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Commissioner Of Income-Tax, Rajasthan-Ii v. Rawat Singh And Sons.
Summary of the Opinion (M.L. Jain, J.)
Factual and Procedural Background
The respondent-assessee, M/s. Rawat Singh and Sons, Jodhpur, were required to file a return for assessment year 1965–66 by 30 September 1965. An extension to 15 November 1965 was allowed, but the return was filed on 21 December 1965 showing an estimated income of Rs. 12,000. That return was treated as invalid because it lacked profit & loss, trading accounts and balance-sheet.
The ITO communicated this deficiency on 4 January 1966. The assessee then furnished a return on 19 May 1966 declaring income of Rs. 89,338 with the profit & loss account. Assessment under s.143 was completed on 24 December 1969 assessing income at Rs. 1,05,000.
Because of delay in submitting the return, penalty proceedings under cl. (a) of sub-s. (1) of s.271 were initiated. The ITO imposed a penalty of Rs. 6,090 by order dated 25 February 1972, holding that the assessee had not shown a “reasonable cause” for late submission.
On appeal the AAC quashed the penalty by order dated 1 March 1973, accepting that the assessee had a reasonable cause since it had sought extension up to 30 April 1966 (an application shown by day-book entry No. 6664 dated 28 March 1966). The ITO appealed to the Income-tax Appellate Tribunal (ITAT). The Tribunal dismissed the appeal by order dated 23 July 1974, holding that it was unable to conclude that the assessee had “deliberately acted in defiance of law” or that its conduct was “contumacious or dishonest.”
The Commissioner of Income-tax applied to the Tribunal for a reference of a question of law; the Tribunal refused to state a case on 19 December 1974, treating the Tribunal's findings as factual and not giving rise to a question of law. The present application under s.256(2) of the Income-tax Act, 1961 seeks to require the Tribunal to state a case on whether the Tribunal was justified in cancelling the penalty of Rs. 6,090 imposed by the ITO under s.271(1)(a).
Legal Issues Presented
- Whether, on the facts and in the circumstances of the case, the Tribunal was justified in cancelling the penalty of Rs. 6,090 imposed by the ITO under s.271(1)(a) of the Income-tax Act, 1961.
- Whether the Tribunal misdirected itself in relying on authorities holding that mens rea (or proof that the assessee deliberately acted in defiance of law or was contumacious or dishonest) is an essential ingredient before imposing penalty under s.271(1)(a), and whether that reliance gave rise to a question of law requiring a reference.
Arguments of the Parties
Appellant (Revenue / CIT) — Summary of Arguments
- The Tribunal erred in placing reliance on the Kerala High Court decision in Dawn & Co. v. Commissioner of Income-tax, Kerala which held that mens rea is an essential ingredient to be proved by the department before imposing penalty under s.271(1)(a).
- It was urged that the Supreme Court decision in Hindustan Steel Ltd. v. State of Orissa relates to sales tax legislation and therefore should not have been applied as laying down general principles for income-tax penalty proceedings.
- The revenue pointed out that the Kerala decision in Dawn & Co. had been overruled by a Full Bench of the same High Court in Commissioner of Income-tax, Kerala v. Gujarat Travancore Agency.
- Reliance was placed also on a Full Bench decision of the Orissa High Court in CIT v. Gangaram Chapolia and other authorities holding that the burden of proof of “reasonable cause” under s.271(1)(a) is on the assessee (matter being within the assessee's special knowledge), to be discharged on a preponderance of probabilities.
Respondent (Assessee) — Summary of Arguments
- The assessee relied on a Full Bench decision of the Gujarat High Court in Addl. CIT v. I.M. Patel & Co., which held that penalty proceedings under s.271(1)(a) are quasi-criminal and that the department must first lead some evidence to show prima facie absence of reasonable cause; once that slight initial burden is discharged, the assessee must show reasonable cause on balance of probabilities.
- The assessee referred to V.L. Butt v. CIT as taking a view similar to the Gujarat Full Bench.
