Calcutta High Court
Commissioner Of Income-Tax vs Hiralal Shankarlal on 28 January, 1986
Equivalent citations: [1987]165ITR124(CAL)
Author: Suhas Chandra Sen
Bench: Suhas Chandra Sen
JUDGMENT Satish Chandra, C.J.
1. At the instance of the Revenue, the Income-tax Appellate Tribunal has submitted this statement of the case and has referred the following question of law for the opinion of this court :
"Whether, on the facts and in the circumstances of the case, the Tribunal was right in holding that no penalty could be imposed upon the assessee in terms of Section 271(1)(c) read with the Explanation thereunder relating to the assessment year 1964-65 ?"
2. The assessee carries on business, wholesale and retail, in cloth and jute. For the assessment year 1964-65, the assessee, on December 7, 1964 filed a return showing total income of Rs. 49,558. The Income-tax Officer found that in the assessee's books, there was an entry dated April 18, 1962, showing a cash credit of Rs. 25,000 in the name of one Jagadish Prosad Agarwalla. The assessee pleaded that the entry represented a loan transaction from Jagadish Prosad Agarwalla. In support, he filed a confirmation letter from the creditor. The Income-tax Officer, however, disbelieved the case of the assessee. He held that the loan transaction was not genuine. The assessee's claim of having paid a sum of Rs. 1,500 as interest to the said creditor was also disallowed. He held that the amount of Rs. 25,000 represented the assessee's income from undisclosed sources. He included the sum of Rs. 25,000 and assessed the total income at Rs. 94,560.
3. Penalty proceedings were also commenced in respect of the cash credit of Rs. 25,000. Since the minimum penalty leviable was more than Rs. 1,000, the case was referred to the Inspecting Assistant Commissioner. The Inspecting Assistant Commissioner held that the assessee failed to prove the genuine character of the alleged cash credit. It represented an unexplained cash credit and the assessee should have shown the same as part of taxable income in the return. The assessee failed to do that and resorted to further concealment by claiming bogus expense of interest of Rs. 1,500. The assessee was liable for omitting to show most of the taxable income in the return. He, went on to hold that the Explanation to Section 271(1)(c) was applicable. The assessee has done nothing to show or to prove that the omission to return the correct income was not due to any fraud or gross or wilful neglect on his part. The concealment, therefore, has to be presumed. He held that the assessee was guilty of concealment and levied a penalty of Rs. 17,500.
4. The assessee went up in appeal to the Tribunal. The Tribunal observed that the scope of the Explanation to Section 271(1)(c) of the Act has been discussed in detail by the Punjab and Haryana High Court in the case of Addl. CIT v. Karnail Singh v. Kaleran [1974] 94 ITR 505. In that case, their Lordships of the Punjab High Court held that the decision of the Supreme Court in CIT v. Anwar Ali [1970] 76 ITR 696 would be applicable to a case even under the Explanation to Section 271(1)(c) of the Act. Relying upon the decision in Karnail Singh's case, the Tribunal deleted the penalty.
5. Section 271 of the Act of 1961 is the successor to Section 28 of the Indian Income-tax Act, 1922. Clause (c) of Section 28(1) of the Act of 1922 provided for imposition of penalty where the assessee "has concealed the particulars of his income or deliberately furnished inaccurate particulars of such income". This provision came up for consideration before the Supreme Court in CIT v. Anwar Ali [1970] 76 ITR 696. The Supreme Court, in its judgment delivered on April 29, 1970, held :
(1) Proceedings under Section 28 of the Income-tax Act, 1922, are penal in character.
(2) 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.
(3) The burden is on the Department to establish that the receipt of the amount in dispute constitutes income of the assessee.
(4) In a case where there is no evidence on 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.
(5) The finding given in the assessment proceedings for determining or computing the tax is not conclusive. However, it is good evidence.
(6) 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.
6. This decision was affirmed by the Supreme Court in CIT v. Khoday Eswarsa and Sons [1972] 83 ITR 369.
7. The question which arises for determination before us is as to the import, implication and scope of Section 271(1)(c) read with its Explanation. Section 271(1)(c) as originally enacted provided :
"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,--..."
