Direct Tax (Article) Penalty for Concealment/Furnishing of Inaccurate Particulars of Income

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Direct Tax (Article) Penalty for Concealment/Furnishing of Inaccurate Particulars of Income The information contained herein is of a general nature and is not intended to address the circumstances of

1 Direct Tax (Article) Penalty for Concealment/Furnishing of Inaccurate Particulars of Income The information contained herein is of a general nature and is not intended to address the circumstances of any particular individual or entity. Although we endeavor to provide accurate and timely information, there can be no guarantee that such information is accurate as of the date it is received or that it will continue to be accurate in the future. No one should act on such information without appropriate professional advice after a thorough examination of the particular situation.

2 Penalty for Concealment/Furnishing of Inaccurate Particulars of Income under the Income Tax Act, 1961 Background A person is liable for penalty u/s 271(1)(c) of the Income Tax Act, 1961 if the Assessing Officer or the Commissioner or Commissioner(Appeals) in the course of any proceedings is satisfied that any person has concealed the particulars of his income or furnished inaccurate particulars of income. The person so charged is directed to pay by way of penalty a sum which shall not be less than, but which shall not exceed three times, the amount of tax sought to be evaded by reason of the concealment of particulars of his income or the furnishing of inaccurate particulars of such income in addition to tax & interest, if any, payable. However, it has been experienced that the revenue authorities sought to initiate the penalty proceedings in most of the cases whenever the income assessed is more than the income returned. They do not analyze whether the assessee is guilty of concealment of income or furnishing inaccurate particulars of income and issues the notice u/s 274 r.w.s. 271(1)(c) without clearly specifying whether it is a case of concealment or furnishing of inaccurate particulars. Merely sending printed form where all the grounds for levying penalty in Section 271 are mentioned does not satisfy the requirement of law. Taking the penalty proceeding on one bough and finding the assessee guilty of another bough is also not the intention of the legislature. Karnataka High Court laid down following principles in case of CIT & ANR. Vs. MANJUNATHA COTTON & GINNING FACTORY (2013) 92 DTR 111 Karnataka High Court recently in case of CIT & ANR. Vs. MANJUNATHA COTTON & GINNING FACTORY (2013) 92 DTR 111 after considering the various judgments of Supreme Court & High Courts has laid down the following principles in relation to penalty proceedings u/s 271(1)(c):- 1. Penalty u/s 271(1)(c) is a civil liability. Willful concealment is not an essential ingredient for attracting civil liability. This principle has also been laid down by the Hon ble Supreme Court in case of UOI & Ors. Vs. Dharamendra Textile Processors & Ors. 306 ITR Mens Rea is not an essential element for imposing penalty for breach of civil obligations or liabilities. Mens rea is an evil state of mind. It is the state of mind of a culprit and is said to be present if a person does something wrong deliberately knowing that his action is against the law i.e., the person had a guilty mind while committing the act. Under the Income Tax Act, the burden of proof that there is no guilty mind is on the assessee and not on the Department. 3. The imposition of penalty is not automatic. Imposition of penalty even if the tax liability is admitted is not automatic. Mere completion of assessment at an income higher than the income returned does not automatically lead to the imposition of penalty on the assessee. The levy of penalty is not an automatic concomitant of the assessment. It is not a matter of course. It has to be found that the assessee has concealed the income or furnished inaccurate particulars of its income. Where there is no concealment or no material for concealment, no penalty can be imposed. Safeguards have been provided for in the Act itself to see that the penalties are levied only in appropriate cases.

