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Commissioner Of Income-Tax, Punjab v. Aya Singh Ishar Singh.
Structured Summary of the Opinion — B.S. Dhillon, J.
Factual and Procedural Background
The respondent is an assessee-firm (Messrs. Aya Singh Ishar Singh, Tarn Taran). It claimed deductions for purchase tax in respect of assessment year 1959-60 (Rs. 23,078) and 1960-61 (Rs. 17,989) under provisions of Punjab sales-tax legislation (East Punjab General Sales Tax (Amendment) Act, 1958, revalidated by Punjab General Sales Tax (Amendment and Validation) Act, 1960, later repealed on October 3, 1961).
As a consequence of the repeal and by operation of section 41(1) of the Income-tax Act, 1961, a sum of Rs. 41,067 was deemed to be income of the assessee for assessment year 1962-63. The Income-tax Officer issued a notice under section 148 on the ground of escapement of income. The assessee filed a return in response, and there was a note in that return stating there was no escapement of income.
During assessment proceedings the assessee argued that the purchase-tax amounts should have been assessed in the earlier assessment years (1959-60 and 1960-61). The Inspecting Assistant Commissioner rejected that plea, concluded that by operation of section 41 the amount was to be included in 1962-63, and completed assessment computing total income at Rs. 86,121. A penalty notice was issued for concealment under section 271(1)(c). The Inspecting Assistant Commissioner imposed a penalty of Rs. 6,000, recording that the income was clearly to be assessed in the year and that the assessee furnished inaccurate particulars.
The assessee filed two appeals to the Income-tax Appellate Tribunal (Chandigarh): one challenging the assessment of Rs. 41,067 (dismissed by the Tribunal) and the other challenging the penalty (accepted by the Tribunal). The Tribunal accepted the penalty appeal primarily because (1) the remission of liability arose in confused circumstances (governmental uncertainty) and (2) section 41(1) is a deeming provision and, in the Tribunal's view, a deemed income could not form the basis for penalty under section 271(1)(c).
The Tribunal referred the following question of law to the High Court: “Whether, on the facts and in the circumstances of the case, the Appellate Tribunal was right in deleting the penalty of Rs. 6,000 imposed under section 271(1)(c) in respect of the sum of Rs. 41,067 assessed under section 41(1)?”
Legal Issues Presented
- Whether, on the facts and in the circumstances of the case, the Appellate Tribunal was right in deleting the penalty of Rs. 6,000 imposed under section 271(1)(c) in respect of the sum of Rs. 41,067 assessed under section 41(1) of the Income-tax Act, 1961.
Arguments of the Parties
Revenue / Inspecting Assistant Commissioner
- The income of Rs. 41,067 was to be assessed in assessment year 1962-63 by reason of section 41(1) after repeal of the Punjab sales-tax enactment, and the assessee was not justified in failing to declare it.
- Because the assessee furnished inaccurate particulars of income, the provisions of section 271(1)(c) were attracted and a penalty of Rs. 6,000 was imposed.
Assessee / Appellate Tribunal (reasons recorded by the Tribunal)
- The Tribunal accepted the appeal against penalty because the remission of liability happened in "peculiar" and "confused" circumstances (including prior litigation and statutory amendments/repeal), such that there was no intention on the part of the assessee to furnish inaccurate particulars.
- The Tribunal held that section 41(1) is a deeming provision and took the view that income deemed by such a provision cannot form the basis for imposition of penalty under section 271(1)(c).
- Additionally, counsel for the assessee (Mr. Harinder Singh) contended before the High Court that the assessee had disclosed the amount in an earlier return before receipt of the notice under section 148; this fact was not contained in the statement of the case and the Court noted it but did not decide it at that stage.
