Gauhati High Court
Commissioner Of Income-Tax vs Gurudayalram Mukhlal on 3 April, 1991
Equivalent citations: [1991]190ITR39(GAUHATI)
Author: H.K. Sema
Bench: H.K. Sema
JUDGMENT Dr. B.P. Saraf, J.
1. By this reference under Section 256(1) of the Income-tax Act, 1961, the Income-tax Appellate Tribunal, Gauhati Bench, Gauhati, has referred the following question of law to this court for opinion ;
"Whether, on the facts and in the circumstances of the case, the Tribunal was right in cancelling the penalty levied by the Inspecting Assistant Commissioner under Section 271(1)(c) of the Income-tax. Act, 1961 ?"
2. The facts giving rise to this reference may be briefly stated as follows :
The assessee is a registered firm. The relevant assessment year is 1965-66.
The previous year is Ram Navami year 2021. In the course of examination of the accounts of the assessee for the assessment year 1965-66, the Income-tax Officer found that the assessee had shown in its cash book on October 28, 1964, receipt of a sum of Rs. 27,000. The bank account, how ever, showed the withdrawals as under :
Date Amount 29-10-64 ...
Rs. 10,000 5-11-64 ...
Rs. 10,000 5-11-64 ...
Rs. 7,000
3. Again, on September 30, 1964, the cash book of the assessee showed receipt of Rs. 10,800 from the State Bank of India but the bank account showed that the money had been withdrawn on October 1, 1964. Similar discrepancy was noticed on January 6, 1965, when the cash book of the assessee showed receipt of a sum of Rs. 6,000 from the bank whereas the amount had actually been withdrawn from the bank only on January 7, 1965. The Income-tax Officer required the assessee to explain the sources of these amounts totalling Rs. 43,800. The assessee explained that one Srimati Janki Devi, aunt of one of the partners of the firm, Shri Jamuna Prasad Jaiswal, who came to perform the sradha ceremony of her husband, gave old currency notes of Rs. 27,000 for being exchanged for new notes. The money deposited in the accounts on October 28, 1964 was stated to represent the cash received from her. She was given back the money by cheques encashed from the bank on October 29, 1964 and November 5, 1964 as indicated above. Regarding the other two items of Rs. 10,800 and Rs. 6,000, no explanation was given. No evidence to support the explanation given in respect of the amount of Rs. 27,000 was also produced by the assessee. The Income-tax Officer found that all the cheques drawn on October 29, 1964 and November 5, 1964 were in favour of self. The Income-tax Officer, therefore, held that these amounts totalling Rs. 43,800 represented the assessee's income from undisclosed sources and, accordingly, the assessment was completed after adding this amount, to the income of the assessee. Proceedings were also initiated for levy of penalty under Section 271(1) of the Act for concealment of income.
4. The Inspecting Assistant Commissioner of Income-tax, Shillong, to whom penalty proceedings were referred by the Income-tax Officer, wanted the assessee to produce evidence in support of its explanation regarding the source of Rs. 27,000 credited in its cash book on October 28, 1964. The assessee's representative expressed his inability to produce any evidence to show that Srimati Janki Devi, an aunt of a partner of the firm, actually came to Imphal to perform the sradha ceremony of her husband. He alsoleaded inability to prove that the lady had Rs. 27,000 in old currency notes with her and she deposited the same with the assessee for being exchanged for new notes. The Inspecting Assistant Commissioner found that no account has been opened by the assessee in the name of the lady for crediting this amount. Under the circumstances, he arrived at the conclusion that the amount of Rs. 27,000 represented the assessee's income from undisclosed sources. He, therefore, held that it was a fit case for levy of penalty under Section 271(1)(c) of the Act and levied the penalty of Rs. 20,000.
5. Against the order of assessment, the assessee appealed before the Appellate" Assistant Commissioner who confirmed the addition of Rs. 43,800 made to the income of the assessee as income from undisclosed sources. The addition was affirmed on account of absence of material in support of the assessee's explanation regarding its source. The assessee filed a second appeal against the order of the Appellate Assistant Commissioner before the Income-tax Appellate Tribunal (hereinafter referred to as the "Tribunal"). It also filed an appeal against the order of penalty passed by the Inspecting Assistant Commissioner of Income-tax.
6. Both the appeals were heard by the Tribunal together and were disposed of by a consolidated order dated July 26, 1973. In the course of hearing before the Tribunal, the assessee sought to file an affidavit from Srimati Janki Devi. The affidavit, however, was not admitted by the Tribunal as additional evidence on the ground that the assessee could not explain why this affidavit could not be filed earlier either before the Income-tax Officer or the Appellate Assistant Commissioner. The Tribunal, therefore, did not accept the explanation of the assessee in regard to the source of the sum of Rs. 27,000 and affirmed the addition made by the Income-tax Officer. The addition was, however, confined to Rs. 27,000 as that was the peak amount of the total deposits of Rs. 43,800.
