Kerala High Court
Commissioner Of Income-Tax vs Geo Sea Foods on 27 November, 1999
Equivalent citations: [2000]244ITR44(KER)
Author: Arijit Pasayat
Bench: Arijit Pasayat, K.S. Radhakrishnan
JUDGMENT Arijit Pasayat, C.J.
1. Pursuant to a direction given by this court in O. P. No. 11602 of 1993 under Section 256(2) of the Income-tax Act, 1961 (in short, "the Act"), the following question has been referred by the Income-tax Appellate Tribunal, Cochin Bench (in short, "the Tribunal"), for the opinion of this court :
"Whether, on the facts and in the circumstances of the case, the Tribunal is right in law and fact in cancelling penalty under Section 271(1)(c) of the Income-tax Act, 1961 ?"
2. The background facts are as follows : The assessee, a partnership firm, is engaged in the business of processing and export of sea foods. For the assessment year 1977-78, it had filed a return declaring total income of Rs 3,36,750. In computing the income, the assessee had claimed deduction of Rs. 2,99,996 out of the compensation received by it amounting to Rs. 5,09,872. The said sum of Rs. 2,99,996 was credited to the current account of four partners of the assessee in equal shares. The claim was that the partners of the firm happened to be the shareholders of a company by name "Hotel Winrace (P.) Ltd.", and the amount in question was due to the said company under an agreement dated March 31, 1976. The Assessing Officer noticed that the corresponding entry crediting commission in the account of the company was made on March 31, 1977, dividing the amount and crediting it to the accounts of four shareholders equally. He further noted from a letter dated March 3, 1978, of Greaves International Ltd., Bombay, from which the assessee had received commission to Hotel Winrace (P.) Ltd., that it had not appointed the latter as its agent prior to March, 1978, and there was no reason why commission should have been paid by it to the assessee had Hotel Winrace (P.) Ltd. been the agent. The agreement executed by two of the partners of the assessee-firm, one on behalf of the assessee itself and the other on behalf of the company, and the apportionment and crediting of amount in the books of the assessee itself to the credit of the partners indicated that it was a clear device to reduce the income of the assessee. Accordingly, the sum of Rs. 2,99,996 was added to disclosed income. On appeal, the Commissioner of Income-tax (Appeals) (in short, "the CIT(A)") held that even though commission was paid to a limited company, it had ultimately been divided among four partners of the assessee, and hence it should be considered as payment to partners and disallowed the same by applying Section 40(b) of the Act. That decision was affirmed by the Tribunal by order dated April 5, 1983, in I.T.A. Nos. 471 and 515/ Coch. of 1981. The Tribunal observed that :
"Main prop to the claim of the assessee is the agreement dated March 31, 1976. The reasons given by the Income-tax Officer to discount this agreement may not be accepted but the other material brought in by the Income-tax Officer confirms the conclusion of the Commissioner of Income-tax (Appeals). Greaves International Ltd. has denied an understanding with Hotel Winrace Ltd. prior to March, 1978. The impugned amount though credited to the account of Hotel Winrace Ltd. has been immediately transferred in the assessee's books to the partners' accounts. Even though the partners are the shareholders in the company, the funds of the company cannot be transferred in this manner to the shareholders without an authority from a person competent to act in this behalf. In the circumstances, the inference of the Commissioner of Income-tax (Appeals) that the arrangement in this year was made by a partner K. G. Felix and not by Hotel Winrace Ltd. is justified. We would uphold the order of the Commissioner of Income-tax (Appeals) in this regard."
3. In a reference application filed by the assessee, two questions were referred to this court. By order dated August 2, 1989, in I. T. R. No. 412 of 1985, this court answered the questions in the affirmative, by observing thus :
"The Appellate Tribunal in paragraph 13 of its order has affirmed the said reasoning and conclusion of the Commissioner of Income-tax. We are of the view that the concurrent finding, entered by the Commissioner of Income-tax and the Tribunal that the payment in question is a payment under Section 40(b) of the Income-tax Act is justified in law."
