Full Judgment
At the time of hearing the appeals, the learned counsel appearing on behalf of the assessees filed the following common additional grounds in respect of ITA Nos. 845 to 853/Hyd/2003 : (i) The assessing officer has no jurisdiction under section 120 on the appellant for levying penalty of Rs. 58,256, under section 271(1)(c), especially as the proceedings are of quasi-criminal in nature.
(ii) The above ground has been omitted to raise at the time of filing the original appeal, because the appeal was filed in a hurry as the assessing officer attached bank accounts of the company in which I am a whole time director, for recovery of the above penalty. Consequently, the appeal and stay petitions were hurriedly filed on 4-6-2003.
(iii) Thus, the assessee is prevented by sufficient reasonable cause for not filing the above additional ground at the time of filing the original appeal.
(iv) If this additional ground is not admitted, it would put irreparable loss and hardship, and the penalty liability of the appellant effects, in view of the Supreme Court judgment in National Thermal Power Co. Ltd. v. CIT (1998) 229 ITR 383 (SC).
The facts of the case revolve in a narrow compass. All the appellants herein belong to one family and they were partners in Sri Rama Engg.
Constructions, Hyderabad. They have received from the firm, salary and interest for the assessment years under consideration. Lady partners have also earned property income in addition to the income from the firm. From the profit and loss account and computation of the income of the firm, the assessing officer noticed that the partners, appellants herein, have earned substantial income. However, they have not filed the returns of income in their individual status. Therefore, notices were issued under section 148 of the Act in response to which all the partners have filed their returns and declared their respective incomes. It may be noticed that in the case of lady partners, property income was not declared in the returns filed in response to the notices under section 148 but before completion of assessment and without any detection or indication by the assessing officer they have declared property income by filing letters dated 27-3-2002, stating that the property income was not declared in the original return by mistake. The assessments in the case of lady partners and also in the case of other partners except Sri V. Narayana were completed on the basis of incomes returned. In other words, the income declared by the assessees was accepted by the assessing officer. However, in the case of Sri V.Narayana, depreciation was claimed on an imported car which was disallowed by the assessing officer. According to the assessee, the claim of depreciation was based on a wrong advice by the tax consultant and thus it was a genuine and bona fide mistake.
Upon completion of assessments, the Income Tax Officer, Ward-6(3), Hyderabad, initiated penalty proceedings under section 271(1)(c) of the Act, presumably by invoking ExpIn. 3 to section 271(1)(c) of the Act.
In response to the notices, the assessees herein submitted that the returns of income were filed voluntarily before any detection by the assessing officer and they were under bona fide impression that the previous tax consultant had filed returns of income. It was also contended that they were not aware that salary and interest received from the firm are liable to tax in their hands even after the firms income had suffered tax at a flat rate. Reliance was placed on the following judgments of the Supreme Court in support of their contention that in the absence of any deliberateness on the part of the assessees in not disclosing the income, penalty should not be levied :Cement Marketing Co. of India Ltd. v. Asstt. Commr. of Sales-tax (1980) 124 ITR 15 (SC) (c) Sir Shadilal Sugar & General Mills Ltd. v. CIT (1987) 168 ITR 705 (SC).
The assessing officer was not convinced with the explanation for the following reasons : (i) The assessees have not voluntarily disclosed in their returns of income until the same were detected by the assessing officer and issued notices under section 148 of the Act.
(ii) Ignorance of law is not an excuse for failure to fulfil statutory obligation under any law.
(iii) The claim of the assessees that they are under the bona fide impression that the returns of income were filed by the tax consultant himself is not tenable as the returns of income has to be signed by the assessees themselves and it cannot be filed without their knowledge.
(iv) Assessees explanation is general in nature and not supported by any documentary evidence.
(v) The firm in the name of M/s. Sri Rama Engineering Constructions was formed in the year 1973 and the firm as well as its partners were filing return of income and were paying taxes thereon. Therefore, the claim of the assessees that refund of the firm would be adjusted against the advance-tax of the partners is not correct.
