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(Un)conscious concealment
July, 28th 2007

Concealment or furnishing inaccurate particulars of income is liable for penalty. The concealment may be deliberate or otherwise. Provisions relating to concealment penalty have undergone frequent changes . For example, the Finance (No. 2) Act, 1977 empowered the Appellate Commissioner, that is the CIT (Appeals), to initiate proceedings for levy of concealment penalty, the Finance Act, 2002 empowers the Commissioner to levy penalty in the course of any proceeding before him.

The Taxation Laws (Amendment and Miscellaneous Provisions) Act, 1986 has shifted the burden of proof for levy of concealment penalty. Previously, the tax department had to establish that the explanation of the assessee was not bona fide< /em> as regards understatement of income or furnishing of inaccurate particulars thereof. However, from September 10, 1986, the taxpayer is liable for penalty if he is unable to substantiate and fails to prove the bona fide of the exp lanation for understatement of income or furnishing of inaccurate particulars.

Ashok Pai decision

The apex court in T. Ashok Pai vs CIT (2007 292 ITR 11) dealt with levy of concealment penalty. Though the facts relate to the period in which the onus was on the tax department to prove the explanation of the taxpayer as not being bona fide, yet the interpretation of the expression concealment in this decision has great significance.

It was held that the term conceal would signify a deliberate act of omission on the part of the assessee. Such deliberate act could be concealment of income or furnishing of inaccurate particulars. The omission of the word deliberate in Section 271(1)(c) was held as not significant. Mere omission of the word deliberate would not mean that inadvertent omissions are also to be penalised. For concealment to be liable for penalty, there must be an inherent motive to evade tax. The term conceal or concealment carries with it the element of mens rea.

The act of omitting an item of income cannot be taken as concealment unless there is evidence from which it can be gathered that the omission was attributable to an intention or desire to hide or conceal income and the consequent tax liability.

Dilip N. Shroff case

The apex court, in Dilip N. Shroff vs JCIT (291 ITR 519), reiterated that the assessing officer (AO) while initiating penalty proceedings must be fair and objective. The order imposing penalty, being quasi-criminal in nature, the t ax department must establish that there was concealment of income chargeable to tax.

A finding in assessment proceeding as regards omission of income is a good evidence for initiating penalty proceedings but not sufficient enough for automatic levy of penalty. It was held that the tax officers should not begin the assessment work with a presumption that the taxpayer is guilty. The facts of this case relate assessment year 1998-99, that is, after the change in law, shifting the onus on the taxpayer to prove the bona fide of his explanation.

Decision vs Circular

In the Dilip N. Shroff case it was held that concealment means deliberate act on the part of the assessee. In the T. Ashok Pai case the same reasoning was given by the apex court. Circular No. 469, explaining the reasons for amending Explanation 1 to Section 271(1)(c), however says that the onus of proving the bona fide of the explanation is on the taxpayer w.e.f. September 10, 1986.

As per Article 141 of the Constitution, apex court decisions are binding and hence would supersede the circular and thus provide much needed relief to taxpayers.

V. K. Subramani
(The author is an Erode-based chartered accountant.)
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