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Commr. Of Income Tax v. India Sea Foods

Kerala High Court

Feb 21, 1995

Judgment

Subsequent
References

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Summary of the Legal Opinion (Pareed Pillay, C.J.)

Factual and Procedural Background

The Reference arises at the instance of the Revenue in respect of the assessment year 1967–68. The assessee filed a provisional return on 10-4-1968 declaring income of Rs. 2,75,000 and explicitly stated that the accounts were pending finalisation and that the return would be amended when accounts were finalised. The Managing Partner, who represented this assessee and two sister firms, sought settlement with the Commissioner of Income-tax, disclosing wealth positions as on 31-12-1958 and 31-12-1967. A revised return was furnished on 18-12-1968 disclosing income of Rs. 3,07,428.04. An agreement settling tax liabilities of the three firms and their partners up to 1968–69 was entered into on 27-8-1969; under clause 6 of the agreement the assessee agreed that the Department could levy the minimum penalty prescribed under the Act for the years 1964–65 to 1968–69 in respect of added income of Rs. 7,00,000. On the basis of that agreement revised assessments were completed; the addition for 1967–68 was Rs. 1,64,687 and a penalty of Rs. 1,64,687 was imposed by the Inspecting Assistant Commissioner under S. 27(1)(c) of the Income Tax Act, 1961.

Pursuant to a direction issued by this Court under S. 256(2), the Tribunal referred four questions of law arising out of its order dated 18-4-78 under S. 260(1) in ITA 404.Coch/71-72 (Assessment Year 1967–68). The Tribunal had concluded that the second return was not furnished with intention to conceal and that there was no concealment of income.

Legal Issues Presented

The opinion addresses a procedural matter and does not frame distinct legal issues.

Arguments of the Parties

Revenue's Arguments

The Tribunal was not entitled to go behind the settlement agreement between the parties.
Clause 6 of the agreement demonstrates that the assessee agreed the Department could levy the minimum penalty prescribed under the Act for assessment years 1964–65 to 1968–69 in respect of the unaccounted income of Rs. 7,00,000.
The Tribunal should not have disregarded or set aside the agreement and should have treated the admissions in the agreement as showing concealment.
The presumption under the Explanation to S. 271(1)(c) applied because the returned income was less than 80% of the assessed income; therefore the burden lay on the assessee to displace that presumption.
Because the levy of penalty for 1968–69 was based on admissions in the agreement, no other view (i.e., absence of concealment) was possible.

Assessee's Arguments

There was no concealment of particulars by the assessee; the agreement was a comprehensive scheme of settlement covering three firms and their partners and was not an admission of concealment.
The agreement was entered into to purchase peace and avoid prolonged proceedings rather than as an admission of fraudulent concealment.
The Tribunal found, as a matter of fact, that there was no concealment for the assessment years in question; that factual finding, supported by reasons, cannot be re-agitated before this Court.
Clause 6 of the agreement does not establish intentional concealment.

Table of Precedents Cited

Precedent	Rule or Principle Cited For	Application by the Court
C.I.T. v. Saraf Trading Corpn (167 ITR 909)	Penalty proceedings are penal/quasi-criminal in nature; there must be conscious concealment; provisions construed strictly.	The Court relied on this precedent to emphasise that conscious concealment is necessary for penalty proceedings and that such matters are to be treated as questions of fact, limiting the scope for appellate interference with the Tribunal's factual findings.
C.I.T. v. Pawan Kumar Dalmia (168 ITR 1)	Even after the Explanation to S. 271(1)(c), conscious concealment is necessary; the presumption under the Explanation can be displaced by the assessee proving failure to return correct income did not arise from fraud or gross/wilful neglect; proof on preponderance of probabilities; whether concealment exists and whether burden is discharged are questions of fact.	The Court followed this authority to hold that the Tribunal's finding of no conscious concealment is a fact-based conclusion which this Court cannot re-examine on reference; it also supported the proposition that the assessee can rebut the statutory presumption.
Sir Shadilal Sugar & General Mills Ltd. v. C.I.T (168 ITR 705)	Mere agreement by an assessee to additions does not necessarily mean the amount is concealed income; there may be many reasons for such admission; realisation of the true position by the assessee does not absolve the Revenue from proving the mens rea (conscious concealment) required for quasi-criminal penalty proceedings.	The Court used this Supreme Court authority to underscore that admissions in a settlement do not automatically establish concealment and that mens rea must be proved by the Revenue; this supported the conclusion that clause 6 of the settlement did not mandate a finding of concealment.