4. In the proceeding initiated under Section 271(1)(c) of the Act, the Assessing Officer imposed penalty of Rs. 2,50,000 by order dated October 14, 1983. The Commissioner of Income-tax (Appeals) confirmed the imposition of penalty on the ground that the assessee's claim of payment of commission by it to the company was false, and consequential addition of amount on the ground that it was actually a payment to the partners, thereby forming a part of the assessee's own total income, had prevented the assessee from getting away with reduced tax demand. The matter was carried in appeal before the Tribunal. One of the members, i.e., Judicial Member, held that the addition had been upheld in appeals on a ground different from that on which it had been made in the assessment order, and in view of the decision of the Calcutta High Court in CIT v. Ananda Bazar Patrika (P.) Ltd. [1979] 116 ITR 416, the Income-tax Officer had no jurisdiction to proceed on the basis of modified finding and further since disallowance was made only under Section 40(b) of the Act, there was no question of any concealment. He also held that even by applying the Explanation to Section 271(i)(c), the claim of the assessee cannot be said to be false and, therefore, there should not be any deemed concealment. On the other hand, the Accountant Member held that the proceedings were validly initiated even on the finding of the appellate order and further under the Explanation to Section 271(1)(c), the claim of the assessee having been found to be false, it must be deemed to have concealed its income. The matter was referred to a Third Member under Section 255(4) of the Act. The Vice-President, South Zone, as the Third Member came to the conclusion that this was not a case in which penalty could be imposed under Section 271(1)(c) of the Act. A reference application under Section 256(1) of the Act filed by the Revenue was not accepted and it moved this court under Section 256(2) of the Act. The direction was given and the question has been referred along, with the statement of case as aforestated.
5. In support of the application, learned counsel for the Revenue submitted that the approach of the Third Member, who held that penalty could not be imposed under Section 271(1)(c) of the Act, proceeded with reference to the position as existing prior to the amendment of Section 271(1)(c) of the Act. Great emphasis is laid on certain conclusions of the Third Member, more particularly the following in para. 10 of the judgment rendered by the Vice-President-Third Member :
"10.'. . . There is nothing on record to show that the explanation offered by the assessee was not bona fide . . . ."
6. This, according to learned counsel for the Revenue, indicated the erroneous approach of the Third Member-Vice President. It is further submitted that on consideration of the facts of the case in the background of the statutory position as was relevant for the concerned assessment year, there is no escape from the conclusion that penalty was leviable and was rightly levied. The Explanation added to Section 271(1)(c) is referred to in this context. Amendment has been made to the said provision with effect from April 1, 1976, and a deeming provision has been introduced.
7. Mr. Kochunni Nair, learned counsel for the assessee, submitted that the correct legal position was kept in view by the Judicial Member and the Third Member, Vice-President, and the conclusion arrived at by the majority decision of the Tribunal is in the background of factual position. According to him the conclusions are factual and no question of law arises.
