CIT v. Smt. Shashi Aggarwal & Ors.

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The Tax Publishers2005 TaxPub(DT) 0776 (All-HC) : (2005) 004 (I) ITCL 0194 : (2005) 272 ITR 0036 : (2006) 201 CTR 0048 : (2005) 143 TAXMAN 0199 CIT v. Smt. Shashi Aggarwal & Ors () INCOME TAX --Penalty under section 271(1)(c), Explanation----ConcealmentAgriculture income not disclosed in return--*Held:* The Explanation offered by the assessees that they were under the honest belief that agricultural income was to be disclosed in the subsequent assessment year 1975-76 and there was neither any fraud nor any gross or wilful neglect, had been accepted by the Tribunal. Thus, the burden which was placed upon them by the Explanation had been discharged and it again shifted on revenue to prove that the assessee was guilty of concealment, which it failed to establish, therefore, penalty was rightly deleted. Income Tax Act, 1961 s.271(1)(c), Expl. INCOME TAX --Penalty under section 271(1)(c), Explanation (old)----CONCEALMENTAgricultural income not shown in return--All the three respondent-assessees owned an agricultural farm, along with one Sri S. They were in receipt of their respective share of income from the farm as co-owners. In the return of income filed by them for the assessment year in question, they did not disclose their share of income from the said agricultural farm. It may be mentioned that during the assessment year in question, agricultural income was includible in the total income for rate purposes, in view of the amendment made by the Finance Act, 1973. The AO initiated penalty proceeding under section 271(1)(c) and levied penalties. However, in appeal, the CIT(A) deleted the penalty. The revenue s appeals before the Tribunal had failed. Held: The explanation offered by the assessee that they were under honest and bona fide belief that agricultural income, due to amendment introduced by the Finance Act, 1973, could not be disclosed for the relevant assessment year but from assessment year 1975-76, there was neither any fraud nor any gross or wilful neglect therefore, penalty under section 271(1)(c) was not to be levied as burden of proof which has placed upon them by Explanation had been discharged by the assessee. Deletion of penalty by the Tribunal was therefore, justified. Income Tax Act, 1961 s.271(1)(c), Expl. (old) CIT v. Smt. Shashi Aggarwal & Ors. In the Allahabad High Court R.K. Agarwal & K.N. Ojha JJ. Income Tax Reference No. 26 of 1987 October 12, 2004. Counsel : Shambhoo Chopra, for the Revenue Ritik Upadhaya, for the Assessee. JUDGMENT R. K. Agarwal J. The Income Tax Appellate Tribunal, New Delhi, has referred the following question of law under section 256(1) of the Income Tax Act, 1961 (hereinafter referred to as 'the Act'), for the opinion to this court : 'Whether, on the facts and in the circumstances of the case, the Tribunal was correct in holding that penalty under section 271(1)(c) of the Income Tax Act, 1961, could not be levied even if the assessee had not disclosed in their returns of income their agricultural income for the assessment year 1974-75 ?' Briefly stated, the facts giving rise to the present reference are as follows 2. A consolidated reference in respect of the three assessees, namely, Smt. Shashi Aggarwal, Master Manoj Narain and Sri K. N. Agarwal, has been made by the Tribunal, which relates to the assessment year 1974-75. All the three respondent-assessees own a farm, known as Prag Agricultural Farm, along with one Sri S. N. Agarwal. They were in receipt of their respective share of income from the farm as co-owners. In the return of income filed by them for the assessment year in question, they did not disclose their share of income from the said agricultural farm. It may be mentioned here that during the assessment year in question, agricultural income was includible in the total income for rate purposes, in view of the amendment made by the Finance Act, 1973. The Income Tax Officer initiated penalty proceeding under section 271(1)(c) of the Act and levied penalties. However, in appeal, the CIT(A) had deleted the penalty. The revenue's appeals before the Tribunal have failed. 3. We have heard Sri Shambhoo Chopra, learned standing counsel for the revenue, and Sri Ritik Upadhaya, learned counsel appearing for the respondents. 4. Learned counsel for the revenue submitted that by the Finance Act, 1973, agricultural income was to be disclosed in the return of income, which was to be taken into consideration for rate purposes and, therefore, non-disclosure of agricultural income by the respondents amounted to concealment of income for which penalty under section 271(1) (c) of the Act was attracted. According to him, the Explanation to section 271(1)(c) of the Act was applicable as in the present case the returned income was less than 80 per cent. of the total income assessed. In support of his aforesaid submissions, he has relied upon the following decisions : (i) CIT v. Smt. P. K. Kochammu Amma (1980) 125 ITR 624 (SC); and (ii) CIT v. laora Oil Mill (1981) 129 ITR 423 (MP). 