I.T.A. No. 1144/KB of 1997-98, decided on 8th November, 2002. VS I.T.A. No. 1144/KB of 1997-98, decided on 8th November, 2002., 2003 PTD-INCOME-TAX-APPELLATE-TRIBUNAL-PAKISTAN 1085 (2002)

Income Tax Ordinance (XXXI of 1979)‑‑‑

‑‑‑‑Ss. 111(2)(c) & 13(1)(d)‑‑‑C.B.R. Circular Letter No.1(1)DT. 14/91, dated 24‑4‑1991‑‑‑Penalty‑‑‑Concealment of income‑‑‑While making compromise on an agreed assessment, a penalty was levied under an agreement‑‑‑Validity‑‑‑For penalties to be legally valid and justified the mens rea or the guilty intent on the part of the assessee had to be proved beyond any doubt‑‑‑Penalty proceedings being criminal in nature required evidence or proof like in a criminal case‑‑‑Conscious and deliberate suppression had to be proved by the Department through independent evidence which was lacking in the present case‑‑‑Entire case of penalty proceedings was based merely on the agreement of assessee‑‑ Even if the assessee had agreed to penalty, it would not absolve the Department to prove mens rea and deliberate suppression on the part of assessee‑‑‑First Appellate Authority thus rightly found that the penalties could not be legally sustained and had accordingly cancelled the penalty order‑‑‑Appeal of the Department was dismissed by the Appellate Tribunal.  

I.T.A. No. 109/HQ of 1989‑90 and Western Automobiles (India) v. CIT (1978) 112 ITR 1048 ref.

1992 PTD (Trib.) 155; 1994 PTD (Trib.) 688; 1994 PTD (Trib.) 1266; Muhammad Muslim v. CIT, Karachi 1980 PTD 227 and 1981 PTD (Trib.) 15 rel.

Inayatullah Kashani, D.R. for Appellant.

Taher Moochhala, C.A. for Respondent.

Date of hearing: 30th October, 2002.

ORDER

JAWAID MASOOD TAHIR BHATTI (JUDICIAL MEMBER).‑ The department through this appeal has objected to the impugned order of the learned CIT(A), dated 30‑4‑1997, cancelling the penalty imposed under section 111(2)(c) of the Income Tax Ordinance, 1979.

2. Mr. Inayatullah Kashani, learned representative of the appellant Department has contended that the learned CIT(A) was rot justified in cancelling the penalty imposed under section 111(2?(c) of the Income Tax Ordinance, 1979. According to the learned D.R. the assessment for the year under review was completed under section 62 of the Ordinance, whereby the additions under section 13(1)(d) was made due to the reason that the assessee had understated purchase price of plot acquired by the assessee. According to the learned D.R., the additions under section 13(1)(d) was made in agreement with the assessee whereby the penalty under section 111(2)(c) was also on agreed basis and the written consent of the assessee in this regard was obtained which is available on the record. Learned DR has, therefore, submitted that as the addition regarding understated purchase price was accepted and due to agreement could riot be assailed in appeal, hence, the penalty in this regard should have to be confirmed by the learned CIT(A) but the learned CIT(A) has without any justification cancelled the penalty order. Learned D.R. has further contended that the Assessing Officer has made the penalty placing reliance on the Tribunal's decision in I.T.A. No. 109/HQ of 1989‑90 (assessment year 1988‑89) and in the light of the decision of Bombay High Court in a case Title Western Automobiles (India) v. CIT reported (1978) 112 ITR 1048.

