Judgment:
1. These three appeals by the assessee are directed against the common order of the CIT (Appeals)-II, Bangalore dated 13-12-2000 for the assessment years 1996-97, 1997-98 and 1998-99. Since a common issue is involved in these appeals they are disposed of by a consolidated order, for the sake of convenience.
2. The only issue in these appeals is regarding levy of penalty under Section 271(1)(c) of the Income-tax Act, 1961 amounting to Rs. 1,36,000, Rs. 2,00,000 and Rs. 1,34,000 for the assessment years 1996-97, 1997-98 and 1998-99 respectively. The assessee is Principal of K.V.G. Dental College, Sullia and derives income from salary only. For the assessment years under consideration the assessee filed original returns of income admitting total income of Rs. 70,620, Rs. 85,800 and Rs. 98,900 respectively. These returns of income were based on the salary certificate issued by the employer in Form No. 16. In a survey conducted under Section 133A in the case of the employer Dental College it was found that apart from the salary income the assessee was in receipt of additional sums. As per the Revenue the same was in the nature of salary whereas the assessee contended that the same is in the form of reimbursement of travelling and conveyance expenses and food expenses, incurred at the remote place. On the basis of the advice of the survey tern the employer of the assessee conceded that the additional sum paid is salary and accordingly paid the difference in tax required to be deducted at source under Section 201 of the Act and also paid the interest thereon. The employer K.V.G. Dental College also issued a revised Form No. 16 (salary certificate) to that effect. After the survey the Assessing Officer issued a notice under Section 148 for these three years wherein the assessee included the salary income as per the revised salary certificate issued by the employer to him in Form No. 16. The income disclosed in the returns filed in response to notice under Section 148 was accepted and the penalty proceedings were also initiated in the course of reassessment proceedings.
3. During the course of penalty proceedings before the Assessing Officer it was submitted by the assessee that he has always furnished the correct particulars of his income. Whatever was declared by the employer to be his salary income was always offered for assessment.
Even though the additional allowances paid are in the nature of reimbursement, yet the same was not treated as exempt to avoid any litigation. At all times he was under the bona fide belief that whatever has been done by the employer takes care of his correct tax liability and there is no mala fide intention in furnishing any untrue particulars. It was also argued before the Assessing Officer that he was ignorant of the law and such an ignorance which is supported by the bona fide belief should not be treated as concealing any particulars of income so as to attract penalty under Section 271(1)(c) of the Act. The Assessing Officer held that it is a conspiracy between the employer and the employee to evade tax to the Government. The employer has deliberately issued two orders fixing the assessee's salary. The employer has all the while showed the total income as salary income only and not part thereof has been treated as exempt under Section 10 of the Income-tax Act. Hence whatever was paid was only salary and the theory that the additional sum was paid towards reimbursement of expenses was not accepted by the Assessing Officer. He, therefore, levied the penalty holding that the assessee has concealed his income in collusion with his employer.
4. The CIT(A) also confirmed the above view. He also held that there was a collusion between the employer and the employee. It was stated that the gross amount received were suppressed both in the salary certificate and in the statement of income filed by the assessee. He held that honest belief of the assessee is a lame excuse and not sustainable. This gives rise to the present appeals.
5. Before us the ld. authorised representative argued that the assessee is Principal of the Dental College. He does not know either about the taxation or about the exemption etc. He filed the returns simply based on the salary certificate issued to him by his employer. It is also an accepted fact that he has no other income except the salary. The assessee is originally a resident of Trivandrum, Kerala State and he is required to serve at Sullia in the Karnataka State which is approximately 700 km. away from his normal place of residence. The authorised representative further argued that for the employer it is very difficult to avail the services of qualified persons to head such an important post of Principal of a Dental College for which a person has to be exceptionally qualified and experienced too. To appoint such a person it is incumbent on the part of the employer not only to pay salaries but also to pay substantial sum to meet the travelling expenses and incidental expenses like food, local conveyance. But for payment of such sum no reasonable man with the desired qualification and experience will come forward to serve the institution. It was demonstrated that there are no two appointment orders, but the second one is only an office order whereby the payment of Rs. 20,000 p.m. is granted specifically towards reimbursement of travelling, conveyance and food expenses. After the survey was conducted, the employer agreed to deduct the tax on this additional sum of reimbursement also.