Table of Precedents Cited
| Precedent | Rule or Principle Cited For | Application by the Court |
|---|---|---|
| Commissioner of Income-tax v. Punjabhai Shah [1968] 67 I.T.R. 337 (M.P. High Court) | Penalty proceedings are penal in nature and require a degree/quantum of proof akin to criminal prosecution; assessment findings are evidence but not conclusive in penalty proceedings; the authority imposing penalty must expressly find the assessee's explanation false before inferring deliberate concealment. | The Court endorsed these principles and treated them as authoritative on the need for express findings of conscious concealment before imposing penalty under section 271(1)(c). |
| Commissioner Of Income Tax, West Bengal v. Anwar Ali [1970] 76 I.T.R. 696; [1971] 1 S.C.R. 446 (Supreme Court) | Interpreting corresponding provision in the old Act: the department bears the burden to show the disputed receipt is income; mere falsity of the assessee's explanation in assessment does not automatically establish the receipt as taxable income or justify penalty—entirety of circumstances must point to conscious concealment/deliberate inaccuracy. | The Court applied this principle to require that the department establish that the disputed amount represented income and that concealment/deliberate inaccuracy was conscious before a penalty can be imposed. |
| East End Dwellings Co. Ltd. v. Finsbury Borough Council (Lord Asquith) | On interpretation of deeming provisions: if statute directs one to treat a putative state of affairs as real, one must also treat the inevitable legal consequences of that putative state as real. | The Court relied on this reasoning to conclude that whether income arises actually or by deeming makes no difference for the purpose of determining whether a particular income has accrued. |
| Commissioner of Income-tax v. S. Teja Singh (Supreme Court) | Approval of the observations in East End Dwellings on the consequences of deeming provisions. | The Court noted that the Supreme Court approved Lord Asquith's observations and used that approval to support the view that income deemed by statute is equivalent to actual income for accrual purposes. |
Court's Reasoning and Analysis
The Court framed its reasoning around the interpretation and application of section 271(1)(c) of the Income-tax Act, 1961 (as in force for assessment year 1962-63). The Court noted that the subsection required satisfaction that the assessee "has concealed the particulars of his income or deliberately furnished inaccurate particulars of such income" before penalty can be imposed.
Key steps in the Court's analysis were:
- Statutory construction: The Court emphasized that the provision is penal in character and must be strictly construed. As written (at that time), the subsection required a finding of concealment or deliberate furnishing of inaccurate particulars; the Court noted that "deliberately" was omitted only later by the Finance Act of 1964.
- Standard of proof and need for express findings: The Court relied on the reasoning in Punjabhai Shah and the Supreme Court decision in Anwar Ali to hold that assessment findings are admissible but not conclusive in penalty proceedings and that the authority imposing penalty must expressly find the assessee's explanation false before inferring deliberate concealment.
- Deeming provisions do not immunize from assessment: The Court rejected the Tribunal's second ground that a deeming provision (section 41(1)) cannot form the basis for penalty. By reference to the East End Dwellings dicta (and the approval in S. Teja Singh), the Court held that whether income accrues actually or by deeming is immaterial to the question whether a particular income has accrued; the legal consequences of the deemed state must be treated as real.
- Evaluation of the orders below: The Court observed that neither the Inspecting Assistant Commissioner nor the Appellate Tribunal had recorded a finding that the assessee consciously furnished inadequate particulars or deliberately furnished inaccurate particulars. The Tribunal's reasoning — that governmental confusion meant no intention to furnish inaccurate particulars — was said to be of no consequence because there was no finding that the assessee lacked knowledge of the repealing Act or acted under a mistaken belief of law or fact.
- Procedural posture and remedy: Given the absence of explicit findings on conscious concealment and deliberate inaccuracy, and the Tribunal's failure to examine the matter from the statutory perspective required by section 271(1)(c), the Court declined to answer the referred question in the affirmative or negative. Instead, the Court set out the legal principles and remitted the case to the Appellate Tribunal to examine the facts in light of those principles. The Court noted that the assessee would be free to advance pleas (including the contention that the amount had been disclosed in an earlier return), though that fact was not in the statement of the case before the High Court.
Holding and Implications
CORE RULING: The reference was not answered either affirmatively or negatively; instead the reference was disposed of by stating governing legal principles and remitting the matter to the Appellate Tribunal to reconsider the penalty in the light of those principles.
Implications:
- The Court clarified legal propositions relevant to penalty under section 271(1)(c): penalty requires a finding of conscious concealment or deliberate furnishing of inaccurate particulars, and such penal provisions must be strictly construed.
- The Court held that income deemed by statute (section 41(1)) is not immune from being treated as income for penalty purposes; whether income accrues actually or by deeming does not alter the question of accrual for penalty analysis.
- The direct procedural effect is that the matter is remitted to the Appellate Tribunal for reconsideration with directions to examine whether the requisite findings (conscious concealment or deliberate inaccuracy) can properly be recorded on the facts and evidence. The assessee may advance all pleas before the Tribunal on remand.
- The Court did not make a definitive pronouncement resolving whether the Tribunal was right to delete the penalty in this case; the question was left for the Tribunal to decide on remand after applying the stated legal principles. The opinion therefore did not resolve the referred question finally in this Court.
Judge additional note: P.C. Pandit, J. agreed with the opinion of B.S. Dhillon, J.