(vi) As per the provisions of the Act, TDS is being deducted from the contract receipts of the firm. As income belongs to the firm, credit for TDS belongs to the firm only. A perusal of the assessment folder of the firm for the assessment years 1993-94 to 1996-97 shows that the refund of the firm was either adjusted against the arrears of demand of the firm or of the partners, if the firm gives in writing for the same.
In respect of advance-tax payable by the partners, nothing is given for adjustment of refund of the firm for the abovementioned years.
(vii) According to the ExpIn. 3 to section 271(1)(c) of the Act, the income disclosed under section 148 of the Act has to be considered as income deemed to have been concealed.
The case law referred to by the assessees were distinguished on facts and the assessing officer concluded that the assessees herein have concealed the particulars of salary, remuneration and property income, and accordingly levied penalty amounting to Rs. 19,48,393 as could be seen from the chart (annexed to this order).
Aggrieved, it was contended before the learned CIT (A), apart from the contentions urged before the assessing officer, that the main source of income is interest and salary from the partnership firm. The assessees herein have not concealed income at any time before the department.
They were under the bona fide impression that the income was taxable in the hands of a firm due to improper advice given by the counsel. It was also submitted that the partners tax demands are normally adjusted out of the firms refunds and thus the partners were under the bona fide impression that the tax consultant has taken care of the partners returns and payment of taxes. The very fact that the audit report of the firm for the assessment years under consideration showed the details of individual partners interest and remuneration and the assessments being taken up for scrutiny, it cannot be said that the assessees intended to conceal the income inasmuch as the incomes of the assessees herein were already known to the department and, thus, it is not a case of deliberate concealment of income. As far as male partners are concerned, returns were filed under Voluntary Disclosure Scheme and the incomes of the partners were already disclosed therein but the declarations were held to be invalid due to the fact that the tax dues were not paid. Thus, it was not the intention of the assessees herein to conceal the income. The assessees herein were penalised in the form of interest under sections 234A, 234B and 234C of the Act and the partners have been penalised for no deliberate intentional default. In the case of V. Narayana it was contended that the depreciation on an imported car was wrongly claimed but mere rejection of claim should not be considered as furnishing of wrong particulars inasmuch as the claim was based on a wrong advice. Reliance was placed on several case law.
The learned, CIT (A) rejected the contentions of the assessees and confirmed the penalties levied by the assessing officer. He observed that the returns of income were filed consequent to the notices issued under section 148 of the Act and thus the assessees had concealed the particulars of income within the meaning of section 271(1)(c) of the Act. He further observed that the claim of depreciation constitutes furnishing of inaccurate particulars of income.
Further aggrieved, assessees are in appeal before us. Learned counsel appearing on behalf of the assessees filed written submissions and also the relevant papers to submit that it is not a fit case for levy of penalty under section 271(1)(c) of the Act. In respect of three male partners, a preliminary objection was raised by the learned counsel, i.e., the Income Tax Officer who levied the penalty had no jurisdiction under section 120 of the Act to deal with the assessees and thus penalties imposed by the assessing officer become non est in law.
Adverting our attention to pp. 47 and 48 of paper book, learned counsel submitted that the aforementioned three partners have become directors of the company by name SREC (P) Ltd. which has taken over the assets and liabilities of M/s. Sri Rama Engineering Construction with effect from 1-4-1999, and thus the jurisdiction to assess the said directors is vested with the Deputy Commissioner, 3(2), Aayakar Bhavan, Hyderabad. Though the same was brought to the notice of the Assistant Commissioner, Cir-6(2), Budha Bhavan, Secunderabad, the Income Tax Officer, Ward-6(3), has wrongly assumed jurisdiction to levy penalty and thus the penalty orders are non est in law. The learned counsel has also raised another technical objection, i.e., whether Explanation 3 to section 271(1)(c) is applicable to the assessees herein. The case of the learned counsel is that Expln. 3 can be invoked only in respect of those persons who have not been previously assessed to tax whereas the assessees herein were assessed to tax previously, as has been observed by the assessing officer himself, and thus ExpIn. 3 is not applicable.