However, this fact alone does not necessarily mean that the additional sum is taxable and not exempt under Section 10(14). The assessee agreed to pay the additional tax as advised by his employer. He has no other source of income. To avoid all sorts of litigation and since the revised salary slip was issued to him by the employer, the assessee simply conceded and paid taxes accordingly. At any point of time it cannot be said that the assessee, though in receipt of taxable income, did not offer the same for taxation. It was further argued by the ld.authorised representative that when there is collusion two parties are involved i.e. the employer and the employee. In the case of the employer for non-deduction of tax penalty under Section 271 was levied.
However, the Tribunal, Bangalore Bench 'C' vide order dated 31-12-2001 in ITA Nos. 154 to 158/Bang./2001 for the assessment years 1994-95 to 1997-98 has cancelled the penalty in respect of the employer. The cancellation of penalty in respect of the employer proves that there is no collusion and it was only a bona fide belief of the employer that tax is not deductible on the additional sum paid by way of reimbursement of expenses.
6. The ld. Departmental Representative argued that at all times in the salary certificates issued in Form No. 16 no amount has ever been shown to be exempt under Section 10 even though there is a specific column in Form No. 16 about the same. It was argued that only when during the course of survey the Department was able to find out two appointment orders dated 22-9-1995 fixing a consolidated salary of Rs. 10,000 p.m.
and a separate order dated 5-10-1995 wherein a further sum of Rs. 20,000 p.m. is payable to the employee, the employer came forward and filed the revised Form No. 24 i.e. annual return of salaries and issued revised Form No. 16 i.e. salary certificate to the assessee. These two separate appointment orders itself amount to a conspiracy between the employer and the employee to evade the legitimate tax due to the exchequer. It was further argued that even though the employer has not mentioned any income in the salary certificate yet the employee's responsibility to offer correct income is not ceased. The assessee who is a literate and educated person is supposed to know his responsibility and fulfil his obligations. It was further argued that it is not a case that the gross amount received by the assessee is reflected in the statement of income and the sums were claimed as non-taxable in terms of Section 10 of the Act. The gross salary remains as it is and no part thereof is shown to be exempt under Section 10 either in the original salary certificate or in the revised salary certificate. In the last it was argued that but for the survey under Section 133A the employer would not have deducted the correct tax and the employee would not have paid the legitimate tax due from him. She further relied upon the decision in CIT v. Lalchand Tirath Ram [1997] 225 ITR 675 : 92 Taxman 320 (Punj. & Har.) and CIT v. A. Sreenivasa Pai [2000] 242 ITR 29 : 109 Taxman 267 (Ker.). Our attention was also drawn to the fact that an SLP by the assessee (A. Sreenivasa Pai) has been dismissed by the Hon'ble Supreme Court, as reported in 243 ITR (St.) In reply, the ld. authorised representative argued that the decisions relied upon by the ld. Departmental Representative can be differentiated on the facts of the case. He further relied upon the decision of the Supreme Court in CIT v. Suresh Chandra Mittal [2001] 251 ITR 9 : 119 Taxman 433.
7. We have carefully considered the rival submissions, facts and circumstances of the case, material on record as well as the case law cited. The only point we are required to decide is whether the assessee has concealed his income as held by the Assessing Officer and as confirmed by the CIT(A). In this case penalty was levied because of the survey under Section 133A. After the survey was conducted, during the course of which two letters were found, one being the appointment order dated 22-9-1995 stating the salary and other terms and conditions and another office order dated 5-10-1995 which grants the assessee Rs. 20,000 p.m. towards reimbursement of expenses. The survey party concluded that the sum of Rs. 20,000 p.m. is also part of salary and is required to be included in the assessee's salary income. The employer, therefore, agreed to deduct the tax on this reimbursement and the assessee, who was issued a fresh salary certificate offered the income and paid tax thereon. For appreciating the facts properly we will reproduce the aforesaid two letters dated 22-9-1995 and 5-10-1995 : In accordance with the Proceedings of the meeting of the Governing Body of the Academy of Liberal Education (R), Sullia D.K. You are appointed as Principal, K.V.G. Dental College & Hospital, Sullia, D.K. Karnataka on a consolidated salary of Rs. 10,000 (Rupees ten thousand only) per month for a period of one year from 5-10-1995 to 4-10-1996. Your services in all respects will be governed by the Rules and Regulations of Academy of Liberal Education (R), Sullia D.K. You are required to report for duty to the above said post of Principal, K.V.G. Dental College & Hospital, Sullia, to the President, Academy of Liberal Education (Regd.), Sullia on 5-10-1995.
