Delhi H.C : Whether, on the facts and in the circumstances of the case, the Tribunal was justified in restricting the penalties to 25 per cent of the tax evaded for the asst. yrs. 1961-62 and 1962-63 ?

High Court Of Delhi

CIT vs. Mohan Das Hassa Nand

Sections 271(1)(c), 148

Asst. Year 1961-62, 1962-63

D.K. Kapur & S. Ranganathan, JJ.

IT Ref. No. 170 of 1975

16th November, 1982

Counsel Appeared

G.C. Lalwani, for the Revenue : M.L. Verma with Miss Rashmi Saini, for the Assessee

RANGANATHAN, J. :

These two references under s. 256(1) of the IT Act, 1961, raise a common question which arises in somewhat interesting circumstances. These references relate to the asst. yrs. 1961-62 and 196263. The question arises out of the order of the Tribunal in the appeal preferred by M/s Mohan Das Hassa Nand from the orders of the IAC imposing a penalty under s. 271(1)(c) r/w s. 274(2) of the IT Act, 1961. The IAC had directed by his orders dated February 22, 1973, the imposition of a penalty of Rs. 17,000 and Rs. 23,000 respectively for the two assessment years in question being the amounts of income which had been concealed by the assessee for, the said assessment years. The Tribunal, however, held that though there was justification for the imposition of a penalty for each of the years under reference, the amount of penalty should be restricted to 25 per cent of the tax sought to be evaded for the two assessment years presently in question. The CIT of Incometax aggrieved by the order of the Tribunal, has obtained a reference to this Court of the following question: “Whether, on the facts and in the circumstances of the case, the Tribunal was justified in restricting the penalties to 25 per cent of the tax evaded for the asst. yrs. 1961-62 and 1962-63 ?”

2. The facts may now be stated in greater detail. The assessee is a registered firm carrying on business in the sale of cotton yarn, silk yarn, thread balls, wool, etc., in Sadar Bazar, Delhi. The original assessments for the asst. yrs. 1961-62 and 1962-63 were completed on total incomes of Rs. 40,000 and Rs. 53,340 respectively. Subsequent to the completion of the assessments, the Department appears to have learnt that the assessee was maintaining duplicate sets of accounts which contained transactions of sale not disclosed at the time of original assessments. Proceedings were initiated under s. 133A in the course of which certain books of account and papers were handed over to the Department by the assessee. Subsequently, on September 26, 1967, the assessee wrote a letter to the CIT in which it was admitted that the books of account handed over included some books which had not been shown during the assessment proceedings and that some of these books contained entries of loans and trading transactions which were partly entered and partly not entered in the regular books of account. The assessee stated that it wanted to make a full and true disclosure under s. 271(4A) and requested that it may be allowed to take notes from the books of account so as to enable it to prepare a detailed statement and to make a full and true disclosure. On February 15, 1968, the assessee addressed a further letter to the CIT. It was admitted in this letter, inter alia, that there were certain “loans” in the “irregular sets” of books which amounted to Rs. 39,500 in the asst. yr. 1961-62, Rs. 42,500 in 1962-63, Rs. 89,500 in 1964-65 and Rs. 43,500 in 1968-69. It was stated that the peak credits for the asst. yrs. 1960-61, 1963-64 and 1965-66 to 1967-68 could not be worked out since the “irregular books” for those years were not available. The letter also stated that the undisclosed income of the assessee came to Rs. 1,20,000 and that this should be spread equally over a period of 10 years from 1959-60 to 1968-69 for assessment purposes. It was requested that the firm should be treated as a registered firm and that no penalties or penal interest should be charged. These petitions by the assessee were followed by discussions between the Departmental officers and the assessee. In a letter dated April 14, 1969, the assessee referred to the earlier letter dated February 15, 1968, explained its modus operandi and, after discussing the position regarding the trade conditions and the nature of the accounts kept by the assessee, requested that the disclosure be accepted and no penalty of any nature imposed. It appears that finally there was a settlement between the Department and the assessee. The order of the CIT regarding the terms of the settlement has not been made part of the record but it is common ground that the terms of the settlement were as set out in a letter addressed by the assessee to the IAC on December 4, 1970. The broad terms of the agreement were that a sum of Rs. 1,65,000 was to be added to the assessee’s income for the asst. yrs. 1961-62 to 1968-69, the amounts to be added being Rs. 17,000 and Rs. 23,000, respectively, for the asst. yrs. 1961-62 and 1962-63, that no prosecution proceedings were to be launched against the petitioner-firm or its partners, that “a penalty of 25 per cent would be leviable on account of additions agreed to on the income of the firm from the asst. yr. 1961-62 to asst. yr. 1968-69, treating the firm as unregistered for penalty purposes” and that no further penalty or interest was to be charged. The assessments were completed on this footing.