He has also taken us through ExpIn. 4 to section 271(1)(c) to submit that penalty cannot be computed in respect of assessees who have been previously assessed to tax but filed the returns in response to notices under section 148 of the Act. The main thrust of the argument of the learned counsel is that the incomes declared by the assessees herein were accepted as such and no additions were made except in the case of Sri Narayana where the depreciation was disallowed. Learned counsel has also adverted our attention to the amendment to ExpIn. 3 by the Finance Act, 2002, to submit that only with effect from 1-4-2003, the theory of deemed concealment was extended even in respect of the persons who have been assessed to tax earlier. Since the amendment was brought into force with effect from 1-4-2003, Explanation 3 as it stood before 1-4-2003 is applicable to the assessees who have filed the returns in response to notices issued under section 148 of the Act in respect of the asst. yrs. 1996-97 and 1998-99 and since the assessees herein filed the returns in respect of earlier years, Expln. 3 cannot be invoked to levy penalty. Learned counsel was fair enough to advert our attention to the judgment of the Supreme Court in the case of K.P. Madhusudhan v.CIT (2001) 251 ITR 99 (SC) to submit that even if Explanation 1 is not invoked specifically, the main provisions include the Explanation and then it is the duty of the assessees to satisfy the assessing officer that the case does not fall within the Explanation 1 to section 271(1)(c) of the Act. Learned counsel submitted that three male partners having already declared income under the VDIS, it cannot be said that they have any intention to conceal the income. Non-filing of returns or claiming depreciation on an imported car is only on account of wrong advice and due to bona fide reasons. But for the judgment of the Honble Supreme Court in the case of Hemalatha Gargya v. CIT (2003) 259 ITR 1 (SC), the issue as to whether the time for payment of tax and interest fixed under the VDIS is extendable or not is debatable and thus it cannot be said that the assessee has not intentionally filed the returns. The fact that the returns were filed under VDIS shows that the incomes earned by the assessees are within the knowledge of the departmental officials and thus the assessees would not have taken improper step of not filing the returns intentionally, to face the wrath of levy of interests under sections 234A, 234B and 234C of the Act which itself is almost double the tax payable and, in addition, to face the penalty equivalent to tax payable. The facts and the circumstances show that the assessees herein were wrongly advised. It was also contended that the profit and loss account , balance sheet, and tax audit reports of the firm, filed before the assessing officer exhibited the details of partners interest and remunerations and thus all the particulars were within the knowledge of the department. The assessees could not have intentionally withheld filing of returns.
Reliance was placed on the decision of Tribunal, Hyderabad Bench, in the case of Gudiwada Ramachandra Rao v. ITO (1991) 37 ITD 443 (Hyd), wherein the Bench observed that the word concealment implies that there is deliberate act on the part of the assessees. Thus, it is for the revenue to prove that the assessees have intentionally suppressed the facts and not filed the returns. It was also contended that ignorance of law, particularly in connection with the income-tax legislation, can be a reasonable cause.
On the other hand, the learned Departmental Representative submitted that the assessees have no right to raise additional grounds at this juncture in the light of section 124(3) of Income Tax Act. It was submitted that neither at the time of completion of assessment proceedings nor during the penalty proceedings, the assessees have raised the objection before the Income Tax Officer, Ward-6(3), Secunderabad, in this regard and thus it cannot be agitated at this stage. It was also submitted that the assessees merely stated before the Assistant Commissioner, Cir-6(1), about filing of the returns by the directors but never raised specific objection before the Income Tax Officer.
With regard to the applicability of ExpIn. 3, learned Departmental Representative submitted that the amendment to ExpIn. 3 is clarificatory in nature. At any rate, ExpIn. 1 to section 271(1)(c) applies to the instant case, since admittedly, assessees did not file the returns voluntarily particularly when they were previously assessed to tax. It cannot thus be said that they were not aware of tax liabilities. Even if excess tax is paid by the firm, it is for the assessees herein to ask for adjustment of tax but in the instant case, even admitted tax was not paid and no request was made to that effect.
