Himachal Pradesh H.C : the provisions of Explanation 1A to section 271(1)(c) were not applicable as the Assessing Officer could not establish that the explanation given by the assessee during the assessment proceedings for reduction of value of stock was false

High Court Of Himachal Pradesh

CIT vs. H.P. State Forest Corpn. Ltd

Assessment Year : 1987-88

Section : 271(1)(C)

Deepak Gupta And Sanjay Karol, JJ.

IT Appeal No. 15 Of 2005

January 7, 2011

JUDGMENT

Deepak Gupta, J. – This appeal was admitted on the following questions of law:

“1.Whether on the facts and in the circumstances of the case, the Hon’ble ITAT was right in holding that the provisions of Explanation 1A to section 271(1)(c) were not applicable as the Assessing Officer could not establish that the explanation given by the assessee during the assessment proceedings for reduction of value of stock was false?

2.Whether on the facts and in the circumstances of the case the Hon’ble ITAT was right in holding that the provisions of Explanation 1B to section 271(1)(c) were not applicable as the explanation given by the assessee during the assessment proceedings for reduction of value of stock was duly substantiated by the assessee even though the addition made at Rs. 1,18,12,295 on account of reduction in value of stock was duly upheld by the Hon’ble ITAT holding that the explanation offered by the assessee in this respect was not correct?”

2. Briefly stated the facts of the case are that the respondent Corporation is a Government owned Company. It is engaged in the business of extraction of timber and resin from forests. The assessment of the year 1987-88 was completed under sections 143(3) and 147. During the course of the assessment proceedings the Assessing Officer noticed that the assessee had disclosed work in progress at Rs. 44,27,42,081 with a note that net provision was of Rs. 2,12,18,295. No such provision was made in the balance sheet. According to the assessee the closing stock was reduced by Rs. 2,12,18,295 on account of deterioration of old stocks. The case of the Revenue is that the value of the stock was reduced illegally on the basis of the reports received from the concerned Officers and therefore the Assessing Officer made addition of this amount to the income of the assessee. The assessee filed an appeal before the CIT appeals who confirmed the addition. The Tribunal also confirmed the addition made by the Assessing Officer.

3. In the course of assessment proceedings penalty proceedings under section 271(1)(c) were also initiated by the Assessing Officer. On confirmation of addition by the Appellate Authority the Assessing Officer imposed penalty under section 271(1)(c) amounting to Rs. 2,12,18,300 which was twice the amount of the tax sought to be evaded on the aforesaid addition of Rs. 2,12,18,295. Aggrieved by such order of levying penalty the assessee filed an appeal. The CIT (Appeals) upheld the levy of penalty but the quantum of penalty was reduced from 200 per cent to 100 per cent. Thus, penalty was confirmed at Rs. 1,06,91,418.

4. Aggrieved by the order of the CIT (Appeals) the assessee filed an appeal before the ITAT which vide impugned order dated 24-12-2004 has held that no penalty could have been imposed upon the assessee. According to ITAT the assessee had disclosed all material facts and there was no concealment of income on the part of the assessee and as such no penalty could have been imposed in view of Part-A of Explanation 1 to section 271(1)(c). The ITAT also held that the assessee had discharged the onus placed upon it by part-B of Explanation 1.

5. From the aforesaid narration of facts, it is obvious that as far as the addition to the income is concerned the same has attained finality. The only question which arises is whether the assessee is liable to pay penalty in terms of section 271(1)(c) of the Income-tax Act, 1961. It would be pertinent to refer to section 271(1)(c) which reads as follows:

“271. (1) If the Assessing Officer or the Commissioner (Appeals) or the Commissioner in the course of any proceedings under this Act, is satisfied that any person—

(a)& (b) **

(c)has concealed the particulars of his income or furnished inaccurate particulars of such income, or

(d) **

(i)& (ii) **

(iii) in the cases referred to in clause (c) or clause (d) in addition to tax, if any, payable by him, 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 fringe benefits or the furnishing of inaccurate particulars of such income or fringe benefits.

Explanation 1.—Where in respect of any facts material to the computation of the total income of any person under this Act,—

(A) such person fails to offer an explanation or offers an explanation which is found by the Assessing Officer or the Commissioner (Appeals) or the Commissioner to be false, or

(B) such person offers an explanation which he is not able to substantiate and fails to prove that such explanation is bona fide and that all the facts relating to the same and material to the computation of his total income have been disclosed by him,

then, the amount added or disallowed in computing the total income of such person as a result thereof shall, for the purposes of clause (c) of this sub-section, be deemed to represent the income in respect of which particulars have been concealed.”

