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Durga Kamal Rice Mills v. Commissioner Of Income-Tax
Judgment Summary — D.K. Seth, J. (with R.N. Sinha, J. concurring)
Factual and Procedural Background
A search under section 133 of the Income-tax Act, 1961 revealed a duplicate account book in which an opening balance for the next previous year exceeded the closing balance shown in the return for the earlier previous year. The excess amount was added to the assessee's income for the relevant previous year. By reason of Explanation 1 to section 271(1)(c), that addition was treated by the Income-tax authorities as amounting to concealment by fiction. The matter progressed through the assessing and appellate authorities and reached the Income-tax Tribunal, whose order is impugned before the court in this reference.
Legal Issues Presented
- Whether the finding in the quantum proceedings is conclusive for the purpose of imposing penalty under section 271(1)(c), or whether the penalty authority must make an independent finding on concealment.
- Whether an addition made under Explanation 1 to section 271(1)(c) can be treated as concealment where two reasonable views are possible (e.g., the amount could be income of the following previous year rather than the relevant previous year).
- Whether the amount was owned by the assessee within the meaning of section 69A, such that Explanation 1 to section 271(1)(c) could be attracted and a penalty imposed.
Arguments of the Parties
Appellant's (Assessee's) Arguments — as presented by Mr. J.P. Khaitan
- The amount shown as an opening balance of the next previous year could legitimately be treated as income of that following year; the quantum addition does not conclusively determine the penalty question and the penalty authority must decide independently. When two views are possible (income of the following year versus income of the relevant year), penalty cannot be imposed for concealment.
- The amount was reflected in partners' capital accounts and the partners filed revised returns (accepted by Revenue) showing the amount as theirs; therefore the income belonged to the partners, not the assessee. The quantum decision is not final for penalty purposes and the ownership question must be decided independently; two views are possible, so penalty cannot be imposed.
- The Department itself treated the amount both as income of the assessee and as income of the partners; unless it is shown the assessee owned the amount under section 69A, there is no basis for finding concealment. Because Revenue accepted the amount in both ways, there is no conclusive proof of ownership by the assessee and therefore no penalty can be imposed.
- Statutory and case-law support cited by the appellant included section 69A, section 271(1)(c) and Explanation 1, and decisions: Ashok Timber Industries (1980) 125 ITR 336 (Cal), National Textiles v. CIT (2001) 249 ITR 125 (Guj), and Commissioner of Income-Tax v. P.K. Narayanan (1999) 238 ITR 905 (Ker).
Respondent's (Revenue's) Arguments — as presented by Ms. Gouri Saria Gutgutia
- It is settled that findings in quantum proceedings are not conclusive for penalty; the penalty authority must nevertheless reach an independent finding on concealment. The Revenue asserts it has done so and that there is a clear finding of concealment by the Income-tax authorities.
- Explanation 1 to section 271(1)(c) operates to create a statutory fiction: an addition under that Explanation is deemed concealment. The assessee's explanation was not proved or bona fide and therefore can be treated as false, attracting the mischief of Explanation 1.
- The court need not consider whether the income could be treated as that of the following year; acceptance of revised returns by partners is immaterial — a subsequent claim by a third party will not negate the Revenue's power to treat the income as that of the assessee. The Revenue maintains it arrived at an independent finding and therefore the Tribunal's order should stand.
Table of Precedents Cited
| Precedent | Rule or Principle Cited For | Application by the Court |
|---|---|---|
| Commissioner Of Income-Tax, West Bengal-VI v. Ashok Timber Industries, [1980] 125 ITR 336 (Cal) | Supported the proposition that an amount shown as the opening balance of the following previous year could be treated as income of that following year (i.e., two views are possible). | The court cited Ashok Timber to show that, on the facts, it was open to treat the amount as income of the following year; this supported the view that two reasonable views existed and therefore penalty should not be imposed. |
| National Textiles v. CIT, [2001] 249 ITR 125 (Guj) | Held that until Explanation 1 is found to be false or mala fide, the mischief of section 271(1)(c) cannot be attracted; also supports the principle that when no clear inference can be drawn, penalty should not be imposed. | The court relied on National Textiles to conclude that because there was no finding that the assessee's explanation was false or mala fide, no reasonable and positive inference of concealment could be drawn; thus penalty cannot be sustained. |
| Commissioner Of Income-Tax v. P.K. Narayanan, [1999] 238 ITR 905 (Ker) | Holds that unless the amount is owned by the assessee and there is a conclusive finding to that effect, Explanation 1 to section 271(1)(c) does not apply. | The court invoked P.K. Narayanan to emphasize ownership as a necessary element for attracting Explanation 1; as there was no conclusive finding of ownership, Explanation 1 could not be applied to impose penalty. |
| Commissioner Of Income-Tax v. Bimal Kumar Damani, [2003] 261 ITR 87 (Cal) | Reiterated the proposition that findings in quantum proceedings are not conclusive for penalty proceedings and that the penalty authority must form an independent view. | The court relied on this decision as authority for the legal principle that quantum findings do not bind penalty proceedings; the court treated the matter independently in light of that principle. |
Court's Reasoning and Analysis
The court began from the admitted legal proposition — recognized in Bimal Kumar Damani — that findings in quantum proceedings are not conclusive for penalty proceedings and that the authority imposing penalty must reach an independent finding on concealment. Applying that principle, the court considered the factual matrix before it.
