http://JUDIS.NIC.IN SUPREME COURT OF INDIA Page 1 of 8  

CASE NO.: Appeal (civil)  5204-5207 of 2002

PETITIONER: Sudarshan Silks & Sarees

RESPONDENT: Commissioner of Income Tax, Karnataka

DATE OF JUDGMENT: 11/04/2008

BENCH: ASHOK BHAN & DALVEER BHANDARI

JUDGMENT: J U D G M E N T Reportable

CIVIL APPEAL NOS. 5204-5207 OF 2002

BHAN, J.

1.      These appeals have been filed by the assessee  against the final judgment and order dated 6th October  2001 passed by the High Court of Karnataka at Bangalore  in ITRC Nos. 684/98, 685/98, 686/98 and 687/98 by which  the High Court while setting aside the order of  assessment passed by the Income Tax Appellate Tribunal  (for short, ’the Tribunal’) and that of the Commissioner  of Income Tax (Appeals), held that the facts and  circumstances of the case warranted levy of penalty under  Section 271(1)(c) of the Income Tax Act, 1961 (for short  "the Act").

2.      The assessment years involved in the present Appeals  are 1984-85, 1985-86, 1986-87 and 1987-88.

Facts:

3.      A search was conducted on the premises of the  assesses on 14th and 15th of October, 1987 and  incriminating documents evidencing concealment of income  by the assessee were unearthed apart from cash and  jewellery found at the time of search. It was found that  the appellant was maintaining double set of books and was  accounting for only 50% of sales in the regular set of  books.  This fact was admitted by Shri J.S. Ramesh, a  partner of the firm in the statement recorded under  Section 132(4) of the Act.  Shri J.S. Ramesh is the  person-in-charge of the entire group. The total turn over  suppressed by the assessee for the assessment year 1987- 88 was found to be to the tune of Rs.44,07,783/-.  These  have been discussed in detail in the order of assessment.   Assessing Officer estimated that the sales of the  assessee were Rs.50,000/- per day, whereas the accounted  sales were not found even 50% of the total sales.  Apart  from this, it was found that certain purchases were also  not being accounted for.  Similarly certain payments made  were not being accounted for.  All these were pointed out  to the assessee.  The assessee came forward with offer of  additional income.  Assessee filed a revised return on  31st March, 1989 declaring a total income for this year at  Rs.3,74,226/- as against the earlier amount of  Rs.43,650/-.  This was accepted and after verification

http://JUDIS.NIC.IN SUPREME COURT OF INDIA Page 2 of 8  

the assessment was completed on 29th December, 1989.

4.      During the course of recording the statement under  Section 132(4) of the Act, Shri Ramesh agreed to declare  such additional income as had been estimated by the  search party in the office of the appellant and its  sister concerns.  On the basis of these calculations,  revised returns were filed by the appellant for all the  years under appeal.  The income as per revised returns  were also accepted in toto.  In the course of assessment  proceedings, penal action under Section 271 (1) (c ) of  the Act was initiated and, after considering the reply  filed by the appellant, the learned Assistant  Commissioner of Income Tax / Assessing Officer chose to  levy maximum penalty under Section 271 (1) (c ).  While  levying the penalty, the Assessing Officer repelled the  contention of the appellant that a promise had been made  not to levy the penalty, as there was no evidence to this  effect on record.  It was also held that the appellant  was not entitled to the immunity given under Section  132(4) read with Section 271 (1) (c ) of the Act.

5.      Aggrieved against the levy, the appellant filed  appeal before the CIT (Appeals). The CIT (Appeals) after  detailed discussion and going through the appeal papers,  recorded the following findings: "Besides there are several factors  which would clearly show that the  appellant filed the return merely for  the purpose of purchasing peace.  Although I have held that the  provisions of Section 132 (4) r/w  Explanation 5 to Sec. 271(1)(c) are not  applicable, the record show very  clearly that the appellant was under a  strong impression that the statement by  which he was disclosing additional  amounts was made under the provisions  of Section 132 (4). Question 88, which  has come at the end of an extremely  long session of questioning (the record  of which itself runs to 30 pages) is as  follows:-

"I have explained to you the  provisions of section 132 (4)  of the I.T. Act, 1961 would  you like to make any  disclosure?"

In the context of the pointed reference  made to section 132 (4) by the  interrogator, the appellant’s partner  indicated that he would like to offer  additional incomes and then he  proceeded to make estimates of the  sales and the profits that would have  arisen thereon. It is quite clear that  at the end of the long session of  questioning (coupled with the fact that  in respect of current period there had  been discovery of suppression of sales)  and inducement had been offered in the  form of question 88. At the same time  the appellant was quite apprehensive

http://JUDIS.NIC.IN SUPREME COURT OF INDIA Page 3 of 8  

that there would be a lot of  difficulties, litigation, etc. in  store, regard had of the fact that for  the current period, suppression had  been discovered. Although the  appellant’s partner knew that no books,  documents etc. relating to the earlier  periods had been discovered, he was  aware that the discovery of books for  the current period could lead to  litigation in respect of the earlier  years incomes, by a process of  extension. To avoid this litigation,  and in order to purchase peace, he  offered additional amounts for taxation  in the firm’s hands. A perusal of the  statement accompanying the revised  return also clearly showed that the  higher incomes were returned with the  following legend "Total income as  agreed before the DDI", (emphasis  supplied). This coupled with the fact  that the statement made was in answer  to question 88 (which question was a  clear inducement to purchase peace,  with a pointed reference to section 132  (4) would indicate that the appellant’s  offer of higher income was only a  preoccupation with agreed settlement.

