Kerala H.C : the Tribunal had erred or not in overlooking the evidence relating to the cost of construction provided by the assessee and accepting the valuation as provided by the Valuation Officer

High Court Of Kerala

Medical Land vs. CIT (Appeals), Kochi

Assessment Year : 1995-96

Section : 158B, 132, 32, 158BB, 158BFA, 271(1)(c)

K.M. Joseph And K. Harilal, JJ.

IT Appeal No. 221 Of 2012

January  29, 2014

JUDGMENT

K.M. Joseph, J. – Following Questions of law arise for consideration before this Hon’ble Court.

“(a) Whether in the facts and circumstances of the case and in law, the Tribunal had erred or not in overlooking the evidence relating to the cost of construction provided by the assessee and accepting the valuation as provided by the Valuation Officer.

(b) Whether in the facts and circumstances of the case and in law, the Tribunal could have based the value of construction on the statement of the assessee under Section 132 (4) alone when the assessee had led in evidence on the prevailing cost of construction which stood at a much lesser rate and ought not the Tribunal have accepted the said evidence being material available on record and facts and accepted the same de hors the statement of the assessee under section 132 (4) of the I.T. Act.

(c) Whether in the facts and circumstances of the case and in law, the Tribunal had erred or not in disallowing the deprecision claimed on the building under Section 32 as business assets in block assessment proceedings under Section 158 BB by treating the said amounts as undisclosed income as defined under Section 158 B (b).

(d) Whether in the facts and circumstances of the case and in law, the Tribunal had erred in holding that the depreciation claimed under Section 32 would be subject to the assessment under Section 158 BB even when the said depreciation was claimed by the assessee in regular assessment for the relevant Assessment Years treating the building as business asset.

(e) Whether in the facts and circumstances of the case and in law, when the building is reflected in the Balance Sheet for the relevant Accounting Year and depreciation claimed in regular assessment, could the said aspect be subject to assessment under Section 158 BB at all and is it not a matter to be considered during the course of regular assessment.

(f) Whether the order of the Tribunal is erroneous, illegal and on an improper appreciation of the facts and the law.”

2. Appellant is a firm doing business in wholesale pharmaceutical distribution. One Shri. Sebastian Thomas was the holder of power of attorney given by the Partners for operation of the bank account of the firm. There was a search at the business premises as well as at the residence of the Partners on 30.7.1998. Shri. Sebastian Thomas gave a sworn statement wherein he had declared an amount of Rs. 4 Lakhs under Section 132(4) of the Income Tax Act (hereinafter referred to as the Act) towards the unaccounted investment in the building owned by the firm. The assessee filed a return pursuant to notice under Section 158BC of the Act. The appellant had constructed a building known as “Thomas Puthur Memorial Bldg”. The accounts revealed the cost of construction as Rs. 6,95,700/- only. Shri. Sebastian Thomas had confirmed that there was a deficiency of Rs. 4,00,000/- in accounting the cost of construction. The matter was referred by the Assessing Officer to the Valuation Officer of the Department. The Executive Engineer (Valuation), Calicut fixed the value at Rs. 11,47,600/-. When this was pointed out to the assessee, it contended that the valuation was based on CPWD rates at Delhi and increased cost was taken. The Assessing Officer not finding any documentary evidence for the lower valuation, took Rs. 4,51,900/- being the difference as liable to be taxed as the undisclosed income for the assessment year 1995-96. Still further, the Assessing Officer noted that the assessee was regularly claiming depreciation on the building owned by the assessee which had been rented out to third parties, noting that depreciation under Section 32 of the Act is allowable only when it is used for the purpose of the business and as it was evident that the building was not used for the purpose of the business, no depreciation could be claimed. Depreciation claimed from 1995-96 to 1998-99 was ordered to be treated as the undisclosed income. There were other findings and assessment made with which we are not to be detained. In appeal by the appellant, the Appellate Authority deleted the addition of Rs. 4,51,900/-. Likewise, the Assessing Officer was directed to delete the amount of depreciation from the total undisclosed income and the same was directed to be considered in the regular assessment.