Unless the assessees herein file the returns, request for adjustment of tax cannot be made. It was thus contended that there is no evidence on record that non-filing of the returns was based on wrong advice. It was a deliberate default on the part of the assessees. In the light of the decision of the Honble Supreme Court in the case of K.P. Madhusudhan (supra), there is a deemed concealment. It was also submitted that the word deliberate was deleted from section 271(1)(c) of the Act which implies that in order to levy penalty, it is not necessary to show that the concealment of income was deliberate. Since the returns were not filed voluntarily, penalty levied by the assessing officer and confirmed by the CIT (A) deserve to be. confirmed. He thus strongly relied upon the orders of the tax authorities.
We have carefully considered the rival submissions and perused the record. With regard to the additional grounds raised on behalf of three assessees (S/Sri V. Narayana, V. Vijaya Raghava Choudary and V. Vijaya Bhaskar Choudary), as regards jurisdiction of the assessing officer to levy penalties, we are of the firm view that the assessees abovementioned have lost their right to raise the issue at this juncture in view of section 124(3) of the Act which reads as under : "124(3) No person shall be entitled to call in question the jurisdiction of an assessing officer (a) where he has made return under sub-section (1) of section 139, after the expiry of one month from the date on which he was served with a notice under sub-section (1) of section 142 or sub-section (2) of section 143 or after the completion of the assessment, whichever is earlier; (b) where he has made no such return, after the expiry of the time allowed by the notice under sub-section (1) of section 142 or under section 148 for the making of the return or by the notice under the first proviso to section 144 to show-cause why the assessment should not be completed to the best of the judgment of the assessing officer, whichever is earlier." It may be noticed that in the instant case, the Addl. Commissioner, Range-6, Hyderabad, has specifically requested the assessees to inform their status before assuming jurisdiction. Instead of addressing a letter in reply to the Addl. Commissioner, a letter was addressed to the Assistant Commissioner, Cir-6(1), Budha Bhavan, Secunderabad, wherein it was merely mentioned that the company, SREC Projects (P) Ltd., has taken over the assets and liabilities of M/s. Sri Rama Engineering Constructions and the returns of the directors of the company are filed in the office of the Deputy Commissioner, Range 3(2), Aayakar Bhavan, Hyderabad. This letter is signed by the authorised signatory of SREC Projects (P) Ltd. None of the assessees herein has filed any specific objection before the concerned assessing officer with regard to the jurisdiction. No objection was ever raised either before completion of the assessment or during the course of penalty proceedings. Thus, in our considered view, the assessees have no right to raise the issue of jurisdiction before the Tribunal in the light of clear language of section 124(3) of the Act. Accordingly, additional grounds are rejected.
The next contention of the assessees is that ExpIn. 3 to section 271(1)(c) of the Act, as it stood at the relevant point of time, applies to those assessees who are not previously being assessed to tax. We find merit in the contention of the learned counsel.
Admittedly, ExpIn. 3 to section 271(1)(c) of the Act, as it stood at the relevant point of time, opens with the words "where any person who has not been previously assessed under this head which implies that only those assessees who were not previously assessed to tax but filed the returns in response to section 148 of the Act would be attracted by ExpIn. 3 to section 271(1)(c) of the Act. The intention of the legislature is further clear by the fact that the expression "who has not been previously assessed under the Act" was omitted from the statute book by the Finance Act, 2002, with prospective effect, i.e., with effect from 1-4-2003. Thus, it is only from 1-4-2003, ExpIn. 3 gets attracted even in a case where a person was previously assessed to tax. Since the amendment to ExpIn. 3 was not retrospective, it implies that prior to 1-4-2003, an assessee who has been previously assessed to tax but filed the returns of later years only in response to notices under section 148 would not be treated as an assessee who has concealed the particulars of his income. In the instant case, admittedly, the assessees herein were previously assessed to tax, therefore, we hold that the assessing officer has wrongly invoked ExpIn. 3 to section 271(1)(c) of the Act to impose the penalties.
