Commissioner of Income Tax vs Chandrakant M. Tolia

Thanikkachalam J.

In pursuance of the direction given by this court in T. C. P. Nos. 422 and 423 of 1977, u/s 256(2) of the Income Tax Act, 1961, the Tribunal

referred the following two questions for the opinion of this court :

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

the assessment years 1962-63 and 1963-64 ?

(2) Whether the Appellate Tribunal''s finding that there was no fraud, gross of willful neglect on the part of the assessee is based on valid materials

and is a reasonable view to take on the facts of the case ?

The assessee is an individual deriving share income from various firms and was also carrying on agency business individually and deriving income

from dividend, sitting fees, etc. For the assessment years 1962-63 and 1963-64, assessments were originally completed on a total income of Rs.

24,567 and Rs. 21,417, respectively. It came to be known subsequently that the assessee borrowed loans on hundis and that such loans were not

real and were bogus in nature. The Income Tax Officer, therefore, reopened the assessments for the assessment years 1962-63 and 1963-64 u/s

147(a) of the Income Tax Act, 1961, and the alleged hundi credits of Rs. 1,80,000 and Rs. 75,000, respectively, were brought to tax since the

assessee was unable to discharge the onus u/s 68 of the Income Tax Act, 1961. Interest on such unproved hundi credits was also disallowed. In

the course of reassessment proceedings, the Income Tax Officer initiated penalty proceedings u/s 271(1)(c) of the Income Tax Act, 1961, and

referred the case to the Inspecting Assistant Commissioner u/s 274(2). In the meanwhile, the Appellate Assistant Commissioner and the Tribunal

confirmed the reassessments in quantum appeals.

In the course of penalty proceedings, the Inspecting Assistant commissioner found that the alleged hundi loans really represented the concealed

income of the assessee and, after invoking the Explanation to section 271(1)(c) of the Act, he held that penalty is exigible in the case of the

assessee and, accordingly, levied penalties of Rs. 1,86,814 and Rs. 98,608, respectively, for the assessment years 1962-63 and 1963-64.

On further appeals, the Tribunal, following its earlier orders in the case of the same assessee for the assessment years 1964-65 and 1965-66 in

T. T. A. No. 209/MDS/1973-74 and I. T. A. No. 687/MDS/72-73, dated January 22, 1975, allowed the appeals and cancelled the penalties in

both the assessment years under consideration.

Before us, learned standing counsel for the Department submitted as under : Penalty u/s 271(1)(c) of the Income Tax Act, 1961, is exigible in

the case of the assessee for the assessment years under consideration. It is not correct to state that the law applicable in the matter of levying

penalty on concealment should be that law prevailing on the date when the return was filed. The reassessment were completed on March 22,

1973, and hence the law prevailing on that date should be made applicable in this case. In other words, the law, as it stood on the date when the

concerned authority is satisfied that there is concealment, should be applied in this case. Therefore, section 271(1)(c) with the Explanation is stood

on the date when the Inspecting Assistant Commissioner found concealment is applicable to the facts of this case. But the Tribunal was not correct

in applying the principle laid down in Commissioner of Income Tax, West Bengal I, and Another Vs. Anwar Ali, . If the Explanation to section

271(1)(c) is applicable, then the initial burden is on the assessee to prove that there to discharge the initial burden placed upon him. Since the

Explanation to section 271(1)(c) is applicable, the decision of Supreme Court in this case. Therefore, it was submitted that the Tribunal was not

correct in cancelling the penalties levied u/s 271(1)(c) of the Income Tax Act, 1961, for both the assessment years under consideration.

On the other hand, learned counsel appearing for the assessee submitted as under : The law as it stood on the date when the return was file

alone should be made applicable. The Explanation to section 271(1)(c) would not be applicable to the facts of this case. In fact, the Tribunal, after

taking into consideration the Explanation to section 271(1)(c), came to the conclusion that penalty is not exigible in the case of the assessee. The

Tribunal was correct in following the decision of the Supreme Court in the case of Commissioner of Income Tax, West Bengal I, and Another Vs.

