Ashok Pai Vs. Commissioner of Income Tax, Bangalore  Insc 644 (18 May 2007)
S.B. Sinha & Markandey Katju
CIVIL APPEAL NO. 2747 OF 2007 (Arising out of SLP (C) No.1194 of 2006) S.B.
1. Leave granted.
2. The assessee is in appeal before us aggrieved by and dissatisfied with a
judgment dated 29.9.2005, passed by a Division Bench of the Karnataka High
Court in ITRC No.492 of 1998 whereby and whereunder answer to the following
question was rendered in the negative.
"Whether, on the facts and in the circumstances of the case, the
Tribunal was right in holding that penalty u/s.271(1)(C) was not exigible in
the present case?"
3. Shorn of all unnecessary details the fact of the matter is as under :
Appellant is an individual. He is an engineering graduate. Apart from his
income by way of salary, he was having shares of profit of a number of firms
besides income from proprietorship business. He has also earned income from
dividend and interest. The banker of the assessee was the Syndicate Bank. A
power of attorney was given by the appellant in its favour. The shares of the
companies which the appellant owned were lodged with and in custody of the said
Bank. Under his instructions, the Bank used to purchase shares of various
companies and kept with it the physical possession thereof. It has also sold
the shares of the appellant and delivered the same to the brokers or the
parties and also used to pay or receive the sale proceeds and deposit the same
in the bank account. The said arrangement continued for a number of years in
Tax matters of the appellant were being looked after for a number of years
by the Law Agency Division of the Syndicate Bank, Manipal, which was authorised
to file the returns of income before the tax authorities representing the
assessee herein. For the assessment year 1985-86 the return of income on behalf
of the appellant was filed on 13.2.1989. Respondent, however, being not
satisfied with the return, called for better particulars of investments made by
the appellant, whereupon a revised return was filed on 12.1.1990 furnishing all
the requisite particulars to the Department. An application was filed by him
before the Settlement Commission on or about 17.1.1990 for settlement of the
taxes due which was, however, rejected by an order dated 26.9.1990. Appellant,
thereafter, filed a second revised return, upon which assessment was made by
the Assessing Officer. The said revised return was accepted by the Assessing
Officer. However, a proceedings for imposition of penalty in terms of Section
271(1)(C) of the Income Tax Act was initiated. In the cause shown by the
appellant a contention was raised that he had acted bona fide as the tax
affairs were being looked after by the professional group working with the
Syndicate Bank. The said contention was not accepted by the Assessing
4. The Income Tax Appellate Tribunal, however, considered the entire
materials brought on records and inter alia opined :
(1) When on discovery, some omission or some wrong statement in the original
return is found, a penalty proceeding for concealment of any particulars of
income or furnishing inaccurate particulars of such income as contemplated
under Section 271(1)(C) of the Income Tax Act may not be attracted.
(2) The revised return having been accepted by the Department and the
penalty having not been imposed with reference to the original return filed by
assessee, he cannot be considered to be guilty of concealment of income.
(3) The fault, if any, was with his tax counsel and even the said tax
counsel viz. the Syndicate Bank, cannot be said to have acted in a mala fide
manner in preparing the return of income of the assessee wrongly. The bona
fides of the assessee are proved by the facts and circumstances of the case.
5. A reference was made to the High Court at the instance of the revenue in
respect of the following question :
"Whether on the facts and in the circumstances of the case, the
Tribunal was right in holding that penalty u/s. 271(1)(C) was not exigible in
the present case?"
