COMMISSIONER OF INCOME TAX vs STANDARD MERCANTILE CO.

By the Court - In this reference under s. 256(1) of the IT Act, 1961 (hereinafter to be called as "the Act") we are concerned with the order passed by the ITAT Patna in the penalty proceeding against the assessee. The assessee is a partnership firm. We are concerned in this reference with the asst. yrs. 1962-64 and 1964-65.

The facts in brief are that the assessees books of account for the aforesaid assessment years were seized by the Sales Tax department. Later, after the assessment under that Act had been completed, the seized books of account were released to one of the partners of the firm. It will be relevant to state here that the Sales Tax authorities formed a conclusion that the assessee had done substantial clandestine business which had not been disclosed in the regular books of account in the proceeding for the assessment under the Act. The assessee was called upon to produce books of account in terms of s. 142(1)(i) of the Act. This notice was in relation to the account books which has been seized by the Sales Tax authorities and had been produced by the firm. The assessee failed to produce the books of account on the plea that while the books were being taken to the residence of one of the partners they were lost in the taxi in which they were being brought. This stand of the assessee did not find favour with the revenue in the assessment proceeding.

Parallel to the assessment proceeding, another proceeding was initiated in regard to the registration of the firm in terms of s. 182 of the Act. The benefit of registration was extended to the assessee by the Tribunal. That matter came up before us for reference in Taxation Case Nos. 57 to 60 of 1976, which was disposed of by us on 1-4-1985 and we held that the assessee having failed to produce the books of account it had forfeited right to favourable treatment in terms of s. 186(2) of the Act. Parallel to the assessment and the registration proceeding there was the present penalty proceeding in terms of s. 271(1)(b) for non-compliance with the notice issued under s. 142(1)(i) of the Act, which has given rise to the present reference.

No explanation worth the name was given by the assessee in the penalty proceeding nor was any endeavour made by the assessee to substantiate the plea for non-production of the document which had been set up in the assessment proceeding and the registration proceeding. The ITO then proceeded to impose penalty upon the assessee. The order of the ITO was subject matter of appeal before the AAC. The AAC with some modification in quantum of penalty upheld the order of the ITO. That led to an appeal by the assessee to the Tribunal. The Tribunal allowed the appeal. The reasons given by the Tribunal for allowing the appeal in the penalty matter was, firstly, that the department had failed to establish that there was any deliberate default on the part of the assessee in not producing the books of account; secondly, that there was no mens rea in the production of the books of account and lastly that the imposition of penalty was discretionary with the taxing authority. The revenue being aggrieved by the under of the Tribunal moved for a reference to this Court. The prayer was allowed and the present reference was made to us. That is how the reference came before us. A consolidated statement of fact has been forwarded to this Court, referring the following question of law for the opinion of this Court :

"Whether on the facts and in the circumstances of this case the Tribunal was correct in law in cancelling the penalties levied under s. 271(1)(b) of the IT Act, 1961 in spite of their finding that the assessee was in default in not complying with the notice under s. 142(1) of the IT Act, 1961 ?"

The outstanding feature which has to be noted in the instant case is that the assessees explanation for non-production of books of account and for non-compliance of the notice under s. 142 of the Act that the books of account had been lost while they were in transit in a taxi, was squarely rejected in the assessment proceeding. It was also rejected in the registration proceeding. It is true that in the matter of levy of penalty the findings of the Tribunal or of the revenue authorities is not conclusive and that it would be open to the assessee to show that there was reasonable cause for non-compliance of the order but it should not be lost sight of that it is for the assessee to show that he has reasonable cause for not complying with order in question. Sec. 271(1)(b) of the Act lays down that if the ITO or the AAC in the course of any proceeding under this Act, is satisfied that any person has without reasonable cause failed to comply with a notice under sub-s. (1) of s. 142 of the Act, he may direct that such person shall pay penalty. The wordings of this section are explicit that a person who has failed to comply with the notice must show reasonable cause. The onus is upon the assessee. Onus may not be very heavy as is upon the prosecution in criminal case. The question of onus may be decided upon probability but it is for the assessee to show that there was reasonable cause. That may be shown either by fresh materials or by the materials already on record.

In a Full Bench decision of this Court in the case of the Commissioner of Income Tax Vs. Nathulal Agarwala and Sons, , Sandhawalia, C.J., observed that within the tax field as such there is no room for bringing in the rules of criminal law and insist on a mens rea or proof beyond all reasonable doubt. Both of us were party to that unanimous Full Bench decision. In that view of the matter, reference to absence of mens rea, or failure of the revenue to establish mens rea is entirely irrelevant.

The observation of the Tribunal that there had been failure of the department to show that there had been deliberate default on the part of the assessee in failing to comply with the notice under s. 142(1)(i) of the Act was equally erroneous. The onus was on the assessee to answer the charge of having failed to comply with he notice under s. 142(1) of the Act. The words of s. 271(1)(b) of the Act that if the revenue is satisfied that any person has, without reasonable cause, failed to comply with a notice under s. 142(1) he shall be liable to penalty are rather crucial. It is obvious, therefore, that the assessee was required to show reasonable cause. That was a matter within special knowledge of the assessee. The revenue could not have known what cause the assessee had for failure to comply with the notice. The AAC categorically held that the story of loss of account books was wholly unreliable. He also held in agreement with the ITO that "the appellant failed without any reasonable cause to comply with the terms of notice under s. 142(1)(b) of the Act". It must be added that in the instant penalty proceeding as well the assessee took no steps to establish that there was any reasonable cause for not complying with the notice under s. 142 of the Act. Despite the findings in the assessment and the registration proceedings, we would have been inclined to consider whether there was any reasonable cause or not, but the entire record shows that no effort worth the name was made by the assessee to show that there was any reasonable cause.

The last aspect which must be considered is the observation of the Tribunal that the imposition of penalty under s. 271(1)(b) is discretionary. This is clearly erroneous. It is true that the words used in s. 271 are that the ITO or the AAC "may direct" that such person shall pay by way of penalty. The expression may in the context in which it has been used must be held to be mandatory. The Tribunal, therefore, erred in that regard as well. Reference to the case of The Commissioner of Income Tax Madras Vs. Khoday Eswarsa and Sons, . Where it was held that it was for the revenue to show that there has been any deliberate default on the part of the assessee for imposition of penalty is entirely misplaced. That is a case prior to the introduction of the Explanation to s. 271(1)(c) of the Act. That case, therefore, has no relevance for the present case before us.

For the reasons stated above, we are of the view that the Tribunal erred in law in setting aside the penalty levied under s. 271(1)(b) of the Act. The question referred to us is, therefore, answered in favour of the revenue and against the assessee. In the circumstances of the case, there shall be no order as to costs.