• Jul
  • 31
  • 2009

Merely because an addition is made to the income declared by the assessee, penalty u/s. 271(1)(c) cannot be imposed

CASE LAW DETAILS

Decided by: ITAT, PUNE `A’ BENCH, PUNE,  In The case of: Kanbay Sotware India Pvt. Ltd. V DCIT, Appeal No.: ITA No. 300/PN/07, Decided on: April 28, 2009

RELEVANT PARAGRAPH

44. In Dharmendra Textile Processors’ case (supra), Their Lordships have held that that penalty under section 271(1)(c) provides remedy for loss of revenue. A penalty under section 271 (1)(c) involves payment of an additional amount, which is a civil liability to provide for remedy for loss of revenue, while a sentence of imprisonment under section 276 C means loss of individual liberty which does not help revenue in anyway except as serving as a deterrent for the potential defaulters. Therefore, as held by the Hon’ble Supreme Court, a penalty under section 271(1)(c) indeed provides a remedy for loss of revenue, but then, as the scheme of Section 271(1)(c) itself unambiguously shows, a penalty under section 271(1)(c) can not be imposed for case of addition to income. Section 271(1)(c) envisages certain situations in which penalty under section 271(1)(c) can be imposed and unless those conditions are satisfied, the penalty cannot be imposed merely because there was a loss of revenue. The nature of the penalty being to provide for loss of revenue is thus not in doubt, but that characteristic of penalty under section 271(1)(c) is to be read in conjunction with the scheme of the section 271(1)(c) itself. It is also be borne in mind that, as noted by Hon’ble Supreme Court in the case of Om Prakash Sheo Prakash (supra), there is no contradiction between a liability being civil in nature and yet penal in character. With mens rea or without mens rea, a penalty can only be imposed when there is failure, or deemed failure, to discharge an obligation. Therefore, Hon’ble Supreme Court’s observations to the effect that a penalty is to provide remedy for loss of revenue cannot be construed to mean that a penalty can be imposed as an automatic consequence for addition to returned income.

45. What follows from these discussions is that in view of Hon’ble Supreme Court’s judgment in the case of Dharmendra Textile Processors (supra), once the mandate of section 271(1)(c), read with Explanations thereto, are satisfied, there is no further onus on the Assessing Officer to establish mens rea. To that extent, the law laid down by Their Lordships in the case of Dilip N Shroff was reversed.

46. While in Dilip N Shroff’s case, Division Bench of the Hon’ble Supreme Court had held that , “Before, thus, a penalty can be imposed, the entirety of the circumstances must reasonably point to the conclusion that the disputed amount represented income and that the assessee had consciously concealed the particulars of his income or had furnished inaccurate particulars thereof (emphasis by underlining supplied by us)”, in Dharmendra Textile Processors case, a larger bench, having taken note of the position that “The Explanations appended to Section 271(1)(c) of the IT Act entirely indicates the element of strict liability on the assessee for concealment or for giving inaccurate particulars while filing return” concluded that “The penalty under that provision is a civil liability. Wilful concealment is not an essential ingredient for attracting civil liability as is the case in the matter of prosecution under Section 276C of the I.T. Act”. The observations of willful concealment of income not being an essential condition precedent for imposition of penalty and the penalty being a civil liability were made in the context of the question which was before Their Lordships , i.e., whether or not before imposition of penalty, it is required for Assessing Officer to prove establish a guilty mind and particularly in the light of the Explanations appended to Section 271(1)(c), which contain deeming fiction i.e. situations in which an assessee can be deemed to have furnished inaccurate particulars of income. As a matter of fact, way back in 2001, a three judge bench of the Hon’ble Supreme Court, in the case of K P Madhusudanan Vs CIT (251 ITR 99), the assessee’s plea to the effect that `revenue was required to prove mens rea of a criminal offence’ before penalty under section 271(1)(c) can be imposed, was rejected by Their Lordships. Elaborating upon the stand so taken by Their Lordships, a co ordinate bench of this Tribunal, speaking through one of us and in the case of DCIT Vs Narendra Kumar Mohta ( 84 ITD 495) had observed thus :