6. The High Court compared the returns filed by the appellant under the
Income Tax Act and the Wealth Tax Act and arrived at the following decision :
"The principal is responsible for all the act done by the agent. That
apart, in the case on hand there is no material to show that the agent has
acted in excess of his authority or in disobedience of the authority given by
the principal. The stand taken by the Bank manifestly makes it clear to us that
they prepared the return of income on the basis of information furnished by the
assessee. The assessee is an engineer and a tax payee for a number of years
cannot contend that he signed the return of income by believing his power of
attorney holder. This contention of the assessee cannot be believed for the
reason that in his revised return dated 12.1.1990 again declared a loss of
Rs.1,04,531/- and did not admit the capital gains and other income. The first
appellate authority rightly holds that if the explanation of assessee is
accepted then every tax evader could take shelter by shifting the blame on his
clerk and accountants who invariably prepare the return for them. The
contention of the assessee that because of the negligence on the part of the
Bank the mistake of concealment has crept in is not acceptable."
7. Mr. G. Sarangan, learned senior counsel appearing on behalf of the
appellant, would submit that the Tribunal having arrived at a finding of fact
that the appellant was not guilty of deliberate concealment of his income and
thus, having no mens rea in this behalf, the impugned judgment cannot be
sustained. In any event, it was urged, no specific question having been
referred as to whether the findings of the Tribunal are perverse or not, the
High Court committed a manifest error in differing with the findings of fact
arrived at by the Tribubnal.
8. Mr. B. Datta, learned Additional Solicitor General appearing on behalf of
the respondent, on the other hand, would submit that the Assessing Authority as
also the Commissioner of Income Tax having arrived at a finding of fact that
the appellant was guilty of deliberate concealment of his income, the Tribunal
was not correct in interfering therewith.
9. Reference of the question to the High Court as noticed hereinbefore was
general in nature. No question was referred as to whether the finding of the
Tribunal was perverse or not. Existence of mens rea is essentially a question
of fact. The Tribunal alone, as the highest authority empowered to determine
the question of fact, would be entitled to go thereinto. We may, however,
hasten to add that the same would not mean that the High Court will have no
jurisdiction in this behalf. The High Court, it is well known, should not
ordinarily disturb the finding of fact arrived at by the Tribunal.
Question of law should generally arise only accepting the finding of fact to
10. In Commissioner of Income-Tax v. Mukundray K. Shah (2007) 290 ITR 433,
this Court observed thus :
"The above two judgments indicate that the question as to whether
payment made by the company is for the benefit of the assessee is a question of
fact. In this case, the Tribunal has concluded that the payment routed through
MKF and MKI was for the benefit of the assessee. This was a finding of fact. It
was not perverse.
Therefore, the High Court should not have interfered with the said
11. In K. Ravindranathan Nair v. Commissioner of Income-Tax (2001 (247) ITR
178, a three-Judge Bench of this Court opined :
"The only jurisdiction of the High Court in a reference application is
to answer the questions of law that are placed before it. It is only when a
finding of the Tribunal on fact is challenged as being perverse, in the sense
set out above, that a question of law can be said to arise."
12. Yet again in Century Flour Mills Ltd. v. Commissioner of Income- Tax
2001 (247) ITR 276, it was observed by this Court :
"We have perused the order of the High Court and heard learned counsel
and are in no doubt that the High Court was right. The Appellate Tribunal
having arrived at the finding of concealment of income on the basis of the
material on record, no question of law arose, reference of which could be
13. It is, therefore, trite that if an explanation given by the assessee
with regard to the mistake committed by him has been treated to be bona fide
and it has been found as of fact that he had acted on the basis of wrong legal
advice, the question of his failure to discharge his burden in terms of
explanation appended to Section 271(1)(C) of the Income Tax Act would not
14. In Dilip N. Shroff v. Joint Commissioner of Income-Tax, Mumbai (Civil
Appeal Arising out of SLP (C) No.26831/2004) delivered today, this Court
"The expression "conceal" is of great importance. According
to Law Lexicon, the word "conceal" means:
"to hide or keep secret. The word "conceal" is con plus
celare which implies to hide. It means to hide or withdraw from observation; to
cover or keep from sight; to prevent the discovery of; to withhold knowledge
of. The offence of concealment is, thus, a direct attempt to hide an item of
income or a portion thereof from the knowledge of the income tax
In Webster's Dictionary, "inaccurate" has been defined as:
"not accurate, not exact or correct; not according to truth; erroneous;
as an inaccurate statement, copy or transcript."
