Citation Codes

Equivalent Citations

citation codes

Case Number

ITR. Case No. 50 of 1976

Attorney(S)

For the Appellant: V.S. Moothathu N.R.K. Nair K.J. Joseph T.K.M. Unnithan

Judges

Gopalan Nambiyar, C.J
S.K Kader, J.

Acts

S. 28(1)(a) of the 1922 Act corresponding to S. 271(1)(a) of the present Act,
sub-section (1) of section 142 or sub-section (2) of section 143, or(c)
sub-section (2) of section 139 or section 148
section 143 or section 144 or section 147
clause (c) of sub-section (1) of the Section
S. 271(1)(c). Sub-clause (iii) of the section
S. 28 of the Indian Income-tax Act, 1922,
S. 28 (Indian Income-tax Act, 1922)
sub-section (1) of section 139
INCOME TAX ACT

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Smart Summary

Structured Summary of the Opinion by Gopalan Nambiyar, C.J.

Factual and Procedural Background

The assessee was a firm engaged in the business of food grains, tobacco and rubber. The assessment year in issue was 1969–1970 (accounting year ending 31 March 1969). The Income-tax Officer discovered two cash credits in a folio opened for Kottayam Rubber Company, dated 9‑12‑1968 (Rs. 3,129) and 12‑12‑1968 (Rs. 2,500), totaling Rs. 5,629. These credits were later offset by debit entries of Rs. 3,000 on 25‑12‑1968 and Rs. 2,629 on 31‑3‑1969.

On inquiry the assessee admitted that the credits represented income and the debits were fictitious, but attributed this to the clerk acting without the knowledge of the assessee and to lax supervision by the Managing Partner. The Income-tax Officer rejected that explanation and added back Rs. 5,629 to income. There was no appeal against the assessment.

Penalty proceedings under section 271(1)(c) were initiated. The Inspecting Assistant Commissioner found concealment of income and imposed a penalty of Rs. 8,500. The assessee appealed to the Income‑tax Appellate Tribunal (Cochin Bench).

The Tribunal concluded that, after adding back Rs. 5,629 and disallowing certain amounts, the total assessed income was Rs. 21,384, which was below the assessable limit for a registered firm; consequently the Tribunal found no evidence of deliberate concealment to attract penalty and cancelled the penalty. The Tribunal referred a question of law to this Court under section 256(2) of the Income‑tax Act asking whether the Tribunal was right in law in cancelling the penalty under section 271(1)(c) given the finding of deliberate concealment and applicability of the Explanation to that section.

Legal Issues Presented

Whether, on the facts and in the circumstances of the case and particularly in view of the finding that the assessee consciously and deliberately concealed particulars of its income and deliberately furnished inaccurate particulars thereof and further that the Explanation to S. 271(1)(c) applied to this case, the Income‑tax Appellate Tribunal was right in law in cancelling the penalty imposed under S. 271(1)(c) of the Income‑tax Act, 1961?

Arguments of the Parties

Assessee's Arguments

The fictitious debit entries were made by the clerk without the knowledge of the assessee; the Managing Partner's laxity in checking accounts explained the discrepancy.
Before the Tribunal, the assessee argued that since the assessed income (after adjustments) was below the assessable limit for a registered firm, the resulting “nil” assessment meant no demand and, in effect, no basis for penalty under section 271(1)(c).
Counsel for the assessee contended that the word “income” in sub‑clause (iii) of section 271(1)(c) should be taken to mean “total income” as determined in the assessment, so that the minimum and maximum penalties should be calculated with reference to that total income; reliance was placed on a Lahore High Court decision (Nagiit Chand Shiv Sahai).
Separately, counsel for the assessee submitted that the Tribunal had not adverted to or considered the quantum of the penalty and whether the imposed penalty of Rs. 8,500 was excessive.

Revenue's Arguments

Counsel for the Revenue relied upon the Division Bench decision in Commissioner of Income‑tax, Ernakulam v. India Sea Foods (105 ITR 708) to support the proposition that the penalty under section 271(1)(c) is attracted where particulars of income are concealed or inaccurate particulars furnished, and that the Tribunal's reliance on the assessable limit was immaterial for clause (c).

