A.r.enterprises P.limited v. Commissioner Of Income Tax

IN THE HIGH COURT OF JUDICATURE FOR RAJASTHAN AT JODHPUR -------------------------------------------------------- A.R.ENTERPRISES P.LIMITED V/S COMMISSIONER OF INCOME TAX Mr. ARUN BHANSALI, for the appellant / petitioner. Mr. KK BISSA, for the respondent. Date of Order : 5.2.2008 HON'BLE SHRI N P GUPTA,J. HON'BLE SHRI DEO NARAYAN THANVI,J. ORDER REPORTABLE: This is an appeal, by the assessee against the order ofthe learned Tribunal, upholding the imposition of penaltyunder Section 271(1)(c) of the Income Tax Act. The appealwas admitted on 16.9.2003, by framing following substantialquestions of law: “(1) “Whether on the facts and in the circumstances ofthe case, levy of penalty under Section 271(1)(c) isjustified? (ii) “Whether on the facts and in the circumstances ofthe case, the Tribunal was justified in coming to theconclusion that the assessee has not discharged hisburden to disclose the presumption arising against himunder explantion to Section 271(1)(c) of the Income Tax The facts of the case are, that the appellant filedreturn for the relevant assessment year. However, noticeswere issued to him under Sections 143(2) and 142(1) withdetailed questionnaire. Thereafter, the evidence wasrecorded, enquiry was held, and assessment was made. Thatassessment was challenged in appeal, and on further appeal,there were remands also. However, the assessments haveacquired finality on dismissal of D.B. Income Tax AppealsNo.36 of 2003 and 34 of 2003. In the assessment order, made by the Assessing Officer,the last para reads as under: “Assessed at Rs.38,34,610/- accordingly. Issue demandnotice and challan. Give credit for TDS as percertificate on file. Charge interest under Sec.201 and217(1A). Issue penalty notice u/s.271(1)(c) forconcealing the particulars of income and u/s.273(2)(c)for non-filing of higher estimate.” In compliance thereof, notice was issued to the assessee, and the assessee appeared, and contestedproceedings. The notice related to the payment of twoamounts, being a payment of Rs.2 lacs to M/s Radha KishanBal Kishan Muchhal of Indore, and the payment of Rs.3 lacsto M/s Pyroff Packaging (P) Ltd. of Bombay. These paymentswere disallowed, as they were found to be of other than business consideration, and were added in the income of theassessee. From a look at the order of the Dy. Commissioner,Annex.1, it transpires, that since this involved“concealment/furnishing of inaccurate particulars ofincome”, notice under Sec.274 read with Section 271 of theIncome Tax Act was issued. The learned Dy. Commissionerconsidered the reply, and proceeded on the basis, that theAssessing Officer has thoroughly examined the explanationabout the payment, and found, that the parties did notactually render any service to the assessee. The reasons inthis regard were also considered. Then, the learned Dy.Commissioner concluded, that the assessee failed to furnishany explanation, as to why the penalty should not beimposed upon it, and that, as the addition made on accountof payment to the above parties for no service rendered,involved furnishing of inaccurate particulars of income,resulting in concealment of his income, it attractedpenalty under Section 271(1)(c). Thus, the penalty ofRs.2,75,000/-, being the minimum, i.e. the amount of taxsought to be evaded, was imposed. Challenging this, an appeal was filed, and certainjudgments were also cited. That appeal was allowed, relyingupon the judgment of the ITAT, in case of M/s Aditya Millsv. IAC, reported in (1993) 45 TTJ (Jp) 363, wherein it hasbeen held, that the penalty cannot be levied, if theassessee could not produce the evidence to establish the rendering of any brokerage service by the other party, andthat, inspite of the fact that disallowance has beenconfirmed, the penalty should not be levied. Challenging this, an appeal was filed, and certainjudgments were also cited. That appeal was allowed, relyingupon the judgment of the ITAT, in case of M/s Aditya Millsv. IAC, reported in (1993) 45 TTJ (Jp) 363, wherein it hasbeen held, that the penalty cannot be levied, if theassessee could not produce the evidence to establish the rendering of any brokerage service by the other party, andthat, inspite of the fact that disallowance has beenconfirmed, the penalty should not be levied. This order was challenged by the Revenue, by filing theappeal before the ITAT. It may be observed here, thatbefore the ITAT, three appeals were there, one being