3. The Revenue appealed the decision of the Appellate Authority. The Revenue’s Appeal was partly allowed. The Tribunal found that the appellant had singularly failed to discharge the burden of proof qua what is claimed by it. This is in regard to the addition made towards the cost of construction of the building. It is found that the Revenue’s case is not only supported by the voluntary statement under Section 132(4) which stands not retracted, but also corroborated by the DVO’s report to which no valid rebuttal has been made by the assessee. But, the Tribunal found it justifiable to restrict the addition towards unexplained investment to building at Rs. 4,00,000/- as declared by the assessee. As far as the second issue, namely the claim of depreciation allowance also was concerned, the Tribunal took note of the words “or any expense, deduction or allowance claimed under this Act which is found to be false” added to the definition of the undisclosed income vide Section 158B(b) of the Act by the Finance Act, 2002 with effect from 01/7/1995 which clinched the issue against the assessee. The Tribunal found that Chapter 14B provides separate procedure for assessment of any income revealed by search or requisition. It is against the said order of the Tribunal that the appellant is before us.

4. We heard the learned counsel for the appellant and the learned counsel for the Revenue.

5. Learned counsel for the appellant would submit that there is no basis for making the addition of Rs. 4,00,000/- towards cost of construction in proceedings under Chapter 14B of the Act. The Assessing Officer and the Tribunal have relied on estimation made by the Valuation Officer. The valuation was unacceptable. As far as the question of depreciation is concerned, he would submit that there is no basis for overturning the order of the Appellate Authority. More importantly, it is submitted that under the provisions relied on by the Tribunal, it has to be found that the claim made by the assessee was false. In this case, it is submitted that there is no finding that the claim made by the assessee was false. It is submitted that the use of the word “false” would necessarily bring in the requirement of the element of mens rea and as long as the assessee is not attributed with any criminal intent, the disallowance of the depreciation in block assessment and what is more exposing the assessee to possible penal provisions, is clearly impermissible.

6. Learned counsel for the appellant relied on the following case law:

(1) Bhagwati Prasad Kedia v. CIT [2001] 248 ITR 562/116 Taxman 261 (Cal.) was a case where the question arose whether the genuineness of the loan in question can be considered under the block assessment, though the loan had been duly accounted in the regular business of account found during the time of search. During the time of search, the assessee was called upon to explain the advance taken. Assessee filed confirmation letter including the income tax file numbers to the creditor. The loan was found to be a fictitious one and it was directed to be considered as the undisclosed income. The Court took the following view:

“10. A statute is a creature of the legislature. Every statute has its preamble, it has objects and reasons for which it was enacted. To find out the correct meaning of a particular provision of the statute, it is the duty of the Court of law to examine not only the words of the said provision, but also the background in which such law is enacted. Every statute must be given a logical meaning and harmonious construction. The words used in the statute are not used for nothing. Each and every word has its significance. It is a duty of the judiciary to interpret the same for its implementation as and when they are approached.

12. Now the question comes what does this Explanation mean. Clause (a) of the Explanation makes it clear that the block assessment is in addition to the regular assessment in respect of each previous year included in the block period; (b) means total undisclosed income relating to the block period cannot be tagged with regular assessment; (c) states that the income under Chapter XIV-B, i.e., block assessment shall not be included in regular assessment and other than undisclosed income is assessable in regular assessment under S.143(3) of the Act.

On a composite reading of the said three parts of the Explanation, it is crystal clear that the legislature thought it fit to make a distinction between the block assessment and the regular assessment. As has been held by the Division Bench in Shaw Wallace & Co. Ltd.’s case (supra) that there are three types of income within the meaning of the said Act of 1961, i.e., incomes which are offered for taxation, incomes which are shown in the return but deductions have been claimed wrongly; and undisclosed income. The AO while dealing with regular assessment is free to examine the veracity of the return as well as the claims made by the assessee with regard to exemption and/or deduction, those can be considered under S.143(3) of the said Act of 1961, whereas the third income being “the undisclosed income” is taxed and by way of block assessment resulting in search and seizure. Such block assessment is made under S.158BA. The logic behind the two different modes of assessment, according to us, is that concealment of income and claiming deduction or exemption of taxes in respect of a disclosed income cannot be treated at par. The former is an offence which goes to the root of the matter and the other is on the basis of the cases shown by the assessee where the AO is free to accept the justification shown or reject the same. The said two types of cases cannot be treated at par.”

However, we notice that the Court pronounced the judgment on 19.02.2001. It is by Finance Act 2002, no doubt with retrospective effect from 01.7.1995 that the definition of “undisclosed income” was added to include any exception, deduction or allowance claimed which is found to be false. The Court had no occasion to consider the effect of the said provision. Therefore, the said decision may not assist the appellant. No doubt, the observation is made in paragraph 12 which we have extracted to the effect that concealment of income and claiming deduction cannot be treated at par as the former is an offence.

