Concealment Penalty-Important Issues
Deepa Khare
Chartered Accountant
1. Nature of Penalty Proceedings:
Tax, interest and penalty are distinct and different terms under the Income tax Act. Income Tax is the basic charge under this Act. Interest is levied as compensatory payment for withholding the amount of Tax, which was due to the Government. Liability for interest is merely compensatory in nature. However, imposition of penalty has a deterrent objective. Penalties are imposed to restrain the Assessee from making defaults under the Act and since IT Act provides for a liability for payment in monetory forms, penalty proceedings are considered as quasi-criminal proceedings.
Penalty proceedings being quasi criminal in nature are discretionary. The word ‘may’ used in section 271(1)(c) implies a discretion in the hands of the AO to levy penalty. The Supreme Court in the case of Hindustan Steel held that penalty need not be initiated because it is lawful to do so
2. Rules of Interpretation of Penal Statutes:
In any statute a clear language is needed to create a crime. A provision enacting an offence or imposing a penalty is strictly construed. This rule applies in the selection of one interpretation when two or more constructions are possible. The rules exhibits a preference for the liberty of the subject and in a case on ambiguity enables the court to resolve the doubt in favour of the subject and against the legislature which was failed to express itself clearly. It would further mean the benefit of doubt will go to the assessee and not to the department. If there is a reasonable interpretation which would avoid the penalty in any particular case we must adopt that interpretation. If two possible and reasonable constructions can be put upon a penal provision the court must lean towards that construction which exempts the subject from penalty rather than the one which imposes penalty.
3. Meaning of concealment and furnishing of inaccurate particulars of income:
The basic charge for levy of penalty u/s 271(1)(c) is concealing the particulars of income or furnishing inaccurate particulars of income. The word ‘conceal’ is derives from the Latin word ‘concealare’, which implies con+celare i.r. to hide. Webster in his New International Dictionary equates its meaning ‘to hide or withdraw from observation, to cover or keep from sight, to prevent the discovery of, to withhold the knowledge of. The offence of concealment is thus is a direct attempt to hide an item of income tax authorities. It is implicit in the word ‘conceal’ that there has been a deliberate act on the part of the assessee. While any inaccuracy made in books of accounts or otherwise which resulted in keeping off or hiding a portion of his income is punishable as furnishing inaccurate particulars of his income, the penal provisions would operate when there is failure of duty to disclose fully and truly particulars of income as laid down under the Act. ‘Furnishing of inaccurate particulars” and ‘concealing the particulars of income’ are distinct and different things. ‘‘Furnishing of inaccurate particulars” refer to the particulars which have been furnished by an assessee of his income and ‘concealing the particulars of income’ refer to that income which has not been declared or disclosed in the return by the assessee.
Ref, A M Shah & Co V CIT 238 ITR 415(Gaj)
Penalty can be levied for concealing the particulars of income or furnishing of inaccurate particulars of income. However, there can be a situation that there is a overlapping of both the charges. In case of Rahmat Development & Engg Corporation (130 ITR 602) the Hon Calcutta High Court held that penalty can be levied for both the charges in respect of the addition made for difference in the valuation of construction of the property. The charge of concealing the particulars of income or furnishing of inaccurate particulars of income must be framed specifically so as to provide him reasonable opportunity of being heard. Section 274(a) specifically requires that before imposition of penalty, an assessee is to be heard to provide him an opportunity to prove his innocence. It thus follows, if penalty is initiated on the first charge, it must be imposed on the same charge.
Ref CIT V Lakhbir Lalji 85 ITR 77 Guj
Padmaram Bharati V CIT 110 ITR 54 Gau
4. Mensrea:
The penalty proceedings, being quasi-criminal proceedings, the element of mens rea is relevant. The charge of concealment itself presupposes a conscious or deliberate act on the part of the assessee in concealing the particulars of income.
5. Burden Of Proof- Position upto 31.3.1964
Another important aspect of the penalty proceedings is the burden of proving the default so as to levy penalty. In the context of concealment penalty, the law has undergone a sea change since its inception. At the inception, the Act provided that the burden was on the Department to prove beyond doubt that the disputed amount is the income of the assessee and secondly the assessee has consciously concealed the particulars of income or furnished inaccurate particulars of income. The Supreme laid down the law to the extent of holding that merely because a particular explanation of the assessee is found to be false, it does not necessarily attract penalty.
This remained the legal position upto 31.3.1964 and the said principles were reiterated by the Supreme Court in the following cases:
a. CIT V Khoday Eswara & Sons 83 ITR 369
b. CIT V N A Mohammed Haneef 83 ITR 215
c. Mathuraprasad Agarwal V CIT 108 ITR 370
d. Ananthram Veerasinghaiah & Co V CIT 123 ITR 457
6. Position from 1.4.64 to 31.3.1976
The Finance Act 1964 had brought about two amendments in Section 271(1)(c) wef 1.4.1964:
a. The word ‘deliberately’ was omitted from caluse (c) and
b. An Explanation was added at the end of Section 271(1)
The Explanation made a drastic change in the procedure in as much as it cast the onus upon the assessee where the income returned turned out to be less than 80% of the income assessed. Further, in relation to the first change i.e. deletion of the word ‘deliberately’, a question arose whether such amendment brought cases of unintentional mistakes within the meaning of the term ‘furnishing inaccurate particulars of income’. However, such interpretation is not correct and the deletion of word ‘deliberately’ does not change the position of law by ruling out the existence of mensrea or deliberate act. The word ‘concealed’ itself requires the existence of culpable state of mind. The explanation thus created a legal fiction where the returned income was less than 80% of the assessed income in as much as the assessee is deemed to have concealed the particulars of income or deliberately furnished particulars of income. This presumption was however rebuttable presumption and assessee could get away from the clutches of penalty by proving that he had no guilty mind for not showing the particulars of income and it was an unintentional and bonafide mistake.
