1. This appeal by the assessee arises out of the order dt. 27th Feb., 2001 of the CIT(A)-III, in respect of the block assessment for the period 1988-89 to 1997-98. The only dispute relates to the levy of penalty under Section 158BFA(2) of the IT Act, 1961.
2. The assessee is an individual. There was a search action in the case of the assessee which led to the block assessment being framed under Chapter XIV-B of the IT Act, 1961. For the purpose of assessment, notice under Section 158BC r/w Section 158BD was issued on 13th March, 1998, which was served on the assessee on 14th March, 1998. In response to this notice, the assessee filed a return of income on 28th April, 1998 declaring an undisclosed income of Rs. 21,00,525. The assessment was completed on 15th Nov., 1999, determining the undisclosed income at Rs. 21,79,160 and the tax payable at Rs. 13,07,496. The AO further levied penalty under Section 158BFA(2) of the Act of Rs. 10,44,600, i.e., an amount equal to the amount of tax payable under block assessment. The assessee was unsuccessful before the CIT(A) and is in appeal before us.
3. Before us, the learned counsel for the assessee vehemently argued against the imposition of penalty in the facts and circumstances of the case and in the light of the provisions of Section 158BFA(2) of the Act. Subsequent to search proceedings in the premises of Shri Ambalal Shankarlal, the factor of the assessee, the assessee was asked to file the return of income under the block assessment scheme under Section 158BD of the Act. The assessee complied with the notice and filed a return declaring an income of Rs. 21,00,525. During the course of the assessment, the AO made two additions viz., Rs. 30,000 as unexplained marriage expenses and Rs. 48,635 being the difference on account of certain clerical mistake based on which the assessee had filed the return. The AO left a note in the assessment order in respect of levy of penalty under Section 158BFA(2) which reads as under: Penalty proceedings under Section 158BFA(2) has been initiated in view of the fact that under proviso 1 to Section 158BFA(2), penalty is not leviable, provided, inter alia, the assessee does not go in appeal against the order.
The assessee did not prefer an appeal against the block assessment order in view of the smallness of the amount involved and also to avoid multiplicity of litigations. The learned counsel for the assessee succinctly pointed out that the legislature has not provided the circumstances under which the penalty has to be levied under Section 158BFA{2) of the Act. According to him, the AO was trying to levy a penalty by applying the proviso to the sub-section, which lays down the circumstances of exceptions when no order-imposing penalty could be passed. In other words, the AO has used the exception as a matter of rule for justifying the. imposition of penalty. A reading of the provisions of Sub-section (2), the learned counsel emphasises that there is no charge or mention of the committal of an offence, which results in the imposition of penalty. The learned counsel for the assessee pointed out that the legislature has failed to define the defaults for which the penalty is imposable under Section 158BFA(2). By negative prescriptions, the legislature cannot do what it has miserably failed to do by an express provision in the Act. The learned counsel further pointed out that the legislature is imposing a minimum penalty to the extent of the amount of the tax leviable under the scheme and a maximum penalty to the extent of three times of the amount sought to be levied in respect of the undisclosed income determined by the AO. These provisions are draconian in nature and should be reasonably construed and should never be the tools for harassing the taxpayer. The learned counsel pointed out that no significant additions are made to the declared undisclosed income and the additions that are made are purely based on certain estimates and clerical mistakes. The counsel for the assessee pleaded that the assessee did not prefer an appeal in view of the smallness of the tax effect and to avoid further litigation. To burden such an assessee with vicarious liability like penalty under Section 158BFA(2) of the Act is quite draconian. He requested that the provisions of the said section should be read down and the assessee should not be burdened with such vicarious liability without the sanction of the clear provisions of law in this regard. Our attention was drawn to the principles laid down by the Rajasthan High Court in Suresh Bhai Bhola Bhai Jani and Anr. v. Union of India (2001) 249 ITR 363 (Raj).