(2) The next decision relied on by the learned counsel for the appellant is T.C.V. Engg. Ltd. v. Asstt. CIT [2006] 284 ITR 470/[2007] 160 Taxman 226 (Mad). That was a case where the assessee’s main business was civil engineering contracts. Proceedings were initiated under Section 132A. There were certain materials related to the assessee. The assessee admitted certain amount as undisclosed income. The assessee had been using bulldozers, road rollers, jeep with a trailer and so on. The assessee claimed higher depreciation rate at forty per cent on the basis that these were earth moving machinery which included even the jeep with trailer. For the assessment years 1994-95 and 1995- 96, supervisory charges payable to one M/s. T.C.V. Packers were claimed at Rs. 24.68 lakhs and Rs. 33.67 lakhs respectively, while the amount that was actually found paid in the financial year relevant to the assessment year 1994-95 was only Rs. 6 lakhs. The claim of the assessee was that the assessee was due to pay ten per cent of the gross income on contracts executed to M/S. T.C.V. Packers. It was further found that M/S. T.C.V. Packers was a proprietory concern of Mr. T.T.V. Dinakaran upto 31st March 1994. The said Dinakaran was the Director of the assessee company. In M/s. T.C.V. Packers, other than Mr. T.T.V. Dinakaran, there was no person having any knowledge or experience. In short, the Assessing Officer found that there was no necessity for payment of the supervisory charges to M/S. T.C.V. Packers which was only a cover up, as the same work could have been carried out in his capacity as Director of the company and, therefore, the Assessing Officer took the view that the supervisory charges were not allowable and it was treated as undisclosed income. This was the case where the Court did consider the effect of the words “undisclosed income” as amended by the Finance Act, 2002. The Court made the following observation:

‘6. The Finance Act of 2002 has inserted the words “or any expense, deduction or allowance claimed under this Act which is found to be false” at the end of the cl.(b), with retrospective effect from 1st July, 1995. The object of the amendment is to specifically provide that any expense, deduction or allowance claimed under this Act which is found to be false, shall be included in the undisclosed income as defined in this clause. The last line of the said definition “or any expense, deduction or allowance claimed under this Act which is found to be false” makes it clear that unless and until the said deduction claimed by the assessee is found to be false by the Revenue, there is no scope for the Revenue to treat the disallowance made under S.40A(2) as undisclosed income. As in this case, the AO had not given a finding that this expenditure claimed by the assessee was false. The AO only disallowed the expenditure under S.40A(2) on the ground that this expenditure is unreasonable. The disallowance made under S.40A (2) of the Act, would not be considered for the purpose of making block assessment under Chapter XIV-B of the Act, unless and until the Revenue gives a categorical finding that the whole expenditure of deduction is totally false. In the present case, the actual finding given by the Tribunal in respect of supervisory charges, is as under:

“However, by claiming certain expenditure as has been done in the instant case of supervisory charges, which is not legitimate business expenditure, the income which would have otherwise been shown was reduced and consequently it leads to undisclosed income. This is limited only to supervisory charges. The other disallowances including depreciation, building repairs, cash payment would not be valid in making block assessment.’

It is this decision which is principally relied on by the learned counsel for the appellant to contend that there must be a finding that the allowance or expenditure is false.

(3) Next, the learned counsel for the appellant relied on the decision in (A) CIT v. Vikram A. Doshi [2002] 256 ITR 129/[2003] 127 Taxman 513 (Bom). Therein the Court, inter alia, held as follows:

“4. The other questions sought to be raised by the Revenue need no consideration as the issues raised therein are based on transactions which, by no stretch of imagination can be said to be undisclosed transactions falling under S.158B of the IT Act, since the transactions in question were disclosed in returns which were the subject matter of regular assessment. The same ought to have been assessed in the regular assessment and not in the block assessment. We, therefore, affirm the conclusions or findings recorded by the Tribunal with respect to those transactions referred to in other questions sought to be canvassed, may be for additional different reason recorded herein.”

(4) Next, he relied on the Judgment of the Bombay High Court in CIT v. Templetion Asset Management (India) (P.) Ltd. [2011] 337 ITR 541/[2012] 20 taxmann.com 626. The Court held, inter alia, as follows:

“3. As regards questions Nos.2 and 5 relating to the deletion of accrued interest are concerned, the finding of fact recorded by the Tribunal is that the assessee had purchased the debentures in question in the year 1999 and the same were reflected in the books of account maintained by the assessee.

Therefore, whether interest on those debentures were includible in the total income on accrual basis or not, was a question to be considered in the regular assessment and not in the block assessment. Therefore, no fault can be found with the decision of the Tribunal in deleting the interest on accrual basis in the block assessment order. Accordingly, questions Nos. 2 and 5 cannot be entertained.”

