IMPORTANT POINT
Tribunal was not right in deleting the penalty for concealment of income levied u/s 271(1)(c) of Income Tax Act, 1961 on the ground that the ITO in the proposal u/s 271(1)(c) had not specifically referred to Explanation (1)(B) to Section 271(1)(c) under which penalty was initiated. Kerala High Court has taken right view in this case and the contrary view in 203 ITR 792 (Bom.) and 204 ITR 462 (Bom.) are not correct.

Headnote:Income Tax Act, 1961-Sections 271(1)(c) and Explanation (1B) of Section 271(1)(c)- Penalty for concealment of income or inaccurate particulars of income-Explanation (1B) creating deeming concealment if declared income is less than 80% of assessed income-Bombay High Court holding "...in the absence of invoking the explanation specifically, the burden would remain on the revenue to bring the assessee s case within the mischief of the main provision of Section 271(1)(c) of the Act"-Kerala High Court disagreeing-Whether Bombay view is correct ? (No)-Appeal dismissed.
Held : We find it difficult to accept as correct the two judgments aforementioned. The Explanation to Section 271(1)(c) is a part of Section 271. When the Income-tax Officer or the Appellate Assistant Commissioner issues to an assessee a notice under Section 271, he makes the assessee aware that the provisions thereof are to be used against him. These provisions include the Explanation. By reason of the Explanation, where the total income returned by the assessee is less than 80 per cent of the total income assessed under Sections 143 or 144 or 147, reduced to the extent therein provided, the assessee is deemed to have concealed the particulars of his income or furnished inaccurate particulars thereof, unless he proves that the failure to return the correct income did not arise from any fraud or neglect on his part. The assessee is, therefore, by virtue of the notice under Section 271 put to notice that if he does not prove, in the circumstances stated in the Explanation, that his failure to return his correct income was not due to fraud or neglect, he shall be deemed to have concealed the particulars of his income or furnished inaccurate particulars thereof and, consequently, be liable to the penalty provided by that Section. No express invocation of the Explanation to Section 271 in the notice under Section 271 is, in our view, necessary before the provisions of the Explanation therein are applied. The High Court at Bombay was, therefore, in error in the view that it took and the Division Bench in the impugned judgment was right Learned counsel for the assessee then drew our attention to the judgment of this Court in Sir Shadilal Sugar and General Mills Ltd. & Anr. v. Commissioner of Income-Tax, Delhi (168 ITR 705). He submitted that the assessee had agreed to the additions to his income referred to hereinabove to buy peace and it did not follow therefrom that the amount that was agreed to be added was concealed income. That it did not follow that the amount agreed to be added was concealed income is undoubtedly what was laid down by this Court in the case of Sir Shadilal Sugar and General Mills Ltd. and that, therefore, the Revenue was required to prove the mens rea of a quasi-criminal offence. But it was because of the view taken in this and other judgments that the Explanation to Section 271 was added. By reason of the addition of that Explanation, the view taken in this case can no longer be said to be applicable. The appeal is, therefore, dismissed with costs. (Paras 10, 11 and 12)

JUDGMENT

Bharucha, J.-High Court answered in the negative and in favour of the Revenue the following questions :

"1. Whether, on the facts and in the circumstances of the case, the Tribunal is right in law and fact, in deleting the penalty levied under Section 271(1)(c) of the I.T. Act?

2. Whether, on the facts and in the circumstances of the case, the Tribunal is right in law and fact, in holding that this is an agreed assessment on the basis of which penalty is not leviable?

3. Whether, on the facts and in the circumstances of the case, the Tribunal is right in law and facts, in holding that penalty cannot be levied as the assessing officer in the proposal under Section 271(1)(c) had not referred to Explanation (1B) to Section 271(1)(c) ?"

2. The assessee is in appeal by special leave.

3 . For the assessment year 1986-87 the assessee, which is a partnership firm, filed a return of income which stated that its total income was Rs. 6,76,890/-. The assessment was completed determining the total income of the assessee at Rs.7,90,170/-. This included a sum of Rs.93,000/- assessed as income from other sources.

4. The assessee purchased rice from suppliers in Andhra Pradesh. The rice was some times sent directly and payment therefor was made by demand draft or telegraphic transfer. During the course of the assessment proceedings the Assessing Officer noticed that a demand draft and a telegraphic transfer were not entered by the assessee in its cash book on the dates on which the same were purchased and made, respectively. A demand draft of Rs. 50,000/- had been purchased on 27th January, 1986 in favour of M/s. Sree Jayalaxmi Enterprises, Byravapatanam, Andhra Pradesh, but, in the assessee s accounts, this amount was entered only on 4th February, 1986. The assessee had made a telegraphic transfer through the Andhra Bank, Calicut on 24th March, 1986 to Madavenkataratanam & Others, Bhimavaram, Andhra Pradesh; this transaction again was entered only 24th April, 1986, when these were pointed out to the assessee, it submitted a letter dated 28th August, 1989 stating that as sufficient cash balance was not available to it on the dates of the transactions, it had obtained hand loans from friends and, as it expected to repay such loans within a short time, no entries were made in the books of accounts in respect thereof. The letter also stated that since it was unable to furnish evidence for such loans, it offered the amount of Rs.93,000/- as additional income. The assessment was accordingly made treating the sum of Rs.93,000/- as unexplained investment.

5. Penalty proceedings were then initiated against the assessee under Section 271(1)(c) of the Income Tax Act, 1961. The Assessing Officer found the assessee s explanation in regard to the loans to be unacceptable and noted that it had itself offered the addition of Rs. 93,000/-. Applying Explanation (1B) of Section 271(1)(c), the Assessing Officer imposed upon the assessee the penalty of Rs.37,975/-.

6. The appeal filed by the assessee was dismissed. The assessee then preferred an appeal to the Income Tax Tribunal. The Tribunal allowed the appeal. Arising out of the order of the Tribunal the questions noted above were placed for the consideration of the High Court. The High Court was not persuaded to agree with the view that had been taken by the High Court at Bombay in Commissioner of Income-Tax v. P.M. Shah1 in regard to the Explanation to Section 271(1)(c), and that this is the principal question that we are called upon to consider.

7. The relevant portion of Section 271 reads thus :

"271(1)-If the Income Tax Officer or the Appellate Assistant Commissioner, in the course of any proceedings under this Act, is satisfied that any person......

he may direct that such person shall pay by way of penalty,-..........

(iii) in the cases refer

Click Here to Read the rest of this document