1987-VIL-496-PAT-DT

Equivalent Citation: [1988] 171 ITR 405, 67 CTR 75, 35 TAXMANN 227

PATNA HIGH COURT

Date: 10.09.1987

COMMISSIONER OF INCOME-TAX

Vs

WARASAT HUSSAIN

BENCH

Judge(s)  : B. N. AGARWAL., UDAY SINHA 

JUDGMENT

UDAY SINHA J.-This is a reference under section 256(2) of the Income-tax Act, 1961. The question referred to us for our opinion is:

Whether the Appellate Tribunal was justified in cancelling the penalty imposed by the Inspecting Assistant Commissioner under section 271(1)(c) of the Act read with the Explanation thereto ? "

The question referred to us relates to the assessment year 1972-73. The assessee is an individual and derives income from business in country liquor as well as other sources. There being a difference of more than 20% between the returned income and the assessed income, penalty proceeding was initiated. Since the penalty was to be over Rs. 1,000, the matter was referred to the Inspecting Assistant Commissioner. The latter imposed a penalty of Rs. 20,379 for concealment of three items. The first was a sum of Rs. 3,369 relating to capital gain on sale of agricultural land. The second was Rs. 16,000 relating to cash credit in the name of Bibi Mazidan, mother of the assessee, and the third was a sum of Rs. 1,010 received by the assessee as annuity deposit refund. The Tribunal set aside the penalty on all counts. The Revenue being aggrieved, claimed reference before the Tribunal, but without any success. The High Court, thereafter, being moved by the Revenue, prayed for calling for a reference. This High Court directed the Tribunal to state a case before this court for answering the question mentioned above. Hence, the reference before us.

I would prefer first to take up the cash credit item of Rs. 16,000 said to have been received by the assessee from her mother, Bibi Mazidan. The assessee was called upon to show cause whether his mother was possessed of sufficient assets to advance the sum to him. It was stated on behalf of the assessee that his mother had income from rent of house property at the rate of Rs. 2,440 per year for 1968-69 and between the period 1967-70 at the rate of Rs. 2,608 per year. The Income-tax, Officer had found that the documents produced to support the assessee's claim were forged ones and prepared to booster up his claim for cash credit from his mother, Bibi Mazidan. The finding of fraudulent fabrication of documents was affirmed by the Inspecting Assistant Commissioner. In the quantum appeal, the Tribunal directed the Appellate Assistant Commissioner to examine Mossamat Bibi Mazidan to find out whether she had advanced the amount to Sk. Hefazat Ali and Bibi Patima Begum. To that extent, the Tribunal set aside the order of the Appellate Assistant Commissioner for redeciding the issue in relation to the cash credit of Rs. 16,000. The Tribunal hearing the penalty matter was cognizant of the fact that in the quantum appeal the matter relating to the cash credit of Rs. 16,000 had not been decided and yet surprisingly enough the Tribunal gave a finding that a case has been made out by the assessee that the advance was a probable one and that it could not be said to be a clear case of concealment. It somewhat surprises me that even before the quantum assessment had been rounded up, the Tribunal hearing the penalty matter held that the defence of the assessee was a probable one. This finding would undoubtedly checkmate the Appellate Assistant Cornmissioner from recording a finding in regard to the quantum assessment. The Tribunal, however, loaded the dice against the Revenue in the assessment. In my view, the course of action adopted by the Tribunal was unwarranted, if not illegal. Be that as it may, the finding of fact now is that the assessee had placed a probable defence and it could not be said to be a clear case of concealment. With that finding, the presumption in terms of the Explanation to section 271(1)(c) had been effectively rebutted. The defence being probable, it is obvious that penalty is not called for. That matter must be left at that. The penalty on account of concealment of Rs. 16,000 must, therefore, be held to have been rightly set aside by the Tribunal.