5. Sri Ritik Upadhaya, learned counsel appearing for the respondents, submitted that the accounts of the farm in which the respondents were partners/co-owners, closed on June 30 of every year and for the relevant year under consideration its account was closed on 30-6-1974. The major portion of the taxable income of the respondents was from the source, the accounts of which were closed on December 31, every year and accounts of the taxable income for the assessment year in question closed on 31-12-1973. According to him, the assessment year under consideration is 1974-75 which was the first year in which the agricultural income came to be included in the income for rate purposes only and since the date 30-6-1974, fell within the assessment year 1975-76, they honestly believed that even for rate purposes also the same was to be shown only in the assessment year 1975-76 and not in the assessment year 1974-75. Further, the account books of the agricultural farm for the earlier years were impounded by the Wealth Tax Officer, Central Circle, Kanpur, on 26-12-1973, which was returned only on 21-4-1979, and, in the absence of the books of account, the accounts of the farm for the later years, including the assessment year 1974-75, could not be finalised and the shares could not be ascertained for being declared even for rate purposes in the return. He further submitted that under section 2(24) of the Act 'income' has been defined. It does not include agricultural income. Under section 10(1) of the Act it has been specifically provided that agricultural income shall not be included in the total income. According to him, under entry 82 of List 1 of the Seventh Schedule to the Constitution of India, Parliament has no competence to levy tax on agricultural income and, therefore, if agricultural income has not been disclosed in the return, there cannot be any concealment of income and no penalty under section 271(1)(c) of the Act can be imposed. In the alternative, he submitted that even if the Explanation to section 271(1)(c) of the Act was attracted, there was no gross or wilful neglect on the part of the respondents nor there was any fraud in the failure to return the correct income and, therefore, the penalty has rightly been deleted by the CIT(A), which has been upheld by the Tribunal. In support of his aforesaid submissions, he has relied upon the following decisions : (i) Hindustan Steel Ltd. v. State of Orissa (1972) 83 ITR 26 (SC); and (ii) K. C. Builders v. Asst. CIT (2004) 265 ITR 562 (SC). 6. Having heard learned counsel for the parties, we find that it is not in dispute that the Union of India has no legislative competence to levy any tax on agricultural income as under entry 82 of List 1 of the Seventh Schedule to the Constitution of India, it can levy taxes only on income other than agricultural income. 7. Under section 10(1) of the Act, agricultural income has been specifically excluded from computing the total income. Even under section 2(24) of the Act agricultural income does not find mention in the word 'income'. However, by the Finance Act, 1973, for the first time, agricultural income was required to be disclosed in the return of income for rate purposes only. It was not at all being treated as an income under the provisions of the Act. In section 271(1)(c) of the Act, by section 40 of the Finance Act, 1964, the word 'deliberately' was omitted and the following Explanation was added : Explanation.-Where the total income returned by any person is less than eighty per cent. of the total income (hereinafter in this Explanation referred to as the correct income) as assessed under section 143 or section 144 or section 147 (reduced by the expenditure incurred bona fide by him for the purpose of making or earning any income included in the total income but which has been disallowed as deduction), such person shall, unless he proves that the failure to return the correct income did not arise from any fraud or any gross or will neglect on his part, be deemed to have concealed the particulars of his income or furnished inaccurate particulars of such income for the purposes of clause (c) of this sub-section..' 8. The aforesaid Explanation is applicable in the present case as the returned income was less than 80 per cent. of the total income assessed. 9. The deletion of the word 'deliberately' in section 271(1)(c) of the Act does not rule out mens rea in all cases as still the expression 'concealed the particulars of his income', would require the mental element to be established. The word 'concealed' itself would import this requirement. 10. The Explanation creates a legal fiction in certain circumstances to the effect that the assessee shall be deemed to have concealed the particulars of his income or furnished inaccurate particulars of his income in the circumstances set out in the Explanation. If the Explanation is attracted, the burden shifts on the assessee and if he establishes that the failure to return the correct income did not arise from any fraud or any gross or wilful neglect on his part, the burden would again shift to the revenue to prove that the assessee is guilty of concealment. 