8. The Finance Act of 1964 which came into effect from April 1, 1964, made two significant amendments in Clause fc). It omitted the word "deliberately" from that clause. It added an Explanation which reads as follows :
"Explanation.--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."
9. Section 271(1)(c) is attracted when the Income-tax Officer or the Appellate Assistant Commissioner is, in the course of any proceedings, satisfied that the assessee has concealed or furnished inaccurately the particulars of his income. On such satisfaction being reached, the authority can initiate proceedings for the levy of penalty. In the present case, the assessee is sought to be brought within the clutches of Section 271(1)(c) not on its own terms, but by resort to the Explanation. The Explanation comes into play if the condition of its applicability is satisfied. The condition is an objective one, namely, that the total income returned by the assessee is less than eighty per cent. of the correct income, that is, total assessed income reduced by bona fide expenditure disallowed as deduction. If this objective condition is satisfied, the Explanation at once creates a legal fiction that the assessee shall be deemed to have concealed the particulars of his income or furnished inaccurate particulars of such income within the meaning of Clause (c) of Section 271(1). When the Explanation creates a legal fiction in regard to the particulars of his income being either concealed or inaccurately furnished, ex hypothesi, it deems that the disputed receipt or amount is income assessable to tax. To say that the Explanation has no bearing on the question whether the disputed receipt or amount is the income of the assessee is to render the legal fiction created by the Explanation nugatory. The legal fiction is not only that the assessee shall be deemed to have concealed or furnished inaccurately the particulars, but that the assessee shall be deemed to have done so in respect of the disputed part of the correct income. The Supreme Court in CIT v. S. Teja Singh [1959] 35 ITR 408 has held that when a statute says that you must imagine a state of things, it does not say that having done so, you must cause or permit your imagination to boggle down when it comes to the inevitable corollaries of that state of things.
10. The Explanation, therefore, removes the burden which under Section 28(1 )(c) of the Act of 1922 as well as under Section 271(1)(c) of the Act of 1961 as originally enacted, lay on the Income-tax. Department to prove affirmatively that the disputed amount or receipt was the income of the assessee and its particulars were concealed or inaccurately furnished.
11. The satisfaction reached in the course of the assessment proceedings is, in penalty proceedings governed by the Explanation, automatically replaced by a presumption that the disputed receipt or amount was the income of the assessee in respect of which the assessee either concealed the particulars or furnished inaccurate particulars. It is then not necessary for the Revenue to show affirmatively by producing material that the disputed receipt or amount was the income of the assessee of which he concealed the particulars or furnished inaccurate particulars.
12. It is thus clear that in cases governed by the Explanation, the decision of the Supreme Court in Anwar Ali's case [1970] 76 ITR 696, that the burden is on the Department to establish that the receipt of amount in dispute constitutes the income of the assessee and that the assessee has concealed the particulars or furnished inaccurate particulars thereof is not applicable.
13. The Explanation provides the manner by which the legal fiction created by it can be displaced. The presumption created by the Explanation is rebuttable. The burden of rebutting the presumption is on the assessee. The assessee can rebut the presumption by establishing that the failure to return the correct income did not arise from any fraud or gross or wilful neglect on his part.
14. What is the nature and character of this burden on the assessee ?
15. In CIT v. Sankarsons & Co. [1972] 85 ITR 627, the Kerala High Court held that the quantum of proof necessary would be that required in a civil case, viz., preponderance of probability. This view was accepted and approved by the Delhi High Court in CIT v. Narang & Co. [1975] 98 ITR 462.
16. After analysing the effect of the legal fiction created by the Explanation in the same manner as stated above, Bhagwati C. J. (as he then was), in CIT v. S. P. Bhatt [1974] 97 ITR 440 (Guj), observed with respect to the nature of the burden of proof of the assessee (at pages 445 and 446) :
"Now, this burden is not of the same nature as the burden which rests on the prosecution in a criminal case where the prosecution has to establish the guilt of the accused beyond reasonable doubt nor is it of the same nature as the burden which lies upon the Revenue in establishing that the assessee has concealed the particulars of his income or furnished inaccurate particulars of such income. It is a burden akin to that in a civil case where the determination is made on preponderance of probabilities. It is also not necessary that any positive material should be produced by the assessee in order to discharge this burden which rests upon him. The assessee may claim to have discharged the burden by relying on the material which is on record in the penalty proceedings, irrespective of whether it is produced by him or by the Revenue. The only question to which the Income-tax Authority has to address itself is, whether on the material on record in the penalty proceedings, it can be said on preponderance of probabilities that the failure to return the total assessed income has not arisen on account of any fraud or any gross or wilful neglect on the part of the assessee. If the answer to the question is in the affirmative, the legal fiction enacted in the Explanation cannot arise and the Revenue must fail in its attempt to impose penalty on the assessee."