3. While completing the assessments the ITO issued notices calling upon the assessee to show cause why penalty should not be imposed under s. 271(1)(c) for the above two assessment years. The proceedings were, thereafter, referred to the IAC under s. 274(2), who also issued a show-cause notice to the assessee. It appears that during the hearings the IAC was of the opinion that the assessee was liable to penalty on the terms of the provisions of s. 271(1)(c), as amended by the Finance Act of 1968, namely, to a sum not less than, but not exceeding twice, the amount of the income in respect of which particulars had been concealed. The assessee by a letter dated February 17, 1973, objected to this proposal. It submitted that no penalty under the amended provision would be leviable as the assessment years in question were prior to 1968-69. It was submitted that the additions did not call for penalty and that in any event the amount of penalty could not exceed 25 per cent of the tax sought to be evaded treating the assessee as an unregistered firm. This was the amount of penalty that had been agreed to between the CIT and the assessee and the amount of penalty as suggested by the IAC, it was pointed out, would mean going back on an agreement reached with the previous IAC and the CIT. It was, therefore, submitted that the penalty should be restricted to that amount for each of these years and not levied at the rates proposed by the IAC. The pleas of the assessee were, however, rejected. After referring to the circumstances in which the additions were made, the IAC observed that the assessee had admitted before him that it had concealed the particulars of the income. So far as the quantum of penalty was concerned, he observed, the assessee was liable to penalty under the amended provisions inasmuch as the returns of income had been furnished after April 1, 1968. He pointed out that the assessee’s petition under s. 271(4A) had been rejected by the CIT and, therefore, the CIT had no power to reduce the amount of penalty to less than the minimum leviable according to law. The IAC, therefore, came to the conclusion that the assessee was liable to the minimum penalty under the amended provisions of s. 271(1)(c). He, therefore, imposed penalties of Rs. 17,000 and Rs. 23,000 for the two years in question, as already mentioned.

4. The assessee preferred an appeal to the Tribunal and submitted that the levy of penalty over and above 25 per cent of the tax evaded would not be justified in the circumstances. It was submitted that the provisions of s. 271(1)(c) applicable in the present case would be the provisions as they stood in the relevant assessment years and that the IAC was, therefore, wrong in imposing penalties equal to the income concealed. In any event the CIT having made a promise to impose a penalty of only 25 per cent the same had to be kept up by the Department in view of the ratio of the Supreme Court in the case of Union of India vs. Anglo Afghan Agencies, AIR 1968 SC 718. On the other hand, on behalf of the Department, it was contended that since the returns had been filed after April 1, 1968, the amended provisions of s. 27l(1)(c) applied and this being so, the CIT was not competent, having rejected the application of the assessee under s. 271(4A), to reduce the penalty below the minimum imposable under the amended s. 271(1)(c).

5. Before referring to the findings of the Tribunal two aspects may be clarified at this stage. The first is that, after the assessee made the disclosure on February 15, 1968, and April 14, 1969, the proceedings had been initiated under s. 148 of the IT Act. In response to the notices under this section the assessee had filed returns of income for the two assessment years some time in February-March, 1970 (the exact dates are not available on record). In these returns the assessee had returned its income at the figures of Rs. 40,000 and Rs. 50,340 originally assessed for the two years. The second aspect which needs clarification is regarding the order of the CIT. As already mentioned the details of the settlement between the assessee and the manner in which they had to be assessed were as referred to in the assessee’s letter dated December 4, 1970. But so far as the question of penalty is concerned the CIT appears to have passed the following order on November 30, 1970: “Considering the fact that the assessee has rendered full assistance in determining the income which was concealed, that he came forward with a disclosure as soon as action under s. 133A was taken, as also the nature of his business, it would be harsh to launch prosecution proceedings. Therefore, though it is not a case which can be covered by s. 271(4A), yet it would meet the ends of justice if the concealed income is distributed in the manner proposed by the IAC subject to some slight adjustment, and a penalty of 25 per cent is imposed. The penalty is quite substantial as it would be levied on the basis of treating the firm as unregistered.” (Emphosis, italicised in print, supplied)

6. In other words the CIT appears to have held that the terms of s. 271(4A) had not been fulfilled ; yet he directed that the penalty should be restricted to 25 per cent of the tax sought to be evaded.