In these circumstances I am of the view  that the appellant clearly offered the  amount for taxation for the purpose of  purchasing peace. Together with this  finding, I also notice that no books of  accounts or other documentary evidence  was discovered, that proved any  concealment for the earlier years. I am  of the view that the Supreme Court’s  decision in 168 ITR 705 supporting the  proposition that no penalty is leviable  when unproved income is offered to  purchase peace would be directly  applicable, particularly considering  that the additional income returned,  have only been on the basis of the  appellant’s own estimates and the  appellant’s own admission, unsupported  by the discovery of any other  documentary evidence relevant to years  for which the higher incomes were  returned."

6.      On the basis of these findings, the CIT (Appeals)  accepted the appeal and set aside the orders of the  Assessing Officer.  It was held that in the facts and  circumstances of the case, no case for levy of penalty  under Section 271 (1) (c ) was made out.

7.      Aggrieved against the order passed by the CIT  (Appeals), the Revenue filed the appeals for all the  assessment years before the Tribunal.

8.      The Tribunal upheld the findings recorded by the CIT

http://JUDIS.NIC.IN SUPREME COURT OF INDIA Page 4 of 8  

(Appeals) and recorded a finding to the following effect:

"\005\005 Although there is nothing on record  to show that he was given an assurance  that no penalty would be levied, the  fact however clearly suggest that such  an inducement must have been given by  the searching party. When only partial  evidence in support of concealment for  a very limited period was detected  during the search, why would a man go  to offer much higher amounts for a  large number of years unless he was  promised some reciprocal benefit like  not being visited with penalty? The  learned DR has tried to argue before us  that a change of heart might have taken  place as a result of which Sri Ramesh  came forward with all the disclosures  for different years voluntarily. But  looking into the hard facts of life and  the general experience of mankind,  especially with regard to financial  affairs, it would be difficult to  accept such a proposition. Evidently,  huge amount of unexplained investments  including unexplained stock was found  at the time of search. Ultimately,  almost the same amount of income was  offered by the assessees over a number  of years. As the tax rates over the  entire period was more or less the  same, the tax effect, either from the  point of view of the Dept., or the  assesses would have more or less the  same, had the entire undisclosed assets  been subjected to tax in the year of  search or the entire income was spread  over a number of years as has been done  in the present assessments. In view of  the deposition given u/s. 132 (4)  followed by the cooperating attitude of  the assesses in paying up the tax, it  would be clear that no penalty u/s. 271  (1) ) would have been leviable had the  entire undisclosed income been assessed  in the year of search. Instead of going  for that simple way, Sri Ramesh went  into the question of admitting  undisclosed income on estimated basis  for the different past years. He must  have felt that in that process alone,  he would avoid the levy of penalty by  the departmental authorities. The facts  and circumstances strongly indicate  that an inducement and an allurement  had been provided to him at the time of  search in that matter.

       Again, although incriminating  materials were found out during the  search, such materials were however  ultimately not used by the departmental  authorities in making the assessments.  The assessments were made totally on

http://JUDIS.NIC.IN SUPREME COURT OF INDIA Page 5 of 8  

the basis of estimation income for the  earlier years as disclosed in the  revised returns. The revised returns  should therefore be considered as  having been filed in good faith. So far  as assessment of the undisclosed income  is concerned, such revised returns  would be sufficient evidence for that  purpose. However, for levying penalty,  some further and stronger evidences  were surely required In the cases  relied upon by the learned DR, the  search itself discovered the  undisclosed income. In the instant  cases, the search merely led to certain  clues to the undisclosed income and but  for the statement made by Sri Ramesh,  it would perhaps have not been possible  for the Dept. to assess the undisclosed  income over all these years in the way  in which such assessments have been  made. The only way for the dept. in  such a case would have been to assess  the entire amount of undisclosed  investments for the year of search as  has been discussed by use above, the  Dept. could not have been in a position  to levy penalty for concealment in such  a case. We are therefore of the opinion  that the case laws as cited by the  Dept., do not exactly support its case,  so far as the present appeals are  concerned. On the other hand, most of  the judgments cited by the learned  counsel for the assesses support the  case of the assesses that on account of  strong circumstantial evidences being  there about inducement having been  given by the departmental authorities  for not levying penalty in case of  disclosure of income over the earlier  years, no penalty can actually be  levied by the Dept."

