Stop Injustice to the assessee

Stop Injustice to the assessee

Gopal Nathani


In Union of India v. Dharamendra Textile Processors and others(2008) 306 ITR 277 the question before the Apex Court was whether section 11AC of the Central Excise Act, 1944 inserted by Finance Act, 1996, with the intention of imposing mandatory penalty on persons who evaded payment of tax should be read to contain mens rea as an essential ingredient and whether there is scope for levying penalty below the prescribed minimum. Before the Division Bench, the stand of the Revenue was that the said section should be read as penalty for a statutory offence and the authority imposing penalty has no discretion in the matter of imposition of penalty and the adjudicating authority in such cases was duty bound to impose penalty equal to the duties so determined.


The assessee on the other hand made a blunder by referring  to the provisions of section 271(1)(c) of the Income-tax Act, 1961 so as to take a stand that section 11AC of the Act is identically worded and in a given case it was open to the Assessing Officer not to impose any penalty. And the Apex Court signalled that both the two provisions indicate the element of strict liability.


This very remark was enough for the revenue to stretch it all over to levy penalty in every case possible. In fact there was no need for either the assessee or his counsel or for that matter for the  Supreme Court to touch upon the provisions of section 271 (1 ) (c ) in answering a matter under the Excise provisions.


Now after the passing of the controversial order  by the Supreme Court in Union of India v. Dharamendra Textile Processors and others, 306 ITR 277 the A O’s  have been imposing penalty for concealment in every case of disallowance/addition and this needs to be stopped at once else it would cause undue harassment to the assessee’s.


It is indeed obnoxious on the part of the A O to say the following in CIT v. Haryana Warehousing Corporation (2009) 314ITR215:


1)     That the entire income which remained undisclosed, “with or without” any conscious act of the assessee, is liable to penal action;


2)     That  the concept of law, with regard to levy of penalty has drastically changed in view of the S C judgment in Dharamendra Textile Processors case (supra) , inasmuch as, now penalty can be levied even when an assessee claims deduction or exemption by disclosing the correct particulars of its income;


3)     That  if an addition is made in quantum proceedings by the revenue authorities, which addition attains finality, an assessee per se becomes liable for penal action under section 271(1)(c) of the Act;


4)     That a penalty automatically became leviable against the assessee under section 271(1)(c) of the Act, after the finalisation of quantum proceedings;


5)     That in view of the judgment of the Supreme Court in Dharamendra Textile Processors case (supra), the dichotomy between penalty proceedings and assessment proceedings stands completely obliterated.


The AO’s have been rampant these days in taking a plunge under  the garb of the Supreme Court ruling in Dharmendra Textiles case( supra) which is sign of gross injustice to the assessee community who under a bonafide belief make a claim for deduction or exemption.


The Pune bench of ITAT in Kanbay Software India (P.) Ltd. v. Dy. CIT (2009) 31SOT153 clearly read out impact of Supreme Court judgment in Dharmendra Textiles case (supra) on scheme of section 271 (1) (c). In this case the assessee filed a revised return and made a new claim. In their ruling the bench held that raising a legal claim even if it is ultimately found to be legally unacceptable cannot amount to furnishing of inaccurate particulars of income. The following observations cut the ice on the subject :


“61. The expression ‘furnishing inaccurate particulars of income’ has also not been defined in the Act. The expression’ inaccurate’ refers to ‘not in conformity with the fact or truth’ and that is the meaning which, in our considered view, is relevant in the context of ‘furnishing of inaccurate particulars’. The expression ‘particulars’ refers to ‘facts, details , specifics or information  about someone or something.’ Therefore, the plain meaning of the expression ‘furnishing of inaccurate particulars of income’ implies furnishing of details or information about income which are not in conformity with the fact or truth. The details or information about income deal with the factual details of income and this cannot be extended to areas which are subjective such as the status of taxability of an income, admissibility of a deduction and interpretation of law. The furnishing of inaccurate information thus relates to furnishing of factually correct details and information about income. In the present case, however, what has been treated as furnishing of inaccurate particulars is making of a claim which was not admitted by the Assessing Officer an action not contested by the assessee. The admission or rejection of a claim is a subjective exercise and whether a claim is accepted or rejected has nothing to do with furnishing of inaccurate particulars of income. The authorities below have apparently proceeded to treat assessee’s making an incorrect claim of income as furnishing of inaccurate particulars. What is a correct claim and what is an incorrect claim is a matter of perception. In our considered view, raising a legal claim, even if it is ultimately found to be legally unacceptable, cannot amount to furnishing of inaccurate particulars of income. ‘Inaccurate’, as we have noted above, is something factually incorrect and interpretation of law can never be a factual aspect. Just because an Assessing Officer does not accept an interpretation, such an interpretation is not rendered incorrect. Even the judgments of Hon’ble Supreme Court are revered by the Larger Benches of Hon’ble Supreme Court. The development of law is a dynamic process which is effected by the innumerable factors, and it is always an ongoing exercise. In such circumstances, a bon fide legal claim by the assessee being visited with penal consequences only because it has not been accepted thus far by the tax authorities or judicial authorities is an absurdity. I any event, as we have noted above, the connotations of expression ‘ p[particulars of income’ do not extent to the issues of interpretation of law and as such making a claim , which is found to be unacceptable in law, cannot be treated as furnishing of inaccurate particulars of income. In this view of the matter, the case of the assessee cannot be said to be a case of ‘furnishing of inaccurate particulars of income’ , in its natural sense, either.” 


