1.1 Under the Income-tax Act (the Act), to safeguard the
interest of the Revenue against non-disclosure of correct income in the return
of income furnished by the assessee, various provisions are made including the
provisions for imposition of penalty for concealment of income. A penalty
u/s.271(1) c) of the Act (‘Concealment Penalty’) can be imposed in cases where
the assessee has concealed the particulars of his income (‘Concealed Income’) or
furnished inaccurate particulars of his income (‘Furnishing Inaccurate
Particulars of Income’). The action of imposition of penalty should clearly
bring out whether the penalty is imposed on account of concealed income or for
furnishing inaccurate particulars of income.
1.2 Explanation 1 to S. 271(1) provides legal fiction
whereunder any addition or disallowance is deemed to represent the concealed
income for the purpose of levy of concealment penalty once the condition
provided in the Explanation are satisfied (hereinafter this Explanation 1 is
regarded to as the said Explanation). The said Explanation shifts the burden of
proof from the Department to the assessee as regards the concealed income. In
substance, the said Explanation provides for a deeming fiction whereunder any
addition or disallowance made to the total income is regarded as concealed
income for the purpose of levy of concealment penalty under the circumstances
mentioned therein. The said
Explanation has undergone change from time to time and the same was last
substituted by the Taxation Laws (Amendment) Act, 1975 and the same was
subsequently amended by the Taxation Laws (Amendment and Miscellaneous
Provisions) Act, 1986 w.e.f. 10-9-1986. It may also be noted that it is a
settled law that the issue of concealment of income for the purpose of imposing
concealment penalty is to be decided on the basis of the law in force at the
time of furnishing return of income.
1.3 In the context of the levy of concealment penalty,
various issues are under debate. By and large, in practice, once any claim of
expenditure made in the return of income is disallowed [or any addition is made
to the returned income], the assessing authority initiates proceedings for
imposition of concealment penalty. In most such cases, once such
disallowance/addition is confirmed by the First Appellate Authority, generally
the assessing authority imposes concealment penalty, though it is a settled
position in law that mere disallowance of expenditure or addition to income by
itself does not give rise to concealed income.
1.4 In the context of imposition of concealment penalty,
various issues are under debate. One such issue is : whether disallowance of
claim of expenditure treating the same as incorrect amounts to furnishing
inaccurate particulars of income, attracting provisions relating to concealment
penalty.
1.5 Earlier, the Apex Court in the case of Dilip N. Shroff
(291 ITR 519), inter alia, held that the order imposing such penalty is
quasi-criminal in nature and the concealment of income and furnishing inaccurate
particulars of Income, both, referred to deliberate act on the part of the
assessee. In substance, the Court expressed the view that mens rea is essential
ingredient for invoking provisions relating to concealment penalty. The Apex
Court, in this case, also made various other important observations with regard
to provisions relating to concealment penalty.
1.6 Subsequently, another Division Bench of the Apex Court,
in the context of similar provisions relating to the levy of penalty under
Central Excise Act, 1944 and the rules made thereunder (the Excise Act), had to
consider some of the views expressed in the above referred judgment of Dilip N.
Shroff (Dilip N. Shroff’s case). At the instance of this Division Bench of the
Apex Court, the relevant issue was referred to a Larger Bench (consisting of
three Judges) and that is how the Larger Bench in the case of Dharmendra
Textiles Processors (306 ITR 277) considered the effect of the judgment of the
Apex Court in the case of Dilip N. Shroff (supra). Primarily, the latter
judgment was concerned with the levy of penalty under the Excise Act. The Larger
Bench in this case (Dharmendra Textile’s case), did not agree with the view
taken in Dilip N. Shroff’s case. We have analysed this judgment in this column
in the December, 2008 issue of the Journal. In our write-up, we have expressed
the view that the judgment in Dharmendra Textile’s case overrules the judgment
of Dilip N. Shroff’s case only to the extent it holds that deliberate act on the
part of the assessee will have to be proved for the levy of concealment penalty
(i.e., mens rea is essential ingredient of the provisions) and the order
imposing such penalty is quasi-criminal in nature, but the other observations
made in Dilip N. Shroff’s case in the context of concealment penalty
u/s.271(1)(c) should continue to hold good, as the Apex Court in the case of
Dharmendra Textile’s case was neither specifically concerned with those
observations, nor with the provisions of S. 271(1) (and the Explanation thereto)
of the Act.
1.6.1 Unfortunately, subsequent to the judgment in the case
of Dharmendra Textile’s case, by and large in most cases, the Department appears
to have taken a view that once the disallowance/addition is confirmed at the
Appellate level and the final total income is higher than the returned income,
provisions relating to levy of concealment penalty get attracted.