7. In the context of the above circumstances, the Tribunal pointed out that there had been a composite or “package deal” between the assessee and the Department. The assessee had agreed to be assessed, in respect of the concealed income, over 8 years while the CIT agreed to the imposition of a penalty of 25 per cent of the tax sought to be evaded. In accepting this settlement, the assessee had acted to its detriment by agreeing to be assessed in respect of additional income for 8 years. The CIT had made a promise that a penalty equal to only 25 per cent of the tax sought to be evaded would be imposed. In these circumstances, the Tribunal was of opinion that the principle laid down by the Supreme Court in the case of Anglo Afghan Agencies, (supra), was attracted. The Tribunal did not agree with the contention of the Department that the CIT was not competent to make such a promise. It was pointed out that the CIT was competent to waive or reduce the penalty under s. 271(4A) and that, though the formal application of the assessee in this behalf was rejected, there was no bar to the CIT acting suo motu and reducing the penalty. The order of the CIT dated November 30, 1970, should be treated as an order under s. 271(4A) passed by the CIT suo motu. But, even apart from this, a promise having been made by the CIT, it was evidently meant to be kept up and hence a penalty of more than 25 per cent of the tax evaded could not be imposed. The Tribunal also proceeded to deal with the law applicable in the matter of imposition of penalty. It referred to the decision of the Kerala High Court in the case of Hajee K. Assainar vs. CIT (1971) 81 ITR 423 and to the decision of the Punjab and Haryana High Court in the case of CIT vs. Bhan Singh Boota Singh (1974) 95 ITR 562 (P&L), which had taken conflicting views on the issue. In view of these conflicting decisions, the Tribunal held, following the decision in favour of the assessee, that for the assessment years under appeal, penalty had to be imposed on the amount of tax sought to be evaded and not with reference to the amount of income concealed. The Tribunal, therefore, restricted the penalties to 25 per cent of the tax sought to be evaded for both the assessment years under appeal and allowed the appeals in part. The Commissioner, aggrieved by the order of the Tribunal, has come in reference before us.

8. On behalf of the applicant, it is submitted that the assessee in the present case had filed two sets of returns and in both of them he had concealed the income, to the addition of which he had subsequently agreed. Since there was concealment in the returns filed in February-March, 1970, under s. 148, the Department is entitled to levy penalties on the basis of the amended provisions of s. 271(1)(c). These provisions stipulated a minimum penalty equal to 100 per cent of the concealed income. The order of the CIT dated November 30, 1970, was not an order passed under s. 271(4A) inasmuch as the provisions of that sub-section were not fulfilled. The assessee had not come forward voluntarily to declare its concealed income; it had been forced to that course only as a result of the survey conducted by the Department. Since the provisions of s. 271(4A) did not apply, and, since in fact the CIT had rejected the application under that sub-section, he had no jurisdiction to reduce the penalty as he purported to do. His assurance to the assessee in this regard cannot also found a claim on the basis of equitable estoppel inasmuch as it was something which he had no power to do under the provisions of the Act. It is pointed out by referring to the decision of this Court in Jaswant Rai vs. CBDT (1982) 133 ITR 19 (Del), that the question of reduction of a penalty under s. 271(4A) could arise only when a penalty had been imposed. In these circumstances, it is submitted that the order of the CIT has neither any legal nor equitable effect to relieve the assessee of its liability to pay penalty on the basis of the amended section.