B.S Dhillon, J.:— The question of law referred to by the Income-tax Appellate Tribunal, Chandigarh Bench, Chandigarh, is in the following terms:
“Whether, on the facts and in the circumstances of the case, the Appellate Tribunal was right in deleting the penalty of Rs. 6,000 imposed under section 271(1)(c) in respect of the sum of Rs. 41,067 assessed under section 41(1)?”
2. Briefly stated, the facts giving rise to this reference are that the respondent, assessee-firm, Messrs. Aya Singh Ishar Singh, Tarn Taran (Amritsar), claimed deduction on account of the payment of purchase tax in the assessment year 1959-60 to the extent of Rs. 23,078 and in the assessment year 1960-61 to the tune of Rs. 17,989. This claim was made on account of the provisions of the East Punjab General Sales Tax (Amendment) Act, 1958 (Punjab Act No. 7 of 1958), which was revalidated by the Punjab General Sales Tax (Amendment and Validation) Act, 1960 (Punjab Act No. 17 of 1960), and the said Act was ultimately repealed on October 3, 1961. In the return filed by the assessee for the assessment year 1962-63, the assessee did not disclose the income of Rs. 41,067 which income had accrued to him in view of the provisions of section 41(1) of the Income-tax Act, 1961, because of the repeal of the Punjab General Sales Tax (Amendment and Validation) Act, 1960 (Punjab Act No. 17 of 1960), on October 3, 1961. The Income-tax Officer issued notice under section 148 of the Income-tax Act, 1961, on the ground of escapement of the income of the assessee for the assessment year 1962-63 and in response to the said notice, the assessee filed another return showing the same income as originally shown in the return. However, there was a note in the return that there was no escapement of income. During the course of the assessment proceedings, the assessee claimed that the amounts of purchase tax claimed and allowed as deduction in the assessment year 1959-60 and 1960-61 should be assessed in the assessment proceedings of the years 1959-60 and 1960-61 as the amounts were wrongly claimed and the same were wrongly allowed as deductions in those years. This plea of the assessee did not find favour with the Inspecting Assistant Commissioner of Income-tax on the ground that the liability of the assessee for paying the purchase tax ceased by the passing of Punjab Act No. 28 of 1961, which Act received the assent of the Governor on October 3, 1961, and, therefore, the said liability having ceased under the financial year 1961-62 being the previous year for the assessment year 1962-63, the assessee in view of the provisions of section 41 of the Income-tax Act, 1961, was deemed to have added to his income the amount of Rs. 41,067 and the total income was computed at Rs. 86,121. The assessment proceedings were completed on December 7, 1967, and then a notice was issued for the levy of penalty for concealment and because the minimum penalty leviable exceeded Rs. 1,000, therefore, the case was referred by the Income-tax Officer to the Inspecting Assistant Commissioner of Income-tax for imposing penalty. The plea of the assessee before the Inspecting Assistant Commissioner of Income-tax that the amount of Rs. 41,067 ought to have been assessed in the assessment years 1959-60 and 1960-61 failed. The Inspecting Assistant Commissioner of Income-tax imposed a penalty of Rs. 6,000 on the assessee and while imposing the said penalty, he recorded the following findings:
“The income was clearly to be assessed in this year and the assessee was not justified in not declaring the same. As the assessee furnished inaccurate particulars of its income, the provisions of section 271(1)(c) were clearly artracted.”
3. Two appeals were filed by the assessee before the Income-tax Appellate Tribunal, Chandigarh. In one appeal the liability of the assessee for the assessment of Rs. 41,067 in the year 1962-63 was challenged and it was contended that the same should be assessed in the assessment years 1959-60 and 1960-61. This appeal was dismissed by the learned Appellate Tribunal, Chandigarh. The other appeal was directed challenging the imposition of penalty of Rs. 6,000 and the learned Appellate Tribunal accepted this appeal of the assessee mainly on the reasons given below:
1. That the remission of liability which took place was under the peculiar circumstances where even the Punjab Government did not know its mind much less the assessee. The Act No. 7 of 1958 was challenged in the High Court which held it to be invalid. An Amendment and Validation Act No. 17 of 1960 was passed on May 10, 1960, which was subsequently repealed on October 3, 1961, by Act No. 28 of 1961. In such confused circumstances under which the remission has taken place there is no intention on the part of the assessee to furnish inaccurate particulars.
2. That section 41(1) was a deeming provision and that the income, which is deemed to be the income of the assessee for the purposes of assessment, cannot form the basis for penalty which pre-supposes that the assessee has concealed the particulars of income or furnished inaccurate particulars thereof.