The above change was brought about to obviate the difficulties found in proving the positive element of motive for concealment. By introducing the explanation, the onus was cast upon the assessee to prove that the additions to the income did not arise from fraud or willful neglect on his part. The explanation thus was laid down the rule of evidence where a presumption was raised against the assessee, which was open for rebuttal for him. Hence, the explanation cast a negative burden on the assessee.
7. Position from 1.4.76:
With effect from 1.4.76, the old explanation was replaced by four explanations prescribing different deeming provisions. Explanation 5 was added in 1984 and Explanation 6 was added in 1989, Explanation 7 in 2001.
8. Controversy in the context of decisions of Supreme Court in the case of Dilip Shroff and Dharmendra Textiles:
Recently, the Supreme Court in the case of Dilip Shroff reported in 291 ITR 523 had an occasion to deal with the legal position right from the inception. The Supreme Court having considered the scope of Explanations to Section 271(1)(c) observed that after the insertion of the Explanations, there is a change in the legal position. The burden now shifted to the assessee to prove that there is no concealment. It has created a rebuttable presumption to the effect that the case is covered by any Explanation, the assessee shall be deemed to have concealed the particulars of income. Thus the change was in the context of the burden of proof. However, interpretations of the said position were made by the Department by taking a view that after the insertion of the Explanations, it rested entirely on the assessee to prove that the impugned addition does not refer to any concealed income of the assessee. It has been observed that every penny that was added to the income of the assessee in the assessment proceedings led to the conclusions on the part of the AO that it represents the concealed income of the assessee and resulted into initiation of concealment penalty. The Supreme Court further observed the legal position as enunciated in various decisions. It held that as laid down, there is a change in the position as far as the burden of proof is concerned. In view of the new Explanations, now the burden shifts to the assessee to prove that there is no concealment on the part of the assessee. However, the basic ingredients of the penalty still have to be considered. The conditions of Mensrea or guilty mind are essential and therefore the Department has to prove that the amount is income and it is the concealed income of the assessee and refer to the specific Explanation to the Section. Only after giving such finding by the AO the burden would shift to the assessee and not otherwise. The AO thus has to give a specific finding as to whether the assessee fails to offer any explanation or the explanation offered by the assessee is false or fails to substantiate his explanation and also fails to prove that the explanation is bonafide and all the facts material to the computation are not disclosed by him.
Further controversy arose because the above decision in the case of Dilip Shroff was relied upon by the assessee in another case of UOI V Dharmendra Textiles 306 ITR 277 which was a case involving a question under the Central Excise Law. The Supreme Court while dealing with the provisions of Central Excise Act also commented on the decision in the case of Dilip Shroff and observed that penalty u/s 271(1)(c) is a civil liability and implies a strict liability. The observations of Supreme Court in Dilip Shroff that mensrea is still applicable are not correct and mens rea is not essential ingredient as is the case of prosecution u/s 276C and therefore the case is not correctly decided. The interpretations of this later decision of Supreme Court in the case of Dharmendra Textiles were made as if the penalty being civil liability or strict liability implied an automatic liability.
The rigour of the decision of Dharmendra Textiles however has now been toned down by Supreme Court in the case of UOI V Rajasthan Spinning & Weaving Mills reported in 224 CTR 1 wherein the Supreme Court explained that the decisions in the case of Dharmendra Textiles cannot be said to hold that penalty u/s 11AC is applicable for every non-payment of duty regardless of the conditions stated therein.
Pune Tribunal in the case of Kambay Software (I) Pvt Ltd V DCIT 122 TTJ 721 has explained the legal position after considering the decision in the case of Dharmendra Textiles.
9. Important Principles:
i. Occasion for disclosure of correct income:
Section 139 of Income Tax Act requires a person to file his return of income. The only occasion for filing the correct and true income is u/s 139(1) i.e. in the course of filing the original return. There is no other occasion to file correct return of income. The levy of concealment penalty is therefore seen with reference to the original return. If the assessee declares his income in the original return, no penalty for the concealment can be levied.
ii. Law applicable:
The law applicable for levy of penalty is the law on the date of default. The date of default will be the date of filing the original return and hence the law that existed at the time of filing original return will be applicable.
Ref Brijmohandas 120 ITR 1 SC
CIT V Omkarsaran & Sons 195 ITR 1 SC
Vakri Chaco V CIT 203 ITR 885 SC
iii. Assessment Proceedings and penalty proceedings are separate and independent proceedings:
As laid down by the Supreme Court in the case of Ananthram Veersinghaiah V CIT (123 ITR 457), the penalty proceedings are separate and independent from penalty proceedings. The AO is required to consider the entire material on record in order to decide whether penalty is leviable or not. The assessee can also place any further evidence in support of his case to prove that there was no default on his part. However, it is because of the change in the legal position due to insertions of explanations that the assessee would get further opportunity to prove his innocence rather than the AO who otherwise had to independently prove for the imposition of penalty that the disputed amount constitutes income and the income is on account of concealment on the part of the assessee. The findings or observations made in assessment proceedings are relevant but not conclusive in penalty proceedings.
iv. Satisfaction to be recorded by Assessing Officer: