1993-(IT2)-GJX -0197 -BOM

Commissioner Of Income-tax V. Dharamchand L. Shah.

DATE : 23-02-1993

EQUIVALENT CITATION(S) :

1993-(002)-TLR -0520 -BOM

1993-(002)-TLR -0527 -BOM
1993-(070)-TAXMAN -0414 -BOM
1993-(113)-CTR -0214 -BOM
1993-(204)-ITR -0462 -BOM

CATCHNOTE / WORDS AND PHRASES :

p> Income Tax

Penalty Under S. 271(1)(C) -- Concealment

-- Additions Made In Assessment Proceedings Accepted By Assessee - But It

Would Not Automatically Justify The Imposition Of Penalty - Iac Failed To
Invoke The Expln. To S. 271(1)(C) - Penalty Under S. 271(1)(C) Could Not
Be Imposed

HEADNOTE :

Penalty under S. 271(1)(c) - Concealment - Additions made in assessment

proceedings accepted by assessee - But it would not automatically justify the
imposition of penalty - IAC failed to invoke the Expln. to S. 271(1)(c) - Penalty
under S. 271(1)(c) could not be imposed.

Held

The fact that certain additions were made in the assessment proceedings would not
automatically justify the Revenue to impose penalty under S. 271(1)(c) of the Act. It
is also a well-established principle that the provisions relating to penalty proceedings
are quasi-criminal in nature and, therefore, the burden is large on the Revenue to
establish the charge before imposing penalty under S. 271(1)(c) of the Act, more so,
when the provision of the Expln. to that section has not been invoked. In the instant
case, it is quite apparent from the order of the IAC that he has imposed penalty
under S. 271(1)(c) of the Act merely on the ground that certain additions were made
in the assessment proceedings and that the assessee had accepted the same. The
provisions of S. 69A of the Act are enabling provisions for making certain additions,
if the assessee fails to give an explanation or the explanation given by the assessee
is not to the satisfaction of the ITO. Surely, the additions made on this count would
not automatically justify the imposition of penalty under S. 271(1)(c) of the Act,
since the IAC had failed to invoke the provision of the Explanation to S. 271(1)(c) of
the Act, there is no possibility of confirming the penalty imposed by him under S.
271(1)(c) of the Act.

Conclusion
As IAC failed to invoke the provision of the Expln. to S. 271(1)(c), penalty under S.
271(1)(c) could not be imposed.

Legislation referred to

IT Act, 1961, Ss. 69A & 271(1)(c).

Counsel

Dr. V. Balasubramaniam for the Commissioner. P. C. Tripathi as amicus curiae.

JUDGE(S) :

Sujata V Manohar
U T Shah

TEXT :

COMMISSIONER OF INCOME-TAX v. DHARAMCHAND L. SHAH.

Income-tax Reference No. 66 of 1978, decided on February 23, 1993.

JUDGMENT

The Judgment of the Court was delivered by

U. T. SHAH J. - In this reference, the Revenue is challenging the action of the

Income-tax Appellate Tribunal (the Tribunal), in cancelling the penalty imposed
under section 27 (1) (c) of the Income-tax Act, 1961 (the Act). The respondent
(hereinafter referred to as the "assessee"), is an individual. The assessment year is
1971-72 and the relevant previous year is the financial year which ended on March
31, 1970, in respect of the item with which we are concerned in this reference.

The facts in brief are that, on June 18, 1970, the assessee along with an accomplice,
was apprehended by the customs authorities and gold biscuits with foreign markings
weighing 400 tolas were found on his person. When interrogated by the customs
authorities, the assessee admitted that the said gold belonged to him. In the course
of the income-tax assessment proceedings, however, the assessee resiled from his
earlier stand and contended that he was not the owner of the gold. The Income-tax
Officer (the ITO) rejected this contention and treated a sum of Rs. 84,000 being the
market value of the gold at the material time, as the assessee's income from
undisclosed sources, by invoking the provisions of section 69A of the Act.

The Appellate Assistant Commissioner of Income-tax (the AAC) upheld the finding of
the Income-tax Officer in regard to the ownership of the gold but took the view that
an addition to be made on that account requires to be quantified with reference to
the international price of gold and not the market price prevailing in India.