Anwar Ali, and in cancelling the penalties. The assessee produced discharged hundis as prima facie evidence to explain the credits appearing in his

accounts. The provisions of section 28(1) (c) of the Indian Income Tax Act, 1922, alone would be applicable for the appeals relating to the

assessment years 1962-63 and 1963-64. In view of the various decisions rendered u/s 28 of the Indian Income Tax Act, 1922, the assessee

should be deemed to have discharged the burden of proof placed on him when he produced the discharged hundis. Hundis are negotiable

instruments and discharged hundis are sufficient proof of the loans. Though the credits appear in the books relating to the assessment year 1962-

63, the loans related to a period 12 years back. The assessee had furnished the particulars of the parties as given in the hundis and it will be too

much to call upon the assessee after a lapse of 12 years to produce the parties. During the original assessment proceedings, the assessee produced

the particulars to the Income Tax Officer who, after necessary investigation, was satisfied with the explanation offered by the assessee. In fact, the

assessee produced the addressed of the creditors as stated in the hundis to discharge the burden placed upon him and if the Department is not

satisfied, then it is for the Department to take steps to examine the concerned parties. But, on the side of the Department, there is no evidence to

disprove the explanation offered by the assessee. It was, therefore, pleaded that the Tribunal was correct in cancelling the penalties.

The assessee (since deceased) was partner in four firms, viz., (1) M/s. C. J. Seth and Company, Madras (2) M/s. Rathod Trading Company,

Madras (3) M/s. Pagada Metal Industries and (4) C. J. Sheth and Company, Bangalore. The assessee was also carrying in an agency business

and was deriving income by way of dividends, sitting fees, etc. For the assessment year 1962-63, the return of income was originally filed on

March 21, 1963, admitting a total income of Rs. 21,988. The assessment was completed on a total income of Rs. 24,567. Subsequently, this

assessment was reopened u/s 147(a) as there were hundis credits and interest relating thereto. The reassessment u/s 143(3) read with section

147(a) of the Income Tax Act, 1961, was finalised on March 22, 1973, on a total income of Rs. 2,43,060, which included a sum of Rs. 1,80,000

as unproved hundi credits.

Similarly, for the assessment year 1963-64, the return of income was originally filed on January 21, 1964, admitting a total income of Rs.

16,448 and the assessment was finalised on a total income of Rs. 21,417. Since there was hundi credits and interest relating thereto, the

assessment was subsequently reopened u/s 147(a) and the reassessment was finalised on March 22, 1973, on a total income of Rs. 1,26,610 and

this included the unproved hundi credits of Rs. 76,000 and interest relating thereto. Both the Appellate Assistant Commissioner and the Tribunal

confirmed the additions made in the reassessments. No revised returns were filed for both these assessment years under consideration.

While completing the reassessment proceedings, the Inspecting Assistant Commissioner initiated penalty proceedings u/s 271(1)(c) of the Act in

both the assessment years under consideration. The assessee offered an explanation that additions on hundis were not justified an necessary

evidence was produced to prove the genuineness of the hundi credits and that, for the later assessment years 1964-65 and 1965-66, the penalties

were cancelled by the Tribunal on the ground that the additions did not represent the concealed income. However, the Inspecting Assistant

Commissioner was not convinced by the explanation offered by the assessee and levied a penalty of Rs. 1,86,814 for the assessment year 1962-

63 and Rs. 98,608 for the assessment year 1963-64 u/s 271(1)(c) of the Act.

Learned standing counsel for the Department contended that, in the matter of levying penalty for concealment, the law which stood on the date

when the Inspecting Assistant Commissioner was satisfied that there was concealment alone should be made applicable. Thus, according to

learned standing counsel for the Department, the penalty for concealment in the present case should be levied u/s 271(1)(c) read with the

Explanation introduced by the Finance Act, 1964.

According to learned counsel for the assessee, the Explanation to section 271(1)(c) would not be applicable to the present case and the

proper provision of law applicable in the present case is section 28(1) (c) of the 1922 Act, or section 271(1)(c) as it stood before the amendment,

which introduced the Explanation with effect from April 1, 1964.

