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CASE NO.: Appeal (civil)  2747 of 2007

PETITIONER: Sri T. Ashok Pai

RESPONDENT: Commissioner of Income Tax, Bangalore

DATE OF JUDGMENT: 18/05/2007

BENCH: S.B. Sinha & Markandey Katju

JUDGMENT: J U D G M E N T

CIVIL APPEAL NO.     2747            OF 2007 (Arising out of SLP (C) No.1194 of 2006)

S.B. Sinha, J.

1.      Leave granted. 2.      The assessee is in appeal before us aggrieved by and dissatisfied with  a judgment dated 29.9.2005, passed by a Division Bench of the Karnataka  High Court in ITRC No.492 of 1998 whereby and whereunder answer to the  following question was rendered in the negative. "Whether, on the facts and in the circumstances of  the case, the Tribunal was right in holding that  penalty u/s.271(1)(C) was not exigible in the  present case?"

3.      Shorn of all unnecessary details the fact of the matter is as under :         Appellant is an individual.  He is an engineering graduate.  Apart from  his income by way of salary, he was having shares of profit of a number of  firms besides income from proprietorship business.  He has also earned  income from dividend and interest.  The banker of the assessee was the  Syndicate Bank.  A power of attorney was given by the appellant in its  favour.  The shares of the companies which the appellant owned were  lodged with and in custody of the said Bank.  Under his instructions, the  Bank used to purchase shares of various companies and kept with it the  physical possession thereof.  It has also sold the shares of the appellant and  delivered the same to the brokers or the parties and also used to pay or  receive the sale proceeds and deposit the same in the bank account.  The said  arrangement continued for a number of years in the past.         Tax matters of the appellant were being looked after for a number of  years by the Law Agency Division of the Syndicate Bank, Manipal, which  was authorised to file the returns of income before the tax authorities  representing the assessee herein.  For the assessment year 1985-86 the return  of income on behalf of the appellant was filed on 13.2.1989.  Respondent,  however, being not satisfied with the return, called for better particulars of  investments made by the appellant, whereupon a revised return was filed on  12.1.1990 furnishing all the requisite particulars to the Department.  An  application was filed by him before the Settlement Commission on or about  17.1.1990 for settlement of the taxes due which was, however, rejected by  an order dated 26.9.1990.  Appellant, thereafter, filed a second revised  return, upon which assessment was made by the Assessing Officer.  The said  revised return was accepted by the Assessing Officer.  However, a  proceedings for imposition of penalty in terms of Section 271(1)(C) of the  Income Tax Act was initiated.  In the cause shown by the appellant a

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contention was raised that he had acted bona fide as the tax affairs were  being looked after by the professional group working with the Syndicate  Bank.  The said contention was not accepted by the Assessing Authority.    4.      The Income Tax Appellate Tribunal, however, considered the entire  materials brought on records and inter alia opined : (1)     When on discovery, some omission or some wrong statement in  the original return is found, a penalty proceeding for concealment  of any particulars of income or furnishing inaccurate particulars of  such income as contemplated under Section 271(1)(C) of the  Income Tax Act may not be attracted. (2)     The revised return having been accepted by the Department and  the penalty having not been imposed with reference to the original  return filed by assessee, he cannot be considered to be guilty of  concealment of income. (3)     The fault, if any, was with his tax counsel and even the said tax  counsel viz. the Syndicate Bank, cannot be said to have acted in a  mala fide manner in preparing the return of income of the assessee  wrongly.  The bona fides of the assessee are proved by the facts  and circumstances of the case. 5.      A reference was made to the High Court at the instance of the revenue  in respect of the following question : "Whether on the facts and in the circumstances of  the case, the Tribunal was right in holding that  penalty u/s. 271(1)(C) was not exigible in the  present case?"

