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Karnataka High Court has given a vast judgment on the scope of the provisions of section 271 of the Income Tax Act, 1961. One of the issue before the Court was the scope of the word “concealment” as per penalty provisions u/s 271(1)(c) for concealment of income or furnishing inaccurate particulars of income.

Case Details:
ITA-2564, 2565/2005
1. CIT,  2. ITO (Appellant) vs M/s Manjunatha Cotton and Ginning Factory (Respondent)
Date of Judgment: 13-12-2012

Court’s Observations:
The Court deliberated on the various aspects of the section in quite details. The Court ruled that though Mens rea is not an essential element for imposing penalty for breach of civil obligations or liabilities, evasion of tax is the sine qua non for imposition of penalty. The observation of the Court on the word concealment as occurring in the section was as under:

CONCEALMENT

34. The word ‘conceal’ means to hide, to keep secret. The phrase ‘conceal the particulars of his income’ would include false deduction or exemptions claimed by the assessee in his return. The word ‘conceal’ involves a knowledge on the part of the assessee of the real income when giving the particulars. Concealment might arise even if the statement as to the income is a guarded one, as, for example, the enquiry should be made to ascertain the correct income. Concealment of income may arise in various ways. It may take various forms of manipulation of entries in accounts, non-disclosure of items of source that existed and income that has clearly been earned by the assessee in the previous year, claim of false deductions or losses, suppression of sales, camouflage of income as loans taken from third parties and claim of interest thereon as deduction, giving a colour of agricultural income to the otherwise taxable income, and unexplained investments that can be clearly attributed to concealed income. However, mere addition or estimates made on mere suspicion that there is something wrong with the book entries or their incompleteness, inadvertent omissions, debatable additions or disallowances, cash credits or investments not accepted as genuine, and rejection of a claim of expenses may not be themselves justify a penalty. The finding in assessment proceedings can be rebutted in the penalty proceedings to even demonstrate that the amount taxed was not income, or it has been taxed in the wrong year.

35. The condition precedent for inference of concealment of income is the intention to conceal income.

This part of the clause earlier contained an adverbial prefix ‘deliberately’. The word ‘deliberately’ in the above phrase was dropped by the Finance Act, 1964, with effect from 1 April, 1964. So, the element of mens rea was sought to be excluded from 1 April, 1964. However, notwithstanding the absence of the qualifying word ‘deliberately’ the furnishing of inaccurate particulars also has to be conscious and so a deliberate act, which is involved in the very expression ‘concealed’. The Apex Court in the case of RELIANCE PETRO PRODUCTS reported in 322 ITR 165 has explained the meaning of the words, ‘furnish inaccurate particulars of income’. It is stated that reading the words in conjunction, they must mean the details supplied in the return which are not accurate, nor exact or correct, not according to truth or erroneous. When an item has not been shown at all, it would fall in the limb of concealment and an item which has been shown in the return but wrongly, would come under the limb of furnishing inaccurate particulars of income. Yet, broadly speaking, the effect of the amendment which has to be read along with the Explanation that was inserted by the Finance Act, 1964 has been that it is no longer necessary to establish that the assessee had deliberately concealed the particulars of his income or furnished inaccurate particulars of such income.

It is sufficient to show that the furnishing of inaccurate particulars is the result of gross or wilful neglect. The expression ‘particulars of such income’ to cover a case where a false explanation is given as to the source of income. The word ‘income’ in clause (c) refers to positive income only.

Evasion of tax is the sine qua non for imposition of penalty. If there is no taxable income or tax assessed for payment during a particular year, the question of evasion and consequently penalty does not arise.

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Karnataka HC-Mens Rea is not Essential Element but Tax Evasion is the Sine Qua Non for Imposition of Penalty u/s 271(1)(c) for Concealment of Income | 29-08-2015 |