1. This appeal by the Revenue is against the order dt. 17th Jan., 1995 of CIT(A)-in, Baroda cancelling the penalty of Rs. 4,95,410 levied by AO under Section 271(1)(c) of the IT Act, 1961 for the asst. yr.
1985-86.
2. The facts in brief are that a search was conducted at the business premises of the assessee on 31st Aug., 1984 wherein excess stock of Rs. 5,36,838 was found. The AO made the addition and on appeal, learned CIT(A) sustained the addition of Rs. 3,72,907 on account of unexplained investment in stock. In response to penalty notice under Section 271(1)(c), the assessee contended that assessee has not concealed the particulars of income as assessee did not furnish the return under Section 139(1) and assessee is an old assessee assessed to tax. The AO levied the penalty of Rs. 4,95,410, equal to 100 per cent of the amount of tax sought to be evaded. The assessee carried the matter in appeal and learned CIT(A), cancelled the penalty on the ground that Expln. 3 as well as Expln. 5 of Section 271(1)(c) are not applicable to the facts of assessee's case. Aggrieved by the order of learned CIT(A) Revenue is in appeal before us.
3. At the time of hearing before us on behalf of Revenue Shri P.N.Tatoo, learned Departmental Representative appeared and contended that assessee has concealed the particulars of income because the assessee did not file the return of income and excess stock was found during the course of search which was conducted on 31st Aug., 1984. Relying on the reasons given by the AO in the penalty order, learned Departmental Representative contended that penalty was correctly levied and learned CIT(A) is not justified in cancelling the same.
4. On the other hand, learned Authorised Representative appearing for the assessee supported the order of learned CIT(A). The counsel of the assessee submitted that mere failure to file the return by any person who is previously assessed to tax, do not tentamount to concealment as per Expln. 3 of Section 271(1)(c) (operative between 1st April, 1976 and 31st March, 1989). The counsel of the assessee submitted that assessee is previously assessed to tax. Therefore, Expln. 3 is not applicable. The Expln. 5 is also not applicable as the same is also inserted by Taxation Laws (Amendment) Act, 1984 w.e.f. 1st Oct., 1984 whereas search was conducted on 31st Aug., 1984. The learned counsel of the assessee finally contended that even otherwise the portion of addition has been sustained by learned CIT(A) on estimate basis, for which no penalty under Section 271(1)(c) is leviable.
5. After hearing both the sides, we have carefully gone through the orders of authorities below. Rival submissions were also considered.
Admittedly the assessee was previously assessed to tax. Therefore, in our opinion, Expln. 3 to Section 271(1)(c) is not applicable. In the impugned order, learned CIT(A) has stated that Expln. 5 to Section 271(1)(c) is also not applicable because it is doubtful whether stock-in-trade would be covered under the head money, bullion, jewellery or other valuable articles or thing. The learned CIT(A) has also stated that concept of deemed concealment was introduced in the IT Act w.e.f. 1st Oct., 1984. Keeping in view the totality of the facts and circumstances of the case, we are of the view that learned CIT(A) has given cogent reasons for cancelling the penalty levied by AO under Section 271(1)(c). We are, therefore, inclined to uphold the order of learned CIT(A).
7. I have had the benefit of discussing the draft order proposed by my learned brother. I have not been able to persuade myself to agree with the reasoning and conclusion arrived at in the order proposed. I, therefore, propose to pass a dissenting order in the aforesaid appeal by the Revenue against the order by learned CIT(A) cancelling the levy of penalty under Section 271(1)(c) of the IT Act (the Act.) 8. The relevant facts have not been discernibly brought out and hence some more facts are also noted. In this case the assessee never filed its return of income. Several opportunities were given by the AO. In a search conducted by the Department on 31st Aug., 1984, certain material came to light according to which the assessee though having taxable income, did not offer the same by filing the return of income as required under the Act. From the assessment order passed under Section 144, it is seen that as many as ten opportunities were given to file the return of income. The AO, in absence of return, had no option but to complete the assessment to the best of his judgment as required under Section 144 of the Act. The assessee was found to carry large amount of inventory in the business carried on by him. The stock found during search was much larger than that recorded in the books of accounts. The business of trading in foot-ware was also carried on during the assessment year. The AO, therefore, estimated the turnover based on the average turnover of last three years. The rate of net profit was also applied based on the basis of average net profit of last three years. The addition by way of excess stock found during search was also made. In the penalty proceedings no satisfactory reply was furnished except stating that in computing income on estimate basis, penalty under Section 271(1)(c) is not attracted. Learned CIT(A) deleted the penalty on the ground that since the assessee is a regular assessee. Expln. 3 to Section 271(1)(c) is not attracted. The concealment of income can be only with reference to return of income filed. In the absence, of any return filed, it cannot be held that assessee has concealed the particulars of his income. It was also held that, since the income is assessed on estimate basis, penalty for concealment of income is not leviable.
