Judgment:
1. This is an appeal filed by the Revenue against the order of the CIT (A), dt. 30th July, 2004 for the asst. yr. 2001-02, in the matter of deletion of penalty of Rs. 11,05,712 imposed under Section 271(1)(c) of the of the IT Act, 1961.
On the facts and in the circumstances of the case the learned CIT (A) erred in (i) deleting the penalty levied under Section 271(1)(c) of the IT Act, 1961 amounting to Rs. 11,05,712 on the ground that for disallowance of certain expenses or addition to the declared taxable income, it cannot be concluded that the assessee has concealed the true particulars of its income.
(ii) relying upon the judgment in the case of CIT v. Prithipal Singh & Co. relating to asst. Yr. 1970-71 as the same was not applicable after amendment to Section 271(1)(c) by the Direct-tax Laws (Amendment) Act of 1975.
3. Rival contentions have been heard and record perused. The brief facts of the case are that the assessee filed its return of income declaring a loss at Rs. 78,28,451 which was subsequently assessed under Section 143(3) on 30th Sept., 2003 determining the loss at Rs. 50,32,719, after making a disallowance under Section 40(a)(i) of Rs. 9,25,568 and making an addition of Rs. 18,70,164 on account of deferred revenue expenditure. The AO observed that a sum of Rs. 9,25,568 was paid as web hoisting charges and software in foreign currency; however, no deduction at source was made by the company under Section 195 of the Act which it was supposed to do. Similarly, a sum of Rs. 18,70,164 was disallowed, being deferred revenue expenditure debited to the P&L a/c which is approximately 50 per cent of the cost of website purchased from Burgundy Trading (P) Ltd. It has been observed that the payment made for purchase of website was incurred to commence the sale of flowers through internet which was the principal source of income of the assessee. The expenditure was of non-recurring nature and provided an enduring benefit to the assessee for a number of years. In view of the above, the AO observed that the assessee has tried to conceal income by furnishing inaccurate particulars of its income and, therefore, penalty under Section 271(1)(c) r/w Section 274 was imposed by the AO, with respect to these disallowances.
4. By the impugned order, CIT (A) deleted the penalty after observing that there is no concealment of income. The CIT (A) also observed that issue is covered by the decision of apex Court in the case of Prithipal Singh & Co. (supra), wherein it was held that income occurring in Clause (c) and (iii) of Section 271(1) of the IT Act, 1961 refers to positive income and that no penalty could be levied in case where there is no tax determined to be payable.
5. It was argued by learned Departmental Representative that assessee had furnished inaccurate particulars of income so far as claim of expense on account of web hoisting charges and the price of web purchased from Burgundy Trading (P) Ltd. are concerned. He, therefore, contended that CIT (A) was not justified in deleting the penalty imposed under Section 271(1)(c), with respect to wrong particulars of expenses furnished by the assessee along with return of income.
6. On the other hand, learned Authorised Representative reiterated the contentions raised before CIT (A) and justified his order with respect to the findings recorded by him.
7. We have considered the rival contentions, carefully gone through the orders of the authorities below and found from the record that disallowance of Rs. 9,25,568 was made on the ground that no deduction at source was made under Section 195 of the IT Act. The expenses were claimed to be legitimate and incurred by the assessee in due course of business. The assessee had not deducted TDS on these payments on the reasoning that these foreign parties to whom payments were made are not having any principal place of business in India. However, the AO rejected the contentions of the assessee and held that the assessee has contravened the provisions of Section 195 of the Act. Similarly, the addition made on account of deferred revenue expenditure was not an ad hoc addition but was based on judicial pronouncements. The AO concluded that the assessee made certain claims by way of business expenditure in the return of income but could not substantiate the claims. In view of the Expln. 1 to Section 271(1)(c), where in respect of any fact material to the computation of total income, assessee fails to offer any explanation or fails to substantiate any explanation/claim made by him, then the amount added/disallowed in computing total income shall be deemed to represent the income in respect of which particulars have been concealed. The AO observed that the case of the assessee falls under the Expln. 1 to Section 271(1)(c) of the Act and, therefore, held the assessee-company to be in default for furnishing inaccurate particulars of its income and imposed a penalty of Rs. 11,05,712 @ 100 per cent of the tax sought to be evaded.