According to section 28(1)(c) of the 1922 Act, penalty is exigible when the assessee has concealed the particulars of his income or

deliberately furnished inaccurate particulars of such income. This sub-section was bodily lifted and incorporated in section 271(1)(c) of the 1961

Act. But, with effect from April 1, 1964, introduced an amendment by inserting an Explanation. The true legal import of the Explanation is to shift

the burden of proof from the Department to the shoulders of the assessee in the kind of case where the returned income was less than 80% of the

income assessed by the Department. The onus of proof for rebooting these presumptions lies on the assessee. This burden, however, can be

discharged by a preponderance of evidence. It is permissible in the penalty proceedings for the assessee to show and prove that, on the existing

material itself, the presumption raised by the Explanation stands rebutted.

In the instant case, the Tribunal followed the ratio of the decision of the Supreme Court in the case of the Commissioner of Income Tax, West

Bengal I, and Another Vs. Anwar Ali, in cancelling the penalties. Further, while considering the stand taken by the Department that the Explanation

to section 271(1)(c) applies, the Tribunal pointed out that the assessee had produced before the Income Tax Officer the discharged hundis and

there were no circumstances to indicate that the assessee''s failure to disclose the added amounts in the returns filed by him was due to any fraud or

willful neglect on his part.

The Explanation to section 271(1)(c) was introduced by the Finance Act, 1964, with effect from April 1, 1964. The Supreme Court decided

Commissioner of Income Tax, West Bengal I, and Another Vs. Anwar Ali, on April 29, 1970, i.e., six years after the introduction of the

Explanation. Therefore, it is not correct to state that the Finance Act, 1964, was passed to override the ratio of Commissioner of Income Tax,

West Bengal I, and Another Vs. Anwar Ali, . The assessment year involved in Commissioner of Income Tax, West Bengal I, and Another Vs.

Anwar Ali, was 1947-48. Therefore, in that case, the Supreme Court was concerned with section 28(1) (c) of the Act of 1922. It remains to be

seen that neither the Finance Act, 1964, nor the Explanation adder to section 271(1)(c) was taken into consideration by the Supreme Court in

Commissioner of Income Tax, West Bengal I, and Another Vs. Anwar Ali, . Therefore, before the passing of the Finance Act, 1964, and the

introduction of the Explanation to section 271(1)(c), the ratio of the decision in Commissioner of Income Tax, West Bengal I, and Another Vs.

Anwar Ali, held the field.

Section 271(1) makes appropriate provisions for levying penalties on assessee in different eventualities. One is for non-filling of the returns or

delay in filling the returns without reasonable cause. The other is for non-comeliness with the statutory notice for production of accounts and

documents when summoned for an enquiry. The last one is for concealment of income. Each one of these penalty provisions has two limbs. One

limb deals with the conditions precedent for initiating penalty action and assumption of jurisdiction of the authority concerned. This limb is

separately enacted in each of the clauses (a), (b) and (c) of sub-section (1) of section 271. The other limb of the penalty provision is the

substantive provision which deals with the actual imposition of the liability for penalty and the quantification thereof. This limb is found enacted

respectively in clauses (i), (ii) and (iii) of sub-section (1) of section 271. This, however, cannot mean that the two limbs have to be read separately

and distinctively. Ordinarily, penalty can be imposed under one or more of the circumstances mentioned in clauses (a), (b) and (c) of section 271

and the quantum of penalty is prescribed in clauses (i), (ii) and (iii) of the self-same sub-section.

