jodhpur, [2001] 251 ITR 373 (Raj); and

(2) National Textiles v. CIT, [2001] 249 ITR 125 (Guj).

4. Per contra, Sri M.V Seshachala, learned standing counsel for the Revenue, contends that the failure of the assessee in not justifying the claim of Rs. 12 lakhs as lease rent amounts to a false claim and therefore the levy of penalty is just and proper. There is deemed furnishing of inaccurate particulars and consequently the assessee is liable to pay penalty under section 271 of the Act. Reliance is placed on the following decision:

K.P Madhusudhanan v. Commissioner Of Income Tax, Cochin, [2001] 251 ITR 99 (SC).

5. During the course of arguments, the assessee filed a paper book containing the copies of documents relied on by the assessee before the Revenue authorities. Learned counsel for the assessee filed an affidavit to this effect. Learned counsel for the Revenue has no objection to production of the paper book by the assessee. Accordingly, the paper book filed by the assessee is placed on record.

6. Heard the arguments on both the sides. Perused the entire reference papers and the paper book.

7. The assessee entered into an agreement of lease and licence on December 29, 1979, with one M/s. Chabirani Agro Industrial Enterprises Ltd., (for short “the licensor”) under which the assessee was permitted to utilise the plant and machinery of the licensor for processing vanaspathi for a period of 11 months on some terms and conditions. The assessee invested some money and ran the factory of the licensor for a period of 10 days only, i.e, between January 1, 1980 to January 10, 1980. The licensor was heavily indebted to the bank. The bank brought an action and got a receiver appointed through the court. The receiver took possession of all the assets including the factory premises in question on January 10/11, 1980. Consequently, the assessee cannot make use of the plant and machinery. The assessee contends that under these circumstances, they settled the issue with the licensor and cancelled the entire agreement dated December 29, 1979, by paying a sum of Rs. 12 lakhs to the licensor as lease rent in full and final settlement on March 30, 1980. The assessee in their returns claimed allowance of Rs. 12 lakhs as payment towards lease rent to the licensor. The Income-tax Officer disallowed this claim of the assessee on the ground there is no obligation on the part of the assessee to pay lease rent under the agreement dated December 29, 1979 and therefore the same was brought to tax and the assessee has paid the tax on the disallowance of Rs. 12 lakhs.

8. The Revenue has not disputed the payment of Rs. 12 lakhs by the assessee to the licensor. The Revenue refused to accept this payment of Rs. 12 lakhs as lease rent and therefore the same was brought to tax. Whether this addition by the Income-tax Officer amounts to furnishing inaccurate particulars of income under section 271(1)(c) of the Act. In order to justify the levy of penalty, the circumstances must show that there was animus on the part of the assessee. In the instant case, the assessment year is 1980-81. section 271(1)(c) and Explanation 1 appended thereto as was in force in the relevant assessment year 1980-81 reads thus:

“271. (1) If the Income-tax Officer or the Appellate Assistant Commissioner or the Commissioner (Appeals) in the course of any proceedings under this Act, is satisfied that any person—…..

he may direct that such person shall pay by way of penalty,—….

Explanation 1.—Where in respect of any facts material to the computation of the total income of any person under this Act,—

(A) such person fails to offer an explanation or offers an explanation which is found by the Income-tax Officer or the Appellate Assistant Commissioner or the Commissioner (Appeals) to be false, or

(B) such person offers an explanation which he is not able to substantiate,

then, the amount added or disallowed in computing the total income of such person as a result thereof shall, for the purposes of clause (c) of this sub-section, be deemed to represent the income in respect of which particulars have been concealed:

Provided that nothing contained in this Explanation shall apply to a case referred to in clause (B) in respect of any amount added or disallowed as a result of the rejection of any explanation offered by such person, if such explanation is bona fide and all the facts relating to the same and material to the computation of his total income have been disclosed by him….”

