N. Ranjit vs Commissioner of Income Tax

Chitra Venkataraman, J.—This Tax Case Appeal, relating to the assessment year 2002-03, filed by the assessee against the order of the

Tribunal challenging the levy of penalty, was admitted on the following substantial questions of law:

Whether on the facts and in the circumstances of the case, the Tribunal was justified in holding that there was concealment warranting levy of

penalty u/s 271(1)(c)?

Whether on the facts and in the circumstances of the case, the Tribunal was justified in concluding that the revised return filed on 9.5.2005 was

not voluntary even though notice u/s 148 was issued only on 14.12.2005 and the enquiry by the DDI also pertained only to the later assessment

years?

Whether the Tribunal was justified in its conclusion that penalty was leviable, by ignoring that the difference arise only due to the methodology of

computing the capital gains on the sale of shares and not due to their non-disclosure in the original return?

The assessee is an individual. He filed return of income on 29.07.2002, admitting salary income of Rs. 21,07,645/-. On 11.03.2005, there was an

enquiry by the Investigation Unit I(3), Chennai, in the assessee''s wife''s case as regards certain mutual fund transaction made by her. In the course

of enquiry, a statement was recorded from the assessee herein on 01.04.2005. On 09.05.2005, the assessee herein is stated to have filed a

revised return for the year 2002-03, wherein, he offered an amount of Rs. 79,08,118/- under the head of ''capital gains''.

On 14.12.2005, a notice u/s 148 of the Income Tax Act was issued, requesting revised return and on the assessee filing the revised returns, the

assessment was completed, thereby assessing long-term capital gains. After completion of assessment, penalty proceedings were initiated u/s

271(1)(c) of the Income Tax Act, on the incorrect particulars of income disclosed in the original returns. The assessee resisted the said proposal,

contending that the assessee had filed the details of the share transactions in its returns for the assessment year 2004-05 filed on 16.02.2005 and

that even before the receipt of notice, he had paid the tax thereon in addition to the TDS. There was no addition to the income to the revised

returns for 2002-2003 filed by him on 09.05.2005 and hence, no concealment of income could be held to have been detected by the Authority.

He pointed out that he was originally allotted 75000 shares of HCL Technologies in January, 1998 at a face value of Rs. 2/- each. Subsequently,

during the assessment year 2002-03, he had bought and sold the said shares many times, which did not yield any profit during assessment year

2002-03 and hence, was not included in his return for the assessment year 2002-03. However, while he was going through the records and the

case laws for preparing the answers to the questions during the investigation, the assessee found that the method adopted for calculating the profit

was incorrect. Thereafterwards, the right method of FIFO to calculate the profits was adopted. As the original shares were acquired by the

assessee at very low rates, the revised calculation yielded large profits; hence, no concealment or inaccurate particulars could be attributed to the

assessee. He pointed out that the filing of revised returns was voluntary and was made to set right the error that had crept in the original returns;

that there was no mala fide intention in filing a wrong return or in concealing the particulars of the income, in his original return. In the

circumstances, he prayed for dropping of the proceedings.

The Assessing Officer, however, rejected the said contention and pointed out to the chronological order of events that had taken place, leading

to the filing of the revised return. The Assessing Officer pointed out that prior to 2005, the Investigation Wing of the Department received an

information from CIB on the mutual fund transactions by Mrs. Kanchana, the assessee''s wife. Thereupon, Kanchana, wife of the assessee, was

called upon to show the source of huge funding for investment in mutual funds. This led to further investigation. During the course of recording of

sworn statement dated 01.04.2005, the assessee did not admit the transactions in shares and the source of acquisition of shares.

After referring to the statements recorded and the answers to the queries raised, the Assessing Officer pointed out that confronted with the

situation that the Department had evidence against the assessee as regards the earning of income on the transaction in shares, the assessee was

forced to admit the same by filing revised returns, admitting long term capital gains of Rs. 79,08,118/-. Thus, looking at the conduct of the

assessee, the Assessing Officer came to the conclusion that there was no voluntaries on the part of the assessee in filing the revised return. Thus the

wilful act of concealment of particulars and furnishing inaccurate particulars being there, he levied minimum penalty of Rs. 8,06,628/-.

Aggrieved by this levy of penalty, the assessee went on appeal before the Commissioner of Income Tax (Appeals), who agreed with the

assessee that there was no justification for levy of penalty. He reasoned out that the Assessing Officer had not given any explanation in the order of

assessment on the disclosure of capital gains arising on the sale of shares; that the Officer had not given any explanation as to why he had not taken

any action till 14.12.2005, the date on which Section 148 proceedings were taken. The penalty order did not anywhere bring out the fact that the

assessee had in his possession, the details of escapement of income under the head ""capital gains"" for the assessment year 2002-03 prior to

09.05.2005, on which date the assessee filed revised return, offering a sum of Rs. 79,08,118/- as income under the head ""capital gains"". In the

circumstances, the first Appellate Authority cancelled the levy of penalty, holding that there was no justification to uphold the same. Aggrieved by

this order, the Revenue went on appeal before the Income Tax Appellate Tribunal.

The Revenue took the contention that during the assessment proceedings for the assessment year 2005-06, the Officer went through the

statement filed by the assessee in respect of the loan amount advanced to his wife and found out that she had made investment in shares during the

earlier years, including the years under consideration; that Revenue was in possession of information regarding the shares purchased by the

assessee held in his name and not disclosed in the original return filed by him; that the enquiry with the wife of the assessee about her investment

kick-started further investigation. Thus, realising the piquant situation, the assessee had filed the revised returns, which is subsequent to the

incorrect returns filed by him originally.

