K.P. Madhusudhanan Vs. Commissioner of Income Tax, Cochin  Insc 408 (21 August 2001)
Bharucha, Y..K. Sabharwal & Brijesh Kumar Bharucha, J.
High Court answered in the negative and in favour of the Revenue the following questions
on the facts and in the circumstances of the case, the Tribunal is right in law
and fact, in deleting the penalty levied under Section 271(1)(c) of the I.T.
Whether, on the facts and in the circumstances of the case, the Tribunal is
right in law and fact, in holding that this is an agreed assessment on the
basis of which penalty is not leviable?
Whether, on the facts and in the circumstances of the case, the Tribunal is
right in law and facts, in holding that penalty cannot be levied as the
assessing officer in the proposal under Section 271(1)(c) had not referred to
Explanation (1B) to Section 271(1)(c)? The assessee is in appeal by special
the assessment year 1986-87 the assessee, which is a partnership firm, filed a
return of income which stated that its total income was Rs.6,76,890/-. The
assessment was completed determining the total income of the assessee at Rs.7,90,170/-.
This included a sum of Rs.93,000/- assessed as income from other sources.
purchased rice from suppliers in Andhra Pradesh. The rice was some times sent
directly and payment therefor was made by demand draft or telegraphic transfer.
the course of the assessment proceedings the Assessing Officer noticed that a
demand draft and a telegraphic transfer were not entered by the assessee in its
cash book on the dates on which the same were purchased and made, respectively.
A demand draft of Rs.50,000/- had been purchased on 27th January, 1986 in favour
of M/s. Sree Jayalaxmi Enterprises, Byravapatanam, Andhra Pradesh, but, in the assessees
accounts, this amount was entered only on 4th February, 1986. The assessee had
made a telegraphic transfer through the Andhra Bank, Calicut on 24th March,
1986 to Madavenkataratanam & Others, Bhimavaram, Andhra Pradesh; this
transaction again was entered only on 24th April, 1986, when these were pointed
out to the assessee, it submitted a letter dated 28th August, 1989 stating that
as sufficient cash balance was not available to it on the dates of the transactions,
it had obtained hand loans from friends and, as it expected to repay such loans
within a short time, no entries were made in the books of accounts in respect
thereof. The letter also stated that since it was unable to furnish evidence
for such loans, it offered the amount of Rs.93,000/- as additional income. The
assessment was accordingly made treating the sum of Rs.93,000/- as unexplained
proceedings were then initiated against the assessee under Section 271(1)(c) of
the Income Tax Act, 1961. The Assessing Officer found the assessees explanation
in regard to the loans to be unacceptable and noted that it had itself offered
the addition of Rs.93,000/-. Applying Explanation (1B) of Section 271(1)(c),
the Assessing Officer imposed upon the assessee the penalty of Rs.37,975/-.
appeal filed by the assessee was dismissed. The assessee then preferred an
appeal to the Income Tax Tribunal. The Tribunal allowed the appeal. Arising out
of the order of the Tribunal the questions noted above were placed for the
consideration of the High Court. The High Court was not persuaded to agree with
the view that had been taken by the High Court at Bombay in Commissioner of
Income-Tax vs. P.M. Shah (203 ITR 792) in regard to the Explanation to Section
271(1)(c), and that this is the principal question that we are called upon to
relevant portion of Section 271 reads thus :
- 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,-.
in the cases referred to in clause (c), in addition to any tax payable by him,
a sun which shall not be less than, but which shall not exceed twice, 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 :
that, if in a case falling under clause (c), the amount of income (as
determined by the Income Tax Officer on assessment) in respect of which the
particulars have been concealed or inaccurate particulars have been furnished
exceeds a sum of twenty-five thousand rupees, the Income Tax Officer shall not
issue any direction for payment by way of penalty without the previous approval
of the Inspecting Assistant Commissioner.
1. - Where in
respect of any facts material to the computation of the total income of any
person under this Act, -
such person fails to offer an explanation or offers an explanation which is
found by the Income Tax Officer or the Appellate Assistant Commissioner to be
person offers an explanation which he is not able to substantiate, then, the
amount added or disallowed in computing the total income of such person as a
result thereof shall, for the purposes of clause (c) of this sub-section, be
deemed to represent the income in respect of which particulars have been
that nothing contained in this Explanation shall apply to a case referred to in
clause (B) in respect of any amount added or disallowed as a result of the
rejection of any explanation offered by such person, if such explanation is bonafide
and all the facts relating to the same and material to the computation of his
total income have been disclosed by him.
the High Court at Bombay observed that the Explanation to
Section 271(1)(c) created a legal fiction. It was that the assessee would be
deemed to have concealed the particulars of his income or furnished inaccurate
particulars thereof in the circumstances set out in the Explanation. But for
such legal fiction, it could never have been said that there was any concealment
or furnishing of inaccurate particulars of income simply because the returned
income was less than 80 per cent of the assessed income.
Explanation shifted the burden of proof on the assessee.
it said, when the Explanation is being resorted to by the Income-tax Officer or
by the Inspecting Assistant Commissioner in penalty proceedings, it is
essential that the assessee must be informed that penalty proceedings against
him are being commenced under the Explanation to Section 271(1)(c).
added, The Inspecting Assistant Commissioner could not have proceeded to levy
the penalty under the Explanation to Section 271(1)(c) in the absence of any
initiation of penalty proceedings under the Explanation to Section 271(1)(c).
These are penalty proceedings and the section must be strictly construed. The assessee,
in our view, had no opportunity of meeting the case under the Explanation to
Bench of the High Court at Bombay that
delivered the judgment in the case of P.M. Shah followed it in the case of
462). It said, . in the absence of invoking the Explanation specifically, the
burden would remain on the Revenue to bring the assessees case within the
mischief of the main provisions of Section 271(1)(c) of the Act.
find it difficult to accept as correct the two judgments aforementioned. The
Explanation to Section 271(1)(c) is a part of Section 271. When the Income-tax
Officer or the Appellate Assistant Commissioner issues to an assessee a notice
under Section 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 Sections 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 Section 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
conceal 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 Section 271 in the notice under
Section 271 is, in our view, necessary before the provisions of the Explanation
therein are applied. The High Court at Bombay was, therefore, in error in the view that it took and the Division
Bench in the impugned judgment was right.
counsel for the assessee then drew our attention to the judgment of this Court
in Sir Shadilal Sugar and General ITR 705). He submitted that the assessee had
agreed to the additions to his income referred to hereinabove to buy peace and
it did not follow therefrom that the amount that was agreed to be added was
concealed income. That it did not follow that the amount agreed to be added was
concealed income is undoubtedly what was laid down by this Court in the case of
Sir Shadilal Sugar and General Mills Ltd. and that, therefore, the Revenue was
required to prove the mens rea of a quasi-criminal offence. But it was because
of the view taken in this and other judgments that the Explanation to Section
271 was added. By reason of the addition of that Explanation, the view taken in
this case can no longer be said to be applicable.
appeal is, therefore, dismissed with costs.