Issue for Consideration Section 271(1)(c) provides for the imposition of penalty by an AO in cases where he is satisfied that the person has concealed the particulars of his income or has furnished inaccurate particulars of such income. The penalty leviable shall not be less than the amount of tax sought to be evaded but shall not exceed three times the amount of such tax.
Section 273B provides that no penalty shall be imposable where the person proves that there was a reasonable cause for his failure to disclose the particulars of his income or to furnish accurate particulars of such income. It is thus, essential for a person, for escaping the penalty to prove that he had not concealed the particulars of his income or has not furnished inaccurate particulars of his income or in any case he was prevented by a reasonable cause in concealing the income or furnishing the inaccurate particulars.
None of the relevant terms namely, concealment, inaccurate particulars or reasonable cause are defined under the Income-tax Act. Needless to say, that a person has therefore to rely on the several decisions delivered by the Courts for assigning true meaning to the said terms. Over a period, a judicial consensus has emerged where under a decision taken under a bona fide belief is considered to be not a case of concealment or a case of furnishing inaccurate particulars of income. Likewise, selecting one of the possible views on a subject that is capable of 2 views is held to be providing the person with a reasonable cause for his failure to disclose or furnish accurate particulars of his income.
There seems to be an unanimity about the understanding that no penalty is leviable in a case where the issue concerning a claim of allowance/disallowance/ addition/ deduction/ exemption is debatable. Recently, the term ‘debatable’ has attracted the attention of the judiciary where under, the Courts are asked to determine whether an issue can be said to be debatable in a case where a High Court has admitted the appeal on merits of the claim by holding the issue to be one which involves a substantial question of law. While the Gujarat High Court has held that simply because an appeal has been admitted on merits of the claim of an assesse, it could not automatically be held that the issue was debatable and that no penalty was leviable. The Bombay High Court approving the 3rd member decision of the Ahmedabad bench of the Tribunal held that the issue became debatable once an appeal on merits of the claim was admitted on the ground that it formed a substantial question of law.
Dharamshi B. Shah’s case
The Gujarat high court had an occasion to consider the issue in the case of the CIT vs. Dharamshi B. Shah, 51 taxmann.com 274 (Gujarat). In the said case, an addition made by the AO on account of capital gains computed u/s. 45(3) was upheld by the tribunal and the assessee’s appeal against such an order was admitted by the High Court. The AO subsequently had passed an order levying penalty u/s. 271(1)(c), which was deleted by the Tribunal on the ground that no penalty was leviable once an appeal on the merits of the case was admitted by the court. In an appeal by the revenue department against such an order of the Tribunal, the court was asked to consider whether merely because the assessee’s appeal in respect of an addition on the basis of which penalty u/s. 271(1)(c) was levied, had been admitted by High Court, it could be said that the issue was debatable so as to delete the penalty. One of the substantial questions of law raised before the court by the revenue was:
“Whether, in the facts and in the circumstances of the case and in law, the Income-tax Appellate Tribunal is justified in not upholding the penalty u/s. 271(1)(c) of the Act imposed by the Assessing Officer and upheld by the Commissioner of Income-tax (Appeals) holding that since the substantial question of law in respect of the addition on which the penalty has been levied, has been admitted by the hon’ble Gujarat High Court, the penalty would not survive without appreciating that the addition on which the penalty was levied was confirmed by the Commissioner of Income-tax (Appeals) and by Income-tax Appellate Tribunal itself ? ”
The Revenue submitted that;
- in the case before the court, the Tribunal had deleted the penalty imposed by the AO and confirmed by the Commissioner (Appeals) solely on the ground that the appeal against the order passed by the Tribunal on the merits of the case, was admitted by the high court and, therefore, the issue was not free from debate and, consequently, the tribunal had set aside the penalty,
- the issue involved in the appeal was squarely covered by the decision of the court in the case of CIT vs. Prakash S Vyas rendered in Tax Appeal No. 606 of 2010, now reported in 58 taxmann.com 334, wherein the aforesaid view was not accepted by the Division Bench of the court,
- the impugned order passed by the tribunal was required to be quashed and set aside and the matter was required to be remanded to the Tribunal to decide the appeal afresh in accordance with law and on its own merits.
