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Commissioner Of Income-Tax, Bihar v. Parmanand Advani
Factual and Procedural Background
The case concerns an assessee (a registered firm) on whom a penalty of Rs. 22,600 was imposed for the assessment year 1963–64 by the IAC under section 274(2) of the Income-tax Act, 1961. The penalty was based on a finding that the assessee had concealed particulars of income amounting to Rs. 50,000; that amount had been added to the assessee's income in a reassessment proceeding initiated under section 147(b).
Reassessment proceedings began on 5 January 1966 and the reassessment was completed in 1967. Penalty proceedings under section 271(1)(c) were initiated on 3 October 1968 and an order levying the penalty was dated 1 March 1969. The assessee appealed to the Income-tax Appellate Tribunal (Patna Bench), which deleted the penalty on the ground that, being a penal proceeding, the onus lay on the department to prove concealment and the department had failed to discharge that onus.
The Commissioner of Income-tax (CIT) caused the following question to be referred to the High Court under section 256(1) of the Act:
“Whether, on the facts and in the circumstances of the case, the Tribunal was justified in deleting the penalty imposed under section 271(1)(c) of the Act?”
The Finance Act, 1964 introduced an Explanation to section 271(1) of the Act, taking effect from 1 April 1964; the Explanation changes the burden of proof in certain circumstances where the returned total income is less than 80% of the assessed total income.
Legal Issues Presented
- Whether the Tribunal was justified in deleting the penalty imposed under section 271(1)(c) of the Income-tax Act, 1961.
- Whether the Explanation to section 271(1) (introduced by the Finance Act, 1964, effective 1 April 1964), which shifts the burden of proof where returned total income is less than 80% of the assessed total income, applied to the penalty proceedings in this case (i.e., whether the Explanation applies based on the date of filing of the return in which concealment was made or based on the date on which the assessing authority became satisfied of concealment).
Arguments of the Parties
Department's Arguments
- The Tribunal erred in deleting the penalty because it ignored the Explanation to section 271(1) (inserted by the Finance Act, 1964, effective 1 April 1964), which places the onus on the assessee to prove that the failure to return the correct income did not arise from fraud or gross or wilful neglect where the returned income is less than 80% of the assessed income.
- The material date for determining applicability of the Explanation is the date on which the Income-tax Officer or Appellate Assistant Commissioner attains the satisfaction that concealment occurred (which will arise on completion of assessment or during appellate proceedings), not the date when the return was originally filed.
- Cited decisions (including CIT v. K.C. Behera and CIT v. Puranmal Prabhudayal) were relied upon to support the department's position on the applicability of the Explanation.
Assessee's Arguments
- The reference to the High Court was incompetent because no question of law arose: the Tribunal had made a finding of fact that the assessee had not concealed particulars of income, and a factual finding cannot give rise to a question of law.
- The Explanation to section 271(1) did not apply because the default (the alleged concealment) occurred before the Explanation came into force; therefore the law in force when the offence was committed should govern.
- Further, the assessee contended that a regular return had been filed much earlier (before the Explanation came into force) and that the levy of penalty should be referable to that earlier return rather than to a later revised/reassessment return filed after the Explanation came into force.
