Return of the Ghost of Section 271(1) (c)

CA. Hiten Chande

Recently, Supreme Court in the case of MAK Data P. Ltd. vs CIT (C.A.No. 9772 of 2013) has pronounced the judgment in respect of section 271(1)(c), which has again raised the vexed issue of levy of penalty u/s 271(1)(c). In this case, Apex court has laid down that even if income surrendered during the assessment proceedings to buy the peace, penalty can still be levied by Assessing officer.

Facts of the case:

1. Assessee filed return of income for A.Y. 2004-05 declaring total income of Rs. 16,17,040. During the course of assessment proceedings, AO found that certain documents comprising share application forms, bank statements, MOA of companies, affidavits, return of income were impounded in survey u/s 133A on sister concern of the assessee. On 26.10.2006, show cause notice was issued seeking information relating share applications and bank transfer deeds signed by applicants. In reply assessee offered 40.74 lakhs as income in the following words,

“The offer of surrender is by way of voluntary disclosure of without admitting any concealment whatsoever or with any intention to conceal and subject to non-initiation of penalty proceedings and prosecution.”

2. AO after verifying the details of share application money accepted the surrender made by the assessee and accordingly concluded the assessment u/s 143(3). AO also initiated penalty proceedings for concealment of income and not furnishing true particulars of income and imposed penalty of Rs. 14.61 lakhs. On appeal, CIT(A) confirmed the order of AO. On further appeal, ITAT allowed the plea of the assessee on the ground that there was no concealment and amount was voluntarily surrendered by assessee. Aggrieved by the order of ITAT, revenue took the matter to High court who pronounced the judgment against the assessee confirming the order of the AO. On appeal to Supreme Court it was held as under:

Judgment of Apex Court:

1. Whenever there is a difference between the returned and assessed income, onus is on the assessee to substantiate the claim by cogent and reliable evidence. When initial onus placed by the Explanation-1 to Section 271(1)(c)  is discharged by the assessee, burden of proving the ground to levy the penalty is on Revenue.

2. Assesse’s plea like “voluntary disclosure”, “buy peace”, “avoid litigation”, “amicable settlement”, etc. are not recognized by the statute under Explanation-1.  Voluntary disclosure made by the assessee does not release the appellant from the mischief of penal proceedings and income tax law does not absolve assessee from penalty when voluntary disclosure is made.

3. Surrender of income cannot be termed as “voluntary”, as it was offered for taxation after detection was made by the AO in the search proceedings conducted on sister concern of assessee. If assessee’s intention was to declare correct income, it would have done so at the time filing return of income.

Analysis of the Judgment:

1. Penalty u/s 271(1)(c) has always been a pestered issue between the assessee and Income tax department. Questions have always been raised regarding the scope of levying penalty u/s 271(1)(c) whether each and every addition is liable for penalty and what meaning is to be attached to the words “concealment of particulars” and “inaccurate particulars”. This judgment is important in the sense that it lays down a ratio that, assessee cannot circumvent the provisions of section 271(1)(c) merely by making voluntarily disclosure in assessment proceedings. Even if all the particulars are disclosed and there is no discrepancy in the particulars disclosed in return of income to that with books of account, onus is still on the assessee to substantiate why a particular income or expenses was treated in a specific way in return of income, which is different from the way AO is treating.

2. Thus in the first instance, it recognizes the burden on the part of assessee for advancing the explanation for all the claims made in return of income and only after assessee is able to substantiate his claim with cogent and reliable evidence, burden shifts on revenue. Further, Court also lay down that Assessee cannot plead bonafide after particular discrepancy is detected by AO as it raises presumption that assessee was holding back the issue to escape from it; If genuine bonafide exists, it must be proved by way of an evidence.