appealof the assessee, seeking to challenge the assessment, otherbeing by the Revenue, challenging certain benefits grantedto the assessee, and third being appeal of the Revenue,seeking to challenge the setting aside of the penalty. Thelearned ITAT decided all the appeals against the assessee,and restored the penalty. So far as the assessment orders are concerned, asobserved above, the appeals against those orders havealready been dismissed. Regarding the penalty, all that has been said by thelearned Tribunal is in para Nos.33, 37 and 39. In paraNos.33 and 34, the Tribunal discussed the sustainability ofdisallowance of the payments, made by the assessee. Then,in para 37, the learned Tribunal noticed the contentions ofthe parties, on the matter of penalty, and distinguishedthe case cited on behalf of the assessee, by finding interalia, that in the case of CIT v. S.C. Mittal, (2001) 251ITR 9 (SC), the Assessing Officer had detected payment of commission claimed, which was not paid. Then in para 39,all that has been said by the Tribunal is, as under:- “39. After having discussed the factual and legalposition, we have come to the conclusion that thecommission paid to the persons mentioned in the orderwas not for business consideration and no services hadbeen rendered by these two persons to the assessee.Therefore, the assessee has concealed the particularsof its income. The penalty is leviable u/s 271(1)(c)of the Act. The CIT (A) had grossly erred incancelling the penalty levied by the AO u/s 271(1)(c)of the Act. The order of the CIT (A) is reversed andthat of the AO is revived/sustained.” Assailing the impugned judgment, it is contended by thelearned counsel for the appellant, that for initiatingproceedings for penalty, according to language of Section271(1), the Assessing Officer, or the Commissioner(Appeals), or the Commissioner, in the course of anyproceedings, should be satisfied about any person, havingconcealed the particulars of his income, or havingfurnished inaccurate particulars of such income [Clause(c)of sub-section (1)], and submitted, that a positivesatisfaction should be recorded by the authority, withrespect to either of the eventualities. While in thepresent case, by referring to the original assessmentorder, available with us, in the file of the Appeal No.36,which has been decided today, as Annex.1, it is submittedthat the Assessing Officer has not recorded anysatisfaction, and in a routine manner, while makingassessment of the income at a particular amount, directed issuance of demand notice, giving credit for TDS & chargingof interest, and in the same rhythm, without anyapplication of mind, & directed issuing of penalty noticeunder Section 271(c), for concealing the particulars ofincome, which does not fulfil the requirements of Section271(1) and, therefore, the entire proceedings are bad.Elaborating the argument, it was contended, that it istrite law, that simply because the Assessing Officer doesnot agree with the return, or makes any addition forwhatever reason, ipso facto, would not entitle him todirect initiation of penalty proceedings by issuing notice.Rather, in the case, where there is found to be anyconcealment of income, or furnishing of inaccurateparticulars, even that, ipso facto, does not render theassessee liable for penalty, as the imposition of penaltyis not automatic. While in the present case, from theassessment order, it transpires, that things haveproceeded, as if it was an automatic consequence ofdisallowance of the amounts, as claimed by the assessee,and therefore, the imposition of penalty is bad. The othersubmission made is, that the assessee had bonafidelyclaimed the deduction, and simply because the authoritiesin hierarchy, and this Court, did not accept the stand ofthe assessee, upheld the addition. If the penalty isimposed, it practically comes to, as if the mere fact ofnon-acceptance of a particular explanation of the assesseeregarding deduction, ipso facto, attracts the penalty, Learned counsel for the Revenue has supported theimpugned order, and submitted, that the Assessing Officerhad clearly recorded the satisfaction, by directingissuance of notice under Sec.271 (1)(c) of the Act, andpursuant thereto, separate notice was issued to theassessee, and since the assessee could not furnish thesatisfactory explanation, as to why the penalty be notimposed, the penalty was imposed by the Assessing Officer,which was erroneously set aside by the learnedCommissioner, and has rightly been