Table of Precedents Cited
| Precedent | Rule or Principle Cited For | Application by the Court |
|---|---|---|
| Dawn & Co. v. Commissioner Of Income-Tax, Kerala [1973] 87 ITR 71 | Held that mens rea is an essential ingredient to be proved by the department before imposition of penalty under s.271(1)(a); department must point out circumstances from which an inference of deliberate action in violation of law can be drawn. | The Tribunal relied on this decision; the court considered this authority but observed that later Supreme Court decisions placed the matter beyond controversy and that the Tribunal's reliance did not amount to misdirection on a question of law. |
| Hindustan Steel Ltd. v. State Of Orissa [1972] 83 ITR 26 : [1970] 25 STC 211 (SC) | Stated that an order imposing penalty for failure to carry out a statutory obligation is the result of quasi-criminal proceedings; penalty ordinarily not imposed unless party acted deliberately in defiance of law or was contumacious or dishonest; whether to impose penalty is a judicial discretion considering all relevant circumstances. | The court treated these observations as general and wide enough to apply beyond sales tax statutes and as supportive of the Tribunal's approach that department must show deliberate or contumacious conduct before imposing penalty. |
| Commissioner Of Income-Tax, Kerala v. Gujarat Travancore Agency [1976] 103 ITR 149 (Ker) | Full Bench decision overruling the earlier Kerala view (Dawn & Co.) — referenced as part of the debate over the correct position on burden and mens rea. | The revenue relied on this Full Bench decision to challenge the Tribunal's reliance on Dawn & Co.; the court noted these competing authorities but concluded Supreme Court authorities settled the matter. |
| CIT v. Gangaram Chapolia [1976] 103 ITR 613 (Orissa Full Bench) | Held that the burden of proof of “reasonable cause” under s.271(1)(a) is on the assessee (matter is within his special knowledge) and can be discharged on preponderance of probabilities, not beyond reasonable doubt. | Relied upon by the revenue to argue burden lies on assessee; the court acknowledged this authority as part of the divergent views among High Courts. |
| Addl. CIT v. I.M. Patel & Co. [1977] 107 ITR 214 (Gujarat Full Bench) | Held that s.271(1)(a) penalty proceedings are quasi-criminal; department must show absence of reasonable cause by leading some evidence prima facie; thereafter assessee must prove reasonable cause on balance of probabilities. | Relied upon by the assessee; the court noted this as an authority supporting Tribunal's approach that initial burden may be on department to lead some evidence. |
| V.L. Butt v. CIT [1976] 103 ITR 634 (Madras) | Adopted a view similar to the Gujarat Full Bench (regarding initial departmental burden and quasi-criminal character). | Noted by the court as supporting the assessee's position; used to illustrate difference of opinion among High Courts. |
| Commissioner Of Income Tax, West Bengal v. Anwar Ali [1970] 76 ITR 696 (SC) | Observed that penalty orders have the character of quasi-criminal proceedings and approved views that penalty proceedings are criminal in their nature (citing earlier authorities). | Relied upon by the court as a Supreme Court authority indicating that penalty proceedings are quasi-criminal and supporting the view that mens rea/contumacious conduct is relevant before imposing penalty. |
| CIT v. Goculdas Harivallabhdas [1958] 34 ITR 98 (Bombay HC) | Observed that penalty proceedings are criminal proceedings in their very nature. | Approved in Anwar Ali and relied upon by the court as historical authority supporting the quasi-criminal characterization of penalty proceedings. |
| Khemka and Co. (Agencies) Pot. Ltd. v. State of Maharashtra [1975] 35 STC 571 : (1975) 2 SCC 22 : AIR 1975 SC 1549 | Stated that the Income-tax Act, 1961 imposes penalties under ss.270 and 271 for contumacious or fraudulent assessees; applied the general principles about penalties and their quasi-criminal character to income-tax penalties. | Used by the court to conclude that Supreme Court decisions place beyond doubt that ss.270 and 271 relate to penalties for contumacious or fraudulent assessees, and therefore supported the Tribunal's approach rather than indicating any misdirection of law. |
Court's Reasoning and Analysis
The court proceeded by examining the facts accepted by the Tribunal and the legal authorities relied upon by the parties. It observed that the Tribunal had accepted that the assessee had made an application for extension of time (day-book entry No. 6664 dated 28 March 1966) and that this factual finding could not be successfully challenged in the present reference application. The court noted that the revenue did not contend that no application had been made or that such an application could not amount to a “reasonable cause.”