11. In the case of Hindustan Steel Ltd. (1972) 83 ITR 26 (SC), the Apex Court has held that an order imposing penalty for failure to carry out a statutory obligation is the result of a quasi-criminal proceeding and penalty will not ordinarily be imposed unless the party obliged either acted deliberately in defiance of law or was guilty of conduct contumacious or dishonest or acted in conscious disregard of its obligation. 12. In the case of Smt. P. K. Kochammu Amma (1980) 125 ITR 624 (SC), the Apex Court has held that there could be no doubt that the assessee must disclose in the return submitted by him all amounts representing the shares of the spouse and minor child in the profits of the firm in which he is a partner since they form part of the total income chargeable to tax under section 64(1)(i) and (iii) of the Act. The words 'his income' in section 139(1) must include every item of income which goes to make up his total income assessable under the Act and in failing to do so, the assessee was guilty of concealment of this item of income which plainly attracted the applicability of section 271(1)(c) of the Act. 13. In the case of laora Oil Mill (1981) 129 ITR 423 (MP), the Madhya Pradesh High Court has held that the definition of 'income' in section 2(24) is an inclusive definition and even covers such items which are not income in the natural sense of word. Even in its broadest connotation, 'income' refers to monetary return 'coming in' and is conceptually contradictory to 'loss'. 14. In the case of K. C. Builders (2004) 265 ITR 562 (SC), the Apex Court while considering the provision of section 271(1)(c) of the Act, has held as follows (page 569) : 15. 'One of the amendments made to the abovementioned provisions is the omission of the word 'deliberatelyj from the expression 'deliberately furnished inaccurate particulars of such income'. It is implicit in the word 'concealed' that there has been a deliberate act on the part of the assessee. The meaning of the word 'concealment' as found in Shorter Oxford English Dictionary, third edition, volume 1, is as follows : 'In law, the intentional suppression of truth or fact known, to the injury or prejudice of another.' 'The word 'concealment' inherently carried with it the element of mens rea. Therefore, the mere fact that some figure or some particulars have been disclosed by itself, even if it takes out the case from the purview of non-disclosure, it cannot by itself take out the case from the purview of furnishing inaccurate particulars. Mere omission from the return of an item of receipt does neither amount to concealment nor deliberate furnishing of inaccurate particulars of income unless and until there is some evidence to show or some circumstances found from which it can be gathered that the omission was attributable to an intention or desire on the part of the assessee to hide or conceal the income so as to avoid the imposition of tax thereon. In order that a penalty under section 271(1)(iii) may be imposed, it has to be proved that the assessee has consciously made the concealment or furnished inaccurate particulars of his income. Where the additions made in the assessment order, on the basis of which penalty for concealment was levied, are deleted, there remains no basis at all for levying the penalty for concealment and, therefore, in such a case no such penalty can survive and the same is liable to be cancelled as in the instant case. Ordinarily, penalty cannot stand if the assessment itself is set aside. Where an order of assessment or re-assessment on the basis of which penalty has been levied on the assessee has itself been finally set aside or cancelled by the Tribunal or otherwise, the penalty cannot stand by itself and the same is liable to be cancelled as in the instant case ordered by the Tribunal and later cancellation ofpenalty by the authorities.' 16. Applying the principles laid down in the aforesaid cases, we find that the explanation offered by the respondents that they were under the honest belief that agricultural income was to be disclosed in the assessment year 1975-76 and there was neither any fraud nor any gross or wilful neglect, has been accepted by the Tribunal. Thus, the burden which was placed upon them by the Explanation, has been discharged. As held by the Apex Court in the case of K.C. Builders (2004) 265 ITR 562 (SC), the word 'concealment' inherently carries with it the element of mens rea which, in the present case, was to be established by the revenue, which the revenue has failed to establish. In the circumstances, the Tribunal was justified in upholding the deletion of penalty. 17. In view of the foregoing discussion, we answer the question of law referred to us in the affirmative, i.e., in favour of the assessee and against the revenue. There shall be no order as to costs. OPEN SUBSCRIBE FOR FULL CONTENT