The court noted the following observations of the tribunal while setting aside the order of the AO levying penalty:
“… This is the settled position of law that the penalty under section 271(1)(c) of the Income-tax Act, 1961, is imposable in respect of any concealment of income or furnishing of inaccurate particulars of income by the assessee. When for the addition made by the Assessing Officer which is confirmed by the Tribunal, a substantial question of law is admitted by the hon’ble Gujarat High Court, it has to be accepted that the issue is not free from debate, and, hence, in our considered opinion, under these facts, it cannot be said that the assessee has concealed his income or furnished inaccurate particulars of income, and, therefore, penalty is not justified. We, therefore, delete the same.”
The court noted with approval its decision on an identical question in Tax Appeal No. 606 of 2010 now reported in 58 taxmann.com 334, wherein the court had observed as under and had quashed and set aside the order of the tribunal deleting the penalty and had remanded the matter to the Tribunal to consider the appeal afresh in accordance with law and on its own merits.
“10. Having, thus, heard learned counsel for the parties, we reiterate that the sole ground on which the Tribunal deleted the penalty was that with respect to the quantum additions, the assessee had approached the High Court and the High Court had admitted the appeal framing substantial questions of law for consideration. In view of the Tribunal, this would indicate that the issue was debatable and that, therefore, no penalty under section 271(1)(c) could be imposed.
11. We are of the opinion that the Tribunal erred in deleting the penalty on this sole ground. Admission of a tax appeal by the High Court, in majority cases, is ex parte and without recording even prima facie reasons. Whether ex parte or after by-parte hearing, unless some other intention clearly emerges from the order itself, admission of a tax appeal by the High Court only indicates the court’s opinion that the issue presented before it required further consideration. It is an indication of the opinion of the High Court that there is a prima facie case made out and the questions are required to be decided after admission. Mere admission of an appeal by the High Court cannot without there being anything further, be an indication that the issue is a debatable one so as to delete the penalty under section 271(1)(c) of the Act even if there are independent grounds and reasons to believe that the assessee’s case would fall under the mischief envisaged in said clause (c) of sub-section (1) of section 271 of the Act. In other words, unless there is any indication in the order of admission passed by the High Court simply because the tax appeal is admitted, would give rise to the presumption that the issue is debatable and that, therefore, penalty should be deleted.
12. This is not to suggest that no such intention can be gathered from the order of the court even if so expressed either explicitly or in implied terms. This is also not to suggest that in no case, admission of a tax appeal would be a relevant factor for the purpose of deciding validity of a penalty order. This is only to put the record straight in so far as the opinion that the Tribunal as expressed in the present impugned order, viz., that upon mere admission of a tax appeal on quantum additions, is an indication that the issue is debatable one and that, therefore, penalty should automatically be deleted without any further reasons or grounds emerging from the record.
13. This is precisely what has been done by the Tribunal in the present case. The order of the Tribunal, therefore, cannot be sustained. The question framed is answered in favour of the Revenue and against the assessee. The order of the Tribunal is reversed. Since apparently the assessee had raised other contentions also in support of the appeal before the Tribunal, the proceedings are remanded before the Tribunal for fresh consideration and disposal in accordance with law. The tax appeal is disposed of accordingly.”
The court approving the reasons stated in the said decision, quashed and set aside the order of the tribunal and remanded the matter to the Tribunal for fresh consideration and disposal in accordance with law on its own merits while holding that penalty u/s. 271(1)(c) could not be deleted on the sole ground that assessee’s appeal in respect of addition on basis of which penalty was levied had been admitted by the High Court.
Nayan Builders Case
The issue also arose before the Bombay High Court in the case of CIT vs. Nayan Builders, 368 ITR 722 wherein the court found that the appeal of the Revenue department could not be entertained as it did not raise any substantial question of law.
In the said case the addition of income of Rs. 1,04,76,050 and disallowance of expenses of Rs.10,79,221 on brokerage and Rs. 2,00,000 on legal fees made by the A.O. were sustained by the Tribunal and the appeal of the assessee u/s. 260A was admitted by the High Court on the ground that the said addition and the disallowances represented a substantial question of law.