(5) Still further, he sought support from the decision of the Apex Court in CST v. Sanjiv Fabrics [2010] 9 SCC 630. There, the case arose under the Central Sales Tax Act. The Court was considering the question whether mens rea was an essential element to levy penalty under Section 10(b) with Section 10A of the Central Sales Tax Act, 1956. Section 10 of the Act provides for penalties. Clause (b) related to a case where a person being a registered dealer falsely represents that when purchasing any class of goods, goods are covered by his Certificate. Clause (c) refers to a case where a person not being a registered dealer falsely represents when purchasing goods in the course of industrial trade or commerce that he is a registered dealer. Clause (d) of Section 10 referred to any person who fails to make use of the goods after purchasing such goods for the purpose mentioned therein. Section 10A on the other hand, reads as follows:

“10A. Imposition of penalty in lieu of prosecution.—(1) If any person purchasing goods is guilty of an offence under clause (b) or clause (c) or clause (d) of Section 10, the authority who granted to him or, as the case may be, is competent to grant to him a certificate of registration under this Act, may, after giving him a reasonable opportunity of being heard, by order in writing, impose upon him by way of penalty a sum not exceeding one-and-a-half times the tax which would have been levied under sub-section (2) of Section 8 in respect of the sale to him of the goods, if the sale had been a sale falling within that sub-section;

Provided that no prosecution for an offence under Section 10 shall be instituted in respect of the same facts on which a penalty has been imposed under this Section.”

The Court took note of the words “falsely represents” in clause (b) in contra-distinction of the words “wrongfully represents” and held as follows:

“36. In view of the above, we are of the considered opinion that the use of the expression “falsely represents” is indicative of the fact that the offence under Section 10(b) of the Act comes into existence only where a dealer acts deliberately in defiance of law or is guilty of contumacious or dishonest conduct. Therefore, in proceedings for levy of penalty under Section 10-A of the Act, burden would be on the Revenue to prove the existence of circumstances constituting the said offence.”

Based on the same, learned counsel for the appellant would submit that the Tribunal has acted illegally in not noting that there was no finding by the Assessing Officer that the assessee had falsely claimed the benefit of depreciation. In other words, apart from there being a finding on the said lines as such, it is necessary to sustain an addition by way of undisclosed income that the depreciation should have been claimed falsely, that is to say, it should have been claimed with the knowledge that it was knowingly and intentionally false.

(6) Lastly, he also relied on the Judgment of this Court in CIT v. Smt. C. Sabira [2011] 338 ITR 226/[2012] 20 taxmann.com 614, wherein this Court was also dealing with a case of block assessment and it was, inter alia, held as follows:

“17. We are of the view that there is no merit in the contention of the appellant. Chapter XIV-B deals with ascertainment of the undisclosed income of the party for the block period. In the case of a search, the undisclosed income must be determined with reference to the evidence unearthed during the search and also the other materials or information available which are relatable to such evidence. Therefore, the focus must be on the evidence which was unearthed during the course of the search or other material or information relating to such evidence. There is no relevant material as such which can be relied on by the appellant to justify the finding about the cost of construction being what was estimated. In the statement, in fact, what is stated is, as already noted, approximately one crore of rupees was spent. The AO could not have by way of estimation in proceedings under Chapter XIV-B, determined the cost of construction and therefrom arriving at the undisclosed income by deducting the alleged admitted cost of construction.”

7. Per contra, learned counsel for the Revenue sought to support the order. He pointed out that as far as the addition of a sum of Rs. 4,00,000/- as sustained by the Tribunal is concerned, the Partner had made the statement that there was a short fall of Rs. 4,00,000/-. No doubt, there was also the report of the Valuation Officer. As far as the undisclosed income in the form of depreciation is concerned, it was pointed out that it was found that it was claimed falsely and that is sufficient.

8. As far as the question relating to reckoning of Rs.4,00,000/- as undisclosed income is concerned, we find there is no merit. As correctly held by the Tribunal, it is supported by the voluntary statement given under Section 132(4). The statement was not retracted. No doubt, corroboration was sought to be drawn from the report of the DVO. The Tribunal has in fact limited the addition strictly on the basis of the statement made by the assessee and not accepted Rs.4,52,000/- which would involve some variations. We would think that in such circumstances, there can be no room for complaint and none of the decisions cited by the appellant can come to its rescue.

