COMMISSIONER OF INCOME-TAX VS PRATHI HARDWARE STORES, 1994 PTD-ORISSA-HIGH-COURT-INDIA 989 (1993)

Income-tax---

----Penalty---Concealment of income---Cash credits---Credits found in accounts---No proper explanation regarding credits---Presumption that credits represent concealed income---No rebuttal of presumption---Levy of penalty-- Valid---Indian Income Tax Act, 1961, S.271(1)(c).

Section 271(1)(c) of the Indian Income Tax Act, 1961, is attracted where in the course of any proceedings under the Act, the Assessing Officer or the first appellate authority is satisfied that (a) any person has concealed particulars of his income, or (b) has furnished, inaccurate particulars of such income. The expressions "has concealed" and "has furnished inaccurate particulars" have not been defined either in the section or elsewhere in the Act. However, notwithstanding differences in the two circumstances, they lead to the same effect, viz., keeping off a certain portion, of income. The former is direct while the latter may be indirect in its execution. The position of law on or after April 1, 1976, is that where, in respect of any item of credit, (a) the assessee fails to offer an explanation, or (b) the assessee offers ad explanation which the taxing officer considers to be false, or (c) the assessee offers an explanation but no material or evidence to substantiate it, he shall be deemed to have concealed such income within the meaning of section 271(1)(c). What sections 68, 69, 69A, 69B and 69C deem for the purpose of assessment was injected for the purpose of penalty by operation of a deemed provision. In essence, the Explanation to section 271(1)(c) (both after 1964 and 1976) is a rule of evidence. Presumptions which are reputable in nature are available, to be drawn. The initial burden of discharging the onus of rebuttal is on the assessee.

The assessee-firm derived income from the sale of hardware goods and paints. For the assessment year 1983-84, relating to the accounting year ending on December 31, 1982, the assessee filed a return of income on July 11, 1983, showing a total income of Rs.38,980. The assessment was completed on a total income of Rs.59,540. During the assessment, the Income Tax Officer observed that the assessee claimed to have obtained a loan of Rs.20,000 from G. The Income-tax Officer examined G but did not accept G s explanation regarding the source of the amount. He treated the amount as income of the assessee from undisclosed sources by application of section 68 of the Act. Proceedings under section 271(1)(c) of the Act were initiated in respect of the addition. The addition by the Income Tax Officer was sustained by the Appellate Assistant Commissioner. Penalty was also imposed but the Appellate Assistant Commissioner cancelled the penalty. The Tribunal observed that though the assessee did not go further in appeal when the Appellate Assistant Commissioner confirmed the addition of Rs.20,000, one did not know whether the said addition would have been confirmed before the Tribunal. It was further observed that disbelieving an explanation does not prove concealment. The Tribunal upheld the order of cancellation. On a reference:

Held, that, in the instant case, the explanation of the assessee so far as genuineness of credit of the lender was concerned was not accepted. The assessee's appeal before the Appellate Assistant Commissioner failed. It was observed that the assessee offered an explanation but no material or evidence to substantiate the same. The Tribunal came to a presumptuous conclusion that the assessee may have succeeded in the appeal, had it come before the Tribunal against the addition. No basis or reason had been indicated for such conclusion. The Tribunal did not consider the case of the assessee keeping in 'view the new Explanation 1 to section 271(1)(c) applicable on and after April 1, 1976. By operation of the Explanation, the onus lay on the assessee and findings given at the time of assessment are relevant and have probative value where the assessee offered nothing beyond the explanation offered at the assessment stage. In such case, it cannot be said that the assessee had discharged the onus even by a preponderance of probabilities. The initial burden, which lay on assessee was not discharged. There was total absence of material to rebut the presumption. The cancellation of penalty was not valid.

CIT v. Anwar Ali (1970) 76 ITR 696 (SC) and CIT v. Mussadilal Ram Bharose (1987) 165 ITR 14 (SC) ref.

A.K. Ray for the Commissioner.

S.N. Ratho for the Assessee.

JUDGMENT

A. PASAYAT, J.---On being moved by the Revenue by an application under section 256(1) of the Income Tax Act, 1961 (in short, "the Act"), the Income-tax Appellate Tribunal, Cuttack Bench, Cuttack (in short, "the Tribunal"), has referred the following question to this Court for opinion:

"Whether, on the facts and in the circumstances of the case, the Tribunal was legally justified in confirming the order of the Appellate Assistant Commissioner deleting the penalty imposed on the assessee under section 271(1)(c) of the Income Tax Act, 1961?"'