9.      Revenue thereafter filed a reference application  under Section 256(1) of the Act.  The Tribunal referred  the following question to the jurisdictional High Court  for its opinion: "Whether on the facts and in the  circumstances of the case ITAT is right  in law in upholding the orders of the  CIT(A) canceling the penalty levied  u/s.271(1)(c)?

10.     High Court on consideration of the matter concluded  that the findings recorded by the Tribunal and CIT  (Appeals) being perverse, which no reasonable person  could have taken, are liable to be set aside and  accordingly accepted the reference and held that in the  facts and circumstances of the case, Tribunal was not  right in upholding the order of the CIT (Appeals) in  canceling the penalty levied under Section 271 (1)(c).   It was held that in the facts of the case the penalty  under Section 271 (1)(c) is clearly exigible.  Reference

http://JUDIS.NIC.IN SUPREME COURT OF INDIA Page 6 of 8  

was answered in favour of the Revenue and against the  assesee.

11.     Being aggrieved, the assessee has filed these  appeals.

12.     The only contention raised by the learned counsel  for the appellant is that the Tribunal is the final fact- finding authority and its decision on the facts can be  gone into by the High Court only if a question has been  referred to it which says that the finding of the  Tribunal on facts is perverse, in the sense that it is  such as could not reasonably have been arrived at on the  material placed before the Tribunal.  In the absence of  such a question having been claimed, the High Court was  obliged to accept the findings of fact arrived at by the  Tribunal and then proceed to decide the question of law  referred to it.  Relying upon the two judgments of this  Court in K. Ravindranathan Nair v. Commissioner of Income  Tax, (2001) 247 ITR 178 (SC) and T. Ashok Pai v.  Commissioner of Income Tax, (2007) 292 ITR 11 (SC), it  was contended that the High Court exceeded its  jurisdiction in coming to the conclusion that the finding  recorded by the Tribunal were perverse as no question of  law to that effect had been either claimed or referred by  the Tribunal to the High Court for its opinion.    13.     We find substance in this submission. In            K. Ravindranathan Nair’s case (supra) the question  referred to the High Court was:         "Whether on the facts and in the  circumstances of the case, the assessee  is entitled to claim deduction of Rs.  4,18,107, under section 37 of the  Income Tax Act, 1961. "           14.    The High Court instead of answering the question of  law referred to it came to the conclusion that the  Tribunal had misdirected itself in law in arriving at the  findings as according to the High Court the Tribunal had  overlooked or ignored a clinching document present on  record to prove to the contrary and because it had  wrongly cast the burden of proving the facts on a party.   Reversing the finding recorded by the High Court, it was  held as under:- "The High Court overlooked the cardinal  principle that it is the Tribunal which  is the final fact-finding authority.  A  decision on fact of the Tribunal can be  gone into by the High Court only if a  question has been referred to it which  says that the finding of the Tribunal  on facts is perverse, in the sense that  it is such as could not reasonably have  been arrived at on the material placed  before the Tribunal.  In this case,  there was no such question before the  High Court.  Unless and until a finding  of fact reached by the Tribunal is  canvassed before the High Court in the  manner set out above, the High Court is  obliged to proceed upon the findings of  fact reached by the Tribunal and to  give an answer in law to the question  of law that is before it.

http://JUDIS.NIC.IN SUPREME COURT OF INDIA Page 7 of 8  

       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."                                                  (Emphasis supplied)

15.     To the similar effect is the judgment of this Court  in T. Ashok Pai’s case (supra).  Relying upon the  judgments of this Court in CIT v. Mukundray K. Shah,  (2007) 290 ITR 433 (SC), Century Flour Mills Ltd. v. CIT,  (2001) 247 ITR 276 (SC) and K. Ravindranathan Nair’s case  (supra), it was held: -         "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. The question of law should  generally arise only accepting the  finding of fact to be correct."

16.     In the present case, the question of law referred to  the High Court for its opinion was, as to whether the  Tribunal was right in upholding the findings of the CIT  (Appeals) in canceling the penalty levied under section  271(1)(c).  Question as to perversity of the findings  recorded by the Tribunal on facts was neither raised nor  referred to the High Court for its opinion.  The Tribunal  is the final court of fact.  The decision of the Tribunal  on the facts can be gone into by the High Court in the  reference jurisdiction only if a question has been  referred to it which says that the finding arrived at by  the Tribunal on the facts is perverse, in the sense that  no reasonable person could have taken such a view.  In  reference jurisdiction, the High Court can answer the  question of law referred to it and it is only when a  finding of fact recorded by the Tribunal is challenged on  the ground of perversity, in the sense set out above,  that a question of law can be said to arise.  Since the  frame of the question was not as to whether the findings  recorded by the Tribunal on facts were perverse, the High  Court was precluded from entering into any discussion  regarding the perversity of the finding of fact recorded  by the Tribunal.   

17.     Accordingly, the Orders under appeal are set aside  and that of the CIT (Appeals) and Tribunal restored.  It  is held that in the facts and circumstances of the case,  penalty under Section 271(1)(c) was not exigible.  The

http://JUDIS.NIC.IN SUPREME COURT OF INDIA Page 8 of 8  

appeals are accepted with costs.