In Jain Bros. and Others Vs. The Union of India (UOI) and Others, , the Supreme Court has held that both sections 271(1) and 297(2)(g)

have to be read together and in harmony and so read the only conclusion possible is that for the imposition of a penalty in respect of any

assessment for the year ending on March 31, 1962, or any earlier year, the assessment, reassessment or fresh assessment for which is completed

on or after April 1, 1962, the proceedings have to be initiated and the penalty imposed in accordance with the provisions of section 271 of the Act

of 1961. This will be so even if the return is filed before April 1, 1962, and the assessment is completed by virtue of section 297(2) under the Act

of 1961. The position thus is that an assessee would be liable to penalty as provided in section 271(1) for the default mentioned in section 28(1) of

the 1922 Act, if his case falls u/s 297(2)(g) and the provisions of section 271 will apply mutatis mutandis to proceedings relating to penalty initiated

in accordance with section 297(2)(g). This is based upon the principle that penalty proceedings are not essentially a continuation of the

proceedings relating to assessment where a return has been filed and that, for the imposition of penalty, it is not the assessment year or the date of

filing of the return which is important, but it is the satisfaction of the Income Tax authorities that a default has been committed by the assessee which

would attract the provisions relating to penalty whatever be the stage at which the satisfaction is arrived. The scheme of sections 274(1) and 275 of

the Act is that the order imposing penalty must be made after the completion of the assessment. The crucial date, therefore, for the purpose of

penalty is the date of such completion.

It remains to be seen that section 297 is meant to provide as far as possible for all the contingencies which may arise out of the repeal of the

Act of 1922. Clauses (f) and (g) of section 297(2) make a classification for purposes of completion of penalty proceedings by reference to the

date on which the assessment is completed. The crucial date for imposition of penalty is the date of completion of the assessment. Clause (g)

constitutes an exception to the general principle but the law to be applied is that in force on the date when the default which attracts penalty is

committed. It enacts that, in respect of the assessment years prior to 1962-63, if the assessment is completed on or after April 1, 1962, penalty

may be levied under the provisions of the 1961 Act. This clause which is constitutional and does not violate the fundamental rights attracts section

271 and the other penalty provisions of the present Act, even if the default was committed and detected in the course of proceedings under the

1922 Act. In a case covered by this clause, the quantum of penalty should be determined with reference to the provisions of section 271 of the Act

and not section 28 of the 1922 Act.

Since the satisfaction of the Income Tax Officer is the condition precedent for the exercise of power u/s 271, i.e., satisfaction that there was

concealment or furnishing of inaccurate particulars under clause (c) of that sub-section, it must be arrived at aligned - before the penalty

proceedings are commenced. Thus, the formation of satisfaction by the Income Tax Officer in the course of assessment proceedings or, as the

case may be, reassessment proceedings, is sufficient to form the basis for initiation of penalty proceedings which can then be commenced at any

time later.

In Brij Mohan Vs. Commissioner of Income Tax , New Delhi, , the Supreme Court has laid down that where penalties are imposed for

concealment of particulars of income, it is the law ruling on the date on which the act of concealment takes place which is relevant. It is wholly

immaterial that the income concealed was to be assessed in relation to an assessment year in the past. It was observed that, in the case of a

penalty, penalty is imposed on account of a commission of a wrongful act and plainly it is the law operating on the date on which the wrong is

committed which determines the penalty. Therefore, where the concealment of income took place, where the returns for the assessment year

1961-62 and 1962-63 were filed long before the amendment of section 271 with effect from April 1, 1968, penalty for such concealment of

income was held leviable in accordance with the provisions of section 271 of the Act as they stood prior to the amendment and not after the

amendment, even where the penalty proceedings had been initiated after the amendment came into force.

But it is significant to note that, in this decision, section 297(2)(g) of the 1961 Act was not considered.

A similar question came up for consideration before this court in the case of Commissioner of Income Tax Vs. C.J. Sheth, in which one of us

(Ratnam J.) was a party wherein this court held that (headnote), ""in this case, the original assessment was completed in August, 1960; the

reassessment was completed only in 1972. Hence, u/s 297(2)(g) of the Act of 1961, penalty proceedings could be initiated only u/s 271 of the Act

of 1961 and not u/s 28(1) (c) of the Act of 1922. The entire facts and materials considered during the reassessment proceedings established

clearly and cogently that there had been concealment of income and the Explanation to section 271(1)(c) applied. The assessee had not attempted

to discharge the presumption of concealment. The levy of penalty was valid and the quantum of penalty calculated under the provisions of clause

(iii) of section 271(1) was also in order."" This decision was rendered after taking into consideration the following decisions, viz.,

Chuharmal Vs. Commissioner of Income Tax, M.P., ; Commissioner of Income Tax, West Bengal I, and Another Vs. Anwar Ali, ;

Commissioner of Income Tax Vs. Bihar Cotton Mills Limited, ; Commissioner of Income Tax Vs. Mussadilal Ram Bharose, ; Jain Bros. and

Others Vs. The Union of India (UOI) and Others, ; R. Kuppuswamy Chetty Vs. Commissioner of Income Tax, Madras, ; Maya Rani Punj Vs.