restored by the learnedTribunal. Disallowance of the deductions, claimed by theassessee, and imposition of penalty, were entirelyindependent proceedings, and since the present is a clearcase of concealment of particulars of income, and resultantfurnishing of inaccurate particulars of income, penalty hasrightly been imposed. We have considered the submissions, and gone throughthe record available, so also the provisions of Section271, and the judgment cited by the learned counsel for theassessee, being Dilip N. Shroff v. Joint Commissioner ofIncome Tax, reported in (2007) 6 SCC 329. For ready reference, we may quote the provisions ofSection 271(1)(c), which reads as under: “271(1) If the Assessing Officer or the Commissioner(Appeals) or the commissioner in the course of anyproceedings under this Act, is satisfied that anyperson - xxxxx (c) has concealed the particulars of his income orfurnished inaccurate particulars of such income, he may direct that such person shall pay by way ofpenalty....” In our view, a bare reading of this Section does clearly show, that it contemplates existence ofsatisfaction, on the part of the authorities concerned,about existence of any of the eventualities, listed inClauses (b), (c) & (d) of Sub-section (1). It is settledlaw, that mere fact that the Assessing Officer did notagree with the return submitted by the assessee, or madecertain additions, by itself, would not entail initiationof penalty proceedings, as a mere consequence thereof. Wemake it clear, that we do not mean to say, that recordingof satisfaction, as required by Section 271(1) should, byitself, be an independent act, but it can very well becomprised in the order of the assessment itself, as it canbe in the course of any proceedings under this Act. In our view, a bare reading of this Section does clearly show, that it contemplates existence ofsatisfaction, on the part of the authorities concerned,about existence of any of the eventualities, listed inClauses (b), (c) & (d) of Sub-section (1). It is settledlaw, that mere fact that the Assessing Officer did notagree with the return submitted by the assessee, or madecertain additions, by itself, would not entail initiationof penalty proceedings, as a mere consequence thereof. Wemake it clear, that we do not mean to say, that recordingof satisfaction, as required by Section 271(1) should, byitself, be an independent act, but it can very well becomprised in the order of the assessment itself, as it canbe in the course of any proceedings under this Act. We may now refer to judgment of the Hon'ble SupremeCourt in Dilip N. Shroff's case (supra), wherein in para “42. The legal history of Section 271(1)(c) of the Acttraced from the 1922 Act prima facie shows thatExplanations were applicable to both the parts.However, each case must be considered on its ownfacts. The role of Explanation having regard to theprinciple of statutory interpretation must be borne inmindbeforeinterpretingtheaforementionedprovisions. Clause (c) of sub-section (1) of Section271 categorically states that the penalty would beleviable if the assessee conceals the particulars ofhis income or furnishes inaccurate particularsthereof. By reason of such concealment or furnishingof inaccurate particulars alone, the assessee does notipso facto become liable for penalty. Imposition ofpenalty is not automatic. Levy of penalty is not onlydiscretionary in nature but such discretion isrequired to be exercised on the part of the assessingofficer keeping the relevant factors in mind. Some ofthose factors apart from being inherent in the natureof penalty proceedings as has been noticed in some ofthe decisions of this Court, inhere on the face of thestatutory provisions. Penalty proceedings are not beinitiated, as has been noticed by the WanchooCommittee, only to harass the assessee. The approachof the assessing officer in this behalf must be fairand objective.” If the assessment order is read, much less appreciated,or construed, as per the requirements expressed by theHon'ble Supreme Court in this para 42 above, to say theleast, the order does not satisfy the requirements ofSection 271(1), even for initiating any penaltyproceedings. The various appellate orders and remandorders, available in the appellate file of the assessmentmatters, do show, that there was a bonafide dispute, goingon between the assessee and the department, about thejustifiability of the payments made, and it is very If the assessment order is read, much less appreciated,or