Further the Chennai ITAT in GEM Granties v. DCIT (2009) 31SOT21 (URO) after considering Dhamendra Textiles case held that penalty is not automatic and cannot be equated with tax. In this ruling, Chennai ITAT after making reference to Larger Bench SC ruling in Dharmendra Textiles 306 ITR 277, has interalia held as under:

"..We note that even though the Supreme Court held that penalty provision is civil liability and willful concealment is not an essential ingredient for attracting this liability, but still the penalty provision requires a strict construction and onus to prove there was concealment of income with a view ot avoid tax, is on the department. We are also of the view that penalty is not automatic and department has to establish fool proof case for attracting penalty. Merely because the addition is confirmed does not ipso facto attract the penalty provision. In the penalty proceeding, the whole matter has to be seen in a different perspective…." 


The P & H High Court in Haryana Warehousing case (supra) in repelling the contentions of the revenue as absurd and thus held as below: (Quote)


“17. We have considered the second contention advanced by the learned counsel for the appellant revenue. To state the least, the instant submission is absolutely absurd. The parameters of imposition of penalty under section 271 (1) (c) of the Act, have been incorporated in the provision itself. Section 271 (1) (c) of the Act, is being extracted hereunder:-


Failure to furnish returns, comply with notices, concealment of income, etc.—

271. (1) If the Assessing Officer or the Commissioner (Appeals) or the Commissioner in the course of any proceedings under this Act, is satisfied that any person--

            (a)  to (b)  xx       xx

            (c) has concealed the particulars of his income or furnished inaccurate particulars of such income,

           (d)     xx      xx

he may direct that such person shall pay by way of penalty,--

(i)                 to (iii)       xx        xx

Explanation 1.--Where in respect of any facts material to the computation of the total income of any person under this Act,--

            (A) such person fails to offer an explanation or offers an explanation which is found by the Assessing Officer or the Commissioner (Appeals) or the Commissioner to be false, or


            (B) such person offers an explanation which he is not able to substantiate and fails to prove that such explanation is bona fide and that all the facts relating to the same and material to the computation of his total income have been disclosed by him,


then, the amount added or disallowed in computing the total income of such person as a result thereof shall, for the purposes of clause (c) of this sub-section, be deemed to represent the income in respect of which particulars have been concealed.


Explanation-2 to 5-A   xx      xx”.


The essential pre-requisites section 271 (1) (c ) of the Act before a penalty can be imposed are; the assessee should have either “ concealed the particulars of his income “, or alternatively the assessee should have “ furnished inaccurate particulars” of his income. Therefore, before determining the liability of the respondent assessee in the present case, it would first have to be ascertained, whether or not, the respondent-assessee had “concealed the particulars of his income” or had furnished “inaccurate particulars of his income”. The clear and categoric finding at the hands of the Income Tax Appellate Tribunal in the impugned order dated 4.10.2007 , was that the respondent-assessee had disclosed the entire facts without having concealed any income. There is no allegation against the respondent-assessee that it had concealed inaccurate particulars of his income. The aforesaid determination at the hands of the Income Tax Appellate Tribunal has not been conytraverted even in the grounds raised in the instant appeal. Additionally, in spite of our order dated 11.2.2009 (extracted in paragraph 18 above) the appellant revenue has not been able to controvert the aforesaid finding of fact. Concealment of particulars of income, or furnishing incorrect particulars of income, have in our view, been confused by the appellant-revenue, with, an unacceptable plea foe exemption of tax-liability. Section 271 (1) (c) of the Act can be invoked for imposing a penalty on an assessee, only if there is a “concealment of particulars of income” or alternatively if an assessee furnishes “incorrect particulars of income”. The respondent-assessee in the present controversy is guilty of neither of the above. Accordingly, we are satisfied that in the absence of the two pre-requisites postulated under section 271 (1) (c) of the Act, it was not open to the appellant-revenue tom inflict any penalty on the respondent-assessee.    


26. It is also essential for us to notice, while dealing with the second submission advanced by the learned counsel for the appellant revenue, that the issue which arose for determination before the Supreme Court in Union of India v. Dharamendra Textiles Processors and others, 306 ITR 277 was, whether under section 11AC inserted in the Central Excise Act, 1944, by the Finance Act 1996, penalty for evasion of payment of tax had to be mandatorily levied, in case of short of levy or non-levy of duty under the Central Excise Act, 1944, irrespective of the fact whether it was an intentional or innocent omission. In other words, the Apex Court was examining a proposition, whether mens-rea was an essential ingredient before penalty under section 11AC of the Central Excise Act, 1944 could be levied. In view of the factual position noticed here in above, the issue of mens-rea does not arise in the present controversy because the ingredients before any penalty can be imposed on an assessee under section 271 (1)(c) of the Act, were not made out in the instant case, as has been concluded in the foregoing paragraph. Thus viewed, the judgment relied upon by the learned counsel for the appellant-revenue is, besides being a judgment under a different legislative enactment, is totally inapplicable to the facts and circumstances of this case. Accordingly, we find no merit even in the second contention advanced by the learned counsel for the appellant revenue” (Unquote)


In yet another decision the P & H High Court in CIT v. Sidhrath Enterprises in ITA NO. 908 of 2008 dated 14.7.2009 held that concept of penalty have not undergone change by virtue of the judgment of Supreme Court in Dharmendra Textile’s case. As per the Court penalty is imposed only when there is some element of deliberate default. 


On top of this the Commissioner (Appeals) have been encouraging this practice by confirming the penalty orders on misreading of Supreme Court judgment. It is time that the Supreme Court removes the dust from their earlier decision in Dharmendra Textiles case (supra) to prevent further litigation in penalty matters. And further it would be onerous duty of the Apex Court to avoid signalling their view on parallel laws to avoid interpretational conflicts. In my view a strict discipline must be exercised in interpreting a subject to avoid any perennial litigation for any passing reference to the provisions of sister enactment. It may be good idea to set up a special bench in every region to rectify the damage. 



Published in Taxation
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