“We now come to the CIT(A)’s stand that penalty cannot be imposed in the case of an agreed addition and unless the Revenue is able to prove mens rea as of a quasi criminal offence. Since we have already held that it is not a case of agreed addition, assessee’s arguments clearly proceed on a fallacious assumption so far as `agreed addition’ is concerned. In any case, as to the requirement of Revenue’s establishing mens rea on the part of the assessee, we may only refer to the observations of the Hon’ble Supreme Court, in the case of K P Madhusudanan (supra), which are reproduced below:

Learned counsel then drew our attention to the judgment of this Court in the case of Sir Shadi Lal Sugar and General Mills Ltd Vs CIT (168 ITR 705). He submitted that the assessee had agreed to addition to his income referred to hereinabove to buy peace and it did not follow therefrom that the amount that was agreed to be added was concealed income. That did not follow that amount was agreed to be added to income as concealed income. That it did not follow that amount was agreed to be added to income as concealed income is undoubtedly what was laid down by this Court in Sir Shadu Lal Sugar and General Mills Ltd vs CIT (supra) and that, therefore, the Revenue was required to prove mens rea of a criminal offence. But it was because of the view taken in this and other judgments that the Explanation to Section 271(1)(c) was added. By reason of addition of Explanation , the view taken in the said case can no longer be said to be applicable.

It is thus clear that, in the considered view of Hon’ble Supreme Court, it is no longer necessary that Revenue is required to prove mens rea and , therefore, independent finding about conscious concealment is no longer a condition precedent for imposition of penalty under section 271(1)(c) read with Explanation 1 thereto. The school of thought casting onus on Revenue to prove mens rea, as advocated by large number of judicial precedents relied upon by the assessee, has been thus specifically rejected by the Hon’ble Supreme Court. `’

47. The proposition that mens rea need not be proved before penalty under section 271(1)(c) can be imposed was not laid down by the Hon’ble Supreme Court for the first time in Dharmendra Textile Processors’ case (supra). As we have noted above, there are earlier judicial precedence to that effect. K P Madhusuanan’ s case (supra) is one such example, and incidentally that judgment was also rendered by a three judge bench.

48. The views expressed by Their Lordships in Dharmedra Textile Processors’ case (supra) cannot be viewed as an authority for the proposition that a penalty under section 271(1)(c) is an automatic consequence of an addition being made to income of the taxpayer, for the reason that whether it is a civil liability or a criminal liability, penalty under section 271(1)(c) can only come into play when the conditions laid down under that section are to be satisfied. In view of the elaborate discussions in the preceding paragraphs, by no stretch of logic or rationale it could be said that imposition of penalty under section 271(1)(c) has a cause and effect relationship with addition being made to the returned income per se. An addition being made to income does, because of impact of Explanation 1, effectively does raise a presumption against the assessee but that is an entirely rebuttable presumption and the scheme of rebuttal is provided in the Explanation itself.

49. In our humble understanding, all that the Explanation 1 to Section 271(1)(c) does is to shift the onus of proof from Assessing Officer to the assessee; instead of Assessing Officer being under an obligation to establish the malafides of the assessee, the onus is now on the assessee to establish his innocence and righteous conduct. As a matter of fact, as a result of the Explanation 1 to Section 271(1)(c) in its present form, the burden of proof has entirely shifted to the assessee, and it is this paradigm shift which is one of the most important feature of rule of evidence in civil proceedings as distinct from criminal proceedings. In the `Law of Evidence’ by Ratan Lal and Dhiraj Lal (@ pages 10-11), this aspect is highlighted thus:

Difference between evidence in civil and criminal proceedings

…………………

In a civil case, a Judge of fact must find for the party in whose favour there is a preponderance of proof, though the evidence is not entirely free from doubt. In a criminal case, no weight of preponderant evidence is sufficient, short of that which excludes all reasonable doubt……

In a criminal trial the degree of probability of guilt has got to be very much higher – almost amounting to a certainty – than in civil proceeding, and if there is slightest reasonable or probable chance of innocence of an accused, the benefit must be given to him……..

The onus of proof in criminal cases never shifts to the accused, and they are under no obligation to prove their innocence ………

50. The views so expressed by the learned authors appeal to us. Viewed from the above perspective, the observations made by Their Lordships in Dharmendra Textile Processors’ case (supra) only reemphasizes the paradigm shift on burden of proof as brought about by Explanation 1 to Section 271(1)(c). The observations made in Dilip Shroff’s case, on the need for the tax authorities to establish mens rea before a penalty can be imposed, were contrary to this school of thought and, to that extent, therefore, the larger bench overruled the Dilip Shroff decision. However, even when the liability under section 271(1)(c) is viewed as a civil liability, while the onus is certainly not on the tax authorities to establish mens rea of the assessee, the explanation of the assessee is still to be examined by the adjudicating authority on its own merits.

