2007 (5) TMI 199 - SC - Income Tax

Penalty under section 271(1)(c) not applicable when conditions not met, assessee's appeal allowed

T Ashok Pai Versus Commissioner of Income-Tax

The SC allowed the assessee's appeal regarding penalty under section 271(1)(c). The Court held that the Tribunal was correct in determining that the ... Whether the Tribunal was right in holding that penalty under section 271(1)(c) was not exigible in the present case - It is not a case where penalty has been imposed for breach or contravention of a commercial statute where lack of intention to contravene or existence of bona fides may not be of much importance. It is also not a case where penalty is mandatorily imposable - appeal of assessee is allowed 1. ISSUES PRESENTED and CONSIDEREDThe core legal question considered by the Court was whether, on the facts and circumstances of the case, penalty under section 271(1)(c) of the Income-tax Act was exigible against the assessee for concealment of income or furnishing inaccurate particulars of income.2. ISSUE-WISE DETAILED ANALYSISIssue: Whether penalty under section 271(1)(c) is imposable for concealment of income or furnishing inaccurate particulars when a revised return was filed and accepted, and whether the assessee acted bona fide.Relevant legal framework and precedents: Section 271(1)(c) imposes penalty for concealment of income or furnishing inaccurate particulars. The term 'conceal' implies a deliberate act to hide or withhold knowledge from tax authorities, involving mens rea. The penalty provision is penal in nature and must be strictly construed. The burden lies on the Department to prove concealment or inaccuracy with a deliberate intention to evade tax. Explanation 1 to section 271(1)(c) shifts the burden of proof to the assessee to show bona fide action and full disclosure of material facts. The Court referred to several precedents including CIT v. Mukundray K. Shah, K. Ravindranathan Nair v. CIT, Century Flour Mills Ltd. v. CIT, Addl. CIT v. Jeevan Lal Sah, K. C. Builders v. Asst. CIT, and Virtual Soft Systems Ltd. v. CIT, which emphasize the requirement of mens rea, the distinction between concealment and mere omission or negligence, and the necessity of a finding of fact that the assessee acted deliberately.Court's interpretation and reasoning: The Court noted that concealment involves a deliberate act or omission to hide income. Mere omission or negligence does not amount to concealment or furnishing inaccurate particulars. The acceptance of a revised return by the Department is significant and suggests absence of concealment. The Court emphasized that penalty proceedings are quasi-criminal and require a higher standard of proof than assessment proceedings. The Tribunal had found that the assessee acted bona fide, relying on professional advice from the Syndicate Bank's Law Agency Division, which prepared and filed the returns. The Court held that such bona fide reliance negates mens rea necessary for penalty under section 271(1)(c).Key evidence and findings: The assessee, an engineering graduate with multiple sources of income, had authorized the Syndicate Bank by power of attorney to manage his shares and tax filings. The original return was filed late and was unsatisfactory to the Department, leading to a revised return with full particulars. The Settlement Commission rejected an application for settlement of tax dues. The revised return was accepted by the Assessing Officer. The Tribunal found no deliberate concealment, attributing any fault to the tax counsel (the bank), who acted without mala fide intent. The High Court, however, held the assessee responsible for the acts of the agent and disbelieved the bona fide claim, emphasizing the assessee's responsibility for signing the returns.Application of law to facts: The Court analyzed the distinction between the High Court's approach and the Tribunal's findings. It reaffirmed that the High Court should not ordinarily interfere with findings of fact by the Tribunal unless such findings are perverse. Since the question of mens rea is factual, the Tribunal's finding of bona fide conduct and absence of deliberate concealment was binding. The Court reiterated that penalty under section 271(1)(c) cannot be imposed merely because of mistakes or omissions unless deliberate concealment is proved. The acceptance of the revised return and the lack of evidence of mala fide intent supported the Tribunal's conclusion.Treatment of competing arguments: The Revenue argued that the Assessing Officer and Commissioner found deliberate concealment, and the Tribunal erred in overturning these findings. The assessee contended that the Tribunal's factual findings of bona fide conduct and absence of mens rea should not be disturbed. The Court held that the High Court's interference with the Tribunal's factual findings was erroneous, especially since no question of perversity was referred. The Court emphasized the need for strict construction of penal provisions and the importance of mens rea in imposing penalty.Conclusions: The Court concluded that the penalty under section 271(1)(c) was not exigible as the assessee acted bona fide, relying on professional advice, and there was no deliberate concealment or furnishing of inaccurate particulars. The High Court's judgment was set aside, and the appeal allowed.3. SIGNIFICANT HOLDINGS'The expression 'conceal' is of great importance. ... The offence of concealment is, thus, a direct attempt to hide an item of income or a portion thereof from the knowledge of the income-tax authorities.''Concealment of income and furnishing of inaccurate particulars carry different connotations. Concealment refers to a deliberate act on the part of the assessee. A mere omission or negligence would not constitute a deliberate act of suppressio veri or suggestio falsi.''It is trite that if an explanation given by the assessee with regard to the mistake committed by him has been treated to be bona fide and it has been found as of fact that he had acted on the basis of wrong legal advice, the question of his failure to discharge his burden in terms of the Explanation appended to section 271(1)(c) of the Income-tax Act would not arise.''The order imposing penalty is quasi-criminal in nature and, thus, the burden lies on the Department to establish that the assessee had concealed his income.''Section 271(1)(c) remains a penal statute. The rule of strict construction shall apply thereto.''The Tribunal having arrived at a finding of fact that the appellant was not guilty of deliberate concealment of his income and thus, having no mens rea in this behalf, the impugned judgment cannot be sustained.'Core principles established include: the necessity of mens rea (deliberate concealment or furnishing inaccurate particulars) for imposition of penalty under section 271(1)(c); the importance of bona fide reliance on professional advice negating mens rea; the distinction between mere omission or negligence and deliberate concealment; the strict construction of penal provisions; and the limited scope of appellate courts to interfere with factual findings of the Tribunal unless perverse.Final determinations: The Court allowed the appeal, set aside the High Court's judgment, and held that penalty under section 271(1)(c) was not exigible in the facts and circumstances of the case, given the bona fide conduct of the assessee and absence of deliberate concealment.