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Case Number
Advocates
  • For the Appellant: M.V. Seshachala, Advocate.
  • For the Respondent: S. Parthasarathi, Advocate.
Judges
  • R. Gururajan
  • Anand Byrareddy, JJ.
Acts
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Citation Codes
Equivalent Citations
citation codes
Case Number
Advocates
  • For the Appellant: M.V. Seshachala, Advocate.
  • For the Respondent: S. Parthasarathi, Advocate.
Judges
  • R. Gururajan
  • Anand Byrareddy, JJ.
Acts
See more information ...
Smart Summary

Structured Summary of the Opinion — R. Gururajan, J.

Factual and Procedural Background

The Revenue challenged an order of the Tribunal dated March 5, 2001 (CP No. 1282/1999) cancelling a penalty imposed under Section 271(1)(c) of the Income-tax Act. The Assessing Officer (AO) had levied a penalty of Rs. 8,00,000 for concealment of income arising from a claim related to the cost of purchase of machinery amounting to Rs. 14,65,669.80. The Commissioner of Income-tax (Appeals) confirmed the penalty. The assessee appealed to the Tribunal, which cancelled the penalty on the ground that there was no concealment and relied on a certificate (said to be issued by the factory manager) and on the Tribunal's prior decision in T. Ashok Pai v. Asst. CIT [1994] 51 ITD 467 (Bang.). The Revenue filed a miscellaneous petition to rectify errors which the Tribunal rejected, and then sought a reference to this Court. The Tribunal framed two questions of law for reference and the matter was heard by this Court.

Legal Issues Presented

  1. Whether, on the facts and circumstances (including that the assessee withdrew its claim for depreciation, extra shift allowance and investment allowance only after being confronted with evidence that the machinery had not reached its premises before the close of the relevant accounting year), the Tribunal was correct in cancelling the penalty under Section 271(1)(c) on the ground that the false claim was made on the strength of a certificate issued by the factory manager and that there was nothing to show the assessee included the machinery in its fixed assets?
  2. Whether the Tribunal was correct in holding that making a false claim of depreciation, extra shift allowance, investment allowance, etc., neither amounts to concealment of income nor furnishing of inaccurate particulars so as to attract penalty under Section 271(1)(c)?

Arguments of the Parties

Revenue's Position

  • The Assessing Officer found that the machinery had not been dispatched from the seller's factory premises by June 30, 1984, and was actually received on July 13, 1984; yet the assessee claimed depreciation and other allowances as if the machinery had been put to use before June 30, 1984.
  • On the basis of the material (including a belated certificate purportedly from the factory manager dated October 24, 1987), the AO concluded that the assessee had concealed particulars of income and furnished inaccurate particulars and therefore Section 271(1)(c) was attracted.
  • The Tribunal erred in cancelling the penalty by accepting the defence that the claim was based on the factory manager's certificate and that the assessee withdrew its claim on discovering the mistake.

Assessee's Position (as recorded in the opinion)

  • The assessee consistently maintained that the machinery had arrived and was put to use before June 30, 1984.
  • The assessee relied on a certificate said to be issued by the factory manager in support of the depreciation claim and, when confronted with contrary evidence, withdrew the claim.
  • Before the Tribunal the assessee relied on the principle (as applied in T. Ashok Pai) that an assessee who bona fide relies on advice or documents supplied by agents/counsel should not be visited with penalty under Section 271(1)(c) where there is no mala fides.

Tribunal's Reasoning (as recorded)

  • The Tribunal accepted the assessee's explanation that the claim was made on the basis of a certificate issued by the factory manager and that the assessee withdrew the claim on discovering the mistake.
  • The Tribunal relied on its earlier decision in T. Ashok Pai v. Asst. CIT [1994] 51 ITD 467 (Bang.) to the effect that an assessee who bona fide relied on counsel/agent should not be penalised for errors not committed mala fide.
  • The Tribunal rejected the Revenue's miscellaneous petition for reconsideration on the ground that no review power was available to it in that context.