1.6.2 In various decisions of the Tribunal, the effect of the
judgment in Dharmendra Textile’s case came up for consideration under different
circumstances and on different set of facts. In most such cases, by and large,
the different Benches of the Tribunal have not accepted the extreme stand taken
by the Department on the effect of the judgment in Dharmendra Textile’s case and
in those decisions, the effect of the said judgment is explained under different
circumstances [Ref. Gem Granite — 18 DTR 358 (Chennai), Mrs. Najma Kanchwalla —
24 DTR 369 (Mumbai), Glorious Reality (P) Ltd. — 29 SOT 292 (Mumbai), Veejay
Service Station — 22 DTR 527 (Delhi), V.I.P. Industries Ltd. — 21 DTR 153
(Mumbai), etc.]. Apart from this, the Delhi High Court in the case of Escorts
Finance Ltd. (ITA No. 1005 of 2008) also explained the effect of Dharmendra
Textile’s case. After considering the said judgment of the Apex Court, the
Punjab and Haryana High Court in the case of Haryana Warehousing Corporation
also took the view that no concealment penalty can be levied where the assessee
has made a bona fide claim of exemption by making proper and adequate disclosure
in the return of income even if the claim of such exemption is not accepted.
Even the Apex Court in the case of Rajasthan Spinning & Weaving Mills considered
the judgment in the case of Dharmaneda Textile and did not agree with the
extreme view of the Department, though in the context of the provisions under
the Excise Act.
1.6.3 A very detailed and well-reasoned decision explaining the effect of the judgment in Dharmendra Textile’s case is found in the case of Kanbay Software India [P] Ltd. — 22 DTR 481 (Pune). In this decision, various aspects of concealment penalty have been considered in detail.
1.7 Notwithstanding the above, the controversy with regard to the effect of Dharmendra Textile’s case continued. In spite of various decisions of the Apex Court and the High Courts explaining the provisions relating to concealment penalty, by and large, the Department is invoking these provisions in most cases where any disallowance of expenditure/claim of deduction or addition to income is confirmed at the Appellate level. In this scenario, the judgment of the Apex Court in Dharmendra Textile’s case gave a fillip to the existing practice, adding fuel to the fire, and the problem got aggravated, notwithstanding the subsequent development on the issue referred to hereinbefore. The Department continued to hold a view that the judgment in Dilip N. Shroff’s case is no longer a good law. On the other hand, the view held in the profession, by and large, was that the Larger Bench in the Dharmendra Textile’s case overrules the judgment in Dilip N. Shroff’s case only to the extent it holds that mens rea is essential ingredient of the provisions relating to concealment penalty and the provisions are quasicriminal in na-ture and except for this, the judgment in Dilip N. Shroff’s case is still a good law.
1.8 Recently, the Apex Court in the case of Reliance Petroproducts Pvt. Ltd. had an occasion to consider the issue referred to in para 1.7 above and hence the judgment of the Apex Court in that case becomes relevant and important in relation to the matters concerning concealment penalty. Therefore, it is thought fit to consider the same in this column.
CIT v. Reliance Petroproducts Pvt. Ltd.
— 322 ITR 158 (SC) :
2.1 The above case relates to A.Y. 2001-02. The brief facts of the said case were : The assessee had furnished return of income showing a loss of Rs.26,54,554. The assessee had claimed deduction of expenditure by way of interest (Rs.28,77,242) on borrowing for the purpose of purchase of shares of IPL by way of its business policy. The assessee did not earn any income from those shares and the Assessing Officer (AO) disallowed the claim of the said interest expenditure by invoking provision of S. 14A. Accordingly, the income was assessed at Rs.2,22,688.
2.2 In response of show-cause notice regarding concealment penalty, the assessee, inter alia, contended that all the details given in the return of income were correct and it was neither a case of concealment of income, nor a case of furnishing any inaccurate particulars of such income. It was also pointed out that the disallowance is made in the as-sessment solely on account of different view taken on the same set of facts and hence, at the most, the same could be termed as difference of opinion and not a case of concealed income or a case of furnishing inaccurate particulars of income as contemplated in provisions relating to concealment penalty. It was also pointed out that the assessee is an invest-ment company and in the earlier A.Y. (i.e., 2000-01) similar disallowance is deleted by the First Appellate Authority and that view has also been confirmed by the Appellate Tribunal. The AO did not accept the contentions of the assessee and imposed a penalty of Rs.11,37,949. The First Appellate Authority deleted the penalty and the appeal of the Department before the Appellate Tribunal also did not succeed. The High Court also confirmed the order of Appellate Tribunal. Under these circumstances, the issue with regard to the said penalty came-up before the Apex Court at the instance of the Department.