17. Since the burden of proof is on the assessee, the assessee is entitled to prove or to establish the requisite facts. He can rely upon the material on record of the assessment proceedings as well. He can contend that the explanation given by him which has been disbelieved (a finding which is relevant but not conclusive) should be looked into from the point of view whether there was any fraud or any gross or wilful neglect on his part. The authority has to consider the totality of the circumstances and then answer the question whether the assessee has not committed fraud or gross or wilful neglect, on a preponderance of probabilities.
18. For the assessee, reliance was placed on the decision of the Punjab and Haryana High Court in CIT v. Karnail Singh v. Kaleran [1974] 94 ITR 505. In that case, it was held that in a case covered by the Explanation, the decision of the Supreme Court in Anwar Ali's case [1970] 76 ITR 696 to the effect that the burden of proof to show that the disputed amount or receipt was the income of the assessee was on the Revenue is applicable. For the reasons mentioned above, I am unable to agree with this decision. Karnail Singh's case no longer stands. It has been overruled by the same High Court in Vishwakarma Industries v. CIT [1982] 135 ITR 652 [FB].
19. In CIT v. W.J. Walker and Company [1979] 117 ITR 690, this court held that in view of the clear provision of the Explanation, it must be held that the burden is on the assessee to prove that the failure to return correct income did not arise from any fraud or gross or wilful neglect on his part. The passing observation that the Explanation presumes fraud or gross or wilful neglect on the part of the assessee is, with respect, not quite apposite. The presumption is about concealment of particulars or furnishing of inaccurate particulars of income and such presumption is rebutted by showing that there is no fraud, gross or wilful neglect.
20. To sum up : the position is that in cases which do not attract the Explanation, viz., where the difference between the returned income and the assessed income is twenty per cent. or less, the decision of the Supreme Court in Anwar Ali's case [1970] 76 ITR 696 will apply. The burden of proof will squarely be on the Department. But, in a case where the difference is more than twenty per cent. the Explanation is attracted. Under it, the assessee has to prove that there was no fraud or gross or wilful neglect on his part. The concerned Income-tax Authority has to look into the totality of the facts and circumstances and answer the question whether there was lack of fraud or gross or wilful neglect on the part of the assessee. An answer to this question will determine whether the assessee is liable to penalty under Section 271(1)(c).
21. In the present case, the Tribunal did not approach the case from the correct angle and viewpoint. It has not recorded its finding on the relevant and material question. The reference is, hence, returned unanswered with a direction that the Tribunal will rehear the appeal and in the light of the observations made above and if necessary after permitting the parties to adduce fresh materials.
Suhas Ciiandra Sen, J.
22. I agree with the order proposed to be passed in this case. I will add a few words of my own.
23. Section 271(1) is the penalty section of the Income-tax Act. It makes penalty leviable in cases of failure to furnish return of income without reasonable cause in Clause (a), failure to comply with statutory notice without reasonable cause in Clause (b) and for concealment of particulars of income or furnishing inaccurate particulars of such income in Clause (c). The word "concealment" has a definite legal connotation. Mere inadvertent omission or accidental failure to disclose particulars of income cannot be regarded as concealment. This aspect of the matter was pointed out by Sabyasachi Mukherji J. in the case of CIT v. Rupabani Theatre P. Ltd. , where it was observed that the expression "concealment" has to be understood in contradistinction to the expression "failure". Concealment requires a positive act.
24. In the case of CIT v. Anwar Ali [1970] 76 ITR 696, the Supreme Court observed (at page 701) :
"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."
25. The amendment in 1964 has done away with the requirement of proving deliberate furnishing of inaccurate particulars of income. The word "concealment", however, has remained.