We now come to the next item, i.e., concealment of Rs. 3,369 received as capital gain by sale of land. Land measuring about 491 kathas was sold by the assessee during the accounting year for Rs. 49,500. The central capital account of the assessee showed a deposit of Rs. 12,375 which represented one-fourth interest of the assessee in the sale proceeds. The assessee did not produce the sale deed in respect thereof. If the sale deed had been produced, the area where the land was situated and the probable market value could have been ascertained therefrom. It could have been found out whether the land was sold actually for Rs. 49,500 or for more. This was a matter within the special knowledge of the assessee. The Tribunal could not be expected to produce the sale deed. Learned counsel for the assessee submitted that even if the assessee did not produce the original sale deed, the Revenue could have obtained a certified copy of the sale deed from the registration office and disproved the stand of the assessee that the land had been sold really for a sum higher than Rs. 49,500. This does not lie in the mouth of the assessee. No court or Tribunal should countenance in an assessee the attitude of failure to produce relevant material and ask the adversary to disprove it. This attitude was decribed by Chinnappa Reddy J. in McDowell and Co. Ltd. v. CTO [1985] 154 ITR 148 (SC).

The command of Parliament is to penalise the tax-dodgers. Such stand of the assessee is nothing but trickery and should not be countenanced by courts. Further, the Revenue could have produced a certified copy of the sale deed only if the details of the land sold were known. There is nothing on record to show that the details had been provided by the assessee. Merely stating that income was derived from sale of land in the town of Munger was not enough to enable the Revenue to find out what land had been sold. The assessee had not disclosed whether the land was Khatiani land or it was acquired by purchase. The Inspecting Assistant-Commissioner, therefore, had to calculate on the basis of the value prevailing on January 1, 1954. That could be done only by estimate. The Inspecting Assistant Commissioner valued the land at Rs. 5,000, i.e., at the rate of Rs. 100 per katha. The assessee's share would be Rs. 1,250 by the rate estimated for 1954, since the land had been sold for Rs. 5,000. On that basis the addition of Rs. 3,369 was upheld in the quantum appeal. No other material was brought on record in the penalty matter either by the assessee or by the Revenue. The Tribunal set aside this penalty on the footing that where the market value had been ascertained on estimate, no penalty could be levied. I seriously contest this proposition of law that where assessment has been done on estimate, no penalty can be levied. In relation to this sort of conduct, Lord Greene M.R., in Lord Howard de Walden v. IRC [1942] 1 KB 389 [1941] 25 TC 121, observed as follows (p. 134 of 25 TC) :

" For years a battle of manoeuvre has been waged between the Legislature and those who are minded to throw the burden of taxation off their own shoulders on to those of their fellow subjects. In that battle, the Legislature has often been worsted by the skill, determination and resourcefulness of its opponents, of whom the present appellant has not been the least successful. It would not shock us in the least to find that the Legislature has determined to put an end to the struggle by imposing the severest of penalties. It scarcely lies in the mouth of the taxpayer who plays with fire to complain of burnt lingers."

Chinnappa Reddy J. in McDowell's case [1985] 154 ITR 148, 154 (SC) approved the observations of Stamp J. in In re Westeminister's Settlements as follows :

".. ...... There must be some limit to the devices which this court ought to countenance in order to defeat the fiscal intentions of the Legislature ............ I am not persuaded that this application represents more than a cheap exercise in tax avoidance which I ought not to sanction, as distinct from a legitimate avoidance of liability to taxation."

In Greenberg v. IRC [1971] 3 All ER 136; 3 WLR 386, Lord Reid, dealing with endeavours by the assessee to cheat the exchequer, observed as follows :

"We seem to have travelled a long way from the general and salutary rule that the subject is not to be taxed except by plain words. But I must recognize that plain words are seldom adequate to anticipate and forestall the multiplicity of ingenious schemes which are constantly being devised to evade taxation. Parliament is very properly determined to prevent this kind of tax evasion and, if the courts find it impossible to give very wide meanings to general phrases, the only alternative may be for Parliament to do as some other countries have done, and introduce legislation of a more sweeping character which will put the ordinary well-intentioned person at much greater risk than is created by a wide interpretation of such provisions as those which we are now considering ...... Indeed, I sometimes suspect that our normal meticulous methods of statutory construction tend to lead its astray by concentrating too much on verbal niceties and paving too little attention to the provisions read as a whole."