2.3 On behalf of the Department, it was, inter alia contended that the claim of interest expenditure was totally without any legal basis and was made with mala fide intentions and the claim was also not accepted by the First Appellate Authority and hence it was obvious that such claim did not have any basis. It was also pointed out that the issue of deductibility of such expenditure in the earlier year is pending before the High Court. It was further contended that otherwise also, the expenditure of interest is not eligible for deduction u/s.36(1)(iii) of the Act as under the said provision, only the amount of interest paid on capital borrowed for the purpose of business/profession could be claimed and the present case was not in respect of the capital borrowed for such purposes. Attention was also drawn to the provisions of S. 10(33) to show that expenditure incurred in relation to exempt income is not deductible. In short, the contention was that the assessee had made a claim, which was totally unacceptable in law and thereby had invited the provisions relating to concealment penalty and had exposed itself to such provisions.
2.4 On behalf of the assessee, it was, inter alia, contended that the language of the provision of concealment penalty had to be strictly construed, this being part of a taxing statute and more particularly the one providing for penalty. Accordingly, unless the wording directly covered the assessee and the factual situation therein, there could not be any penalty under the Act. It was also pointed out that there was no case of concealed income or the case of furnishing inaccurate particulars of income in the return furnished by the assessee.
2.5 After considering the contentions of both the sides, the Court proceeded to consider the issue further and after referring to the relevant provisions of the Act, the Court noted that the provisions suggest that for imposing concealment penalty, there has to be concealed income or furnishing inaccurate particulars of income. The Court then noted that the present case is not the case of concealed income and that is not the case of the Department either. On behalf of the Department, it was suggested that by making incorrect claim for the expenditure of interest, the assessee has furnished inaccurate particulars of income. Dealing with this contention, after referring to the dictionary meaning of the word ‘particulars’, the Court stated that the same used in S. 271(1)(c), would embrace the meaning of the de-tails of claim made. It is an admitted position that in the present case no information given in the return was found to be incorrect or inaccurate. It is not, as if, any statement made or any details supplied were found to be factually incorrect. Therefore, at least, prima facie, the assessee cannot be made guilty of furnishing inaccurate particulars of income. While dealing with the interpretation of the Department that ‘submitting an incorrect claim in law for the expenditure on interest would amount to giving inaccurate particulars of such income’, the Court stated that such cannot be the interpretation of the concerned words. According to the Court, the words are plain and simple and in order to expose the assessee to concealment penalty, unless the case is strictly covered by the provision, the penalty provision cannot be invoked. According to the Court, by any stretch of imagination, making an incorrect claim in law cannot tantamount to furnishing inaccurate particulars of income. The Court also referred to the judgment of the Apex Court in the case of Atul Mohan Bindal (317 ITR 1), in which the Court considered the same provisions. After referring to judgment in Dharmendra Textile’s case, as also to the judgment in the case of Rajasthan Spinning and Weaving Mills (supra), the Court in that case reiterated on page 13 of the judgment that : ‘It goes without saying that for applicability of S. 271(1)(c), conditions stated therein must exist’.
2.6 After mentioning the above position in law, the Court referred to the Dilip N. Shroff’s case and stated as under (pages 164-165) :
“Therefore, it is obvious that it must be shown that the conditions u/s.271(1)(c) must exist before the penalty is imposed. There can be no dispute that everything would depend upon the return filed because that is the only document where the assessee can furnish the particulars of his in-come. When such particulars are found to be inaccurate, the liability would arise. In Dilip N. Shroff v. Joint CIT, (2007) 6 SCC 329, this Court explained the terms ‘concealment of income’ and ‘furnishing inaccurate particulars’. The Court went on to hold therein that in order to attract the penalty u/s.271(1) (c), mens rea was necessary, as according to the Court, the word ‘inaccurate’ signified a deliberate act or omission on behalf of the assessee. It went on to hold that clause (iii) of S. 271(1)(c) provided for a discretionary jurisdiction upon the assessing authority, inasmuch as the amount of penalty could not be less than the amount of tax sought to be evaded by reason of such concealment of particulars of income, but it may not exceed three times thereof. It was pointed out that the term ‘inaccurate particulars’ was not defined anywhere in the Act and, therefore, it was held that furnishing of an assessment of the value of the property may not by itself be furnishing inaccurate particulars. It was further held that the Assessing Officer must be found to have failed to prove that his explanation is not only not bona fide but all the facts relating to the same and material to the computation of his income were not disclosed by him. It was then held that the explanation must be preceded by a finding as to how and in what manner, the assessee had furnished the particulars of his income. The Court ultimately went on to hold that the element of mens rea was essential. It was only on the point of mens rea that the judgment in Dilip N. Shroff v. Joint CIT was upset”.
