Saturday, December 31, 2011

Section 271 (1) (c) of the Income-tax Act, 1961


Section 271 (1) (c) of the Income-tax Act, 1961

SECTION 271 (1) (c)

PENALTIES

Penalty under clause c of Sub-Section 1 of Section 271 of the Income-tax Act, 1961, if the Assessing Officer or the Commissioner of Income Tax (Appeals) during the course of the Assessment Proceedings under the Act is satisfied that any person has ‘concealed’ or ‘furnished inaccurate particulars of income’. The words ‘concealed’ or ‘furnished inaccurate particulars of income’ has been defined either in this Section nor any where else of the Act. One thing is certain that these two circumstances are not identical in details although they may lead to the same effect, namely, keeping a certain portion of the income. The word ‘conceal’ is derived from the Latin word ‘concelare’ which implies to ‘hide’. It signifies a deliberate act of omission on the part of the assessee. A mere omission or negligence would not constitute a deliberate act suppressio veri or suggestio falsi – T. Ashok Pai Vs. CIT (2007) 161 Taxman 340, 292 ITR 11 (SC).

The words ‘furnishing inaccurate particulars of income’ refer to the particulars which have been furnished by an assessee of his income and the requirements of concealment of income is that income has not been declared at all or is not even recorded in the books of accounts or in a particular case the concealment of the particulars of income may be from the books of accounts as well as from the furnished – CIT vs. Raj Trading Co. (1996) 217 ITR 208, 86 Taxman 282 (Raj).

Above provisions of the Section clarifies that:

a) The penalty could only be levied by the Assessing Officer and/or the Commissioner of Income Tax (Appeals) and not higher authorities to that such as Income Tax Appellant Tribunal, High Court, and Supreme Court.

b)   It would only be levied during the Assessment Proceedings under the Income-tax Act, 1961.

c)   The penalty is in addition to the tax, if any payable by the assessee.

d)  Penalty could not be levied where the Total Income of the Assessee is in negative i.e. loss after the completion of the Assessment Proceedings under the Income-tax Act, 1961. Commissioner of Income Tax vs. Rajasthan Vanaspati Product Limited, (2008) 8 DTR (Raj) 282, were it has been held that, Penalty under section 271(1)(c)—Concealment—Assessment at loss—Penalty under s. 271(1)(c), prior to amendment of Explanation 4 thereof by the Finance Act, 2002, w.e.f. 1st, April, 2003, could not be imposed in cases where, even after adding the concealed income, the assessed income remained a loss. And concluded that, Penalty under s. 271(1)(c), prior to amendment of Explanation 4 thereof by the Finance Act, 2002, w.e.f. 1st April, 2003, could not be imposed in cases where, even after adding the concealed income, the assessed income remained a loss.

HISTORY OF THE SECTION

It all started way back in 01.04.1965 when the word ‘deliberately’ was omitted by the Finance Act 1964. It is obvious that the onus to prove the ‘deliberately’ was on the department. But, the same had been causing difficulties to the assessee as the departments are used to levy penalty almost under all the circumstances of disallowance or additions as the case may be.

The principal object of enacting this section was to provide prevention against recurrence of default on the part of the assessee. The basic sense of this section was to stop the practice of what the legislature considers to be against the public interest. The department was unable to prove one’s deliberateness towards certain act, thus the whole onus was on the laps of the department wholly and solely.

To overcome this difficulties in discharging this ‘onus’ the legislature came with an amendment under the Finance Act, 1964 w.e.f. 01/04/1965 by deleting the word ‘deliberately’ from the section. With this the burden once again fell on the assessee. Thus, the assessee was the one who had to prove that the particular act has not been done deliberately. An explanation was also added at the end of the section in order to cast upon the assessee the ‘onus’ to prove that the omission of income did not arise from any fraud or gross or wilful neglect in case where the difference between the returned income and assessed income was at a certain specified percentage.

DETAILED VIEW ON CASE LAWS

1.   VOLUNTARY SURRENDER OF UNDISCLOSED INCOME

A close study of the recent cases reveals the liberal judicial approach in applying the specific and strict provisions of section 271(1)(c). Voluntary surrender of the alleged undisclosed income just to buy peace of mind has emerged as an exception protecting the assessee against penalty even in an obvious case.

