Court Quashes Penalty for Alleged Income Concealment, Citing Lack of Evidence

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Case Name:

Jayeshbhai J. Shah vs Commissioner of Income Tax (High Court of Gujarat)

Special Civil Application No. 9315 of 2008

Date: 15th July 2016

Key Takeaways:

1. Penalty under section 271(1)(c) is not automatic when there's a difference between returned and assessed income.

2. The court emphasized the need for clear evidence of income concealment or inaccurate particulars.

3. Disallowance of expenses alone doesn't necessarily imply furnishing of inaccurate income particulars.

4. The judgment reinforces the principle that penalty provisions should be strictly interpreted.

Issue:

Was the imposition of penalty under section 271(1)(c) of the Income-tax Act, 1961, justified in this case where there was no clear evidence of income concealment or furnishing of inaccurate income particulars?

Facts:

1. The petitioner filed a return for the assessment year 1996-97, disclosing a total income of Rs.42,020/-.

2. The Assessing Officer made a regular assessment, determining the total income at Rs.10,86,800/-.

3. The Assessing Officer disallowed Rs.10,39,787/- of labour charges claimed by the petitioner.

4. After appeals and remands, the Assessing Officer imposed a penalty of Rs. 6,96,630/- under section 271(1)(c).

5. The petitioner's revision application under section 264 was rejected by the Commissioner of Income-tax.

Arguments:

Petitioner's Arguments:

1. There was neither concealment of income nor furnishing of inaccurate particulars.

2. The penalty order was bad in law based on previous court decisions.

3. The difference between returned and assessed income was due to disallowances, not concealment.

Revenue's Arguments:

1. The assessee had accepted the original assessment order by not challenging it.

2. The penalty was justly imposed based on the assessment findings.

Key Legal Precedents:

1. Navnitlal K. Zaveri v. Commissioner of Income-tax (125 ITR 385): Held that penalty is not leviable if the variation between returned and assessed income is due to disallowances or additions made by the Assessing Officer.

2. Commissioner of Income-tax v. Reliance Petroproducts Pvt. Ltd. (2010) 322 ITR 158 (SC): Established that making an incorrect claim doesn't amount to furnishing inaccurate particulars, and penalty can't be invoked unless strictly covered by the provision.

3. Tripal Singh and another vs. Commissioner of Income-tax and another (2014) 365 ITR 511 (SC): Held that in certain circumstances, penalty proceedings should not be initiated even if the assessment order becomes final.

Judgement:

1. The High Court allowed the petition, quashing both the penalty order and the revision order.

2. The court held that penalty under section 271(1)(c) is not automatic when there's no clear evidence of income concealment or furnishing of inaccurate particulars.

3. The court noted that merely having a difference between returned and assessed income due to disallowances doesn't imply furnishing of inaccurate particulars.

4. The judgment emphasized that there was no finding that the details furnished by the assessee were incorrect or false.

FAQs:

1. Q: What does "sine qua non" mean in the context of this case?

  A: It means that the penalty under section 271(1)(c) is not an essential condition or automatically applicable when there's a difference between returned and assessed income.

2. Q: Does this judgment mean that no penalties can be imposed for disallowed expenses?

  A: Not necessarily. It means that penalties shouldn't be automatic and require clear evidence of concealment or inaccurate particulars.

3. Q: What's the significance of the court mentioning both "outstanding expenses" and "outstanding debt"?

  A: The court pointed out an inconsistency in the Assessing Officer's approach, suggesting that both should have been treated similarly for fairness.

4. Q: How might this judgment affect future income tax penalty cases?

  A: It may lead to more careful scrutiny of evidence before imposing penalties and a stricter interpretation of what constitutes "furnishing inaccurate particulars."

5. Q: What should taxpayers learn from this case?

  A: While it's important to be accurate in tax returns, this case shows that taxpayers have recourse if penalties are imposed without clear evidence of wrongdoing.

1. By way of this petition under Article 226 of the Constitution of India, the petitioner has challenged the order passed under section 264 of the Income-tax Act, 1961, on 25.2.2008 at Annexure-H to the petition by the Commissioner of Income-tax, Surat, whereby the revision preferred by the petitioner was dismissed.

2. The facts of the case are that the assessee filed return of income for assessment year 1996-97 on 12.8.1996 disclosing total income at Rs.42,020/-. In the profit and loss account filed along with the return of income, the petitioner had shown labour charges to be paid at Rs.15,19,030/-. The Assessing Officer made regular assessment under section 143(3) of the Act on 31.3.1997 determining total income at Rs.10,86,800/-. While making assessment, the Assessing Officer accepted payment of Rs.4,79,243/- made to five works who appeared before him and disallowed Rs.10,39,787/-. Being aggrieved by the order of the Assessing Officer, the petitioner preferred appeal before the Commissioner of Income-tax (Appeals) who reduced the disallowance to Rs.7,27,851/- vide his order dated 22.3.2002. Against the order of the Commissioner (Appeals), the petitioner carried the matter further before the Income-tax Appellate Tribunal. The Tribunal vide its order dated 21.12.2004 remanded the matter to the Assessing Officer. The Assessing Officer again added Rs.10,39,787/- to the total income and ordered to issue penalty proceedings under section 271(1)(b) and 271(1)(c) of the Act. Thereafter, the Assessing Officer imposed penalty of Rs.6,96,630/- by order dated 30.8.2006. However, since the petitioner could not file appeal, the petitioner preferred revision application under section 264 of the Act to the respondent wherein he has clearly mentioned that the penalty is not imposable in view of the decision of the Apex Court in the case of T. Ashok Pai v. Commissioner of Income-tax reported in 292 ITR 11 and requested to set aside the order of the Assessing Officer imposing penalty. However, to his utter surprise, the revision application was rejected by the respondent vide order dated 25.2.2008 by upholding the penalty order of the Assessing Officer by observing in paragraph No. 5 of the said order thus:

