Commissioner of Income Tax vs A. Hariraman

P.D. Dinakaran, J.—The above tax case appeal is directed against the order of the Income Tax Appellate Tribunal in dated 25.8.2005

made in ITA No. 1678/Mds/1999, raising the following substantial questions of law.

Whether on the facts and in the circumstances of the case, the Income Tax Appellate Tribunal was right in deleting the penalty, even though the

assessee was concealed any income or furnished inaccurate particulars of income under the meaning of section 271(1)(c) of the Income Tax Act?

(2) Whether on the facts and in the circumstances of the case, the Income Tax Appellate Tribunal was right in cancelling the penalty u/s 271(1)(c),

on the ground the assessee''s income computed by the assessing officer is a net loss?

The facts which led to the rise of the above appeal by the revenue are as under.

The assessee publishes and prints five tamil magazines, apart from doing job works, in the name of M/s. Parvathy Publication and M/s. Parvathy

Art Printers. The assessee filed the return admitting a loss of Rs. 9,45,242/- for the assessment year 1992-93. On perusal of the account books,

the assessing officer came to the conclusion that an attempt had been made to reconcile paper purchases account by making transfer entries and

inflation of paper purchases account etc. and treating the purchases of Rs. 3,07,172/- and Rs. 4,00,723/- made from Kothandapani Paper Stores

and Karpagam Agencies as bogus purchases, added the same to the total income, thereby computing the loss at Rs. 19,874/- and consequently,

initiated penalty proceedings u/s 271(1)(c) of the Act. Hence, the assessee preferred an appeal before the Commissioner of Income Tax

(Appeals), who dismissed the appeal confirming the penalty levied. The Income Tax Appellate Tribunal, on appeal, allowed the appeal in favour of

the assessee holding that quantum proceeding and penalty proceeding are separate and because of the quantum, penalty cannot be levied

automatically. Hence, the present appeal by the revenue.

It would be appropriate to refer Section 271(1)(c) of the Act in this regard, which reads as under:

Failure to furnish returns, comply with notices, concealment of income etc.

(1) If the Assessing Officer or the Commissioner (Appeals) or the the Commissioner in the course of any proceedings under this Act, is satisfied

that any person-

(a) ...

(b) ...

(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, -

(i) Omitted by the Direct Tax Laws (Amendment) Act, 1989, with effect from 1.4.1989

(ii) in the cases referred to in clause (b), in addition to tax, if any, payable by him, a sum of ten thousand rupees for each such failure;

(iii) in the cases referred to in clause (c), in addition to tax, if any, payable by him, a sum which shall not be less than, but which shall not exceed

three times, 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.

The words ""in addition to tax, if any, payable him"" employed in clauses (ii) and (iii) above and the words ""amount of tax sought to be evaded by

reason of such concealment of particulars of his income"" employed in clause (iii) of Section 271(1)(c) of the Act are the deciding factors for

invoking penalty proceedings u/s 271(1)(c) of the Act. A plain reading of clauses (ii) and (iii) in Section 271(1)(c) of the Act, particularly in the

context of the words ""in addition to tax, if any, payable him"" employed in clauses (ii) and (iii) would make it clear that the penalty contemplated in

all the above clauses is a measure of tax payable by the assessee. In other words, if no tax is payable by the assessee, there would be no penalty

which could be levied on the assessee.

4.2. As per the language in Section 271(1)(c) of the Act, there could be no case in which penalty could be levied where no tax is payable by the

assessee since the quantification of the penalty is totally dependent upon the tax payable by the assessee. Therefore, the conclusion is irresistible

that when the assessee is not liable to pay any tax, no penalty can be levied on the assessee, vide ADDITIONAL COMMISSIONER OF Income

Tax, MADRAS-II Vs. MURUGAN TIMBER DEPOT., .

4.3. It is trite law that the loss cannot be taken into account in computing penalty. Similarly, the amount representing unexplained credit cannot be

treated as concealed income for levying penalty, vide Commissioner of Income Tax Vs. C.R. Niranjan, .

4.4. The word ""income"" occurring in clause (c) and (iii) of Section 271(1) of the Act refers to positive income only and not a loss. Penalty could be

imposed only in addition to the tax payable. When there is no tax payable, the question of any penalty does not arise. In fact, evasion of tax is the

sine qua non for imposition of penalty. If there is no taxable income or tax assessed for payment during a particular year, the question of evasion

and consequently, penalty do not arise. The penal provisions of Section 271(1)(c), therefore, are attracted only in the case of an assessee having

positive income and not loss, as the question of concealment of income to avoid payment of tax would arise only in the former case. Penalty is a

deterrent measure to prevent evasion of tax and when there was no tax payable, there could be any such evasion so as to provide a scope for

levying any penalty, vide Commissioner of Income Tax Vs. Prithipal Singh and Co., .

4.5. The view taken by the Punjab & Haryana High Court in Commissioner of Income Tax Vs. Prithipal Singh and Co., was upheld by the

Supreme Court in Commissioner of Income Tax Vs. Prithipal Singh and Co., .

4.6. This Court, in Ramnath Goenka (Decd. by L. Rs.) Vs. Commissioner of Income Tax, , following the decisions cited above, held that penalty

is imposable only in cases where tax has been levied and that no penalty can be levied when the result of the computation made by the assessing

officer is a loss. In other words, penalty is not leviable when the assessment did not show any taxable income, but net loss.

Applying the ratio laid down in the decisions cited supra, we do not find any error or illegality in the order of the Tribunal in deleting the penalty

taking into account the income of the assessee is a net loss. Finding no substantial question of law arising for consideration, the appeal is dismissed.