DCIT vs Chirag Metal Rolling Mills Ltd.
Citation 185 Taxman 120, 207 CTR 395

The primary onus to prove that there was no concealment of income was on the assessee in view of Explanation I to s.271(1)(c) of the Income Tax Act 1961. The assessee could also prove his bona fide belief in penalty proceedings. The tribunal could not hold that the onus was on the Revenue to prove mala fide on assessees part.

Explanation I to s.271(1)(c) of the Income Tax Act 1961 

High Court of Madhya Pradesh

DCIT vs Chirag Metal Rolling Mills Ltd.

IT Appeal No. 35 of 1999

S.K. Kulshrestha and N.K. Mody, JJ

31 August 2006

R.L. Jain with Ms. Veena Mandlik, for the Appellant
G.M. Chaphekar with Ms. Vandana Kasrekar, for the Respondent

ORDERN.K. Mody, J.:

This appeal is being filed by the Revenue under s. 260A of the IT Act against the order dt. 22nd Oct., 1998 passed in ITA No. 484/Ind//1994 whereby the appeal filed by the Revenue against the order passed by CIT in ITA Nos. 484 and 485/Ind/1994 was dismissed, which was admitted for final hearing on 7th Sept., 2000 on the following substantial questions of law :

"(i) Whether, on the facts and in the circumstances of the case and in law, Tribunal was justified in holding that the onus is on the Revenue to prove mens rea even when the primary onus is upon the assessee to prove that there was no concealment in view of Expln. 1 to s. 271(1) of the IT Act ?

(ii) Whether, on the facts and in the circumstances of the case and in law, Tribunal was justified in holding that independent enquiry should have been conducted into the explanation of the assessee by Revenue during the penalty proceedings, in spite of the facts that no details regarding purchase such as the names and addresses of the parties from whom purchase were made, thus, prohibiting the Department for making any enquiry in this regard ?

(iii) Whether, on the facts and in the circumstances of the case and in law, Tribunal was justified in cancelling the penalty under s. 271(1)(c) of the Act levied upon the assessee by the AO ?"

2. Short facts of the case are that the assessee company has made purchases in cash for which advance (additions) of Rs. 74,92,919 and Rs. 79,00,198 were made under s. 40A(3) of the Act in the accounting years 1989-90 and 1990-91, respectively. Against these additions though assessee went in appeal before the CIT(A) but the appeals were dismissed on the ground that these advances (sic-additions) were made on account of surrender made by assessee during the course of assessment. Consequently, penalty under s. 271(1)(c) has been levied for a sum of Rs. 51,92,642 and Rs. 61,00,533 for the accounting years 1989-90 and 1990-91, respectively. In the appeal filed by the assessee, CIT(A) in ITA Nos. 442 and 443 of 1993/1994 vide order dt. 3rd March, 1994 allowed the appeal and cancelled the penalty orders in full. Against which the Revenue filed an appeal before Tribunal, Indore, which were numbered as ITA Nos. 484 and 485/Ind/1994 and vide order dt. 22nd Oct., 1998 dismissed the appeal against which the present appeal has been filed.

3. Shri R.L. Jain, learned senior counsel for the appellant submits that learned Tribunal committed error in dismissing the appeal. It is submitted that in the facts and circumstances of the case, the order of penalty could not have been cancelled. The reliance was placed on a decision of Delhi High Court in the case of Tube Fabrico (I) Ltd. vs. CIT (1994) 210 ITR 1035 (Del), wherein Delhi High Court has held that the very fact that the assessee filed revised returns was an admission on its part of concealment of income. The assessee could not plead an agreement because of estoppel against statute. When the statute itself casts a liability on the assessee, no agreement with the Department could entitle it to avoid that liability. Once assessment was made in respect of each of the assessment years by giving effect to spread over the only implication in law was that in each of these years there was concealment of income.

4. Learned counsel further submits that in the facts and circumstances of the case, sub-cl. (B) of Expln. 1 to s. 271 is attracted. It is submitted that since entire payment of Rs. 74,92,990 which was claimed as deduction and addition of Rs. 15,00,000 was made on account of forged rolls on which the assessee claimed depreciation and the assessee failed to produce vouchers evidencing acquisition of the rolls forged at Rs. 15,00,000, the case comes within the purview of s. 1 to s. C [cl. (c) of sub-s. (1)] of the Act and in the circumstances the penalty was rightly levied by the concerned AO which was wrongly cancelled by the CIT(A) and also by the Tribunal. Sec. 271(1)(c) of IT Act reads as under:

"271. Failure to furnish returns, comply with notices, concealment of income, etc.(1) if the AO or the CIT(A) or the CIT in the course of any proceedings under this Act, is satisfied that any person-

(a) xxxxx

(b) has failed to comply with a notice under sub-s. (1) of s. 142 or sub-s. (2) of s. 143 or fails to comply with a direction issued under sub-s. (2A) of s. 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) xxxxxx

(ii) in the cases referred to in cl. (b), in addition to any tax payable by him, a sum of ten thousand rupees for each such failure;

(iii) in the cases referred to in cl. (c), in addition to any tax payable by him, a sum which shall not be less than, but which shall not exceed three times, 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.