The reference relates to Messrs Prathi Hardware Stores (hereinafter referred to as "the assessee").

The background facts as called out from the statement of case arc as follow: -

The assessee is a partnership firm deriving income from the sale of hardware goods and paints. For the assessment year 1983-84, relating to the accounting year ending on December 31, 1982, the assessee filed a return of income on July 11, 1983, showing a total income of Rs.38,980. The assessment -assessment, was completed on a total income of Rs.59,540. During the assessment, the Income Tax Officer observed that the assessee claimed to have obtained a loan of Rs.20,000 from Sri R.V.P. Ganapati Rao on different occasions. The Income Tax Officer examined the said Ganapati Rao who admitted to have advanced the loan and explained that this mount was saved out of commission, which he had earned as commission agent. According to him, the amount was not kept in the bank because of an apprehension that, if the fact of his having the amount was known to his brother, he would have been forced/ persuaded to use the amount in the business of his brother, which he did not want to do. The Income Tax Officer did not accept the explanation and treated the amount as income of the assessee from undisclosed sources by the application of section 68 of the Act. Proceedings under section 271(1)(c) of the Act were initiated in respect of the addition. The addition made by the Income-tax Officer was sustained by the Appellate Assistant Commissioner of Income-tax, Berhampur Range, Berhampur. In response to the notice under section 274 read with section 271 of the Act, the assessee explained that the creditor having admitted the advance of loan, the burden placed on it has been discharged and, therefore, no case for imposition of penalty was made out. The Income Tax Officer rejected the explanation and imposed penalty of Rs. 10,000.

The matter was carried in appeal before the Appellate Assistant Commissioner who held that the imposition of penalty was not in order. According to him, the onus lies on the Department to prove contumacy of conduct and the expression "concealment" under section 271(1)(c) imports the concept of mens rea and, consequently, the intention of the Legislature appears to be that the assessee is not to be penalized unless the necessary mental element could be spelt out from the materials on record. It was held that the assessee had discharged the primary onus laid upon it and, in the absence of any proof contrary to the probabilities raised by the assessee, penalty cannot be imposed. Further, it was observed that the language used in the penalty notice spoke of concealment and/or furnishing of inaccurate particulars. Though, in the notice, such alternative language is used, a positive 'finding was required to be recorded as to whether there was concealment of income or furnishing of inaccurate particulars of income. It was held that the notice did not specifically mention whether there was concealment or whether' inaccurate particulars of income had been furnished by the assessee and that invalidated the notice. The Revenue carried the matter in appeal before the Tribunal. Considering the submissions of the parties, the tribunal disposed of the appeal by concurring with the conclusions of the Appellate Assistant Commissioner. It was observed that though the assessee did not go further in the appeal when, the Appellate Assistant Commissioner confirmed the additions of Rs.20,000, one does not know whether the said addition would have been confirmed before the Tribunal. It was further observed that disbelieving the explanation does not prove concealment. The ingredients of concealment, according to it, are well-known and the ingredients required to attract penalty proceeding were not established by the Income-tax Officer. The assessee had filed a cross-objection in support of the Appellate Assistant Commissioner's order. Both the Revenue's appeal and cross-objections were dismissed. On being moved by the Revenue, the reference as aforeindicated has been made.

According to learned counsel for the Revenue, the approach of the Tribunal was erroneous. The Tribunal did not apply its minds to the questions raised before it and came to an abrupt conclusion about the justifiability of the Appellate Assistant Commissioner's order. No reason was indicated as to why the view of the Appellate Assistant Commissioner was confirmed. A presumptuous conclusion was arrived at, viz. that the Tribunal may not have approved the addition of Rs.20,000 as income from undisclosed sources had the matter been carried before it. The onus has been wrongly placed on the Revenue and, therefore, the Tribunal was not justified in its conclusion. Learned counsel for the assessee, however, submitted that the question as raised is one of fact and not of law, and mere rejection of the explanation was not sufficient to attract levy of penalty.