3. On the other hand, Mr. Taher Moochhala, C.A. is supporting the impugned order of the learned CIT(A). Apart from his arguments already reproduced in the impugned order of the learned CIT(A), learned counsel for the respondent/assessee has contended that the Assessing Officer has levied penalty under section 111 of the Ordinance being 100% of the tax charged under section 13(1)(d) of the Ordinance taking it to be a concealed income which in fact is incorrect. According to the learned counsel, the penalty proceedings being criminal in nature, the Assessing Officer was duty bound to prove the guilty intention of the assessee. He has argued that even the penalty levied on agreed basis is also illegal. He has in this regard placed reliance on the decision of this Tribunal reported as 1992 PTD (Trib.) 155 and 1994 PTD (Trib.) 688 and the Circular Letter C.No.1(1)DT 14/91, dated 28th April, 1991 of the Central Board of Revenue, wherein, it has been said that the mere difference of opinion between the ITO and the assessee is not sufficient evidence for levy of penalty. Mr. Moochhala regarding the agreement of the assessee on the addition and the penalty has conceded that the assessee agreed to the addition and the penalty before the Assessing Officer, as the case‑law referred supra were in his knowledge and he was confident that the penalty cannot be imposed due to above referred case law decided by this Tribunal.

4. We have heard the learned representative of both the parties, perused the impugned order of the learned CIT(A), the assessment order and the case‑law referred by the learned counsel for the assessee. We have found that assessment for the year under review i.e. 1996‑97 was completed under section 62 at Rs.18,93,373. The Assessing Officer has made an addition of Rs.7,95,093 under section 13(1)(d) on account of under stated purchase price of the open plots acquired by the assessee. While imposing the penalty the Assessing Officer in the impugned order "categorically stated that the addition under section 13(1)(d) was made in agreement with the assessee whereby penalty under section 111 (2)(c) was also agreed by the assessee.

5. The learned AR has referred the case decided by this Tribunal reported as 1994 PTD (Trib) 688 wherein the principle governing the levy of penalty has been spelt out by this Tribunal. Those principles for the facility of the decisions are reproduced hereunder:‑‑‑

"(i) The assessment proceedings and penalty proceedings stand on two different footings. In a proceeding relating to assessment the onus is on the assessee to prove that income returned by him is his true income:, In proceedings for imposition of penalty for concealment of income the onus is on the Department to establish that the assessee had concealed his income.

(ii) The penalty proceedings are criminal in nature and the standard of proof which is required in a criminal case is also required to sustain the order imposing penalty.

(iii) A definite finding by the ITO AAC CIT (Appeals) or the Income Tax Appellate Tribunal on the point of concealment of income or furnishing of inaccurate particulars of income is sine qua non for initiating penalty proceedings.

(iv) Whenever penalty proceedings are sought to be initiated by an Assessing Officer, there should be a finding to this effect in the assessment order indicating the intention of initiating penalty proceedings.

(v) The notice under section 116 should contain in clear terms the alleged act of concealment of income or furnishing of inaccurate particulars of income in clear and unambiguous terms and such notice should contain the necessary particulars indicating the charge to be proved against an assessee.

(vi) The assessee should be given reasonable opportunity of being heard without violating the principles of natural justice.

(vii) In all cases where version of taxpayers is not accepted the penalty proceedings shall not be attracted ipso facto although the rejection of taxpayer's version may justify the addition to basis total income. A reasonable difference of opinion on the point of law or principles of accountancy shall not attract the imposing of penalty."

6. We have found that the Assessing Officer in the case under hand has not followed the above criteria before imposing the penalty under section 111(2)(c) of the Income Tax Ordinance, 1979 and has failed to establish that the assessee had concealed his income as no definite findings on the point. (Concealment of income) has been made in the assessment order, except stating that the value of properties are under stated. The penalty proceedings has been initiated, only, on the ground that the addition in value has been agreed by the assessee. We have found that while making compromise on the agreed assessment the "AR of the assessee agreed for a penalty under section 111 of the Income Tax Ordinance, 1979. In the impugned order learned CIT(A) has reproduced the offer and acceptance by both the parties regarding enhancement of value of property and the penalty. The relevant paras. are again reproduced hereunder for the facility of decision:‑‑‑

"However, considering the rise in the market value and the trend of ever increasing values of larded properties, on behalf of our client wish to offer on a compromise basis on the value of properties an enhancement to the extent as under ."