The Tax Publishers2005 TaxPub(DT) 0776 (All-HC) : (2005) 004 (I) ITCL 0194 : (2005) 272 ITR 0036 : (2006) 201 CTR 0048 : (2005) 143 TAXMAN 0199

CIT v. Smt. Shashi Aggarwal & Ors ()

INCOME TAX

--Penalty under section 271(1)(c), Explanation----ConcealmentAgriculture income not disclosed in return--Held: The Explanation offered by the assessees that they were under the honest belief that agricultural income was to be disclosed in the subsequent assessment year 1975-76 and there was neither any fraud nor any gross or wilful neglect, had been accepted by the Tribunal. Thus, the burden which was placed upon them by the Explanation had been discharged and it again shifted on revenue to prove that the assessee was guilty of concealment, which it failed to establish, therefore, penalty was rightly deleted.

Income Tax Act, 1961 s.271(1)(c), Expl.

INCOME TAX

--Penalty under section 271(1)(c), Explanation (old)----CONCEALMENTAgricultural income not shown in return--All the three respondent-assessees owned an agricultural farm, along with one Sri S. They were in receipt of their respective share of income from the farm as co-owners. In the return of income filed by them for the assessment year in question, they did not disclose their share of income from the said agricultural farm. It may be mentioned that during the assessment year in question, agricultural income was includible in the total income for rate purposes, in view of the amendment made by the Finance Act, 1973. The AO initiated penalty proceeding under section 271(1)(c) and levied penalties. However, in appeal, the CIT(A) deleted the penalty. The revenue s appeals before the Tribunal had failed. Held: The explanation offered by the assessee that they were under honest and bona fide belief that agricultural income, due to amendment introduced by the Finance Act, 1973, could not be disclosed for the relevant assessment year but from assessment year 1975-76, there was neither any fraud nor any gross or wilful neglect therefore, penalty under section 271(1)(c) was not to be levied as burden of proof which has placed upon them by Explanation had been discharged by the assessee. Deletion of penalty by the Tribunal was therefore, justified.

Income Tax Act, 1961 s.271(1)(c), Expl. (old)

CIT v. Smt. Shashi Aggarwal & Ors.

In the Allahabad High Court R.K. Agarwal & K.N. Ojha JJ.

Income Tax Reference No. 26 of 1987 October 12, 2004.

Counsel : Shambhoo Chopra, for the Revenue Ritik Upadhaya, for the Assessee.

JUDGMENT

R. K. Agarwal J.

The Income Tax Appellate Tribunal, New Delhi, has referred the following question of law under section 256(1) of the Income Tax Act, 1961 (hereinafter referred to as 'the Act'), for the opinion to this court :

'Whether, on the facts and in the circumstances of the case, the Tribunal was correct in holding that penalty under section 271(1)(c) of the Income Tax Act, 1961, could not be levied even if the assessee had not disclosed in their returns of income their agricultural income for the assessment year 1974-75 ?'

Briefly stated, the facts giving rise to the present reference are as follows

2. A consolidated reference in respect of the three assessees, namely, Smt. Shashi Aggarwal, Master Manoj Narain and Sri K. N. Agarwal, has been made by the Tribunal, which relates to the assessment year 1974-75. All the three respondent-assessees own a farm, known as Prag Agricultural Farm, along with one Sri S. N. Agarwal. They were in receipt of their respective share of income from the farm as co-owners. In the return of income filed by them for the assessment year in question, they did not disclose their share of income from the said agricultural farm. It may be mentioned here that during the assessment year in question, agricultural income was includible in the total income for rate purposes, in view of the amendment made by the Finance Act, 1973. The Income Tax Officer initiated penalty proceeding under section 271(1)(c) of the Act and levied penalties. However, in appeal, the CIT(A) had deleted the penalty. The revenue's appeals before the Tribunal have failed.

3. We have heard Sri Shambhoo Chopra, learned standing counsel for the revenue, and Sri Ritik Upadhaya, learned counsel appearing for the respondents.