Chinnappa Reddy J. observed at page 154 of 154 ITR that " The march of the law against tax avoidance schemes continued and came significant departure from the Westminster and the Fisher's Executors principle." (IRC v.. Duke of Westminster [1935] 19 TC 490 and IRC v. Fisher's Executors [1926] AC 395 (HL) ).

Further, note must be taken of the significant observation of Chinnappa Reddy J. (at page 156 of 154 ITR).

" ......While the techniques of tax avoidance progress and are technically improved, the courts are not obliged to stand still. Such immobility must result either in loss of tax, to the prejudice of other taxpayers, or to parliamentary congestion or (most likely) to both. To force the courts to adopt, in relation to closely integrated situations, a step by step, dissecting, approach which the parties themselves may have negated would be a denial rather than an affirmation of the true judicial process. In each case, the facts must be established, and a legal analysis made: legislation cannot be required or even be desirable to enable the courts to arrive at a conclusion which corresponds with the parties' own intentions.

The capital gains tax was created to operate in the real world, not that of make-believe."

The oft-quoted dictum in IRC v. Duke of Westminster [1936] AC I at page 19; 19 TC 490, 520 is as follows :

" ' Every man is entitled if he can to order his affairs so that the tax attaching under the appropriate Acts is less than it otherwise would be,' tell us little or nothing as to what methods of ordering one's affairs will be recognised by the courts as effective to lessen the tax that would attach to them if business transactions were conducted in a straightforward way." (page 156 of 154 ITR)

There has been a significant departure from that dictum. Chinnappa Reddy J. observed that " the ghost of Westminster (in the words of Lord Roskill) had been exorcised in England ". His Lordship posed a question should it be allowed to rear its head in India ? In my view, courts and tribunals should redefine their approach to the problem of evasion of taxes by the assessees. We should not go by loose principles so that the courts thwart the endeavour of Parliament to check evasion of taxes. I find no justification for the assessee in the instant case not to produce, the original sale deed or certified copy thereof. That would have thrown open the lid in regard to the conduct of the assessee. The correct and proper attitude of courts is the one laid down by Chinnappa Reddy J. in the following terms :

" We think that the time has come for us to depart from the Westminster principle as emphatically as the British Courts have done and to dissociate ourselves from the observations of Shah J. and similar observations made elsewhere. The evil consequences of tax avoidance are manifold. First, there is substantial loss of much needed public revenue, particularly in a welfare State like ours. Next, there is the serious disturbance caused to the economy of the country by the piling tip of mountains of blackmoney directly causing inflation. Then there is 'the large hidden loss' to the community (as pointed out by Master Sheatcroft in 18 Modern Law Review 209) by some of the best brains in the country being involved in the perpetual war waged between the tax-avoider and his expert team of advisers, lawyers and accountants on the one side and the tax-gatherer and his perhaps not so skilful advisers on the other side. Then again there is the 'sense of injustice and inequality which tax avoidance arouses in the breasts of those who are unwilling or unable to profit by it'. Last, but not the least is the ethics (to be precise, the lack of it) of transferring the burden of tax liability to the shoulders of the guideless, good citizens from those of the 'artful dodgers'. It may, indeed, be difficult for lesser mortals to attain the state of mind of Mr. justice Holmes, who said, 'Taxes are what we pay for a civilized society. I like to pay taxes. With them I buy civilization'. But, surely, it is high time for the judiciary in India too to part its ways from the principle of Westminster and the alluring logic of tax avoidance. 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 a 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."