7. So far as the penalty is concerned, the Tribunal observed that the mere fact that the assessee was not able to explain the source of the particular amount to the satisfaction of the Income-tax Officer was not sufficient to justify the levy of penalty unless the Department proved that a receipt of income nature was concealed. On the facts and circumstances of the case, the Tribunal held that no such proof was there. It also held that there was no fraud or gross or wilful negligence on the part of the assessee. The Tribunal also found that the explanation given by the assessee in regard to giving of currency notes of Rs. 27,000 by Janki Devi was also not denied by Smt. Janki Devi. In view of the aforesaid findings, the Tribunal allowed the appeal of the assessee and cancelled the penalty levied by the Inspecting Assistant Commissioner.
8. Aggrieved by the order of the Tribunal cancelling the penalty, the Revenue applied for a reference to the High Court of a question-of law arising out of the order of the Tribunal as to whether the Tribunal was justified in cancelling the penalty levied by the Inspecting Assistant Commissioner under Section 271(1)(c) of the Act. On being satisfied that a question of law did arise, the Tribunal referred the Question set out above to this court for opinion.
9. Before we proceed to consider the question referred to us, it may be expedient to set out the law on the subject. The undisputed position is that levy of penalty in this case is governed by Section 271(1)(c) of the Act (as amended by the Finance Act, 1964). This Section, so far as is relevant, reads :
"271. Failure to furnish returns, comply with notices, concealment of income, etc. -- (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 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 20% 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.
Explanation.--Where the total income, returned by any person is less than 80% 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."
10. The nature of penalty and the principles governing imposition of the same are well-settled by a catena of decisions of the Supreme Court and the various High Courts. The propositions that emerge from these decisions can be summarised as below :
(i) Provisions dealing with penalty must be strictly construed. Penalties are to be construed within the term and language of the particular statute.
(ii) Penalty provision should be interpreted as it stands and, in case of doubt, in a manner favourable to the taxpayer. If the court finds that the language of a taxing provision is ambiguous or capable of more meanings than one, then the court has to adopt the interpretation which favours the assessee, more particularly so where the provision relates to the imposition of penalty (See CIT v. Vegetable Products Ltd. [1973] 88 ITR 192, 195 (SC) and C, A. Abraham v. ITO [1961] 41 ITR 425 (SC)).
(iii) An order imposing penalty for failure to carry out a statutory obligation is the result of a quasi-criminal proceeding, 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 obligations. 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. Even if a minimum penalty is prescribed, the authority competent to impose the penalty will be justified in refusing to impose penalty when there is a technical or venial breach of the provisions of the Act or where the breach flows from the belief that the offender is not liable to act in the manner prescribed by the statute (See Hindustan Steel Ltd. v. State of Orissa [1972] 83 ITR 26 (SC)).
(iv) Penalty proceedings are apart and separate from assessment proceedings. An assessee is entitled to adduce any evidence which he had adduced or not in the assessment proceedings and such evidence has to be duly considered by the authorities. The assessee is also entitled in the penalty proceedings to take up new pleas which he had not taken up in the course of the assessment proceedings.
(v) The considerations that arise in penalty proceedings are different from those in assessment proceedings. As such, the findings given in assessment proceedings, though relevant and admissible material in penalty proceedings, cannot operate as res judicata.
11. These are some of the broad propositions of law in regard to levy of penalty. Besides, in a case of levy of penalty for alleged concealment of income, it is well settled that the mere fact that the assessee's explanation regarding a cash credit or other asset is disbelieved and the amount is assessed in his hands does not by itself justify the Department in imposing a penalty. The circumstances of the case must be such as to lead to a reasonable and positive conclusion that the amount represents the assessee's income. Penalty cannot be levied merely on the basis of reasons given in the order of assessment. In penalty proceedings for a particular assessment year, the assessee is entitled to urge that the undisclosed income for which penalty is sought to be levied was wrongly assessed for that assessment year (See CIT v. Khoday Eswarsa [1972] 83 ITR 369, 376 (SC) and Anantharam Veerasinghaiah and Co. v. CIT [1980] 123 ITR 57 (SC)). The levy of penalty must be shown to be justified by the facts of the case. Even the fact that the assessee agreed to the inclusion of cash credits or other amounts in the total income on account of his inability to prove the source or to avoid protracted litigation with the Department may not justify imposition of penalty unless the Income-tax Officer has some material to satisfy him that the disputed amount represented the income of the assessee (Sir Shadilal Sugar and General Mills Ltd. v. CIT [1987] 168 ITR 705, 712-713 (SC)).
