Tilting Onus U/s 271(1)(c)

 
Rano Jain, FCA, DISA (ICA)

With the advent of Apex Court Ruling in the recent judgment of Dilip Shroff  reported in 291 ITR (SC) 519, it seems that the issue of onus under Section 271(1)(c)  has travelled into a  full circle.  It also appears as if the ghost of Anwar Alis case [CIT & Anr. Vs. Anwar Ali (1970) 76 ITR 696 (SC)]  is still haunting and in one way or the other influencing both the legislators as well as the judiciary.  It has been a long battle between the assessee and the department to prove whose onus is to show that the concealment of income or the act of furnishing inaccurate particulars have been done willfully by the assessee so as to make him liable for penalty under Section 271(1)(c).

It all started way back in 01.04.1996 when the word deliberately was omitted by the Finance Act, 1964.  Earlier to this the penalty under Section 271(1)(c) was leviable when any person had  concealed the particulars of his income  or deliberately furnished inaccurate particulars of such income.  With the term deliberately being there, the obvious onus to prove that the same has been done was on the revenue.  However, it was causing a lot of difficulties and tickling the department to show the  deliberateness in all cases, as the department has been following its everlasting habit of imposing penalty for  concealment  in each and every case of addition or disallowance whatever it may be.

The principal object of enacting this section has always been to provide a deterrent against recurrence of default on the part of the assessee.  There has never been an iota of doubt that the section is penal in nature in the sense that the same will be effecting in stopping the practice of what the legislature considers to be against the public interest.  There are a number of judgments including that of Supreme Court in the case of Anwar Ali (Supra) whereby this fact has been affirmed.  The obvious implication of the section being penal in nature is that the department must establish that the receipt of the amount in dispute contributes income of the assessee.  It would not be out of place here to quote the findings of the Apex Court which reads as under :-

It must be remembered that the proceedings under s. 28 are of a penal nature and the burden is on the Department to prove that a particular amount is a revenue receipt.  It would be perfectly legitimate to say that the mere fact that the explanation of the assessee is false does not necessarily give rise to the inference that the disputed amount represents income.  It can not be said that the finding given in the assessment proceedings for determining or computing  the tax is conclusive.  However, it is good evidence.  Before penalty can be imposed  the entirety of circumstances must reasonably point to the conclusion that the disputed amount represented income that the assessee had consciously  concealed the particulars of  his income or had deliberately furnished inaccurate particulars.

With the pronouncement of this ruling, the onus fell in the lap of the department wholly and solely.  To overcome the difficulties in discharging this onus, the legislature came with an amendment under the Finance Act, 1964, w.e.f. 1.4.1996 by deleting the word deliberately from the section.  With this new development the onus again came back to the assessee.  Since the act was not mandatorily to be deliberate, it was the  assessee, who had to prove and give evidences to show that the act was not done deliberately for him to be liable for penalty.  An explanation was also added at the end of section in order to cast upon the assessee the onus to prove that the omission of income did not arise from any fraud or gross or willful neglect in cases where the difference between the returned income and assessed income was at a certain specified percentage.

As this explanation was also found to be inadequate, it further led to the substitution by Taxation Laws (Amendment) Act, 1975 of four Explanations,  Explanation I consists of two clauses.  Clause (A) provides that the assessee fails to offer an explanation or offer an explanation which is found to be false.  Clause (B) provides for the situation when the assessee is not able to substantiate the explanation and fails to prove that the explanation is bonafide.  It was a deeming fiction created by law and in the provided situations the amount would be deemed to represent the income in respect of which particular have been concealed.

The mere reading of the explanation shows that with the deeming fiction coming into play, even the rule of Anwar Ali got nullified and the onus came back squarely on the assessee.  But as the saying goes the legislation keeps on making provision to trap the innocent assesses and the battery of advocates keep on working to find solutions to take the assessee back from the net, on very strong arguments made by certain advocates, there came certain judgments, prominently from the Bombay High Court in the case of CIT Vs P.M. Shah (1993) 203 ITR 792 (Bom)  and  CIT Vs Dharamchand L.Shah (1993) 204 ITR  462 (Bom), whereby it was held that unless the department specifically brings the explanation on record in the notice for initiation of penalty, the deeming fiction can not come into play. 