The assessee had accepted the order of the Appellate Assistant Commissioner.
However, the Revenue went up in appeal before the Tribunal and contended that the
gold biscuits should have been valued at the market price prevailing in India and not
at the international price as held by the Appellate Assistant Commissioner. The
Tribunal accepted the stand taken by the Department and reversed the decision of
the Appellate Assistant Commissioner and thereby restored the original addition of
Rs. 84,000 made by the Income-tax Officer.

On the aforesaid facts, the Inspecting Assistant Commissioner of Income-tax (the

Inspecting Assistant Commissioner) initiated proceedings under section
274(2)/271(1)(c) of the Act and called upon the assessee to show cause why penalty
should not be imposed for the concealment of Rs. 84,000. It appears that the
assessee had not responded to the said show-cause notice issued by the Inspecting
Assistant Commissioner. In this view of the matter, the Inspecting Assistant
Commissioner was of the opinion that the assessee had no explanation to offer. He,
therefore, imposed a penalty of Rs. 84,000 under section 271(1)(c) of the Act.

Aggrieved by the order of the Inspecting Assistant Commissioner, the assessee

preferred an appeal before the Tribunal and submitted that in view of the decision of
the Supreme Court in the case of CIT v. Anwar Ali [1970] 76 ITR 696 and of the
Punjab and Haryana High Court in the case of Addl. CIT v. Karnail Singh v. Kaleran
[1974] 94 ITR 505, the Inspecting Assistant Commissioner was not justified in
imposing penalty under section 271 (1) (c) of the Act. It was also submitted that the
addition made by invoking the provisions of section 69A of the Act would not
automatically justify the income-tax authorities to hold that there was a concealment
of income by the assessee. In other words, the assessee argued before the Tribunal
that the fiction created by section 69A of the Act should be restricted for assessment
purpose only and cannot be imported into penalty proceedings. In its order under
reference, the Tribunal deleted the penalty imposed by the Inspecting Assistant
Commissioner.

Having been dissatisfied with the order of the Tribunal, the Revenue made an
application under section 265 (1) of the Act before the Tribunal with a request to
refer the following questions to this court :

"1. Whether, on the facts and in the circumstances of the case, the Tribunal was
right in law in holding that the fiction crated by the provisions of section 69A of the
Income-tax Act was only for the purpose of assessment and that it cannot be made
applicable for levy of penalty under section 271(1)(c) on the assessee ?

2. Whether, on the facts and in the circumstances of the case, the Tribunal was right
in law in cancelling the penalty of Rs. 84,000 levied on the assessee under section
271 (1) (c) read with section 274 (2) by the Inspecting Assistant Commissioner ?"

Learned counsel for the Revenue submitted that even in the case of "deemed
income" included in the total income of the assessee, the assessee would be liable to
penalty under section 271 (1) (c) of the Act. In this connection, he relied on certain
decisions of the Punjab and Haryana High Court as well as of the Andhra Pradesh
High Court in the case of CIT v. Aya Singh Ishar Singh [1973] 92 ITR 182 (P & H),
CIT v. Behari Lal Pyare Lal [1977] 107 ITR 587 (P & H), Hindustan Tools Mfg. Co. v.
CIT [1976] 102 ITR 174 (P & H), CIT v. Chandulal [1985] 152 ITR 238 (AP).
Thereafter, he referred to the decision of the Supreme Court in the case of
Chuharmal v. CIT [1988] 172 ITR 250, wherein, according to him, on identical facts
and circumstances obtaining in that case, the Supreme court had upheld the penalty
imposed under section 271 (1) (c) of the Act. He, therefore, strongly urged that the
questions referred to us should be answered in favour of the Revenue.

