The Hindu Business Line : A rational view on penalties

The order imposing penalty is quasi-criminal in nature and the burden lies upon the Department to establish that the assessee had concealed his income.

Since burden of proof in penalty proceedings varies from that in assessment proceedings, a finding that a particular receipt is income cannot automatically be adopted.

However, a finding in the assessment proceedings constitutes good evidence in the penalty proceedings. In the penalty proceedings, the authorities must consider the matter afresh as the question has to be considered from a different angle.

Section 271(1)(c) of the Income-tax Act, 1961, categorically states that penalty would be leviable if the assessee conceals particulars of his income or furnishes inaccurate particulars thereof.

However, by reason of such concealment or furnishing of inaccurate particulars alone, the assessee does not ipso facto become liable for penalty. Imposition of penalty is not automatic. Not only is the levy of penalty discretionary in nature but discretion is also required to be exercised on the part of the Assessing Officer keeping the relevant factors in mind.

Some of those factors inhere on the face of the statutory provisions. Penalty proceedings are not to be initiated merely to harass the assessee. The approach of the Assessing Officer in this behalf must be fair and objective.

Legal nuances

“Concealment of income” and “furnishing inaccurate particulars” are different. Both concealment and furnishing of inaccurate particulars refer to deliberate acts on the part of the assessee.

A mere omission or negligence would not constitute a deliberate act of suppressio veri or suggestio falsi.

A duty may be enjoined on the assessee to make a correct disclosure of income but if such disclosure is based on the opinion of an expert, who is otherwise also a registered valuer having been appointed in terms of a statutory scheme, merely because his opinion is not accepted or some other expert gives another opinion, the same by itself may not be sufficient for arriving at a conclusion that the assessee has furnished inaccurate particulars.

Discretionary jurisdiction

Section 271(1)(iii) again provides for a discretionary jurisdiction upon the assessing authority inasmuch as the amount of penalty may not be less than the amount of tax sought to be evaded by reason of such concealment of particulars of income but it may not exceed three times thereof.

The factors that are material for the purpose of the computation of total income as sought to be explained in Explanation 1 refer to computation of income on the part of the assessee that is directly relatable to (a) failure to offer an explanation and/or offering an explanation that is false; and (b) which he is not able to substantiate and fails to prove that such explanation is bona fide.

Only if both factors enumerated in clauses (A) and (B) of Explanation 1 are satisfied and a finding in this behalf is arrived at by the Assessing Officer that the legal fiction created thereunder would be attracted. For the purpose of invoking section 271(1)(iii), the expression “amount of tax sought to be evaded” is set out in Explanation 4.

This clause would be attracted when a finding is arrived at that some amount of tax was sought to be evaded by the assessee as envisaged by clause (a) thereof.

The word “inaccurate” signifies a deliberate act or omission on the part of the assessee. Such deliberate act must be either for the purpose of concealment of income or furnishing inaccurate particulars.

The term “inaccurate particulars” is not defined. Furnishing of an assessment of the value of property may not, by itself, be furnishing inaccurate particulars.

The primary burden of proof is on the Revenue. The statute requires a satisfaction on the part of the Assessing Officer: he is required to arrive at a satisfaction so as to show that there is primary evidence to establish that the assessee had concealed the amount or furnished inaccurate particulars and this onus is to be discharged by the Department.

Landmark decision

This was held by the Supreme Court in a landmark decision in Dilip N. Shroff v. C.I.T.(291 I.T.R. 519). The facts in this case were that the assessee (HUF) had an undivided 1/4th share in certain land and building, which was sold during the previous year relevant to the assessment year 1998-99.

To value the property for the purpose of capital gains, the assessee appointed a registered valuer.

For the assessment year 1998-99 the assessee had disclosed an income of Rs 30,80,030 showing a long-term capital loss of Rs 34,12,000 on account of the sale of the property and had filed the registered valuer’s report along with the return.

The Joint Commissioner referred under section 55-A of the Income-tax Act, 1961, the matter for valuation of the undivided 1/4th share of the appellant’s property as on April 1, 1981, to the District Valuation Officer, who submitted a report determining the share of the assessee at Rs 1,14,92,907 and on that basis, the Joint Commissioner determined the capital gain of the assessee at Rs 3,09,78,478.

After a show-cause notice under section 274 read with section 271, the Joint Commissioner imposed a minimum penalty of Rs 68,78,095 under section 271(1)(c) on the basis that the assessee had furnished inaccurate particulars of income. The Commissioner (Appeals) as well as the Appellate Tribunal affirmed the imposition of penalty. The High Court dismissed the appeal in limine.

On appeal, the Supreme Court held that in a case of this nature, the question would be whether this was a fit case where the discretionary jurisdiction was properly exercised or not.

A registered valuer was supposed to know which method or mode should be adopted for the purpose of valuing a particular land or a building having regard to the large number of factors involved therein.

There could be a genuine difference of opinion between two experts. A duty might be enjoined on the assessee to make a correct disclosure of income but if such disclosure is based on the opinion of an expert, who was otherwise also a registered valuer having been appointed in terms of a statutory scheme, simply because his opinion was not accepted or some other expert gave another opinion, that would not by itself be sufficient for arriving at the conclusion that the assessee had furnished inaccurate particulars. Therefore, the apex Court held that penalty was not leviable.

This decision will bring much relief to the harassed tax-payer who is constantly under a threat of penalty being levied on him.

(The author is a Mumbai-based advocate. He can be contacted at ranina@bom2.vsnl.net.in)