The Hindu Business Line : Initiating penalty proceedings

The Income-Tax Act of 1961 has several sections dealing with penalty being levied for various non-compliances. In fact, a separate chapter deals with various penal provisions under the I-T Act.

Section 271(1)(c) deals with levy of penalty on account of concealment of particulars of income or furnishing of inaccurate particulars of income.

The tax assessments for assessment year (AY) 2005-06 (involving transfer pricing) and AY 2006-07 (not involving transfer pricing) would have been completed or would be nearing completion — December 31, 2008, being the last date to complete the assessment.

It is observed that wherever an addition is made, generally the tax officer initiates penalty proceedings under Section 271(1)(c) of the I-T Act in respect of the additions made. Though there have been several judicial pronouncements that penalty cannot be levied merely on difference in the interpretation of law, more often than not it is seen that penalty is invariably initiated, allegedly on account of concealment of particulars of income or furnishing of inaccurate particulars of income.

Separate proceedings

It is well settled that assessment and penalty are two separate proceedings. The issue that needs to be addressed is whether for levying penalty, wilful concealment or deliberateness is still an essential element to be considered.

When sub-section (c) of Section 271(1) was introduced, the language was slightly different than what is presently contained therein.

Before the amendment brought in by the Finance Act, 1964, the pre-amended section stated that penalty can be levied where a taxpayer has concealed the particulars of his income or “deliberately” furnished inaccurate particulars of such income.

Thus under the pre-amended provisions, wilful concealment or deliberateness was expressly contained in the section itself, thereby implying that was an essential factor to be considered before levy of penalty.

The Supreme Court, in the CIT vs Khoday (83 ITR 369) case, has held that the tax authorities, before levying penalty, must have before it cogent material or evidence from which it could be inferred that the assessee has consciously concealed the particulars of the income.

The word “deliberately” was however omitted by the Finance Act, 1964. Despite the deletion of the word “deliberately”, there have been several decisions of the Supreme Court which have held that concealment and furnishing inaccurate particulars refer to a deliberate act on the part of the taxpayer.

The Supreme Court, in the K. C. Builders vs ACIT (265 ITR 562) case, after referring to the aforesaid amendment, held that the word concealment inherently carried with it the element of mens rea.

The above principle was reiterated by the Supreme Court in the Dilip N. Shroff vs JCIT (291 ITR 519) case, wherein it held that before 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.

The Supreme Court referred to the definition of word “conceal” in Law Lexicon and the word “inaccurate” in Webster’s Dictionary, and observed that the same 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 of inaccurate particulars.

Similarly, the Supreme Court, in the T. Ashok Pai vs CIT (292 ITR 11) case, held that the omission of the word “deliberate” may not be of much significance.

Mens rea not essential

However, recently, a larger bench of the Supreme Court, in the Union of India and others vs Dharmendra Textiles Processors and Others (306 ITR 277) case, has taken a different view and held that mens rea is not an essential element for imposing penalty for breach of civil obligations as is the case in the matter of prosecution under Section 276C. The question before the apex court was whether penalty under Section 11AC of the Central Excise Act inserted by Finance Act, 1996 should be read to contain mens rea as an essential ingredient.

The department’s stand was that the said section should be read as penalty for statutory offence and the authority imposing penalty has no discretion in the matter of imposition of penalty and the adjudicating authority in such cases was duty bound to impose penalty equal to the duties so determined.

The taxpayer, on the other hand, referred to Section 271(1)(c) of the I-T Act, taking the stand that Section 11AC of the Central Excise Act, 1944 is identically worded and, in a given case, it was open to the tax officer not to impose any penalty.

The Supreme Court, after referring to various decisions (mainly the non-tax decisions) held that the Dilip Shroff case (supra) was not correctly decided. The court further went on to observe that the Explanations appended to Section 271(1)(c) indicates the element of strict liability on the assessee for concealment or for giving inaccurate particulars while filing return and the object behind enactment of Section 271 (1)(c) read with Explanations indicate that the said section has been enacted to provide for a remedy for loss of revenue. Therefore, the penalty under that provision is a civil liability and wilful concealment is not an essential ingredient for attracting civil liability.

Though this decision of the apex court was rendered in the context of penalty under Section 11AC of the Central Excise Act, the above observations made in the context of penalty under Section 271(1)(c) of the I-T Act could have far-reaching consequences. However, the implications of Section 273B of the I-T Act, which state that no penalty is leviable if reasonable cause for the failure is proved by the taxpayer, will have to be considered.

Nonetheless, the above decision could ruffle some feathers of the taxpayers.

(The author is Director, Deloitte Haskins & Sells. blfeedback@thehindu.co.in)

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