As none appeared on behalf of the assessee, we had requested Shri Tripathi to be

amicus curiae and assist us in disposing of this reference. Shri Tripathi for the
assessee submitted that, since the penalty proceedings and assessment proceedings
are two separate and distinct proceedings, the fact that certain additions were made
in the assessment proceedings under section 69A of the Act would not automatically
justify the Inspecting Assistant Commissioner to impose penalty under attention
271(1)(c) of the Act. In this connection, he also invited our attention to the aforesaid
decision of the Supreme Court in the case of Chuharmal v. CIT [1988] 172 ITR 250
and pointed out that the penalty in that case was upheld by the Supreme Court
mainly on the ground that the income-tax authorities have invoked the provisions of
the Explanation to section 271(1)(c) of the Act as they stood at the relevant time.
Since, however, in the instant case, the income-tax authorities have not invoked the
provisions of the Explanation to section 271(1)(c) of the Act, the Revenue cannot get
any benefit out of the said decision of the Supreme Court. Placing before us a recent
decision of this court in the case of CIT v. P. M. Shah [1993] 203 ITR 792 (I.T.R. No.
237 of 1977 dated November 9, 1992), to which both of us were parties, Shri
Tripathi pointed out that, since the main provision of section 271(1)(c) and the
Explanation thereto are two separate provisions and since the Inspecting Assistant
Commissioner has not invoked the provisions of the Explanation to section 271(1)(c)
of the Act, the same should not be considered in deciding the issue raised in this
reference. In that case, the Income-tax Officer had referred the matter to the
Inspecting Assistant Commissioner as the penalty imposable under section 271(1)(c)
of the Act exceeded Rs. 25,000. The Income-tax Officer had not invoked the
provisions of the Explanation to the said section. However, while imposing penalty
under section 271(1)(c) of the Act, the Inspecting Assistant Commissioner had
invoked the provisions of the Explanation to the said section. This was challenged by
the assessee before the Tribunal and the Tribunal held that the Inspecting Assistant
Commissioner could not have invoked the provisions of the Explanation to section
271(1)(c) of the Act as the same was not invoked by the Income-tax Officer. Against
the said decision of the Tribunal, the Revenue had come up in a reference before this
court and this court has upheld the order of the Tribunal. In doing so, this court had
referred to the decision of the Supreme Court in the case of CIT v. Mussadilal Ram
Bharose [1987] 165 ITR 14 and of the Gujarat High Court in the case of CIT v.
Lakhdhir Lalji [1972] 85 ITR 77. According to him, unless and until the provisions of
the Explanation to section 271(1)(c) of the Act are specifically invoked by the
Inspecting Assistant Commissioner, we should not consider the said provisions in
deciding the issue raised in the present reference. He, therefore urged that we
should answer both the question referred to us against the Revenue and in favour of
the assessee.

Learned counsel for the Revenue, in his reply, vehemently argued that no not
mentioning the Explanation in the show-cause notice issued by the Inspecting
Assistant Commissioner or by not specifically invoking the provisions of the
Explanation to section 271(1)(c) of the Act, the Revenue is not prevented from
imposing penalty under section 271(1)(c) of the Act on the main provision of the
section. In other words, according to him, by not mentioning the Explanation in the
show-cause notice, no prejudice would be caused to be Revenue and, therefore, we
should consider the same as was done in the case before the Supreme Court.
In order to appreciate the stand taken by the parties, it would be necessary to advert
to the relevant provision of section 271 (1) (c) and the Explanation thereto as they
stood at the material time :

"Section 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 twenty per cent. 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. "

The section further provides that, if the concealment exceeds Rs. 25,000, the
Income-tax Officer cannot issue any notice without the prior permission or approval
of the Inspecting Assistant Commissioner.

The Explanation to section 271(1)(c) of the Act, which was inserted by the Finance
Act, 1964, with effect from April 1, 1964, reads as under :

"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 this 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."

It would appear from the above that the Explanation extends the provision of clause
(c). Therefore, once the explanation is also invoked in the show-cause notice, the
burden is not only shifted on the assessee but is also heavy to prove that he had not
concealed particulars of his income or furnished inaccurate particulars thereof.
However, in the absence of invoking the Explanation specifically, the burden would
remain on the Revenue to bring the assessee's case within the mischief of the main
provisions of section 271 (1) (c) of the Act. In the instant case, it is not in dispute
that the provision of the Explanation was not invoked nor was it mentioned in the
show-cause notice issued to the assessee.