Table of Precedents Cited
| Precedent | Rule or Principle Cited For | Application by the Court |
|---|---|---|
| Hajee K. Assainar v. Commissioner Of Income-Tax, Kerala, [1971] 81 ITR 423 (Ker) | Addressed penalty proceedings where the proceedings had concluded before the Explanation came into force. | The Court held this case had no bearing because penalty proceedings there had finished before the Explanation took effect; the High Court had rightly rejected the department's attempt to rely on the Explanation after proceedings had ended. |
| Commissioner Of Income-Tax, Kerala v. K. Ahamed, [1974] 95 ITR 599 (Ker) [FB] | Whether Explanation can be used to determine the nature of the offence. | The ratio is that the Explanation cannot be used to determine the nature of the offence (which is to be determined by law in force at time of commission); the Court noted that determining nature of offence differs from determining procedure for punishing the offender. |
| Commissioner Of Income-Tax, Patiala v. Bhan Singh Boota Singh, [1974] 95 ITR 562 (Punj) | Applicability of the Explanation where return filed after Explanation came into force. | Cited as authority that if the return is filed after the Explanation came into force, the Explanation would be attracted; the Court treated this decision as supporting the department's position. |
| Rajputana Stores v. IAC, [1975] 99 ITR 499 (Gauhati) | Applicability of the Explanation where return filed after Explanation came into force. | The decision is cited as holding that the Explanation applies if the return was filed after it came into force; the Court regarded it as supporting the view that the Explanation applies in such circumstances. |
| CIT v. Data Ram Satpal, [1975] 99 ITR 507 (All) | Applicability of the Explanation where return filed after Explanation came into force. | Cited as supporting the proposition that the Explanation applies when the return is filed after it came into force; the Court regarded it as against the assessee's contention. |
| Continental Commercial Corporation v. ITO, [1975] 100 ITR 170 (Mad) | Held a view on applicability of the Explanation (contrary to views of other courts). | The High Court's view was considered incorrect by the Court below because it conflicted with the Supreme Court's observations in Jain Brothers v. Union of India; the present Court rejected the Madras view as being directly against the Supreme Court authority. |
| Jain Brothers v. Union of India, [1970] 77 ITR 107 (Supreme Court) | Principles on timing of penalty imposition: penalty must be calculated and imposed according to the tax assessed; crucial date is completion of assessment/satisfaction of authorities. | The Court relied on this Supreme Court authority to state that imposition of penalty follows completion of assessment and that the crucial date for penalty purposes is the date of completion of assessment (the date when satisfaction is reached). |
| CIT v. K.C. Behera, [1976] 103 ITR 479 (Orissa) | Support for department's contention regarding applicability of the Explanation. | The Court observed that this decision supports the department's position that the Explanation is applicable under the circumstances advanced by the department. |
| CIT v. Puranmal Prabhudayal, [1977] 106 ITR 675 (Orissa) | Support for department's contention regarding applicability of the Explanation. | The Court observed that this decision supports the department's position that the Explanation is applicable under the circumstances advanced by the department. |
Court's Reasoning and Analysis
The Court analyzed two principal matters: (1) whether the reference raised a question of law and whether the Tribunal's order rested on a finding of fact or law; and (2) whether the Explanation to section 271(1) applied to the penalty proceedings in question.
On the competency of the reference, the Court rejected the assessee's contention that the Tribunal had made a factual finding. The Court examined the Tribunal's order and held that the Tribunal had not resolved factual disputes; rather it had deleted the penalty solely because it held, as a matter of legal effect, that the onus lay on the department to prove concealment and the department had failed to discharge that onus. The observation by the Tribunal that the assessee "cannot be held to have concealed the particulars..." was treated by the Court as a legal conclusion based on the department's failure of proof, not a primary factual finding. Consequently, the reference did present a question of law.
On the applicability of the Explanation to section 271(1), the Court:
- Quoted the Explanation in full, noting it came into force on 1 April 1964 and shifts the burden of proof to the assessee where returned total income is less than 80% of the assessed total income (as reduced by bona fide expenditure disallowed as a deduction).
- Framed the competing positions: the assessee said the relevant date is the date of the filing of the return in which concealment occurred (and if that date was before 1 April 1964 the Explanation should not apply); the department said the relevant date is the date on which the ITO or AAC attains satisfaction of concealment (which arises on completion of assessment or during appeal), so that the Explanation applies if proceedings to punish the offender were pending when the Explanation came into force.
- Held that the argument that the procedure for trying an offender must be the one in force when the offence was committed was unsound where the procedural law had changed: procedural laws are, unless otherwise indicated, retrospective in application to proceedings pending when they take effect. The Explanation prescribes a rule of evidence (burden of proof) and is procedural in nature; therefore, it applies where the proceeding for punishment was pending on the date it came into force.
- Distinguished authorities relied upon by the assessee: Hajee K. Assainar was said to be inapplicable because the penalty proceedings there had concluded before the Explanation came into force. K. Ahamed was recognized as holding that Explanation cannot determine the nature of the offence (which is judged by law at the time of commission), but the Court emphasized that determining nature of offence is different from determining procedure for dealing with the offender. Other decisions (Bhan Singh Boota Singh, Rajputana Stores and Data Ram Satpal) were taken to support the proposition that the Explanation applies if the return was filed after the Explanation took effect.
- Relied on the Supreme Court decision in Jain Brothers v. Union of India for the proposition that penalty is imposed after assessment has been completed and that the crucial date for penalty purposes is the date of completion of assessment (i.e., the date on which satisfaction is reached by the tax authorities).