At this juncture, it is necessary to refer to the legislative history so far as section 271(1)(c) is concerned. There are three stages of amendment of section 271(1)(c). The periods are (a) prior to April 1, 1964, (b) April 1, 1964 to March 31, 1976, and (c) after April 1, 1976. Originally, the word "deliberately" existed which was omitted by the Finance Act, 1964, with effect from April 1, 1964. An explanation was inserted at the end of subsection (1) of section 271 by the said Finance Act (section 40 of the Finance Act, 1964). In between, by the Finance Act, 1968, the base for levy of penalty became the amount of concealment as against the quantum of tax sought to be avoided under the then existing provisions. Subsequently, further amendments ere brought by the Taxation Laws (Amendment) Act, 1975 (section 61 of the said Amending Act). Four Explanations were substituted for the Explanation introduced by the Finance Act, 1964. The effect of the said amendment, so far as we are concerned, is that where, in respect of facts material to computation of total income of the assessee, he furnishes no explanation, or he cannot substantiate the explanation offered by him, or the explanation offered by him is found to be false, relevant income shall be deemed to be his concealed income. Another change was the base for levy of penalty for concealment. The base, which was made, viz. the concealed income, was again changed to tax sought to be evaded. We are not very much concerned with other changes. The effect of amendment with effect from April 1, 1976, is that a deemed provision was introduced. The provision at the relevant time reads as follows:

"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-- ....

(c) has concealed the particulars of his income or furnished inaccurate particulars of such income,

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

(iii) In the cases referred to in clause (c), in addition to any tax payable by him, a sum which shall not be less than, but which shall not exceed twice, the amount of tax sought to be evaded by reason of the concealment of particulars of - his income or the furnishing of inaccurate particulars of such income:

Provided that, if in a case falling under clause (c), the amount of income (as determined by the Income-tax Officer on assessment) in respect of which the particulars have been concealed or inaccurate particulars have been furnished exceeds a sum of twenty-five thousand rupees, the Income-tax Officer shall not issue any direction for payment by way of penalty without the previous approval of the Inspecting Assistant Commissioner.

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 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 subsection, 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 question of onus is of primary and added importance in legal acrimony. In CIT v. Anwar Ali (1970) 76 ITR 696, the apex Court laid down that, before a person could be visited with a penalty for concealment, etc., the Revenue must prove that the amount in question was the income of the assessee and that he had concealed it with a motive. It was further held that penalty could not be imposed merely because any explanation given by the assessee in regard to the items in question was not believed to be true. The position of law on or after April 1, 1976, is that where, in respect of any item of credit, (a) the assessee fails to offer an explanation, or (b) the assessee offers an explanation which the taxing officer considers to be false, or (c) the assessee offers an explanation but no material or evidence to substantiate it, he shall be deemed to have concealed such income within the meaning of section 271(1)(c). What sections 68, 69, 69A, 69B and 69C deem for the purpose of assessment was injected for the purpose of penalty by operation of a deemed provision. A proviso was added to the new Explanation. It concerns cases where the assessee offers an explanation, which he is not able to substantiate. Consequentially, the provision intended to save such amount from imposition of penalty-, although the same had been added to the assessee's income in the assessment, if the assessee's explanation is found to be bona fide and all facts relating to the same and material to the computation of his total income have been disclosed by him.

Section 271(1)(c) is attracted where, in the course of .any proceedings under the Act, the Assessing Officer or the first appellate authority is satisfied that (a) any person has concealed particulars of his income or (b) has furnished inaccurate particulars of such income. The expressions "has concealed" and "has furnished inaccurate particulars" have not been defined either in the section or elsewhere in the Act. However, notwithstanding differences in the two circumstances, they lead to the same effect, viz. keeping off a certain portion of the income. The former is direct while the latter may be indirect in its execution. The word "conceal" is derived from the Latin word "concelare" which implies "to hide". In Webster's New International Dictionary, the word has been equated "to hide or withdraw from observation; to cover or keep from side; to prevent discovery of; to with hold knowledge of'. There may be cases where the facts may attract both the offences, and in some cases there may be overlapping of the two offences.

If in the facts and circumstances of a particular case and on the materials before it, the Tribunal reaches a conclusion that concealment was not proved, it is a question of fact and no question of law arises from such order. Similarly whether the burden in a given case has been discharged on a set of facts or not is a question of fact. Where a finding of fact arrived at by the Tribunal is based on no material or is perverse or is based on irrelevant; extraneous or inadmissible considerations or is arrived at by application of wrong principles of law, a question of law arises. Where the Tribunal fails to arrive at its own conclusion of fact after due and proper consideration of the entire materials for and against the assessee and cancels the penalty, a question of law arises. Similar is the case where the conclusion of the Tribunal suffer from infirmity on account of relevant materials and evidence being ignored.