6. We have heard learned counsel for the parties and also gone to the authorities cited by them.

7. Shri Vinay Kuthiala, learned counsel for the Revenue has urged that in the previous proceedings between the parties, the authorities clearly held that the assessee had furnished inaccurate particulars of its income and therefore the provisions of section 271(1)(c ) are attracted. He further submits that the Explanation (1) to section 271 makes it abundantly clear that if an assessee offers an explanation which is not found true by the Assessing Officer and also fails to prove that such explanation was bona fide then the amount added to his income will be deemed to have been concealed by him.

8. On the other hand Sh. M.M. Khanna, learned senior counsel appearing on behalf of the assessee submits that the Assessing Officer has nowhere recorded his satisfaction in the assessment order or formed his opinion that the assessee has concealed the particulars of income or has filed incomplete particulars. It is also urged that concealment by its very nature means that there should be some mens rea on the part of the assessee. In this behalf it is urged that the assessee is a Government Company and the officials have no personal benefit in the Company and as such it cannot be said that the assessee concealed any income.

9. To appreciate the rival contentions of the parties it would be pertinent to mention certain facts which led to the addition of the income. During the course of assessment proceedings the assessee deducted the value of some timber lying in Chopal and Chamba Divisions which amounted to Rs. 2,12,18,295. This was purportedly done in accordance with the Resolution of the Board of Directors of the Assessee dated 22-8-1990 which reads as follows:

“While finalizing the account and audit for the financial year 1986-87, the auditors have observed that in Chopal and Chamba Divisions, certain old inventories of timber lots in the form of work in progress have been carried forward for the past several years. In some cases, the work in progress pertains to even 1981-82 lots. In the opinion of the auditors, such work in progress/inventory which is presently valued at cost may not be having the same reliable value. The auditors had, therefore, recommended that the corporation studies the position in depth and prepare the status of such lots up to date.

Accordingly, the corporation has conducted detailed study of such inventory and prepared the present status in consultation with the concern Divisional Managers and the field staff. On physical examination of such lots at random basis by the Divisional Managers/Field staff, it has been found that quality of certain lots has deteriorated considerably and such lots may fetch substantially low prices in the market when compared to the book values. The Divisional Managers have, therefore, recommended an overall reduction of 25 per cent in Chamba Division and 50 per cent in Chopal Division in the value of such stock. We are, however, not in a position to determine the exact reliable value and have to rely on such estimation in the interest of proper and fair valuation of inventories in our balance sheet for the financial year 1986-87. We, therefore, recommend that the valuation of old lots lying in the forests at various stages under work in progress as on 31-3-1987 (but which still exist as on date) be valued at their reliable value as estimated by the Divisional Managers i.e. 25 per cent and 50 per cent respectively below book value as per details annexed.

It is emphasized here that this reduced valuation of inventory is purely for the purpose of presenting a true and fair picture in the balance sheet and in no way prevents the right of the Corporation in recovering any physical loss of inventory at actual cost.”

10. It appears that some timber of the assessee lying in Chamba and Chopal Divisions had deteriorated considerably and the Officers of the Corporation were sending letters to it that net realizable value was now 25 to 50 per cent below costs. After reducing the value in terms of Resolution of the Board deduction of Rs. 2,12,18,295 was made.

11. During the assessment proceedings the assessee was asked to furnish a copy of the detailed study carried out by it as per the Board’s Resolution. The stand of the assessee was that actually no detailed communication in this behalf took place. The assessee only relied upon the reports of the Divisional Manager of Chamba, Chopal and Nerwa in support of its claim. The officers who had written these letters were examined during the assessment proceedings and on such examination the Assessing Officer had found that there was no justification in reduction of the value of the work in progress and thus addition for Rs. 2,12,18,295 was made. According to the Assessing Officer, the under valuation was done with a view to avoid tax liability. The main ground for rejection of the claim by the Assessing Officer was that there was no proposal for reduction in the value of work in progress on 31-3-1989 i.e. during the assessment year and that no such reduction in the value of the stocks was proposed during the said period. The main ground which weighed with the Assessing Officer was that the Board’s Resolution dated 22-8-1990 could not be given retrospective effect to reduce the value of the goods as on 31-3-1987. The Assessing Officer came to the conclusion that the Corporation had deliberately and consciously under-valued the stocks without any justification only in order to reduce its tax liability. The Assessing Officer came to the conclusion that inaccurate particulars of income were filed and as such imposed penalty equal to twice the amount of tax payable. This order was upheld in appeal.