With the  advent of these judgements the department once again found itself in a fix, since it became its duty to specifically mention the Explanation in the notice for initiation of penalty.  However, these cases were overruled by a landmark judgement of the Apex Court in the case of K.P. Madhusudanan Vs. CIT (2001) 251 ITR 99(SC).  In this case, it was categorically held that the Explanation to s. 271(1)( c) is a part of s. 271.  When the ITO or the AAC 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 the 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.  No express invocation of the Explanation to s. 271 in the notice under s. 271 is necessary before the provisions of the Explanation therein are applied. 

In a relatively later decision of the Delhi High Court in the case of Kamal Chand Jain Vs. ITO (2005) 277 ITR 429 (Del),  it has been held that under the Explanation to Section 271 where an explanation offered by the assessee is found by the AO, or even the CIT(A) to be false or that the explanation was bonafide and fails to substantiate such explanation, then the amount added or disallowed in computing the total income of such person as a result thereof would deem to represent the income in respect of which particulars have been concealed.  In other words, there is a deemed addition in the event the concerned authorities record their satisfaction that there is no proper and plausible explanation offered by the assessee or he has failed to substantiate such explanation.  Obviously, the law places an obligation upon the assessee to substantially support his explanation in all reasonable manners.

All these developments  once gain shifted the whole sole onus of proving that the amount was not deliberately concealed on the assessee, till the advent of very recent judgement of the Supreme Court in the case of Dilip N.Shroff Vs JCIT & ANr. (2007) 291 ITR 519 (SC),  whereby, very extensively discussing the provisions of Section 271(1)(c) together with its explanation, the Honble Apex Court has held that  Clause (c ) of sub-s. (1) of s. 271 categorically states that the penalty would be leviable if the assessee conceals the particulars of his income or furnishes inaccurate particulars thereof. 

It was stated that by reason of such concealment of furnishing of inaccurate particulars alone, the assessee does not ipso facto become liable for penalty.  Imposition of penalty is not automatic.  Levy of penalty not only is discretionary in nature but such discretion is required to be exercised on the part of the AO keeping the relevant factors in mind.  Some of those factors apart from being inherent in the nature of penalty proceedings, inheres on the face of the statutory provisions.  Penalty proceedings are not to be initiated, as has been noticed by the Wanchoo Committee, only to harass the assessee. Expln. I  refer to computation of income on the part of the assessee which is directly relatable to : (a) failure to offer an explanation and/or offering an explanation which is false; and (b) which he is not able to substantiate  and fails to prove that such explanation is bona fide. 

It was further stated that only in the event, the factors enumerated in cls. (A) and (B) of Expln. I are satisfied and a finding in this behalf is arrived at by the AO, the legal fiction created there under would be attracted.  The expression conceal is off great importance.  It signifies a deliberate act   or omission on the part of the assessee.  Such deliberate act must be either for the purpose of concealment of income or furnishing of inaccurate particulars.  Even if the Explanation are taken  recourse to,  a finding has to be arrived at having regard to cl. (a) of Expln. 1 that the AO is required to arrive at a finding that the explanation offered by an assessee, in the event he offers one, was false.  He must be found to have  failed to prove that such explanation is not only not bona fide but all the facts relating to the same and material to the income were not disclosed  by him.  Thus, apart from his explanation being not bona fide, it should have been found as of fact that he has not disclosed all the facts which was material to the computation of his income. 

The Honble court observed that the explanation must be preceded by a finding as to how and in what manner he furnished the particulars  of his income.   Once the primary burden of proof is discharges, the secondary burden of proof would shift on the assessee because  the proceeding under s. 271 (1)( c) is of penal nature  in the sense that its consequences are intended to be an effective deterrent which will put a stop to practices which the Parliament considers to be against the public interest and, therefore, it was for the Department to establish that the assessee shall be guilty of the particulars of income.  The order imposing penalty is quasi-criminal in nature and, thus, burden lies on the Department to establish that the assesee had concealed his income.

In the light of the forgoing discussion, it can reasonably be inferred that the Rule of Anwar Ali has came back in the form of Dilip N. Shroff to the rescue of the assessee  taking in its lap all the new provisions, amendments and explanations to Section 271(1)( c).

At present the onus of proving concealment or furnishing inaccurate particulars is basically on the revenue, but it has to be seen how long this view servives.

(The writer is a practicing chartered accountant with M/s. Ved Jain and Associates)