6.      The High Court compared the returns filed by the appellant under  the Income Tax Act and the Wealth Tax Act and arrived at the following  decision : "The principal is responsible for all the act done by  the agent.  That apart, in the case on hand there is  no material to show that the agent has acted in  excess of his authority or in disobedience of the  authority given by the principal.  The stand taken  by the Bank manifestly makes it clear to us that  they prepared the return of income on the basis of  information furnished by the assessee.  The  assessee is an engineer and a tax payee for a  number of years cannot contend that he signed the  return of income by believing his power of  attorney holder.  This contention of the assessee  cannot be believed for the reason that in his  revised return dated 12.1.1990 again declared a  loss of Rs.1,04,531/- and did not admit the capital  gains and other income.  The first appellate  authority rightly holds that if the explanation of  assessee is accepted then every tax evader could  take shelter by shifting the blame on his clerk and  accountants who invariably prepare the return for  them.  The contention of the assessee that because  of the negligence on the part of the Bank the  mistake of concealment has crept in is not  acceptable."

7.      Mr. G. Sarangan, learned senior counsel appearing on behalf of the  appellant, would submit that the Tribunal having arrived at a finding of fact  that the appellant was not guilty of deliberate concealment of his income and  thus, having no mens rea in this behalf, the impugned judgment cannot be  sustained.  In any event, it was urged, no specific question having been  referred as to whether the findings of the Tribunal are perverse or not, the  High Court committed a manifest error in differing with the findings of fact  arrived at by the Tribubnal. 8.      Mr. B. Datta, learned Additional Solicitor General appearing on

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behalf of the respondent, on the other hand, would submit that the Assessing  Authority as also the Commissioner of Income Tax having arrived at a  finding of fact that the appellant was guilty of deliberate concealment of his  income, the Tribunal was not correct in interfering therewith. 9.      Reference of the question to the High Court as noticed hereinbefore  was general in nature.  No question was referred as to whether the finding of  the Tribunal was perverse or not.  Existence of mens rea is essentially a  question of fact.  The Tribunal alone, as the highest authority empowered to  determine the question of fact, would be entitled to go thereinto.  We may,  however, hasten to add that the same would not mean that the High Court  will have no jurisdiction in this behalf.  The High Court, it is well known,  should not ordinarily disturb the finding of fact arrived at by the Tribunal.   Question of law should generally arise only accepting the finding of fact to  be correct. 10.     In Commissioner of Income-Tax v. Mukundray K. Shah (2007)  290 ITR 433, this Court observed thus : "The above two judgments indicate that the  question as to whether payment made by the  company is for the benefit of the assessee is a  question of fact.  In this case, the Tribunal has  concluded that the payment routed through MKF  and MKI was for the benefit of the assessee.  This  was a finding of fact.  It was not perverse.   Therefore, the High Court should not have  interfered with the said finding."

11.     In K. Ravindranathan Nair v. Commissioner of Income-Tax (2001  (247) ITR 178, a three-Judge Bench of this Court opined : "The only jurisdiction of the High Court in a  reference application is to answer the questions of  law that are placed before it.  It is only when a  finding of the Tribunal on fact is challenged as  being perverse, in the sense set out above, that a  question of law can be said to arise."

12.     Yet again in Century Flour Mills Ltd. v. Commissioner of Income- Tax 2001 (247) ITR 276, it was observed by this Court : "We have perused the order of the High Court and  heard learned counsel and are in no doubt that the  High Court was right.  The Appellate Tribunal  having arrived at the finding of concealment of  income on the basis of the material on record, no  question of law arose, reference of which could be  called for."

13.     It is, therefore, trite that if an explanation given by the assessee with  regard to the mistake committed by him has been treated to be bona fide and  it has been found as of fact that he had acted on the basis of wrong legal  advice, the question of his failure to discharge his burden in terms of  explanation appended to Section 271(1)(C) of the Income Tax Act would not  arise. 14.     In Dilip N. Shroff v. Joint Commissioner of Income-Tax, Mumbai  (Civil Appeal Arising out of SLP (C) No.26831/2004) delivered today, this  Court observed.         "The expression "conceal" is of great  importance.  According to Law Lexicon, the word  "conceal" means: "to hide or keep secret.  The word "conceal" is con  plus celare which implies to hide.  It means to hide or  withdraw from observation; to cover or keep from  sight; to prevent the discovery of; to withhold  knowledge of.  The offence of concealment is,

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thus, a direct attempt to hide an item of income or  a portion thereof from the knowledge of the  income tax authorities."         In Webster’s Dictionary, "inaccurate" has  been defined as: "not accurate, not exact or correct; not according  to truth; erroneous; as an inaccurate statement,  copy or transcript."