12. The learned Tribunal on the other hand vide a detailed judgment came to the conclusion that the assessee was unable to carry out actual inspection of the entire deteriorated stocks spread over several kilometers. The reduction was done on an estimate basis. The ITAT held that in fact if the assessee had been able to prepare the details as required by the Assessing Officer in penalty proceedings then in all probability the claim of the assessee for deduction itself would have been allowed. Because the assessee resorted to estimation in determining the value of the depreciated stocks that the claim was not accepted by the Revenue. In regard to the Resolution of the Board of Directors passed in the year 1990 the ITAT came to the conclusion that the Government Corporations move at their own pace and have to follow long procedures. It found that the decision of the Board of Directors would not personally benefit any of the Directors. It also came to the conclusion that the statutory Auditors had audited the accounts including the valuation in respect of the deteriorated stocks. It was also found that even the Comptroller and Auditor General of India had approved the accounts of the assessee in this regard. According to the ITAT the assessee had disclosed all material facts and had also disclosed that the deduction was claimed on the basis of the estimates. Since there was no concealment the assessee was not liable to pay penalty. It also held that merely because the explanation afforded was not substantiated the consequences could not be that the assessee must pay penalty.

13. Both the sides have relied upon a large number of decisions and we therefore propose to cite them in chronological order.

14. In Gujarat Travancore Agency v. CIT [1989] 177 ITR 455/ 44 Taxman 278, the Apex Court held as follows:

“….Unless there is something in the language of the statute indicating the need to establish the element of mens rea, it is generally sufficient to prove that a default in complying with the statute has occurred. In our opinion, there is nothing in section 271(1)(a) which requires that mens rea must be proved before penalty can be levied under that provision.”

15. In CIT v. Balakrishna Textiles [1992] 193 ITR 361, a Division Bench of the Madras High Court held as follows:

“… The requirement of the first part of the Explanation is, therefore, fully satisfied. That would suffice to attract the latter part of the Explanation in order to deem that the assessees had concealed the particulars of income or furnished inaccurate particulars of such income, unless the assessees prove that the failure to return the correct income did not arise from any fraud or gross or wilful neglect on their part. On the application of the Explanation to the assessees, what emerges is that the income of the assessees, as assessed, is the correct income and in fact is that of the assessees and the failure on the part of the assessees to return the correct income arose from any fraud or gross or wilful neglect on their part. Of course, this could be rebutted by the assessees in the course of the penalty proceedings. But the assessees in these cases did not, in any manner, attempt to establish that the failure to return the correct income did not arise from any fraud or gross or wilful neglect on their part……”

16. The Apex Court in Addl. CIT v. I.M. Patel & Co. [1992] 196 ITR 297 / 62 Taxman 497, held that if the return was not filed within time then it was for the assessee to prove the reasonable cause for delay otherwise penalty could be imposed and it was not necessary to prove mens rea on the part of the assessee.

17. A Division Bench of the Rajasthan High Court in CIT v. Harshvardhan Chemicals & Mineral Ltd. [2003] 259 ITR 212 / 133 Taxman 320 , held as follows:

“The finding of the Tribunal that when the assessee has claimed some amount though that is debatable, in such cases, it cannot be said that the assessee has concealed any income or furnished inaccurate particulars for evasion of the tax. In view of the findings of the Tribunal, no case is made out for interference by this Court.”

18. The question with regard to the interpretation of section 271(1)(c) and the Explanation thereto, came up for consideration before the Apex Court in CIT v. Gold Coin Health Food (P.) Ltd. [2008] 172 Taxman 386 , which is not relevant because the main question decided in that case was that even in a case where the assessee declared loss in income, if there is concealment of income, penalty can be imposed.

19. The Apex Court in CIT v. Atul Mohan Bindal [2009] 183 Taxman 444, after considering the provisions of section 271 held as follows:

“10. The quantum of penalty is prescribed in clause (iii ). Explanation 1, appended to section 271(1) provides that if that person fails to offer an explanation or the explanation offered by such person is found to be false or the explanation offered by him is not substantiated and he fails to prove that such explanation is bona fide and that all the facts relating the same and material to the computation of his total income has been disclosed by him, for the purposes of section 271(1)(c), the amount added or disallowed in computing the total income is deemed to represent the concealed income. The penalty spoken of in section 271(1)(c) is neither criminal nor quasi criminal but a civil liability; albeit a strict liability. Such liability being civil in nature, mens rea is not essential.

