PENAL PROVISIONS
PENALTY UNDER SECTION 271(1)(c) - AN ANALYSIS
In this article, the author has taken up for discussion the implications of the decision of the Supreme Court in UOI v. Dharamendra Textile Processors [2008] 306 ITR 277/ 174 Taxman 571, wherein it has been held that wilful concealment is not an essential ingredient for attracting civil liability. However, the author opines that the Supreme Court has not considered the ad hoc manner in which penalty proceedings are initiated by the Assessing Officer in respect of additions/disallowances made in the assessment orders and the hardships faced by the assessees in proving their bona fides. He has also given some suggestions to make the law fair and just for the assessees.
Introduction
1. If the Assessing Officer or the Commissioner (Appeals) in the course of any proceedings under the Act is satisfied that any person has concealed the particulars of his income or furnished inaccurate particulars of such income, then he can direct that such person shall pay by way of penalty under section 271(1)(c), a sum not less than 100 per cent but not exceeding 300 per cent of the amount of tax sought to be evaded by reason of concealment of his income or furnishing inaccurate particulars of his income. This section is used as a sword by the Assessing Officers. In fact, in the orders passed under section 143(3) of the Income-tax Act, 1961, they have been mentioning ‘Initiate penalty proceedings under section 271(1)(c) of the Income-tax Act’ by default on additions/disallowances done without providing any reasons irrespective of whether the assessee really tried to conceal his income or furnish inaccurate particulars of his income or even if additions/disallowances are on account of legally debatable issues.
Various Judicial pronouncements
2. There are various judicial pronouncements, viz., CIT v. Ram Commercial Enterprises Ltd. [2000] 246 ITR 568/[2002] 122 Taxman 620 (Delhi), T. Ashok Pai v. CIT [2007] 292 ITR 11/ 161 Taxman 340 (SC), Shri Bhagwant Finance Co. Ltd. v. CIT [2005] 147 Taxman 53 (Delhi), etc. wherein it had been held that satisfaction of the Assessing Officer under section 271(1)(c) is a condition precedent to initiation of penalty proceedings. Penalty proceeding cannot be exercised unless requisite satisfaction is recorded in the proceedings under the Act. Non-recording of satisfaction is a jurisdictional defect which cannot be cured. Hence, in such cases, penalty proceedings are bad and also subsequent proceedings must fail. However,
the Finance Act, 2008 has introduced new sub-section (1B) with retrospective effect from April 1, 1989 to nullify the effect of the above-mentioned judgments. It provided that where any amount is added or disallowed in computing the total income or loss of an assessee in any order of assessment or reassessment and if such order contains a direction for initiation of penalty proceedings, then such an order of assessment or reassessment shall be deemed to constitute satisfaction of the Assessing Officer for initiation of the penalty proceedings under section 271(1)(c). Unfortunately, this proviso has come as another weapon in the hands of the Assessing Officers. They do not have to record any satisfaction for initiating the penalty proceedings.
Further, the Larger Bench of the Supreme Court in the case of Union of India v.
Dharamendra Textiles Processors [2008] 306 ITR 277/ 174 Taxman 571 while reversing the Supreme Court’s judgment of Dilip N. Shroff v. Jt. CIT [2007] 291 ITR 519/ 161 Taxman 218 has held that :
“It is a well-settled principle in law that the court cannot read anything into a statutory provision or a stipulated condition which is plain and unambiguous. A statute is an edict of the Legislature. The language employed in a statute is the determinative factor of legislative intent”
Also it has further held that :
“The Explanations appended to section 272(1)(c) of the Income-tax Act entirely indicates the element of strict liability on the assessee for concealment or for giving inaccurate particulars while filing return. The judgment in Dilip N. Shroff v. Joint CIT [2007] 291 ITR 519 (SC) has not considered the effect and relevance of section 276C of the Income-tax Act. The object behind the enactment of section 271(1)(c) read with Explanations indicate that the said section has been enacted to provide for a remedy for loss of revenue. The penalty under that provision is a civil liability. Wilful concealment is not an essential ingredient for attracting civil liability as is the case in the matter of prosecution under section 276C of the
Income-taxAct”.
Hence, the Supreme Court in this judgment has concluded that ‘mens rea’or
‘wilful concealment ’is not acriterion for determining leviability of penalty.
AnalysisofSupremeCourt’sdecision
3. With due respect to the judgment of the Supreme Court, it appears that the Supreme Court ought to have appreciated the ad hoc manner in which penalty proceedings are initiated by the Assessing Officers in respect of the additions/disallowances made in the assessment orders. The assessees genuinely have a strong and quite logical ground to argue and prove that there was no intention to conceal/furnish inaccurate particulars and additions are merely differences of opinion between the Assessing Officer and the assessee.
Further today in the online E-filing of returns, there is no place to include any notes to income-tax return or to include any explanations in respect of any legal position taken by the assessee on a specific claim while filing
the return of income. Under the Income-tax Act, there are many issues which are debatable and, hence, assessee takes a legal position based on judicial pronouncements existing at the time of filing returns. An assessee would prefer making a claim in a transparent manner by providing on record all relevant facts, reasonings and relevant judicial pronouncements. However, in absence of an opportunity to submit such an explanation (through online e-filing of returns), the assessee is clearly losing the opportunity to provide proper explanations and is exposed to the vagaries of penalties levied by the Assessing Officers whimsically even on the genuine claims made by him.
Based on the above, in today’s scenario, it appears that once additions/disallowances are made in the assessment orders, there is no onus on the department to prove that the assessee has concealed his income or furnished inaccurate particulars. The onus is entirely on the assessee to prove his bona fides. The Assessing Officers merrily just have to mention ‘Initiate penalty proceedings under section 271(1)(c)oftheIncome-taxAct’.
In today’sworld where transparency and governance are provided highest ratings, to make the law fair and just for the assessees following should be considered :
u The Assessing Officers should mandatorily provide reasons for initiation of penalty proceedings. This will also bring discipline with the Assessing Officers to genuinely initiate penalty proceedings where assessee has really concealed his income or has furnished inaccurate particulars and avoid to some extent ill-motivated initiation of penalty proceedings. Penalty proceedings should not just be initiated on each and every addition/disallowance made in the assessment order.
u Penalty provision requires strict adherence and, hence, the onus to prove that there was concealment of income with a view to avoid tax, should be on the department. Penalty should only be levied in cases where mens rea exists.
u
This would certainly help the genuine and honest taxpayers in the long way and at the same time provide department with a level-playing opportunity to prove in case assessee has really concealed the income or has furnished inaccurate particulars.
CAclubindia
