Commissioner of Income Tax vs J.K.A. Rajappa Chettiar

Balasubrahmanyan, J.—The question in these two cases relates to two penalties, one in sum of Rs. 5,00,000 for 1963-64, and the other in

the sum of R. 36,712 for 1964-65, originally levied on the assessee by the IAC and subsequently cancelled by the Income- tax Appellate Tribunal.

The penalties were levied under s. 271(1)(c) of the I.T. Act, 1961. The IAC found concealment in the original returns filed by the assessee,

although those returns filed by the assessee did not have to be acted upon or inquired into by the assessing officer, because even before the Officer

could take them up, the assessee had made a voluntary disclosure under s. 68 of the Finance Act, 1965, and also filed revised returns for the two

assessment years in questions. It was on the basis of the revised returns that the Department pursued the voluntary disclosure proceedings and

completed the assessments on estimates which, in appeal, were substituted by lesser estimates by the AAC. In the penalty proceedings, however,

the IAC took the view that for imposing penalties on an assessee, it was enough that the initial returns filed by the assessee were proved to be false

returns even if the Department did not have to take note of them for purposes of assessment. The Tribunal, however, went into the whole course of

assessment proceedings in this case in order to find out whether the assessee was guilty of concealment of income. The Tribunal found that the

assessee possessed ""actual user''s licences"" for import of art silk yarn, but instead of importing the yarn and manufacturing textiles out of it in

accordance with the licence terms, the assessee had sold, at a profit, all his licences in the market, in which practically everyone else like these

assessee was selling import licences. The Tribunal further fount that although the assessee filed hi original returns on the footing that he had eked

out a modest income from exploiting the import licences, soon after his premises were raided by the enforcement authorities, the assessee came out

with a voluntary disclosure to the Income Tax Department. The Tribunal pointed out that at the time of the assessee''s making the voluntary

disclosure and filing his revised returns, the ITO had not taken any steps to pursue the assessee''s original returns or institute any inquiries to find

out if those returns were true or false. The Tribunal also found that in making the voluntary disclosure, the assessee was handicapped in the matter

of furnishing full particulars, since his accounts and records had already been destroyed for fear of criminal proceeding by the enforcement

authorities. The Tribunal observed that a correct assessment of the assessee''s profit on the sale of the licences had, therefore, to be made only of

estimates based chiefly on the market quotations for premia on licences during the material period. According to the Tribunal, the course of

assessment proceedings showed that they were only based on the assessee''s own representation of the real nature of his business as well as the

true source of his profits and, further, even the quantification of the assessments was made only on these basis of mere estimates and not on the

basis of any actual discovery of concealed income.

These were the considerations which weighed with the Tribunal when they cancelled the penalties, holding that no concealment had been made

out by the IAC. The question is whether the concealment of the penalties, in these circumstances, can be justified on a true construction and

application of s. 271(1)(c) of the Act.

Mr. Jayaraman, learned counsel for the Revenue, urged that the Tribunal''s approach in this case was quite wrong. On the other hand, according

to the learned counsel, the IAC had applied the law correctly when he took, as his basis, the original returns and found that the incomes disclosed

by the assessee in those return were false on the basis of the assessee''s own subsequent voluntary disclosure and revised returns. Learned counsel

submitted that penalty is leviable under s. 271(1)(c) where the ITO is satisfied that the assessee has concealed particulars of his income.

Concealment, according to learned counsel, may be established in different ways. If, in a given case, concealment was writ large in the original

return itself, then, Mr. Jayaraman said penalty can be supported on the basis that the return is a false return. The subsequent conduct of the

assessee during the rest of the proceedings cannot, according to learned counsel, take away the concealment in the original return.

The contention of the Department''s learned counsel are not borne out by the language of s. 271(1)(c) of the Act. The true scope of this section

is illustrated, by way of contrast, by what we find in another provision in the Act, namely s. 277. This section renders punishable a false return, or,

rather, a false verification in a return. Construing this section, this court in A.D. Jayaveerapandia Nadar and Co. and Others Vs. Income Tax

Officer, pointed out that the gist of the offence under s. 277 was a verification made by an assessee which is false and which he either knows or

believes to be false or does not believe to be true. According to this court''s decision in that case, the fact that an assessee, after filing a return,

agrees to an addition in the assessment does not falsify the return; nor does it operate in the other way and exonerate the assessee from

prosecution. The false verification must be held to be indictable on its own terms. section 271(1)(c), on the contrary, enables the officer to levy

penalty only if he is satisfied, in the course of any proceedings, that the assessee has concealed particulars of his income. The section does not

particularly focus the penalising officer''s attention to the assessee''s return of income alone. Mark the words ""in the course of any proceedings"".