13. It goes without saying that for applicability of section 271(1)(c ), conditions stated therein must exist. Insofar as the present case is concerned, as noticed above, the High Court relied upon its earlier decision in Ram Commercial Enterprises which is said to have been approved by this Court in Dilip N. Shroff. However, Dillip N. Shroff has been held to be not laying down good law in Dharamendra Textiles. Dharamendra Textiles is explained by this Court in Rajasthan Spinning and Weaving Mills. Having thoughtfully considered the matter, in our judgment, the matter needs to be reconsidered by the High Court in the light of the decisions of this Court in Dharamendra Textiles and Rajasthan Spinning and Weaving Mills.”

20. The Apex Court again considered this question in CIT v. Reliance Petro Products (P.) Ltd. [2010] 322 ITR 158/ 189 Taxman 322, and held as follows:

“8. A glance at this provision would suggest that in order to be covered, there has to be concealment of the particulars of the income of the assessee. Secondly, the assessee must have furnished inaccurate particulars of his income. The present is not the case of concealment of the income. That is not the case of the Revenue either. However, the Learned Counsel for Revenue suggested that by making incorrect claim for the expenditure on interest, the assessee has furnished inaccurate particulars of the income. As per Law Lexicon, the meaning of the word “particular” is a detail or details (in plural sense); the details of a claim, or the separate items of an account. Therefore, the word “particulars” used in the section 271(1)(c) would embrace the meaning of the details of the claim made……

9. Therefore, it is obvious that it must be shown that the conditions under section 271(1)(c) must exist before the penalty is imposed. There can be no dispute that everything would depend upon the Return filed because that is the only document, where the assessee can furnish the particulars of his income. When such particulars are found to be inaccurate, the liability would arise. In Dilip N. Shroff v. Jt. CIT 2007 (6) SCC 329, this Court explained the terms “concealment of income” and “furnishing inaccurate particulars”. The Court went on to hold therein that in order to attract the penalty under section 271(1)(c), mens rea was necessary, as according to the Court, the word “inaccurate” signified a deliberate act or omission on behalf of the assessee. It went on to hold that clause (iii) of section 271(1) provided for a discretionary jurisdiction upon the Assessing Authority, inasmuch as the amount of penalty could 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. It was pointed out that the term “inaccurate particulars” was not defined anywhere in the Act and, therefore, it was held that furnishing of an assessment of the value of the property may not by itself be furnishing inaccurate particulars. It was further held that the assessee must be found to have failed to prove that his explanation is not only not bona fide but all the facts relating to the same and material to the computation of his income were not disclosed by him. It was then held that the explanation must be preceded by a finding as to how and in what manner, the assessee had furnished the particulars of his income. The Court ultimately went on to hold that the element of mens rea was essential. It was only on the point of mens rea that the judgment in Dilip N. Shroff v. Jt. CIT was upset. In Union of India v. Dharamendra Textile Processors (cited supra), after quoting from section 271 extensively and also considering section 271(1)(c), the Court came to the conclusion that since section 271(1)(c) indicated the element of strict liability on the assessee for the concealment or for giving inaccurate particulars while filing Return, there was no necessity of mens rea. The Court went on to hold that the objective behind enactment of section 271(1)(c) read with Explanations indicated with the said section was for providing remedy for loss of revenue and such a penalty was a civil liability and, therefore, wilful concealment is not an essential ingredient for attracting civil liability as was the case in the matter of prosecution under section 276C of the Act. The basic reason why decision in Dilip N. Shroff v. Jt. CIT (cited supra) was overruled by this Court in Union of India v. Dharamendra Textile Processors (cited supra), was that according to this Court the effect and difference between section 271(1)(c) and section 276C of the Act was lost sight of in case of Dilip N. Shroff v. Jt. CIT (cited supra ). However, it must be pointed out that in Union of India v. Dharamendra Textile Processors (cited supra), no fault was found with the reasoning in the decision in Dilip N. Shroff v. Jt. CIT (cited supra ), where the Court explained the meaning of the terms “conceal” and inaccurate”. It was only the ultimate inference in Dilip N. Shroff v. Jt. CIT (cited supra ) to the effect that mens rea was an essential ingredient for the penalty under section 271(1)(c) that the decision in Dilip N. Shroff v. Jt. CIT (cited supra) was overruled.

10. We are not concerned in the present case with the mens rea. However, we have to only see as to whether in this case, as a matter of fact, the assessee has given inaccurate particulars. In Webster’s Dictionary, the word “inaccurate” has been defined as:-

“not accurate, not exact or correct; not according to truth; erroneous; as an inaccurate statement, copy or transcript”.