"........... Should you accept the offer kindly intimate to us for our confirmation to these proposal by way of a compromise settlement alongwith penalty under section 111 of the Income Tax Ordinance, 1979."

7. It has been pleaded on behalf of the assessee that the above referred agreement has been extracted from assessee under duress and threats imposition of penalty at the maximum rate of` 250% as provided in the law and if agreed upon penalty would be levied at 100% of the tax evaded. The Assessing Officer has after giving notice under section 116 of Income Tax Ordinance, 1979 imposed the penalty. We find force in. the contention of the learned counsel that the penalty proceedings are criminal in nature and had to be treated as such, as this Tribunal in many cases has held that for the penalty proceedings mandatory requirements of law has to be fulfilled. Reliance may be placed on the case referred by the learned AR reported as 1994 PTD (Trib.) 1266 wherein it has been held that:‑‑‑

"As regards the penalties, the contentions raised by the learned counsel for the appellant bear weight. In the first instance he maintained that the said agreement having remained the sole reason for imposition of penalties, the purpose for which independent proceedings are contemplated was necessarily defeated .... "

"After hearing the parties and going through the orders of the authorities below we conclude that the department based the penalty orders solely on the agreement executed between itself and the assessee and that penalty proceedings were conducted in a predetermined manner without a manifest effort to justify the penalties except for the factum of the aforesaid agreement. Therefore, we will accept ail the four appeals and order that the penalties imposed in all the four years under review shall be deleted."

8. In another case where the facts were almost similar as of the present case reported as 1992 PTD (Trib) 155, this Tribunal has held that "even otherwise the penalty proceedings being criminal in nature, the Assessing Officer has to establish independently mens rea or the guilty intention of the assessee. It is not sufficient that the assessee given incorrect particulars of his income and had not disclosed his purchase properly. The department has to prove independently not only that the assessee had concealed the income or had furnished inaccurate particulars of his income but also that he did so deliberately and intentionally. If any other meaning is to be given, section 116 of the Income Tax Ordinance would become redundant because once an Assessing Officer finds in the assessment order that the assessee had suppressed his income then no further enquiry or notice is necessary. The law requires that a notice under section. 116 should be given to provide a reasonable opportunity of being heard to the assessee so that he can defend and explain his case. Such a notice under section 116 is not a mere formality. It is sine qua non before passing an order for imposing the penalty".

9. In a case Muhammad Muslim v. CIT Karachi reported as 1980 PTD 227 a Division Bench of the Hon'ble Sindh High Court dealt with this issue a length. Their Lordships referring to a decision of the Supreme Court of India observed at page 135 of the Order that:‑‑

"The Supreme Court affirmatively held that the burden of proof was on the department who must establish that the receipt of the amount in dispute constituted income of the assessee and in case no evidence was available, except the explanation of the assessee which may be false, it would not follow that receipt constitutes taxable income.

In short, the Supreme Court of India took the view that provisions relating to penalty are penal in nature and the burden of proof of evasion of tax is glaringly on the department and not on the assessee. In a subsequent case namely Commissioner of Income v. Koday Eswarsa & Sons (1972) 83 ITR 369 the Supreme Court of India reaffirmed the dictum in the earlier case of Anwar Ali and held that apart from the falsity of the explanation of the assessee, the department must have some cogent material or evidence which should raise an inference that the assessee had consciously concealed the particulars of his income or had furnished inaccurate particulars. Ices reported by the Supreme Court of India that the mere fact of assessee's explanation being rejected and on establishment of a sum of money being in the hands of the assessee, an inference would not be necessarily available that the assessee had, by concealing his income or furnishing of inaccurate particulars incurred a penalty."