26. What the Explanation inserted by the Finance Act, 1964, with effect from April 1, 1964, has done is to introduce a legal fiction. Broadly stated, the legal fiction will be operative where the total returned income is less than 80% of the total assessed income. If this happens, the assessee is deemed to have concealed the particulars of his income or furnished inaccurate particulars of such income. The assessee can prevent the legal fiction from coming into play by proving that failure to return the correct income did not arise from any fraud or any gross or wilful neglect on his part. In other words, the moment it is established that the returned total income is less than 80% of the assessed total income, the assessee is not presumed but is deemed to have concealed his income. The onus is upon the assessee to prove that there was no fraud or any gross or wilful neglect on his part. If he fails to prove that, the deeming clause will be operative. If the assessee can prove that there was no fraud or any gross or wilful neglect on his part, there cannot be any question of imposition of penalty.
27. The assessee filed a return on December 7, 1984, showing a total income of Rs. 49,558. The total assessed income came to Rs. 94,460, The amount of Rs. 25,000 was added back as the assessee was unable to prove the nature and source of cash credit entry. The alleged creditor did not appear pursuant to a summons issued by the Income-tax Officer. The assessee's argument before the Inspecting Assistant Commissioner in the penal proceeding was that no penalty could be levied in a case like this in view of the decision of the Calcutta High Court in the case of CIT v. Anwar Ali [1967] 65 ITR 95. The Inspecting Assistant Commissioner expressed the view that since the return has been filed after April 1, 1964, the newly introduced Explanation to Section 271(1)(c) was attracted. It has to be deemed that the assessee had concealed its incomes and/or furnished inaccurate particulars of the same. The Inspecting Assistant Commissioner observed that the assessee has done nothing to prove that the omission to return the correct income was not due to any fraud or gross or wilful neglect on their part. The concealment has to be presumed. The onus of proof is now fully and squarely on the assessee and not even a fringe of that onus has been discharged. The Tribunal referred to the judgment of the Supreme Court in the case of CIT v. Anwar Ali [1970] 76 ITR 696 and upheld the contention of the assessee that the principles laid down in that judgment were still good law and there was no evidence to hold that the assessee has concealed the particulars of its income. The Tribunal relied on the judgment of the Punjab and Haryana High Court in the case of Addl. CIT v. Karnail Singh v. Kaleran [1974] 94 ITR 505.
28. This judgment of the Punjab and Haryana High Court was overruled subsequently by a Full Bench judgment of that court in the case of Vishwakarma Industries v. CIT [1982] 135 ITR 652. In that case, it was held by the Full Bench that (headnote) "once the Explanation is held to be applicable to the case of an assessee, it straightaway raises three legal presumptions, viz, :
(i) That the amount of the assessed income is the correct income and it is in fact the income of the assessee himself ;
(ii) that the failure of the assessee to return the correct assessed income was due to fraud ; or
(iii) that the failure of the assessee to return the correct assessed income was due to gross or wilful neglect on his part.
29. It was further observed by the Full Bench (at page 671) :
"To conclude, it must be held that the patent intent of the Legislature in amending Section 271(1)(c) and in inserting the Explanation thereto by the Finance Act of 1964 was to bring about a change in the existing law. Consequently, the ratio of Anwar Ali's case [1970] 76 ITR 696, which had considered the earlier provision of Section 28(1) of the 1922 Act, is no longer attracted. The true legal import of the Explanation is to shift the burden of proof from the Department on to the shoulders of the assessee in the class of cases where the returned income was less than 80 per cent. of the income assessed by the Department. In this category of cases, the Explanation raises three rebuttable presumptions against the assessee as spelt out in detail above in para. 16 of this judgment. The onus of proof for rebutting these presumptions lies on the assessee. This burden, however, can be discharged (as in civil cases) by the preponderance of evidence. Equally, it would be permissible in the penalty proceedings for the assessee to show and prove that on the existing material itself the presumption raised by the Explanation stands rebutted."