A conspectus of the Explanation added by the Finance Act, 1964, and the subsequent substituted Explanations makes it clear that the statute visualized the assessment proceedings and penalty proceedings to be wholly distinct and independent of each other. In essence, the Explanation (both after 1964 and 1976) is a rule of evidence. Presumptions, which are reputable in nature are available to be drawn. The initial burden of discharging the onus of rebuttal is on the assessee. The rationale behind this view is that the basic facts are within the special knowledge of the assessee. Section 100 of the Indian Evidence Act, 1872, gives statutory recognition to this universally accepted rule to evidence. There is no discretion conferred on the Assessing Officer as to whether he can invoke the Explanation or not. Explanation 1, which primarily concerns the case at hand, automatically comes into operation when, in respect of any facts material to the computation of total income of any person, there is failure to offer an explanation or an explanation is offered which is found to be false by the Assessing Officer or the first appellate authority, or an explanation is offered which is not substantiated. In such a case, the amount added or disallowed in computing the total income is deemed to represent the income in respect of which particulars have been concealed: As per the provision of Explanation 1, the onus to establish that the explanation offered was bona fide and all facts relating to the same and material to the computation of his income have been disclosed by him will be on the person charged with concealment. Mere failure to substantiate the explanation is not enough to warrant penalty. The Revenue has to establish that the explanation offered was not substantiated. The provision of explanation 1 is concerned only with cases coming under clause (B) of the Explanation, where the assessee offered an explanation, which he was not able to substantiate. The explanation of the assessee for the purpose of avoidance of penalty must be an acceptable explanation; it should not be a fantastic or fanciful one. As indicated above, the consequence follows as a matter of law. The burden is on the assessee. If he fails to discharge that burden, the presumption that he had concealed the income or furnished inaccurate particulars thereof is available to be drawn. 't

The principal logical import of the explanation is to shift the burden of proof from the Revenue on to the assessee. The rebuttal must be on material- relevant and cogent. It is for the fact-finding body to judge the relevancy and sufficiency of the materials. If such a fact-finding body, bearing the aforesaid principles in mind, comes to the conclusion that the assessee has discharged the onus, it becomes a conclusion of fact, and no question of law arises. A observed earlier, the initial burden is on the assessee. Once the initial burden is discharged, the assessee would be out of the mischief unless further evidence i,, adduced. It is plain on principle that it is not the law that the moment any fantastic or unacceptable explanation is offered, the burden placed would be discharged and the presumption rebutted. As pointed out by the apex Court in, CIT v. Mussadilal Ram Bharose (1987) 165 ITR 14, the burden placed upon the assessee is not discharged by any fantastic explanation. It must be an explanation acceptable to the fact-finding body.

The position on and after April 1, 1976 is clear that where, in respect of any item of credit, the assessee has offered an explanation which the taxing officer has considered to be false or the assessee has offered an explanation; but no material or evidence to substantiate it, he shall be deemed to have concealed such income within the meaning of section 271(1)(c). A further condition was imposed with effect from September 10, 1986, with which we are not concerned. In the case at hand, the explanation of the assessee so far the genuineness of credit of the lender was concerned was not accepted. The assessee's appeal before the Appellate Assistant Commissioner failed. It was observed that the assessee offered an explanation but no material or evidence to substantiate the same. The. Tribunal came to a presumptuous conclusion that the assessee may have succeeded in the appeal had it come before the Tribunal against the addition. No basis or reason has been indicated for such conclusion. A narration of facts would go to show that the Appellate Assistant Commissioner and. the Tribunal did not consider the case of assessee keeping in view the new Explanation 1 applicable on and after April 1, 1976. By operation of the Explanation, the onus lay on the assessee and findings given a the time of assessment are relevant and have probative value where the assessee offered nothing beyond the explanation offered at the assessment stage. In such cases, it cannot be said that the assessee had discharged the onus even by a preponderance of probabilities. The initial burden, which lay on the assessee, was not discharged. There was total absence of material to rebut the presumption. The assessee's plea does not stand the test of preponderance o probabilities.

In our considered opinion, therefore, the Appellate Assistant Commissioner and the Tribunal erred in holding that penalty was not imposable. Accordingly, we answer the question referred to us in the negative, in favour of the Revenue and against the assessee. No costs.

D.M. PATNAIK, J.---I agree.

M.BA./193/T.F.Reference answered.