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Karnataka High Court has given a detailed judgment on the scope of the provisions of section 271 of the Income Tax Act, 1961. One of the issue before the Court was related to penalty 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 the penalty u/s 271(1)(c) is not automatic and existence of the conditions prescribed is a must for the imposition of the penalty. The detailed observation of the Court was as under:

NOT AUTOMATIC
36. The levy of penalty is not a matter of course. It has to be found that the assessee concealed any income. Where there is no concealment, or no material for concealment, no penalty can be imposed. But where the assessee has concealed income, any subsequent act of voluntary disclosure would not affect the imposition of penalty. The mere addition to the taxable income would not automatically lead to an order of penalty. Further, the levy of penalty is not an automatic concomitant of the assessment. Therefore, safeguards have been provided for in the Act itself to see that penalties are levied only in appropriate cases. The Apex Court in the case of SURESHCHANDRA MITTAL reported in 251 ITR 9, held that higher income offered after search would not lead to levy of penalty automatically. The Apex Court in the case of DILIP SHROFF reported in 291 ITR 529, at Page 547 at para 62 has observed that finding in assessment proceedings cannot automatically be adopted in penalty proceedings and the authorities have to consider the matter afresh from different angle. This Court in the case of VASANTH K HANDIGUND reported in 327 ITR 233, has held that when addition has been accepted to buy peace and avoid litigation and the explanation was found reasonable by the appellate authorities the cancellation of penalty was justified. This Court in the case of BHADRA ADVANCING PVT LIMITED reported in 210 CTR 447, held that merely because the assessee has filed a revised return and withdraw some claim of depreciation penalty is not leviable. The additions in assessment proceedings will not automatically lead to inference of levying penalty. This Court in the case of GUJAMGADI reported in 290 ITR 168, has held that every addition to income by the Income Tax Officer will not automatically attract levy of penalty. Similar view has also been taken by this Court in the case of BALAJI VEGETABLE PRODUCTS PRIVATE LIMITED reported in 290 ITR 173. The facts of the addition has to be looked into and the conduct of the assessee may also be taken into consideration. Merely because addition has been accepted and taxes paid along with interest should mitigate the attitude of the Assessing Officer in not levying penalty rather than levy of penalty. The Punjab and Haryana High Court in the case of SURAJ BHAN reported in 294 ITR 481, has held that when an assessee files revised return showing higher income penalty cannot be imposed merely on account of the higher income. There is no deeming fiction for survey similar to explanation 5 or 5A which are in respect of search action only. There is no deeming fiction for higher income declared during survey and the assessing authorities cannot levy penalty automatically in case of survey cases where higher income is declared after survey. The Punjab and Haryana High Court in the case of HUKUMCHAND HARI PRAKASH reported in 72 CTR 271, has held that additional income offered after survey cannot lead to imposition of penalty. In cases where the assessee have accepted the view of the department and have either filed revised return or letters accepting the addition and offered the additional income to tax and have not filed appeal or revision, the Assessing Officers are duty bound in law to take these factors and also the facts leading to addition and use the discretion vested in them in the main provision of the Section.

37. It was contended that for imposing penalty under Section 271 (1)(c) of the Act, mens rea is not the requirement. Therefore, once the aforesaid conditions mentioned in the aforesaid provision is satisfied, the imposition of penalty is automatic. There is no discretion left with the authorities in the matter of imposing penalty. In support of the said contention, the revenue relied on the judgment of the Apex Court in the case of UNION OF INDIA VS. DHARMENDRA TEXTILES PROCESSORS & OTHERS reported in (2008) 306 ITR 277 (SC) .

38. The Supreme Court in the case of GUJARAT TRAVANCORE AGENCY V. CIT [1989] 3 SCC 52, at page 55, paragraph 4 held as under:

“…..It is sufficient for us to refer to section 271(1)(a), which provides that a penalty may be imposed if the Income-tax Officer is satisfied that any person has without reasonable cause failed to furnish the return of total income, and to section 276C which provides that if a person wilfully fails to furnish in due time the return of income required under section 139(1), he shall be punishable with rigorous imprisonment for a term which may extend to one year or with fine. It is clear that in the former case what is intended is a civil obligation while in the latter what is imposed is a criminal sentence. There can be no dispute that having regard to the provisions of section 276C, which speaks of wilful failure on the part of the defaulter and taking into consideration the nature of the penalty, which is punitive, no sentence can be imposed under that provision unless the element of mens rea is established. In most cases of criminal liability, the intention of the Legislature is that the penalty should serve as a deterrent. The creation of an offence by statute proceeds on the assumption that society suffers injury by the act or omission of the defaulter and that a deterrent must be imposed to discourage the repetition of the offence. In the case of proceeding under Section 27(1)(a), however, it seems that the intention of the legislature is to emphasise the fact of loss of revenue and to provide a remedy for such loss, although no doubt an element of coercion is present in the penalty. In this connection the terms in which the penalty falls to be measured is significant. Unless there is something in the language of the statute indicating the need to establish the element of means 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 means rea must be proved before penalty can be levied under that provision…...”