I must bow with respect to the observations of Chinnappa Reddy J. in regard to the attitude of courts. Members of the Income-tax Appellate Tribunal would do well to read the decision in McDowell and Co. Ltd.'s case [1985] 154 ITR 148 (SC) and appreciate and follow the principles enunciated therein. In the instant case, I have not the least doubt that the failure to produce the original deed or details of the land sold by the assessee was intended to conceal the capital gain earned by the assessee.

The Tribunal cancelled the order of penalty on account of concealment of capital gain of Rs. 3,369 for two reasons. The first reason was that no penalty can be levied on the basis of estimated calculation. The second reason was that the penalty not having been imposed under the Explanation, the Revenue could not take the advantage of the Explanation for showing that there had been concealment of income. I have stated earlier that I seriously contest the bald proposition that no penalty can be levied where the assessment has been made on the basis of estimate. Assessment by estimate is one of the known processes in the taxation world. Where the assessee conceals relevant material/evidence, the Revenue has no option but to make a best judgment by estimate. An assessment by estimate is as much legal as any other assessment. Once an assessment has been done, whether it is a best judgment assessment or otherwise, the figure assessed must be held to be the income of the assessee. 1 do not see why such an assessment cannot invite penalty in its trial.

Learned counsel for the assessee placed reliance upon Dr. (Mrs.) K. D. .Arora v. CIT [1986] 162 ITR 481 (Pat), a decision rendered by me in which I had observed as follows (p. 490):

" I am, therefore, definitely of the view that even if an assessment has been done by estimate, penalty cannot be deleted merely on the score of assessment by estimate. But I should make it clear that it is not intended to be conveyed that in every case of estimated assessment specially in the case of investment over construction of buildings, penalty must be imposed. If the difference is marginal between the returned investment and the assessment so that it may be said that there is scope for honest difference of opinion, that will not be a case for imposition of penalty. If the difference is minimal, the assessee may well say that the circumstances point in the direction of honest mistake or miscalculation. "

The decision relied upon by learned counsel for the assessee is really against him. I had observed in unambiguous terms that even if an assessment had been done by estimate, penalty cannot be deleted merely on the scope of assessment by estimate. I would once again reiterate and approve that view, supported as it is by the decision of the Allahabad High Court in CIT v, Kedar Nath Ram Nath [1977] 106 ITR 172 and of the Madras High Court in A. K. Bashu Sahib v. CIT [1977] 108 ITR 736. In CIT v. Swarup Cold Storage and General Mills [1982] 136 ITR 435 (All), it was contended before a Bench of the Allahabad High Court that no penalty could be levied in respect of estimated income. The contention was squarely rejected at page 439 in the following terms :

" Even if the difference between the income returned and that assessed has been due to an estimate, the applicability of the Explanation will not be affected. "

Learned counsel for the assessee also placed reliance on CIT v. Patna Timber Works [1977] 106 ITR 452. 1 had distinguished that case in the case of Dr. (Mrs.) K. D. Arora v. CIT [1986] 162 ITR 481 (Pat) and once again observed that learned counsel for the assessee did not correctly appreciate the ratio of the decision in CIT v. Patna Timber Works [1977] 106 ITR 452 (Pat). In that case, their Lordships held that the reasons for enhancing the assessment were non est. That was the basis on which the High Court held that no penalty could be imposed. In the instant case, the situation is different. The assessee did not produce necessary materials in regard to capital gains which were in his possession to dislodge the view of the Income-tax Officer or the Inspecting Assistant Commissioner. In my view, the assessee was seriously remiss in this behalf. Having left the Income-tax Officer and the Inspecting Assistant Commissioner to estimate it themselves, it does not lie in the mouth of the assessee to contend that where the assessment had been done by estimate, no penalty is leviable.