4. Learned counsel for the revenue submitted that by the Finance Act, 1973, agricultural income was to be disclosed in the return of income, which was to be taken into consideration for rate purposes and, therefore, non-disclosure of agricultural income by the respondents amounted to concealment of income for which penalty under section 271(1) (c) of the Act was attracted. According to him, the Explanation to section 271(1)(c) of the Act was applicable as in the present case the returned income was less than 80 per cent. of the total income assessed. In support of his aforesaid submissions, he has relied upon the following decisions :

(i) CIT v. Smt. P. K. Kochammu Amma (1980) 125 ITR 624 (SC); and

(ii) CIT v. laora Oil Mill (1981) 129 ITR 423 (MP).

5. Sri Ritik Upadhaya, learned counsel appearing for the respondents, submitted that the accounts of the farm in which the respondents were partners/co-owners, closed on June 30 of every year and for the relevant year under consideration its account was closed on 30-6-1974. The major portion of the taxable income of the respondents was from the source, the accounts of which were closed on December 31, every year and accounts of the taxable income for the assessment year in question closed on 31-12-1973. According to him, the assessment year under consideration is 1974-75 which was the first year in which the agricultural income came to be included in the income for rate purposes only and since the date 30-6-1974, fell within the assessment year 1975-76, they honestly believed that even for rate purposes also the same was to be shown only in the assessment year 1975-76 and not in the assessment year 1974-75. Further, the account books of the agricultural farm for the earlier years were impounded by the Wealth Tax Officer, Central Circle, Kanpur, on 26-12-1973, which was returned only on 21-4-1979, and, in the absence of the books of account, the accounts of the farm for the later years, including the assessment year 1974-75, could not be finalised and the shares could not be ascertained for being declared even for rate purposes in the return. He further submitted that under section 2(24) of the Act 'income' has been defined. It does not include agricultural income. Under section 10(1) of the Act it has been specifically provided that agricultural income shall not be included in the total income. According to him, under entry 82 of List 1 of the Seventh Schedule to the Constitution of India, Parliament has no competence to levy tax on agricultural income and, therefore, if agricultural income has not been disclosed in the return, there cannot be any concealment of income and no penalty under section 271(1)(c) of the Act can be imposed. In the alternative, he submitted that even if the Explanation to section 271(1)(c) of the Act was attracted, there was no gross or wilful neglect on the part of the respondents nor there was any fraud in the failure to return the correct income and, therefore, the penalty has rightly been deleted by the CIT(A), which has been upheld by the Tribunal. In support of his aforesaid submissions, he has relied upon the following decisions :

(i) Hindustan Steel Ltd. v. State of Orissa (1972) 83 ITR 26 (SC); and (ii) K. C. Builders v. Asst. CIT (2004) 265 ITR 562 (SC).

6. Having heard learned counsel for the parties, we find that it is not in dispute that the Union of India has no legislative competence to levy any tax on agricultural income as under entry 82 of List 1 of the Seventh Schedule to the Constitution of India, it can levy taxes only on income other than agricultural income.

7. Under section 10(1) of the Act, agricultural income has been specifically excluded from computing the total income. Even under section 2(24) of the Act agricultural income does not find mention in the word 'income'. However, by the Finance Act, 1973, for the first time, agricultural income was required to be disclosed in the return of income for rate purposes only. It was not at all being treated as an income under the provisions of the Act.

In section 271(1)(c) of the Act, by section 40 of the Finance Act, 1964, the word 'deliberately' was omitted and the following Explanation was added :

Explanation.-Where the total income returned by any person is less than eighty per cent. of the total income (hereinafter in this Explanation referred to as the correct income) as assessed under section 143 or section 144 or section 147 (reduced by the expenditure incurred bona fide by him for the purpose of making or earning any income included in the total income but which has been disallowed as deduction), such person shall, unless he proves that the failure to return the correct income did not arise from any fraud or any gross or will neglect on his part, be deemed to have concealed the particulars of his income or furnished inaccurate particulars of such income for the purposes of clause (c) of this sub-section..'

8. The aforesaid Explanation is applicable in the present case as the returned income was less than 80 per cent. of the total income assessed.

9. The deletion of the word 'deliberately' in section 271(1)(c) of the Act does not rule out mens rea in all cases as still the expression 'concealed the particulars of his income', would require the mental element to be established. The word 'concealed' itself would import this requirement.