15. It signifies a deliberate act of 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.
16. The term 'inaccurate particulars' is not defined. Furnishing of an
assessment of value of the property may not by itself be furnishing of
inaccurate particulars. Even if the explanations are taken recourse to, a
finding has to be arrived at having regard clause (a) of Explanation 1 that the
Assessing Officer 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 be found
as of fact that he has not disclosed all the facts which was material to the computation
of his income.
17. The explanation having regard to the decision of this Court must be
preceded by a finding as to how and as to in what manner he furnished the
particulars of his income. It is beyond any doubt or dispute that for the said
purpose the Income Tax Officer must arrive at its satisfaction in this behalf.
[See Commissioner of Income Tax v. Ram Commercial Enterprises Ltd., 246 ITR
568 and Diwan Enterprises v. Commissioner of Income Tax, 246 ITR 571].
18. The order imposing penalty is quasi-criminal in nature and, thus, burden
lies on the department to establish that the assessee had concealed his income.
Since burden of proof in penalty proceedings varies from that in the assessment
proceeding, a finding in an assessment proceeding that a particular receipt is
income cannot automatically be adopted, though a finding in the assessment
proceeding constitute good evidence in the penalty proceeding. In the penalty
proceedings, thus, the authorities must consider the matter afresh as the question
has to be considered from a different angle.
19. It is now a well-settled principle of law that the more is the stringent
law, more strict construction thereof would be necessary. Even when the burden
is required to be discharged by an assessee, it would not be as heavy as the
prosecution. [See P.N. Krishna Lal and Others v. Govt. of Kerala and Another,
1995 Supp (2) SCC 187]
20. The omission of the word "deliberate", thus, may not be of
21. Section 271(1)(c) remains a penal statute. Rule of strict construction
shall apply thereto. Ingredients of imposing penalty remains the same. The
purpose of the legislature that it is meant to be deterrent to tax evasion is
evidenced by the increase in the quantum of penalty, from 20% under the 1922
Act to 300% in 1985.
22. 'Concealment of income' and 'furnishing of inaccurate particulars' carry
different connotations. Concealment refers to deliberate act on the part of the
assessee. A mere omission or negligence would not constitute a deliberate act
of suppressio veri or suggestio falsi.
23. We may notice that in Commissioner of Income-Tax v. Jeevan Lal Sah 1994
(205) ITR 244, this Court dealt with the amendment of Section 271(1)(C) made in
the year 1964 to hold :
"Even after the amendment of 1964, the penalty proceedings, it is
evident, continue to be penal proceedings. Similarly, the question whether the
assessee has concealed the particulars of his income or has furnished
inaccurate particulars of his income continues to remain a question of fact.
Whether the Explanation has made a difference is while deciding the said
question of fact the presumption created by it has to be applied, which has the
effect of shifting the burden of proof. The entire material on record has to be
considered keeping in mind the said presumption and a finding recorded."