Thus, the Madras High Court in the case of CIT vs. Jayaraj Talkies (1999) 239 ITR 914 (Mad) held that mere agreement to addition of income or surrender of income did not imply concealment of income where the assessee surrendered certain amount to assessment because it was unable to substantiate its claims with necessary vouchers.

Similarly, the Kerala High Court in the case of CIT vs. M. George & Brothers (1987) 59 CTR (Ker) 298 : (1986) 160 ITR 511 (Ker) held that where the assessee for one reason or the other agrees or surrenders certain amounts for assessment, the imposition of penalty solely on the basis of the assessee's surrender will not be well founded.

In CIT vs. Suraj Bhan (2006) 203 CTR (P&H) 230 : (2007) 294 ITR 481 (P&H), the Punjab & Haryana High Court held that penalty cannot be imposed merely on account of higher income having been subsequently declared.

In this case, the assessee filed revised return showing higher income and gave the explanation that the higher income was offered to buy peace of mind, and to avoid litigation.

The Punjab & Haryana High Court, again, seems to have gone a step further in defying the specific provision of Explanation 1. In this case, transportation charges to the tune of Rs. 12,12,880 debited in the profit and loss account, when detected and investigated by the Assessing Officer during the assessment proceedings, the assessee could not satisfactorily explain the same. The assessee, without filing a revised return, surrendered the said uncorroborated amount of expenses merely to buy peace of mind and to avoid further litigation.

Although it was a clear-cut case of concealment penalty but the Punjab & Haryana High Court rather unconvincingly found that since the impugned payments were directly made by the suppliers, therefore, there was neither concealment of income nor furnishing of inaccurate particulars of income within the meaning of section 271(1)(c). "The Department has to prove mens rea before levying penalty under section 271(1)(c) and it cannot be made out that the assessee has concealed income or furnished inaccurate particulars merely because he has surrendered certain amount to avoid litigation and to buy peace of mind."

It appears that in all the aforediscussed cases, the respective Madras, Kerala, Punjab & Haryana High Courts relied on the two rulings of the Supreme Court, viz., Sir Shadi Lal Sugar & General Mills Ltd. vs. CIT (1987) 64 CTR (SC) 199 : (1987) 168 ITR 705 (SC) and CIT vs. Suresh Chandra Mittal (2001) 170 CTR (SC) 182 : (2001) 251 ITR 9 (SC).

In Sir Shadi Lal Sugar & General Mills Ltd. (supra) it was categorically ruled that if the assessee had agreed to the assessment of undisclosed income, it did not absolve the Revenue from proving mens rea in a quasi criminal offence.

In Suresh Chandra Mittal's case (supra) the Court came out with an epoch-making ruling, viz., if an assessee files a revised return showing higher income and gives explanation that he has offered higher income to buy peace of mind and to avoid litigation, penalty cannot be imposed merely on account of higher income having been subsequently declared.

2.   IF EXPLANATION IS NOT PRESSED INTO SERVICE BURDEN IS ON THE DEPARTMENT

It would indeed be a misconception of law to assume that merely by bringing the case under section 271(1)(c), its Explanation 1 would automatically be made applicable. Instead, Explanation 1 has to be specifically referred in the relevant notice; otherwise the case has to be adjudicated in the light of the main provision of section 271(1)(c) which has to be construed in the light of the ruling of Anwar Ali (supra). Consequently, the initial burden which has been cast upon the assessee by reason of Explanation 1 would automatically be on the Department by virtue of the rule of Anwar Ali. This, as a matter of fact and law, is the stand repeatedly taken by the Bombay High Court in the two cases of CIT vs. P.M. Shah (1993) 203 ITR 792 (Bom) : TC 50R.800 and CIT vs. Dharamchand L. Shah (1993) 113 CTR (Bom) 214 : (1993) 204 ITR 462 (Bom).

In both the cases, penalty proceedings were initiated without mentioning in the notice that Explanation 1 to section 271(1)(c) was being resorted to. The assessee objected the application of Explanation 1 at a subsequent stage. When the controversy came up before the Bombay High Court by way of a reference, the Court, concurring with the Tribunal, held that in the absence of any intimation of penalty proceedings under the Explanation 1 to section 271(1)(c), levy of penalty under the Explanation was not sustainable.

