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Deputy Commissioner Of Income-Tax v. K. Suresh Kumar

Kerala High Court

Sep 19, 2001

Judgment

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Judgment Summary — Deputy Commissioner of Income-tax, Circle-I, Trivandrum v. Assessee (P.K. Balasubramanyan, J.)

Factual and Procedural Background

This appeal under section 260A of the Income-tax Act, 1961, is by the Deputy Commissioner of Income-tax (Revenue) and arises from penalty proceedings under section 271(1)(c) of the Act for the assessment year 1987–88.

The assessee, an individual with income from an abkari business, returned a total income of Rs. 82,000 (including Rs. 75,000 estimated from abkari business). The Assessing Officer completed assessment under section 143(3) on a total income of Rs. 1,52,950 after adding Rs. 94,000 as income from other sources on the basis of an increase in net wealth shown in the assessee's wealth-tax statements. The assessee did not challenge that addition.

During assessment the Assessing Officer initiated penalty proceedings under section 271(1)(c) and issued a show-cause notice. The assessee explained that he had received Rs. 70,000 from his father-in-law (employed outside India), received through his mother-in-law, and that documentary evidence was not available; he characterised the amount as belonging to others or as a loan, and denied deliberate concealment. The Assessing Officer found the explanation unacceptable, concluded there was concealment of income of Rs. 70,000, and imposed the minimum penalty of Rs. 33,295 under section 271(1)(c).

The assessee's appeal to the Commissioner of Income-tax (Appeals), Trivandrum, was dismissed; the Commissioner found the explanation unsubstantiated and noted absence of legal channels/evidence for receipt from abroad. The assessee then appealed to the Income-tax Appellate Tribunal (Tribunal), which accepted the assessee's statement (finding no material adduced by the Assessing Officer to discredit it) and set aside the penalty orders. The Revenue challenged the Tribunal's decision before this Court, formulating four substantial questions of law for decision.

Legal Issues Presented

Whether, on the facts and in the circumstances of the case, the Tribunal was right in law and fact in deleting the penalty levied under section 271(1)(c) of the Income-tax Act?
Whether, on the facts and in the circumstances of the case, the Tribunal was right in law and fact in holding that “the Assessing Officer has not established conscious concealment of income by the assessee”; whether no material was brought on record to show it was a false claim and whether the Tribunal wrongly cast the burden of proof on the Revenue?
Whether, on the facts and in the circumstances of the case, and in the light of the relevant Explanation to section 271(1)(c) read with the decision of the Supreme Court in Commissioner Of Income Tax (Additional), Lucknow v. Jeevan Lal Sah and other Supreme Court decisions, the decision in Commr. Of Income Tax v. India Sea Foods (Full Bench) has application to the facts of the case?
Whether the Tribunal should have considered the case under the relevant Explanation to section 271(1)(c) and whether the order is vitiated for not doing so?

Arguments of the Parties

Appellant (Revenue) — Main Arguments

The assessee had accepted the addition made under section 69 at assessment and did not challenge it, so the circumstances were put to the assessee at assessment time.
Explanation 1 to section 271(1)(c) (as in force for the assessment year) shifts the burden to the assessee to substantiate his explanation and permits a presumption of concealment where the explanation is unsubstantiated; thus the Tribunal erred in not applying Explanation 1.
The assessee first advanced the father-in-law explanation only at the penalty stage; in absence of acceptable documentary evidence for receipt from abroad, imposition of penalty was justified and required no interference.

Respondent (Assessee) — Main Arguments

The Assessing Officer did not produce material to support a finding of concealment; therefore, penalty under section 271(1)(c) could not be imposed without proof of conscious concealment.
Explanation 1 to section 271(1)(c) did not apply because the assessee's explanation was not sought at the time of completing the assessment but only during penalty proceedings; accordingly the onus did not shift to the assessee.