3 The Apex Court in the case of Dilip N. Shroff Vs. JCIT (2007) 291 ITR 519 at Para 62 has observed that finding in the assessment proceedings cannot automatically be adopted in the penalty proceedings and the authorities have to consider the matter afresh from a different angle. Hon ble Apex Court in the case of Suresh Chand Mittal (2001) 251 ITR 9 has held that higher income offered after search would not lead to levy of penalty automatically. 4. The penalty proceedings are distinct from the assessment proceedings. The proceedings for imposition of penalty though emanate from the proceedings of assessment; it is independent and separate aspect of proceedings. The assessment proceedings are taxing proceedings while the penalty proceedings are penal in nature to safeguard the interest of the revenue. The decision given in an assessment proceeding cannot possibly bind the authority who tries the assessee for an offence. Assessee is entitled to submit fresh evidence in the course of penalty proceedings. It is because they are separate proceedings. Separate provision is made for recovery of tax and amount of penalty. Also separate appeal is provided against order of imposition of penalty. Normally the assessment proceedings must precede the penalty proceedings. 5. The validity of the assessments or reassessments in pursuance of which penalty is levied, cannot be the subject-matter of penalty proceedings. The assessment or the reassessment cannot be declared as invalid in the penalty proceedings. Jurisdiction under penalty proceedings is limited to the issue of penalty, so that the validity of the assessment or reassessment in pursuance of which penalty is levied, cannot be the subject matter in penalty proceedings. It is not possible to give a finding that reassessment is invalid in such penalty proceedings. 6. Taking up of penalty proceedings on one limb and finding the assessee guilty on another limb is bad in law. This principle has been also held by the Gujarat High Court in case of Commissioner of Income-Tax v. Lakhdhir Lalji 85 ITR Existence of conditions stipulated in sec. 271(1)(c) is a sine qua non for initiation of penalty proceedings u/s 271. The existence of such conditions should be discernible from the assessment order or the order of the appellate authority or the revisional authority. Penalty can be levied if the AO during the course of proceedings is satisfied that assessee has concealed the income or furnished inaccurate particulars of such income. However, by insertion of sub section (1B) to section 271, if the AO writes in the assessment order that Penalty proceedings have been initiated the same will be treated as recording of satisfaction. In other words, even if there is no specific finding regarding the existence of the conditions mentioned in sec. 271(1)(c), at least from the facts set out in Expln. 1(A) and (B), it should be discernible from the said order which would by a legal fiction constitute the concealment because of deeming provision. Even if these conditions do not exist in the assessment order passed, at least, a direction to initiate proceedings under sec. 271(1)(c) is a sine qua non for the assessment officer to initiate the proceedings because of the deeming provision contained in sec. (1B). The said deeming provisions are not applicable to the orders passed by the CIT(A) and the CIT. 8. Only when no explanation is offered or the explanation offered is found to be false or when the assessee fails to prove that the explanation offered is not bona fide, an order imposing penalty could be passed.

4 9. If the explanation offered, even though not substantiated by the assessee, but is found to be bona fide and all the facts relating to the same and material to the computation of his total income have been disclosed by him, no penalty could be imposed. 10. The direction referred to in the sub-section (1B) to sec. 271 of the Act should be clear and without any ambiguity. 11. If the AO has not recorded any satisfaction or has not issued any direction to initiate the penalty proceedings, in appeal, if the appellate authority records satisfaction, then the penalty proceedings have to be initiated by the appellate authority and not the assessing authority. 12. Notice under sec. 274 of the Act should specifically state the grounds mentioned in sec. 271(1)(c), i.e., whether it is for concealment of income or for furnishing of incorrect particulars of income 13. The findings recorded in the assessment proceedings insofar as concealment of income and furnishing of incorrect particulars would not operate as res judicata in the penalty proceedings. It is open to the assessee to contest the said proceedings on merits. Res judicata means that once a matter is judicially decided it is finally decided. The doctrine of res judicata bars the relitigation of the matter already been determined in adjudication. It bars the reconsideration of settled civil matters. It has been settled that by the Courts that the doctrine of res judicata does not apply to penalty proceedings before the income tax authorities. 14. Even if the assessee has not challenged the order of assessment levying tax and interest and has paid tax and interest that by itself would not be sufficient for the authorities either to initiate penalty proceedings or to impose penalty, unless it is discernible from the assessment order that, it is on account of such unearthing or enquiry concluded by authorities it has resulted in payment of such tax or such tax liability came to be admitted and if not it would have escaped from tax net and as opined by the AO in the assessment order. 15. Sending printed form where all the grounds mentioned in sec. 271 are mentioned would not satisfy the requirement of law. 16. The assessee should know the grounds which he has to meet specifically. Otherwise, principles of natural justice is offended. On the basis of such proceedings, no penalty could be imposed to the assessee. CONCLUSION There is a need for the authorities to be more cautious while levying the penalty. It should be ensured that in levying the penalty and charging the assessee of the concealment or furnishing of inaccurate particulars of income, there is an application of mind along with the justification of such charge. The Principle of natural justice is fundamental in any law. The principles so laid down and approved by the Hon ble Karnataka High Court should act as an eye-opener for the Income tax authorities in providing justice to the respondent assessee from the harsh penal provisions under the Income Tax Act, An officer should adopt a broader view and an open mind before initiating penalty proceedings. It is expected from the revenue authorities to give a thought to the above laid down principles otherwise the same may result into loss of resources to both the counterparts and give rise to the unwarranted litigation.

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IN THE INCOME TAX APPELLATE TRIBUNAL (DELHI BENCH G, NEW DELHI)

IN THE INCOME TAX APPELLATE TRIBUNAL (DELHI BENCH G, NEW DELHI) BEFORE SHRI J. S. REDDY, ACCOUNTANT MEMBER AND SHRI A. T. VARKEY, JUDICIAL MEMBER I.T.A. No.1423 /Del/2013 Assessment year : 2008-09 Simran