Kanbay Software India Pvt. Ltd. vs. DCIT
A.Y. : 2002-2003. Date of Order : 28.4.2009
Income-tax Act, 1961 — Section 271(1)(c) — Concealment
penalty — Impact of the decision of the Apex Court in Dharmendra Textile
Processors on the scheme of S. 271(1)(c) — Whether even a civil liability for
penalty can be invoked only when the conditions for imposition of penalty
under Section are satisfied — Held : Yes. Whether once the mandate of S.
271(1)(c), read with Explanations thereto are satisfied, there is no further
onus on the AO to establish mens rea —Held : Yes. Whether ratio decidendi of
the judgment of Apex Court in Dharmendra Textile Processors and Ors. is
confined to treating the willful concealment as not vital for imposing penalty
u/s. 271(1)(c) and not that in all cases where addition is confirmed, the
penalty shall mechanically follow — Held, Yes.
Facts :
The assessee company was engaged in the business of
development and export of computer software. The assessee had two units
eligible for deduction u/s. 10A. For assessment year 2002-03, in the first
unit the assessee had made profits, while in the second unit, the assessee
incurred losses. The assessee filed a revised return of income for AY 2002-03,
wherein it claimed carry forward of loss and unabsorbed depreciation of second
unit and claimed a deduction u/s. 10A on the profits of first unit without
setting off loss and depreciation of the second unit. Appropriate disclosure
was made in the return of income. The Assessing Officer (AO) rejected this
claim and the assessee accepted the decision of the AO. The AO initiated
proceedings for furnishing inaccurate particulars of income and levied penalty
u/s. 271(1)(c) which action of the AO was confirmed by CIT(A). Aggrieved,
assessee preferred an appeal to the Tribunal.
Held :
The Tribunal deleted the penalty and held as under :
(a) On first principles, penalty u/s. 271(1)(c) is not
simply a consequence of an addition being made to the income of the
assessee. Unless it is established that there is concealment of income or
furnishing of inaccurate particulars or it is established that on the facts
of the case, concealment of income can be deemed in accordance with the
provisions of law, the penalty provisions cannot be invoked at all,
irrespective of whether penalty is a civil liability or a criminal
liability.
(b) The judgment of the Supreme Court (SC) in UOI vs.
Dharmendra Textile Processors (306 ITR 277) has to be understood in the
correct perspective. Penalty u/s. 271(1)(c) has been held to be a ‘civil
liability’ in contradistinction to prosecution u/s. 276C. It is wrong to
infer that because the liability is a ‘civil liability’ it ceases to be
penal in character. There is no contradistinction in a liability being a
civil liability and the same liability being a penal liability as well,
though a civil liability cannot certainly be a criminal liability as well.
(c) The only impact of a liability being a civil
liability is that mens rea or the intentions of the assessee need not
be proved. Unless contravention of law takes place and unless the conditions
for imposition of penalty u/s. 271(1)(c) are satisfied, even a civil
liability cannot be invoked. The action which triggers the civil liability
is the lapse on the part of the assessee.
(d) An addition made during the course of assessment
proceedings, by itself, cannot be enough to initiate, leave aside conclude,
penalty proceedings u/s. 271(1)(c).
(e) The proposition that mens rea need not be
proved before penalty u/s. 271(1)(c) can be imposed was not laid down by SC
in Dharmendra Textile for the first time. Even in the case of K. P.
Madhusudan (251 ITR 99), a three-judge Bench of SC had so held.
(f) Dharmendra Textiles is not an authority for the
proposition that penalty is an automatic consequence of an addition being
made to the income of the taxpayer for the reason that whether it is a civil
liability or a criminal liability, penalty can only come into play when
conditions are satisfied. All that Explanation 1 to S. 271(1)(c) is to shift
the onus of proof from AO to the assessee; instead of AO being under an
obligation to establish the mala fides of the assessee, the onus is
now on the assessee to establish his innocence and righteous conduct.
(g) The observations in Dharmendra Textile to the effect
that penalty is to provide a remedy for loss of Revenue cannot be construed
to mean that penalty can be imposed as an automatic consequence for addition
to returned income, given the scheme of S. 271(1)(c).
(h) An assessee’s statutory obligation u/s. 139(1) is to
give correct and complete information with the return of income. If this is
complied with, then there is no contravention which can attract even a civil
liability. The fact that additions and disallowances are made by the AO does
not mean that there is a breach of the obligation. The proposition that just
because penalty u/s. 271(1)(c) is a civil liability, it must mean that
penalty can automatically be levied on the basis of any addition to income
is not correct.