Table of Precedents Cited

Precedent	Rule or Principle Cited For	Application by the Court
Commissioner Of Income Tax (Additional), Lucknow v. Jeevan Lal Sah	Cited as a Supreme Court decision relevant to Explanation to section 271(1)(c).	The case was referenced among Supreme Court authorities in the memorandum of appeal; the Court did not develop a separate line of reasoning from it in the reported judgment but treated it as part of the judicial context for interpreting Explanation 1.
Commr. Of Income Tax v. India Sea Foods (Full Bench)	Full Bench decision relied upon earlier authorities (notably Sir Shadilal) concerning the scope/applicability of Explanation 1 to section 271(1)(c).	The assessee relied on this decision; the Court rejected its applicability here because the Full Bench had essentially relied on Sir Shadilal, which the Supreme Court had held not to be good law after the Explanation was added. The Court therefore declined to apply India Sea Foods to the facts.
Commissioner Of Income-Tax v. K.P. Madhusudanan (Division Bench, [2000] 246 ITR 218)	Explained the scope and ambit of section 271(1)(c) as amended (including Explanation 1), defining the burden-shifting effect.	The Court treated this decision as authoritative on the scope of section 271(1)(c) and relied on it to hold that Explanation 1 places the burden on the assessee to substantiate his explanation.
K.P. Madhusudhanan v. Commissioner Of Income Tax, Cochin ([2001] 251 ITR 99) — Supreme Court	Affirmed the Division Bench's exposition of the amended section 271(1)(c) and the effect of Explanation 1; overruled contrary earlier decisions.	The Supreme Court's affirmation was treated as decisive: it confirmed that Explanation 1 shifts the burden to the assessee, and that Sir Shadilal could not be regarded as good law after the Explanation was added.
Commissioner Of Income-Tax v. P.M. Shah	Earlier decision (Bombay High Court) that was inconsistent with the later exposition of law.	The Court noted that P.M. Shah was overr-ruled by the Division Bench decision in K.P. Madhusudanan (and its Supreme Court affirmation) and therefore not followed.
CIT v. Dharmchand L. Shah	Earlier decision (Bombay High Court) inconsistent with the later authoritative position.	The Court recorded that this decision was also overruled by K.P. Madhusudanan and not followed in the present reasoning.
Sir Shadilal Sugar and General Mills Ltd. v. CIT ([1987] 168 ITR 705)	Earlier Supreme Court authority relied upon by later Full Bench(s) prior to the insertion of Explanation 1 to section 271(1)(c).	The Court observed that the Supreme Court has found Sir Shadilal not to be good law after the Explanation was added; because India Sea Foods relied on Sir Shadilal, that Full Bench's foundation was undermined.

Court's Reasoning and Analysis

The Court focused its analysis on (a) the applicability of Explanation 1 to section 271(1)(c) for the assessment year in question and (b) whether the assessee had substantiated his explanation for the unexplained addition.

First, the Court rejected the assessee's contention that Explanation 1 did not apply because no explanation had been sought at assessment stage. The Court relied on the fact that the addition had been made under section 69 (deeming provisions for unexplained money) and that the assessee had accepted the addition and not appealed. On that basis the Court concluded that the circumstances were put to the assessee at assessment (or must be deemed to have been put to him) in terms of section 69; therefore the argument that the explanation was raised only during penalty proceedings was unsustainable on the facts.

Second, the Court considered the statutory law and precedent. It treated the Division Bench decision in Commissioner Of Income-Tax v. K.P. Madhusudanan (and its Supreme Court affirmation) as authoritative on the post-amendment scope of section 271(1)(c). That jurisprudence explains that Explanation 1 shifts the evidential burden to the assessee to substantiate his explanation and permits a presumption of concealment where the explanation is unsubstantiated.

Third, applying those principles to the facts, the Court observed that the assessee's explanation was that Rs. 70,000 had been received from a father-in-law employed abroad and had been routed through the mother-in-law, yet the assessee produced no documentary material to substantiate a lawful inward remittance or other legal channel of receipt. The Court emphasized that money coming from abroad legally must pass through banking channels (cheque or withdrawal deposited in bank), and the assessee admitted absence of documentary evidence in his explanation to the Assessing Officer. Because the assessee failed to substantiate the explanation, Explanation 1 mandated that concealment be taken to have occurred, rendering the assessee liable to penalty under section 271(1)(c).