9. It was the submission of learned Departmental Representative that irrespective of Expln. 3, under the main provision of Section 271(1)(c), penalty is leviable. Learned counsel for assessee strongly supported the order of CIT(A). Learned brother, the J.M., agreed with the reasoning of CIT(A). I ascribe the following reasons to hold that penalty under Section 271(1)(c) of the Act is leviable on the facts and circumstances of the case.
10. It is the primary responsibility of the assessee to file the return of income. The correct income for a particular year is best known to assessee only. In spite of several opportunities given to it, the assessee failed to file the return of income. The AO, had therefore no option but to compute the income to the best of his judgment and information available to him. The computation of income is not in dispute. It is not the contention of assessee that it has not earned any income. The only contention is that income is estimated and hence penalty is not leviable. The computation of income has reached finality according to which the assessee has large income chargeable under the Act. The estimate of income was resorted to by the AO only as a last resort after the assessee failed to disclose the income by filing return of income. Thus, the inaction on the part of the assessee itself is the act of concealment of particulars of income. The word "concealment" presupposes some act on the part of the assessee. In the present case, the inaction of not filing return of income itself can be considered as act of concealment of particulars of income. Thus provision of Section 271(1)(c) is attracted on the facts of the case.
11. It is stated that since the assessee is hitherto assessed, hence Expln. 3 to Section 271(1)(c) is not applicable. Since concealment can be with reference to return of income only and since return of income is not filed, penalty is not leviable. I am not convinced with the argument. An assessee not filing the return of income and not showing the income therein cannot be better off or in advantageous position than the person filing the return of income and not showing the correct income in the return. In my opinion both the persons are equally responsible for concealment of particulars of income. Thus even though Expln. 3 to Section 271(1)(c) is not attracted, the provisions of section itself, irrespective of any Explanation, is attracted.
12. It was held by the CIT(A) that concealment of income can be with reference only to the return of income filed by the assessee. During the course of discussing the issue with my learned brother, we came across cases in S. Santhosa Nadar v. ITO (1962) 46 ITR 411 (Mad) and Thoppil Kutti Eroor v. CIT (1958) 34 ITR 850 (Ker) holding so. I have gone through the cases cited. All these decisions were rendered in the context of time-limit for completion of assessment. In these cases it was held that so long as return of income is not filed, it cannot be said that assessee has concealed the particulars of income so as to avail longer time-limit available for completion of assessment. The decisions were rendered under the Indian IT Act, 1922, where the provisions of penalty were prescribed with reference to deliberate concealment of particulars of income, Under the present Act, the word 'deliberately' is deleted as back as w.e.f. 1st April, 1964. At this juncture, it. should be noted that it is neither desirable nor permissible to pick out a word or a sentence from the judgment of the Court, divorced from the context of the question under consideration and treat it to be the complete 'law' declared by the Court. The judgment must be read as a whole and the observations from the judgment have to be considered in the light of the questions which were before the Court. A decision of the Court takes its colour from the questions involved in the case in which it is rendered and, while applying the decision to a later case, the Courts must carefully try to ascertain the true principle laid down by the decision of the Court and not to pick out words or sentences from the judgment, divorced from the context of the questions under consideration by the Court to support their reasonings. In Madhav Rao Jivaji Rao Scindia Bahadur v. Union of India AIR "It is not proper to regard a word, a clause or a sentence occurring in a judgment of the Supreme Court, divorced from its context, as containing a full exposition of the law on a question when the question did not even fall to be answered in that judgment." Thus the case laws relied will not be of any help to the assessee under the present set of facts and provisions of the Act.