Explanation 1Where 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 AO or the CIT(A) or the CIT 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 cl. (c) of this sub-section, be deemed to represent the income in respect of which particulars have been concealed."

5. Shri G.M. Chaphekar, learned counsel for the respondent submits that the learned Tribunal has rightly dismissed the appeal. It is submitted that the assessee surrendered to buy peace and avoid litigation. The surrender does not invite penalty under s. 271(1)(c) of the Act. It was submitted that this aspect was examined by the CIT(A) and finally agreed with the contentions of the assessee that no concealment penalty is tenable with regard to the additions made under s. 40A(3) of the Act, which was made on account of surrender of particular amount by the assessee. Reliance was placed on a Full Bench decision of Kerala High Court in the matter of CIT vs. India Sea Foods (1997) 137 CTR (Ker)(FB) 553 : (1996) 218 ITR 629 (Ker)(FB) wherein a Full Bench of Kerala High Court held that penalty proceedings are penal in nature. The elementary principles of criminal law will apply. It is a quasi criminal proceeding. There should be conscious concealment. The provisions should be construed strictly. Even after the addition of Explanation to s. 271(1)(c) of the Act, 1961, conscious concealment is necessary and the presumption under Explanation to s. 271(1)(c) can be displaced by the assessee proving that the failure to return the correct income did not arise from any fraud or gross or wilful neglect and the quantum of proof necessary would be that required in a civil case, namely, preponderance of probabilities. In the facts and circumstances, it was observed by the Full Bench that as there was no conscious concealment of income and as this was not a case where a Revenue through its machinery had unearthed the concealment and as the Tribunal on a consideration of the entire matter had found that there was no concealment as such by the assessee, it could not be said that the Tribunal's finding was perverse or legally wrong and, therefore, there was no point for reference.

6. Further reliance was placed on a case in the matter of Sir Shadilal Sugar and General Mills Ltd. vs. CIT (1987) 64 CTR (SC) 199 : (1987) 168 ITR 705 (SC) wherein the Hon'ble Supreme Court has observed that the assessee has only accepted certain amounts as taxable, it had not been accepted by the assessee that it had deliberately furnished inaccurate particulars or concealed any income. It was further observed that from the assessee agreeing to additions to his income, it does not follow that the amount agreed to be added was concealed income. There may be a hundred and one reasons for such admission, i.e. when the assessee realizes the true position, it does not dispute certain disallowances but that does not absolve the Revenue from proving the mens lea of quasi criminal offence.

7. Shri R.L. Jain, learned counsel for the appellant placed reliance on a decision of apex Court in the matter of K.P. Madhusudhanan vs. CIT (2001) 169 CTR (SC) 489 : (2001) 251 ITR 99 (SC) wherein the apex Court observed that the Explanation to s. 271(1)(c) is a part of s. 271. When the AO or the AAC issues a notice under s. 271, he makes the assessee aware that the provisions thereof are to be used against him. These provisions include the Explanation. By virtue of the notice under s. 271 the assessee is put to notice that, if he does not prove, in the circumstances stated by the Explanation, that his failure to return his correct income was not due to fraud or neglect, he shall be deemed to have concealed the particulars of his income or furnished inaccurate particulars thereof, and, consequently be liable to the penalty under the section. No express invocation of the Explanation to s. 271 in the notice under s. 271 is necessary before the provisions of the Explanation are applied.

8. In the matter of CIT vs. Suresh Chandra Mittal (2000) 158 CTR (MP) 26 : (2000) 241 ITR 124 (MP) wherein the Division Bench of this Court after following the decision of Sir Shadilal Sugar and General Mills Ltd. vs. CIT (supra) has held that under s. 271(1)(c), the initial burden lies on the Revenue to establish that the assessee had concealed the income or had furnished inaccurate particulars of such income. The burden shifts to the assessee only if he fails to offer any explanation for the undisclosed income or offers an explanation which is found to be false by the assessing authority. However, the proviso to Expln. 1 provides for shifting of this burden again where the explanation offered by the assessee is found to be bona fide.