51. There can be three distinct mutually exclusive situations in the case of an addition to income. In the first scenario, the addition made could be on account of contumacious conduct of the assessee in which mens rea is established or can be reasonably inferred. As far as this situation is concerned, penalty was always leviable under section 271(1)(c). In the second scenario, while the addition is made to the returned income, neither is it established, or can be reasonably inferred, that the addition made to the income is on account of contumacious conduct of the assessee nor is it established, or can be reasonably inferred, that the assessee’s conduct and explanation is bonafide. In such a situation, in the light of Hon’ble Supreme Court’s judgment in the case of Dilip Shroff (supra), penalty under section 271(1)(c) could not have been levied since the onus of establishing mens rea of the assessee could not have been discharged in such a situation. However, as the law stands now and in the light of the Hon’ble Supreme Court’s judgment in the case of Dharmendra Textile Processors (supra), penalty under section 271(1)(c) will be leviable since it is not necessary for the tax authorities to establish mens rea of the assessee. That is the area in which legal position has changed. However, there is still a third scenario in which an addition is made to the income but it is established, or can be reasonably inferred, that assessee conduct and explanation is bonafide. These are the situations in which the assessee is able to establish his innocence. In such a situation, in accordance with the undisputed scheme of section 271(1)(c), neither the penalty was leviable prior to Hon’ble Supreme Court’s judgment in the case of Dilip Shroff, nor is it leviable after the Dharmendra Textile Processors’ case.

52. In our considered view, therefore, there is no change in law so far as first and third scenario visualized above are concerned. The scheme of Section 271(1)(c) remains as it and this scheme clearly requires much more than a mere addition to assessee’s income before penalty under the said section can be imposed. The views expressed by Their Lordships in Dharmendra Textile Processors’ case (supra) do not bring about any radical change in the scheme of Section 271(1)(c) though these views do seek to nullify the Dilip Shroff judgment which, in the esteemed views of the larger bench, did not take into account the correct scheme of things as these were – more particularly post insertion of Explanation 1 to Section 271(1)(c). Indeed, even on the first principles and as seen in the above light, while this view is in accordance with the scheme of the section and the amendment brought about in the scheme of the section by insertion of Explanation 1 to Section 271(1)(c), it does not bring about any radical change to the main scheme of Section 271(1)(c) itself.

53. Even as there were huge apprehensions about possible unduly aggressive interpretation of this judgment by an overzealous section of tax authorities, there have been also been number of published opinions highlighting the correct perspective in which this judgment needs to be taken. Just as much as we have benefited from the lively debate in our courtroom, we have also had benefit of perusing many such well reasoned opinions in the press, and we would like to take note of some such helpful material. Shri S Rajarathnam, a well known author and commentator on income tax, has, in his column in `The Hindu’, and while dealing with the impact of Dharmendra Textile Processors’ judgment on law relating to penalties under section 271(1)(c), inter alia observed as follows:-

The view taken by the Full Bench that penalty is automatic for violation of rules under central excise law is rendered in the context of excise law. Reference to an income-tax penalty in such a case cannot be treated as a direct authority on the subject. Revenue itself had not contended with reference to income-tax penalty that it is automatic, but only questioned the onus of proving lack of bona fides on revenue.

As regards approval by the Full Bench of the decision in SEBI’s case (supra), this case dealt with an instance of violation of SEBI regulations, where penalty was considered to be automatic for a default, though such default was found to be non-intentional and in fact inadvertent by the SEBI Tribunal. This decision cannot be applicable to income-tax penalty. Income-tax penalties are governed by provision under the income-tax statute, which, no doubt, do not require mens rea on the part of the assessee as a pre-condition for penalty, but all the same require conditions under the tax statute to be satisfied before any levy of penalty.