Table of Precedents Cited

Precedent Rule or Principle Cited For Application by the Court
T. Ashok Pai v. Asst. CIT, [1994] 51 ITD 467 (Bang.) That an assessee who bona fide relied on his tax counsel/agent and whose representative made a non-mala fide blunder should not be visited with penalty under Section 271(1)(c). The Tribunal relied on this decision to excuse the assessee's conduct; this Court distinguished and rejected that reliance because the certificate was from a factory manager (a servant) and not a legal/tax agent, and the assessee remains bound by acts of its servants.
[1969] 2 Mys LJ 469 That mere reliance on the opinion of a lawyer/legal adviser is not in itself sufficient cause under Section 5 of the Limitation Act unless the adviser exercised due diligence; principle that commission/omission of a representative can bind the principal. This Court cited the judgment to support the proposition that wrong advice or acts of representatives (including advisers) do not automatically excuse the principal/assessee; the principle was held to support the Revenue.
STRP No. 68 of 2005 (bench of this court) — paragraph 11 (as quoted) That an assessee is bound by acts of its representative; where bogus documents were created for exemption and the assessee did not take action against the representative, the assessee could not escape penalty. The Court treated the reasoning in STRP No. 68 of 2005 as applicable by analogy to the present facts and used it to reinforce that the assessee cannot avoid penalty by blaming a representative.

Court's Reasoning and Analysis

The Court examined the material on record and traced the sequence of findings:

  1. The Assessing Officer recorded that the assessee (a public limited company under statutory and tax audit) maintained fixed asset records and audited accounts. The AO found a conflict between the assessee's claim that machinery was put to use before June 30, 1984 and the evidence that the machinery had not been dispatched from the seller's premises by that date and was received on July 13, 1984.
  2. The AO also noted that the factory manager's certificate relied upon by the assessee was dated October 24, 1987 — more than two years after the return (filed July 30, 1985) — and that written submissions by the assessee did not satisfactorily answer the factual discrepancies. On that basis the AO concluded the assessee had concealed particulars and furnished inaccurate particulars and imposed penalty under Section 271(1)(c).
  3. The Tribunal excused the assessee by treating the factory manager's certificate and the subsequent withdrawal of the claim as showing the absence of culpable concealment, relying on T. Ashok Pai. The Tribunal therefore cancelled the penalty and refused the Revenue's request for reconsideration on review grounds.
  4. The Court rejected the Tribunal's approach for several reasons grounded in authority and principle that it set out:
    • The Court emphasised that the factory manager is a servant of the assessee and the acts or statements of servants are binding on the principal; therefore the factory manager's certificate cannot be used as a shield to excuse the assessee's false claim.
    • The Court distinguished reliance on a tax counsel/agent (the context of T. Ashok Pai) from reliance on an internal servant (factory manager); the latter does not afford the assessee protection from penalty in the circumstances recorded.
    • The Court relied on the cited Mysore Law Journal judgment ([1969] 2 Mys LJ 469) to show that mere reliance on another's opinion (legal adviser) is not sufficient excuse unless that adviser exercised due diligence — supporting the proposition that representative errors bind the principal unless exceptional due diligence is shown.
    • The Court cited STRP No. 68 of 2005 to reinforce the proposition that an assessee is bound by acts of its representative and that where documents were created for the purpose of obtaining exemption, the assessee could not avoid penalty by blaming a representative, especially where no action was taken against the representative.
  5. Applying these principles to the facts (that the machinery was not dispatched by the relevant date, the belated factory manager certificate post-dated the return, and the AO and CIT(A) found concealment), the Court concluded the Tribunal committed a legal error in cancelling the penalty and that the AO's imposition of penalty under Section 271(1)(c) was justified by the available material.

Holding and Implications

Holding: The appeal is accepted and the questions of law are answered in favour of the Revenue.

Implications and direct effects:

  • The Court reversed the Tribunal's order cancelling the penalty and restored the Assessing Officer's order imposing penalty under Section 271(1)(c).
  • The Court expressly rejected the Tribunal's reliance on a defence based on a factory manager's certificate and its reliance on T. Ashok Pai in the particular factual matrix of this case.
  • The opinion emphasises that Section 271(1)(c) must be strictly applied to maintain discipline in filing correct returns and to protect the revenue; the Court observed that tax concessions/deductions must be claimed bona fide and cannot be obtained by false declarations.
  • No costs were awarded (the opinion records "No costs").

This summary is limited to and strictly derived from the content of the provided opinion and does not add information beyond that source.

Show full summary ...