8. There is no dispute to the well-settled legal proposition that the penalty proceedings are distinct and different from assessment proceedings. Findings in the assessment proceedings are not conclusive.
The entire material available should be considered afresh by the authorities before imposing penalty under Section 271(1)(c). The Explanation to Section 271(1)(c) provides a rule of evidence raising a rebuttable presumption in certain circumstances. No substantive right is created or annulled thereby. The substantive law relating to levy of the penalty is preserved. The initial burden of proof is cast on the assessee to establish the presumption arising in certain cases. The assessee can discharge the onus either by direct evidence or circumstantial evidence or by both. The cumulative effect of all facts should be taken into consideration. During the course of penalty proceedings, the assessee is entitled to show and establish by the material and relevant facts, which may go to affect and having direct hearing on the liability for penalty. Whether there is a concealment to make the penalty exigible is normally a question of fact. Where the burden of proof in a given case has been discharged on a set of facts, is also a question of fact. The burden is cast on the assessee to offer a bona fide explanation. There are also plethora of judgments to the effect that findings recorded or conclusion drawn in deciding the quantum appeal, are neither conclusive nor binding. For this proposition reliance may be placed on the judgment of Hon'ble Kerala High Court in the case of CIT v. Pawan Kumar Dalmia and the judgment of the Hon'ble Allahabad High Court in the case of Banaras Textorium v. CIT (1988) 67 CTR (All) 191 : (1988) 169 ITR 782 (All) and also the Judgment of the Hon'ble Delhi High Court in the case of CIT v. Chetan Dass Lachhman Dass .
9. The considerations in penalty proceedings are different from those in quantum proceedings. It is trite law that merely because an addition has been made and confirmed in the appeal, levy of penalty is not automatic. In National Textiles v. CIT (2000) 164 CTR (Guj) 209 : (2001) 249 ITR 125 (Guj), the Gujarat High Court held that it is not enough for the purpose of penalty that the amount has been assessed as income, the circumstances must show that there was animus i.e.
conscious concealment or act of furnishing inaccurate particulars on the part of the assessee. In the present case, the appellant's conduct and the explanation offered by it shows that there was no conscious or intentional act of appellant to conceal or furnish inaccurate particulars of income.
10. In order to justify the levy of penalty, two factors must co-exist, (i) there must be some material or circumstances leading to the reasonable conclusion that the amount does represent the assessee's income. It is not enough for the purpose of penalty that the amount has been assessed as income, and (ii) the circumstances must show that there was animus i.e., conscious concealment or act of furnishing of inaccurate particulars on the part of the assessee. The Explanation has no bearing on factor No. 1 but it has bearing only on factor No. 2. The Explanation does not make the assessment order conclusive evidence that the amount assessed was in fact the income of the assessee. No penalty can be imposed if the facts and circumstances are equally consistent with the hypothesis that the amount does not represent concealed income as with the hypothesis that it does. If an assessee gives an explanation which is unproved but not disproved i.e. it is not accepted but circumstances do not lead to the reasonable and positive inference that the assessee's case is false, the Explanation cannot help the Department because there will be no material to show that the amount in question was the income of the assessee Alternatively, treating the Explanation as dealing with both the ingredients (i) and (ii) above, where the circumstances do not lead to the reasonable and positive inference that the assessee's explanation is false, the assessee must be held to have proved that there was no mens rea or guilty mind on his part. Absence of proof acceptable to the Department cannot be equated with fraud or willful default. In the instant case, disallowance of expenditure for non-deduction of tax at source does not lead to the inference that assessee-company had concealed its particulars of income in terms of Section 271(1)(c) of the Act. All the particulars relating to the impugned expenditure were undisputedly furnished before the AO as well as in its return of income and the audited annual accounts for the year ended on 31st March, 2001. All these documents were enclosed with and formed part of the return of income filed with the Department.