12. So far as levy of penalty for concealment of income or furnishing of inaccurate particulars of income in cases where Section 271(1)(c) (as amended by the Finance Act, 1964) applies (as in the present case) is concerned, the aforesaid principle will have to be read in the light of the Explanation to Sub-section (1) of Section 271 which was inserted with effect from January 1, 1964. Prior to the insertion of this Explanation, the onus was on the Revenue to prove that the assessee had concealed his income or furnished inaccurate particulars of such income. To obviate the difficulties which were found in proving the positive element required for concealment under the law prior to the amendment, the Explanation was added. The effect of the Explanation is that where the total income returned by any person is less than 80% of the total income assessed, the onus is on such person to prove that the failure to return the correct income did not arise from any fraud or any gross or wilful neglect on his part and unless he does so, he would be deemed to have concealed the particulars of his income or furnished inaccurate particulars of such income for the purposes of Clause (c) of Sub-section (1) of Section 271. As a result of this Explanation, in cases of stipulated difference between the returned income and the assessed income, the onus to prove that it was not the failure of the assessee or fraud of the assessee or neglect of the assessee that caused the difference shifted to the assessee. The question that arises for consideration is whether the Explanation has changed the entire concept of penalty for concealment discussed above. Whether the Department has been totally exonerated from the duty of even proving that the disputed amount was the income of the assessee. Or, it has simply relieved it of the onus of proving mens rea which it was obliged to do prior to the 1964 amendment. On a careful consideration of the amendment, deletion of the word "deliberately" which preceded the word "concealed" and the insertion of the Explanation with the deeming provision, it appears that the amendment has simply shifted the onus to prove the mental state to the assessee. Moreover, the onus that has been shifted is rebuttable. If in an appropriate case the Tribunal or the fact-finding body is satisfied by the evidence on record and inference drawn from the record that the assessee was not guilty of any fraud or any gross or wilful neglect and if the Revenue had not adduced any further evidence, then in such case, the assessee cannot come within the mischief of the section and suffer the imposition of penally. That appears to be the true effect of the Explanation.
13. The Explanation inserted in 1964 and its effect came up for consideration before the Supreme Court in CIT v. Mussadilal Ram Bharose [1987] 165 ITR 14. The Supreme Court held that the Explanation to Sub-section (1) of Section 271 only makes a presumption but the presumption is rebuttable and the fact-finding body may, on relevant and cogent materials, come to the conclusion that, in spite of the presumption, the assessee was not guilty. No question, of law will arise from such a conclusion.
14. The law was summarised by the Supreme Court in CIT v. Mussadilal Ram Bharose [1987] 165 ITR 14, in the following words (at page 22) : "The position, therefore, in law is clear. If the returned income is less than 80% of the assessed income, the presumption is raised against the assessee that the assessee is guilty of fraud or gross or wilful neglect as a result of which he has concealed the income but this presumption can be rebutted. The rebuttal must be on materials relevant and cogent. It is for the fact-finding body to judge the relevancy and sufficiency of the materials. If such a fact-finding body, bearing the aforesaid principles in mind, comes to the conclusion that the assessee has discharged the onus, it becomes a conclusion of fact. No question of law arises."
15. On the facts, it was held in that case that (p. 23) "the Tribunal has borne in mind the relevant principles of law and has also judged the facts on record. It is not a case that there was no evidence or there was such evidence on which no reasonable man could have accepted the explanation of the assessee. In that view of the matter, in our opinion, the Tribunal rightly rejected the claim for reference under Section 256(1) and the High Court correctly did not entertain the application for reference under Section 256(2) of the Act."
16. From a careful reading of the judgment of the Supreme Court in Mussadilal Ram Bharose [1987] 165 ITR 14, it is clear that the Explanation simply pertains to the onus of proof. The onus was earlier on the Revenue. It has now been shifted to the assessee in cases covered by the Explanation. The onus is on the assessee to prove that the failure to file the correct income did not arise from any fraud or gross or wilful neglect on his part. If the assessee fails to discharge this onus, the deeming provision contained in the Explanation will come into operation and presumption will be drawn against the assessee and he will be deemed to have concealed the particulars of his income or furnished inaccurate particulars of such income for the purpose of Clause (c) of Sub-section (1) of Section 271 of the Act. The Explanation, however, does not relieve the Department from its primary duty to establish, on the basis of materials or circumstances on record, that the disputed amount represented the assessee's income. Even in case of stipulated difference between the assessed income and the returned income, the penalty under Section 271(1)(c) is not automatic. In such cases also, the authority concerned must first satisfy itself on the basis of materials on record that the disputed income represented the income of the assessee. Once it is so satisfied, it need not prove mens rea, it can levy penalty if the assessee fails to show that there was no fraud or gross or wilful neglect on his part in furnishing the return of his income. But, in the absence of such material, no penalty can be levied even if the assessee fails to furnish any such explanation. The fact that certain income has been assessed by the Income-tax Officer in the assessment order by itself is not conclusive evidence that the amount assessed was the income of the assessee. In fact, in very many cases, the Assessing Officer can include certain amounts in the income of the assessee if the explanation given by the assessee in regard to the source thereof is not found to be satisfactory. That may be all right so far as the assessment is concerned but when the question of penalty comes, different considerations will apply and the Income-tax Officer will be required to put on record some further material other than the rejection of the explanation of the assessee in regard to its source to hold that the amount in question was the income of the assessee to justify imposition of penalty.