    Commissioner Of Income-Tax v. Sree Valliappa Textiles

    R. Gururajan, J.:— The Revenue is before us aggrieved by the order dated March 5, 2001, of the Tribunal in the case on hand in CP No. 1282/1999. The Assessing Officer levied a penalty under Section 271(1)(c) of the Act for concealment of income on the cost of purchase of machinery amounting to Rs. 14,65,669.80. The penalty levied is Rs. 8,00,000 for concealment. Aggrieved by the same, an appeal was filed before the Commissioner of Income-tax (Appeals). The Commissioner (Appeals) agreed with the levy of penalty and confirmed the same. The assessee filed an appeal before the Tribunal. The Tribunal cancelled the penalty levied by the Assessing Officer on the ground of no concealment in terms of the Act. The Revenue aggrieved by the same filed a miscellaneous petition to rectify the errors. The Tribunal rejected the same. Thereafter the Revenue sought for a reference to this court. After hearing, the Tribunal has so chosen to refer the following questions of law:

    “1. Whether, on the facts and in the circumstances of the case, particularly having regard to the fact that the assessee withdrew its claim for depreciation, extra shift allowance and investment allowance, etc., only after it was confronted with full evidence with regard to the fact that the impugned machinery had not even reached its premises before the close of the relevant accounting year and only after exhausting itself in proving genuineness of its claim, the Tribunal was right in law in cancelling the penalty under Section 271(1)(c) on the ground that the levy was not justified as the false claim was made on the strength of the certificate issued by the factory manager and there was nothing to show that the assessee included these machinery in its fixed assets?

    2. Whether the Tribunal was right in law in holding that making a false claim of depreciation, extra shift allowance, investment allowance, etc., neither amounts to concealment of income, nor furnishing of inaccurate particulars to attract penalty under Section 271(1)(c)?”

    2. Heard learned counsel for the parties and perused the material on record.

    3. The Assessing Officer in his order dated December 21, 1990, would notice the material facts. Thereafter, he noticed that the assessee is a public limited company. There is statutory audit and also tax audit. According to the report of the auditors for the relevant year, the company had been maintaining proper records showing full particulars including quantitative details and situation of fixed assets.

    4. These fixed assets were physically verified by the management and no serious discrepancies were noticed on verification. The assessee consistently maintained that the machinery had arrived and put to use before June 30, 1984, whereas by June 30, 1984, the machinery was not even dispatched from the seller's factory premises. The assessee is not a small one time assessee who does not know the intricacies of the Income-tax Act. The managing director of the company is aware that only if the machinery were put to use, the company is eligible for depreciation, investment allowance, etc. The Assessing Officer also would notice that a certificate from the factory manager was filed before the Assessing Officer in the matter of depreciation. A letter from the assessee to Lakshmi Machine Tools Works would show that machinery was factually received on July 13, 1984. The assessee despite its letter has chosen to provide a letter from the factory manager that the machinery was installed before June 30, 1984. The Assessing Officer also would notice that written submissions were filed in which they have chosen to say that the Assessing Officer was wrong in disallowing the claim in the matter. The Assessing Officer also would notice the reply submitted by the assessee. After noticing all these aspects of the matter he has come to a conclusion that the assessee had concealed the particulars of its income and furnished inaccurate particulars of income. Thereafter, he has imposed a penalty of Rs. 8,00,000. When this order was challenged before the appellate authority, the appellate authority has confirmed the penalty. Thereafter, when the matter was taken up before the Tribunal, the Tribunal has chosen to cancel the penalty levied under Section 271(1)(c) of the Act. In the order the Tribunal would say that the assessee offered an explanation that the claim was made on the basis of a certificate issued by the factory manager. When the assessee came to know of the mistake, it withdrew the claim. The point is whether the mistake can be attributed to the assessee by invoking Section 271(1)(c) of the Act. The Tribunal has also chosen to rely on a judgment in T. Ashok Pai v. Asst. CIT, [1994] 51 ITD 467 (Bang.). Thereafter, a miscellaneous petition was filed stating that the assessee made the claim by way of its return of income which was filed on July 30, 1985. The certificate of the factory manager was issued more than two years later, i.e, on October 24, 1987. The Revenue wanted the matter to be reconsidered. The Tribunal has rejected by saying that no review power is available to the Tribunal.