No other contention is raised by the assessee for non-levy of penalty.
I, therefore, set aside the order of CIT(A) and confirm levy of penalty under Section 271(1)(c). In the result the appeal of the Revenue is allowed.
On account of difference of opinion between the members who heard this appeal, the following question has been referred to me. for consideration under Section 255(4) of the IT Act: "Whether, on the facts and circumstances of the case, the learned CIT(A) is justified in cancelling the penalty of Rs. 4,95,410 levied by AO under Section 271(1)(c) of the IT Act, 1961 for the asst. yr.
1985-86?" 2. The facts of the case are given in the proposed orders of the learned members. All the same, brief history of the case may be noted to appreciate the controversy.
(i) That the assessee is a dealer in shoes and sells shoes on wholesale and retail basis. A search under Section 132 of the IT Act was carried on by the Revenue Department at the premises of the assessee. The stock found was inventorised and its value was fixed at Rs. 15,66,568. The assessee did not maintain day today stock register and therefore, did not have exact value of stock in the books on the date of search. The Authorised Officer on the basis of rough and ready calculation and after applying G.P. rate of 7 per cent, worked out stock at Rs. 10,29,730. This way, discrepancy of Rs. 5,36,838 was noted by the Revenue authorities.
(ii) That, after the close of financial year, the assessee was required to submit the return for asst. yr. 1985-86. The assessee did not file any return in spite of repeated notices. The AO accordingly made ex parte assessment estimating assessee's income on the basis of material available to him, at Rs. 10,89,410.
3. The assessee impugned above assessment in appeal before the CIT(A) who after considering facts and circumstances of the case, held that the estimate made was on the higher side. He scaled down assessee's business income from Rs. 5,52,572 to 4,63,653 and unexplained investment in stock from Rs. 5,36,838 to Rs. 3,72,908. No further proceedings were taken by either of the parties and thus above order of the CIT(A) in quantum proceedings became final.
4. During the course of assessment proceedings, the AO also initiated penalty proceedings under Section 271(1)(c) of the IT Act and issued show-cause notice to the assessee under the above provisions. A fresh opportunity was provided to the assessee vide letter dt. 9th Aug., 1989. The assessee in its reply dt. 29th Aug., 1989 stated that assessee has already furnished a reply and had nothing further was to be added.
5. The AO after considering facts and circumstances of the case, concluded that assessee had concealed particulars of income both in respect of business as also investment and assessed under Section 69 of the IT Act. The AO also took into account that the assessee failed to furnish any return either under Section 139(1) or even after notice under Section 139(2) was served on the assessee. This, according to the AO, clearly showed that the assessee did not have any reply and "concealment" was so obvious. The AO further observed that he was satisfied that the assessee wanted to conceal entire income which was subsequently assessed in its hands. The AO also noted that assessee did not produce books of accounts to explain excess turnover or business addition made in the hands of the assessee. He accordingly imposed penalty of Rs. 4,95,410 representing 100 per cent of tax sought to be evaded under Section 271(1)(c) of the IT Act.
6. The assessee impugned above assessment in appeal before the CIT(A) who after considering facts and circumstances of the case and background under which unexplained stock was found with the assessee at the time of search cancelled the levy of the penalty. Before him the main argument advanced was that the assessee did not file any return of income and therefore, could not be penalised for concealment of income or furnishing of inaccurate particulars of income in terms of Section 271(1)(c) of the Act. It was submitted that Expln. 3 or Expln. 5 to Section 271(1)(c), was not applicable in this case. Explanation 3 was applicable to the assesses who have not yet been assessed under the IT Act whereas Expln. 5 was applicable to the cases where search took place after 1st Oct., 1984 whereas in this case, search had taken place much earlier that is on 31st Aug., 1984. The learned CIT(A) accepted that above two Explanations were not applicable to the facts of the case. He further observed that no penalty for concealment can be imposed where the assessee did not submit any return of income. The learned CIT(A) further held that it was not a fit case for levy of penalty as income was computed on estimate basis and no concealment or furnishing of inaccurate particulars of income was established.