4. The learned Departmental Representative, on the other hand, drawing our attention to the proviso to Section 158BFA(2), pointed out that the assessee has not satisfied all the conditions laid down in the said proviso. Therefore, by implication the assessee is liable for penalty under Section 158BFA(2), the AO has levied the minimum penalty prescribed under the statute and strongly justified the imposition of the said penalty in the light of the provisions of the law and in the light of the discussions in the two impugned orders.
5. We have carefully and anxiously considered the rival contentions and gone through the records. The provisions of Section 158BFA(2), which are the cause of the controversy are reproduced hereunder : "Section 158BFA(1) : Where the return of total income including undisclosed income for the block period, in respect of search initiated under Section 132 or books of account, other documents or any assets requisitioned under Section 132A on or after the 1st day of January, 1997, as required by a notice under Clause (a) of Section 158BC, is furnished, after the expiry of the period specified in such notice, or is not furnished, the assessee shall be liable to pay simple interest at the rate of two per cent of the tax on undisclosed income, determined under Clause (c) of Section 158BC, for every month or part of a month comprised in the period commencing on the day immediately following the expiry of the time specified in the notice, and- (a) where the return is furnished after the expiry of the time aforesaid, ending on the date of furnishing the return; or (b) where no return has been furnished, on the date of completion of assessment under Clause (c) of Section 158BC. (2) The AO or the CIT(A) in the course of any proceedings under this Chapter, may direct that a person shall pay by way of penalty a sum which shall not be less than the amount of tax leviable but which shall not exceed three times the amount of tax so leviable in respect of the undisclosed income determined by the AO under Clause (c) of Section 158BC : Provided that no order imposing penalty shall be made in respect of a person if-- (i) such person has furnished a return under Clause (a) of Section 158BC; (ii) the tax payable on the basis of such return has been paid or, if the assets seized consist of money, the assessee offers the money so seized to be adjusted against the tax payable; (iv) an appeal is not filed against the assessment of that part of income which is shown in the return : Provided further that the provisions of the preceding proviso shall not apply where the undisclosed income determined by the AO is in excess of the income shown in the return and in such cases the penalty shall be imposed on that portion of undisclosed income determined which is in excess of the amount of undisclosed income shown in the return." 6. In a taxing statute of this nature, the legislature must envisage and provide for cases where the assessees attempt to contravene the provisions of the Act and to evade payment of rightful tax levied thereunder. If such contingencies are not visualised and such leaks are not plugged, no taxation law can be effective and satisfactorily implemented. In order to satisfactorily and effectively implement their provisions, penalties are generally provided for in all taxation laws.
Without such a sanction, there is the danger of the evasion of tax.
Thus, provision for levy and collection of penalties for contravening their requirements has become an integral part of such enactments. It has now been well recognised that a provision dealing with penalty must be strictly construed. Penalties -are to be construed within the term and language of the particular statute. Penalty provision should be interpreted as it stands and in case of doubt in a manner favourable to the taxpayer. If the Court finds that the language of a taxing provision is ambiguous or capable of more meanings than one, then the Court has to adopt the interpretation which favours the assessee, more particularly so, where the provision relates to the imposition of penalty. Useful reference may be made in this regard to the observations in the decisions in CIT v. Vegetable Products Ltd. (1973) 88 ITR 192 (SC), C.A. Abraham v. ITO and Anr. (1961) 41 ITR 425 (SC), Braja Lal Banik v. State of Tripura (1990) 78 STC 283 (Gau), CIT v.P.M. Shah (1993) 203 ITR 792 (Bom), J.K. Synthetics Ltd. v. CTO and Birla Cement Works v. State of Rajasthan (1994) 94 STC 422 (SC).
7. Now applying the above principle, the provisions of Section 158BFA(1) provides that where the assessee did not file a return of income as required by notice under Section 158BC and has furnished the return after the expiry of the period specified in that notice or has not furnished the return of income, the assessee shall be liable to pay simple interest at the rate of two per cent of the tax on undisclosed income determined under Clause (c) of Section 158BC, for every month or part of a month comprised in the period commencing on the day immediately following the expiry of the time specified in the notice.