2.7 The Court then dealt with the judgment of Dharmendra Textile’s case and the effect thereof on Dilip N. Shroff’s case and explained as under (page
165) :
“. . . . . . The basic reason why the decision in Dilip N. Shroff v. Joint CIT was overruled by this Court in Union of India v. Dharmendra Textiles Processors, was that according to this Court the effect and dif-ference between S. 271(1)(c) and S. 276C of the Act was lost sight of in the case of Dilip N. Shroff v. Joint CIT. However, it must be pointed out that in Union of India v. Dharmendra Textile Processors, no fault was found with the reasoning in the decision in Dilip N. Shroff v. Joint CIT, where the Court explained the meaning of the terms ‘conceal’ and ‘inaccurate’. It was only the ultimate inference in Dilip N. Shroff v. Joint CIT to the effect that mens rea was an essential ingredient for the penalty u/s. 271(1)(c) that the decision in Dilip N. Shroff v. Joint CIT was overruled.”
2.8 The Court then noted that in the present case, it is not concerned with mens rea and also stated that it has seen the meaning of the word ‘particu-lars’ earlier. The Court then stated as under (pages165-166) :
“. . . . . . Reading the words in conjunction, they must mean the details supplied in the return, which are not accurate, not exact or correct, not according to truth or erroneous. We must hasten to add here that in this case, there is no finding that any details supplied by the assessee in its return were found to be incorrect or false. Such not being the case, there would be no question of inviting the penalty u/s.271(1)(c) of the Act. A mere making of the claim, which is not sustainable in law, by itself, will not amount to furnishing inaccurate particulars regarding the income of the assessee. Such claim made in the return cannot amount to the inaccurate particulars.”
2.9 The Court then referred to the argument based on S. 14A of the Act and the points raised and reiterated that such claim of excessive deductions, knowing that they are incorrect, amounted to concealed income. Further, the Court noted that it was tried to be argued that the falsehood in accounts can take either of two forms : (i) an item of receipt will be suppressed fraudulently or (ii) an item of expenditure may be falsely (or in an exaggerated amount) claimed. According to the Department, both types of items are to reduce the taxable income and therefore, amount to concealed income as well as furnishing of inaccurate particulars of income. Rejecting these contentions, the Court stated as under (page 166) :
“We do not agree, as the assessee had furnished all the details of its expenditure as well as income in its return, which details, in themselves, were not found to be inaccurate, nor could be viewed as the concealment of income on its part. It was up to the authorities to accept its claim in the return or not. Merely because the assessee had claimed the expenditure, which claim was not accepted or was not acceptable to the Revenue, that by itself would not, in our opinion, attract the penalty u/s. 271(1)(c). If we accept the contention of the Revenue, then in case of every return where the claim made is not accepted by the Assessing Officer for any reason, the assessee will invite penalty u/s.271(1)(c). That is clearly not the intendment of the Legislature.”
2.10 The Court then also referred to the judgment of the Apex Court in the case of Sree Krishna Electricals (27 VST 249) rendered under the Tamil Nadu General Sales Tax Act in connection with the penalty proceedings wherein the authorities had found that there were some incorrect statements made in the return, though the said transactions were reflected in the accounts of the assessee. The Court then quoted the following observations from the judgment in that case (page 167) :
“So far as the question of penalty is concerned, the items which were not included in the turnover were found incorporated in the appellant’s account books. Where certain items which are not included in the turnover are disclosed in the dealer’s own account books and the assessing authorities include these items in the dealer’s turnover disallowing the exemption, penalty cannot be imposed. The penalty levied stands set aside.”
2.10.1 Referring to the above-referred observations in the context of penalty proceedings under the Sales Tax Act of Tamil Nadu, the Court stated that the situation in the present case is still better as no fault has been found with the particulars submitted by the assessee in his return. Accordingly, the Court held that the First Appellate Authority, the Tribunal and the High Court have correctly reached the conclusion and accordingly, dismissed the appeal filed by the Department as without merit.
Conclusion :
3.1 In view of the above judgment of the Apex Court, the settled position is again reiterated that mere disallowance of claim for expenditure by itself would not tantamount to furnishing inaccurate particulars of income and accordingly, in such cases no concealment penalty can be levied on that basis, notwithstanding the judgment of the Apex Court in Dharmendra Textile’s case. We hope that this principle reiterated by the Apex Court will be followed by the Department in spirit. We also hope that the Department will not initiate proceedings for the levy of concealment penalty in such cases.
3.2 From the above judgment of the Apex Court, it is now clear that the judgment of the Apex Court in Dilip No. Shroff’s case is overruled by the judgment in Dharmendra Textile’s case only to the extent it holds that the element of mens rea is essential for levy of concealment penalty and the other observations in Dilip N. Shroff’s case will continue to hold good, except perhaps the observations with regard to nature of concealment penalty.