Table of Precedents Cited

Precedent	Rule or Principle Cited For	Application by the Court
Commissioner of Income‑tax, Ernakulam v. India Sea Foods (105 ITR 708)	The construction of sub‑clause (iii) of section 271(1)(c): penalty may be not less than and not more than twice the amount of the income in respect of which particulars have been concealed; rejected the contention that “income” must be read as “total income” in that sub‑clause.	The Court relied on this decision to reject the assessee's argument that the assessable limit or “nil” assessment made the concealment immaterial; used India Sea Foods to show that clause (c) focuses on concealment of particulars, not on whether tax is ultimately payable.
Nagiit Chand Shiv Sahai v. Commissioner of Income‑tax ((1938) 6 ITR 534, Lahore)	A Lahore High Court decision discussed by the assessee to support the narrower meaning of “income” under the penal provision in the 1922 Act.	The Court observed that the Lahore decision was of no assistance to the assessee in the present context and did not adopt its reasoning for interpreting “income” in sub‑clause (iii) of section 271(1)(c).
Commissioner of Income‑tax v. S.M. Chitnavis ((1932) 2 Comp. Cas. 464; AIR 1932 PC 178)	Remarks of the Privy Council that “income” for assessment purposes must take account of allowable deductions (e.g., bad debts); falsehood in accounts can be suppression of items or fraudulent claims for deductions.	The Court cited these remarks to explain the wide meaning of “income” in related statutory contexts but noted that the Lahore High Court's observations (relying on Chitnavis) did not help the assessee’s contention in the present matter.
Esthuri Aswathiah v. Income Tax Officer, Mysore State (41 ITR 539)	Authority recognizing that even a “nil assessment” is to be regarded as an assessment in law for Income‑tax Act purposes.	Used to support the proposition that whether the concealed income would, after addition, bring the assessee within the tax net is immaterial for purposes of clause (c); a “nil assessment” remains an assessment in law and does not negate concealment.
Commissioner of Income‑tax, Calcutta v. Bidhu Bhusan Sarkar (63 ITR 278)	Another decision recognizing that a “nil assessment” is an assessment in law.	Relied upon similarly to Esthuri Aswathiah to show immateriality of the assessable limit argument relied on by the Tribunal.
V.S. Sivalingam Chettiar v. Commissioner of Income‑tax, Madras (62 ITR 678)	Decision cited among authorities treating “nil assessment” as an assessment in law.	Referenced to reinforce the point that the Tribunal's emphasis on assessed income being below the assessable limit was legally irrelevant to clause (c).
Commissioner of Income‑tax, Bihar and Orissa v. Bankipur Club Ltd. (67 ITR 491)	Decision treated as supporting the proposition that even a “nil assessment” is an assessment in law.	Cited to support the Court's view that the Tribunal erred in treating the insufficiency of assessed income as material to the question of liability under clause (c).
Commissioner Of Income‑Tax, Kerala v. Malangadan Timber Traders (88 ITR 215)	Decision concerned with section 28(1)(a) of the 1922 Act corresponding to section 271(1)(a) of the present Act (i.e., based on different considerations and ingredients).	The Court held the decision inapplicable because it concerned a different statutory provision (clause (a) rather than clause (c)) with materially different ingredients.

Court's Reasoning and Analysis

The Court began by analysing the language and ingredients of section 271(1) of the Income‑tax Act (as it then stood), observing that clause (c) requires only that the officer be satisfied that a person has concealed particulars of his income or furnished inaccurate particulars of such income. Unlike clauses (a) and (b), clause (c) does not require a failure to furnish returns or to comply with notices as a pre‑condition.

The Court further noted that the measure of penalty under clause (c) (sub‑clause (iii)) is not necessarily tied to the tax payable: the penalty may be in addition to any tax payable, and may be up to twice the amount of the income in respect of which particulars were concealed or inaccurate particulars were furnished.

Applying this statutory analysis, the Court concluded that the Tribunal's reasoning — that even after adding the concealed income the assessee's total income would be below the assessable limit for a registered firm and therefore the penalty was not imposable — was legally wrong. The assessable limit or the fact that the addition would still leave the firm with a “nil” assessment is immaterial to the legal question under clause (c).

The Court examined authorities: it accepted the proposition from several cases that a “nil assessment” is nevertheless an assessment in law, and therefore the existence of a “nil” assessment does not negate the existence of concealment attracting clause (c). The Court considered India Sea Foods (105 ITR 708) persuasive on the correct construction of sub‑clause (iii), including rejecting an interpretation that would confine “income” to “total income” in the sense urged by the assessee.

The Court also addressed the assessee’s reliance on precedents (including Lahore High Court authorities and Malangadan Timber Traders) and explained why those authorities did not aid the assessee: the Lahore decision was of no assistance on the specific statutory wording and the Malangadan decision concerned a different provision (clause (a)) with different ingredients.

Finally, the Court observed that the Tribunal had explicitly not considered whether the quantum of the penalty was excessive. The Court held that the question referred under section 256(2) was limited to the point of law about the imposition of penalty under clause (c), and that matters as to quantum and consequential orders should be left to the Tribunal to decide in the first instance. In its advisory capacity the Court confined itself to answering the question of law and left the Tribunal free to pass consequential orders.