- Applied these principles to the facts: the satisfaction required for initiating penalty proceedings arose only on processing the revised (reassessment) return filed on 8 February 1966, which was after the Explanation came into force; therefore the Explanation applied. The Court rejected the assessee's contention that the penalty should be referable to an earlier regular return filed before the Explanation, because the satisfaction on which the penalty proceeding was based arose only on processing the revised return.
Holding and Implications
Holding: The Court held that the Tribunal erred in deleting the penalty by wrongly placing the burden of proof on the department. The question referred was answered in the negative and against the assessee.
Implications and Direct Consequences:
- The Tribunal's deletion of the penalty was set aside to the extent that the legal reasoning (placing the onus on the department) was incorrect because the Explanation to section 271(1) applied.
- There will be no order as to costs.
- Because the Tribunal had not dealt with the merits of the assessee's appeal, the Tribunal was permitted to consider those merits in the proceedings that follow.
- The Court expressly treated the Explanation as procedural (a rule of evidence) that applies to proceedings pending when it came into force and identified the material date for penalty purposes as the date of satisfaction/completion of assessment rather than the date of filing of the original return.
Additional note from the opinion: Justice S. Sarwar Ali concurred with the judgment.
S.P Sinha, J.:— The Patna Bench of the Income-tax Appellate Tribunal has referred the undermentioned question under s. 256(1) of the I.T Act, 1961 (hereinafter referred to as “the Act”), for the opinion of this court:
“Whether, on the facts and in the circumstances of the case, the Tribunal was justified in deleting the penalty imposed under section 271(1)(c) of the Act?”
2. The assessee is a registered firm. For the assessment year 1963–64, a penalty of Rs. 22,600 was imposed on it by the IAC acting under s. 274(2) of the Act on the ground that it had concealed the particulars of its income for the said assessment year to the tune of Rs. 50,000. This amount had been added to the assessee's income in a reassessment proceeding, under s. 147(b) of the Act. The reassessment proceedings had been started on the 5th of January, 1966, and the assessment had been completed some time in the year 1967. On completion of the said reassessment, proceedings for levy of penalty in terms of s. 271(1)(c) of the Act was initiated on the 3rd October, 1968, and the penalty was levied by order dated the 1st of March, 1969.
3. The assessee carried the matter in appeal to the Income-tax Appellate Tribunal, Patna Range, Patna, which relying upon several decisions of various High Courts, held that a proceeding for levy of penalty for concealment of income being a penal proceeding, the onus lay on the department to establish the assessee's guilt. The Tribunal then observed that—
“merely because the addition was maintained in the assessment proceedings, the assessee cannot be held to have concealed the particulars of his income or furnished inaccurate particulars of such income…”
4. The penalty was, accordingly, deleted.
5. The Tribunal having thus deleted the penalty, the reference in question has been made to this court at the instance of the CIT.
6. The short argument made on behalf of the department is that the Tribunal, while deleting the penalty, had lost sight of the Explanation to s. 271(1) of the Act which had been introduced into the Act by the Finance Act, 1964, and took effect from the 1st of April, 1964. By this Explanation, it was submitted, where the total income returned fell short of 80% of the income assessed, the onus lay upon the assessee to prove that the failure to return the correct income did not arise from any fraud or any gross or wilful neglect on its part.
7. In the instant case, it was submitted, that the said Explanation to s. 271(1) was clearly attracted and, therefore, the Tribunal erred in deleting the penalty by wrongly throwing the onus of proving the guilt of concealment on the department.
8. Mr. Jain appearing for the assessee, firstly, questioned the competence of the reference on the ground that no question of law arose out of the Tribunal's order. The Tribunal, according to Mr. Jain, had arrived at a finding of fact that the assessee had not concealed the particulars of its income, which finding could not give rise to any question of law.
9. His next submission was that, in any event, the Explanation to s. 271(T) of the Act had no application to the case in question, because on the date when the default was committed by the assessee, the said Explanation did not exist.
10. On these grounds, it was submitted that this court should refuse to answer the question referred or should answer it in favour of the assessee.