10. The Explanation creates a legal fiction in certain circumstances to the effect that the assessee shall be deemed to have concealed the particulars of his income or furnished inaccurate particulars of his income in the circumstances set out in the Explanation. If the Explanation is attracted, the burden shifts on the assessee and if he establishes that the failure to return the correct income did not arise from any fraud or any gross or wilful neglect on his part, the burden would again shift to the revenue to prove that the assessee is guilty of concealment.

11. In the case of Hindustan Steel Ltd. (1972) 83 ITR 26 (SC), the Apex Court has held that an order imposing penalty for failure to carry out a statutory obligation is the result of a quasi-criminal proceeding and penalty will not ordinarily be imposed unless the party obliged either acted deliberately in defiance of law or was guilty of conduct contumacious or dishonest or acted in conscious disregard of its obligation.

12. In the case of Smt. P. K. Kochammu Amma (1980) 125 ITR 624 (SC), the Apex Court has held that there could be no doubt that the assessee must disclose in the return submitted by him all amounts representing the shares of the spouse and minor child in the profits of the firm in which he is a partner since they form part of the total income chargeable to tax under section 64(1)(i) and (iii) of the Act. The words 'his income' in section 139(1) must include every item of income which goes to make up his total income assessable under the Act and in failing to do so, the assessee was guilty of concealment of this item of income which plainly attracted the applicability of section 271(1)(c) of the Act.

13. In the case of laora Oil Mill (1981) 129 ITR 423 (MP), the Madhya Pradesh High Court has held that the definition of 'income' in section 2(24) is an inclusive definition and even covers such items which are not income in the natural sense of word. Even in its broadest connotation, 'income' refers to monetary return 'coming in' and is conceptually contradictory to 'loss'.

14. In the case of K. C. Builders (2004) 265 ITR 562 (SC), the Apex Court while considering the provision of section 271(1)(c) of the Act, has held as follows (page 569) :

15. 'One of the amendments made to the abovementioned provisions is the omission of the word 'deliberatelyj from the expression 'deliberately furnished inaccurate particulars of such income'. It is implicit in the word 'concealed' that there has been a deliberate act on the part of the assessee. The meaning of the word 'concealment' as found in Shorter Oxford English Dictionary, third edition, volume 1, is as follows :

'In law, the intentional suppression of truth or fact known, to the injury or prejudice of another.'

'The word 'concealment' inherently carried with it the element of mens rea. Therefore, the mere fact that some figure or some particulars have been disclosed by itself, even if it takes out the case from the purview of non-disclosure, it cannot by itself take out the case from the purview of furnishing inaccurate particulars. Mere omission from the return of an item of receipt does neither amount to concealment nor deliberate furnishing of inaccurate particulars of income unless and until there is some evidence to show or some circumstances found from which it can be gathered that the omission was attributable to an intention or desire on the part of the assessee to hide or conceal the income so as to avoid the imposition of tax thereon. In order that a penalty under section 271(1)(iii) may be imposed, it has to be proved that the assessee has consciously made the concealment or furnished inaccurate particulars of his income. Where the additions made in the assessment order, on the basis of which penalty for concealment was levied, are deleted, there remains no basis at all for levying the penalty for concealment and, therefore, in such a case no such penalty can survive and the same is liable to be cancelled as in the instant case. Ordinarily, penalty cannot stand if the assessment itself is set aside. Where an order of assessment or re-assessment on the basis of which penalty has been levied on the assessee has itself been finally set aside or cancelled by the Tribunal or otherwise, the penalty cannot stand by itself and the same is liable to be cancelled as in the instant case ordered by the Tribunal and later cancellation ofpenalty by the authorities.'

16. Applying the principles laid down in the aforesaid cases, we find that the explanation offered by the respondents that they were under the honest belief that agricultural income was to be disclosed in the assessment year 1975-76 and there was neither any fraud nor any gross or wilful neglect, has been accepted by the Tribunal. Thus, the burden which was placed upon them by the Explanation, has been discharged. As held by the Apex Court in the case of K.C. Builders (2004) 265 ITR 562 (SC), the word 'concealment' inherently carries with it the element of mens rea which, in the present case, was to be established by the revenue, which the revenue has failed to establish. In the circumstances, the Tribunal was justified in upholding the deletion of penalty.

17. In view of the foregoing discussion, we answer the question of law referred to us in the affirmative, i.e., in favour of the assessee and against the revenue. There shall be no order as to costs.

OPEN