Holding and Implications

Holding: The question of law was answered in the negative — that is, in favour of the Revenue and against the assessee. The Court held that the Tribunal was wrong in law in cancelling the penalty under section 271(1)(c) on the ground that the addition of the concealed income would still leave the firm below the assessable limit.

Implications:

The immediate legal consequence is that the Tribunal's cancellation of the penalty on the ground advanced was not correct in law; the Tribunal may proceed to consider and, if appropriate, re‑impose the penalty in accordance with law.
The Court expressly left to the Tribunal the question of the quantum of penalty and whether the penalty imposed was excessive; the Tribunal was directed to consider and pass consequential orders as necessary.
No costs were ordered by the Court in this advisory opinion.
The opinion does not purport to set down any novel or binding new principle beyond the application of the existing statutory language and the precedents cited; the decision resolves the referred question in favour of the Revenue and leaves consequential determinations to the Tribunal.

A certified copy of this judgment was to be forwarded to the Income‑tax Appellate Tribunal, Cochin Bench, as required by law.

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Commissioner Of Incometax v. Rowther Bros.

The Judgment of the Court was delivered by

Gopalan Nambiyar, C.J:— The Income-tax Appellate Tribunal, Cochin Bench, has sent up a statement of the case and referred the following question of law for our opinion viz.,

“Whether, on the facts and in the circumstances of the case and particularly in view of the finding that the assessee consciously and deliberately concealed particulars of its income and deliberately furnished inaccurate particulars thereof and further that the Explanation to S. 271(1)(c) applied to this case, the Income-tax Appellate Tribunal is right in law in cancelling the penalty imposed under S. 27(1)(c) of the Income-tax Act, 1961?”

2. The assessee was doing business in food grains, tobacco and rubber. The assessment year with which we are concerned is 1969-1970, the accounting year being the financial year 1968-1969 ending with 31st March, 1969. On an examination of the accounts, the Income-tax Officer found two credits in the folio opened for Kottayam Rubber Company to the following effect:

(1) 9-12-1968 Rs. 3,129 (2) 12-12-1968 Rs. 2,500 Rs. 5,629

3. These credits were wiped off by debit entries on 25-12-’68 for Rs. 3000/- and on 31-3-1969 for Rs. 2,629/-. The Officer grew suspicious in regard to the debit entries, and called upon the assessee to explain the cash credits and how they were squared up. It was then admitted before the Officer that the credits represented the income of the assessee and that the debits were fictitious. The plea was that it was so done by the Clerk without the knowledge of the assessee, and on account of the laxity on the part of the Managing Partner to checkup the cash balance as per accounts. The explanation was rejected by the Income-tax Officer, and the amount of Rs. 5,629/- was added back. There was no appeal against the assessment. Penalty proceedings were initiated for concealment of income, and the case was referred to the Inspecting Assistant Commissioner who found concealment of income and imposed the penalty of Rs. 8,500/-. The assessee appealed to the Tribunal. The Tribunal took the view that even after the addition of Rs. 5,629/-, and the disallowance of certain amounts, the total income assessed was only Rs. 21,384/-, viz. below the assessable limit for a registered firm; that, being a registered firm with income of less than; Rs. 25,000/-, the assessment, was a ‘Nil’ assessment which would result in no demand against the firm. It was of opinion that there was no evidence of any concealment of any other item of income. The Tribunal hence came to the conclusion that there was no material to show that there was any intention or desire to hide or to conceal the income so as to attract a penalty. It allowed the appeal, and held that no penalty was imposable. The question has been referred to us under S. 256(2) of the Act. S. 271(1) of the Income-tax Act as it stood at the relevent time read:

“271. Failure to furnish returns, comply with notices, concealment of income, etc.— (1) If the Income-tax Officer or the Appellate Assistant Commissioner in the course of any proceedings under this Act, is satisfied that any person—

(a) has without reasonable cause failed to furnish the return of total income, which he was required to furnish under sub-section (1) of section 139 or by notice given under sub-section (2) of section 139 or section 148 or has without reasonable cause failed to furnish it within the time allowed and in the manner required by sub-section (1) of section 139 or by such notice, as the case may be, or

(b) has without reasonable cause failed to comply with a notice under sub-section (1) of section 142 or sub-section (2) of section 143, or

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

(i) In the cases referred to in clause (a), in addition to the amount of the tax, if any, payable by him, a sum equal to two percent of the tax for every month during which the default continued, but not exceeding in the aggregate fifty per cent of the tax;

(ii) in the cases referred to in clause (b), in addition to any tax payable by him, a sum which shall not be less than ten per cent but which shall not exceed fifty per cent of the amount of the tax, if any, which would have been avoided if the income returned by such person had been accepted as the correct income?