Thus, there was no concealment nor furnishing of any inaccurate particulars of income. The offence of concealment is a direct attempt to hide an item of income from the knowledge of the IT Department.
Whereas in the instant case the assessee has furnished full details in the return of income and the same were verified as correct by the auditor of the company. We also found that while making the disallowance of expenses on the plea of non-deduction of tax, the AO has not recorded his satisfaction to the effect that assessee has concealed or furnished inaccurate particulars of income, which is a mandatory requirement as per the decision of the jurisdictional High Court in the case of CIT v. Ram Commercial Enterprises Ltd . As per the verdict of Delhi High Court, the satisfaction as to the assessee having concealed the particulars of his income or furnished inaccurate particulars of such income is to be arrived at by the AO during the course of any proceedings under the Act, which would mean the assessment proceedings without which, the very jurisdiction of initiating the penalty proceedings is not conferred on the assessing authority under Section 271(1)(c) of the Act. With regard to disallowance of deferred revenue expenses of Rs. 18.70 lacs, we found that AO has disallowed the same on the plea that it was capital in nature and provided enduring benefit to the assessee for a certain number of years. Thus, it also amounts to disallowance of certain expenses which were claimed by the assessee as deductible, but was not found admissible in the view of the AO. Hon'ble Punjab and Haryana High Court in the case of CIT v. Ajaib Singh ands Co.
have observed that merely because of certain expenses claimed by the assessee are disallowed by an authority, it cannot mean that particulars furnished by the assessee were wrong. It was held that mere disallowance of expenses per se cannot mean that assessee has furnished inaccurate particulars of its income. Concealment involved penal action, it has to be proved as a conscious act. The issue under reference is squarely covered by the above decision. We, therefore, do not find any infirmity for deletion of penalty imposed on account of disallowance of expenses incurred by the assessee, the genuineness of which were not doubted and particulars to which were correctly furnished by the assessee along with the return of income and the explanation furnished before the AO was bona fide.
11. With regard to reliance placed by CIT (A) on the decision of Prithipal Singh & Co. (supra), we are inclined to agree with the contention of senior Departmental Representative, Mr. B.P. Mishra, that this judgment is not applicable to the asst. yr. 2001-02, under our consideration, after amendment in Section 271(1)(c) by the Direct Tax Laws (Amendment) Act of 1975. As per Mr. Mishra, the penalty prescribed is relatable to "the amount of tax sought to be evaded". This is an expression which has been ascribed a fictional meaning under Expln. 4 to Section 271(1). It does not refer to the actual tax payable. It refers to the tax "that would have been chargeable" on the concealed income had such concealed income been the total income. So, even if there is no tax payable on the actual total income, the "amount of tax sought to be evaded" is easily quantifiable. He thus submitted that CIT (A) was not justified in deleting the penalty imposed, on the plea of assessed loss.
12. Learned Departmental Representative further submitted that the word "total income" appearing in Clause (a) of Expln. 4 to Section 271(1)(c) include both a positive figure as well as negative figure and, therefore, penalty for concealment or furnishing of inaccurate particulars of income is leviable irrespective of the fact whether total income assessed is positive or negative; expression "in addition to any tax payable", in the context it is used, does not and cannot mean that there must be a tax payable before penalty under Section 271(1)(c) of the Act can be levied.
13. On the other hand it was contended by senior Authorised Representative, Mr. Anil Bhalla that the legislature, vide Finance Act, 2002, amended Section 271(1)(c) w.e.f. 1st April, 2003, and modified Clause (iii) after Section 271(1)(c) After the sentence "in addition to tax", the words "if any" are inserted. Similarly, the Expln. 4 is modified. From the amended Expln. 4(a) it is clear that now the legislature clearly provides for the levy of penalty where the loss declared in the return of income is reduced or converted into income.
