Karnataka High Court
Commissioner Of Income Tax vs S. Padmanabhan on 25 January, 2006
Equivalent citations: (2006)203CTR(KAR)616
Author: N. Kumar
Bench: P. Vishwanatha Shetty, N. Kumar
JUDGMENT N. Kumar, J.
1. At the instance of the Revenue by reference under Section 256(1) of the Income-tax Act, 1961 (for short hereinafter referred to as "the Act"), the Tribunal has referred the following substantial question of law for opinion of this Court.
Whether, on the facts and in the circumstances of the case, the Income-tax Appellate Tribunal is right in law in holding that levy of penalty under Section 271(1)(c) is unjustified ?
2. The brief facts which give rise to this question are as under:
The assessee is an individual and derives income from salary as regional manager of Orissa Industries Limited, Bangalore. A search was conducted in his residential premises on March 23,1992, and fixed deposits in various banks on various dates totally valued at Rs. 5,92,432 were seized. An order under Section 132(5) of the Act was passed on July 1, 1992. Thereafter, the assessee filed his returns disclosing income from salary and also admitted investments in fixed deposits. On consideration of the said returns on the ground of non-disclosure of income by way of interest on deposits penalty was imposed under Section 271(1)(c) of the Act. Aggrieved by the imposition of penalty the assessee preferred an appeal. The appellate authority affirmed the said order on the ground that is it doubtful if the assessee would have on his own declared his income, assets, etc., but for the search and that the assessee is not a lay person and was occupying a good position in the branch of a company. Aggrieved by the said order of the first appellate authority rejecting the appeal, the assessee preferred a second appeal to the Tribunal. The Tribunal by the impugned order set aside the orders impugned and allowed the appeal and held that the authorities were not justified in imposing the penalty. Aggrieved by the said finding of the Tribunal on an application made by the Revenue, the Tribunal has referred the above substantial question of law for our opinion.
3. Sri M.V. Seshachala, learned Counsel appearing for the Revenue, contends that, in the light of the aforesaid undisputed facts, the Tribunal was not justified in recording a finding that the assessee under a bona fide the returns and that there is no concealment on his part and that it is not a wilful neglect. The said finding is contrary to law and liable to be quashed and the approach of the Tribunal is not correct. In this connection he brought to our attention Explanation 1 to Clause (iii) of Section 271(1) of the Act and contended that when the assessee is not able to substantiate the explanation offered and fails to prove that such an explanation is bona fide then the authorities are justified in imposing the penalty.
4. Per contra learned Counsel appearing for the assessee submitted that, what the authorities have to consider is whether the cause shown by the assessee is false or is it reasonable. If they are satisfied that it is not false and it is reasonable, it is permissible for the authorities to accept the explanation and not to impose the penalty. He pointed out that, though the language employed and the reasons given by the Tribunal may not be appropriate the sum and substance is that the explanation offered is a reasonable one and not false and, therefore, it is worthy of acceptance.
5. In the light of the aforesaid submissions, in order to decide the controversies it is relevant to notice Section 271(1) which reads as under:
(1) If the Income-tax Officer or the Appellate Assistant Commissioner or the Commissioner (Appeals) in the course of any proceedings under this Act, is satisfied that any person-
(a) has failed to furnish the return of total income which he was required to furnish under Sub-section (1) of Section 139 or by notice given under Sub-section (2) of Section 139 or Section 148 or has failed to furnish it within the time allowed and in the manner required by Sub-section (1) of Section 139 or by such notice, as the case may be, or
(b) has failed to comply with the notice under Sub-section (1) of Section 142 or Sub-section (2) of Section 143, or fails to comply with a direction issued under Sub-section (2A) of Section 142, or
(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,
(i) in the cases referred to in clause (a),
(a) in the case of a person referred to in Sub-section (4A) of Section 139, where the total income in respect of which he is assessable as a representative assessee does not exceed the maximum amount which is not chargeable to income-tax, a sum not exceeding one per cent, of the total income computed under this Act without giving effect to the provisions of Sections 11 and 12, for each year or part thereof during which the default continued;
(b) in any other case, in addition to the amount of the tax, if any, payable by him, a sum equal to two per cent, of the assessed tax for every month during which the default continued ;
Explanation.In this clause 'assessed tax' means tax as reduced by the sum, if any, deducted at source under Chapter XVIIB or paid in advance under Chapter XVIIC;
(ii) in the cases referred to in Clause (b), in addition to any tax payable by him, a sum which shall not be less than ten per cent, but which shall not exceed fifty per cent, of the amount of the tax, if any, which would have been avoided if the income returned by such person had been accepted as the correct income ;
(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 2.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 or the Commissioner (Appeals) to be false, or (B) such person offers an explanation which he is not able to substantiate and fails to prove that such explanation is bona fide and that all the facts relating to the same and material to the computation of his total income have been disclosed by him, 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....