The central legal contention advanced by the revenue was that the Tribunal had misdirected itself by relying on Dawn & Co. (Kerala) and the Supreme Court decision in Hindustan Steel, and that later High Court Full Bench decisions (and some High Court precedents) required the burden of proving reasonable cause to rest on the assessee. The court examined this body of conflicting High Court authority.
The court concluded that the question was settled by Supreme Court authority. It reviewed the Supreme Court's approach in Anwar Ali (and the authorities approved in that case, including CIT v. Goculdas Harivallabhdas and Hindustan Steel) and Khemka and Co., noting that:
- Supreme Court observations treat penalty proceedings as quasi-criminal in character and indicate that penalty will not ordinarily be imposed unless the party obliged acted deliberately in defiance of law or was contumacious or dishonest;
- Those observations, though made in the context of sales tax law in some instances, were general and wide enough to apply to penalty provisions imposing penalties for failure to carry out statutory obligations, including ss.270 and 271 of the Income-tax Act.
Given these Supreme Court authorities, the court held that the Tribunal's approach — to dismiss the appeal because it could not find that the assessee acted deliberately in defiance of law or contumaciously or dishonestly, and to rely on the requirement that the department prove such conduct before imposing penalty — did not amount to a misdirection on a question of law. The Tribunal had also offered an additional ground of support by stating that the department had failed to prove deliberate or contumacious conduct.
On that basis the court found that no substantial question of law arose from the Tribunal's order which required a case to be stated under s.256(2), and therefore the application for a reference failed.
Holding and Implications
HOLDING: The application under sub-s. (2) of s.256 of the Income-tax Act, 1961 is DISMISSED.
Implications:
- The CIT's request that the ITAT be directed to state a case on the question whether the Tribunal was justified in cancelling the penalty is refused; the Tribunal's factual findings and its application of the governing Supreme Court authorities were held not to involve a question of law warranting a reference.
- The direct effect is that the ITAT's order dated 23 July 1974 (dismissing the ITO's appeal and thereby sustaining the quashing of the penalty) stands unchallenged by way of the present reference application.
- No new legal precedent is created by this decision; the court treated the matter as settled by existing Supreme Court authorities and therefore declined to entertain the reference. The application was dismissed without any order as to costs.
This summary is prepared strictly from the content of the provided opinion and does not add or infer facts beyond those stated therein.
M.L Jain, J.:— This is an application under sub-s. (2) of s. 256 of the I.T Act, 1961 (hereinafter referred to as “the Act”), for requiring the Income-tax Appellate Tribunal, Jaipur Bench, to state a case and refer the following question of law alleged to be arising out of its order dated July 23, 1974, namely:
“Whether, on the facts and in the circumstances of the case, the Tribunal was justified in cancelling the penalty of Rs. 6,090 imposed by the ITO u/s. 271(1)(a)?”
2. The respondent-assessee, M/s. Rawat Singh and Sons, Jodhpur, were required to file the return of their total income for the assessment year 1965-66, by September 30, 1965. They made an application for extension of time and were allowed to file the return by November 15, 1965. The return was, however, filed on December 21, 1965, showing a total income of Rs. 12,000 on estimated basis. The return was considered invalid as it was not accompanied by a copy of the profit and loss account, trading accounts, and balance-sheet.