On hearing both sides, the Tribunal pointed out that the Investigation Unit of the Department considered the letter dated 11.03.2005 and the

statement of the assessee was recorded by the DDIT on 01.04.2005 and only subsequently thereon, the assessee filed the return on 09.05.2005,

including the sum relating to the capital gains received on the sale of shares. The assessment u/s 143(3) read with Section 147 of the Income Tax

Act was completed on 27.12.2006, accepting the second return of income, which was to be treated as return in response to the notice u/s 148 of

the Income Tax Act. The Tribunal pointed out it was no doubt true that there was no specific satisfaction recorded during the course of assessment

proceedings. However, considering Clause (IB) of Explanation 7 to Section 271(1)(c) of the Income Tax Act, the said requirement was necessary

while making the assessment. Considering the fact that the second return itself came to be filed only after detection, the contumacious conduct of

the assessee in not disclosing the gains earned in the share transaction certainly warranted levy of penalty. The Tribunal pointed out that the modus

operandi adopted by the assessee in filing the revised return on being discovered during the investigation made by the Revenue; there was no

compulsion for filing a revised return. Yet, the mere filing of the revised return would not be sufficient to exonerate the conduct of the assessee in

not originally disclosing the amount earned on capital gains on the sale of the shares. Thus, even if the Department had not come across any

tangible evidence as regards concealment, yet, when admittedly the original return failed to disclose the assessable income and on investigation,

ultimately led to the filing of the revised income, the question of accepting the case of the assessee as regards bona fides, did not arise. The

Tribunal pointed out that the revised returns filed clearly showed the attempt of the assessee to pre-empt any action on the part of the Department

from taking any further investigation. In the circumstances, the culpability in the conduct of the assessee in the background of the facts stated,

attracted the penal provisions of the Act. Aggrieved by this, the present Tax Case Appeal has been filed by the assessee.

Learned counsel appearing for the assessee strenuously argued that there was no allegation of concealment in the assessment order on the

assessment made u/s 143(3) read with Section 147 of the Income Tax Act. He further pointed out that there was a difference in the methodology

of calculation of capital gains and hence, he immediately volunteered to file revised returns, disclosing the details and paid the tax thereon and

hence, there was no evasion of tax on the assessment made u/s 143(3) read with Section 147 of the Income Tax Act, to hold that there was

concealment of income. In fact, the assessment itself was based on the revised returns filed by the assessee. In the circumstances, he submitted that

it was incorrect to say that the Revenue had found huge transactions in shares, calling for addition to the assessment. He further pointed out that the

investigation itself was with reference to the assessee''s wife''s investment and there was no investigation as such, on the assessee, to hold that there

was concealment of particulars of income. In the circumstances, in the absence of any mens rea or lack of bona fides found on the part of the

assessee, the penal provisions are not attracted in this regard. Hence, the Tribunal committed serious error in confirming the order of penalty. In

this regard, he placed reliance on the decision of this Court reported in CIT Vs. Ample Properties Ltd., .

We do not find any justifiable ground to set aside the order of the Tribunal, upholding the levy of penalty u/s 271(1)(c) of the Income Tax Act.

We may immediately point out herein that the above decision of this Court referred to by the assessee, does not, in any manner, advance the cause

of the assessee, since, on facts, this Court accepted the reasoning of the Tribunal and cancelled the levy of penalty. The addition in that case itself

arose on account of the assessee agreeing on the addition of income on the percentage of profit. Thus, when the assessment itself was completed

as per the direction of the appellate authority adopting 1% of profit, which is not based on any material but based on an offer to purchase peace,

this Court held that penalty could not be levied. Contrary to the assertion of the assessee, the facts herein clearly point out to the contumacious

conduct of the assessee that but for the investigation and the enquiry made by the Revenue, the revised returns would not have come as regards the

income relating to the capital gains, arising on the sale of shares.

It is seen from the facts that the enquiry herein made by the DDI was initiated under letter dated 11.03.2005 and a statement was recorded on

11.04.2005. Based on the enquiry, the revised return was filed by the assessee on 09.05.2005, offering an income of Rs. 79,08,118/- under the

head of capital gains. The original return filed made no reference to the sale of shares at all and it merely indicated the salary income received by

the assessee.

It may be of relevance to point out herein that leaving aside the valuation on shares, there is hardly any indication as regards the transaction in

shares, which, even accepting the assessee''s case, had not been a loss. Thus, when confronted with the question on the source of funds on the

investment made in mutual fund by the assessee''s wife, the assessee took his opportunity first to file the revised returns to set his assessment in

order. The fact that the assessee had filed revised returns and the same was accepted, by itself, however, does not efface the fact of non-

disclosure of the income arising under the head of ""capital gains"" in the original return. In the background of this conduct, we do not find any

acceptable ground to set aside the order of the Tribunal as held by the Apex Court in a series of decisions. It is not that every case of addition

warrants levy of penalty. The application of penal provisions are not automatic and the levy itself depends upon the facts and circumstances of each

case. On the incorrectness of the returns originally filed, not disclosing the transaction in shares, the proceedings subsequent to the statement filed

certainly indicates the conduct of the assessee. Thus in view of the decision of the Apex Court reported in Union of India (UOI) Vs. Rajasthan

Spinning and Weaving Mills, on the law propounded on penalty, we reject this Tax Case Appeal and thereby confirm the order of the Tribunal.

In the result, the Tax Case Appeal stands dismissed. No costs.