“From the above, it may be appreciated that the assessee was allowed repeated opportunities to produce the parties to whom the payments were made or any other evidences in this regard. However, there was no compliance on the part of the assessee and the Assessing Officer was constrained to pass ex-parte order under section 144 of the I.T. Act as the assessee did not comply with the notices issued by him from time to time. During the course of penalty proceedings also the repeated opportunities allowed to the assessee were not complied with and which establishes that the assessee has concealed his income by furnishing inaccurate particulars of his income.”

3 Learned counsel for the petitioner Mr. Shah has contended that if we look at the original order, it shows that there is neither concealment nor furnishing inaccurate particulars of income and therefore the penalty order is bad in law. He has relied on the decision of this court in the case of Navnitlal K. Zaveri v. Commissioner of Income-tax reported in 125 ITR 385, particularly at page 388, relevant portion which is reproduced below:

“It must be pointed out that time and again the Supreme Court and High Courts have pointed out that if the variation between the returned income and the assessed income arises by virtue of additions to the income made either because of disallowance or because of deemed income added or because of the estimate of the income made by the ITO, then penalty is not leviable.”

3.1 He has further relied on the decision of the Delhi High Court in the case of Devsons Pvt. Ltd. v. Commissioner of Income-tax & others reported in (2010) 329 ITR 483 (Delhi) where in paragraph No. 27, it is observed as under:

“Another contention of the learned counsel for the Revenue is that this issue whether the sundry creditors are genuine or not could not have been re- examined by a co-ordinate Bench of the Tribunal in penalty proceedings to arrive at a contrary conclusion by relying upon the assessment orer of 1998-99 passed under section 143(3) of the Act after scrutiny and in particular on the following observations made therein:

`The assessee has shown in the balance sheet under schedule III as details of sundry creditors – hire charges of Rs. 58,55,005/- but during the course of hearing it was intimated by them that it was only the payments to be made to the contractors who were plying the trucks on behalf of the company and the company had hired them for Jaipur Municipality for removing the garbage. The list of these creditors to whom the amount is payable have been filed and affidavit to the effect for the person concerned have been filed stating thereby the amounts receivable by them from M/s. Devsons Pvt. Ltd.

The total amount of Rs. 58,55,005/- consists of sundry creditors of Rs. 49,93,003/- and other creditors for hire charges of Rs. 8,61,942/-. Thus, there has been a scrutiny of the amount outstanding towards these eight persons in the subsequent years and at least in one of the assessment orders there is a finding that the amounts were actually due to them and that some of them have filed affidavits also to the effect that the amounts are due to them. At our instance, the learned counsel for the assessee pointed out to the ledger accounts of sundry creditors placed at pages 70-109 of paper book No. 1. The account of Morari Lal to whom an amount of Rs. 4,71,658/- is outstanding as on March 31, 1995 is at pages 71A to 73A. The account shows that several payments were made during the year under appeal to this contractor and there has been no disallowance of the amounts so paid. This indicates that the Assessing Officer has no objection to allowing the actual amounts paid to these persons, which could have been only on his being satisfied that such a person actually existed, that he has done work for the assessee-company during the year and the payment was otherwise genuine and bona fide incurred for the purpose of the business. It is not, therefore, understood as to how the balance outstanding to such persons at the end of the year can be considered to be non-genuine. The ledger account also shows that the assessee has deducted tax on the hire charges paid to Morari Lal. The ledger accounts of all the other seven creditors have also been placed in the paper book and these also exhibit the same position.’ “

3.2 Further reliance has been placed by the learned counsel for the petitioner on the decision of the Apex Court in the case of Tripal Singh and another vs. Commissioner of Income-tax and another reported in (2014) 365 ITR 511 (SC) wherein it is held as follows:

“Held, that the assessees, who were not very educated persons, unfortunately could not be properly represented before the Assessing Officer and, therefore, the assessment was made for the assessment years 1998-99. The assessment for the assessment year 1998-99 was over and the assessment order had become final. In these circumstances, the court would not interfere with the assessment order. However, no penalty proceedings were to be initiated and no interest was to be recovered from the assessee if the tax was paid within 60 days.”