30. A Division Bench of this court in the case of CIT v. W. J. Walkar and Company [1979] 117 ITR 690, has taken a similar view. It was observed in that case (at page 693) :
"Where the total income returned is less than 80 per cent. of the total income as assessed under Section 143 or Section 144 or Section 147, the assessee must prove that the failure to return the correct income did not arise from any fraud or any gross or wilful neglect on his part as enjoined by the Explanation. In other words, the Explanation presumes fraud, gross or wilful neglect on the part of the assessee in the circumstances stated therein. Similarly, where an assessee fails to prove that the failure to return the correct income did not arise from any fraud or any gross or wilful reglect on his part, he shall be deemed to have concealed particulars of his income or furnished inaccurate particulars of such income for the purposes of Clause (c) of Section 271(1) of the Act as stated in the Explanation."
31. In my judgment, it is not necessary to express any opinion on the question whether the Explanation presumed fraud, gross or wilful neglect on the part of the assessee in the circumstances stated therein. This much is clear that by the Explanation, the Legislature has introduced a legal fiction by which concealment of the type that merits penalty is deemed to have taken place in the circumstances mentioned in the Explanation. Accidental or inadvertent omission or failure to furnish full and correct particulars of income cannot be a ground for imposition of penalty and has not been made a ground for imposition of penalty.
32. The next question is whether the principles laid down in the case of CIT v. Anwar All [1967] 65 ITR 95 (Cal), survive after the introduction of the Explanation to cases which come within the ambit of the Explanation. It has to be borne in mind that the Supreme Court in the case of Anwar Ali [1970] 76 ITR 696, affirmed the principles enunciated in a long line of decisions of the various High Courts starting with the judgment of the Bombay High Court in the case of CIT v. Gokuldas Harivallabhdas [1958] 34 ITR 98. In Gokuldas' case, Chagla C.J., expressed the view that penalty could not be regarded merely as an additional tax. The proceedings were of penal nature. Unlike in the assessment proceedings, the burden of proof in a case of penalty lay upon the Department. It is true that the judgment of the Supreme Court in the case of Anwar Ali [1970] 76 ITR 696 was delivered on April 29, 1970 whereas the Explanation came into force on April 1, 1974. From this, however, it does not follow that the Explanation was not to negate the principles which were enunciated by various High Courts and ultimately approved by the Supreme Court in the case of Anwar Ali [1970] 76 ITR 696.
33. In my judgment, the key to the answer to this question is contained in the Explanation itself. Wherever the returned income falls short of the assessed income by the stated percentage, concealment of income will be deemed. The legal Hction is "for the purposes of Clause (c) of this subsection". Therefore, the concealment of particulars of income or furnishing of inaccurate particulars of such income which had to be proved by the Department in a penalty proceeding under Section 271(1)(c) will not have to be proved now. If the assessee does not come forward to prove that there was no fraud or any gross or wilful neglect on his part, the legal fiction will come into play and the Department will be entitled to impose penalty on the strength of the deeming clause without any further ado.
34. No hard and fast rule can be laid down about the quantum of evidence that the assessee will have to produce in order to establish that there was no fraud or any gross or wilful neglect on his part. This can be done from the materials already on record in the assessment proceedings. This can also be done by producing other evidence. It is a question of fact in every case. If the assessee is able to discharge the onus that has been imposed upon him by the Explanation of proving that there was no fraud or gross or wilful neglect on his part, the deeming clause of concealment will not come into operation. If the authority concerned is satisfied that the assessee has been able to prove that there was no fraud or gross or wilful neglect on his part, there cannot be any question of imposition of any penalty. In my judgment, in a case where the Explanation applies, there is no scope for invoking the principles laid down by the Supreme Court in the case of Anwar Ali [1970] 76 ITR 696. There cannot be any question of shifting of onus of proof. In the circumstances stated in the Explanation, concealment of income is deemed. It is not presumed. The deeming clause will come into operation unless the assessee can prove what he is required to prove by the Explanation. But if the assessee can establish that there was no fraud or gross or wilful neglect on his part, there cannot be any question of imposition of penalty thereafter.
35. I agree with the view expressed by my learned brother, the Chief Justice, that the assessee, in this case, will have to prove that there was no fraud or gross or wilful neglect on his part, and that the concerned Income-tax Authority will have to look into the totality of the facts and circumstances and decide the question whether the assessee has been able to prove lack of fraud or any gross or wilful neglect on his part.