7. The Revenue being aggrieved challenged the above order of the CIT(A) in appeal before the Tribunal. After hearing the case, the learned J.M.in the proposed order, held that Explns. 3 and 5 to Section 271(1)(c) were not applicable in this case. He agreed with the learned CIT(A) that on totality of facts and circumstances of the case, no penalty was exigible and the penalty was rightly cancelled by the CIT(A). The learned A.M. of the Bench did not agree with the view expressed by the learned J.M. He dissented from the above view and held that levy of penalty was required to be upheld. The relevant portion of the proposed order of the learned A.M. is as under : "10. It is the primary responsibility of the assessee to file the return of income. The correct income for a particular year is best known to assessee only. In spite of several opportunities given to it, the assessee failed to file the return of income. The AO had, therefore, no option but to compute the income to the best of his judgment and information available to him. The computation of income is not in dispute. It is not the contention of assessee that it has not earned any income. The only contention is that income is estimated and hence penalty is not leviable. The computation of income has reached finality according to which the assessee has large income chargeable under the Act. The estimate of income was resorted to by the AO only as a last resort after the assessee failed to disclose the income by filing return of income. Thus, the inaction on the part of the assessee itself is the act of concealment of particulars of income, The word "concealment" presupposes some act on the part of the assessee. In present case the inaction of not filing return of income itself can be considered as act of concealment of particulars of income. Thus, provision of Section 271(1)(c) is attracted on the facts of the case.
11. It is stated that, since the assessee is hitherto assessed, hence Expln. 3 to Section 271(1)(c) is not applicable. Since concealment can be with reference to return of income only and since return of income is not filed, penalty is not leviable. I am not convinced with the argument. An assessee not filing the return of income and not showing the income therein cannot be better off or in advantageous position than the person filing the return of income and not showing the correct income in the return. In my opinion both the persons are equally responsible for concealment of particulars of income. Thus, even though Expln. 3 to Section 271(1)(c) is not attracted, the provisions of section itself, irrespective of any Explanation, is attracted.
12. It was held by the CIT(A) that concealment of income can be with reference only to the return of income filed by the assessee. During the course of discussing the issue with my learned brother, we came across cases in S. Santhosa Nadar v. ITO (1962) 46 ITR 411 (Mad) and Thoppil Kutti Eroor v. CIT (1958) 34 ITR 850 (Ker) holding so. I have gone through the cases cited. All these decisions were rendered in the context of time-limit for completion of assessment. In these cases it was held that so long as return of income is not filed, it cannot be said that assessee has concealed the particulars of income so as to avail longer time-limit available for completion of assessment. The decisions were rendered under the Indian IT Act, 1922, where the provisions of penalty were prescribed with reference to deliberate concealment of particulars of income. Under the present Act, the word 'deliberately' is deleted as back as w.e.f.
1st April, 1964. At this juncture, it should be noted that it is neither desirable nor permissible to pick out a word or a sentence from the judgment of the Court, divorced from the context of the question under consideration and treat it to be the complete 'law' declared by the Court. The judgment must be read as a whole and the observations from the judgment have to be considered in the light of the questions which were before the Court. A decision of the Court takes its colour from the questions involved in the case in which it is rendered and, while applying the decision to a later case, the Courts must carefully try to ascertain the true principle laid down by the decision of the Court and not to pick out words or sentences from the judgment, divorced from the context of the questions under consideration by the Court to support their reasonings. In Madhav Rao Jivaji Rao Scindia Bahadur v. Union of India AIR 1971 SC 530, Hon'ble Supreme Court (at p. 578) observed: 'It is not proper to regard a word, a clause or a sentence occurring in a judgment of the Supreme Court, divorced from its context, as containing a full exposition of the law on a question when the question did not even fall to be answered in that judgment'.
Thus the case laws relied will not be of any help to the assessee under the present set of facts and provisions of the Act.