4. It is in these, circumstances that the question of law has been referred to this court.
5. In view of the peculiar facts and circumstances of this case, we are not inclined to give our opinion on the question referred to us in the affirmative or in the negative. We propose to express our opinion on the import of the legal provisions on the interpretation of which the ultimate fate of the present case will be determined.
6. The Indian Income-tax Act of 1922 (Act No. 11 of 1922) was repealed and the Income-tax Act of 1961 came into force on April 1, 1962. Since the present case concerns the assessment year 1962-63, therefore, it is apparent that this case will be governed by the provisions of the Income-tax Act of 1961. section 271(1)(c) of the Income-tax Act, 1961, as it stood in the assessment year 1962-63 and which is the only provision on the interpretation of which the fate of the present case hinges, is as follows:
“271. (1) If the Income-tax Officer or the Appellate Assistant Commissioner in the course of any proceedings under this Act is satisfied that any person—…………
(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—…………………
(iii) in the cases referred to in clause (c), in addition to any tax payable by him, a sum which shall not be less than twenty per cent, but which shall not exceed one and a half times the amount of the tax, if any, which would have been avoided if the income as returned by such person had been accepted as the correct income.”
7. It may be pointed out that the word “deliberately” in sub-section (c) of section 271(1) of the Act was omitted in the year 1964 by the Finance Act No. 5 of 1964. Therefore, from the words of the sub-section referred to above, it is clear that the penalty can only be imposed if the authorities mentioned in sub-section (1) of section 271 of the Act are satisfied that the assessee has concealed the particulars of his income or has deliberately furnished inaccurate particulars of such income. Thus it is apparent that for recording such a finding the facts of a particular case have to be kept in mind in order to find out whether the assessee had concealed the particulars of the income or has deliberately furnished inaccurate particulars of such income. It is also clear that the penalty provisions referred to above are penal in character and, in this view of the matter, the same have to be strictly construed.
8. It was held by a Division Bench of the Madhya Pradesh High Court in Commissioner of Income-tax v. Punjabhai Shah [1968] 67 I.T.R 337 M.P., that the penalty proceedings being in their very nature penal proceedings, the degree or quantum of proof for finding an assessee guilty is that of a criminal prosecution. The assessment proceedings and penalty proceedings are different in their nature. The findings given in assessment proceedings are no doubt relevant and admissible in penalty proceedings. But they do not operate as res judicata so as to preclude the production of other evidence in penalty proceedings to show that the assessee concealed his income or to rebut this charge. It was further held that the bare fact that the explanation offered by the assessee in assessment proceedings was rejected and it was held in those proceedings that he had concealed his income or that the explanation was unsatisfactory by itself cannot be made the basis of the conclusion that he has been guilty of deliberately concealing the particulars of his income. No doubt, if the assessee's explanation is found to be deliberately false, then it is possible to infer that he concealed his income. But the authority competent to impose penalty must expressly find that the assessee's explanation is false. In our opinion no exception can be taken to the view expressed by the Madhya Pradesh High Court. The provisions of section 271(1)(c) of the Income-tax Act of 1961 correspond to the provisions of section 28(1)(c) of the Income-tax Act of 1922 (Act No. 11 of 1922). The provisions of section 28(1)(c) of the Act came up for consideration before the Supreme Court in the case of Commissioner Of Income Tax, West Bengal v. Anwar Ali [1970] 76 I.T.R 696, 701; [1971] 1 S.C.R 446 S.C., in which their Lordships of the Supreme Court, while interpreting section 28(1)(c) of the old Act, observed as follows:
“The gist of the offence under section 28(1)(c) is that the assessee has concealed the particulars of his income or deliberately furnished inaccurate particulars of such income and the burden is on the department to establish that the receipt of the amount in dispute constitutes income of the assessee. If there is no evidence on the record except the explanation given by the assessee, which explanation has been found to be false, it does not follow that the receipt constitutes his taxable income. It would be perfectly legitimate to say that the mere fact that the explanation of the assessee is false does not necessarily give rise to the inference that the disputed amount represents income. It cannot be said that the finding given in the assessment proceedings for determining or computing the tax is conclusive. However, it is good evidence. Before penalty can be imposed the entirety of circumstances must reasonably point to the conclusion that the disputed amount represented income and that the assessee had consciously concealed the particulars of his income or had deliberately furnished inaccurate particulars.”