Commissioner of Income Tax, Delhi, and Vishwakarma Industries Vs. Commissioner of Income Tax, .

Reliance was placed by the Department on the decision rendered by the Supreme Court in the case of Maya Rani Punj Vs. Commissioner of

Income Tax, Delhi, . According to the facts in that case, for the assessment year 1961-62, the assessee''s return of income had to be filed by

September 28, 1961, but neither was the return filed by that date nor was any extension of time asked for. The return was filed after a delay of

seven months on May 3, 1962, i.e., after the Income Tax Act, 1961, had come into force. The Income Tax Officer initiated proceedings u/s

271(1)(a) of the Act of 1961, and holding that the assessee had not been prevented by any reasonable cause from filling the return within time,

imposed a penalty of Rs. 4,060. The tribunal held that though the penalty was leviable u/s 271(1)(a) of the Act of 1961, the amount of penalty had

to be quantified according to section 28 of the 1922 Act and reduced the penalty to Rs. 400. On a reference, the High Court held that the Tribunal

was not competent to reduce the penalty levied u/s 271(1)(a) of the 1961 Act to a figure lower than the sum equal to 2% of the tax for every

month during which the default continued but not exceeding in the aggregate 50% of the tax. Affirming the decision of the High Court, the Supreme

Court held that the proper provision to apply in this case was the one provided in section 271(1)(a) of the 1961 Act and not the one provided in

section 28 of the 1922 Act. The Supreme Court further pointed out that if a default continued from day to day, the non-performance of that duty

from day to day is a continuing wrong. In this case, the Supreme Court followed the ration of the decision of the Supreme Court in the case of Jain

Bros. and Others Vs. The Union of India (UOI) and Others, .

This decision is concerned with penalty leviable u/s 271(1)(a) of Act, which is a continuing wrong. Therefore, this decision will not render much

assistance in deciding the issue arising in the present case.

In view of the above-said legal position, in the present case, penalty for concealment, if at all leviable, is leviable in accordance with the

provisions contained in section 271(1)(c) of the 1961 Act read with the Explanation thereunder, since the assessments were completed in both the

assessment years under consideration on March 22, 1973, in spite of the fact that the original returns were filed before the introduction of the

Explanation to section 271(1)(c) by the Finance Act, 1964.

Now, what remains to be considered is whether even if the Explanation to section 271(1)(c) is applicable to the facts of the present case, the

Tribunal was justified in cancelling the penalties levied by the Inspecting Assistant Commissioner. Whenever the Explanation to section 271(1)(c) is

attracted, the initial burden of proof is upon the assess to prove that the failure to return the correct income does not arise from any fraud or any

gross upon the assessee by the Explanation has been discharged by him, then the onus shift to the Department to show that the amount to question

constituted his income and not otherwise. If the assessee has tendered proof or the explanation given by him is not satisfactory or convincing

merely on the possibility of its being unlikely, the conclusion that concealment was established has been held to be not warranted.

In the present case, sums of Rs. 2,43,060 for the assessment year 1962-63 and Rs. 1,26,510 for the assessment year 1963-64 were brought

to tax under the head ""Other sources"" only on the ground that the assessee has not explained the genuineness of the transactions evidenced by the

credit entries standing in the names of various multani bankers in his books. The said amounts represented the increase in the peak credits during

the assessment years under consideration. The assessee produced the discharged hundis in proof of the transactions and the assessee was unable

to produce the bankers. The hundi papers are negotiable instruments containing the names and addresses of the creditors. The assessee also

produced his account books where the credits are entered. The assessee, in his letter, explained that, at this distance of time, he was unable to

produce the creditors and if the Department wanted to examine them, it can do so since he has already furnished the addresses of the creditors.