On due consideration of the submissions made on behalf of the parties and the
material available on record coupled with the relevant provisions discussed above,
we are of the view that no fault could be found in the order of the Tribunal under
reference. It is by now trite law that the assessment proceedings and penalty
proceedings are two separate and distinct proceedings. The fact that certain
additions were made in the assessment proceedings would not automatically justify
the Revenue to impose penalty under section 271(1)(c) of the Act. It is also a well-
established principle that the provisions relating to penalty proceedings are quasi-
criminal in nature and, therefore, the burden is large on the Revenue to establish the
charge before imposing penalty under section 271(1)(c) of the Act, more so, when
the provision of the Explanation to that section has not been invoked. In the instant
case, it is quite apparent from the order of the Inspecting Assistant Commissioner
that he has imposed penalty under section 271(1)(c) of the Act merely on the
ground that certain additions were made in the assessment proceedings and that the
assessee had accepted the same. The provisions of section 69A of the Act are
enabling provisions for making certain additions, if the assessee fails to give an
explanation or the explanation given by the assessee is not to the satisfaction of the
Income-tax Officer. Surely, the additions made on this count would not automatically
justify the imposition of penalty under section 271(1)(c) of the Act. In our view,
since the Inspecting Assistant Commissioner had failed to invoke the provision of the
Explanation to section 271(1)(c) of the Act, there is no possibility of confirming the
penalty imposed by him under section 271(1)(c) of the Act.

We would like to observe that invariably the Revenue is not properly applying its
mind before initiating penalty proceedings and imposing penalty under section 271
(1) (c) of the Act, or for that matter, any other penal provisions contained in the Act.
It is due to this reason that even though the Revenue has a good case for imposing
penalty under various provisions of the Act, the assessee, by and large, succeed
right from the first appellate stage itself. In the subsequent proceedings before the
Tribunal and in the reference before the High Court, the Revenue finds it extremely
difficult to improve the case which was not well though of when initiated at the first
stage. In this case also, a similar thing has happened. If the Inspecting Assistant
Commissioner had invoked the provision of the Explanation to Section 271 (1) (c) of
the Act, perhaps the decision of the Tribunal and thereafter, of this court would have
been different from what it is.

In view of the aforesaid discussion, we answer both the questions in the affirmative
and in favour of the assessee. No order as to costs.

Before we part with his judgment, we would like to put on record our appreciation of
the Assistance referred by Shri Tripathi as amicus curiae.

BACKWARD REFERENCE :

[Referred]

1955-(IT2)-GJX -0054 -MAD Omar Salay Mohammed Sait (Mathurai) V.

Commissioner Of Income-tax, Madras.
1970-(IT2)-GJX -0199 -SC Commissioner Of Income-tax, West Bengal I, And
Another V. Anwar Ali.
1972-(IT2)-GJX -0195 -P&H Commissioner Of Income-tax, Punjab V. Aya Singh Ishar
Sing.
1973-(IT2)-GJX -0429 -P&H Additional Commissioner Of Income-tax, Punjab V.
Karnail Singh V. Kaleran.
1975-(IT2)-GJX -0068 -P&H Commissioner Of Income-tax, Haryana, H.P., And Delhi
Iii V. Behari Lal Pyare Lal.
1984-(IT2)-GJX -0330 -AP Commissioner Of Income-tax, Andhra Pradesh-ii V.
Chandulal.
1988-(IT2)-GJX -0262 -SC Chuharmal V. Commissioner Of Income-tax, M.P.
1992-(IT2)-GJX -0792 -BOM Commissioner Of Income-tax V. P. M. Shah.

FORWARD REFERENCE :

[Referred]

2001-(IT1)-GJX -1184 -KER Deputy Commissioner Of Income-tax V. K. Suresh

Kumar.
2002-(IT3)-GJX -0288 -BOM (1) Sheraton Apparels (2) Max Corporation (3) Tressa
Fashion V. Assistant Commissioner Of ....

REFERENCES :

ACTS & SECTIONS REFERENCE :

INCOME TAX ACT 1961

Section 27(i)
Section 69A
Section 143
Section 144
Section 147
Section 265(1)
Section 271(1)
Section 271(1)(c)
Section 274(2)

NOTIFICATIONS REFERENCE :