On the facts, the amount in question appeared as the opening balance of the following previous year; as a result, it was open to the assessee to treat and disclose the amount as income of that following year. The court recognized that in law the amount "could" be treated as income of the relevant previous year (and had been added in quantum), but equally there was nothing to prevent the assessee from treating it as income of the following year — thus, two reasonable views existed.
The court further observed that the amount was shown in the partners' capital accounts and that the partners had filed revised returns (accepted by Revenue) claiming the amount as their income. Whether the amount belonged to the partners or to the assessee is a determinable question, but the tribunal's quantum finding is not binding on the penalty inquiry. The Tribunal had not established conclusively that the assessee was the owner of the amount; in any event, two views as to ownership were possible.
The court examined the statutory context: section 69A concerns unexplained money "owned" by the assessee and found in his possession, whereas section 68 does not require ownership and applies to amounts shown in an assessee's books. The present amount was not shown in the assessee's books (duplicate accounts having been found in the search), so it fell within the ambit of section 69A for quantum purposes. However, for penalty under Explanation 1 to section 271(1)(c) the authority must find ownership conclusively. The court found no such conclusive finding by the Tribunal.
The court then applied the cited precedents: P.K. Narayanan for the requirement of conclusive ownership to attract Explanation 1; National Textiles for the principle that Explanation 1 cannot be invoked unless the assessee's explanation is shown to be false or mala fide; and Ashok Timber for the proposition that the amount shown as opening balance could be treated as income of the following previous year. Because two reasonable views existed and there was no finding that the explanation was false or mala fide, the court concluded that no reasonable positive inference of concealment could be drawn for penalty purposes.
The court therefore declined to rely on the quantum finding, held that the penalty authority had not reached a conclusive independent finding of ownership or mala fide concealment, and found that the circumstances permitted two views, which precluded imposition of penalty.
Holding and Implications
Holding: The court answered the reference question in the negative in favour of the assessee and, having regard to the facts and circumstances, set aside the impugned order of the Income-tax Tribunal. The court ordered that there would be no order as to costs and directed parties to act on a xerox signed copy of the dictated order. (R.N. Sinha, J. agreed.)
Implications: The direct effect is that the penalty imposed by the Tribunal is vacated and the Tribunal's impugned order is set aside on the grounds summarized above (absence of a conclusive independent finding of ownership or mala fide falsehood of the explanation and the existence of two reasonable views). The opinion does not purport to establish a new principle of law beyond applying and following earlier authorities; rather, it applies established principles (as discussed) to the facts of this case.
The Judgment of the Court was delivered by
D.K Seth, J.:— The quantum proceeding was held against the assessee. The facts revealed that upon a search under section 133 of the Income-tax Act, 1961, a duplicate account book was found where the opening balance shown exceeded the figure of the closing balance of the previous year disclosed in the return. This amount was added in the income of the assessee for the previous year. By reason of Explanation 1 to section 271(1)(c), such addition would amount to concealment by fiction. Therefore, the mischief of section 271(1)(c) of the Income-tax Act, 1961, is attracted in this case. That was how this matter was dealt with by the Income-tax authorities up to the Tribunal, against which this reference has been sought for.