8. At this juncture, it is necessary to refer to the legislative history so far as Section 271(1)(c) is concerned. There are three stages of amendment of Section 271(1)(c). The periods are : (a) prior to April 1, 1964 ; (b) April 1, 1964 to March 31, 1976 ; and (c) after April 1, 1976. Originally, the word "deliberately" existed which was omitted by the Finance Act, 1964, with effect from April 1, 1964. An Explanation was inserted at the end of Sub-section (1) of Section 271 by the said Finance Act (Section 40 of the Finance Act, 1964). In between, by the Finance Act, 1968, the base for levy of penalty became the amount of concealment as against the quantum of tax sought to be avoided under the then existing provisions. Subsequently, further amendments were brought by the Taxation Laws (Amendment) Act, 1975 (section 61 of the said amending Act). Four Explanations were substituted for the Explanation introduced by the Finance Act, 1964. The effect of the said amendment, so far as we are concerned, is that where, in respect of facts material to the computation of the total income of the assessee, he furnishes no explanation, or he cannot substantiate the explanation offered by him, or the explanation offered by him is found to be false, the relevant income shall be deemed to be his concealed income. Another change was the base for levy of penalty for concealment. The base which was made, viz., the concealed income, was again changed to the tax sought to be evaded. We are not very much concerned with the other changes. The effect of the amendment with effect from April 1, 1976, is that a deeming provision was introduced. The provision at the relevant time reads as follows :
"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 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, but which shall not exceed twice, the amount of tax sought to be evaded by reason of the concealment of particulars of his income or the furnishing of inaccurate particulars of such income :
Provided that, if in a case falling under Clause (c), the amount of income (as determined by the Income-tax Officer on assessment) in respect of which the particulars have been concealed or inaccurate particulars have been furnished exceeds a sum of twenty-five thousand rupees, the Income-tax Officer shall not issue any direction for payment by way of penalty without the previous approval of the Inspecting Assistant Commissioner.
Explanation 1.--Where in respect of any facts material to the computation of the total income of any person under this Act,--
(A) such person fails to offer an explanation or offers an explanation which is found by the Income-tax Officer or the Appellate Assistant Commissioner to be false, or (B) such person offers an explanation which he is not able to substantiate, then, the amount added or disallowed in computing the total income of such person as a result thereof shall, for the purposes of Clause (c) of this sub-section, be deemed to represent the income in respect of which particulars have been concealed :
Provided that nothing contained in this Explanation shall apply to a case referred to in Clause (b) in respect of any amount added or disallowed as a result of the rejection of any explanation offered by such person, if such explanation is bona fide and all the facts relating to the same and material to the computation of his total income have been disclosed by him."
9. The question of onus is of primary and added importance in legal acrimony. In CIT v. Anwar Ali [1970] 76 ITR 696, the apex court laid down that, before a person could be visited with a penalty for concealment, etc., the Revenue must prove that the amount in question was the income of the assessee and that he had concealed it with a motive. It was further held that penalty could not be imposed merely because any explanation given by the assessee in regard to the items in question was not believed to be true. The position of law on or after April 1, 1976, is that where, in respect of any item of credit, (a) the assessee fails to offer an explanation, or (b) the assessee offers an explanation which the taxing officer considers to be false, or (c) the assessee offers an explanation but no material or evidence to substantiate it, he shall be deemed to have concealed such income within the meaning of Section 271(1)(c). What Sections 68, 69, 69A, 69B and 69C deem for the purpose of assessment was injected for the purpose of penalty by operation of a deeming provision. A proviso was added to the new Explanation. It concerns cases where the assessee offers an explanation which he is not able to substantiate. Consequentially, the proviso intended to save such amount from imposition of penalty, although the same had been added to the assessee's income in the assessment, if his explanation is found to be bona fide and all facts relating to the same and material to computation of his total income have been disclosed by him.
10. Section 271(1)(c) is attracted where, in the course of any proceedings under the Act, the Assessing Officer or the first appellate authority is satisfied that (a) any person has concealed particulars of his income, or (b) has furnished inaccurate particulars of such income. The expressions "has concealed" and "has furnished inaccurate particulars" have not been defined either in the section or elsewhere in the Act. However, notwithstanding differences in the two circumstances, they lead to the same effect, viz., keeping off a certain portion of the income. The former is direct while the latter may be indirect in its execution. The word "conceal" is derived from the Latin word "concelare" which implies "to hide". In Webster's New International Dictionary, the word had been equated "to hide or withdraw from observation ; to cover or keep from sight ; to prevent discovery of ; to withhold knowledge of". There may be cases where the facts may attract both the offences, and in some cases there may be overlapping of the two offences.
