COMMISSIONER OF INCOME-TAX VS DHOOLIE TEA CO. LTD.
1999 P T D 4102
[231 I T R 65]
[Calcutta High Court (India)]
Before Y. R. Meena and Bijitendra Mohan Mitra, JJ
COMMISSIONER OF INCOME-TAX
Versus
DHOOLIE TEA CO. LTD.
Income-tax Reference No. 196 of 1991, decided on 20/02/1998.
Income-tax---
----Penalty---Concealment of income---Bona fide belief of assessee that income not taxable---Levy of penalty not valid---For levy of penalty Revenue has to prove assessee had knowingly concealed his income ---Assessee, a tea company, selling all its assets---Sale proceeds of tea estates from S under litigation and only one instalment paid to assessee---No interest received from W---W under liquidation and even principal amount from W not recoverable ---Assessee having no income except interest income in relevant years---Method of accounting changed from mercantile to cash system---Bona fide belief of assessee that no taxable income in hands of assessee -after switch over of method of accounting--Levy of penalty not valid---Indian Income Tax Act, 1961, S.271(1)(c).
In cases where the assessee bona fide believed that his income is not taxable and he failed to disclose such income under that bona fide belief, no penalty should be imposed on the assessee under section 271(1)(c) of the Income Tax Act, 1.961. For imposition of penalty under section 271(1)(c) the Revenue has to prove that the assessee had knowingly concealed his income.
The assessments of the assessee, which owned tea estates and maintained its accounts on the mercantile system, were completed under section 143(3) of the Income Tax Act, 1961, at "nil" income for the assessment years 1976-77, 1977-78, 1978-79, 1979-80 and 1981-82. All the assets of the tea estates were sold before the previous years relevant to the assessment years in question. After completion of the assessments, the Income-tax Officer found that some interest was receivable by the assessee on the amounts of sale proceeds of tea estates from S Tea Co., and some interest from W Tea Co. The assessee contended before the Income-tax Officer that the amount of sale proceeds payable by S Tea Co. was under litigation and only one instalment of the sale proceeds had been paid and the second instalment was payable in the year 1976 which had not yet been paid and no interest had been received. Similarly, no interest had been received from W Tea Co. and the company had gone into liquidation and there was no hope of recovery of even the principal amount from it. The assessee also contended that it had no income except the interest income in the relevant years, that it had also changed its method of accounting from the mercantile system to the cash system and that no amount of cash had been received during the previous years relevant to the assessment years in question and that, therefore, there was no taxable income in the hands of the assessee. The assessee further contended that the services of its agent had been terminated. However, in the reassessment proceedings, the Income-tax Officer assessed to tax the interest receivable on the sale proceeds of the amount from S Tea Co. and the interest receivable from W Tea Co, The Income-tax Officer also initiated penalty proceedings under section 271(1)(c) of the Income Tax Act, 1961, and levied penalties for all the assessment years in question. On appeal, the Commissioner of Income-tax (Appeals) confirmed the levy of penalties. On further appeal, the Tribunal found that the assessee bona fide believed that after the switch over from the mercantile system of accounting to the cash system, there was no interest income taxable in the hands of the assessee, that, therefore, the assessment was made at "nil" income and hence cancelled the penalties levied by the Income-tax Officer. On a reference:
Held, affirming the decision of the Tribunal, that the assessee had bona fide believed that no interest income had accrued to it and, therefore, the levy of penalty under section 271(1)(c) was not valid.
Standing Counsel for the Commissioner.
Nemo for the Assessee.
JUDGMENT
By this application under section 236(2) of the Income Tax Act, 1961, the following questions are referred for our opinion:
"(1) Whether, on the facts and in the circumstances of the case, the Tribunal was right in law to conclude that there was no mens rea on the part of the assessee-company to conceal the interest income from the Revenue?
(2) Whether, on the facts and in the circumstances of the case, the Tribunal was right in law in holding that the assessee did not conceal any income and, therefore, the imposition of penalty under section 271(1)(e) of the income Tax Act, 1991, was not proper?"
The assessee is a company and maintains its accounts on tile mercantile system. The assessment was completed under section 143(3) of the Income-tax Act at nil income. All the assets of the tea estates were sold before the previous years relevant to all assessment years. After completion of the assessment, it came to the notice of the Income-tax officer that some interest was receivable by the assessee on the amount of sale proceeds of the tea estates from saharaj Tea Co. Ltd., and some interest from W. S. Cresswell & Co- Ltd. Therefore, in the reassessment, the interest receivable on the sale proceeds amount and the interest receivable from Cresswell Co. Ltd. were taxed and penalty proceedings for concealment, under section 271(1)(c), were initiated and finally the penalties for the assessment years 1976-77, 1977-78, 1978-79, 1979-80 and 1981-82 were imposed.
The case of the assessee is that the amounts of sale proceeds payable by Saharaj Tea Co. Ltd., was under litigation. Only one instalment has been paid and the balance amount has not been paid even today, the matter is pending in the Court. No interest has been received and. similarly. No interest has been received from Cresswell & Co Ltd. The- assessee also brought to the notice of the Assessing Officer that the assessee had no income except this interest income in these relevant years and he changed his method of accounting from mercantile to cash. No amount of cash had been received during the previous year relevant to the assessment years therefore no taxable income arose in the hands of the assessee.
In appeal, the Commissioner of Income-tax (Appeals) has also confirmed the penalties imposed by the Income-tax Officer.
In appeal before the Tribunal, it was found that there was a bona fide belief of the assessee that after switch over of the system of accounting from mercantile to cash, there is no interest income taxable in the hands of the assessee. Therefore, the assessment was made at "nil" income and the penalty so imposed has been cancelled by the Tribunal.
None appears for the assessee. Counsel for the Revenue only supports the orders of the Income-tax Officer and the Commissioner of Income-tax (Appeals). He further submits that not disclosing the income is enough for imposing of the penalty, even if he is in bona fide belief that such income in not taxable.
We are unable to accept the submission of counsel for the Revenue. In cases, where the assessee has bona fide belief that his income is not taxable and he failed to disclose such income under bona fide belief, no penalty should be imposed under section 271(1)(c) of the Act.
In the case under consideration the facts are not in dispute that all the tea gardens were sold. The amount was payable in two instalments. One instalment has been paid of the sale proceeds. The second instalment was payable in the year 1976 relevant to the assessment year 1976-77. That has not been paid. The dispute was under litigation. The assessee has changed its system from mercantile to cash, though that has not been accepted by the Commissioner of Income-tax (Appeals). It had no other income except interest income on the basis of accrual, the balance amount of sale proceeds has not been paid in all these previous years, relevant to the assessment year. Even, no interest has been received from W. S. Cresswell & Co. Ltd. The services of the agent of the assessee were terminated.
It appears that W. S. Cresswell & Co. Ltd. has gone into liquidation. There was no hope of recovery even of the principal amount, and the assessee switched over the system from the mercantile system to the cash system- and had a bona fide belief that no interest income accrued. It has shown "nil" income and was assessed as such.
No case of penalty or concealment has been made out under section 271(1)(c). For penalty under section 271(l)(c), the Revenue has to prove that the assessee has knowingly concealed his income.
Accordingly, we answer both the questions in the affirmative, i.e. in favour of the assessee and against the Revenue.
M.B.A./3180-A/FC???????????????????????????????????????????????????????????????????????????? Reference answered.