9. The second question which arises is whether on finding that the assessee had used the building by way of renting it out and, therefore, the claim for depreciation could not be allowed and, therefore, relying on the definition of the words “undisclosed income”, the said amount claimed as depreciation could be considered as undisclosed income. There is no case for the appellant that the finding that the building was let out, is not correct. Therefore, the building was not used for the purpose of the business of the assessee. Depreciation was, however, claimed by the assessee, even though the building could not be said to have been used for the business of the assessee. Thus, in law, the depreciation could not have been claimed or granted. The case of the appellant is that as held by the Appellate Authority, this is a matter for consideration in the regular assessment and it is not a matter to be considered in the block assessment.

10. The argument of the learned counsel for the appellant addressed before us is essentially two-fold: He would submit that even going by the definition of the word “undisclosed income”, the requirement is that the expense, deduction or allowance must be found to be false. Apart from the fact that the matter was to be decided in regular assessment, it is pointed out that there is no finding that the depreciation was claimed falsely. The further aspect is apparently an offshoot of the employment of the word “false”. That is to say, the learned counsel would contend that the deliberate use of the word “false” necessarily means that the Legislature contemplated that only if the claim of expense, deduction or allowance was made with the evil intention or with deliberateness that the said expense, deduction or allowance could be treated as undisclosed income. In this context, the learned counsel for the appellant also drew our attention to Section 158BFA of the Act which provides for levy of interest and penalty in certain cases. Sub-section (1) of Section 158BFA deals with levy of interest. We are not concerned with the same. Apparently, the appellant seeks to draw support from Sub-section (2) of Section 158BFA. It reads as follows:

“158 BFA. (1). ** ** **

(2) The Assessing Officer or the Commissioner (Appeals) in the course of any proceedings under this Chapter may direct that a person shall pay by way of penalty a sum which shall not be less than the amount of tax leviable but which shall not exceed three times the amount of tax s leviable in respect of the undisclosed income determined by the Assessing Officer under clause( c ) of section 158 BC”

Sub-section (3) provides for certain conditions to be fulfilled in the matter of imposing penalty.

11. In order to appreciate this argument, we must consider the scheme of Chapter XIV-B. As the very heading suggests, the provisions in the Chapter provides for a special procedure for assessment of such cases. No doubt, the body of the provisions show that they are intended to cover cases not only of a case of search under Section 132, but they are intended to also deal with a case where books of account, other document or assets are requisitioned under Section 132A. Section 158BA sub-section (2) vide its Explanation declares that the assessment under Chapter XIV-B is to be in addition to the regular assessment in respect of each previous year including the block period. Further, it is declared that the total undisclosed income relating to the block period shall not include the income assessed in any regular assessment. Likewise, the income assessed under Chapter XIV-B is not to be included in the regular assessment of any previous year included in the block period. Section 158BB provides for the computation of undisclosed income for the block period. The undisclosed income of the block period is the aggregate of the total income for the relevant previous years computed in accordance with the Act on the basis of the evidence found as a result of the search or requisition of the book of account, documents and other materials as are available relatable to such evidence. The said total income is to be reduced, inter alia, on the basis of the income where assessments have been concluded under Sections 143, 144 or 147 on the basis of the assessments. In a case where returns are filed, but the assessment has not been made till the date of the search or requisition, the undisclosed total income for the block period is to be reduced by the amount shown in the return. In a case where return is not filed, clause (C) applies. Likewise, Clauses C(a) to (f) provide for other situations. The Explanation to Section 158BB Clause (a) reads as follows:

“Explanation.— For the purposes of determination of undisclosed income, — (a) The total income or loss of each previous year shall, for the purpose of aggregation, be taken as the total income or loss computed in accordance with the provisions of this Act without giving effect to set off of brought forward losses under Chapter VI or unabsorbed depreciation under sub-section (2) of Section 32:

Provided that in computing deductions under Chapter VIA for the purposes of the said aggregation, effect shall be given to set off of brought forward losses under Chapter VII or unabsorbed depreciation under sub-section (2) of Section 32.”

It is thereafter that Section 158 BF reads as follows:

“158BF. Certain interests and penalties not to be levied or imposed. — No interest under the provisions of section 234A, 234B or 234C or penalty under the provisions of clause ( c ) of sub-section (1) of section 271 or section 271A or section 271B shall be levied or imposed upon the assessee in respect of the undisclosed income determined in the block assessment.”

