Income Tax Ordinance (XXXI of 1979)---

----Ss. 111(2) (c) [as amended by Finance Ordinance (XXVIII of 19841, 13 & 116---Penalty for concealment of income --Procedure to be followed by the Assessing Officer, elaborated.

In the present case when a notice under section 116 of the Ordinance was issued to the assessee, his plea was that the estimate of cost of construction per square foot at Rs.200 as against the declared average cost of construction at Rs.150 was difference of opinion between the assessee and the I.T.O. and, therefore, it should not be taken as deliberate concealment of income. Both the officers below discarded the assessee's plea on the sole ground that under clause (c) of section 111(2) of the Ordinance any addition made under section 13 of the Ordinance was to be treated as concealment.

The precise question for determination in this case was that when an addition is made under section 13 of the Ordinance, was the I.T.O. under obligation to impose a penalty solely on the ground that an addition has been made under section 13 of the Ordinance.

Held the word used in subsection (1) of section 111 of the Ordinance is "may" and not "shall". Therefore, even if an assessing officer comes to the conclusion that the assessee had concealed any part of his income by fiction of law an addition made in the income of the assessee is to be considered as concealed income, still the assessing officer has a discretion to impose or not to impose the penalty. It is for this reason that the law has provided that before imposing the penalty a notice has to be given to the assessee under section 116 of the Ordinance so as to give him a reasonable opportunity of being heard. If the penalty is to be imposed on concealed income automatically then there was hardly, any need to provide an opportunity of being heard to the assessee. The Legislature has provided under section 116 of the Ordinance that a show -cause notice has to be given to the assessee before imposing a penalty meaning thereby that if satisfactory explanation is given by the assessee then the penalty may not be imposed. Mere fact that the assessee's explanation in regard to certain cash credits was not accepted and the amount was assessed at his hands, does not by itself justify the Department to impose penalty. In a case like this where the average cost of construction declared by the assessee was not accepted by the assessing officer and he gave his own estimate, it could not be said with definiteness that what the I.T.O. has estimated is correct. After all the I.T.O. has only made an estimate. Therefore, in such circumstances the assessing officer should be very careful before imposing the penalty. In such cases he should take into consideration the explanation of the assessee and the facts of the case. Unless it is discovered that an assessee has concealed his income deliberately or has furnished inaccurate particulars of his income consciously only then a penalty should be imposed. The circumstances should be such as to lead to the reasonable and positive conclusion that income was deliberately concealed by the assessee: The penalty proceedings are criminal in nature and, therefore, the principles of criminal law have to be kept in view. It has to be seen whether mens rea is available in a case before imposing the penalty. In the present case the addition was made only at Rs.7,500 and the penalty has been imposed at Rs.2,075. There was no material with the assessing officer to hold that what he had estimated as cost of construction was last word. In the absence of such a material it could not be said that what the assessee had declared was a deliberate attempt to furnish inaccurate particulars of income or to conceal his income. Therefore, what clause (c) of subsection (2) of section 111 of the Ordinance lays down is only that by fiction of law any addition made under section 13 is to be treated as concealed income or would be deemed to be furnishing of inaccurate particulars of income. This only gives an edge to the Income Tax Authorities or the Tribunal to presume that in case of such an addition made under section 13 there was an element of concealment or inaccurate furnishing of income. However, this by no means makes it obligatory on the authorities to impose a penalty unless they are satisfied that there was an element of deliberate furnishing of inaccurate particulars of income or concealment of income. In the present case even otherwise the addition was too small to call for a penalty. In these circumstances, it was directed that the penalty imposed should be cancelled.

CIT v. Khonday Eswarse 83 ITR 369 (SC) and CIT v. Muhammad Haneef 83 ITR 215 (SC) ref.

Nemo for Appellant.

D.R. Bilal Khan D.R. for Respondent.

Date of hearing: 14th September, 1992.

ORDER

This is an appeal filed by an individual deriving income as a partner of a firm, namely, S. Khan & Sons, Lahore. This appeal has been filed against the penalty imposed at Rs.2,075 under section 111 of the Income Tax Ordinance, 1979 (hereinafter called the `Ordinance').

2. The facts of the case as disclosed in the impugned orders are that the assessee's income from partnership firm was accepted by the assessing officer but an addition of Rs.7,500 was made under section 13(1)(d) of the Ordinance. This addition was made in the following circumstances: --

"The assessee had constructed a study room and disclosed cost of construction at Rs.150 per sq 4.ft. The ITO regarded this cost of construction as low and determined the cost of construction at Rs.200 per sq. ft. Consequently, the difference of Rs.7,500 was added under section 13(1)(d) of the Ordinance as deemed income of the assessee."