Explanation 3.Where any person who has not previously been assessed under the Indian Income-tax Act, 1922 (11 of 1922), or under this Act, fails, without reasonable cause, to furnish within the period specified in Sub-clause (iii) of Clause (a) of Sub-section (1) of Section 153 a return of his income which he is required to furnish under Section 139 in respect of any assessment year commencing on or after the 1st day of April, 1974, and, until the expiry of the period aforesaid, no notice has been issued to him under Sub-section (2) of Section 139 or Section 148 and the Income-tax Officer or the Appellate Assistant Commissioner or the Commissioner (Appeals) is satisfied that in respect of such assessment year such person has taxable income, then, such person shall, for the purposes of Clause (c) of this Sub-section, be deemed to have concealed the particulars of his income in respect of such assessment year, notwithstanding that such person furnishes a return of his income at any time after the expiry of the period aforesaid in pursuance of a notice under Section 148.
6. Section 271 of the Act deals with the consequences of failure to furnish return, comply with notices, concealment of income, etc., Clause (c) of Sub-section (1) of Section 271 provides that any of the authorities mentioned in Section 271 in the course of any proceedings under the Act are satisfied that any person has concealed the particulars of his income or furnished inaccurate particulars of such income they may direct that such person shall pay the penalty as stipulated therein. Explanation 1 to the said section states that before imposing such penalty, an opportunity should be given to the assessee to offer his explanation. Similarly, Explanation 3 to the said section also contemplates an opportunity being given to the assessee who has not filed his return within the stipulated time to show a reasonable cause for not filing such return. If the cause shown is not accepted then he is deemed to have concealed the particulars of his income. After such an opportunity being given, if the assessee fails to offer the explanation or the explanation offered is found to be false or fails to substantiate the explanation offered, then the amount added or disallowed in computing the total income of such person shall be deemed to represent the income in respect of which particulars have been concealed. Then the authorities would be justified in imposing the penalty at the rate specified in Sub-section (1) of Section 271. If the explanation offered is satisfactory or the reasonable cause shown is accepted by the authorities, the question of imposing penalty would not arise.
7. In the instant case admittedly, only after the search the assessee filed the return immediately without any delay. It shows his bona fides. The explanation offered was that he was a salaried employee and his main source of income was salary and out of the savings from the salary he had saved the money by way of bank deposits. He was under the impression that interest from bank deposit is exempted from income-tax as his employer had deducted the income-tax from his salary. He further stated that he was not knowing about the tax implications on his interest income and therefore, he has not filed the returns within the stipulated period. The non-compliance with the requirement of law was not wilful. Therefore, he requested for dropping of the proceedings.
8. Both the authorities do not say that the said explanation offered is false. They accepted the explanation but they say that it amounts to non-furnishing of the details accurately as well as it amounts to concealment. Even though, in law, it amounts to concealment, the authorities should have considered whether the explanation offered by the assessee is a reasonable one and is he offering a false explanation to get over the effect of concealment.
9. A reading of the order gives an impression that they were satisfied with the explanation offered to them. But in their view in law, it amounts to concealment and penalty should follow. The Tribunal in second appeal was of the view that the explanation offered was a reasonable one and it cannot be termed false. Further, it proceed to observe that in their opinion the concealment was because of a bona fide belief and that no evidence was adduced by the Revenue to show the concealment alleged by them and that there is no wilful neglect on the part of the assessee in not disclosing interest earned on the fixed deposit. It is in respect of these observations made by the Tribunal that serious grievance is made out by the Revenue as if it would amount to the Revenue accepting the said position as a statement of law. There is considerable force in this submission of learned Counsel for the Revenue.
10. When an explanation is offered, all that the authorities are expected to consider is whether the said explanation is reasonable and whether the same is offered to avoid the penal consequences flowing from concealment of income. Having regard to the explanation offered the conduct of the party before and after disclosure if they are satisfied that there is no falsity in the explanation offered, the question of imposing penalty would not arise. In that view of the matter it was totally unnecessary for the Tribunal to record a finding even though the assessee himself did not put forth the said case that it was on account of bona fide belief, there is no wilful neglect and that there is no material on record to establish the case of concealment. In order to attract the imposition of penalty, it is not necessary to establish wilful neglect as held by the Tribunal. Therefore, the aforesaid observations/findings recorded by the Tribunal are totally unwarranted and requires to be set aside.
11. The tenor of the orders of all the three authorities makes it clear that the authorities were satisfied with the explanation offered by the assessee and that he had shown reasonable cause for not filing the returns within the stipulated period. Therefore, the imposition of penalty in the facts and circumstances of the case was not justified and therefore, the order of the Tribunal to that extent does not call for any interference. Accordingly, the question of law is answered in the affirmative and in favour of the assessee and against the Revenue and the aforesaid offending observations of the Tribunal are hereby set aside. In terms of what is stated above, the reference is disposed of.