15.     It signifies a deliberate act of omission on the part of the assessee.   Such deliberate act must be either for the purpose of concealment of income  or furnishing of inaccurate  particulars. 16.     The term ’inaccurate particulars’ is not defined.  Furnishing of an  assessment of value of the property may not by itself be furnishing of  inaccurate particulars.   Even if the explanations are taken recourse to, a  finding has to be arrived at having regard clause (a) of Explanation 1 that the  Assessing Officer is required to arrive at a finding that the explanation  offered by an assessee, in the event, he offers one was false.   He must be  found to have failed to prove that such explanation is not only not bona fide  but all the facts relating to the same and material to the income were not  disclosed by him.  Thus, apart from his explanation being not bona fide, it  should be found as of fact that he has not disclosed all the facts which was  material to the computation of his income. 17.     The explanation having regard to the decision of this Court must be  preceded by a  finding as to how and as to in what manner he furnished the  particulars of his income.  It is beyond any doubt or dispute that for the said  purpose the Income Tax Officer must arrive at its satisfaction in this behalf.   [See Commissioner of Income Tax v. Ram Commercial Enterprises Ltd.,  246 ITR 568 and Diwan Enterprises v. Commissioner of Income Tax, 246  ITR 571]. 18.     The order imposing penalty is quasi-criminal in nature and, thus,  burden lies on the department to establish that the assessee had concealed his  income.  Since burden of proof in penalty proceedings varies from that in the  assessment proceeding, a finding in an assessment proceeding that a  particular receipt is income cannot automatically be adopted, though a  finding in the assessment proceeding constitute good evidence in the penalty  proceeding.  In the penalty proceedings, thus, the authorities must consider  the matter afresh as the question has to be considered from a different angle. 19.     It is now a well-settled principle of law that the more is the stringent  law, more strict construction thereof would be necessary.  Even when the  burden is required to be discharged by an assessee, it would not be as heavy  as the prosecution.  [See P.N. Krishna Lal and Others v. Govt. of Kerala and  Another, 1995 Supp (2) SCC 187] 20.     The omission of the word "deliberate", thus, may not be of much  significance. 21.     Section 271(1)(c) remains a penal statute.  Rule of strict construction  shall apply thereto.  Ingredients of imposing penalty remains the same.  The  purpose of the legislature that it is meant to be deterrent to tax evasion is  evidenced by the increase in the quantum of penalty, from 20% under the  1922 Act to 300% in 1985. 22.     ’Concealment of income’ and ’furnishing of inaccurate particulars’  carry different connotations.  Concealment refers to deliberate act on the part  of the assessee.  A mere omission or negligence would not constitute a  deliberate act of suppressio veri or suggestio falsi.   23.     We may notice that in Commissioner of Income-Tax v. Jeevan Lal  Sah 1994 (205) ITR 244, this Court dealt with the amendment of Section  271(1)(C) made in the year 1964 to hold : "Even after the amendment of 1964, the penalty  proceedings, it is evident, continue to be penal  proceedings.  Similarly, the question whether the  assessee has concealed the particulars of his  income or has furnished inaccurate particulars of  his income continues to remain a question of fact.   Whether the Explanation has made a difference is

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\026 while deciding the said question of fact the  presumption created by it has to be applied, which  has the effect of shifting the burden of proof.  The  entire material on record has to be considered  keeping in mind the said presumption and a  finding recorded."