If the Supreme Court’s decision in Dharmendra Textiles Processors’ case (supra) now referred by the reader is understood as warranting automatic levy in case of every default even for income-tax defaults, such understanding is not correct. It was conceded by the Supreme Court in Dharmendra Textiles Processors’ case (supra) while referring to Dilip N. Shroff’s case (supra) that “the question relating to discretion was not a basic issue” and that Sec. 271(1)(c) of the Income-tax Act provides for some discretion. Hence SEBI’s case (supra) cannot apply for tax penalties.

For concealment penalties under Sec. 271(1)(c), there is a complete code for such penalty under Explanation 1 to Sec. 271(1)(c), which presumes concealment wherever there is a difference between reported and assessed income but would authorise levy of penalty only where the explanation is not bona fide and all the materials to the computation of his total income has been disclosed by him.

There has been no change in this law. The decision in Dharmendra Textiles Processors’ case (supra) cannot be understood as having brought about any change in the interpretation of the provisions, which are clear not admitting of any controversy. It may also be pointed out that even for initiation of penalty, satisfaction is required. Sec. 273B gives a blanket immunity for various offences listed in the Chapter relating to penalty, if the assessee proves that there is reasonable cause for such failure. It is in this context that there is no scope for apprehension that penalties under the income-tax law will, henceforth, be automatic. All that has been decided is that proof of mens rea is necessary only for prosecution cases.

54. In the light of our detailed analysis of the legal position, as set out earlier in this order, it is clear that our views are broadly on the same lines as the above comments, and, to that extent, we are in considered agreement with the views so articulated by the learned author. Similar are the views expressed by another eminent author in an article in the journal published by the Bombay Chartered Accountant Society (2008- 40B – BCAJ 411) which are reproduced below:

From the judgment of the larger bench, it seems that the same overrules the judgment of Apex Court in Dilip Shroff’s case only to the extent that deliberate act on the part of the assessee will have to be proved for levy of concealment penalty (i.e. mens rea is essential ingredient of the provisions) and the order imposing such penalty is quasi criminal in nature. ……………………..

55. In the light of the above discussions, and for the detailed reasons set out above, we are of the considered view that even post Dharmendra Textile Processors’ judgment by the Hon’ble Supreme Court, merely because an addition is made to the income declared by the assessee, penalty under section 271(1)(c) cannot be imposed. In our considered view, Hon’ble Supreme Court’s judgment in the case Dharmendra Textile Processors’ case (supra) does not bring about any radical change in the scheme of Section 271(1)(c) though it does nullify the earlier Division Bench judgment of Hon’ble Supreme Court in the case of Dilip Shroff to the extent it held that the onus was on the tax authorities to establish mens rea before a penalty under section 271(1)(c) can be imposed – a proposition which, in the esteemed views of the larger bench, did not take into account the correct scheme of things as these were – more particularly of Explanation 1, as it exists now, to Section 271(1)(c). Their Lordships have indeed held that a penalty under section 271(1)(c) is a civil liability but that expression is used in contradistinction with criminal liability and, as held by the Hon’ble Supreme Court itself in the case of Om Prakash Shiv Prakash (supra), there is no conflict in a liability being a civil liability and at the same time being penal in character. In effect, therefore, liability under section 271(1)(c) continues to have its basic penal character even as it is held to be a civil liability. Hon’ble Supreme Court has also held that the onus is not on revenue to prove mens rea before penalty under section 271(1)(c) can be imposed on an assessee, but that does not imply that where assessee can prove his bonafides, in accordance with the scheme of the Section 271(1)(c), penalty under section 271(1)(c) will still be leviable. All this means that in a situation where assessee has not been able to establish his bona fides, and a penalty under section 271(1)(c) is warranted in accordance with the scheme of the Section 271(1)(c), tax authorities are prevented from imposing the penalty only on the ground that mens rea of a criminal offence is not established. It is this context in which Their Lordships have held that `willful concealment is not an essential ingredient for attracting a civil liability’ and that it is a `strict liability’ which is to remedy the loss of revenue unlike a criminal liability, resulting in loss of individual liberty, which only to serve as a deterrent to other potential defaulters. All these observations do not disturb, or even touch, the basic statutory scheme of penalty under section 271(1)(c). A civil liability is for contravention of civil obligations, and , under the scheme of the Income Tax Act, that civil obligation is furnishing of a return of income “in the prescribed form and verified in the prescribed manner and setting forth such particulars as may be prescribed”. There is thus no cause an effect relationship between an addition being made to the income of an assessee and a penalty under section 271(1)(c). No doubt an addition to income is the starting point of this exercise, but not only that in the assessment proceedings itself the Assessing Officer has to be satisfied that the additions are such that penalty proceedings under section 271(1)(c) are required to be initiated but also before any penalty under section 271(1)(c) can be imposed, each such case will have to be examined in the light of scheme of things envisaged by Section 271(1)(c) read alongwith Explanations thereto.