24. The question came for consideration of this Court yet again in K.C.
Builders and Anr v. Assistant Commissioner of Income-Tax 2004 (265) ITR 562
= (2004) 5 SCC 731), wherein it was held :
"One of the amendments made to the abovementioned provisions is the
omission of the word 'deliberately' from the expression 'deliberately furnished
inaccurate particulars of such income'. It is implicit in the word 'concealed'
that there has been a deliberate act on the part of the assessee. The meaning
of the word 'concealment' as found in Shorter Oxfort English Dictionary, third
edition, Volume I, is as follows :
'In law, the intentional suppression of truth or fact known, to the injury
or prejudice of another.' The word 'concealment' inherently carried with it the
element of mens rea. Therefore, the mere fact that some figure or some
particulars have been disclosed by itself, even if it takes out the case from
the purview of non-disclosure, it cannot by itself, even if it takes out the
case from the purview of non-disclosure, it cannot by itself take out the case
from the purview of non-disclosure, it cannot by itself take out the case from
the purview of furnishing inaccurate particulars. Mere omission from the return
of an item of receipt does neither amount to concealment nor deliberate
furnishing of inaccurate particulars of income unless and until there is some
evidence to show or some circumstances found from which it can be gathered that
the omission was attributable to an intention or desire on the part of the
assessee to hide or conceal the income so as to avoid the imposition of tax
thereon. In order that a penalty under Section 271(1)(iii) may be imposed, it
has to be proved that the assessee has consciously made the concealment or
furnished inaccurate particulars of his income."
25. The said principle has been reiterated in M/s Virtual Soft Systems Ltd.
v. Commissioner of Income Tax, Delhi 2007 (2) SCALE 612, where it was held :
"24. Section 271 of the Act is a penal provision and there are well
established principles for the interpretation of such a penal provision. Such a
provision has to be construed strictly and narrowly and not widely or with the
object of advancing the object and intention of the legislature."
26. Referring to a large number of decisions, it was furthermore observed :
"27. Every statutory provision for imposition of penalty has two
(i) That which lays down the conditions for imposition of penalty.
(ii) That which provides for computation of the quantum of penalty.
Section 271(1)(c) and clause (iiii) relate to the conditions for imposition
of penalty, whereas, on the other hand , Explanation 4 to Section 271(1)(c)
relates to the computation of the quantum of penalty.
28. The provisions of Section 271(1)(c)(iii) prior to 1.4.1976, and after
its amendment by the Finance Act, 1975 with effect from 1.4.1976, later
provisions being applicable to the assessment year in question, being
substantially the same except that in place of the word 'income' in sub clause
(iii) to sub clause (c) of Section 271 prior to its amendment by Finance Act,
1975, the expression "amount of tax sought to be evaded" have been
substituted. Explanation 4 inserted for the purpose of clause (iii) where the
expression "the amount of tax sought to be evaded", was inserted had
in fact made no difference in so far as the main criteria, namely, absence of
tax continued to exist, prior to or after 1.4.1976, changing only the measure
or the scale as to the working of the penalty which earlier was with reference
to the 'income' and after the amendment related to the 'tax sought to be
evaded'. The sine qua non which was there prior or after the amendment on
1.4.1976 to the fact that there must be a positive income resulting in tax
before any penalty could be levied continued to exist. The penalty imposed was
in 'addition to any tax'. If there was no tax, no penalty could be levied. The
return filed declaring loss and assessment made at a reduced loss did not
warrant any levy of penalty within the meaning of Section 271(1)(c)(iii) with
or without Explanation 4."
27. In Commissioner of Income Tax, Indore v. Suresh Chandra Mital (2003) 11
SCC 729, whereupon Mr. Datta, learned Additional Solicitor General relied, no
reason was assigned and only the order of the High Court was not interfered
with. Therein, it appears, the assessee pleaded that he had submitted the
revised return of income which was not found to be sufficient.
28. In M. Janardhana Rao v. Joint Commissioner of Income Tax (2005) 2 SCC
324, whereupon again reliance was placed by Mr. Datta, this Court was concerned
with the meaning of the substantial question of law as obtaining in Section
271A of the Income Tax Act. We are not concerned with the said question in the
29. It is not a case where penalty has been imposed for breach of
contravention of a commercial statute where lack of or intention to contravene
or existence of bona fie may not be of much importance. It is also not a case
where penalty is mandatorily impossible. It was, therefore, not a case where
the enabling provision should have been invoked.
30. For the reasons aforementioned the impugned judgment cannot be sustained
which is set aside accordingly. The appeal is allowed. However, in the facts
and circumstances of this case, there shall be no order as to costs.