Since any addition made under section 13 is included in the definition of concealed income the ITO imposed a penalty of Rs.2,075 under section 111 of the Ordinance, which has been confirmed in appeal by the learned Appellate Assistant Commissioner and has been contested by the assessee in this appeal.

3. When a notice under section 116 of the Ordinance was issued to the assessee, his plea was that the estimate of cost of construction per square foot at Rs.200 as against the declared average cost of construction at Rs.150 was difference of opinion between the assessee and the I.T.O. and, therefore, it should not be taken as deliberate concealment of income. Both the officers below discarded the assessee's plea on the sole ground that under clause (c) of section 111(2) of the Ordinance any addition made under section 13 of the Ordinance is to be treated as concealment.

4. The precise question for determination in this case is that when an addition is made under section 13 of the Ordinance, is the I.T.O. under obligation to impose a penalty solely on the ground that an addition has been made under section 13 of the Ordinance. I have given my careful consideration to this issue. The aforesaid clause (c) was added by the Finance Ordinance, 1984, so as to include the additions made under section 13 of the Ordinance in the definition of concealment of income for the purposes of subsection (1) of section 111 of the Ordinance. Subsection (1) of section 111 of the Ordinance lays down that where any Income Tax Officer etc., are satisfied that any person has concealed his income or furnished inaccurate particulars of such income, he or it may impose upon such person a penalty .. . From the words underlined it is evident that notwithstanding the fact that any addition made under section 13 of the Ordinance is to be considered as concealed income but the Income Tax Officer or any other authority are not under obligation to impose a penalty. The word used in subsection (1) of section 111 of the Ordinance is "may" and not "shall". Therefore, even if an assessing officer comes to the conclusion that the assessee had concealed any part of his income by fiction of law an addition made in the income of the assessee is to be considered as concealed income, still the assessing officer has a discretion to impose or not to impose the penalty. It is for this reason that the law has provided that before imposing the penalty a notice has to be given to the assessee under section 116 of the Ordinance so as to give him a reasonable opportunity of being heard. If the penalty is to be imposed on concealed income automatically then there was hardly, any need to provide an opportunity of being heard to the assessee. The Legislature has provided under section 116 of the Ordinance that a show-cause notice has to be given to the assessee before imposing a penalty meaning thereby that if satisfactory explanation is given by the assessee then the penalty may not be imposed. In CIT v. Khonday Eswarse reported as 83 ITR 369 (SC) the Supreme Court of India held that mere fact that the assessee's explanation in regard to certain cash credits was not accepted and the amount was assessed at his hands, does not by itself justify the Department to impose a penalty. In a case like this where the average cost of construction declared by the assessee was not accepted by the assessing officer and he gave his own estimate, it could not be said with definiteness that what the I.T.O. has estimated is correct. After all the I.T.O. has only made an estimate. Therefore, in such circumstances the assessing officer should be very careful before imposing the penalty. In such cases he should take into consideration the explanation of the assessee and the facts of the case. Unless it is discovered that an assessee has concealed his income deliberately or has furnished inaccurate particulars of his income consciously only then a penalty should be imposed. The circumstances should be such as to lead to the reasonable and positive conclusion that income was deliberately concealed by the assessee. If an authority is needed the judgment of the Supreme Court of India in CIT v. Muhammad Haneef reported as 83 ITR 215 (SC) may be cited. The penalty proceedings are criminal in nature and, therefore, the principles of criminal law have to be kept in view. It has to be seen whether mens rea is available in a case before imposing the penalty. In this particular case the addition was made only at Rs.7,500 and the penalty has been imposed at Rs.2,075. There was no material with the assessing officer to hold that what he had estimated as cost of construction was the last word. In the absence of such a material it could not be said that what the assessee had declared was a deliberate attempt to furnish inaccurate particulars of income or to conceal his income. Therefore, what clause (c) of subsection (2) of section 111 of the Ordinance lays down is only that by fiction of law any addition made under section 13 is to be treated as concealed income or would be deemed to be furnishing of inaccurate particulars of income. This only gives an edge to the Income Tax Authorities or the Tribunal to presume that in case of such an addition made under section 13 there was an element of concealment or inaccurate furnishing of income. However, this by no means makes it obligatory on the authorities to impose a penalty unless they are satisfied that there was an element of deliberate furnishing of inaccurate particulars of income or concealment of income. In this case even otherwise the addition was too small to call for a penalty. In these circumstances, it is directed that the penalty imposed should be cancelled. The appeal succeeds accordingly.

M.BA./1940/TAppeal accepted.