56. The scheme of Section 271(1)(c), as we have noted earlier in this order, visualizes imposition of penalty when the assessee has concealed income or when the assessee has furnished inaccurate particulars of income. In addition to these two situations, penalty can also be imposed, inter alia, when assessee is deemed to have concealed particulars of income under Explanation 1 to Section 271(1)( c). This Explanation provides that the assessee will be deemed to have concealed particulars of income where in respect of any facts material to the computation of the total income of any person under this Act, (i) when the assessee fails to provide an Explanation, (ii) when the assessee provides an Explanation which is found to be false, and (iii) when the assessee provides an Explanation which he fails to substantiate and he fails to prove that the explanation was bonafide and that all the facts necessary for the same and material for computation of income have been duly disclosed by the assessee.

57. Let us now revert to the facts of this particular case before us. The assessee initially filed an income tax return claiming deduction under section 10A after setting off losses of Unit II against profits of Unit I. As the eligible profits of Unit I were obviously more than the income so arrived at, while the assessee was entitled to deduction under section 10A for the entire profits of Unit I, the actual deduction was restricted to the amount of income after set off . Thereafter, the assessee filed a revised income tax return in which deduction under section 10A was claimed in respect of profits of Unit I individually and the unabsorbed depreciation and business loss of Unit II was claimed to be carried forward. In the note filed alongwith the revised return, the assessee, inter alia, submitted as follows:

Kanbay India had filed its original return of income for the financial year ended 31st March 2002 (`AY 2002-03′) on 31st October 2002 with Ward 8(2) (acknowledgement number 05079).

For the financial year ended 31st March 2002, Unit 1 has derived profits whereas Unit 2 has incurred a loss (these have been disclosed in the accountant’s report in Form 56 F for these two units for the financial year ended 31st March 2002 filed along with the original return of income). In the original return of income, the deduction under section 10A in respect of Unit 1 was erroneously calculated after setting off the losses of Unit 2.

Given that the deduction under section 10A is an undertaking specific deduction, the return is now being revised to claim the deduction under section 10A in respect of profits of Unit 1 without considering the losses of Unit 2. The balance taxable profits of Unit 1 have been set off against the loss incurred by Unit 2 to arrive at income chargeable under the head `Profits and Gains from Business or Profession’.

………….

Further to the above, the balance losses of Unit 2 after set off against taxable profits of Unit 1 are carried forward and set off to future years. The position in this regard is as follows:

Particulars Unabsorbed Business Total

depreciation Losses

AY 2002-03 19,758,291 33,868,757 53,627,048

58. It is this claim which did not find favour with the Assessing Officer. The Assessing Officer was of the view that since, post 2001 amendment of Section 10A, the benefit under section 10 A is no longer a tax exemption but only a deduction from total income, it can never exceed the total income. It was also noted that since total income of the assessee can only be computed after aggregating the profits and losses of various units, the losses of Unit 2 are set off against profits of Unit 1 and there is nothing left to be carried forward and that the deduction under section 10A is to restricted to the net income after the set off. The assessee’s initial contention was that since 10 A benefit is an undertaking specific tax benefit, the deduction under that section cannot be restricted to overall total income of the assessee and must be granted to with respect to the profits of the undertaking. The assessee has referred to the circulars issued by the Central Board of Direct Taxes as also a reference is made to the certain columns in forms prescribed in the Income Tax Rules which support this interpretation of law. When the claim was rejected by the Assessing Officer, the assessee let the matter rest there and did not carry in further appeal.

59. We are not really concerned with the merits of the stand taken by the assessee in the claim made by the assessee in the revised return so filed, but all that is necessary to be examined for our purposes is whether making such a claim can be said to concealment of income or furnishing of inaccurate particulars.