3.3 Reliance has also been placed on the decision of this court in the case of Commissioner of Income-tax III v. Sonal Construction Co., reported in (2015) 55 taxmann.com 425 (Gujarat) wherein at paragraph Nos. 6 and 7, it is observed as under:

“6. We are taking this view in light of the factual scenario as it emerges and more particularly, paragraph 5 of the reasons given by the Tribunal which we propose to reproduce hereunder :-

“5. We have heard rival submission and perused material available on record. As the facts emerge, it is clear that assessee furnished relevant details i.e. names, addresses, confirmations etc. and offered AO to call some of them for examination. It appears that these details were not inquired into further, however, assessee offered about amount for addition purpose. We find merit in the argument of learned counsel that assessment proceedings and penalty proceedings are separate and distinct and merely because additions has been made, same will not lead to automatic levy of penalty. Assessee reiterated its stand in penalty proceedings, AO should have inquired matter independently in penalty proceedings and given a finding about correctness or otherwise of assessee's explanation. AO has imposed penalty solely on the basis of agreed addition by assessee, in the given facts and circumstances, explanation furnished by assessee remains uncontroverted, and therefore, it cannot be held that explanation given by the assessee have been found to be incorrect or false. In view of the above facts, ratio of Hon'ble Supreme Court in the case of K.P. Madhusudanan Vs. CIT, 25 ITR 99 is not applicable as explanation offered by the assessee remains uncontroverted on record and addition offered was clearly worded to avoid litigation, and offer cannot be held to be without bonafide. Penalty imposition solely on the basis of such addition, overlooking details and explanation filed by the assessee cannot be sustained. In view thereof, we delete the penalty.”

7. We are even supported in our view by the latest decision of the Apex Court in reported in 348 Income Tax Reports 561 and in the case of Northland Development and Hotel Corporation v. CIT reported in 349 Income Tax Reports 363. The twin decisions will permit us to hold in favour of the Assessee and against the Revenue.”

3.4 Reliance has been placed on the decision of this court in the case of Commissioner of Income-tax-I v. Jyoti Ltd., reported in (2013) 34 taxmann.com 65 (Gujarat) in which it is held as under:

“Where Assessing Officer in order of penalty did not come to a clear finding regarding penalty being imposed on concealment of income or on furnishing inaccurate particulars of income, Tribunal was justified in setting aside impugned penalty order.”

3.5 Further reliance is placed on the decision of the Apex Court in the case of Commissioner of Income-tax v. Reliance Petroproducts Pvt. Ltd., reported in (2010) 322 ITR 158 (SC) where it is observed as under:

“A glance at the provisions of section 271(1)(c) of the Income-tax Act, 1961, suggests that in order to be covered by it, there has to be concealment of the particulars of the income of the assessee. Secondly, the assessee must have furnished inaccurate particulars of his income. The meaning of the word `particulars’ used in section 271(1)(c) would embrace the details of the claim made. Where no information given in the return is found to be incorrect or inaccurate, the assessee cannot be held guilty of furnishing inaccurate particulars. In order to expose the assessee to penalty, unless the case is strictly covered by the provision, the penalty provision cannot be invoked. By no stretch of imagination can making an incorrect claim tantamount to furnishing inaccurate particulars. There can be no dispute that everything would depend upon the return filed by the assessee, because that is the only document where the assessee can furnish the particulars of his income. When such particulars are found to be inaccurate, the liability would arise. To attract penalty, the details supplied in the return must not be accurate, not exact or correct, not according to the truth or erroneous. Where there is no finding that nay details supplied by the assessee in its return are found to be incorrect or erroneous or false there is no question of inviting the penalty under section 271(1)(c). A mere making of a claim, which is not sustainable in law, by itself, will not amount to furnishing inaccurate particulars

regarding the income of the assessee. Such a claim made in the return cannot amount to furnishing inaccurate particulars.”

4. Learned counsel for the revenue Mr. Mehta has contended that decision taken by the authorities are just and proper. Since the assessee has accepted the original order of the Assessing Officer as he has not challenged the same, penalty has been rightly imposed by the Assessing Officer.

5. We have heard learned counsel for the parties. Taking into account the decision of this court in the case of Navnitlal K. Zaveri (supra) and other decisions of the Apex Court, it is clear that penalty under section 271(1)(c) is not sine qua non when there is no concealment of income or furnishing inaccurate particulars of income. Merely because there is difference between the income returned and income assessed as a result of disallowance made by the Assessing Officer, it cannot be said that the assessee has furnished inaccurate particulars of income. In the present case, outstanding expenses were not believed by the Assessing Officer but outstanding debt was believed. The authority ought to have either believed both or disbelieved both outstanding expenses and outstanding debt. There is no finding to the effect that the details furnished by the assessee are incorrect or false. In that view of the matter, relying on the decision of the Apex Court in the case of Commissioner of Income-tax v. Reliance Petroproducts Pvt. Ltd. (supra), no penalty can be leviable. Hence the order dated 25.2.2008 passed by the Commissioner of Income-tax, Surat, under section 264 of the Act is quashed and set aside and the penalty under section 271(1)(c) of the Act imposed by the Assessing Officer vide order dated 30.8.2006 is also quashed and set aside.

6. In the result, the petition is allowed accordingly.

(K.S.JHAVERI, J.)

(G.R.UDHWANI, J.)