(iii) in the cases referred to in clause (c), in addition to any tax payable by him, a sum which shall not be less than, but which shall not exceed twice, the amount of the income in respect of which the particulars have been concealed or inaccurate particulars have been furnished.

Explanation.—Where the total income returned by any person is less than eighty per cent of the total income (hereinafter in this Explanation referred to as the correct income) as assessed under section 143 or section 144 or section 147 (reduced by the expenditure incurred bona fide by him for the purpose of making or earning any income included in teetotal income but which has been disallowed as a deduction), such person shall, unless he proves that the failure to return the correct income did not arise from any, fraud or any gross or wilful neglect on his part, be deemed to have concealed the particulars of his income or furnished inaccurate particulars of such income for the purposes of clause, (c) of this sub-section.

4. The Section has been amended with effect from 1-4-1976. But as the amendment is immaterial for the purposes of this case, we are leaving it out. The order of imposition of the penalty with which we are concerned is dated 15-11-1973. It would be noticed that under the Section, all that is required for the imposition of a penalty under clause (c) of sub-section (1) of the Section is that the Officer concerned must be satisfied that any person has concealed the particulars of his income, or has furnished inaccurate particulars of such income. In other words, for the purposes of clause (c), there is no need to find any failure to furnish return or failure to comply with a notice etc. which are the necessary ingredients under clauses (a) and (b). Again, in the matter of computation of penalty under clauses (a) & (b) it would be seen that under the sub-clauses (i) and (ii) after clause (c), the penalty imposed is geared to the tax payable or avoided; whereas in the case referred to under clause (c), it is not necessarily geared to the tax payable, but is in addition to any tax payable (if no tax is payable this will not enter the reckoning), an amount not more than twice the amount of the income concealed or the inaccurate particulars furnished. With this analysis of the Section and its ingredients, it seems to us that the Tribunal was wrong in its reasoning that even if the concealed income were to be added, the resultant figure would only fall below the assessable limit for a registered firm, and things of the kind. These are immaterial for the purpose of clause (c). Counsel for the Revenue cited the decision of a Division Bench of this Court in Commissioner of Income-tax, Ernakulam v. India Sea Foods (105 ITR. 708). The Division Bench observed:

“The second part of the question does really arise in the case and that concerns the quantum of the penalty leviable against the assessee who had been found guilty of concealment of income under S. 271(1)(c). Sub-clause (iii) of the section lays down the principle to be applied in respect of the said matter. As per that sub-clause an assessee whose case falls within clause (c) may be directed to pay by way of penalty a sum which shall not be less than, but which shall not exceed twice, the amount of the income in respect of which the particulars have been concealed or inaccurate particulars have been furnished. It was contended by the assessee's learned advocate that the ‘income’ referred to in this sub-clause should be taken to mean the ‘total income’ of the assessee as determined by the Income-tax Officer in the order of assessment, that the minimum penalty prescribed by the said sub-clause is the amount of such ‘total income’ and that the maximum penalty prescribed is twice that amount. In support of this contention counsel for the assessee relied strongly on certain observations of a Division Bench of the Lahore High Court in Nagiit Chand Shiv Sahai v. Commissioner of Income-tax (1938) 6 ITR. 534, 535 Lah.)) In our opinion that decision is of no assistance at all to the assessee. The question that fell to be considered by the Lahore High Court in that case was whether under S. 28 of the Indian Income-tax Act, 1922, a penalty could be imposed against an assessee who had deliberately put forward certain false claims for deductions.” Rejecting the contention put forward by the assessee that the word ‘income’ was used in S. 28 (Indian Income-tax Act, 1922) in its popular sense as meaning only money received by the assessee and that it did not refer to any deduction or exemption claimed by him, the Division Bench stated as follows:

“If the interpretation put upon the word by the assessee be adopted it would lead to absurd and anomalous results. An assessee would in those circumstances be at liberty to forge his return with impunity in any manner that he likes so far as the expenditure, deduction or exemptions are concerned and would escape the consequences of the law so long as he furnishes true particulars of his income in the narrower sense of the term. This, however, could never be the intention of the legislrture.