2. Mr. J.P Khaitan, learned counsel for the assessee, has pressed three contentions for our consideration. First, the amount shown in the opening balance of the next previous year can be treated to be an income for the next previous year. Though it could be treated as income of the earlier previous year by reason of the addition, yet the finding with regard to the quantum proceedings will not conclusively determine the case for the purpose of penalty proceedings. The court cannot rely on the finding in the quantum proceedings as a factor for imposing penalty. It requires to be decided independent thereof. It, therefore, seems that two views are possible, viz., the income could be that of the following previous year or it could also be that of the relevant previous year. When two views are possible then penalty cannot be imposed on account of concealment in respect of the relevant previous year when the amount could be disclosed in the following previous year. Secondly, that this amount was claimed to be the amount at the hands of the partners as it was shown in the capital accounts of the partners. At the same time, the partners in their revised returns had shown this amount in their account. Such returns have since been accepted by the Revenue. Therefore, the income did not belong to the assessee but to the partners. Though on identical grounds yet the decision in the quantum proceeding cannot be treated to have reached finality for the purpose of penalty proceedings. The question has to be determined independent of the said finding and decided accordingly. Again he submits when it cannot be conclusively determined whether this amount is an income of the assessee or at the hands of the partners included in their capital account. Therefore, when two views are possible, no penalty could be imposed. Thirdly, this amount admittedly has been added as income of the assessee for the previous year. At the same time, this was shown in the return filed by the partners as their income and such returns have since been accepted. The Department itself had treated the same amount once as income of the assessee and again as income at the hands of the partners. Unless the amount is owned by the assessee in view of section 69A, there cannot be any question of concealment. When the Department itself had accepted the same in both ways, there cannot be any conclusive proof that this amount was owned by the assessee. Therefore, no penalty can be imposed in such a case.
3. Mr. Khaitan has led us through the order imposing penalty as well as the decisions cited by him, viz., Commissioner Of Income-Tax, West Bengal-Vi v. Ashok Timber Industries., [1980] 125 ITR 336 (Cal) to support his first contention and National Textiles v. CIT, [2001] 249 ITR 125 (Guj) and Commissioner Of Income-Tax v. P.K Narayanan, [1999] 238 ITR 905 (Ker) to substantiate the other two contentions. He has referred to section 69A and section 271(1)(c) and Explanation 1 thereunder.
4. Ms. Gouri Saria Gutgutia, learned counsel for the respondent/Revenue, on the other hand, has contended that it is a settled proposition of law that the findings in the quantum proceedings will not be a conclusive determination for the purpose of imposing penalty. The authority imposing penalty has to come to its independent finding with regard to the question of concealment. She has led us through the order passed by the learned Tribunal imposing the penalty as well as the other materials in the paper book. She has contended that there is a clear finding of fact by the Income-tax authorities with regard to the concealment. There is no infirmity in the finding. Therefore, this court cannot interfere with the same. Secondly, by reason of Explanation 1 to section 271(1)(c), there is a fiction created by a statute. By reason thereof, addition is deemed to be a concealment within the meaning of section 271(1)(c). The explanation advanced by the assessee could not be proved. As such the same can be treated to be false. By no stretch of imagination the explanation can be treated to be a bona fide one. As such it attracts the mischief of Explanation 1. The question is relevant for the purpose of the relevant previous year. The court is not supposed to look into the question as to whether this income could be treated to be an income of the following previous year. The acceptance of revised returns submitted by the partners claiming the same to be that of their own income is wholly immaterial. Even if some-one claims the income added to the assessee as their own income by reason of section 69A, the authority is empowered to add the same as income of the assessee. As such the subsequent claim by a third party will not negate the same. Such authority can also be available to the Revenue when deciding the question of imposing penalty. But, however, such finding has to be arrived at independent of the finding in the quantum proceedings. According to her, the Revenue has arrived at an independent finding. As such the three contentions raised by Mr. Khaitan cannot be sustained.
5. We have occasion to hear this matter at length. It is an admitted proposition in law that the finding in the quantum proceeding is not a factor for determining the question for the purpose of imposing penalty. Such a question arose for our consideration in the case of Commissioner Of Income-Tax v. Bimal Kumar Damani, [2003] 261 ITR 87 (Cal) in Income-tax Reference No. 39 of 1997, disposed of by us on February 10, 2003. In the said decision, we have considered a few of the decisions operating in the field and had so held. This proposition has not been disputed by either of learned counsel appearing for the parties. We cannot look into the findings arrived at by the authorities in the quantum proceedings. This question has to be decided independent of such finding. If we do not fall back on the finding in the quantum proceedings, then it seems on facts, that this income was shown as the opening balance of the following previous year and it was open to the assessee to disclose the said income in the returns for the following previous year. That in law, it could be treated as income of the relevant previous year. But there is nothing to prevent the assessee to treat the income as income of the following previous year. It might have been a concealment for the relevant previous year. But whether it is a concealment for the following previous year cannot be determined without a reference to the assessment for the following previous year. Therefore, it appears to us that two views are possible.