No other contention is raised by the assessee for non-levy of penalty. I, therefore; set aside the order of CIT(A) and confirm levy of penalty under Section 271(1)(c). In the result the appeal of the Revenue is allowed." 8. On account of above difference, the matter has come up before me under Section 255(4) of the IT Act. It was fixed for hearing and learned representatives of both the parties were heard. The learned Departmental Representative relied upon and supported the order of the AO. He fairly conceded that Explns. 3 or 5 to Section 271(1)(c) were not attracted in this case. He, however, contended that penalty was rightly imposed under the main provision which is to the following effect: "271(1) If the AO or the CIT(A) or the CIT in the course of any proceedings under this Act, is satisfied that any person-- (c) has concealed the particulars of his income or furnished inaccurate particulars of such income." 9. It was emphasised by Shri R.C. Gupta, learned Departmental Representative that when assessee did not submit his return, he concealed the particulars of his income. No income was shown in the return in respect of the discrepancies found by the search party at the time of search. Thus entire income assessed in his hands was income which was concealed from the Revenue. When it was not shown in the return, it was concealed. It was accordingly emphasised that first limb of Clause (c) i.e. "has concealed the particulars of his income" was fully applicable and therefore, levy of penalty was justified. The above provision fully supports the view taken by the learned A.M. as the main section was applicable, there was no necessity to go to the Explanations in this case.
10. Shri Gupta also emphasised that after amendment of Section 271(1)(c), the word "deliberate" was omitted from statute book w.e.f.
1st April, 1964 and therefore, onus stood shifted to the assessee to prove that he did not conceal any income. Shri Gupta further submitted that even where assessment was made on estimate basis, the levy of penalty is fully justified. In this connection, he drew my attention to decision of Hon'ble Madhya Pradesh High Court in the case of Addl. CIT v. Smt. Chandrakanta and Anr. (1994) 205 ITR 607 (MP).
11. Shri J.P. Shah, learned counsel for the assessee, supported the proposed order of the learned J.M. He emphasised that only provisions under which penalty under Section 271 could be levied, without submission of return, were Explns. 3 and 5 to Section 271(1)(c). Under the above Explanations, the legislature provided the circumstances and stretched the meaning of "concealment" or "furnishing of inaccurate particulars" to include cases of "deemed concealment" and "deemed furnishing of inaccurate particulars". If circumstances prescribed in the provisions were satisfied, the penalty could be levied. Although there was no concealment or furnishing of inaccurate particulars of income, but legislature in their wisdom, treated certain situations of "deemed concealment" or "deemed furnishing of inaccurate particulars" of income as covered under Section 271(1)(c) of the Act. Admittedly in the present case neither Expln. 3 nor Expln. 5 has been held to be applicable and there is no charge of deemed concealment or deemed furnishing of inaccurate particulars of income. Even both the members have agreed that above Explanations are not attracted to the facts of the case.
12. Shri Shah further contended that there can be no concealment without furnishing of a return. Whether assessee is going to show income or conceal it, can be found only when return is filed and not otherwise. In this connection, Shri Shah drew my attention to observations of their Lordships of the Hon'ble Kerala High Court in the case of Thoppil Kutti Eroor v. CIT (supra), which are as under: "It is impossible to say that when a person has failed to furnish any return at all what he has done is to conceal particulars of his income or to deliberately furnish inaccurate particulars of such income within the meaning of Section 38(1)(c) of the Cochin IT Act, 1117. Therefore, where a person has not filed any return, the longer period of eight years is not available for the purpose of assessing escaped income under Section 44(2) of that Act, and only the shorter period of four years is available." He has also placed reliance on the decision of Hon'ble Mysore High Court in the case of S. Narayanappa & Bros. v. CIT (1961) 41 ITR 125 (Mys) wherein their Lordships have held as under : "But the learned Government Pleader at one stage urged before us that the mere fact that an assessee has not produced a return before the ITO in a case like the one which is before us, would not necessarily make it incompetent for the ITO to impose a penalty under Section 28(1)(b). What was urged before us was that in a case where an assessee has furnished no return at all before the ITO, it should be presumed for the purposes of Section 28(1)(b) that he has furnished a return of his income intimating the ITO that his income is nil. It seems to me that the language of Section 28(1) does not admit of any such construction since the clear requirement of the provisions of this sub-section is that an assessee on whom a penalty is proposed to be imposed under Section 28(1)(b) should have in the first instance furnished his return. That, in my opinion, is the ordinary and grammatical meaning of the words occurring in the Act.
To interpret the language of this provision in the manner suggested by the learned Government Pleader would, in my opinion, be too artificial and too far-fetched to commend itself for acceptance.