8. Now coming to the provisions of Section 158BFA(2), we will analyse the section as under : (c) An sum which shall not be less than the amount of tax leviable but which shall not exceed three times the amount of tax so leviable in respect of the undisclosed income determined by the AO under Clause (c) of Section 158BC of the Act.
On a reading of the aforesaid provision, it is very obvious and patent that the legislature has miserably failed to bring on statute what nature of offence results in the penalty that is specified in that section. In other words, the legislature has not brought the charge in the provisions of Sub-section (2) of the Act. The legislature simply enables the AO to impose a penalty, but it is silent about the circumstances which attract this penalty. It can also be said that the provisions are totally ambiguous and do not clearly define the scope for its operation. The Sub-section (2) has miserably failed to bring any charge to surface so that the AO may look at the gravity of the charge in order to impose the penalty. What the Revenue is trying to canvass is that the proviso enables the imposition of penalty. The proviso, which is relied upon by the Revenue, although extracted above, we think it fit to repeat the reading to achieve clarity in the matter.
The said proviso read as under: "Provided that no order imposing penalty shall be made in respect of a person if- (i) such person has furnished a return under Clause (a) of Section 158BC; (ii) the tax payable on the basis of such return has been paid or, if the assets seized consist of money, the assessee offers the money so seized to be adjusted against the tax payable; (iv) An appeal is not filed against the assessment of that part of income which is shown in the return.
In other words, it gives the situations and prescribes the circumstances under which penalty shall not be levied. The AO, the CIT(A) and the learned Departmental Representative are trying to canvass that if these circumstances are not satisfied cumulatively, the assessee is automatically levied with penalty, which proposition cannot be accepted in the light of the principle laid down by the Supreme Court and followed by every High Court while dealing with penalties and the provisos dealing with penalties. The legislature, in our view, has not prescribed the circumstances under which the penalty has to be levied. It has only said the circumstances under which no penalty is leviable. That does not mean that in every other circumstance the penalty is automatic and has to be levied. We should not forget that the words used in Sub-section (2) are that the AO may direct the imposition of penalty. It means that the penalty is not automatic and de hors the committal of the offence or the offence for which the legislature has prescribed the penalty. In our view, Sub-section (2) has miserably failed to provide for circumstances justifying the penalty. We are unable to sustain the penalty levied by the AO in the facts and circumstances of the case.
9. In this case, the assessee has filed the return of income and has declared most of the undisclosed income, except for some clerical mistake and the marriage expenses. Even on the principle that when a discretion is vested with the officer, in the circumstances in which there is lot of lacuna, the AO should have used the discretion in favour of the assessee appreciating the fact that the assessee has accepted the additions made and has not even filed an appeal in the matter. The provisions of Section 158BFA(2) give a scope for exercising discretion on the part of the AO. After all, the proviso which allows the AO to impose a penalty begins with the words "may" only and not "shall". That means the AO still has discretion to impose or not to impose, but the moment he decides to impose, he has to levy a minimum penalty equal to the amount of tax involved. Closely examining the facts of this case, the assessee has himself offered Rs. 21,00,525 as undisclosed income. What all the AO has made the addition is based on an estimate, which cannot be treated as an undisclosed income in accordance with the strict provisions of law in this regard and a clerical mistake, which in any case, could have been corrected by the AO himself while processing the return. Just for a delay in filing the return by fifteen days, the Department justifies the imposition of penalty to the extent of 60 per cent of undisclosed income. It effectively means imposing 120 per cent of the undisclosed income as taxes and penalties. Any AO could easily harass the taxpayer by demanding nearly 240 per cent (60 per cent + 180 per cent maximum penalty) of the tax, which cannot be the purpose of Chapter XIV-B of the Act. This is clearly obnoxious and has never been the intention of the legislature while drafting these provisions. The scope of Chapter XIV-B is to ease out the tax computations in search cases. But herein it has ended up with all sorts of harassment to the taxpayer who wants to come clean before the Department. Therefore, after appreciating these things, we read down the provisions and are of the opinion that the AO has miserably failed in not exercising the discretion in favour of the assessee considering the fact that the assessee has just delayed the filing of the return by a fortnight. The conscience of the AO should have tilted in favour of the assessee who has co-operated with the Department in getting the undisclosed income assessed to tax at a higher rate of taxation, than under the normal Finance Act. Instead, the AO used the discretion against the assessee in imposing the penalty, which according to us, is unreasonable and as we have already explained, even on merits, the penalty is not sustainable. We appreciate the efforts made by the assessee's counsel to bring to our attention the possible harassment the AO can cause to the taxpayers for want of necessary provisions in this regard for imposition of penalties under Chapter XIV-B. We, therefore, even on merits do not agree with the imposition of penalty. The same stands cancelled.