11. If, in the facts and circumstances of a particular case and on the materials before it, the Tribunal reaches a conclusion that concealment was not proved, it is a question of fact and no question of law arises from such order. Similarly, whether the burden in a given case has been discharged on a set of facts or not is a question of fact. Where a finding of fact arrived at by the Tribunal is based on no material or is perverse or is based on irrelevant extraneous or inadmissible considerations or is arrived at by application of wrong" principles of law, a question of law arises. Where the Tribunal fails to arrive at its own conclusion of fact after due and proper consideration of entire materials for and against the assessee and cancels the penalty, a question of law arises. Similar is the case where conclusions of the Tribunal suffer from infirmity on account of relevant materials and evidence being ignored.
12. A conspectus of the Explanation added by the Finance Act, 1964, and the subsequent substituted Explanations, makes it clear that the statute visualised the assessment proceeding's and penalty proceedings to be wholly distinct and independent of each other. In essence, the Explanation (both after 1964 and 1976) is a rule of evidence. Presumptions which are rebuttable in nature are available to be drawn. The initial burden of discharging the onus of rebuttal is on the assessee. The rationale behind this view is that the basic facts are within the special knowledge of the assessee. Section 106 of the Evidence Act, 1872, gives statutory recognition to this universally accepted rule of evidence. There is no discretion conferred on the Assessing Officer as to whether he can invoke the Explanation or not. Explanation 1, which primarily concerns the case at hand, automatically comes into operation when, in respect of any facts material to the computation of total income of any person, there is failure to offer an explanation or an explanation is offered which is found to be false by the Assessing Officer or the first appellate authority, or an explanation is offered which is not substantiated. In such a case, the amount added or disallowed in computing the total income is deemed to represent the income in respect of which particulars have been concealed. As per the provisions of Explanation 1, the onus to establish that the explanation offered was bona fide and all the facts relating to the same and material to the computation of his income have been disclosed by him will be on the person charged with concealment. Mere failure to substantiate the explanation is not enough to warrant penalty. The Revenue has to establish that the explanation offered was not substantiated. The provision of Explanation 1 is concerned only with cases coming under Clause (B) of the Explanation, where the assessee offered an explanation which he was not able to substantiate. The explanation of the assessee for the purpose of avoidance of penalty must be an acceptable explanation ; it should not be a fantastic or fanciful one. As indicated above, the consequence follows as a matter of law. The burden is on the assessee. If he fails to discharge that burden, the presumption that he has concealed the income or furnished inaccurate particulars thereof, is available to be drawn.
13. The principal logical import of the Explanation is to shift the burden of proof from the Revenue on to the assessee. 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 principfes in mind, comes to the conclusion that the assessee has discharged the onus, it becomes a conclusion of fact, and no question of law arises. As observed earlier, the initial burden is on the assessee. Once the initial burden is discharged, the assessee would be out of the mischief unless further evidence is adduced. It is plain on principle that it is not the law that the moment any fantastic or unacceptable explanation is offered, the burden placed would be discharged and the presumption rebutted. As pointed out by the apex court in CIT v. Mussadilal Ram Bharose [1987] 165 ITR 14, the burden placed upon the assessee is not discharged by any fantastic explanation. It must be an explanation acceptable to the fact-finding body.
