The Hindu Business Line : A case of two views and no penalty

A SENSATIONAL crime story in Tamil Nadu involved a young lady who faced serious accusations of money laundering. Police accused her of selling narcotic drugs, and it was alleged that Rs 1 crore in cash was found in her possession.

A zamindar appeared on the scene claiming ownership of the monies. The Income-Tax Department filed a petition seeking custody over the cash and proposing to assess the same as undisclosed income of the damsel in distress.

This situation is not uncommon for the I-T authorities. Quite often, doubts arise as to the ownership of the monies to be brought to tax. Such doubts can relate to either the person to be assessed or the particular year for which the assessment has been made.

As a last resort, normally the Department chooses to make protective assessments for several years or in the hands of more than one person, leaving it to the appellate authorities to decide the truth of the matter. Such procedure for making protective assessment has the blessings of the Supreme Court.

While protective assessments can be made, is the Department entitled to levy protective penalties as well? This question arose before the Calcutta High Court in Durga Kamal Rice Mills vs CIT (265 ITR 25). A survey of the premises of the rice mill under Section 133 of the I-T Act revealed duplicate account books, wherein the opening balance disclosed exceeded the figure of the closing balance of the previous year shown in the return. The difference obviously represented undisclosed income.

The rice mill was run as a partnership. There was no explanation for the difference. The partners of the firm filed returns admitting their share of the difference as undisclosed income and those returns had to be accepted by the assessing officer. So far as the firm was concerned, the assessing officer thought it prudent to assess the same in the hands of the firm in both the years. Not content with this procedure, he went on to levy penalties for concealment, invoking Explanation 1 to Section 271(1)(c).

The levy of such penalty was agitated before the Calcutta High Court.

The court pointed out that the findings recorded in the quantum proceedings cannot be a factor for determining the question of imposing penalty. This question has to be decided independent of such finding.

"If we do not fall back on the finding in the quantum proceedings, then it seems on facts, that this income was shown as the opening balance of the following previous year and it was open to the assessee to disclose the said income in the returns for the following previous year.

That, in law, could be treated as income of the relevant previous year. But there is nothing to prevent the assessee to treat the income as income of the following previous year.

It might have been concealment for the relevant previous year. But whether it is concealment for the following previous year cannot be determined without a difference to the assessment for the following previous year. Therefore, it appears to us that two views are possible.

"At the same time, this income was shown in the capital accounts of the partners. Whether this was the income of the partners or of the assessee is also a question, which can be raised requiring determination. The determination in the quantum proceedings not being final, this question has to be examined. It can be an income at the hands of the assessee or an income at the hands of the partners.

"Whether it is an income of the one or the other is immaterial for our present purpose since it was in relation to the relevant previous year in respect of which it was treated to be an income of the assessee. But, at the same time, that finding would not be binding on the penalty proceedings. An independent finding has to be arrived at.

"Now having treated the same amount at the hands of the assessee as well as at the hands of the partners, the Department cannot conclusively say or stick to one for the purpose of imposing penalty that there was concealment by the assessee. Inasmuch as in order to attract the mischief of concealment in a given case, it has to be treated under which provision the particular case is being governed."

The court finally ruled that when two views are possible, no penalty could be imposed. The I-T authorities had taken two different stands by adding the amount in the income of the partnership and again accepting the same at the hands of the partners.

They cannot, therefore, fall back on one and reject the other. When no clear and definite inference can be drawn in a penalty proceeding, penalty cannot be imposed.

The judgment appeals to commonsense. But as Chief Justice Chagla said, commonsense is uncommon in income-tax proceedings.

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