Fourth, the Court addressed competing precedents: the assessee relied on India Sea Foods (Full Bench) and related reasoning. The Court explained that India Sea Foods had effectively relied on Sir Shadilal; but after the addition of Explanation 1 the Supreme Court had held Sir Shadilal not to be good law. Given the Supreme Court's affirmation of K.P. Madhusudanan, the Court found that the correct legal position is that Explanation 1 applies and shifts the burden to the assessee. Accordingly, the Tribunal's approach (which effectively placed the burden on the Assessing Officer and accepted the assessee's bare statement) was legally unsound.

Finally, on the facts and law taken together, the Court concluded that the Tribunal's order deleting the penalty was incorrect; the Commissioner of Income-tax (Appeals) order imposing penalty (minimum amount) was correct and should be restored. The Court directed that consequential orders (if necessary) be passed by the Assessing Officer in terms of section 260(1A).

Holding and Implications

Holding: The Court answered the substantial questions of law in favour of the Revenue and against the assessee. The Court therefore allowed the Revenue's appeal, set aside the order of the Income-tax Appellate Tribunal, and restored the order of the Commissioner of Income-tax (Appeals), Trivandrum. The Court directed that appropriate consequential orders, if necessary, be passed by the Assessing Officer under section 260(1A) of the Act. The appeal was allowed and the Court made no order as to costs.

Implications:

Direct effect on the parties: the penalty imposed by the Assessing Officer (and sustained by the Commissioner of Income-tax (Appeals)) stands; the Tribunal's deletion of the penalty is set aside.
On the legal position: the Court applied and endorsed the view that Explanation 1 to section 271(1)(c) (as interpreted in Commissioner Of Income-Tax v. K.P. Madhusudanan and affirmed by the Supreme Court) places the onus on the assessee to substantiate explanations for unexplained receipts and allows a presumption of concealment where explanations are unsubstantiated. The Court rejected the applicability of the India Sea Foods Full Bench decision as founded on Sir Shadilal, which the Supreme Court had held not to be good law after the Explanation was inserted.
No order as to costs was made by the Court.

Show all summary ...

The Judgment of the Court was delivered by

P.K Balasubramanyan, J.:— This appeal under section 260A of the Income-tax Act, 1961, is by the Deputy Commissioner of Income-tax, Circle-I, Trivandrum. The appeal arose from the proceeding for imposition of penalty under section 271(1)(c) of the Income-tax Act. For the year 1987–88, the asses-see, an individual deriving income from abkari business, filed a return admitting a total income of Rs. 82,000 including the income of Rs. 75,000 as estimated from abkari business. The assessment was completed under section 143(3) of the Act on a total income of Rs. 1,52,950 including an addition of Rs. 94,000 as income from other sources on the basis of the increase in the net wealth as could be gathered from wealth-tax statements furnished by the assessee. The Assessing Officer treated this Rs. 94,000 as income and completed the assessment on that basis. The assessee did not challenge the addition. The Assessing Officer, during the course of the assessment, initiated penalty proceedings under section 271(1)(c) of the Act and issued a notice to the assessee to show cause why penalty under section 271(1)(c) of the Act should not be levied. In response to the notice in the explanation called for from the assessee, the assessee submitted an explanation to the effect that during the year he had received from his father-in-law, who was working outside India, a sum of Rs. 70,000 for which documentary evidence was not available. He stated that this amount was received through his mother-in-law. He also pointed out that even though the addition was made under the deeming provisions of section 69 of the Income-tax Act, the amount did not really represent the income earned by him. He had not consciously or deliberately concealed any income. The amount assessed as his income was an amount which belonged to others and it was obtained by him as loan. The Assessing Officer, after considering the objection, came to the conclusion that the explanation of the assessee was unacceptable. He found that if a sum of Rs. 70,000 had been received from his father-in-law, who was working outside the country, was true, the assessee would have been able to produce definite evidence to show such payment. The Assessing Officer took the view that simply because the assessee's father-in-law was employed outside India, that would not by itself support the explanation put forward by the assessee. The Assessing Officer thereupon held that on the materials he was convinced that the assessee has concealed his income to the extent of Rs. 70,000 and the penal provisions under section 271(l.)(c) of the Act are attracted. The Assessing Officer imposed a penalty of Rs. 33,295, the minimum prescribed under the Act. The assessee appealed before the Commissioner of Income-tax (Appeals), Trivandrum. His explanation that he had received the money from his father-in-law, was found unsubstantiated. The Commissioner of Income-tax (Appeals) noticed that the assessee did not have any evidence in support of his claim that the amount was received by him from his father-in-law. He also noticed that the assessee was not able to show that the amount was actually received by him through legal channels. In that situation, the Commissioner of Income-tax (Appeals) agreed with the order imposing penalty and dismissed the appeal noticing that the penalty levied was also the minimum. The assessee appealed before the Income-tax Appellate Tribunal. According to the assessee, the Assessing Officer has not shown any material to support the case of concealment by the assessee. The assessee submitted that in view of his explanation, unless the Revenue showed that there was concealment within the meaning of section 271(1)(c) of the Act, no penalty could be imposed.

