Commissioner of Income Tax vs Smt. Chanchal Katyal

The Income Tax Appellate Tribunal, Delhi has referred the following question of law u/s 256(1) of the Income Tax Act, 1961 (hereinafter referred to as ''the Act'') for opinion of this Court:

Whether on the facts and circumstances of the case, the I.T.A.T. was correctin law in holding that the ingredient of Section 271(1)(c) of the Income Tax Act,1961 was not present in this case and penalty u/s 271(1)(c) was not pexigible?

The reference relates to the assessment year 1980-81. In respect of the penalty imposed u/s 271 (1)(c) of the Act.

Briefly stated the facts giving rise of the present reference are as follows:

The assessee is an individual and is doing proprietary business of a job-work in leather tanning in the name of M/s. Vijay Industries, Kanpur. Return showing net loss of Rs. 38,314 was filed on 1-3-1983 in compliance to notice issued u/s 148 of the Act. The assessment in this case was, however, completed vide order dated 14-3-1985 on total income of Rs. 2,29,030 which, inter alia, included disallowance under section36(1)(iii) of interest of Rs. 1,98,607 on the debit balance in the name of M/s. Mohan General Trading Company, Calcutta and M/s. Mallik & Co., HUF, Kanpur. During the course of assessment proceedings, it was found by the Assessing Officer that the assessee had received huge loans from the various persons who were mostly close relatives of the assessee and also paid substantial interest amounting to Rs. 2,33,434 to them on their respective deposits. It was further found by him that the assessee had shown receipts of interest of Rs. 17,500 only on the advances given to M/s. Ideal Glass Co. It was also found by him that the assessee had given substantial loans to M/s. Mohan General Trading Company, Calcutta and M/s. Mallik & Co., HUF, Kanpur and she had not charged interest from them with a view to divert the interest income and also payment of Income Tax was avoided on such income. Accordingly, the assessing officer made the above disallowance of Rs. 1,98,607. Penally proceedings u/s 271(1)(c) of the Act was also initiated. The assessing officer vide order dated 28-9-1987 levied penalty of Rs. 1,95,693 u/s 271(1)(c) of the Act. The assessee had filed appeal against the above penalty order. The Commissioner (Appeals) vide order in Appeal No. Commissioner (Appeals)/633/II(5)/1987-88, dated 25-2-1988 confirmed the levy of penalty holding that the assessee was guilty of concealment of income and was liable for penalty u/s 271(1)(c) of the Act. However, at the same time, the Commissioner (Appeals) reduced the quantum of penalty to minimum at Rs. 1,30,467 and allowed relief of Rs. 65,226 to the assessee. Thereafter, the assessee had filed second appeal against the above order of Commissioner (Appeals). The Tribunal vide order in I.T.A. No. 875 (All.)/ 1988, dated 27-4-1993 have cancelled the aforesaid penalty order on the ground that the ingredient of Section 271(1)(c) of the Act was not present in this case and, therefore, the penalty u/s 271(1)(c) of the Act is not exigible. It was also held by the Tribunal in quantum appeal that the addition was justified but that fact by itself will not justify the imposition of penalty u/s 271(1)(c) of the Act. It has further been held by the Tribunal that the rejection of some explanation given by the assessee is sufficient to uphold the addition in the quantum appeal but some thing p more is needed to support the levy of penalty u/s 271(1)(c) of the Act.

We have heard Shri R.K. Upadhyaya, learned standing Counsel appearing for the revenue and Shri Shakeel Ahmad, learned Counsel appearing for the respondent-assessee.

It is relevant to mention, here that in the penalty proceedings, the Income Tax Officer had specifically mentioned that at the time of penalty u/s 271(1)(c) of the Act, the assessee has not given reply to the show-cause notice to the Income Tax Officer which only confirms the view taken at the time of assessment proceedings and shows that the assessee does not have anything to say in this regard. He had further mentioned that the factual evidence which has come out in this case also shows that it is not a case of mere rejection of the explanation of the assessee but it is a case where mens rea and the element of deliberateness stands proved. The Tribunal has, however, deleted the penalty without considering Clause (A) of Explanation 1 of Section 271(1)(c) of the Act. Explanation 1 as it stood during the relevant assessment year is reproduced below:

Explanation 1.- Where in respect of any facts material to the computation of the total income of any person under this Act,-

(A) such person fails to offer an explanation or offers an explanation which is found by the Income Tax Officer or the Appellate Assistant Commissioner or the Commissioner (Appeals) to be false, or

(B) such 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 concealed:

Provided 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 bona fide and all the facts relating to the same and material to the computation of his total income have been disclosed by him.

The Tribunal had merely observed as follows :

After hearing the rival submissions and after going through the materials placed before us we are of the view that the ingredient of Section 271(1)(c) of the Act was not present in this case, and therefore, the penalty u/s 271(1)(c) of the Act is not exigible. It is true that the quantum appeal the addition was justified but that fact by itself will not justify the imposition ofkpenalty u/s 271(1)(c) of the Act.

The rejection of some explanation given by the assessee is sufficient to upheld the addition in the quantum appeal but something is needed to support the levy u/s 271(1)(c) of the Act. Judicial support in this view can be seen in the case reported in Commissioner of Income Tax Vs. Devi Dayal Aluminium Industries (Pvt.) Limited, and Cement Marketing Co. of India Ltd. Vs. Assistant Commissioner of Sales Tax, Indore and Others, . Thus we allow the appeal of the assessee and cancel the penalty levied u/s 271(1)(c) of the Act.

As in the present case, we find that the assessee has not offered any explanation, Clause (A) of Explanation 1 was clearly attracted and, therefore, the Tribunal was not justified in deleting the penalty.

We, accordingly, answer the question referred to us in the negative, i.e., in favour of the revenue and against the assessee. There will be no order as to costs.