construed, as per the requirements expressed by theHon'ble Supreme Court in this para 42 above, to say theleast, the order does not satisfy the requirements ofSection 271(1), even for initiating any penaltyproceedings. The various appellate orders and remandorders, available in the appellate file of the assessmentmatters, do show, that there was a bonafide dispute, goingon between the assessee and the department, about thejustifiability of the payments made, and it is very significant to note here, that it is not the finding of anyof the authorities, that the payment was not made to thepersons concerned. The precise finding in the assessmentproceedings is, that the payment was not made for businesspurposes, as it is not shown that the recipients did, orcould render, any business advantage to the assessee. Insuch circumstances, when the payment has factually beenmade by the assessee, the question only was, as to whetherhe is entitled to deduction or not, and may be, that theauthorities found, that the assessee is not entitled todeduction, resultantly the addition in the income was made,but then, for initiating penalty proceedings, that, byitself, is not enough; and beyond that, namely thededuction claimed by the assessee, has not been allowed,there is nothing more to show, as to why the penaltyproceedings should be initiated against the assessee. Inthis very judgment, in Dilip N.Shroff's case (supra), theHon'ble Supreme Court has dealt in detail, the meaning andimport of the expressions “concealment of income” and“furnishing of inaccurate particulars” and have alsoconsidered the legislative history, and evolution of theprovisions. In para 49, it was held, that this concealmentor submitting inaccurate particulars, signifies adeliberate act or omission, on the part of the assessee.Such deliberate act must be either for the purpose ofconcealment of income, or furnishing of inaccurateparticulars. Then in para 50, it was held, that furnishing of an assessment of value of the property may not, byitself, be furnishing of inaccurate particulars. Even ifthe Explanations are taken recourse to, a finding has to bearrived at, having regard to clause (A) of Explanation 1that the assessing officer is required to arrive at afinding, that the explanation offered by an assessee, inthe event he offers one, was false. He must be found tohave failed to prove, that such explanation is not only notbonafide, but all the facts relating to the same andmaterial to the income, were not disclosed by him. Thus,apart from his explanation being not bonafide, it shouldhave been found as of fact, that he has not disclosed allthe facts, which were material to the computation of hisincome. With all humility at our command, we are constrained toobserve, that all these requirements are conspicuouslymissing. Again, reverting back to the order of the learnedTribunal, in our view, even a closest reading of the orderonly shows, that the Tribunal has gone into the aspect ofjustifiability of expenditure, so as to entitle theassessee to deduction, and then, even in para 39, all thathas been held is, that it came to the conclusion, that thecommission paid to the persons, mentioned in the order, wasnot for business consideration, and no service had been rendered by these two persons to the assessee, and fromthat itself, it has been concluded, by observing, that“therefore, the assessee has concealed the particulars ofits income”. Even at the cost of repetition, we find that a“concealment” as comprehended by the Hon'ble Supreme Courtin Dilip N. Shroff's case (supra) as a deliberate act, isnot the finding given by the learned Tribunal, rather, thefinding is only, as if it was a necessary consequence,which cannot be sustained. rendered by these two persons to the assessee, and fromthat itself, it has been concluded, by observing, that“therefore, the assessee has concealed the particulars ofits income”. Even at the cost of repetition, we find that a“concealment” as comprehended by the Hon'ble Supreme Courtin Dilip N. Shroff's case (supra) as a deliberate act, isnot the finding given by the learned Tribunal, rather, thefinding is only, as if it was a necessary consequence,which cannot be sustained. Thus, both the questions, as framed, are answered infavour of the assessee and against the Revenue. The appeal is, therefore, allowed. The order of thelearned Tribunal, and that of the Assessing Officer (DCIT)are quashed. ( DEO NARAYAN THANVI ),J. ( N P GUPTA ),J. RANKAWAT JK, PS