3. This fact was communicated to the assessee by the ITO on January 4, 1966. Thereafter the assessee furnished a return on May 19, 1966, declaring an income of Rs. 89,338 along with the profit and loss account. The assessment was completed under s. 143 of the Act, on December 24, 1969, and the respondent was assessed at Rs. 1,05,000.
4. Since there was delay in submission of the return, penalty proceedings under cl. (a) of sub-s. (1) of s. 271 of the Act were initiated. In reply to the notice in that respect, one of the submissions made by the assessee was that the assessee had requested for extension up to April 30, 1966. But the ITO observed that in spite of show-cause notice and reminder no one appeared before him, nor was there any evidence produced before him in support of the plea that the assessee had applied for extension of time up to April 30, 1966. No communication to the assessee granting time was either made on behalf of the department. The ITO, therefore, held that the assessee has not been able to show any “reasonable cause” for the late submission of the return and, accordingly, he imposed a penalty of Rs. 6,090 by his order dated February 25, 1972.
5. On appeal, the AAC by his order dated March 1, 1973, quashed the penalty holding that the appellant had a reasonable cause for not filing the return of income until April 30, 1966. In the appellate proceedings, the advocate of the assessee had filed a copy of the application by which he had sought extension of time up to April 30, 1966. The application was filed, vide day-book entry No. 6664 dated March 28, 1966. The Appellate Assistant Commissioner was of the view that in the absence of a negative reply turning down the assessee's request for extension, the assessee was entitled to act reasonably on the assumption that the request for extension of time had been granted.
6. Against this order, the ITO preferred an appeal to the Income-tax Appellate Tribunal. The Tribunal stated that the assessee, vide its application dated March 28, 1966, sought time up to April 30, 1966, for filing the fresh return of income and did the needful on May 19, 1966. The Tribunal dismissed the appeal as they were Unable to hold that the assessee “deliberately acted in defiance of law “or that its conduct was” contumacious or dishonest” so as to justify the levy of penalty. This order of the Tribunal is dated 23rd July, 1974.
7. The CIT then made an application to the Tribunal for reference. That application was rejected by the Tribunal on December 19, 1974, by saying that the findings of the Tribunal that there was no mens rea on the part of the assessee and that the department failed to prove that the assess deliberately and in defiance of law failed to file a return in time and further that the conduct of the assessee has not been contumacious or dishonest, were findings of fact and no question of law arose out of the Tribunal's order. Hence, the present application.
8. We have heard the arguments of the learned counsel. We are of the view that the facts accepted by the Tribunal that the assessee had made an application for extension of time can no more be questioned in the reference it is also not the case of the revenue that the assessee had made no application for extension of time, or that such an application could not be considered a reasonable cause for late filing of the return. The question that is sought to be raised is that the Tribunal misdirected itself in placing reliance upon the decision of the Kerala High Court in Dawn & Co. v. Commissioner Of Income-Tax, Kerala. [1973] 87 ITR 71, according to which mens rea is an essential ingredient to be proved by the department before imposition of penalty under s. 271(1)(a) of the Act, and that it is the duty of the department to point out circumstances from which an inference, that the assessee acted deliberately in violation of law, can be drawn. The Tribunal had also relied upon a decision of the Supreme Court in Hindustan Steel Ltd. v. State Of Orissa†., [1972] 83 ITR 26 : [1970] 25 STC 211. It is urged that the said Supreme Court decision relates to a penalty under a sales tax legislation, while the aforesaid Kerala decision has been overruled by a Full Bench of the same High Court in Commissioner Of Income-Tax, Kerala v. Gujarat Travancore Agency., [1976] 103 ITR 149 (Ker), wherein the said Supreme Court decision was not understood as laying down that penalty proceedings attract the entire body of principles generally associated with criminal proceedings. The learned counsel for the revenue also invited our attention to a Full Bench decision of the Orissa High Court in CIT v. Gangaram Chapolia, [1976] 103 ITR 613. In both these decisions it was held that the burden of proof of “reasonable cause” under s. 271(1)(a) of the Act (as contradistinguished from s. 276 of the Act) is on the assessee as the matter is within his special knowledge, though this burden can be discharged by a preponderance of probabilities as in a civil case and not necessarily by proof beyond reasonable doubt.