11. We have already seen the meaning of the word “particulars” in the earlier part of this judgment. Reading the words in conjunction, they must mean the details supplied in the Return, which are not accurate, not exact or correct, not according to truth or erroneous. We must hasten to add here that in this case, there is no finding that any details supplied by the assessee in its Return were found to be incorrect or erroneous or false. Such not being the case, there would be no question of inviting the penalty under section 271(1)(c) of the Act. A mere making of the claim, which is not sustainable in law, by itself, will not amount to furnishing inaccurate particulars regarding the income of the assessee. Such claim made in the Return cannot amount to the inaccurate particulars.

12. It was tried to be suggested that section 14A of the Act specifically excluded the deductions in respect of the expenditure incurred by the assessee in relation to income which does not form part of the total income under the Act. It was further pointed out that the dividends from the shares did not form the part of the total income. It was, therefore, reiterated before us that the Assessing Officer had correctly reached the conclusion that since the assessee had claimed excessive deductions knowing that they are incorrect; it amounted to concealment of income. It was tried to be argued that the falsehood in accounts can take either of the two forms; (i) an item of receipt may be suppressed fraudulently; (ii) an item of expenditure may be falsely (or in an exaggerated amount) claimed, and both types attempt to reduce the taxable income and, therefore, both types amount to concealment of particulars of one’s income as well as furnishing of inaccurate particulars of income. We do not agree, as the assessee had furnished all the details of its expenditure as well as income in its Return, which details, in themselves, were not found to be inaccurate nor could be viewed as the concealment of income on its part. It was up to the authorities to accept its claim in the Return or not. Merely because the assessee had claimed the expenditure, which claim was not accepted or was not acceptable to the revenue, that by itself would not, in our opinion, attract the penalty under section 271(1)(c). If we accept the contention of the Revenue then in case of every return where the claim made is not accepted by Assessing Officer for any reason, the assessee will invite penalty under section 271(1)(c). That is clearly not the intendment of the Legislature.”

21. We are of the considered view that the latest judgment of the Apex Court in Reliance Petro Products (P.) Ltd.’s case (supra) squarely covers the present case also. The Apex Court in this judgment has clearly held that the word ‘inaccurate’ as used in the Act would mean something which is not accurate, not exact or not correct. Something which is untrue is inaccurate. The same facts can be given two interpretations. If the interpretation given is plausible though not accepted by the Assessing authority it cannot be said that the statement of particulars is so inaccurate or erroneous as to invite imposition of penalty. True it is, that mens rea is not required to be proved. When mens rea is proved it shows that the person had an intention of evading payment of tax by illegal means. Merely because a wrong interpretation to the same set of facts is given would not, in our opinion, mean that the assessee is liable to pay penalty also. We must remember that penalty is by its very nature penal and somebody is being punished for an act which is unjustified. The assessee in the present case has already been burdened with tax and interest on the amount added to his income. The moot question is whether the assessee should be made liable to pay penalty.

22. The Apex Court in Reliance Petro Products (P.) Ltd.’s case (supra) has clearly laid down that merely because the assessee makes a claim which is not sustainable in law, will not amount to furnishing inaccurate particulars regarding the income of the assessee. In the present case, as pointed out above, the assessee was deducting the amount of Rs. 2,12,18,295 on account of deterioration of old stock. This was being done on estimation on the basis of the reports made by various officers of the Corporation. This estimation was not accepted mainly on the ground that the reports were made and resolution passed by the Board after the assessment year was over and therefore they could not be given retrospective benefit. It has not been found that the claim of the assessee that the wood had rotted and deteriorated is false. It is nobody’s case that the assessee fudged the amounts, the books of account or tried to create false evidence. The claim made by the assessee may not have been accepted by the Revenue but it cannot be said that the assessee furnished inaccurate particulars to such an extent that penalty should be imposed upon it. There does not appear to be falsehood in the accounts though the system of calculating the depreciation may have been improper. We also cannot loose site of the fact that assessee is a Government Corporation. It’s accounts are duly audited and even the Comptroller and Auditor General has gone through and approved the accounts of the Corporation. In such circumstances, we are of the view that merely because the assessee had claimed depreciation which claim was not accepted by the revenue that by itself would not, in our opinion, attract penalty under section 271(1)(c) of the Act.

23. The questions framed are answered in favour of the assessee and against the Revenue and consequently the appeal is dismissed with no order as to costs.

[Citation : 340 ITR 204]

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