17. We may now apply the aforesaid principles to the facts of the present case to determine whether the Tribunal was justified in deleting the penalty levied by the Inspecting Assistant Commissioner. The dispute in the instant case related to delivery of currency notes of Rs. 27,000 by Smt. Janki Devi to the assessee firm. The explanation in regard to the source of the said amount was rejected for failure of the assessee to produce requisite evidence in support thereof. The Inspecting Assistant Commissioner levied the penalty as the assessee failed to produce reliable evidence in support of his contention that the lady actually deposited the amount with the assessee. It was on this account that a conclusion was arrived at that the amount was nothing but the income of the assessee from undisclosed sources. The assessee thereafter collected evidence by way of an affidavit from Smt. Janki Devi and wanted to file the same before the Tribunal in the course of hearing of appeal against the order of the Appellate Assistant Commissioner by which he affirmed the additions made in the assessment as well as in the appeal against the order of penalty. The Tribunal did not admit the affidavit as, according to it, the assessee failed to explain why he could not furnish it earlier either before the Income-tax Officer or before the Appellate Assistant Commissioner of Income-tax. This stand of the Tribunal in regard to the admissibility of the affidavit as additional evidence in second appeal against assessment might be understandable but so far as the appeal against the order of penalty was concerned, this evidence was relevant and even though produced at a later stage could not have been disregarded. In the instant case, the explanation of the assessee in regard to the source of Rs. 27,000, though not accepted for the purpose of assessment, cannot be said to be not plausible. On the other hand, there is no evidence at all from the side of the Revenue to show that the amount in question was the income of the assessee. The Revenue is trying to sustain the penalty only on the basis of the failure of the assessee to furnish evidence in support of his contention that the amount in question had been received from Smt. Janki Devi. The Tribunal did not approve of the levy of penalty in such circumstances and, therefore, deleted the same.
18. We have given our careful consideration to the facts and circumstances of the case and the law on the subject. We are of the opinion that in order to impose penalty under Section 271(1)(c) of the Act, there must be some materials with the concerned authority which might reasonably lead to a conclusion that the disputed amount represented the income of the asses-see. This basic requirement, in our opinion, is not in any way affected by the insertion of the Explanation by the Finance Act of 1964. The Explanation has simply changed the law in regard to the duty of the authority to prove mens rea. Under the Explanation, a presumption is now raised against the assessee that he is guilty of fraud or gross or wilful neglect as a result of which he has concealed the income if the returned income is less than 80% of the assessed income. In view of this presumption, the Revenue is relieved of the onus to prove the positive, The Explanation will, however, come into operation only when the Department has proved that the assessed amount represented the income of the assessee.
19. The Tribunal, in the instant case, has arrived at a categorical finding that the Revenue failed to prove that a receipt of income nature was concealed. The Tribunal has also arrived at a further finding that there was no fraud or gross or wilful negligence on the part of the assessee. The explanation given by the assessee was not denied by Smt. Janki Devi. These are the findings of fact arrived at by the Tribunal on a consideration of the facts and circumstances of the case. It was in view of these findings that the penalty was cancelled by the Tribunal.
20. On a careful consideration of the aforesaid findings of the Tribunal in the light of the law stated above, we are of the clear opinion that the Tribunal, in the instant case, was justified in cancelling the penalty. Besides, as observed in Mussadilal Ram Bharose [1987] 165 ITR 14 (SC), that, if such a fact-finding body, bearing the proper principles in mind, comes to the conclusion that the assessee has discharged the onus put on him under the Explanation, it becomes a conclusion of fact. No question of law arises. In that view of the matter also, considering this case from that angle, we find that it is not a case where there was no evidence or there was such evidence on which no reasonable man could have accepted the explanation of the assessee.
21. In view of the foregoing discussion, we answer the question referred to us in the affirmative and in favour of the assessee. Under the facts and circumstances of the case, we make no order as to costs.
H.K. Sema, J.
22. I agree.