9. On the other hand, the learned counsel for the assessee has drawn our attention to a Full Bench decision of the Gujarat High Court in Addl. CIT v. I.M Patel & Co., [1977] 107 ITR 214, wherein it has been held that the penalty proceedings under s. 271(1)(a) of the Act were quasi-criminal proceedings and it was for the department to show the absence of a reasonable cause on the part of the assessee by leading some evidence that prima facie the assessee had without reasonable cause failed to furnish the return within the time specified in s. 271(1)(a) read with other relevant sections referred to in that section. Once that initial burden, which may be slight had been discharged by the department, it was for the assessee to show as in a civil case on balance of probabilities that he had reasonable cause in failing to file the return within the time specified. Our attention was also drawn to V.L Butt v. CIT, [1976] 103 ITR 634 (Mad) which has also taken a view similar to that of the Gujarat High Court.
10. Thus, there is no doubt that a sharp cleavage of opinion between the High Courts in this respect does exist. But upon a careful consideration of the matter, we are of the view that the matter stands concluded by the Supreme Court decisions in this regard and should admit of no controversy. Commissioner Of Income Tax, West Bengal v. Anwar Ali , [1970] 76 ITR 696 (SC) was a case under s. 28(1)(c) of the Indian I.T Act, 1922, which provided for penalties where the assessee concealed the particulars of his income or deliberately furnished inaccurate particulate of such income. The Supreme Court observed that it appears to have been taken as settled by now in the sales tax law, that an order imposing penalty is the result of quasi-criminal proceedings. They also approved the view taken in CIT v. Goculdas Harivallabhdas, [1958] 34 ITR 98 by the Bombay High Court. In that case, it was observed that the penalty proceedings are criminal proceedings in their very nature. In Hindustan Steel Ltd.'s case, [1972] 83 ITR 26 (SC) it was categorically stated by the Supreme Court that an order imposing penalty for failure to carry out a statutory obligation is the result of quasi-criminal proceedings, and penalty will not ordinarily be imposed unless the party obliged either acted deliberately in defiance of law or was guilty of conduct contumacious or dishonest or acted in conscious disregard of its obligation. Penalty will not also be imposed merely because it is lawful to do so. Whether penalty should be imposed for failure to perform a statutory obligation is a matter of discretion of the authority to be exercised judicially and on a consideration of all the relevant circumstances. No doubt these remarks of the Supreme Court were made in reference to the penalty provisions contained in the Orissa Sales Tax Act, 1947, regarding failure of the dealer to have himself registered as such but the observations are so general and wide as can be applied in all cases which provide for penalty for failure to carry out any statutory obligation. Their scope cannot be confined to the sales tax statutes only, nor will it be proper to hold that the basic nature of the penalty proceedings under one clause of s. 271(1) is different from those under another clause of the same sub-section. The matter has been placed beyond all doubt by the Supreme Court in Khemka and Co. (Agencies) Pot. Ltd. v. State of Maharashtra, [1975] 35 STC 571 : (1975) 2 SCC 22 : AIR 1975 SC 1549 by stating that the Income-tax Act, 1961, imposes penalty under ss. 270 and 271. These sections in the I.T Act provide for imposition of penalty on contumacious or fraudulent assessees. It, therefore, appears to us that while applying these dicta to the case the Tribunal cannot be said to have made a wrong approach or misdirected itself on a question of law. It has dismissed the appeal against the order of the AAC and while doing so has supplied an extra ground of support that it was also necessary for the department to show which it failed to do, that the assessee either “deliberately acted in defiance of law “or “its conduct was contumacious or dishonest”. Since the matter stands concluded by the decisions of the Supreme Court, we do not consider that any question of law has arisen and the Tribunal should be directed to state a case.
11. The application for reference is, therefore, dismissed without any order as to costs.
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