The Tribunal has observed in paragraph 5 that " unless a penalty is imposed under the Explanation, the Explanation cannot be considered at the appellate stage ". I have failed to appreciate this observation. No penalty has ever been imposed under the Explanation. The Explanation to section 271(1)(c) is only a rule of evidence and not a substantive law (See CIT v. Nathulal Agarwala and Sons [1985] 153 ITR 292 (Pat) [FB] at page 302). It is not surprising that the Tribunal had not understood the true implication of the Explanation. Whenever there is concealment or inaccurate particulars furnished by an assessee, it calls for imposition of penalty. The proof of concealment or furnishing of inaccurate particulars is to be tested with the help of the Explanation which raises a presumption of concealment. Once there is a difference of more than 20% between the assessed income and the returned income, a presumption of concealment arises. That presumption is rebuttable. Once the presumption has been rebutted, the Explanation loses its force. Thus, it is not sound proposition to state that penalty has been or has not been imposed under the Explanation. The Explanation being a rule of evidence, it must be made applicable at every relevant stage. A Full Bench of this court to which I also was a party considered the implication of the Explanation. The decision of the Full Bench in CIT v. Nathulal .Agarwala and Sons [1985] 153 ITR 292 (Pat) laid down that the onus to discharge the presumption raised by the Explanation was on the assessee and it was for him to prove that the difference did not arise from fraud or wilful neglect on his part. The courts should come to a clear conclusion whether the assessee bad discharged the onus to rebut the presumption against him. The Full Bench decision received unequivocal approval of the Supreme Court in CIT v. Mussadilal Ram Bharose [1987] 165 ITR 14. In the backdrop of these decisions of this court and of the Supreme Court, the decision in CIT v. Nav Bharat Automobiles [1976] 102 ITR 278 (All) loses all significance.

Learned counsel for the assessee placed reliance on CIT v. G. L. Textiles [1977] 109 ITR 37 (All) in support of the proposition that where penalty has not been levied with the aid of the Explanation, the penalty cannot be sustained later on the basis of the Explanation. I regret, have some difficulty in accepting the correctness of the Allahabad High Court decision in this behalf.

On the question of fact, the Tribunal found as follows:

" Under the circumstances, we hold that the appeal has to be decided on the basis whether deliberate concealment has been proved. Under the circumstances, we hold that the assessee cannot be said to be guilty of concealment of the amount of Rs. 3,369 and so no penalty under section 271(1)(c) of the said Act can be imposed relating to this amount."

The finding thus is that there was no deliberate concealment. The view of the Tribunal is that in order to levy penalty, the concealment of income must have been deliberate. Concealment is always deliberate. If it were not deliberate, it would amount to a mistake which in the legal system is always condoned. Where, however, the Explanation comes into play (i.e., where the assessed income exceeds the returned income by 20 per cent. or more), there is a presumption that there has been concealment. Since concealment is always deliberate, it would be wrong to say that there was no deliberate concealment. In every case falling within the mischief of the Explanation, a presumption of deliberate concealment must be raised and the taxing authorities are bound by law to hold accordingly. That presumption has to be rebutted by the assessee. If it is not rebutted by cogent materials, the presumption must be that it was deliberate concealment. Let us see what the Tribunal found the assessee had shown and in what manner the presumption had been rebutted. perusal of paragraph 5 of the order of the Tribunal does not show that the assessee produced any material to rebut that presumption. In that view of the matter, the conclusion of the Tribunal that there had been no deliberate concealment was erroneous in law. The penalty could not have been set aside on that basis. The presumption not having been rebutted, the penalty had to follow.