11. I think there is no merit in either of the two contentions raised on behalf of the assessee.
12. The first contention is clearly based upon a misappreciation of the Tribunal's order. On a plain reading of the said order it is clear that the appeal had been decided in favour of the assessee not on facts, but on the solitary ground that the onus lay upon the department to establish that the assessee had concealed the particulars of its income, which onus the department had failed to discharge. The Tribunal had not gone into the factual aspect of the matter, but had deleted the penalty on the ground that the department had failed to discbarge its onus. The finding of the Tribunal that “…the assessee cannot be held to have concealed the particulars of his income or furnished inaccurate particulars of such income…” is not a finding of fact but of law, the observation being based upon the department's failure to discharge its onus of proving the assessee's guilt. The first submission has, therefore, to be rejected.
13. I now pass on to consider the question as to whether or not the Explanation to s. 271(1) of the Act was applicable to the case in question. The said Explanation is in the following terms;
“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 the total 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.”
14. This provision came into force from the 1st of April, 1964, shifting the burden of proof on the assessee in case its total income, as returned, was less than 80% of the total income assessed, as reduced by the expenditure incurred bona fide by him for the purpose of making or earning any income included in the total income, but which had been disallowed as deduction.
15. There is no dispute that if this provision applies, the Tribunal's order is wrong. The argument on behalf of the assessee, however, is that this provision has no application to the penalty proceeding in question because the concealment had been made before the Explanation had come into force. According to learned counsel for the assessee, the question as to whether or not the Explanation would be applicable to a case would depend upon the date on which the default was committed, namely, when the return was filed in which the concealment was made.
16. According to learned counsel for the department, however, the material date for the purpose of determining the applicability or otherwise of the Explanation to a case was the date on which the ITO or the AAC got the satisfaction that the assessee had concealed the particulars of its income or had furnished inaccurate particulars of such income. Such satisfaction would be available only on completion of the assessment or during the course of hearing an appeal from that assessment. Thus, in either case, the determinative factor would not be the date of the filing of the return of income in which the concealment is made, but the date on which the assessment was made on the basis of which the ITO or the AAC felt satisfied of concealment having been made by the assessee.
17. The question which arises on which the basis of the rival contentions is, whether the applicability of the Explanation to s. 271(1) of the Act depends upon the date on which the return of income is filed concealing the particulars of income or furnishing inaccurate particulars thereof, as has been urged on behalf of the assessee, or would depend upon the date on which the required satisfaction for initiating proceedings for levy of penalty is received by the relevant authority, as has been urged on behalf of the department.
18. The argument made on behalf of the assessee is not sound. Carried to its logical conclusion, in effect, it means that the procedure for trial of an offender must be the one as was in force when the offence was committed by him.
19. It is no doubt true that the offence of concealment of income is committed when the particulars thereof are kept out of the return of income, but it is wrong to say that the procedure to punish the offender must be in accordance with the law as was in force at the time of commission of the offence, notwithstanding such procedure having undergone a change thereafter. Procedural laws, unless otherwise indicated, are retrospective in their application, applying to all proceedings pending on the date of their enforcement. The Explanation to s. 271(1) of the Act only prescribes a rule of evidence relating to burden of proof. It is purely procedural in nature. Naturally, therefore, irrespective of the date on which the offence was committed, it would be attracted if the proceeding for punishing the offender was pending on the date when it came into force.
20. Learned counsel for the assessee has cited a number of decisions which, according to him, by implication hold that if the return of income is filed prior to April 1, 1964, namely, prior to the date on which the Explanation came into force, the Explanation will not apply to the case. The decisions cited are:
Hajee K. Assainar v. Commissioner Of Income-Tax, Kerala., [1971] 81 ITR 423 (Ker), Commissioner Of Income-Tax, Kerala v. K. Ahamed, [1974] 95 ITR 599 (Ker) [FB], Commissioner Of Income-Tax, Patiala v. Bhan Singh Boota Singh, [1974] 95 ITR 562 (Punj), Rajputana Stores v. IAC, [1975] 99 ITR 499 (Gau), CIT v. Data Ram Satpal, [1975] 99 ITR 507 (All) and Continental Commercial Corporation v. ITO, [1975] 100 ITR 170 (Mad).
21. Except the last mentioned decision, in the case of Continental Commercial Corporation, [1975] 100 ITR 170 (Mad), none of the other decisions support the contention on behalf of the assessee that the law applicable for the purpose of levying penalty would be the one which was in force at the time of the commission of the offence.