To clarify its finding, the Court, stressed that the Explanation cannot in any manner be said to be merely an elucidation of what was already contained in section 271(1)(c); instead, the Explanation makes a considerable difference to what was contained in section 271(1)(c).

3.   UNSATISFACTORY EXPLANATION WOULD NOT ATTRACT PENALTY

In the case of Roshan Lal Madan (supra), the Chandigarh Bench of the Appellate Tribunal came out with a very peculiar construction of clause (A) to Explanation 1, which, in effect, renders the whole statutory exercise in this respect as quite futile.

It was virtually pointed out that "The words used in clause (A) of the Explanation 1 "found to be false" expressly imports the element of deceitful intent. The word "false" in its juristic sense implies something more than a mere untruth. Untruth is simply a statement which is not true and may have been uttered without intention to deceive and through ignorance. However, falsehood necessarily denotes the violation of truth for the purposes of deceit. Merely because the explanation furnished by the assessee is considered not satisfactory or unreasonable would not ipso facto justify the invocation of clause (A) to levy penalty under section 271(1)(c)".

The Tribunal, accordingly, came to the conclusion that an unsatisfactorily explained investment would result into the addition of the impugned amount as income from undisclosed sources under section 69 but would not justify the levy of penalty under section 271(1)(c), Explanation 1(A).

4.   SPECIFIC INVOCATION OF EXPLANATION NOT REQUIRED

As has already been stated in the beginning, in the recent case of K.P. Madhusudhanan (supra) a three Judges Bench of the Supreme Court has categorically laid down that no express invocation of the Explanation to section 271 in the notice under section 271 is necessary for applying the provisions of said Explanation and after the introduction of Explanation, there is no question of proof of mens rea.

Affirming the decision of the Kerala High Court in CIT vs. K.P. Madhusudhanan (2001) 165 CTR (Ker) 353 : (2000) 246 ITR 218 (Ker) and overruling the aforediscussed (contrary) decision of the Bombay High Court, the apex Court in K.P. Madhusudhanan’s case (supra) clarified that "The Explanation to section 271(1)(c) is a part of section 271". Therefore, when the designated tax-authority issues to an assessee a notice under Section 271, he makes the assessee aware that the provisions thereof are to be used against him. These provisions include the Explanation. The notice under section 271 puts the assessee to notice that he has to rebut the presumption drawn against him by virtue of the Explanation; otherwise he has to bear the penalty, emphatically concluded the Court.

5.   ASSESSEE’S CONSENT FOR ADDITION SHALL NOT ABSOLVE THE ASSESSEE FROM BURDEN OF PROOF

In an earlier case of Sir Shadilal Sugar & General Mills Ltd. vs. CIT (1987) 64 CTR (SC) 199: (1987) 168 ITR 705 (SC) : TC 50R.300, a two Judges Bench of the Supreme Court, in the context of the assessment year 1958-59, firmly stated that if an assessee admitted that there were incomes, it could not amount to an admission that there was deliberate concealment. "From agreeing to additions, it does not follow that the amount agreed to be added was concealed income. There may be a hundred and one reasons for such admission, i.e., when the assessee realises the true position, it does not dispute certain disallowances but that does not absolve the Revenue from proving the mens rea of a quasi criminal offence".

The three Judges Bench of the Supreme Court in the recent case of K.P. Madhusudhanan (supra) expressly stated that the aforequoted observation was made prior to the insertion of Explanation. Therefore, it is no longer good after the insertion of Explanation. No burden lies on the Revenue to prove mens rea even if the assessee has agreed the additions to his income as by virtue of the Explanation the assessee is not absolved from the initial burden laid on him by the Explanation, Emphatically stated the Court.

6.   PRINCIPLES EMERGING FROM DILIP N. SHROFF'S CASE

A careful reading of the judgment of the Supreme Court reveals the following legal positions regarding the provisions of section 271(1)(c) read with Explanation 1 thereto :

(a)     The Explanations to section 271(1)(c) are applicable to both the concealment of income and the furnishing of inaccurate particulars. Clause (c) of sub-section (1) of section 271 categorically states that the penalty would be leviable if the assessee conceals the particulars of his income or furnishes inaccurate particulars thereof. By reason of such concealment or furnishing of inaccurate particulars alone, the assessee does not ipso facto become liable for penalty. Imposition of penalty is not automatic. Levy of penalty not only is discretionary in nature but such discretion is required to be exercised on the part of the Assessing Officer keeping the relevant factors in mind. Penalty proceedings are not to be initiated, only to harass the assessee. The approach of the Assessing Officer in this behalf must be fair and objective.