The conduct of the assessees would also go to show that they had no intention to conceal their income but for the bona fide mistake of assuming that the firms returns and tax thereon would take care of the tax payable by the partners or wrong assumption that the tax consultant would take care of the matters connected with the taxation of the partners of the firm, M/s. Sri Rama Engineering Constructions.
Admittedly, some of the assessees herein have filed the returns under VDIS. Thus, the income particulars of those assessees were not concealed but within the knowledge of the tax department. No prudent assessee would, under such circumstances, intentionally avoid filing regular Income Tax Returns so as to face the consequences of paying huge tax in terms of compulsory interest leviable under sections 234A, 234B and 234C of the Act and also the penalties levied under other provisions of the Act. Similarly, the balance sheet, Profit and loss account and tax audit reports of the firm filed before the assessing officer contains the details of the partners incomes (interest and remuneration) and thus broad particulars of assessees incomes are already in the knowledge of the assessing officer, and thus it is difficult to conceive that a prudent assessee would intend to conceal the income particulars intentionally, by not filing the returns of income, but for the bona fide reasons. In the peculiar facts and circumstances of the case, we are therefore, of the view that the assessees explanation cannot be said to be false and thus penalty cannot be levied even by invoking Expln. 1 to section 271(1)(c) of the Act. In the case of lady partners, the property income was no doubt omitted to be disclosed in the returns filed in response to notices under section 148 of the Act but the mistake was corrected by bringing to the notice of the assessing officer the particulars of property income, before any detection by the department. In fact, the legislature, in its wisdom, has sought to levy penalty, in respect of those assessees who have been previously assessed to tax but failed to file the returns till the notice was issued under section 148 of the Act, with effect form 1-4-2003, which also shows that the assessees act of non-filing of returns in time would not fall within the category of deemed concealment. Under these circumstances, the onus is on the revenue to prove that the assessees had deliberately and intentionally concealed the particulars of income. In the instant case, the facts and circumstances clearly and categorically prove that the assessees would not have committed the mistake of non-filing of the returns but for the bona fide impressions. Whether an assessees action or inaction is based on bona fide impressions or not depends upon the facts and the circumstances of each case. We confine to the peculiar facts of the case to hold that the assessees herein have not concealed the particulars of income with any mala fide intention. Even in the case of Sri Narayana, the fact remains that depreciation on an imported car is not permissible under law on the face of it and thus the assessee would not have intentionally claimed depreciation but for the wrong advice or on an improper understanding of the advice. The case of the revenue is that ignorance of law is not an excuse. It may be relevant here to appreciate the observations of various Courts on this issue. In the case of Evans v. Bartlam (1937) AC 473, Lord Atkin observed as under : "........ the fact is that there is no and never has been a presumption that every one knows law. There is rule that ignorance of the law does not excuse, a maxim of very different scope and application."Motilal Padampat Sugar Mills Co. Ltd. v. State of Uttar Pradesh & Ors. (1979) 118 ITR 326 (SC) at p. 339, Justice Bhaghvati observed as under ..
"It is often said that every one is presumed to know the law, but that is not, a correct statement; there is no such maxim known to the law." In the case of WTO v. S.P. Jayakumar (1983) 3 ITD 221 (Mad), the Tribunal, A Bench, Madras, observed as under : "6. That the tax laws of this country are complex and complicated and often require for compliance therewith, the assistance of tax practitioners specialising in this field, is a well known fact. It is equally well known fact that the legislation in this field undergoes so frequent changes and amendments that it is not possible for even a person specialising in this field, including the tax administrator, to claim that he knows what exactly the law is on a particular given day or period without making references to the history of the enactments.
In such circumstances, it would be a travesty of truth and justice to hold that the assessee knew or ought to have known the correct law and comply therewith, even though, in fact, he was not aware of the provisions." Under these circumstances, we cancel the penalties levied by the assessing officer and allow the appeals filed by the assessees.