Concealment inherently carries with it the element of mens rea. It is implied in the word `concealment' that there is a deliberate act by the assessee.

But for imposing a penalty under Section 271(1)(iii) of the Income-Tax Act, 1961, it must be proved that the assessee has consciously made the concealment or furnished inaccurate particulars of his income.

Merely because there is a difference of opinion for allowing or disallowing the expenditure between the assessee and the Assessing Officer, it cannot be said that the former intended to conceal income.

Dubbing rights case

In CIT vs. International Audio Visual Co. (288 I.T.R 570), the assessee had claimed a deduction under Section 80-HHC of the I-T Act in respect of dubbing rights of Hindi films, which it had sold to some foreign company.

The Assessing Officer did not agree that it was a sale by the assessee and concluded that it was not a sale of goods or merchandise but a receipt of royalty for transfer of dubbing rights.

Accordingly, he disallowed the claim for deduction. The Assessing Officer also initiated penalty proceedings under Section 271(1)(c). The Tribunal rejected the penalty.

On appeal, the Delhi High Court held that the assessee had a bona fide belief that by selling dubbing rights to a foreign company, it was selling goods or merchandise within the meaning of Section 80-HHC.

Under the circumstances, as there was no concealment of primary facts, penalty could not be imposed.

In C.I.T. v. Snecma SA, France (288 I.T.R 76), the assessee was a foreign company with its employees working in India who were paid salaries in India as also in France.

In the course of survey operations, it was noticed that the assessee had not deducted tax at source on the salaries paid by it to its expatriate employees working in India.

Penalties for the financial years 1991-92 to 1998-99 were accordingly imposed upon the Indian liaison office. Similarly, penalties for the financial years 1989-90 to 1998-99 were imposed upon the assessee.

On appeal, the Delhi High Court held that the fact that the company was a foreign company with its employees working in India, who were paid salaries in India as also in France was not in dispute.

The Tribunal had recorded in clear terms a finding that a certain amount of confusion was prevalent among foreign companies working in India regarding their obligations to deduct tax at source from out of the component of the salary paid by the companies outside India.

It concluded that there was reasonable justification for the assessee for not making the deductions. The cancellation of penalties was justified.

In CIT vs. Nellai Trading Automobile Agency (288 I.T.R 557), the assessee was a firm engaged in the business of dealership in motorcycles, mopeds and spares. It filed its return for the assessment year 1996-97.

The Assessing Officer found that there were certain discrepancies in the quantitative particulars of stock in the invoices totalling Rs 1,63,966.79 and they were not accounted for under sales or in the closing stock as on the last day of the accounting year.

The Assessing Officer initiated penalty proceedings under Section 271(1)(c) of the I-T Act.

Rejecting the explanation offered by the assessee the Assessing Officer imposed a penalty. The first and the second appellate authorities found reasonable the explanation offered by the assessee.

The penalty was cancelled. On appeal the Madras High Court held that the explanation offered by the assessee was plausible. Both the first appellate authority as well as the second appellate authority found that there was no intention to conceal the income. The cancellation of the penalty was valid.

Double deduction

In BTX Chemicals P. Ltd. vs. CIT (288 I.T.R 196), the assessee was a private limited company manufacturing and selling chemicals. During the previous year relevant to the assessment year 1980-81, a few days before the close of its accounting period a fire broke out in the assessee's factory destroying semi-finished goods, all insured.

The assessee claimed from the insurance company (i) Rs 1,83,492 on account of loss and damage to its plant and machinery on replacement cost basis; and (ii) Rs 1,00,112 on account of loss to its finished or semi-finished goods. The insurance company paid in November/December 1979, Rs. 84,462 in respect of the former claim and Rs 56,173 for the latter. The assessee filed its return declaring a loss.

The Assessing Officer worked out profits under Section 41(2) of the I-T Act. The loss claimed by the assessee on account of destruction of and damage to plant and machinery was disallowed. The assessee had claimed Rs 1,00,112 on account of loss of stock due to fire.

The Assessing Officer noted that the assessee had claimed double deduction of this amount of Rs 1,00,112.

In the first place, the amount was debited to consumption of raw material account and in the second the same amount was also debited to the `Profit and Loss Account', under the head of `goods lost in fire'.

The Assessing Officer, therefore, initiated penalty proceedings under Section 271(1)(c) of the Act for the assessee furnishing inaccurate particulars of its income and thus concealing its income in respect of the two amounts of Rs. 1,83,492 and Rs. 1,00,112.

On a reference, the Gujarat High Court held that it could not be said that the assessee knew or had reasons to believe that its claim of Rs 1,83,492 as revenue loss, was untrue. Since the assessee had a bona fide belief on the basis of advice received from its chartered accountant that the loss occurred as a result of destruction of assets such as plant and machinery, buildings, electrical installations, etc., was of revenue nature and claimed it by way of deduction, it was not a case of "concealment" within the ambit and scope of Section 271(1)(c). Penalty could not be levied, in relation to the disallowance of loss of Rs 1,83,492.

The Court further held that the Tribunal, as a matter of fact, found that the double claim for Rs 1,00,112 was made due to a bona fide mistake by the assessee. Soon after an entry made in the trading account of this year, it would affect the opening stock in the next year. Hence, the penalty related to the disallowance of loss of Rs 1,00,112 was rightly deleted by the Tribunal.

Courts have allowed a safety valve for avoiding penalty proceedings even if a false return was originally filed.

This would be so where a voluntary disclosure is made in assessment proceedings or a revised return is filed which discloses the correct income. If assessment is made on the basis of such disclosure or the correct revised return, penalty cannot be imposed.

H. P. RANINA
(The author, a Mumbai-based advocate specialising in tax laws)