9. So far as the decision of Hon'ble Supreme Court in the matter of Sir Shadilal Sugar and General Mills Ltd. vs. CIT (supra) is concerned is based on s. 271(1)(c) of the Act, prior to this amendment in 1964. In this case the assessment was completed under the IT Act, 1922 and the assessment year was 1958-59 wherein the AO made addition of Rs. 1,37,700 towards cane against, shortage in cane and salary of outstation staff and no appeal was filed by the assessee against the addition. Notice was issued under s. 271(1)(c) of the Act in March, 1963 and after considering the reply the penalty was imposed. In the circumstances, the Supreme Court held that the appellant has only accepted certain amounts as taxable, it has not been accepted by the appellant that it has deliberately furnished inaccurate particulars or concealed any income. Hence, it was held that the amount agreed to be added cannot be taken as concealed income, as there may be hundred and one reasons for such admission. So far as Full Bench of Kerala High Court, in the matter of CIT vs. India Sea Foods (supra) and CIT vs. Suresh Chand Mttal (supra) are concerned, are based on the law laid down by Hon'ble apex Court in the matter of Sir Shadilal (supra). So far as K.P. Madhusudhanan's case (supra) which was delivered on 21st Aug., 2001 is concerned, in this case the Hon'ble apex Court has considered the Explanation to s. 271(1)(c) and has held that since in the case of Sir Shadilal (supra) the Revenue was required (to prove) mens lea of quasi-criminal offence, therefore, the legislature has added the Explanation to s. 271 of the Act. It was further observed that by reason of addition of Expln. that view in the matter of Sir Shadilal (supra) can no longer be said to be applicable.

10. Explanation 1 to s. 271 has been substituted by the Taxation Laws (Amendment) Act, 1975, w.e.f. 1st April, 1976. According to which if a person fails to offer an explanation or offers an explanation which is found by the AO to be false or offers an explanation which he is not able to substantiate and fails to prove that such explanation is bona fide and all the facts relating to the same 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 purpose of cl. (c) of this sub-section, be deemed to represent the income in respect of which particulars have been concealed. In the matter of K.P. Madhusudhanan (supra) it has also been observed by Hon'ble apex Court that when the ITO issues to an assessee a notice under s. 271, he makes the assessee aware that the provisions thereof are to be used against him. These provisions include Explanation. By reason of the Explanation, where the total income returned by the assessee is less than 80 per cent of the total income assessed under s. 143 or 144 or 147, reduced to the extent therein provided, the assessee is deemed to have concealed the particulars of his income or furnished inaccurate particulars thereof, unless he proves that the failure to return the correct income did not arise from any fraud or neglect on his part. The assessee is, therefore, by virtue of the notice under s. 271 put to notice that if he does not prove, in the circumstances stated in the Explanation, that his failure to return his correct income was not due to fraud or neglect, he shall be deemed to have concealed the particulars of his income or furnished inaccurate particulars thereof and, consequently, be liable to the penalty provided by that section.

11. From perusal of the record, it appears that the order passed by learned Tribunal dt. 22nd Oct., 1998 is completely based on the decision in the case of Sir Shadilal (supra) as at that time the decision of the apex Court in the matter of K.P. Madhusudhanan (supra) was not there.

12. The combined reading of Expln. 1 to s. 271(1)(c) of the Act and the verdict of Hon'ble apex Court in the matter of Sir Shadilal (supra) and K.P. Madhusudhanan (supra) it is crystal clear that prior to Expln. 1, the position of law was if assessee agrees for addition of his income to buy peace then it will not follow that agreed amount to be added was concealed income and the Revenue was required to prove the mens rea. Because of this view taken by Hon'ble apex Court in the matter of Sir Shadilal (supra) the Expln. 1 to s. 271(1)(c) of the Act was added to the IT Act and after taking into consideration the Explanation, Hon'ble apex Court in the matter of K.P. Madhusudhanan (supra) has laid down that no separate enquiry is necessary for imposing the penalty. However, from plain reading of Explanation, it is evident that some sort of enquiry is necessary, therefore, the proceedings initiated by the Revenue for imposing the penalty under s. 271(1)(c) of the Act shall be treated as proceedings and the assessee is at liberty to show his bona fides in that proceeding. If the assessee fails to show his bona fides, in that case penalty can be imposed by the Revenue.

13. This Court is of the view that the learned Tribunal was not justified in holding that the onus is on the Revenue to prove mala fide, even when the primary onus was on the assessee to prove that there was no concealment in view of Expln. 1 to s. 271(1)(c) of the Act. In view of the answer to first question it appears that no separate enquiry is necessary before imposing the penalty. In the penalty proceedings itself, initiated by the Revenue, the assessee can explain his bona fides and that all the facts relating to the same and material to the computation of his total income have been disclosed by him. Thus, the answer to question No. 2 is no separate enquiry is necessary.

14. In view of this, the appeal filed by the Revenue is allowed and the impugned order dt. 22nd Oct., 1998 passed by Tribunal, Indore in ITA Nos. 484 and 485/Ind/1998 is set aside and the case is remanded back to the Tribunal, Indore, with a direction to pass fresh order after hearing the parties keeping in view the law laid down by the apex Court in the matter of K.P. Madhusudhanan (supra). No order as to costs.