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.