In addition to your appointment order dated 22-9-1995 the following service conditions shall apply to you.
1. In addition to the salary of Rs. 10,000 as mentioned in the appointment order you will be paid a sum of Rs. 20,000 per month towards reimbursement of Travelling, Conveyance and Food expenses.
2. Profession/income-tax etc. will be deducted on salary amount as per the existing rules.
Reading from the aforesaid letters it is clear that the salary of the assessee is Rs. 10,000 p.m. whereas by office order dated 5-10-1995 he was further granted a sum of Rs. 20,000 p.m. towards reimbursement of travelling, conveyance and food expenses. It was also made clear in the office order dated 5-10-1995 that income-tax will be deducted on salary amount only. This was because the employer was under the bona fide belief that the reimbursement of travelling, conveyance and food expenses are exempt under Section 10(14) of the Act. The employer, therefore, never included such portion in the gross income of the employee-assessee. The appointment order and the office order are both addressed to the assessee at Trivandrum only. It is therefore, clear that to attend the duties the assessee has to come all the way from Trivandrum to a small village called Sullia where the employer-institution is located. It is also an accepted fact that the employer-institution is at such a remote place which is somewhat 700 km. from the residence of the employee and is not directly connected by train services. When the employer considered about the liability to deduct tax at source, he issued a revised salary certificate in Form No. 16. The employee also similarly concurred with the employer's decision and offered the additional sum for taxation. However, the fact remains that the assessee has in fact incurred expenses to attend to the duties. If the assessee is to travel only at the week end to his residential place i.e. four visits a month, the travelling and conveyance expenses will be more than Rs. 16,000 p.m. Since the assessee is not having his permanent residence at the employer's place, he is also required to be reimbursed the food expenses also. Taking the total expense into consideration the same will be in the vicinity of Rs. 20,000 p.m. by any standard. This fact is never denied by anybody.
The admission or rather conceding at the time of assessment does not necessarily always mean that the same becomes a concealed income of the assessee.
8. The word "concealment" is to be given its proper meaning before the provisions of Section 271(1)(c) can be applied. To conceal means to hide or to withhold, or not to disclose. This requires some positive action on the part of the person concerned. Looking to the facts of the case this action of concealing is absent on the part of the assessee.
The assessee always paid correct taxes based on the salary certificate issued to him. When the salary certificate did not include the reimbursement of expenses he filed returns accordingly. When the reimbursement of expenses is included as part of his salary income he offered the same for taxation. It is not the case of Department that the reimbursement of expenses were claimed as exempt under Section 10(14) and the assessee was unable to produce any evidence in support of the claim.
The expenses in fact had been incurred. In the ordinary course the assessee is staying at Trivandrum whereas for the purpose of performance of his duties he is required to attend 700 km. at Sullia.
This is not possible without incurring travelling expenses, conveyance expenses and necessary food expenses. Even though the assessee has conceded in the assessment proceedings that certain receipts are taxable, yet in the penalty proceedings he cannot be deprived of his right to argue that the amount offered is not his income or it is exempt from tax. Penalty cannot be levied only because the assessment order taxes the amount as the income. The conclusion in the assessment proceedings does not become binding in penalty proceedings and the assessee can still argue that income is exempt. The Assessing Officer has failed to consider these aspects of the matter and has levied the penalty only because it was added in the assessment proceedings. It is true that the employer and employee-assessee considered the fact after the survey was conducted under Section 133A. However, this action is limited for the purpose of assessment proceedings only. The assessee is still free to demonstrate in penalty proceedings that the amount received is not truly his income or it is exempt from tax. In the case before us the assessee has amply demonstrated that he had incurred the expenses wholly and exclusively in performance of his duties. We, therefore, find that there is no concealment on the part of the assessee.