6. At the same time, this income was shown in the capital accounts of the partners. Whether this was the income of the partners or of the assessee is also a question, which can be raised requiring determination. The determination in the quantum proceedings not being final, this question has to be examined. It does not appear that the learned Tribunal had examined this question. But even if this was examined, still then two views could be possible. It can be an income at the hands of the assessee or an income at the hands of the partners. Whether it is an income of the one or the other is immaterial for our present purpose since it was in relation to the relevant previous year in respect of which it was treated to be an income of the assessee. But, at the same time, that finding would not be binding on the penalty proceedings. An independent finding has to be arrived at. But this question cannot be determined effectively as the present situation stands, which is the third contention of Mr. Khaitan.
7. Admittedly, the income was added to the assessee for the relevant previous year. At the same time, the partners have also shown this amount as income in their revised return, which was alleged to have been filed in June, 1988, which we had found to be in March, 1989, in the quantum proceedings. But then Mr. Khaitan points out from the paper book that in the penalty proceedings, it was recorded as to have been submitted in June, 1988 (at page 36 of the paper book). Therefore, if we go by this finding of the Income-tax authority, still then we cannot overlook that the return so submitted by the partners has since been accepted. The authorities have added the amount in the income of the assessee and then again assessed the same at the hands of the partners for the relevant previous year. Now having treated the same amount at the hands of the assessee, as well as at the hands of the partners, the Department cannot conclusively say or stick to one for the purpose of imposing penalty that there was concealment by the assessee. Inasmuch as in order to attract the mischief of concealment in a given case, it has to be treated under which provision the particular case is being governed.
8. Section 69A deals with unexplained money of which the assessee is found to be the owner. The material difference between sections 68 and 69A is that section 68 does not require that the amount is to be owned by the assessee. It only deals with any amount shown in the books of account of the assessee. Whereas section 69A deals with money, etc., owned by the assessee and found in his possession. Therefore, ownership is one of the considerations when the matter comes under section 69A. Admittedly, this amount was not shown in the books of account of the assessee and as such it could not have been treated under section 68. Admittedly, duplicate books of account were chanced upon by the Income-tax authority in a search conducted under section 133. As such it would come under section 69A. For the purpose of quantum proceedings, it might attract a particular provision for addition to the income of the assessee. But when it comes to the question of imposition of penalty, then independent of the finding arrived at the quantum proceedings, the authority has to find out conclusively that the assessee owns this amount.
9. In the present case, there is nothing to show that the learned Tribunal has ever come to any conclusion that the assessee owned this amount. Even then in this case once it had added to the income of the assessee and then again the same amount has been accepted as income of the partners in their revised return, the Income-tax authority is precluded from contending that the assessee is the owner of the amount or income. In this case, it appears that two views are possible.
10. When two views, are possible, no penalty can be imposed is a principle that has been enunciated in the said two decisions in National Textiles V. CIT, [2001] 249 ITR 125 (Guj) and Commissioner Of Income-Tax v. P.K Narayanan, [1999] 238 ITR 905 (Ker). In Commissioner Of Income-Tax v. P.K Narayanan, [1999] 238 ITR 905 (Ker), it was held that unless the amount is owned by the assessee and there is a conclusive finding to that effect it is not hit by Explanation 1 to section 271(1)(c). Whereas in National Textiles v. CIT, [2001] 249 ITR 125 (Guj), it was held that until and unless the Explanation is found to be false or mala fide, the mischief of section 271(1)(c) cannot be attracted.
11. In the present case, there was nothing to indicate that the explanation was false or mala fide. The learned Tribunal has not arrived at any such conclusion. Having regard to the facts and circumstances of the case, as was held in National Textiles, [2001] 249 ITR 125 (Guj), no reasonable and positive inference could be drawn. Because of the two stands taken by the Income-tax authority in this case by adding the amount in the income of the assessee and again accepting the same at the hands of the partners, the Income-tax authority cannot fall back on one and reject the other. In Ashok Timber Industries, [1980] 125 ITR 336 (Cal), in a similar circumstance, it was held that it could have been treated to be an income of the following previous year when it is shown as the opening balance of that previous year. Thus, also, two views are possible. When two views are possible and when no clear and definite inference can be drawn, in a penalty proceeding, penalty cannot be imposed.
12. For all these reasons, we are not in a position to persuade ourselves to agree with the contention raised by learned counsel for the Revenue and the reason given by the learned Tribunal.
13. We, therefore, hereby answer the question in the negative, in favour of the assessee and having regard to the facts and circumstances of the case, we hereby set aside the impugned order of the learned Tribunal.
14. There will be no order as to costs.
15. All parties are to act on a xerox signed copy of this dictated order on the usual undertaking.
R.N Sinha, J.:— I agree.
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