Thus, no penalty can be levied for concealment of income under Section 271C [sic. 271(1)(c)] of the Act in a case where undisclosed income is determined in the block period. It is thereafter that Section 158BFA provides for levy of penalty. The most important provision which we are called upon to consider is the definition of the word “undisclosed income”. We extract the same as under:

“158B. Definitions — In this Chapter, unless the context otherwise requires, —

(a). ** ** **
(b) “undisclosed income” includes any money, bullion, jewellery or other valuable article or thing or any income based on any entry in the books of account or other documents or transactions, where such money, bullion, jewellery, valuable article, thing, entry in the books of account or other document or transaction represents wholly or partly income or property which has not been or would not have been disclosed for the purpose of this Act. (or any expense, deduction or allowance claimed under this Act which is found to be false)”

The words “or any expense, deduction or allowance claimed under the Act which is found to be false” was inserted by the Finance Act, 2002 with retrospective effect from 1.7.1995. No doubt, the Madras High Court has in the decision in TCV Engg. Ltd. (supra) has taken the view that the expenditure claimed therein by the assessee was found by the Assessing Officer to be unreasonable and there was no finding that it was false. It was further found that unless and until the Revenue gives a categorical finding that the whole expenditure of deduction is totally false, the disallowance could not be considered for making the block assessment. We have already referred to the facts. We would think that it may not apply to the facts of the present case. In the case at hand, the appellant claimed depreciation. The depreciation was claimed though the building was being let out. It is not a case where the expenditure was found to be unreasonable, which involves an element of estimation and that, at any rate, the facts are totally dissimilar. In this case, the assessee could not have claimed depreciation when the asset was being let out and not being used for the purpose of the business. It may be true that the Assessing Officer did not use the words that the claim is false. In stead, what is found is that the appellant was regularly claiming depreciation on buildings occupied by the tenants. It is further found that it is evident that the building has not been used for the assessee’s business and no depreciation could be allowed.

12. The next question which would arise is what is the significance of the use of the word “false”. In Strouds Judicial Dictionary (Vol. II), we find the following commentary against the word “false”:

‘False See per Alverstone C.J. Korten v. West Sussex CC 72 L.J.K.B. 514, cited I.T.A. No. 221 OF 2012 33

Permit. The word is not applicable to a story which merely contains some inaccuracies in detail or is somewhat exaggerated (Mountford v. Crofter (1942) S.A.S.R 244).

(Industrial and Provident Societies Act 1913 (c. 31). s.10(c). could mean no more than incorrect (English and Scottish Properties Mortgage and Investment Society v. Odhams Press [1940] 1 K.B. 440, 458).

Stat. Def., Forgery and Counter Feiting Act 1981(c.45), s.9.

Def., “False Registration card’ (“means a document which is designed to appear to be a registration card”) s. 26A of the Immigration Act 1971 (c.77), inserted by s. 148 of the Nationality, Immigration and Asylum Act 2002 (c.41).

“False representations” see.

Representations’.

In STC v. Bombay Gen. Stores (AIR 1969 MP 213), a Division Bench Judgment was authored by Justice G.P. Singh, the author of the well known book “Principles of Statutory Interpretation”. It was a case which involved Section 10B of the Central Sales Tax Act and the words used were “falsely represents”. The Court took the view that mens rea was an indispensable element to impose a penalty for contravention of Section 10B. We deem it apposite to refer to the following discussion:

‘3. The question referred to us is not happily worded but it is clear that it relates to the construction of the words “falsely represents” as they occur in clause (b) of Section 10, whether these clause (b) of Section 10 whether these words mean merely an incorrect representation or whether they cover only such representations which are made with a guilty mind that is to say which are knowingly, willfully or intentionally false. According to Oxford Dictionary the word ‘false’ may mean “erroneous, incorrect” or ” purposely untrue, deceitful etc.” In pearl Assurance Company v. Bromley, (1931) 49 TLR 446 the words ” false representation” occurring in Section 3 of the Industrial Assurance Act, 1923 were construed as including any untrue statement, whether made innocently or fraudulently. Similarly in Joitabhai Patel v. Controller of Customs, 1965-3 All ER 543, 593 the words “false entry” in Section 116 of the Customs Ordinance (Fiji) were construed by the Privy Council as meaning an incorrect or untrue entry including even an entry which was innocently made false.’

In contrast to these cases, there are others where the word ‘false’ has been used to cover only intentional falsehoods. As stated in Black’s Law Dictionary (p. 722).