10. Before parting, we would like to deal with the Full Bench decision of the Andhra Pradesh High Court in the case of State of Andhra Pradesh v. Godavarthi Kasiviswanadham (1970) 25 STC 1 (AP), wherein while dealing with penalties, it has been observed as under : "Imposition and collection of penalty also are clearly dealt with in a number of provisions of the Act. It must necessarily be so. In a taxing statute of this nature the legislature must envisage and provide for cases, where the assessees attempt to contravene the provisions of the Act and to evade payment of rightful tax levied thereunder. If such contingencies are not visualised and such leaks are not plugged, no taxation law can be effective and satisfactorily implemented. In order to satisfactorily and effectively implement their provisions, penalties are generally provided for in all taxation laws, Without such a sanction, there is the danger of evasion of tax. Thus, provision for levy and collection of penalties for contravening their requirements, has become an integral part of such enactments and one of their purposes. The argument that it does not form part of the purposes of the Act, is thus a wholly untenable one." We draw support from the Maxwell on Interpretation of the Statutes at p. 239 under the caption headed 'Strict Construction of Penal Laws.' It has been stated that in Kartar Singh v. State of Punjab JT 1994 (2) SC 432, p. 466 : 1994 (3) SCC 569, it is held that it is the basic principle of legal jurisprudence that an enactment is void for vagueness if its prohibitions are not clearly defined. If a statute laid a mandatory duty but provided no mode of enforcing it, the presumption in ancient days was that the person in breach of the duty could be made liable for the offence of contempt of the statute. This rule of construction is now obsolete and has no application to a modern statute. Clear language is now needed to create a crime. The principle applied in construing a penal Act is that if, in construing the relevant provisions, there appears any reasonable doubt or ambiguity, it will be resolved in favour of the person who would be liable to the penalty. If there is a reasonable interpretation, which will avoid the penalty in any particular case, that construction must be adopted. If there are two constructions, the more lenient one must be adopted. In every case, the question is simply what is the meaning of the words, which the statute has used to describe the prohibited act or transaction. If these words have a natural meaning, that is their meaning, and such meaning is not to be extended by any reasoning based on the substance of the transaction. If the language of the statute is equivocal and there are two reasonable meanings of that language, the interpretation that will avoid the penalty is to be adopted. These are some of the principles discussed in Maxwell on Interpretation of Statutes 12th Edn. These principles, if squarely applied to the facts of the case, it will only result in cancellation of penalty.
11. In Sales Matic Ltd. v. Hinchcliffe (1959) 1 WIR 1005, it is held that express language is always necessary for creation of an offence. A mere declaration that "all lotteries are unlawful" does not create any offence on which a prosecution could be based. Further in R v.Staincross Justices, ex p. Teasdale (1961) 1 QB 170, it is held that an exemption setting out conditions on which acts, which are made punishable under other provisions of the statute, may be done does not per se operate to make non-observance of the conditions criminal. In other words, the proviso, which deals with the exceptions for imposition of penalty, cannot act as a proviso, which enables the AO to impose the penalty, and also the exception clause cannot act as a main rule for imposition of penalty, 12. We have also gone through the Budget speech of the Finance Minister while introducing the Finance Bill, 1995, and also the CBDT Circular No. 717, dt. 14th Aug., 1995, which also do not throw any light on the nature of offence on which penalty is imposable under Section 158BFA(2) of the Act.