    5. From the material on record what is clear to us is that the assessee has chosen to claim the benefit with regard to machinery on the ground of putting the machinery to use before June 30, 1984, whereas the machinery was not even dispatched from the seller's factory premises. It was received only on July 13, 1984. Thereafter, a false information was provided by the assessee. The so-called factory manager's certificate is only after two years in the case on hand. The assessing authority after noticing the conduct has given a detailed finding with regard to the matter in his order. He has also commented upon the certificate issued by the auditor. According to him, Section 271(1)(c) is attracted in the light of the material available on record. We are of the view that the Assessing Officer cannot be said to have committed any error particularly in the light of the false information for the purpose of benefits in terms of the Act. The same was challenged before the appellate authority. The appellate authority has chosen to dismiss the same thereby confirming the findings of the Assessing Officer. Surprisingly, when the matter was taken to the Tribunal, the Tribunal has failed to look into the matter for the purpose of false information in terms of Section 271(1)(c) in its order. On the other hand, the Tribunal condones the conduct by holding that the claim was made on the basis of the certificate issued by the factory manager. The Tribunal forgot to notice that when the claim was made on the basis of installation, the machinery had not even left the premises of the seller. The defence of factory manager's certificate can never be considered. Even otherwise, it cannot be said that the certificate of the factory manager would come to the aid of the assessee in a matter like this. In fact the Tribunal has chosen to rely on its decision rendered in T. Ashok Pai v. Asst. CIT, [1994] 51 ITD 467 (Bang.). In the said order, the Tribunal would say that no fault could, therefore, be found with an assessee who, bona fide, relied on his tax counsel-cum-agent in the matter of preparation of his income-tax and wealth-tax returns including the work of computation of income/loss/net wealth for the said purpose. If the legal counsel/agent committed a blunder in the exercise of his duty, not in a mala fide manner, not again in collusion with the assessee, the assessee should not be visited with penalty under Section 271(1)(c). Therefore, the assessee could not be considered to be guilty of any of the offence as envisaged under Section 271(1)(c). We are not in agreement with the view expressed by the Tribunal in this case. Any omission and commission on the part of counsel/agent is certainly binding on the assessee. In the case on hand, it is not counsel/agent but it is the factory manager, who has issued the certificate. The assessee is bound by the act of his servants/factory manager as well. In these circumstances, we are of the view that the Tribunal has committed a serious legal error in the case on hand.

    6. At this stage, we must refer to a judgment of this court in [1969] 2 Mys LJ 469, wherein this court was considering with regard to sufficient cause in the light of wrong advice by legal adviser. The court ruled as under: “The mere fact that a party or litigant relied on the opinion of his lawyer or legal adviser, cannot in itself be regarded as sufficient cause for purposes of section 5 of the Limitation Act. Such conduct on the part of the litigant can be regarded as amounting to sufficient cause only if the opinion or advice of his lawyer on which he acted had been arrived at by the lawyer after exercise of due diligence.” This judgment would go to show that the commission/omission of a representative is binding on the principal. No shelter can be taken on the ground of wrong advice by legal counsel. The principle in that case would support the Revenue.

    7. A Bench of this court in STRP No. 68 of 2005 has chosen to consider the issue of penalty and the defence of the assessee with regard to the omission at the instance of the representative. This court has ruled in paragraph 11 reading as under:

    “11. In the case on hand, it is admitted that the bogus document is filed and it is created for the purpose of getting exemption. Only defence of the assessee is that it is at the instance of his representative. It cannot be forgotten that the assessee is bound by what his representative acts on his behalf in the matter. We are not prepared to believe the plea of the assessee that he is totally unaware of the creation of bogus document by his previous STP as sought to be argued before us. The assessee is fairly a big dealer having turnover of more than one crore. He is not a small trader. He is presumed to know his dealings. Hence, it is not possible for this court to accept the plea of ignorance as sought to be pleaded before us. No acceptable materials are placed on record with regard to ignorance plea. It is also to be seen that the assessee has not chosen to take any action against his representative for the purpose of bogus documents and his inaction also would show that all is not well in the assessment proceedings. Therefore, we are of the view that the Tribunal is right in holding that the assessee has to suffer penalty on the facts of this case.”

    8. The said finding is equally applicable to the case on hand. The facts of this case would show the conduct of the assessee, and in the light of the conduct of the assessee, we have no hesitation in reversing the order of the Tribunal and thereby restoring the order of the assessing authority. We cannot forget that the State depends upon the revenue out of the tax collected by the Department. Tax exemption, tax concession, tax deduction has to be for bona fide reason and not for those who make false declaration for the purpose of benefit in terms of the statute. Section 271(1)(c) has to be strictly applied in the larger interest of discipline in filing correct returns by the assessee.

    9. In these circumstances, this appeal is accepted. Questions of law are answered in favour of the Revenue.

    10. No costs.

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    Comments

    Commissioner Of Income-Tax v. Sree Valliappa Textiles
    (Apr 18, 2007)