10. It has been consistently held by the Superior Courts that concealment has to be proved by the department as a criminal charge and guilt must be brought home by adopting the same standard of proof, as far as may be possible, as is requisite to sustain a conviction in a Criminal Court, as the penalty proceedings are of a quasi judicial character and the Assessing Officer has to play a role of both the Prosecutor and the Judge. This Tribunal in its order reported as 1981 PTD (Trib.) 15, held that:‑‑‑

"The penalty proceedings are criminal in nature and, therefore, the standard of evidence required to be adduced should be the same as in the criminal proceedings. It. therefore, follows that even an agreement of the assessee to be penalized would not be itself sufficient and the department could not absolve of its responsibility to prove the concealment as a fact. As in a criminal case, mere confession cannot be made the basis of a conviction without any corroborating evidence, the same principle will be applicable in case of imposition of penalties. The learned A.R. has placed reliance in the case of Kerala High Court reported as Money & Co. v. Commissioner of Income Tax Kerala (1963) 47 ITR 434..."

" . thirdly even if the counsel was authorized even then the department was not absolved of independently proving that the assessee was guilty and suppressed the income consciously and deliberately. Since no material is on record to prove these facts, the penalties impugned are directed to be cancelled."

11. The learned AR of the assessee has also objected to the notice under section 116 served on the assessee which according to him was deficient in the following manner:‑‑‑

(a) Assessment year was not inscribed but figure "19" was stated.

(b) Issuance date was not complete.

(c) Notice did not contain in clear words the alleged act of concealment, Even the pertinent clause printed on the notice applicable in assessee's case was not marked.

Learned counsel for the assessee has contended that the Assessing Officer has not followed the procedure as laid down by this Tribunal as well as by the Superior Courts regarding the penalty proceedings.

12. Keeping all these facts in view and applying principles as laid down by this Tribunal as well as by the Superior Courts referred supra, it emerges that:‑‑‑

(a) The Assessing Officer has not established independently mens rea or the guilty intention of the assessee. The department has to prove that the assessee has concealed the income or had furnished inaccurate particulars regarding the purchase of property but also did so deliberately and intentionally.

(b) Notice served under section 116 before imposition of penalty under section 111 was deficient in regards noted herein‑above such notice under section 116 is not a mere formality. It is sine qua non for passing an order of imposition of penalty.

(c) Even if the counsel of the assessee was authorized to enter into agreement for the assessee, department was not absolved of independently proving that the assessee was guilty and has suppressed the income deliberately.

(d) C.B.R. Circular No.1(1)/DT.14/91, dated 28‑4‑1991 also spells out:

"Proceedings under section 111 are of penal nature and the onus of proof that the assessee had concealed his income lies on the department. Thus, the department must be in possession of such evidence as would convince a reasonable minded person that the assessee has concealed his income by consciously misstating the facts. Mere differences of opinion between the ITO and the assessee is not sufficient evidence for levy of penalty."

13. In view of the above case‑laws and other deficiencies pointed out by the assessee, it is clear that for penalties to be legally valid and justified, the mens rea or the guilty intent on the part of the assessee has, to be proved beyond any doubt, the penalty proceedings being criminal in nature requiring evidence or proof that is necessitated in a criminal case. Conscious and deliberate suppression has to be proved by the department through independent evidence which is lacking in this case. It appears that the ACIT based his entire case of penalty proceedings merely on the agreement of the A.R. of the assessee but as this Tribunal has already held in many cases that even if the A.R. of the assessee had agreed to the said penalty it would not absolve the department to prove mens rea and deliberate suppression on the part of the assessee. For all these reasons and on the basis of the above case -law, the learned CIT(A) has rightly held that the impugned penalties cannot be legally sustained and has accordingly cancelled the penalty order.

14. We, therefore, find no warrant for interference in the impugned order of the learned CIT(A) which is upheld and the appeal filed by the Department is dismissed.

C.M.A./619/Tax(Trib.) Appeal dismissed.