(b)     Only in the event the factors enumerated in clauses (A) and (B) of Explanation 1 are satisfied and a finding in this behalf is arrived at by the Assessing Officer, the legal fiction created thereunder would be attracted.

(c)      Both the expressions, viz., concealment and the furnishing of inaccurate particulars signify a deliberate act or omission on the part of the assessee. Such deliberate act must be either for the purpose of concealment of income or furnishing of inaccurate particulars.

(d)     In view of clause (A) of Explanation 1, the Assessing Officer is required to arrive at a finding that the explanation offered, if any, by the assessee is false. In view of clause (B), findings have to be given by the Assessing Officer (i) that the assessee has failed to prove that explanation given by him is bona fide and (ii) that all the facts relating to the same and material to the computation of income have not been disclosed by him. Thus, apart from his explanation being not bona fide, it should have been found as of fact that he has not disclosed all the facts which are material to the computation of his income.

(e)     Primary burden of proof, therefore, is on the Revenue. The statute requires satisfaction on the part of the Assessing Officer. He is required to arrive at a satisfaction so as to show that there is primary evidence to establish that the assessee has concealed the amount or furnished inaccurate particulars and this onus is to be discharged by the Department.

(f)       While considering as to whether the assessee has been able to discharge his burden, the Assessing Officer should not begin with the presumption that he is guilty.

(g)     Once the primary burden of proof is discharged, the secondary burden of proof would shift on to the assessee because the proceeding under section 271(1)(c) is of penal nature in the sense that its consequences are intended to be an effective deterrent  which will put a stop to practices which the Parliament considers to be against the public interest and, therefore, it is for the Department to establish that the assessee is guilty of concealment of income or of furnishing inaccurate particulars thereof.

(h)     The order imposing penalty is quasi-criminal in nature and, thus, burden lies on the Department to establish that the assessee has concealed his income. Since burden of proof in penalty proceedings varies from that in the assessment proceedings, a finding in an assessment proceeding that a particular receipt is income cannot automatically be adopted, though a finding in the assessment proceeding constitutes good evidence in the penalty proceeding. In the penalty proceedings, thus, the authorities must consider the matter afresh as the question hasto be considered from a different angle.

(i)       Thus, before a penalty can be imposed, the entirety of the circumstances must reasonably point to the conclusion that the disputed amount represents income and that the assessee has consciously concealed the particulars of his income or has furnished inaccurate particulars thereof.

(j)       Penalty provisions have to be strictly construed. Even when the burden is required to be discharged by an assessee, it would not be as heavy as in the case of prosecution.

(k)     It may be true that the legislature has attempted to shift the burden from Revenue to the assessee. It may further be correct that different views have been expressed as regards construction of statutes in the light of the changing legislative scenario, but the tenor of a penal proceeding remains the same.

(l)       The omission of the word "deliberately" from section 271(1)(c), thus, may or may not be of much significance but what is material is its application.

(m)   "Concealment of income" and "furnishing of inaccurate particulars" are different. Both concealment and furnishing of inaccurate particulars refer to deliberate act on the part of the assessee. A mere omission or negligence would not constitute a deliberate act of suppression veri or suggestio falsi. Although it may not be very accurate or apt but suppressio veri would amount to concealment, suggestio falsi would amount to furnishing of inaccurate particulars.

(n)     The Assessing Officer is required to arrive at a satisfaction that there is "falsity" in furnishing of explanation by the assessee. Explanation 1, therefore, categorically states that such Explanation must either be false or not otherwise substantiated.

(o)     Concealment and furnishing of inaccurate particulars would not overlap each other as they represent different concepts. Had they not been so, the Parliament would not have used the different terminologies. Where the show-cause notice issued by the Assessing Officer does not clearly say whether it is issued for concealment of income or for furnishing inaccurate particulars of income, it will mean non-application of mind on the part of the Assessing Officer.

(p)     The Assessing Officer is bound to comply with the principles of natural justice while passing the order levying penalty for concealment.

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