9. When the employer failed to deduct tax at source, the Revenue levied penalty under Section 271C of the Act. However, the Tribunal, C-Bench, Bangalore in ITA Nos. 154 to 158/Bang./2001 (supra) has deleted the penalty on the ground that the employer was under bona fide belief that the income is exempt under Section 10(14) and he is not required to deduct tax thereon. Similarly the assessee before us is also under bona fide belief based on the employer's certificate that income was exempt under Section 10(14). We, therefore, see no collusion between the employer and employee which has been the main ground for levy and sustaining the penalty in the assessment years under consideration.
10. We shall now consider the decisions relied upon by the Id.
Departmental Representative. In the first decision relied upon by her i.e. Lalchand Tirath Ram's case (supra), the Hon'ble Punjab & Haryana High Court held that: Mere offering of an explanation would not absolve the assessee from the liability to penalty under Section 271(1)(c), Explanation 1 clause (B) of the IT. Act, 1961. It is necessary for the assessee to offer an explanation and also to substantiate it.
11. In the case before us we find that the assessee has not only offered an explanation but he had also substantiated it. The expenses reimbursed to him have been incurred wholly and exclusively in the performance of his duties. It is a different thing that the sum is offered for taxation in the assessment proceedings. However, since the explanation offered is substantiated on facts he cannot be said to have concealed the particulars of his income.
12. In the next decision relied upon by the ld. Departmental Representative in the case of A. Sreenivasa Pai (supra), the Hon'ble Kerala High Court held that in respect of any facts material to computation of total income of any person there is failure to offer an explanation or the explanation offered is found to be false, or an explanation which is not substantiated, penalty under Section 271(1)(c) is attracted read with Explanation 1 thereto. In the case before us the assessee, though filed returns of income disclosing the additional income, yet the explanation offered by him for not including the income in the original returns is substantiated by the facts. There is no finding given by the Assessing Officer that the explanation offered by the assessee is either false or is not substantiated. On the contrary, the assessee was under bona fide belief that the income is not taxable as per the provisions of Section 10(14) of the Act which has been amply demonstrated. Therefore the said decision of the Kerala High Court relied upon by the ld. Departmental Representative is also not applicable to the facts of the present case.
13. We shall also consider the decisions relied upon by the ld. counsel for the assessee. In the case of Suresh Chandra Mittal (supra) the Hon'ble Supreme Court held that when in a return submitted in response to notice under Section 148 the assessee had offered additional income to buy peace of mind and avoid litigation, so long as the burden of proving concealment had not been discharged by the Revenue the penalty cannot be levied. The Supreme Court in the said decision has upheld the order of the Hon'ble Madhya Pradesh High Court and declined to interfere in the matter. We, therefore, revert to the decision of the Hon'ble Madhya Pradesh High Court, wherein it was held as under : 241 ITR 124: Held, that the assessment was made by the Revenue and once the Assessing Officer had failed to take any objection in the matter, the declaration of income made by the assessee in his revised returns and the explanation that he had done so to buy peace with the Department and to come out of vexed litigation could be treated as bona fide in the facts and circumstances of the case.
Accordingly, no penalty could be levied for concealment.
We find that this decision is squarely applicable to the facts of the present assessee's case. The assessee has not only filed returns in response to notice under Section 148 but also offered an explanation which has neither been found to be false nor has been disproved.
14. A return cannot be 'false' unless there is an element of deliberateness in it. It is possible that even where the incorrectness of the return is claimed to be due to want of care on the part of the assessee and there is no reasonable explanation forthcoming from the assessee for such want of care, the court may, in a given case, infer deliberation and the return may be liable to be branded as a false return. But where the assessee does not include a particular item in the taxable income under a bona fide belief that he is not liable so to include it, it would not be right to condemn the return as a "false" return inviting imposition of penalty. This view is supported by the decision of the Hon'ble Supreme Court in Cement Marketing Co. of India v. ACST 124 ITR 15 : 4 Taxman 44.
15. As held by us in the preceding paragraphs and relying upon the decision of the Hon'ble Supreme Court cited by the ld. authorised representative in the case of Suresh Chandra Mittal (supra) and the Supreme Court's decision in the case of Cement Marketing Co. of India (supra) we hold that the assessee is not liable for penalty under Section 271(1)(c) of the I.T. Act, 1961.