60. The expression `concealment of income’ has not been defined in the Act, but the natural meanings of the expression `concealment’ are `to keep from being seen, found, observed, or discovered’. It would, therefore, follow that the expression concealment of income, in its natural sense and grammatical meaning, implies an income is being hidden, camouflaged or covered up so as it cannot be seen, found, observed or discovered. That is certainly not the situation before us. The assessee has made a claim, and that too by revised return which virtually ensured that the fact of assessee’s having made this claim cannot remain unnoticed by the Assessing Officer, and has given specific justification and all the supporting details for the same. By no stretch of logic, this situation can be treated as a situation in which any income is concealed by the assessee. Concealment of an income by an income cannot be a passive situation anyway; it implies that the person concealing the income is hiding, covering up or camouflaging an income – something which essentially requires a conscious effort. On the contrary, this is a situation in which the assessee has acted in very transparent and straight forward manner. There cannot be any concealment of income in such a situation.

61. The expression `furnishing of 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 facts 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 to 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 of 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 reversed by the larger benches of Hon’ble Supreme Court. The development of law is a dynamic process which is affected by the innumerable factors, and it is always an ongoing exercise. In such circumstances, a bonafide 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. In any event, as we have noted above, the connotations of expression `particulars of income’ do not extend 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 can not be said to be a case of `furnishing of inaccurate particulars of income’, in its natural sense, either.

62. There is, however, one more eventuality in which penalty can be imposed and that is the situation in which deeming fiction of Explanation 1 to Section 271(1)(c) comes into play. This deeming fiction, as we have noted earlier in this order, comes into play where in respect of any facts material to the computation of the total income of any person under this Act, (i) when the assessee fails to provide an Explanation, (ii) when the assessee provides an Explanation which is found to be false, and (iii) when the assessee provides an Explanation which he fails to substantiate and he fails to prove that the explanation was bona fide and that all the facts necessary for the same and material for computation of income have been duly disclosed by the assessee.

63. Even a casual look at the provision for deeming fiction of Explanation 1 to Section 271(1)(c) would show that it relates only to the factual aspects. The opening words employed in this deeming fiction are “where in respect of any facts material to the computation of the total income of any person under this Act”. In the case before us, the only controversy is regarding legality of a claim made by the assessee and, therefore, this deeming fiction cannot be invoked in the present case at all. In our considered view, the deeming fiction of Explanation 1 to Section 271(1)(c) can only be pressed into service in connection with “facts material to the computation of income” and not in connection with the computation of income per se. Viewed in the light of the discussions in the preceding paragraph, wherein we have held that there cannot be any `concealment of particulars of income’ on the issues of legal interpretation, and viewed in the light of the fact that the deeming fiction is to provide for a `deemed furnishing of inaccurate particulars’ , the reference to the facts material to the computation of the total income is quite in harmony with the scheme of Section 271(1)(c).

64. In the present case, there is no dispute that all the relevant facts material to the computation of total income are duly furnished by the assessee and no deficiencies in furnishing of such facts are pointed out by the authorities below. There is thus no cause of action for deeming fiction being triggered by the conduct of the assessee.

65. Be that as it may, even assuming that deeming fiction under Explanation 1 to Section 271 (1)(c) can be triggered by a wrong legal claim, it cannot be the case that merely because there is a wrong claim, even if that be so, penalty under section 271(1)(c) can be imposed. This deeming fiction under section 271(1)(c) only shifts the onus of proof on the assessee, as this Explanation itself provides that a penalty can only be imposed (a) when there is no explanation by the assessee, (b) when the explanation given by the assessee is found to be false, and (c) when the assessee provides an Explanation which he fails to substantiate and he fails to prove that the explanation was bonafide and that all the facts necessary for the same and material for computation of income have been duly disclosed by the assessee.

66. In the case before us (a) is not satisfied as the assessee has filed an explanation to the effect that he was of the bonafide view that the claim of deduction under section being undertaking specific, the same should be granted with respect to the profits of the eligible undertaking and in isolation with other businesses of the assessee. The condition (b) is also not satisfied, as the explanation of the assessee has not been found to be false. We may also add that the onus of proving that the explanation is false is on the Revenue and there is no finding in this direction at all.