Court's Reasoning and Analysis

The Court recapitulated the factual matrix and the Tribunal's findings and then analysed whether any question of law arose for reference. The essential steps in the Court's reasoning are:

The Tribunal examined the first return and noted the covering letter expressly described the return as provisional and stated that a revised return would be furnished after finalisation of accounts. The Tribunal therefore considered the first return to be an estimate.
On the second return, the Tribunal found that the assessee made it known to the Income-tax Officer that the returned figures were to be accepted only after the settlement process, and that the assessee had offered and supplied materials to the Officer for scrutiny. On that basis the Tribunal concluded there was no wilful or intentional concealment.
The Court treated the Tribunal's conclusion of no concealment as a finding of fact. Because penalty liability for concealment requires proof of conscious concealment (a quasi-criminal standard), this factual determination is central and not ordinarily re-openable on reference.
The Court applied authorities (C.I.T. v. Saraf Trading Corpn; C.I.T. v. Pawan Kumar Dalmia; Sir Shadilal Sugar & General Mills Ltd. v. C.I.T) to reinforce three related propositions: (a) penalty proceedings demand conscious concealment; (b) the Explanation to S. 271(1)(c) creates a presumption that may be rebutted by the assessee on a civil standard of proof (preponderance of probabilities); and (c) admissions in a settlement agreement do not ipso facto establish concealment or mens rea.
The Court noted clause 6 of the agreement permitted the Department to levy the minimum penalty for the unaccounted income of Rs. 7,00,000 but held that such a contractual concession in a settlement did not demonstrate concealment to the Officer concerned. The Tribunal had considered the entire factual matrix and concluded there was no conscious concealment.
Because the Tribunal had fully considered and found no concealment (a question of fact), the Court concluded that there was no question of law arising that warranted a reference. The Court therefore declined to answer the Reference.

Holding and Implications

The Reference is declined and the Court refuses to answer the Reference.

Implications:

The Tribunal's factual finding that there was no conscious concealment of income stands and is not disturbed by this Court on the Reference.
The Court reaffirmed that conscious concealment is required to sustain penalty proceedings of a quasi-criminal character and that the statutory presumption under the Explanation to S. 271(1)(c) can be rebutted by the assessee on the preponderance of probabilities.
The presence of a settlement clause permitting the Department to levy minimum penalty (clause 6) does not automatically establish concealment or mens rea.
No new precedent was laid down; the decision is a conclusion that the specific factual findings of the Tribunal do not give rise to a tenable question of law for reference in this case.

Show all summary ...

Pareed Pillay, C.J:— The Reference is at the instance of the Revenue, assessment year being 1967–68. Assessee filed return of its income on 10-4-1968 disclosing income of Rs. 2,75,000/-, but stating that its accounts were pending finalisation and that the return was only provisional. It was stated that the return would be amended on finalisation of the accounts. The Managing Partner of the assessee, who was also the Managing Partner of two other sister firms, sought settlement of the matters relating to income tax by filing a petition before the Commissioner of Income-tax. In the petition he disclosed the wealth position of the partners and of the firms as on 31-12-1958 and 31-12-1967. Following discussion and correspondences between the parties the assessee furnished a revised return on 18-12-1968 disclosing income of Rs. 3,07,428. 04. Eventually an agreement was entered into on 27-8-1969. The settlement related to the tax liabilities of all the three firms and their partners upto the year 1968–69. The assessee agreed for treating Rs. 7,00,000/- as its income not disclosed in the returns of the years upto 1968–69 and wanted it to be apportioned between the years 1964–65 and 1968–69 on the basis of the turnover. Under clause 6 of the agreement the assessee agreed to the Department levying minimum penalty prescribed under the Act for the years 1964–65 to 1968–69 with regard to the added income of Rs. 7,00,000/-, On the basis of the said agreement revised assessments were completed, the addition for the assessment year 1967–68 being Rs. 1,64,687. The Inspecting Assistant Commissioner imposed a penalty of Rs. 1,64,687/- under S. 27(1)(c) of the Income Tax Act, 1961.

2. At the instance of the Revenue and pursuant to the direction issued by this Court in O.P 2141 of 1979 under S. 256(2) of the Act the Tribunal referred four questions of law as arising out of the order dated 18-4-78 of the Tribunal under S. 260(1) of the Act in ITA 404.Coch/71-72 of the Assessment Year 1967–68. The Tribunal was unable to find that the second return was furnished with the intention to conceal or that there was concealment of the income. Counsel for the Revenue contended that it was not open to the Tribunal to go behind the agreement between the parties. According to him, clause 6 of the agreement would really show that the assessee had agreed that the Department can levy minimum penalty prescribed under the Act for the Assessment years 1964–65 to 1968–69 in the case of M/s. India Sea Foods in whose hands the unaccounted income of Rs. 7,00,000/- is proposed to be assessed. He contended that the Tribunal should not have set the agreement at naught with a finding of its own on the question of concealment. Also it is contended that the presumption under explanation to S. 271(1)(c) is available in favour of the Revenue as it stood then that there was concealment of particulars of income by the assessee inasmuch as the returned income was less than 80% of the assessed income and hence the burden to dislodge the presumption is squarely upon the assessee. In other words, it is contended that as the levy of penalty for the year 1968–69 was based on the admissions in the agreement no other view is possible.