9. On the other hand, on behalf of the respondent, it is submitted that the concealment, in such cases as this, takes place only once and that is at the time when the original return is filed. The failure to disclose the income in a return filed under s. 148 may be a repetition of the same concealment but does not give rise to a fresh liability for penalty. This point of view is, it is said, supported by the decisions of the Allahabad High Court in CIT vs. Ram Achal Ram Sewak (1977) 106 ITR 144 (All) and of the Madras High Court in CWT vs. M. V. Rajamma (1979) 10 CTR (Mad) 193 : (1979) 120 ITR 132 (Mad). Learned counsel for the respondent states that there is a similar decision of the Madhya Pradesh High Court which is unreported (in Kaswani’s case) and it is stated that this decision of the Madhya Pradesh High Court has been accepted by the Central Board. In these circumstances, it is submitted that the penalty in the case of the present assessee was leviable only under the provisions of s. 271(1)(c) before the amendment in 1968. That being so, it was open to the CIT to direct the levy of the penalty at any figure not below the minimum then prescribed, which was only 10 per cent of the tax sought to be evaded. It was in view of this provision that the CIT fixed the quantum of the penalty at 25 per cent, i.e., somewhat above the minimum. It was not open to the Department, in view of the order of the CIT, to levy a larger penalty upon the petitioner as the Department would be bound by the doctrine of equitable estoppel outlined in the case of Anglo Afghan Agencies (supra), and reiterated in subsequent Supreme Court decisions. Though the arguments before us have covered a wide ground we think that the present reference can be disposed of on a much narrower ground based on the facts of the present case. So far as the law relating to the imposition of the penalty is concerned it has been clearly enunciated by the Supreme Court in the case of Brij Mohan vs. CIT (1979) 12 CTR (SC) 198 : (1979) 120 ITR 1 (SC). The Supreme Court has laid down that when penalty is imposed for the concealment of particulars of income, it is the law ruling at the date on which the act of concealment takes place which is relevant. It is wholly immaterial that the income concealed was to be assessed in relation to an assessment year in the past. The penalty is being imposed on account of the commission of a wrongful act and it is the law operating on the date on which the wrongful act was committed which determines the penalty. In view of this decision of the Supreme Court the conclusion of the Tribunal, that penalty in the present case should be imposed on the tax sought to be evaded since the penalty relates to the asst. yrs. 1961-62 and 1962-63, cannot be upheld.

The question, however, arises as to what is the date of the commission of the offence for which the assessee is being sought to be penalised. As already pointed out in this case, there are two sets of returns, one filed in 1961-62 or thereabouts and the other set of returns filed in response to notices under s. 148, in February-March, 1970. On behalf of the Department it is contended that the income now found to have been concealed had been omitted to be included in both sets of returns and that, therefore, it was open to the Department to levy the penalty with reference, to the second occasion when the offence was committed, i.e., when the returns under s. 148 were filed. On the other hand, the view urged on behalf of the assessee is that even though the same concealment existed in the return filed in the reassessment proceedings no fresh cause of action arose for the levy of penalty when the second return was filed inasmuch as it was only a continuation of what had happened earlier and that the repetition of the same omission does not give rise to a fresh offence. This point of view put forward by the assessee is supported by the decisions of the Allahabad and Madras High Courts referred to by the learned counsel. We have, however, not been able to look into the decision of the Madhya Pradesh High Court or the circular of the Central Board, which is said to have been issued accepting the above decision. In our opinion, however, we need not enter into this controversy in the present case in view of the peculiar circumstances prevailing here. It has been mentioned earlier that in the present case the returns under s. 148 were filed in February-March, 1970. But the most important feature of the case is that these returns had been filed very much later than the voluntary disclosures made by the assessee. As already mentioned, the survey of the assessee’s premises took place in 1967. The voluntary disclosure was initiated in September, 1967, and pursued in the two succeeding years. By 14th April, 1969, a full disclosure had been made by the assessee regarding the extent of the concealed income and a prayer had been made that it should be spread over a number of years. The proceedings before the IAC and the CIT in relation to the voluntary disclosure were going on and eventually culminated in a settlement in November- December, 1970. If we bear all these circumstances in mind it will be clear that the returns filed in February- March, 1970, cannot be said to have concealed or furnished inaccurate particulars of the income for which a penalty could be imposed, Those returns were filed only in order to comply with formal notices issued and served under s. 148 to enable the proposal for settlement that had already been initiated being implemented by assessments regularly made under the Act. Having regard to the fact that the assessee had already come forward with a voluntary disclosure agreeing to be assessed on much larger sums than had been previously assessed, it would not be correct to imagine that by filing these returns the assessee really intended to declare that its income was as originally assessed. The whole purpose of s. 271(1)(c) is that where an assessee does not declare his proper income in the return and as a result thereof income could have escaped assessment but for the diligence or investigation of the Department the assessee should be penalised when eventually the assessed income exceeds the returned income. Bat it would be incorrect to apply the penal provision in a case where, though the return does not show certain items of income there is a simultaneous disclosure by the assessee, and full knowledge of the Department, regarding certain other income, which the assessee has earned. At that point of time when the returns under s. 148 were filed, the assessee’s applications for a spread over of the income disclosed over several years were pending and the position had not been finalised. Pending a settlement with the Department the assessee was not in a position to declare any particular income, over and above what had been returned earlier, in respect of these years. It is in these circumstances that the returns filed under s. 148 merely contained a repetition of the incomes that had been assessed earlier. Having regard to these peculiar circumstances of the case, we are of opinion that whatever might be the position regarding a case where there are two separate acts of concealment in an original return and in a subsequent return under s. 148, so far as the present case is concerned, the concealment has really taken place only in the original return. In the reassessment proceedings, there was no concealment on the part of the assessee inasmuch as simultaneously with or even earlier than the return the assessee had placed before the Department full facts and particulars regarding his income during the years in question. For these reasons we would agree with the submission of the learned counsel for the respondent that on the facts of the present case the penalty has to be imposed only with reference to the dates of the original return. In other words, the penalty has to be calculated on the basis of the tax sought to be evaded and not on the basis of the income concealed.