Learned counsel for the assessee submitted before us that the Tribunal having found true the explanation of the assessee in regard to the cash credit of Rs. 16,000, the Explanation would cease to be applicable. That having become inapplicable, the approach of the Tribunal in regard to concealment of capital gain was invulnerable. I regret, I have some difficulty in accepting this statement. In order to appreciate whether the Explanation would govern the case or not, we have to turn back to the date when the penalty proceeding was initiated. On that day, there was a difference of 20%. The initiation of the penalty proceeding being valid, the facts have to be tested in the backdrop of the rule propounded by the Explanation. I have observed earlier that it was unfortunate that the Tribunal disposed of the appeal against imposition of penalty when it knew that the assessment proceeding had not concluded. It was aware of the fact that the Tribunal hearing the assessment matter had remanded the case for reconsideration of the explanation of the assessee in regard to Rs. 16,000. The order of the Tribunal gives an impression that it was determined to knock off the penalty. Since we are not a court of appeal, but only an advisory body, it is not open to us to set aside or reverse the finding of the Tribunal in regard to the cash credit of Rs. 16,000. The Tribunal having found that the assessee had placed probable defence, this court is bound hand and foot to accept that finding whatever the impropriety may have been. The knocking off of the penalty on account of the cash credit of Rs. 16,000 cannot affect the question of penalty in regard to the capital gains of Rs. 3,369. In that view of the matter, I am of the view that the Tribunal was not right in setting aside the penalty on that score.

We are now left with the third item on account of which penalty was levied upon the assessee. That relates to concealment of Rs. 1,010. The assessee had received annuity of Rs. 1,476. The assessee held an annuity bond. He encashed it on its maturing. The maturity value was Rs. 1,476. The assessee returned Rs. 466 as the amount received from the annuity bond. The Inspecting Assistant Commissioner held that the assessee must be knowing full well that he had received Rs. 1,476 and not Rs. 466. The payment must have been made to the assessee by a crossed cheque. Surprisingly, although not suggested by the assessee, the Tribunal held that it was a case of misunderstanding. The assessee did not plead any misunderstanding nor was the nature of the misunderstanding spelt out either by the assessee or by the Tribunal and yet the Tribunal set aside the penalty on the footing that there was misunderstanding. Misunderstanding is a state of mind which must be tested in the background of facts. Misunderstanding does not drop from the heavens. A person who receives an amount by cheque or payment order, but returns lesser figure must be held to have deliberately concealed it. A lawyer receiving his fees by cheque for Rs. 10,000, if he returns only Rs. 2,000 as having been received from the client, the inference is inescapable that there has been concealment. That would fall squarely in the category of section 271(1)(c). It will fulfil the requirement not only of furnishing an inaccurate amount but also of concealment.

Learned counsel for the assessee submitted that the Tribunal had held that the assessee had returned an income of Rs. 466 only under some misunderstanding. That, according to learned counsel for the assessee, was a finding of fact which could not be interfered with or tinkered by this court.. It was submitted that the Revenue had not challenged that finding of fact as being without any material and, therefore, the cancellation of penalty on that score must be upheld. I regret, with great respect, cannot accede to this submission. Whether there was any scope for misunderstanding or not and whether the penalty could be set aside on that score fell within the larger question whether the cancellation of penalty was justified. The question referred took in its sweep a challenge to the entire gamut of finding of fact of the Tribunal. The conclusion of the Tribunal that Rs. 466 only was returned by a misunderstanding was, to say the least, without any basis. There is nothing on the entire record to give any scope for the finding that there was any misunderstanding. The Revenue should have succeeded hands down on this issue against the assessee. This was a clear case of concealment of income. Parliament has made the law stringent in regard to levy of penalty. It was not given to the Tribunal to render it a dead letter by some implicit sympathy for the assessee. Tax dodgers cannot be treated like this. If the assessee had not returned any part of the sum received as annuity, it may have well been argued that it was left out by some mistake. But having returned a sum of Rs. 466 when it had, in fact, received Rs. 1,476, is rather inexplicable.

For all the reasons stated above, I am of the view that the Tribunal was right in law in cancelling the penalty on account of concealment of Rs. 16,000, but it was not right in cancelling the penalty on account of concealment of Rs. 3,369 relating to capital gains on sale of agricultural land and Rs. 1,010 on account of receipt of annuity bond. The reference is thus answered as indicated above, partly in favour of the Revenue and partly in favour of the assessee. In the special circumstances of the case, there shall be no order as to costs.

B. N. AGRAWAL J.-I agree.

 

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