2. On behalf of the Revenue, it was pointed out that the assessee had accepted the order of assessment relating to the addition made by the Assessing Officer and had not appealed against the same. At the time of assessment when the amount was treated as income in terms of section. 69 of the Act, the assessee did not have such an explanation or any other proper explanation for the amount. It was only during the stage of the penalty proceedings that the assessee had put forward the case that the amount, was given to him by his father-in-law and in the absence of any acceptable legal evidence in support of that plea, the imposition of penalty was justified and called for no interference.

3. The Tribunal, it appears to us, has simply accepted the statement of the assessee without any supporting material that the amount was given to him by his father-in-law, who was working abroad. Stating that the Assessing Officer has not adduced any evidence to discredit the story of the assessee, and hence the imposition of penalty was not justified, the Tribunal set aside the order of the Commissioner of Income-tax (Appeals) and that of the Assessing Officer. It is this decision of the Tribunal that is challenged in this appeal at the instance of the Revenue.

4. In the memorandum of appeal the following substantial questions of law are suggested as arising in this appeal:

“(1) Whether, on the facts and in the circumstances of the case, the Tribunal is right in law and fact in deleting the penalty levied under section 271(1)(c) of the Income-tax Act?

(2) Whether, on the facts and in the circumstances of the case, the Tribunal is right in law and fact in holding that ‘the Assessing Officer has not established conscious concealment of income by the assessee’; ‘no material has been brought on record to show that it was a false claim of the assessee… and are not the above findings wrong and casting the burden of proof wrongly on the Revenue?

(3) Whether, on the facts and in the circumstances of the case, and in the light of the relevant Explanation to section 271(1)(c) read with the decision of the Supreme Court in Commissioner Of Income Tax (Additional), Lucknow v. Jeevan Lal Sah., [1994] 205 ITR 244 and other Supreme Court decisions, the decision in Commr. Of Income Tax v. India Sea Foods, [1996] 218 ITR 629 (Ker) [FB] has application to the facts of the case?

(4) Whether, on the facts and in the circumstances of the case should not the Tribunal have considered the case under the relevant Explanation to section 271(1)(c) and is not the order vitiated accordingly?”

5. Accepting that these substantial questions of law arise for decision, this court issued notice on those questions. The respondent has appeared and the appeal was heard on the substantial questions of law as formulated at the time of admission.

6. Learned counsel for the Revenue submitted that the assessment year being 1987–88, section 271 of the Income-tax Act, as amended by the Taxation Laws (Amendment) Act, 1975, with effect from April 1, 1976, applied. Learned counsel submitted that Explanation 1 to section 271(1)(c) of the Act clearly shifted the burden on to the assessee to substantiate his explanation and enables a presumption of concealment to be drawn and the Tribunal was totally in error in not adverting to the relevant provision and in proceeding on the basis that the burden was on the Assessing Officer. Learned counsel for the assessee, on the other hand, contended that Explanation 1 had no application at all in this case because no explanation from the assessee was sought regarding concealment at the time of completing the assessment and this was put to the assessee only at the stage of the penalty proceedings. We may straightaway say that this argument cannot be accepted on the basis of section 69 of the Income-tax Act under which the addition is made while completing the assessment. It is also a fact that the assessee accepted the addition made under section 69 of the Act and did not challenge it in any appeal. It is, therefore, clear that the circumstances were put to the assessee even while completing the assessment or must be deemed to have been put to the assessee while completing the assessment in terms of section 69 of the Act. Therefore, the argument that it was only at the time of the imposition of penalty that explanation of the assessee was sought for, cannot be accepted.