3. By this judgment, Apex court has also clarified the scope of judgments pronounced by it in the case of CIT vs. Reliance Petroproducts Pvt. Ltd.(2010)(322 ITR 158)(SC) wherein it was held that Penalty u/s 271(1)(c) cannot be levied even if an inaccurate claim is made by the assessee and “Inaccurate particulars of income” was interpreted to imply particulars furnished in the return of income vis-à-vis books of accounts. This judgment was relied on in almost all the cases of penalty. Various High courts and tribunals bound by the decision of Supreme Court deleted the penalty imposed by revenue on the basis of this judgment. In case of CIT vs. Benett Coleman & Co. Ltd.( ITA No. 2117 of 2012) (Bom.) wherein assessee offered taxable interest income of Rs. 75 lakh as exempt income, and when confronted by AO during assessment proceeding, pleaded that it was due to “inadvertent error” and there was no desire to conceal the income, Court went on to hold that even if claim made by the assessee is unsustainable in law, penalty u/s 271(1)(c) cannot be levied as interest amount was disclosed in return of income and no inaccurate particulars of income were furnished.

4. Appending to the above judgment, once again Supreme Court in the case of Price Waterhouse coopers Pvt. Ltd. vs. CIT(2012) (348 ITR 306)(SC) deleted the penalty confirmed by the high court, where assessee due to mistake did not disallow amount u/s 40A(7) which was specifically reported in the 3CD report by the tax auditor, on the ground of “bonafide error.” It is difficult to accept that companies like Benett Coleman and Price Waterhouse cooper who have separate workforce to handle tax matters and all the top professionals at its disposal can plead such a mistake and get away with it. Hence, above judgments provided an unbounded ground to assessee to make all types of claim in the return of income, if return gets selected for scrutiny it could always take the shelter under the decisions of Supreme Court.

5. However, in both the judgments above, Supreme court completely lost the sight of Explanation-1 to section 271(1)(c) which creates a presumption against the assessee about concealment of income, where no explanation or evidence is furnished by the assessee for making an unsustainable claim. On many occasions Revenue contended that Explanation-1 to section 271(1)(c) was not considered by Apex Court in above cases however, it was rejected by the tribunals and High courts. In one such case, CIT vs. Aditya Birla Nova Ltd. (ITA No. 3899 of 2010) (Bom.) Court held as under,

“We are unable to agree. In any event we are bound by the judgment of the Supreme Court. Merely because the Explanation was not referred to in the judgment of the Supreme Court in CIT vs. Reliance Petroproducts Pvt. Ltd., it cannot be said that the judgment is per-incuriam. The learned Judges having expressly considered the very section, it can hardly be suggested that they did not notice apart of the section and delivered the judgment in ignorance thereof merely because that part is not in terms noted in the judgment”.

6. Unfortunately, there was no discussion or even a reference to Explanation-1 to section 271(1)(c) in both the judgments above. Where the occasion arose to hold contrary, judicial discipline always required them to act in consonance with law of land laid down by Supreme Court. If decision in the case of MAK Data (Supra) been pronounced earlier, then plethora of appeals allowed by various authorities where assessee had made the claim without any substance would have required some efforts to come out of the jaws of section 271(1)(c). Here, two judgments of Delhi High court namely, CIT vs. Zoom Communications Pvt. Ltd. (2010) (327 ITR 510) (Del.) and HCIL Kalindee ARSSPL vs. CIT (ITA No. 480/2012) (Del.) deserve a special mention as in both the cases court refused to trample down by the Judgment of Supreme court in the case of Reliance Petroproducts (Supra) and upheld the penalty for making a claim without any substance.

7. Decision in the case of Reliance Petroproducts and Price Waterhouse cooper adverted completely to the side of assessee, MAK Data’s judgment has striked a well deserved balance whereby both assessee and revenue is bestowed with a responsibility; assessee is required adduce evidence for making any claim and on the other hand, after assessee complies with its obligation, revenue is required to prove their ground for levy of penalty. Whereas judgment of Reliance Petroproducts and Price Waterhouse cooper breed inefficiency, MAK Data’s case will instill much needed vigilance on the part of tax payers.