The officer has to work on a larger canvass, as it were, of the whole gamut of the assessment proceedings, in order to be able to spell out

concealment. He cannot proceed to levy penalty by concentrating on any particular return filed by the assessee or any particular aspect in any such

return to the entire exclusion of any other consideration relating to the conduct of the assessee in the course of the assessment proceedings. An

assessment under the I. T. Act is seldom done in a trice or based upon the assessee''s return alone. The return, after all, is in a tabular form

prescribed under the rules. The form and its columns can hold only the bare minimum of information. Apart from the statutory duty of the officer to

give a hearing to the assessee before concluding the assessment, the process of assessment itself, in actual practice, would ordinarily take more

than one sitting between the officer and the assessee, for mutual discussion, especially of item which are either under controversy or require

clarification or elucidation. It is during these sittings or hearings, or ""inquiry"", as it is described by the marginal note to s. 142, that the final shape of

the assessment emerges. In the very nature of things, a perusal of the return of income alone would give an inadequate or even a misleading idea of

the course of assessment proceedings. For, return is but the starting point of the proceedings, and even in the best of assessments, the return alone

cannot give a true indication of the course and thrust of the proceedings. When, therefore, s. 271(1)(c) speaks about the ITO having to be satisfied

in the course of any proceedings"", it means that the officer''s satisfaction must be obtained on an appraisal of the stand taken by the assessee in the

whole course of the proceedings and not merely in his formal return of income.

In the present case, it is quite true that the assessee was found to have filed his original returns which could by no mean, be regarded as true

returns, even on a mere comparison with what the assessee himself subsequently furnish by way of revised returns. But it is a significant factor in

this case that these original returns were not pursued by the ITO but were kept aside for the reason that the whole inquiry as to the assessee''

taxable income came to be orientated on the basis of his voluntary disclosure and revised returns. As we earlier indicated, the pertinent inquiry

under s. 271(1)(c) is, not whether the return is true or false, but whether the assessee ""in the course of any (assessment) proceedings"" had

concealed particulars of his income. As the Tribunal said, ever since the date when the assessee filed his voluntary disclosure, the labours of both

the assessee and the Department were directed to finding out what would be the estimate of the assessee''s profit from the sale of licence which

would, as nearly as possible, be close to reality, especially in the absence of factual date available either with the assessee or with the Department.

We also agree with the Tribunal in holding that where, on the basis of a true disclosure of the assessee''s source of income and where, in the

absence of direct materials, the determination of the taxable income has got to be taken up as a matter for estimate, the question of concealment of

income hardly arise. We are, therefore, satisfied that the Tribunal was justified, on the facts of this case, in recording a finding that there was no

concealment of particulars of income by the assessee.

Mr. Jayaraman submitted that to support the conclusion of the Tribunal in this case would be to go against an earlier decision of this court in

Commissioner of Income Tax Vs. J.K.A. Subramania Chettiar, . In that case, an assessee against whom penalty action was started under s.

271(1)(c) contended that penalty proceedings should not be proceeded with since he had moved the Commissioner of Income Tax for relief under

s. 271(4A) of the Act. This objection was overruled, and a penalty was levied under s. 271(1)(c) of the Act. This court upheld the penalty, holding

that the considerations which are relevant for s. 271(4A) are foreign to the scope of s. 271(1)(c) of the Act. Another point raised before the court

by the assessee in that case was that in the connected assessment proceedings, he had filed a revised return showing the correct income and,

therefor, penalty cannot be levied on the basis that the original return did not disclose the true income. This contention was also replied. The court

went into the rationale behind the statutory provision enabling the assessee to file a revised return. The court pointed out that a revised return can

be filed by an assessee only in a case where an omission or a wrong statement in the original return was discovered and not to enable an assessee

to expiate himself from a false return.

We do not regard the above decision as a complete tract on the construction or s. 271(1)(c). The court, in that case, was merely minding to

deal with and dispose of contentions raised before them, one based on s. 271(4A) and the other based on s. 139(4) of the Act. There was no

attempt in that case to define what would be the proper subject of discourse on the issue as to concealment, much less an attempt to construe the

expression ""in the course of any proceedings"" under this Act occurring in s. 271(1)(c). We are, therefore, not constricted in any manner in basing

our decision in the present case on our view of s. 271(1)(c). It does not appear that the Tribunal''s view of s. 271(1)(c) was in very way similar to

ours. Nevertheless, their conclusion on the facts in with our view of the relevant statutory provisions.

The result is that we must answer the following two questions of law in the affirmative and in favour of the assessee.

Whether, on the facts and in the circumstances of the case, the Appellate Tribunal was justified in deleting the penalty of Rs. 5,00,000 levied for

the assessment year 1963-64 u/s 271(1)(c) of the Income Tax Act, 1961, on the ground that there was no concealment of income ?

Whether, on the facts and in the circumstances of the case, and having regard to the Explanation to section 271(1)(c) of the Income Tax Act,

1961, the Appellate Tribunal was justified in deleting the penalty of Rs. 36,712 levied for the assessment year 1964-65 u/s 271(1)(c) of the

Income Tax Act, 1961, on the ground that there was no concealment of income ?

Since the Department has lost in both the references, we award costs to the assessee. Counsel''s fee Rs. 500 (one set).