9. In National Textiles v. CIT, [2001] 249 ITR 125 (Guj), it is held as follows (page 135):

“In order to justify the levy of penalty, two factors must co-exist, (i) there must be some material or circumstances leading to the reasonable conclusion that the amount does represent the assessee's income. It is not enough for the purpose of penalty that the amount has been assessed as income and (ii) the circumstances must show that there was animus, i.e, conscious concealment or act of furnishing of inaccurate particulars on the part of the assessee. The Explanation has no bearing on factor No. 1 but it has a bearing only on factor No. 2. The Explanation does not make the assessment order conclusive evidence that the amount assessed was in fact the income of the assessee. No penalty can be imposed if the facts and circumstances are equally consistent with the hypothesis that the amount does not represent concealed income as with the hypothesis that it does. If the assessee gives an explanation which is unproved but not disproved, i.e, it is not accepted but circumstances do not lead to the reasonable and positive inference that the assessee's case is false, the Explanation cannot help the Department because there will be no material to show that the amount in question was the income of the assessee.

Alternatively treating the Explanation as dealing with both the ingredients (i) and (ii) above, where the circumstances do not lead to the reasonable and positive inference that the assessee's explanation is false, the assessee must be held to have proved that there was no mens rea or guilty mind on his part. Even in this view of the matter, the Explanation alone cannot justify levy of penalty. Absence of proof acceptable to the Department cannot be equated with fraud or wilful default. As we find no material difference between the original Explanation 1 and Explanation 1 as substituted, in our opinion, it has to be so construed as to harmonise it with the basic principles of justice and fairness as in the case of the original Explanation. We are guided by the commentaries of the learned authors Kanga and Palkhiwala, Law and Practice of Income-tax, volume 1, pages 1637, 1639 and 1640.”

10. In Commissioner Of Income Tax v. Santhosh Financiers, [2001] 247 ITR 742 (Ker), it is held as hereunder (page 746):

“Whether there is concealment to make the penalty exigible is normally a question of fact and also as to whether the burden of proof in a given case had been discharged on a set of facts is also a question of fact. The Appellate Tribunal, on the facts, found that the assessees have not concealed any particulars of income or furnishing of inaccurate particulars of income. The assessees took up the contention that the interest over and above what is allowable under the Kerala Money Lenders Act cannot be treated as income. This is only an explanation not to treat a particular amount as income. It cannot be said that the income has been concealed.”

11. We are in respectful agreement with the view expressed in National Textiles v. CIT, [2001] 249 ITR 125 (Guj) and Commissioner Of Income Tax v. Santhosh Financiers, [2001] 247 ITR 742 (Ker). In the instant case, the assessee in their return claimed deduction of Rs. 12 lakhs under the head “Lease rent” paid to the licensor. The Revenue has not disputed the payment of Rs. 12 lakhs by the assessee to the licensor. The only contention of the Revenue is that there is no obligation for the assessee to pay the lease rent to the licensor under the agreement dated December 29, 1979, and therefore the assessee is not entitled for deduction and the Revenue brought the same to tax. Merely because the Revenue refuses to accept the claim of the assessee and treated the same as income it cannot be said that the assessee has concealed the income. In order to justify the levy of penalty the circumstances must show that the assessee is having an intention to conceal the income and to evade the payment of tax. In this case the assessee showed the payment of Rs. 12 lakhs to the licensor in the return filed by the assessee and the same is not disputed by the Revenue. Though the Revenue refuses to accept the claim of the assessee and added the same for tax it will not automatically lead to a circumstance to levy the penalty.

12. The law laid down by the apex court in K.P Madhusudhanan v. Commissioner Of Income Tax, Cochin, [2001] 251 ITR 99, has no application to the facts of this case. This decision of the apex court is subsequent to the amendment of section 271(1)(c) Explanation 1(B). In the case on hand, the assessment year is 1980-81. The amendment to section 271(1)(c) was in the year 1986. The judgment of the apex court has no application to the facts of this case. For the reasons stated above, the questions of law referred to us are answered in the negative and in favour of the assessee.

13. Ordered accordingly.

Balaji Vegetable Products P. Ltd. v. Commissioner Of Income-Tax

Structured Summary of the Opinion (H.N. Nagamohan Das, J.)

Factual and Procedural Background

Legal Issues Presented

Arguments of the Parties

Assessee's Arguments (appellant)

Revenue's Arguments (respondent)

Table of Precedents Cited

Court's Reasoning and Analysis

Holding and Implications

Balaji Vegetable Products P. Ltd. v. Commissioner Of Income-Tax

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