Therefore, before the amendment by Finance Act, 2002, it cannot be held that the penalty under Section 271(1)(c) can be levied where the assessed income is loss. As per the Finance Act, 2002, the amendment is effective from 1st April, 2003, and Section 271(1)(c) is a provision for imposing penalty and, therefore, the normal presumption is that the amendment is not retrospective unless provided otherwise expressly or by necessary implication. The return in the instant case was filed much prior to the amendment by the Finance Act, 2002. As per the law prevailing at that time, penalty under Section 271(1)(c) was not to be levied if the assessed income is loss. Therefore, the subsequent amendment cannot fasten the liability of penalty upon the assessee unless the legislature expressly provided for the same. As the Finance Act, 2002, made the amendment in Section 271(1)(c) w.e.f. 1st April, 2003, it cannot be said that the amendment was clarificatory and, therefore, retrospective in operation. Therefore, the only inference that can be drawn is that the legislature did not intend to effect the amendment in Section 271(1)(c) retrospectively. In view of above, having regard to the amendment made by Taxation Laws (Amendment) Act, 1975, and by Finance Act, 2002, for the asst. yr. 2001-02, under appeal penalty cannot be levied under Section 271(1)(c) as the returned income and assessed income are undisputedly loss.
14. We have considered rival contentions. A plain reading of the relevant provisions makes it clear that the liability to penalty arises if any person has concealed the particulars of his income or furnished inaccurate particulars of such income. The liability for penalty is not in any manner linked with whether total income assessed is positive or negative. Or, to put it differently, whether any tax is payable on the total income assessed. The expression "the amount of tax sought to be evaded" is not to be considered in general terms because a specific meaning has been ascribed to it by Expln. 4. Clause (a) applies to situations where the concealed income exceeds the total income assessed. This can only happen if returned income is negative. Clause (a) of Expln. 4 applies only to a situation where the returned income is negative or a loss. If the intention of the legislature was to shut out penalties in cases where the total income assessed was not positive, it would have not provided for such possibilities by specifying cases under different categories where concealed income exceeds the total income assessed [Clause (a)] and where concealed income is equal to or less than the total income assessed [Clause (a)] and where concealed income is equal to or less than the total income assessed [Clause (c)]. Clause (c) of Expln. 4 applies only to cases where the total income assessed would be positive. Therefore, it would not be possible to hold that under Clause (a) the legislature did not contemplate the imposition of penalty where the total income assessed was not a positive figure. The special case of Clause (b) of Expln. 4 essentially means a situation where returned income is zero and, when this happens the entire total income assessed has to be taken to be the concealed income. And, therefore, the "amount of tax sought to be evaded" means the tax on the total income assessed. The meaning of the provisions and in particular Expln. 4 is very clear. The legislative intent is that in respect of imposition of a penalty for concealment, the issue of the total assessed income being positive or negative does not arise at all.
15. The assessment year involved m CIT v. Prithipal Singh and Co.
(supra) was 1970-71, much before the 1976 amendment came into force on 1st April, 1976 whereunder Expln. 4 was added to Section 271(1). And, although there is mention of this Expln. 4 in Prithipal Singh, it did not arise for consideration therein as the relevant assessment year was 1970-71 when this Expln. 4 was not even in the statute book. So, Prithipal Singh cannot be cited as a precedent or authority with regard to the interpretation of the said Expln. 4. Therefore, the decision in Prithipal Singh by the Supreme Court will have no bearing in those cases which have arisen after 1st April, 1976 when the said Expln. 4 took effect.
16. The expression "in addition to any tax payable", in the context it is used does not and cannot mean that there must be a tax payable before a penalty under the provision can be levied. It only means that the penalty amount will be over and above "any tax payable". The event that triggers a liability of penalty is entirely different and distinct from the taxable event. Therefore, as a general statement it cannot be said "when there is no tax payable, the question of any penalty does not arise." The context of the words must be seen. The expression "in addition to any tax payable" merely signifies that the penalty payable is over and above any tax that may be payable. It does not mean that tax being payable is a condition precedent for the penalty being payable. Our above view is supported by the decision of jurisdictional High Court in case of CIT v. Aditya Chemicals Ltd. and Ors.
17. In the result ground No. 2 of Revenue's appeal is allowed in its favour, even though we have already held that on merits penalty is not imposable under Section 271(1)(c).