24.     The question came for consideration of this Court yet again in K.C.  Builders and Anr v. Assistant Commissioner of Income-Tax 2004 (265)  ITR 562 = (2004) 5 SCC 731), wherein it was held : "One of the amendments made to the  abovementioned provisions is the omission of the  word ’deliberately’ from the expression  ’deliberately furnished inaccurate particulars of  such income’.  It is implicit in the word  ’concealed’ that there has been a deliberate act on  the part of the assessee.  The meaning of the word  ’concealment’ as found in Shorter Oxfort English  Dictionary, third edition, Volume I, is as follows :         ’In law, the intentional suppression of truth  or fact known, to the injury or prejudice of  another.’         The word ’concealment’ inherently carried  with it the element of mens rea.  Therefore, the  mere fact that some figure or some particulars have  been disclosed by itself, even if it takes out the  case from the purview of non-disclosure, it cannot  by itself, even if it takes out the case from the  purview of non-disclosure, it cannot by itself take  out the case from the purview of non-disclosure, it  cannot by itself take out the case from the purview  of furnishing inaccurate particulars.  Mere  omission from the return of an item of receipt does  neither amount to concealment nor deliberate  furnishing of inaccurate particulars of income  unless and until there is some evidence to show or  some circumstances found from which it can be  gathered that the omission was attributable to an  intention or desire on the part of the assessee to  hide or conceal the income so as to avoid the  imposition of tax thereon.  In order that a penalty  under Section 271(1)(iii) may be imposed, it has to  be proved that the assessee has consciously made  the concealment or furnished inaccurate particulars  of his income."

25.     The said principle has been reiterated in  M/s Virtual Soft Systems  Ltd. v. Commissioner of Income Tax, Delhi 2007 (2) SCALE 612, where  it was held : "24. Section 271 of the Act is a penal provision and there  are well established principles for the interpretation of  such a penal provision. Such a provision has to be  construed strictly and narrowly and not widely or with  the object of advancing the object and intention of the  legislature."  

26.     Referring  to  a large number of decisions, it was furthermore  observed : "27.     Every statutory provision for imposition of  penalty has two distinct components: (i)     That which lays down the conditions for          imposition of   penalty. (ii)    That which provides for computation of the

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quantum of penalty. Section 271(1)(c) and clause (iiii) relate to the conditions  for imposition of penalty, whereas, on the other hand ,  Explanation 4 to Section 271(1)(c) relates to the  computation of the quantum of penalty.  28.    The provisions of Section 271(1)(c)(iii) prior to  1.4.1976, and after its amendment by the Finance Act,  1975 with effect from 1.4.1976, later provisions being  applicable to the assessment year in question, being  substantially the same except that in place of the word  ’income’ in sub clause (iii) to sub clause (c) of Section  271 prior to its amendment by Finance Act, 1975, the  expression "amount of tax sought to be evaded" have  been substituted. Explanation 4 inserted for the purpose  of clause (iii) where the expression "the amount of tax  sought to be evaded", was inserted had in fact made no  difference in so far as the main criteria, namely, absence  of tax continued to exist, prior to or after 1.4.1976,  changing only the measure or the scale as to the working  of the penalty which earlier was with reference to the  ’income’ and after the amendment related to the ’tax  sought to be evaded’. The sine qua non which was there  prior or after the amendment on 1.4.1976 to the fact that  there must be a positive income resulting in tax before  any penalty could be levied continued to exist. The  penalty imposed was in ’addition to any tax’. If there was  no tax, no penalty could be levied. The return filed  declaring loss and assessment made at a reduced loss did  not warrant any levy of penalty within the meaning of  Section 271(1)(c)(iii) with or without Explanation 4."

27.     In Commissioner of Income Tax, Indore v.  Suresh Chandra Mital  (2003) 11 SCC 729, whereupon Mr. Datta, learned Additional Solicitor  General relied, no reason was assigned and only the order of the High Court  was not interfered with.  Therein, it appears, the assessee pleaded that he had  submitted the revised return of income which was not found to be sufficient. 28.     In M. Janardhana Rao v. Joint Commissioner of Income Tax  (2005) 2 SCC 324, whereupon again reliance was placed by Mr. Datta, this  Court was concerned with the meaning of the substantial question of law as  obtaining in Section 271A of the Income Tax Act.  We are not concerned  with the said question in the present case. 29.     It is not a case where penalty has been imposed for breach of  contravention of a commercial statute where lack of or intention to  contravene or existence of bona fie may not be of much importance.  It is  also not a case where penalty is mandatorily impossible.  It was, therefore,  not a case where the enabling provision should have been invoked. 30.     For the reasons aforementioned the impugned judgment cannot be  sustained which is set aside accordingly.  The appeal is allowed.  However,  in the facts and circumstances of this case, there shall be no order as to costs.