Although it is true that the provisions of a statute like those contained in Section 28(1)(b) have to receive a construction so as to promote the object of the statute, it is clear that when we interpret a penal provision like that contained in Section 28(1)(b), the interpretation we should place upon it must accord with reason and justice and must be in accordance with the plain ordinary and rational meaning of the words contained in those provisions. So interpreted, I would not, in my opinion, be right in placing on Section 28(1)(b) the construction for which the learned Government Pleader contends.
At one stage it appeared to me that if we should accept the construction suggested by Mr. Srinivasan appearing on behalf of the assesses, it would lead to the result that an assessee who furnished a return, though late, would be in a somewhat more disadvantageous position than one who had furnished no return at all. An assessee who furnished a return though not within the period allowed by the Act, incurs the risk of penalty under Section 28(1)(b) although an assessee who committed contumacious default in furnishing his return and produced none was not in any such jeopardy. But on further reflection, it appears that this seeming incongruity is capable of the explanation that the legislature intended that a more serious view should be taken of the conduct of a person who makes a false and inaccurate return than that of one who furnishes no return at all." In the case of S. Santhosa Nadar v. ITO (supra), their Lordships of Madras High Court observed as under: "As a voluntary return filed after the period of four years from the close of the assessment year is not a valid return, such a case should be regarded as if no return had been filed at all. It could not be said in such a case that there has been a concealment of the particulars of income or deliberate furnishing of inaccurate particulars and Section 28(1)(c) of the IT Act, 1922 would not be applicable; the case would come only within the scope of Section 28(1)(a).
Section 28(1)(a) and Section 28(1)(c) are mutually exclusive. Where no return is filed, the case could not fall under Section 28(1)(c) and accordingly the case will not be taken out of the operation of Section 34(3) of the Act and an assessment made beyond the period of four years would be invalid." 13. I have carefully considered the submissions of both the parties. It is clear from above quoted case law that the matter in issue is not res integra but is covered by three decisions of High Courts. No decision taking a contrary view was cited on behalf of the Revenue. The decisions cited by the learned Departmental Representative in the case of K.P. Reddy v. CIT (1968) 68 ITR 638 (AP), Thakur Veerpal Singh v.CIT (1988) 172 ITR 238 (MP) and CIT v. Dass Jewellers (2002) 258 ITR 668 (Del) do not deal with controversy before me. In all the above cases, the assessee submitted a return and did show return income which was much less than the assessed income and accordingly it was held that onus was on the assessee to prove that it was not a case of concealment or of deemed concealment. No such situation arises in this case.
Likewise omission of word "deliberate" from Section 271(1)(c) of IT Act is not relevant to solve the controversy. The above omission has shifted burden of proof from the Revenue to the assessee. It has nothing to do with effect of non-submission of the return. In the light of above discussion I hold that no penalty can be levied on the assessee under Section 271(1)(c) where no return of income is submitted. I concur with the view taken by the learned J.M.14. Before parting I must also deal with contention of the Revenue that such a view as mentioned above, would encourage assessees not to submit the return of income and thus avoid penalty provision of Section 271(1)(c) of the IT Act. This argument is without any substance. There are several provisions in the Act to compel the assessee to submit the return. In this connection, reference can be made to provisions of Sections 276C and 276CC of the Act, where penalty for failure to furnish the return is provided. The assessee can also be prosecuted. It is, therefore, difficult to accept that assessee can avoid furnishing of return under the IT Act without facing penal and serious consequences. Be that as it may, from the plain language of the section and from the scheme of the Act, it is clear that no penalty under Section 271(1)(c) can be levied unless the assessee submits a return of income under Section 139 or 147 of the IT Act.
15. In the light of above view I deem it unnecessary to record any finding whether penalty could be levied, as income was assessed on "estimate" basis only.
16. I agree with the order proposed by the learned J.M. The matter would now go before the Division Bench for passing an appropriate order in accordance with law.
There being a difference of opinion between the members constituting the original Bench, the matter was referred to a Third Member.
2. In accordance with the majority view, we uphold the order of learned CIT(A) cancelling the penalty of Rs. 4,95,410 levied by AO under Section 271(1)(c) of the IT Act, 1961.