“In Law, this word usually means something more than untrue; it means something designedly untrue and deceitful, and implied an intention to perpetrate some treachery or fraud. Hatcher v. Dunn.102 Lowa 411=71 NW 343 = 36 LRA 689, Mason v . Association, 18 U.C. C.P. 19; State v. Leonard, 73 Or 451 = 144 P. 113 118 and State v. Smith, 63 Vt.201 = 22A 604. It implies either conscious wrong or culpable negligence, and signifies knowingly, negligently untrue. United State v. Ninety – Nine Diamonds, C.C. A.Minn 139 F 961 = CCA 9 = 2 LRA NS 185.

The word ‘ false’ has two distinct and well recognised meanings; (1) intentionally or knowingly or negligently untrue; (2) untrue by mistake or accident, or honestly after the exercise of reasonable care. Metropolitan Life Ins. Co. v. Adams. Mun. App; 37 A 2d. 345, 350. In jurisprudence, “false” and “falsely” are oftenest used to characterize a wrongful or criminal act, such as involves an error or untruth, intentionally or knowingly put forward. A thing is called “false” when it is done, or made with knowledge, actual or constructive, that it is untrue or illegal, or is said to be done falsely when the meaning is that the party is in fault for its error. Fouts v. State 113 Chio St. 450 = 149 Ne 551, 554 and Monahan v. Mutual Life Ins. Co. of New York, 192 Wis 102=212 NW 269. The word “false” in its juristic use implied something more than a mere untruth, Dombroski v. Metropolitan Life Ins. Co., NJL 545 = 19 Ad 2d 678, 680.

The word ‘ false’ sometimes connotes an intent to deceive, People v. Wahl 39 Cal. App 771 = 100 P. 2d 550, 551 and Salt’s Textile Mfg. Co. v. Ghent. 107 Conn. 211 = 139 A 694. 695.

It will thus be seen that the word “false” may be used in a wider or a narrower sense. In wider sense it will embrace all types of falsehoods whether they be intentional or innocent but in narrower sense it will cover only such falsehoods which are intentional. The question whether in a particular enactment the word “false” is used in a restricted sense or in a wider sense would depend on the context in which it is used. Clause (b) of Section 10 of the Central Sales Tax Act, with which we are concerned, uses the words ” falsely represents” as an ingredient of a criminal offence, for which a penalty of imprisonment which may extent to six months is prescribed. We begin with a presumption that a guilty intent is an essential element of a statutory offence and this presumption is strengthened when the offence is made punishable with a sentence of imprisonment. This presumption can be rebutted by showing that the object of the statute would be defeated unless the language used in the enactment is construed in a wider sense to include otherwise innocent persons; (Nathulal v. State of Madhya Pradesh, AIR 1966 SC 43 at p. 45. The object of Section 10 (b) is to protect the revenue by preventing missue of registration certificates and we do not think that this object would be defeated by constructing the section as embracing the element of mens rea. In most cases, it would not be in doubt that the article purchased under ‘C’ form is not entered in the registration certificate and in such cases it will be easy to infer that the false representation by furnishing the declaration in C form was knowingly or intentionally made. But cases cannot be ruled out where it may be a matter of bona fide dispute whether a particular article purchased by a dealer fell within “the class or classes of goods” specified in his registration certificate.

There is nothing in the section to show that the legislature intended to punish a dealer who honestly though incorrectly represented that a particular article fell within the description of goods specified in his certificate. The presumption of existence of mens rea as a necessary constituent of the offence falling under Cl.(b) of Section 10 is not rebutted by anything in its object or language and consistent with the presumption it must be held that the word ‘ false’ is used in that clause in a restricted sense and does not exclude the element of mens rea. In our opinion, in the absence of mens rea a dealer cannot be penalised for contravention of Cl. (b) of Sec. 10. The view that we have taken has also been taken by the Kerala High Court In Varghese and Sons v. Sales Tax Officer, 1965 – 16 STC 323 = (AIR 1965 Ker.212).’

Thus, the meaning of the word “false” cannot be divorced from the context in which the word occurs and the statutory setting. A penalty provision in a taxing statute is distinguished from a provision creating an offence and the former does not involve the concept of mens rea Gujarat Travancore Agency v. CIT [1989] 177 ITR 455/44 Taxman 278 (SC) and. Addl. CIT v. I.M. Patel & Co. [1992] 196 ITR 297/62 Taxman 497. We also refer to the following commentary, namely “The Principles of Statutory Interpretation” by Justice G.P. Singh at page 779. Pages of 779 read as follows:

‘There is a fundamental difference between acceptable tax mitigation and unacceptable tax avoidance. The former are cases in which the tax payer takes advantage of the law to plan his affairs so as to minimise the incidence of tax. “Unacceptable tax avoidance typically involves the creation of complex artificial structures by which, as though by wave of a magic wand the tax-payer conjures out of the air a loss or a gain or expenditure or whatever it may be which otherwise would never have existed. These structures are designed to achieve an adventitious tax benefit for the tax-payer and in truth are no more than raids on the public funds at the expense of the general body of tax-payer and as such are unacceptable. Taxation is the price which we pay for civilization.