3. Counsel for the assessee contended that there was no concealment of particulars at all by the assessee in view of the fact that the assessee had agreed to the addition of Rs. 7,00,000/- for all the five years together as a scheme of settlement with the Department of the disputes not merely of the assessee with the Department but also of the other two firms and of the partners. It is contended that there was no admission of any concealment implied in the agreement Argument advanced by the counsel is that the said agreement was with a view to purchase peace and to avoid prolonged proceedings.

4. Contention of the assessee is that the Tribunal has entered into a finding that there was no concealment for the assessment years during the period and as it has given reasons to that effect and as it is a finding of fact the same question cannot be re-agitated before this Court Also it is contended that it would not be possible to hold that there was intentional concealment in view of Clause 6 of the agreement.

5. This is a case where on 10-4-1968 the assessee filed a return showing income of Rs. 2,75,000/-. That return was filed on an estimate basis. The covering letter with the return mentions in express terms that the accounts of the firm were pending finalisation and hence the return declaring the estimated income of Rs. 2,75,000/- was provisional and that the return would be amended on finalisation of the accounts. On 29-6-1968 the Managing Partner of the assessee firm on behalf of all the firms presented a settlement petition to the Commissioner of Income-tax with details of the wealth position of the partners and of the firms in which they are partners as on 31-12-1958 and 31-12-1967 and requested the Commissioner to settle the income tax liabilities including the pending assessment of all the firms and partners so as to enable the assessee to revive its business. It was thereafter that on 27-8-1969 the agreement was reached.

6. The Tribunal examined the first return and found that it was only on the basis of estimate. In the covering letter itself it was stated that another revised return would be furnished The Tribunal held that when the assessee himself has stated that it was only a provisional return and that a revised return would be furnished after finalisation of the accounts there cannot be any concealment. The Tribunal found that when the second return was filed it was made known to the Income-tax Officer that the returned figures of income need be accepted only after the settlement and so this is a case where there was no wilful concealment. The Tribunal also found that by offer and supply of materials the assessee had informed the Income-tax Officer of the need to scrutinise the return and therefore it cannot be said that there was any intention to conceal or hide anything from the gaze of the Income-tax Officer in the second return. As the assessee had supplied all the necessary materials to the Income-tax Officer the Tribunal's finding that there was no intentional concealment cannot be held to be bad. The Tribunal held that it was not able to find that the second return was furnished with intention to conceal or that there was concealment in the income or furnishing of inaccurate particulars.

7. As the entire matter was considered thread-bare by the Tribunal and found that there was no concealment of the income it being essentially a finding of fact no question of law arises for reference to this Court. In C.I.T v. Saraf Trading Corpn. (167 ITR 909) a Division Bench of this Court held:

“Penalty proceedings are penal in nature. The elementary principles of criminal law will apply. It is a quasi-criminal proceeding. There should be conscious concealment. The provisions should be construed stictly”.

8. It is also held in the above decision that even after the addition of the Explanation to S. 271(1)(c), conscious concealment is necessary and that the presumption under Explanation to S. 271(1)(c) can be displaced by the assessee proving that the failure to return the correct income did not arise from any fraud or gross or wilful neglect and the quantum of proof necessary would be that required in a civil case, namely, preponderance of probabilities. ‘As the Tribunal held that there was no conscious concealment and as that being a finding of fact, this Court cannot probe into the matter and come to a different factual finding. The above decision has been followed in C.I.T v. Pawan Kumar Dalmia (168 ITR 1). As the Tribunal has taken into account the cumulative effects of all the facts and circumstances of the case and held that there was no concealment, this being a question of fact, cannot be re-agitated in the Reference before us.

9. It is open to the assessee to rebut the presumption under Explantion to S. 271(1)(c) of the Act by proving that the failure to return the correct income did not arise from any fraud or gross or wilful neglect on his part. In view of the specific terms in Clause (6) of the agreement that the Department can levy the minimum penalty prescribed under the Act with regard to the unaccounted income of Rs. 7,00,000/- it cannot be said that there was concealment of the income from the Officer concerned. In C.I.T v. Pawan Kumar (168 ITR 1) this Court held that whether there is concealment to make the panalty exigible is normally a question of fact and whether the burden of proof in a given case had been discharged on a set of facts is also a question of fact. It is also useful to refer to Sir Shadilal Sugar & General Mills Ltd. v. C.I.T (168 ITR 705) where the Supreme Court held that merely because the assessee has agreed to additions to his income, it does not follow that the amount agreed to be added is concealed income as there may be hundred and one reasons for such admission. Supreme Court further held that in a case where the assessee realises the true position and did not dispute certain disallowances it does not absolve the Revenue from proving the mens rea of quasi-criminal offence. As there is no conscious concealment of the income and as this is not a case where the Revenue through its machinery unearthed the concealment and as also there is no finding that the tax returned showed 80% concealment as provided under S. 271(1)(c) and as the Tribunal on a consideration of the entire gamut of the matter found that there was no concealment as such by the assessee and as it cannot be said that the Tribunal's finding is perverse or legally wrong there is no point for Reference before us.

10. In the result we do not find that this is a case where reference is warranted. Hence we decline to answer the Reference.