22. Hajee K. Assainar's case, [1971] 81 ITR 423 (Ker) has no bearing on the question raised, because in that case the penalty proceedings had ended up to the last appellate stage much before the Explanation came into force. The department, however, in the course of its contentions before the High Court, sought to support the levy of penalty by reference to the Explanation to s. 271(1), which had come into the Act by that time. The High Court rejected the plea, and I may respectfully add, that it was rightly repelled.
23. In K. Akamai's case, [1974] 95 ITR 599 (Ker) [FB], the ratio laid down is that the Explanation cannot be used for the purpose of determining the nature of the offence, because that has to be determined with reference to the law in force at the time of commission of the act or omission. Determining the nature of the offence is wholly different from determining the procedure for dealing with the offender.
24. So far as the other three decisions are concerned, Commissioner Of Income-Tax, Patiala v. Bhan Singh Boota Singh, [1974] 95 ITR 562 (Punj), Rajputana Stores v. IAC, [1975] 99 ITR 499 (Gauhati) and CIT v. Data Ram Satpal, [1975] 99 ITR 507 (All), the ratio laid down by them is that if the return is filed after the coming into force of the Explanation, the case would attract the Explanation.
25. Now with regard to the view expressed by the Madras High Court in Continental Commercial Corporation v. ITO, [1975] 100 ITR 170, I think, with all respect, the view is incorrect being directly against the view expressed by the Supreme Court in the case of Jain Brothers v. Union of India, [1970] 77 ITR 107, the relevant observations in which are (p. 116):
“There can be no manner of doubt that penalty has to be calculated and imposed according to the tax assessed. It follows that imposition of penalty can take place only after assessment has been completed.”
Further
“It is obvious that for the imposition of penalty it is not the assessment year or the date of the filing of the return which: is important but it is the satisfaction of the income-tax authorities that a default has been committed by the assessee which would attract the provisions relating to penalty. Whatever the stage at which the satisfaction is reached, the scheme of sections 274(1) and 275 of the Act of 1961 is that the order imposing penalty must be made after the completion of the assessment. The crucial date, therefore, for purposes of penalty, is the date of such completion.”
26. Thus, none of the above cited decisions help the assessee. On the contrary, the decisions in the cases of Bhan Singh Boota Singh, [1974] 95 ITR 562 (Punj), Rajputana Stores, [1975] 99 ITR 499 (Gauhati) and Data Ram Satpal, [1975] 99 ITR 507 (All), go against its cause, because according to the decisions, the Explanation to s. 271(1) would get attracted, if irrespective of the assessment year in question, the return of income has been filed after the coming into force of the Explanation.
27. In the instant case, admittedly, the return of income has been filed on the 8th February, 1966, after the coming into force of the Explanation.
28. Learned counsel for the assessee, however, submitted that the return of income related to the reassessment proceeding. Another regular return of income had been filed much before the’ coming into force of the Explanation. The same income had been returned in both of them. The levy of penalty should, therefore, be referable to that return of income in which the concealment of income was first made. And if this be so, the Explanation would not be applicable.
29. In the context of the provisions contained in s. 271(1)(c) of the Act, this argument is untenable.
30. The relevant provision is:
“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 his 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) section 143, or
(c) has concealed the particulars of his income or deliberately furnished inaccurate particulars of such income,
he may direct that such person shall pay by way of penalty—…”
31. The material part is thus not the filing of the return, but the satisfaction about income having been concealed. If such satisfaction would have come on processing the first return, the argument would have been valid, but that is not so. The satisfaction required has come only on processing the revised return. Therefore, it is with reference to that return that proceeding for penalty has to be initiated. The revised return, as stated, has been filed after the coming into force of the Explanation. The Explanation would, therefore, apply.
32. Learned standing counsel for the department has cited the following decisions in support of his contention: CIT v. K.C Behera, [1976] 103 ITR 479 (Orissa) and CIT v. Puranmal Prabhudayal, [1977] 106 ITR 675 (Orissa). These decisions do support his point of view.
33. In view of the above discussion, it must be held that the Tribunal erred in deleting the penalty imposed on the assessee by wrongly placing the burden of proof on the department. The question referred is accordingly answered in the negative and against the assessee. There will be no order. as to costs. Since the Tribunal has not dealt with the merits of the assessee's appeal, it may now do so.
S. Sarwar Ali, J.:— I agree.
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