9. Keeping in view the provisions of section 271(1)(c) of the Act and the legal position as explained earlier, it is apparent that neither the learned Inspecting Assistant Commissioner of Income-tax recorded a finding that the assessee consciously furnished inadequate particulars and that the assessee has concealed the particulars of his income or deliberately furnished inaccurate particulars of such income nor the learned Appellate Tribunal has directed its mind to examine the case from its true perspective keeping in view the provisions of section 271(1)(c) of the Act. The order of the learned Appellate Tribunal proceeds on two grounds, firstly, that the Punjab Government did not know its mind much less the assessee, and, secondly, that since this income accrued to the assessee because of the deeming provision of section 41(1) of the Income-tax Act, therefore, it cannot be made the basis for penalty. As regards the first ground, it may be pointed out that it was not the finding that the assessee had no knowledge of the repealing Act or that he under a mistaken belief of the law or of facts failed to disclose the particulars of the income in his original return filed by him for the assessment year 1962-63. Therefore, the first ground mentioned in the order is of no consequence. As regards the second ground, whether the income had actually accrued or it had accrued because of the deeming provisions of the Act, that would not make any difference as far as the question whether a particular income has accrued or not is concerned. The learned Appellate Tribunal took the view that the said income having accrued because of the deeming provisions of the Income-tax Act, therefore, it cannot form the basis for the penalty. We do not find any basis for this in the provisions of the Income-tax Act. There is absolutely no difference between an actual income accruing or accruing because of the deeming provisions of the Income-tax Act as would be apparent from the provisions of sections 5(a), 7 and 8, etc., of the Income-tax Act, 1961.
10. While considering the import of the deeming provisions the following observations of Lord Asquith in East End Dwellings Co. Ltd. v. Finsbury Borough Council may be appropriately referred to:
“If you are bidden to treat an imaginary state of affairs as real, you must surely, unless prohibited from doing so, also imagine as real the consequences and incidents which, if the putative state of affairs had in fact existed, must inevitably have flowed from or accompanied it. One of these in this case is emancipation from the 1939 level of rents. The statute says that you must imagine a certain state of affairs: it does not say that having done so, you must cause or permit your imagination to boggle when it comes to the inevitable corollaries of that state of affairs.”
11. These observations were approved by their Lordships of the Supreme Court in Commissioner of Income-tax v. S. Teja Singh. It is, therefore, clear that if an income has accrued, whether it actually accrued or accrued because of the deeming provisions, it will not make any difference. In order to find out whether an assessee is liable to pay penalty, it has to be examined whether the assessee violated the provisions of section 271(1)(c) of the Income-tax Act or not. The criteria for attracting the provisions of section 271(1)(c) of the Act would be whether there was concealment of the particulars of income or whether the furnishing of inaccurate particulars was deliberate. Concealment essentially includes conscious concealment and in the second portion of this section “deliberately” would also mean that the furnishing of inaccurate particulars must be conscious. It may be observed that in the return of income to be filed under sub-section (1) or (2) or (3) of section 139 of the Income-tax Act, 1961, in Part VIII of Appendix II, Form No. 2, of the Income-tax Rules, 1962, there is a specific column provided wherein the assessee is required to mention the particulars in the following manner:
“Any other expenditure which is not allowable under the provisions of sections 30 to 43 of the Income-tax Act, 1961 (give details).”
12. Thus this column of the return pointedly drew the attention of the assessee towards the provisions of section 41 of the Income-tax Act, 1961, which section deemed the deduction of the purchase tax claimed by the assessee during the assessment years 1959-60 and 1960-61 to be his income for the year 1962-63.
13. It is apparent that the authorities below did not consider this case keeping in view the relevant provisions of the Act and on the other hand without examining the facts and finding out whether there was any conscious concealment or deliberate furnishing of inaccurate particulars of the income decided the case.
14. It was contended by Mr. Harinder Singh, the learned counsel for the assessee, that the assessee firm, before it received the notice under-section 148 of the Income-tax Act, did disclose in its earlier return about the amount in question. Therefore, the learned counsel contends that there is no concealment and there is no deliberate furnishing of inaccurate particulars. However, we cannot notice this fact as this fact is not contained in the statement of the case, but because we are not answering the question referred to us in the affirmative or in the negative and we are sending the case back to the learned Appellate Tribunal to examine the same from its true perspective in view of the legal principles enunciated above, therefore, it will be open to the assessee to put forth all his pleas before the Tribunal in order to show that the concealment was not conscious or that he had not deliberately furnished inaccurate particulars of such income. This reference is, therefore, disposed of accordingly.
P.C Pandit, J.:— I agree.
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