We are fortified in our conclusion by the remarks made by their Lordships of the Privy Council in Commissioner of Incometax v. S.M Chitnavis (1932) 2 Comp. Cas. 464; LR 59 IA 295-297; AIR 1932 PC. 178). That case is on all fours with the present case in as much as it particularly relates to bad debts. Those remarks are:

“Although the Act nowhere in terms authorises the deduction of bad debts of a business, such a deduction is necessarily allowable. What are chargeable to income-tax in respect of a business are the:profits and gains of a year; and in assessing the amount of the profits and gains of a year account must necessarily be taken of all losses incurred, otherwise you would not arrive at the true profits and gains’.

Falsehood in accounts can take only two forms: either an item may be suppressed dishonestly or an item may be claimed fraudulently, and in penalising concealment of the particulars of one's income as well as deliberate furnishing of inaccurate particulars, S. 28 penalizes both forms of falsehood. In the Case before us it has been found as a fact that the assessee deliberately claimed a false deduction and in the light of the remarks made above, we are disposed to hold, that the case of the assessee fell within the ambit of S. 28. We accordingly dismiss this petition with costs.”

5. What this decision has laid down is only that the liability for penalty under S. 28 of the Indian Income-tax Act, 1922 (corresponding to S. 271(1)(c) of the Act), will be attracted if there has been a concealment or furnishing of false particulars by the assessee either in respect of monies received by the assessee or in respect of any expenditure or claims for deductions and exemptions. It was in this content that the court observed that the word ‘income’ was used in S. 28 not in the narrower popular sense as-meaning only ‘money received’ but in a much wider technical sense so as to take in all items including expenditure and deductions, etc., that are to be, taken into account before the assessable figure is arrived at. We fail to see how the said observation made by the learned Judges of the Lahore High Court is of any assistance to the assessee in this case.

In the present case, the liability of the assessee for being subjected to the imposition of a penalty under S. 271(1)(c) stands concluded by the finding recorded in that behalf by the Tribunal and the question raised before us relates only to the quantum of the penalty that may be levied under sub-clause (iii) of the said section. The answer to the said question depends on the interpretation to be placed. On the said sub-clause.” (pp. 716 to 718).

6. There are decisions which recognize that for purposes of the Income-tax Act even a ‘nil assessment’ has to be regarded as an assessment in the eye of law. See Esthuri Aswathiah v. Income Tax Officer, Mysore State (41 ITR. 539) and Commissioner of Income-tax, Calcutta v. Bidhu Bhusan Sarkar (63 ITR. 278), both decisions of the Supreme Court. See also V.S Sivalingam Chettiar v. Commissioner of Income-tax, Madras (62 ITR. 678) Commissioner of Income-tax, Bihar and Orissa v. Bankipur Club Ltd. (67 ITR. 491) etc. In the circumstances, it seems to us to make little difference that although there is a concealment within the meaning of S. 271(1) the said concealment, would not, even if the concealed income be taken into account, bring the assessee within the assessable fold. This is immaterial, and the Tribunal was, in our view, wrong in relying on this circumstance and in holding on this ground that the penalty was not imposable in law.

7. Counsel for the assessee relied upon the decision of a Division Bench of this Court in Commissioner Of Income-Tax, Kerala v. Malangadan Timber Traders. (88 ITR. 215). But that decision was concerned with S. 28(1)(a) of the 1922 Act corresponding to S. 271(1)(a) of the present Act, which, as noticed, is based on totally different considerations and the ingredients of which are materially different. The decision has therefore no application.

8. Counsel for the assessee submitted that even if penalty be imposable in law, there has been no advertence to, or consideration by, the Tribunal, of the quantum of the penalty, and as to whether the penalty imposed was excessive or not. Indeed, in the order of the Tribunal it is stated:

“So, we are not considering the other question as to whether if penalty is imposable the quantum imposed was excessive.”

9. This is an aspect of the matter which requires consideration by the Tribunal. In our advisory jurisdiction under S. 256(2) we are concerned only with answering of the question of law sent up for our opinion and should leave it to the Tribunal to pass consequential orders Where necessary.

10. In the result, we answer the question of law in the negative, that is, in favour of the Revenue and against the assessee. There will be no order as to costs. We make it clear that nothing said herein will preclude the Tribunal from passing appropriate consequential orders in accordance with law.

11. A copy of this judgment under the signature of the Registrar and the seal of this Court, will be forwarded to the Income-tax Appellate Tribunal, Cochin Bench, as required by law.

Commissioner Of Incometax v. Rowther Bros.

Structured Summary of the Opinion by Gopalan Nambiyar, C.J.

Factual and Procedural Background

Legal Issues Presented

Arguments of the Parties

Assessee's Arguments

Revenue's Arguments

Table of Precedents Cited

Court's Reasoning and Analysis

Holding and Implications

Commissioner Of Incometax v. Rowther Bros.

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