12. Now, to come to the second part of the case, the position gets simplified in view of our above conclusion. It appears to us that it is unnecessary to go into the question regarding the nature or validity of the CIT’s order and to what extent it can create an equitable estoppel against the Department. In view of our conclusion on the first question the view taken by the IAC, that the CIT could not reduce the penalty to 25 per cent of the tax sought to be evaded, is not correct. But it is perhaps still arguable whether the CIT has the power to direct the ITO or the IAC to restrict the penalty to a particular figure particularly when he agrees that s. 271(4A) has no application. It can be argued that like assessment proceedings penalty proceedings are also quasijudicial and that it is for the IAC or the ITO, as the case may be, to consider the facts of the case and to impose a penalty which they consider proper in the facts and circumstances, and that, while it may be open to the CIT, where the terms of s. 271(4A) are fulfilled, to reduce or waive a penalty so imposed, he has no power of reduction or waiver, in anticipation, so as to bind the discretion of the ITO or the IAC. But, even granting this, we see no error in the conclusion of the Tribunal. The IAC in the present case decided that in the circumstances of the case the minimum penalty imposable under the Act should be levied. Only he thought that the minimum penalty was 100 per cent of the income concealed. We have already pointed out that this is not correct. Therefore, when the matter went to the Tribunal and the Tribunal came to the conclusion that it was the pre-1968 provision that applied, the Tribunal could have even restricted the amount of the penalty to 10 per cent of the tax sought to be evaded. Perhaps the assessee could have urged before the Tribunal that, in the view taken by it, the penalty should be the minimum under the pre—1968 provision. However, honouring the settlement arrived at with the Department the assessee raised no objection to the imposition of 25 per cent of the tax evaded by way of penalty as directed by the CIT. It is this which has been sustained by the Tribunal. It appears to us that, quite irrespective of the order of the CIT and without going into the question whether the CIT at all was justified in reducing the amount of penalty or in purporting to reduce it even though the conditions of s. 271(4A) were not fulfilled, the factual position is that, even apart from the CIT’s order, the Tribunal could very well have restricted the penalty to 10 per cent of the tax sought to be evaded if it had applied the standard intended by the IAC and applied the proper law as explained by us earlier. In these circumstances, it cannot be said that the conclusion of the Tribunal (also equitably based on the agreement of the assessee and its acquiescence), that the penalty may be restricted to 25 per cent of the tax sought to be evaded is in any respect unjustified.

13. We, therefore, answer the question referred to us in the affirmative and in favour of the assessee. Quite apart from the merits of this case we felt that this was not a case in which the Department should have come up in reference. After all, the Tribunal had only upheld an order passed by the CIT and it seemed incongruous that the CIT should complain or be aggrieved that his order had been given effect to. When, therefore, this reference came up for hearing on earlier occasions, we adjourned the matter from time to time and directed the counsel for the Department to seek instructions as to whether in the circumstances the Department would like to press their reference further. Though we gave considerable time to enable the standing counsel for the Department to obtain necessary instructions in the matter, the counsel reported that he had received no instructions. In these circumstances, we have been compelled to proceed with the reference. Having regard to these circumstances, we would direct that the assessee should be paid its costs by the CIT: counsel’s fee Rs. 350 (one set).

[Citation : 141 ITR 203]

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