Indeed the courts have now gone to the extent of not recognising tax avoidance schemes or devices even if they are strictly not non-genuine. This new approach to tax avoidance schemes has been accepted in India. In the words of Chinnappa Reddy, J.:” We now live in a welfare state whose financial needs, if backed by the law, have to be respected and met. We must recognise that there is behind taxation laws as much moral sanction as behind any other welfare legislation and it is a pretence to say that avoidance of taxation is not unethical and that it stands on no less moral plane than honest payment of taxation. In our view, the proper way to construe a taxing statute, while considering a device to avoid tax, is not to ask whether the provisions should be construed literally or liberally, nor whether the transaction is not unreal and not prohibited by the statute, but whether the transaction is a device to avoid tax, and whether the transaction is such that the judicial process may accord its approval to it. -It is neither fair nor desirable to expect the Legislature to intervene and take care of every device and scheme to avoid taxation. It is up to the Court to take stock to determine the nature of the new and sophisticated legal devices to avoid tax and consider whether the situation created by the devices could be related to the existing legislation with the aid of emerging techniques of interpretation as was done in Ramsay, Burmah Oil and Dawson to expose the devices for what they really are and to refuse to give judicial benediction.’

13. It is no doubt true that imposition of penalty under Section 271(a) stands on a different footing from penalty under Section 271(c). The use of the word “concealment” has played a large part in persuading the Courts to hold that there must be a deliberate act of omission on the part of the assessee. It has also been held that the order imposing penalty is quasi criminal in nature and thus the burden lies on the Department to establish that the assessee has concealed its income T. Ashok Pai v. CIT [2007] 292 ITR 11/161 Taxman 340 (SC). It is also no doubt true that in Govind Impex (P.) Ltd. v. Appropriate Authority Income-tax Deptt. [2011] 330 ITR 10/196 Taxman 425/9 taxmann.com 56 (SC) the Court took the view that a penal statute which makes an act a penal offence or imposes a penalty is to be strictly construed and if two views are possible, one favourable to citizens is to be ordinarily preferred.

14. Apparently, no penalty can be imposed under Section 271(c) [Sic. 271(1)(c)] where undisclosed income is determined under Chapter XIV. In fact, the provisions of Section 158BFA is a special provision relating to the power to impose penalty as provided therein. No penalty can be imposed if the return is filed as provided in the Explanation followed by payment of tax and the other conditions are satisfied. Secondly, the levy of penalty is not mandatory. There is the discretion. Penalty may be levied. We are called upon to adopt the narrow meaning of the word “false” and to confine the inclusion of any amount claimed by way of deduction or allowance as undisclosed income, only if the same are claimed with an evil intention or with knowing that it is false. There can be no doubt that widely interpreted the word “false” is capable of taking in intentional and innocent falsehoods. In other words, if widely interpreted, it is capable of bearing the meaning that the claim is untrue on the basis of mistake or accident or it was untue even though care had been taken and the appellant had honestly thought that the claim was sustainable.

15. It is no doubt true that the Legislature has made use of the word “false”. We cannot also be unmindful of the fact that when the claim is found to be false in the wider sense and hence rejected, there is the possibility that the Officer may invoke Section 158BFAand impose penalty.

We are of the view that in the facts of this case, the claim for depreciation was made quite without any basis. In view of the amended definition of “undisclosed income” such claim would render it undisclosed income. Merely because it is not in so many words mentioned that the claim is made falsely in the facts of this case it does not mean it is not made falsely. The word “false” in this context need be given only the wide meaning as the direct impact is that amount included will be assessed as undisclosed income. In the facts of this case, where there can be no explanation from the assessee for illegally claiming depreciation, on the admitted facts, there is no need for relegating the matter for regular assessment. The possibility of penalty cannot be a reason to require that it can be treated as undisclosed income only when the claim is found to be made deliberately. In fact, the claim is made as it is clear from the facts without any foundation as the claim was made when the building was let out in which circumstances, there is absolutely no scope for claiming depreciation. In such circumstances, the questions of law are answered against the appellant and the appeal is dismissed as merit less.

[Citation : 363 ITR 81]