The A.O., pending the disposal of the appeal by the High Court, had levied a penalty of Rs. 37,32,777 u/s. 271(1)(c) of the Act which was confirmed by the Commissioner(Appeals). On a further appeal by the assessee to the Tribunal, challenging the levy of the penalty, the Tribunal held that, when the High Court admitted a substantial question of law on the merits of an addition/disallowance, it became apparent that the issue under consideration on the basis of which penalty was levied, was debatable. It held that the admission by the high court lent credence to the bona fides of the assessee in claiming deduction. It held that the mere fact of confirmation of an addition/disallowance would not per se lead to the imposition of penalty, once it turned out that the claim of the assessee could have been considered by a person properly instructed in law and was not completely debarred in law. Relying on the decisions in the cases of Rupam Mercantile Ltd. vs. DCIT, 91 ITD 237(Ahd.) (TM) and Smt. Ramilaben Ratilal Shah vs. ACIT, 60 TTJ 171(Ahd.), the Tribunal held that no penalty was exigible u/s. 271(1)(c), once the high court had held that the issue of addition/disallowance represented a substantial question of law.
On an appeal by the Revenue, the Bombay High Court held that the imposition of the penalty was not justified. The court noted that the Tribunal as a proof that the penalty was debatable and involved an arguable issue, had referred to the order of the court passed in the assessee’s appeal in quantum proceedings and had also referred to the substantial questions of law which had been framed therein.
The court perused its order dated September 27, 2010, passed by it for admitting the Income Tax Appeal No. 2368 of 2009 on merits of the case, and held that there was no case made out for imposition of penalty and the same was rightly set aside. It held that where the high court admitted an appeal on the ground that it involved a substantial question of law, in respect of which penalty was levied, impugned order of penalty was to be quashed. It held that the appeal challenging the order of the Tribunal, passed for deleting the penalty levied, raised no substantial question of law and as a consequence dismissed it with no order as to costs.
Observations
An appeal u/s.260A lies to the High Court from an order of the Tribunal only where the High Court is satisfied that the case involves a substantial question of law. The issue under consideration in such an appeal should not only involve a question of law but should be one which involves a substantial question of law similar to the one required u/s.100 of the Civil Procedure Code, 1908. A full bench of the Supreme Court in the case of Santosh Hazari vs. Purshottam, 251 ITR 84, held that to be a substantial, a question of law must be debatable, not previously settled by law of the land or a binding precedent…. that it was not free from difficulty or that it called for a discussion for an alternate view. It further held that the word “substantial” qualifying “question of law” meant having substance, essential, real, of sound worth, important or considerable.
Recently, the Patna High Court in the case of DCIT vs. Sulabh International Social Service Organisation, 350 ITR 189, has held that a substantial question of law must be one which was debatable and not previously settled under the law of the land or a binding precedent.
A question can be a substantial question of law even when it affects the substantial rights of the party or is of general importance or where a finding based on no evidence is given or where a finding is given without appreciating the admissible evidence or where the order passed is perverse or unreasonable. A question can be held to be a substantial question of law on varied counts – it is largely so in the cases where issues are debatable or call for a discussion for alternate view and are not previously settled by law of the land and binding precedent.
In the context of the provisions of Income-tax Act, it is appropriate in most of the cases, to hold that the issue on hand is debatable, open, capable of having an alternate view once the same is held to be representing a substantial question of law by the Jurisdictional high court at the time of admission of appeal. Once it is so found, it is also appropriate to hold, unless otherwise established, that the assessee was under a bona fide belief for staking his claim and was under a reasonable cause for any failure, if any and in the presence of these factors no penalty u/s. 271(1)(c ) r.w.s.273B was leviable.
The Bombay High Court, in Nayan Builder’s case, following the above discussed logic had held that no penalty u/s.271(1)(c) was leviable once an appeal on merits of the case was admitted by the Court by holding that the issue on merits represented a substantial question of law. It does not appear that even the Gujarat High Court in Dharamshi B. Shah’s case has a different view other than when it held that dropping of the penalty should not be an automatic consequence of an admission of appeal on merits of the case. Even in that case, the Court set aside the order of the Tribunal with a direction to it to examine the issue afresh to find out whether there was a bona fide belief or a reasonable cause in the relevant case or not.
In our experience, a court records its satisfaction about the presence of a substantial question of law only where it is satisfied that the essential requisites forming such a question are placed on record. In the circumstances, the Gujarat High Court may be said to side with the view of the Bombay High Court, which view has been taken by the Court while approving the decisions of the Tribunal in the cases of Rupam Mercantile 91 ITD 273 (Ahd.), Ramilaben Ratilal Shah 60 TTJ 171 (Ahd).