But the fact remains that the Department did not take any steps to summon the creditors.

The onus on the assessee under the Explanation to section 271(1)(c) to prove that the failure to return the correct income did not arise from

any fraud or willful neglect on his part is not absolute, but rebuttable and is negative. The negative burden placed upon the assessee by the

Explanation is discharged if the assessee offers some explanation for his failure to return the income as assessed, which is consistent with his not

being fraudulent or wilfully negligent and the Tribunal, on the basis of the material on record and as a prudent person, should consider it to be

reasonable probable. Thus, before an assessee is mulcted with penalty, all the circumstances and developments till the assessment is completed

should be taken into consideration and, if the collective effect of the situation is to show that the failure to return the correct income was not on

account of fraud or willful neglect, the assessee should not be penalised.

The assessee was called upon to produce the bankers. But the assessee expressed his inability to do so, because these creditors appeared in

the books during the year relating to 1962-63 and the loans related to a period of more than 12 years to produce the creditors. While

disapproving this kind of attitude of the Department, this court in the case of S. Hastimal Vs. Commissioner of Income Tax, Madras, , held as

under :

The Tribunal, however, has not chosen to accept the assessee''s case on grounds which we are unable to appreciate. The Tribunal, commenting

upon the fact that the books of account of the assessee were kept only at Phalodi, that pakka and katcha roker of the assessee at Phalodi had not

been produced, and that the necessary link between the borrowing of Vijayaram and the money brought to Coonoor had not been established. As

stated already, with regard to the sum of Rs. 15,000, the assessee produced indisputable documentary evidence to show that the amount came out

of his borrowings at Jodhpur, whether it was from Vijayaram Ganeshdas or from Gowri Shankar Bagdy. The assessee has been able to point out a

source for this sum of Rs. 15,000 and this cannot be refuted by a mere steady disability on the part of the Department or the Tribunal. After the

lapse of ten years, the assessee should not be placed upon the rack and called upon to explain not merely the origin and source of his capital

contribution by the origin of origin and the source of source as well.

In this context, it is significant to note that, while considering the advisory jurisdiction of the High Court over the reference under the Income

Tax Act pertaining to penalty matters, the Supreme Court in the case of Sir Shadi Lal Sugar and General Mills Ltd. and Another Vs.

Commissioner of Income Tax, Delhi, held as under (headnote) :

The appellant had only accepted certain amounts as taxable; it had not been accepted by the appellant that it had deliberately furnished inaccurate

particulars or concealed any income. This was not a case where there was no evidence to support the Tribunal''s conclusion. Nor had the Tribunal

acted on material which was irrelevant to the enquiry or considered material partly relevant and partly irrelevant or based its decision partly on

conjectures, surmises or suspicion. In preferring one view to another view of factual appreciation, the High Court transgressed the limits of its

jurisdiction on a reference in answering the question that it had reframed against the appellant.

In fact, at the time when the original assessments were completed, the assessee produced all these prima facie facts and after necessary

investigation, the Income Tax Officer completed the assessments. From the fact that the additions were sustained by the Tribunal in quantum

appeals, it does not follow that the income nature of those amounts has been established by the Department. In fact, the assessee has produced

prima facie evidence and discharged the initial burden placed upon him. But the Department has not brought out any circumstances to indicate that

the assessee''s failure to disclose the above amounts in the returns filed by him was due to any fraud or willful neglect on his part. Thus, the

Tribunal, after considering the cumulative circumstances arising in this case and on an appraisal of facts, came to the conclusion that even if the

Explanation to section 271(1)(c) is made applicable, penalty for concealment is not exigible in the case of the assessee for the above-said two

assessment years. Therefore, we have come to the conclusion that there is no infirmity in the orders passed by the Tribunal in cancelling the

penalties in these two assessment years under consideration. Accordingly, we answer the questions referred to us in the affirmative and against the

Department. The assessee is entitled to his costs. Counsel''s fee Rs. 500. One set.