67. As far as conditions in (c) above are concerned, even assuming that the assessee fails to substantiate the explanation, he has been able to demonstrate that the explanation is bonafide and that the assessee in the income tax return itself has duly disclosed all the facts necessary for the same and necessary for computation of income. All the details and justification of claim have been set out in the return of income itself. There was a detailed note giving rationale and computation of the unit wise claim of deduction under section 10 A and it was duly supported by the prescribed certificate from the chartered accountant. The question of bonafides cannot be decided against the assessee either. Whether the conduct of the assessee was bonafide or not is essentially a question of fact and the related facts are always in the exclusive knowledge of the assessee. The assessee’s contention is that he was of the bonafide view that the claim is admissible as the deduction under section 10 A is an undertaking specific relief and a reading of CBDT circular as also the format of rules prescribed in the Income Tax Rules support this interpretation. One may or may not agree with this understanding of law of the assessee, but the fact that there can be a bonafide view to that effect cannot be ruled out. The human probabilities favour acceptance of this explanation for bonafides. The fact that the assessee has not carried in appeal the rejection of his claim by the Assessing Officer is sought to be used against the assessee’s claim of bonafides. We are unable to see any rationale in this. The decision to go in litigation or not does not depend on the merits alone, and merely because an assessee does not challenge a particular addition or disallowance in appeal does not mean that the claim for such exclusion from income or deduction lacked bonafides. The decision not to go into a litigation or not is dependent on a variety of factors, and the merits of the legal issue involved is only one such factor. In our considered view, therefore, the decision to the assessee to pursue or not to pursuer legal remedy against rejection of his stand is not the safe indicator about bonafides of such stand. The authorities below clearly erred in holding that merely because the assessee has accepted the stand of the Assessing Officer, so far as rejection of assessee’s claim was concerned, it would show that action of the assessee lacked bonafides.

68. In any event, when an explanation is offered by the assessee in discharge of the onus cast upon him by Explanation 1 to Section 271(1)(c), it is not for the Assessing Officer to ponder over what should have happened in ideal circumstances, and reject the explanation because what has actually happened is less than such an imaginary ideal situation; he is to consider the explanation objectively and unless he finds the same against the human probabilities or unless there are any real inconsistencies or factual errors in such an explanation, the Assessing Officer ought to accept the same. It cannot always be feasible to prove the claim of bona fides to the hilt, nor, in our considered view, the assessee can be expected to do so. Whether or not a person has acted bona fide reflects the state of his mind in respect of his conduct, and, therefore, the assessee has his inherent limitations in establishing this aspect of the manner. All that the assessee can do is to explain the circumstances in which he has acted in a particular manner and set out the related facts. The explanation for bonafides, at the cost of repetition, needs to be considered in a fair and objective manner and in the light of human probabilities. As long as the explanation given by the assessee is in the light of the human probabilities, there are no factual errors or inconsistencies, and it is supported by reasonable supporting evidences regarding factual elements embedded therein, if any, the bonafides should be taken as proved. The assessee’s explanation regarding bona fides of the claim does not suffer from any apparent consistencies or factual errors and it is quite in tune with the human probabilities. There is no good reason to reject the same as unacceptable for the purpose of making of the claim of deduction being covered by the deeming fiction under Explanation 1 to Section 271(1)(c).

69. In view of the reasons set out above, the case of the assessee is not even hit by the mischief of any of the three eventualities envisaged by the deeming fiction under Explanation 1 to Section 271(1)(c). We have already held that, on the facts and in the circumstances of the case, the assessee could not be said to have concealed the particulars of income or furnished inaccurate particulars of income. Under the scheme of Section 271(1)(c), therefore, it was not a fit case for the imposition of penalty. We need not, therefore, address ourselves to other legal issues raised before us, and, for the short reasons set out above, hold that it was not a fit case for imposition of penalty under section 271(1)(c) of the Act. The issue whether even in the absence of any mens rea, on the facts of this case, the assessee could have been imposed penalty under section 271(1)(c) would have been relevant only if it was found to be a fit case for imposition of penalty under the scheme of Section 271(1)(c). Since we have come to the conclusion that under the scheme of Section 271(1)(c), it was not a fit case for imposition of penalty, and in view of our analysis of legal position set out earlier in this order, we hold that the facts and circumstances of the case did not warrant or justify any imposition of penalty. We, therefore, direct the Assessing Officer to delete the impugned penalty of Rs 2,00,00,000. The assessee gets the relief accordingly.

Sandeep Kanoi

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