14. In the aforesaid legal background, it has to be examined whether the factual position has been rightly appreciated in the majority view. Undisputedly, the assessee had claimed, under an agreement dated March 31, 1976, commission to be paid to Hotel Winrace Ltd. The partners of the assessee-firm were also shareholders of the company and commission paid by the assessee was credited to the accounts of the partners in the assessee-firm. It is not in dispute that the income in question has been taken to the credit of Hotel Winrace (P.) Ltd. and distributed to the shareholders. The amount was included in the assessee's total income and the assessment had been made on that basis and because of income and loss from other heads, the tax paid by the company on this commission was much less than what would have been paid, had the commission been given directly to the partners and disallowed under Section 40(b). Yet the fact remains that the existence of the company, the agreement and the liability to pay amount to the company had not been proved to be false, even though doubts had been thrown by indicating that the agreement had been signed by the two partners, one on behalf of the firm and the other on behalf of the company and the amount had been paid through the accounts of partners. In this backdrop, the Tribunal had found in the quantum appeal that payment should be regarded as an indirect payment to partners, attracting disallowance under Section 40(b). Thus, it is clear that there was no furnishing of any inaccurate particulars of income and the point at issue was only an inference that could be drawn on the disputed fact as to whether the payment could be taken to have been made to an independent entity, viz., the company, or an indirect payment to the partners of the assessee-firm. These observations had been disputed by the assessee throughout, and taken up before this court on a reference. The Vice-President-Third Member has referred to a decision of the Calcutta High Court in Burmah-Shell Oil Storage and Distributing Co. of India Ltd. v. ITO [1978] 112 ITR 592, wherein it was held that there could be no concealment in a case where on admitted facts the assessee disputed the liability to tax on legal contentions. It was also held in that case that the Explanation to Section 271(1)(c) could not also apply because when legal contentions are bona fide raised, whether ultimately accepted or rejected, will not generally be an act of fraud or gross or wilful negligence. The Vice-President-Third Member also noted that since the application of the Explanation was specifically referred to by the two Members earlier, it was necessary to consider its application to facts of the case. Referring to the order of the Accountant Member, it was pointed out that in the assessment order and in the appellate orders, there was no finding that either the company was sham or that the assessee had not paid out the money. It was on the admitted position that the amount had been actually paid that the question whether it should be considered to have been paid to the company or the partners attracting the provisions of Section 40(b) was considered. Even though the Assessing Officer had mentioned that the payment may not be considered as genuine, his finding had been replaced by the finding of the Commissioner of Income-tax (Appeals) and the Tribunal that there was a payment which was disallowable under Section 40(b) of the Act. The Accountant Member's view was based only on the finding of the Tribunal, and that finding was not sufficient to attract the provisions of Explanation 1 to Section 271(1)(c). The Vice-President-Third Member agreed with the Accountant Member that penalty proceedings had been properly initiated. Great emphasis is made by learned counsel for the Revenue on this conclusion to submit that having accepted that penalty proceedings have been properly initiated, the Vice-President-Third Member should not have held that penalty was not imposable. To appreciate this submission, it is necessary to take note of the further observations of the Vice-President-Third Member. It was clearly observed by him that he was left with Explanation 1(B) which provided that where the assessee offers an explanation which is yet to be substantiated, and fails to prove that such explanation is bona fide, then the amount added or disallowed may be deemed to represent the concealed income. The assessee's explanation was that commission was paid to the company whose shareholders also were partners of the asses-see-firm. In that background, the Third Member observed that there was nothing on record to show that the explanation offered by the assessee was not bona fide. It is difficult to accept the stand of learned counsel for the Revenue that by making this observation, the Vice-President-Third Member had placed the onus on the Revenue to establish that the assessee had concealed income, so as to warrant imposition of penalty. The Vice-President-Third Member went on to elaborate the legal and factual position and observed that it was only a legal inference whether such payment could be considered to be an income under Section 40(b). It was, therefore, held that the provisions of Explanation 1(A) are not attracted so as to deem an addition made under Section 40(b) to conclude that the assessee had either concealed or could be deemed to have concealed any income, so as to warrant imposition of penalty under Section 271(1)(c) of the Act.
15. The position, as highlighted above, clearly shows that the Vice-President-Third Member applied the correct position in law and recorded a factual finding that penalty was not imposable. It is not correct, as contended by learned counsel for the Revenue, that the correct position in law was not kept in view. The conclusions on the factual position were arrived at in the background of the legal position applicable at the relevant time. The conclusions are factual, are based on materials and no irrelevant material has been taken into account to arrive at the majority view. Strictly speaking, no question of law arises from the order of the Tribunal, as the conclusions are factual.
16. Reference is answered in the affirmative, in favour of the assessee, and against the Revenue.