7. The scope of section 271(1)(c) of the Act as amended with effect from April 1, 1976, is clearly explained by the Division Bench of this court in Commissioner Of Income-Tax v. K.P Madhusudanan, [2000] 246 ITR 218. Their Lordships scrutinised the history of the legislation and had defined the scope and ambit of the relevant provisions including Explanation 1 to section 271(1)(c) of the Act. The said decision of this court was affirmed in appeal by the Supreme Court in K.P Madhusudanan v. CIT, [2001] 251 ITR 99. In that decision, in addition to overruling the decisions of the Bombay High Court in Commissioner Of Income-Tax v. P.M Shah., [1993] 203 ITR 792 and CIT v. Dharmchand L. Shah, [1993] 204 ITR 462 and affirming the decision of this court in Commissioner Of Income-Tax v. K.P Madhusudanan, [2000] 246 ITR 218, the Supreme Court also found that the decision in Sir Shadilal Sugar and General Mills Ltd. v. CIT, [1987] 168 ITR 705 was not good law after addition of the Explanation to section 271 of the Act. In the light of this position, it is clear that the burden to explain the alleged concealment is on the assessee.

8. Here, the assessee attempted to say that he had received money from his father-in-law who was employed in a foreign country. Obviously, no money from a foreign country could come into his hands legally except through a bank. The amount could be paid over to the assessee by the father-in-law only by way of a cheque or only after withdrawing the same from the bank. The assessee did not produce any material in support of his case that the amount was something received from his father-in-law, who was employed abroad. In fact in his explanation before the Assessing Officer dated August 29, 1999, he had clearly stated that no documentary evidence was available in respect of the receipt of Rs. 70,000 from his father-in-law. In that situation, it is clear that he has failed to substantiate his explanation and hence in terms of Explanation 1 to section 271(1)(c) of the Act, it must be taken that there is concealment of income by the assessee making him liable to penalty under section 271(1)(c) of the Act.

9. Learned counsel for the assessee contended that the law as expounded by this court in Commr. Of Income Tax v. India Sea Foods, [1996] 218 ITR 629 [FB] must be applied in this case since Explanation 1 of section 271(1)(c) has no application to this case. We have already overruled the contention that Explanation 1 to section 271(1)(c) of the Act does not have application to the case on hand. After the amendment of section 271(1)(c) of the Act with effect from April 1, 1976, we find that the position is as expounded by this court in CIT v. K.P Madhu-sudanan, [2000] 246 ITR 218 as affirmed by the Supreme Court (see [2001] 251 ITR 99). Moreover, it is seen that the Full Bench of this court essentially relied on the decision of the Supreme Court in Sir Shadilal Sugar and General Mills Ltd. v. CIT, [1987] 168 ITR 705 in support of its conclusion. In the light of the decision of the Supreme Court in K.P Madhusudhanan v. Commissioner Of Income Tax, Cochin, [2001] 251 ITR 99, holding that the decision in Sir Shadilal Sugar and General Mills Ltd. v. CIT, [1987] 168 ITR 705 (SC) cannot be considered to be good law after the addition of the Explanation to section 271(1)(c) of the Act, the very foundation of the decision of the Full Bench is shaken. We have no hesitation in overruling the contention raised in that behalf.

10. In view of our conclusions as above, we answer the substantial questions of law formulated in this appeal in favour of the Revenue and against the assessee. The consequence of our answering the questions in favour of the Revenue is that the decision of the Income-tax Appellate Tribunal is to be set aside and that of the Commissioner of Income-tax (Appeals) restored. We, therefore, set aside the order of the Income-tax Appellate Tribunal and restore that of the Commissioner of Income-tax (Appeals), Trivandrum. If necessary, appropriate consequential orders should be passed by the Assessing Officer in terms of section 260(1A) of the Act.

11. The appeal is thus allowed. We make no order as to costs.