39. Following the said judgment and other cases the Apex Court in the aforesaid Dharmendra’s case summarised the principles as under:-

(a) Mens rea is an essential or sine qua non for criminal offence.

(b) A straitjacket formula of mens sea cannot be blindly followed in each and every case. The scheme of a particular statute may be diluted in a given case.

(c) If, from the scheme, object and words used in the statute, it appears that the proceedings for imposition of the penalty are adjudicatory in nature in nature, in contradiction to criminal or quasi-criminal proceedings, the determination is of the breach of the civil obligation by the offender. The word ‘penalty’ by its will not be determinative to conclude the nature of proceedings being criminal or quasi-criminal. The relevant considerations being the nature of the functions being discharged by the authority and the determination of the liability of the contravener and the deliquency.

(d) Mens rea is not essential element for imposing penalty for breach of civil obligations or liabilities.

It further held that :

“It is significance to note that the conceptual and contextual difference between section 271(1)(c) and section 276C of the Income-tax Act was lost sight of in Dilip N. Shroff’s case (2007) 8 Scale 304 (SC).”

The Explanations appended to section 272(1)(c) of the Income Tax Act entirely indicate the element of strict liability on the assessee for concealment or for giving inaccurate particulars while filing the return. The judgment in Dilip N. Shroff’s case (2007) 8 Scale 304 (SC) has not considered the effect and relevance of section 276C of the Income-Tax Act. The object behind the enactment of section 271(1)(c) read with the Explanations indicates that the said section has been enacted to  provide for a remedy for loss of revenue. The penalty under that provision is a civil liability. Wilful concealment is not an essential ingredient for attracting civil liability as is the case in the matter of prosecution under Section 276C of the Income-Tax Act.”

……..Dilip N. Shroff’s case (2007) 8 Scale 304 (SC) was not correctly decided but Chairman, SEBI’s case (2006) 5 SCC 361 has analysed the legal position in the correct perspectives. The reference is answered.”

40. In the Dharmendra’s case the apex Court was dealing with the penalty provisions contained in the Central Excise Act, 1944, Sec. 11AC. They have referred to penalty provision in the Income Tax Act 271(1) (c) . After referring to various judgments on the point rendered by both the Apex Court as well as various High Courts it was held that Mens Rea is not an essential element for imposing penalty for breach of civil obligations.......

41. In almost every case relating to penalty, judgment in Dharmendra’s case was referred to on behalf of the Revenue as i f it laid down that in every case of non payment or short payment of duty the penalty clause could automatically get attracted and the authority has no discretion in the matter. Therefore the Apex Court had an occasion to interpret the law laid down in Dharmendra’s case. After referring to the relevant portion of the Dharmendra’s case. This is what the Apex Court held in UNION OF INDIA VS. RAJASTHAN SPINNING & WEAVING MILLS reported in (2009) 224 CTR (SC) 1 at paras 20, 21, 23 and 24 as under:

.........

21. From the above, we fail to see how the decision in Dharmendra Textile (supra) can be said to hold that S. 11AC would apply to every case of non-payment or short payment of duty regardless of the conditions expressly mentioned in the section for its application.

43. From the aforesaid judgment of the Apex Court it is clear the decision in Dharmendra Textiles case is to be understood as a decision u/s 11AC of the Central Excise Act. Though Sec. 271(1)(c) of the Income Tax Act has been extensively quoted and some observations are made, it is not a decision where the interpretation of Sec. 271(1)(c) fell for consideration before the Court. Therefore in Rajasthan Spinning & Mil ls case, the Supreme Court has categorically held at para no. 24 that the decision in Dharmendra Textile’s case is only in so far as Sec. 11AC of Central Excise Act is concerned.

45. Following the said judgment it was held that it goes without saying that for the applicability of Section 271(1) (c) conditions stated therein must exist.

46. In a recent judgment the Supreme Court after referring to the aforesaid Judgments in the case of COMMISSIONER OF INCOME TAX VS. RELIANCE PETROPRODUCTS PVT. LTD., reported in (2010) 322 ITR 158 (SC) held as under:

“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 it 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. Joint 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)(c) 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 Assessing Officer 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. Joint CIT’ was upset in Union of India V. Dharmendra Textile Processors’, 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  or giving inaccurate particulars while filing return, there was no necessity of mens rea. The court went on to hold tht the objective behind the 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. Joint CIT was overruled by this Court in Union of India V. Dharmendra Textile Processors, 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 the case of Dilip N. Sharoff V. Joint CIT. However, it must be pointed out that in Union of India v. Dharmendra Textile Processors, no fault was found with the reasoning in the decision in Dilip N. Shroff v. Joint CIT, where the Court explained the meaning of the terms “conceal” and “inaccurate”. It was only the ultimate inference in Dilip N. Shroff v. Joint CIT to the effect that mens rea was an essential ingredient for the pentlay under section 271(1)(c) that the decision in Dilip N. Shroff v. Joint CIT 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; nor 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……..”

47. The object behind the enactment of section 271(1)(c) read with the Explanations indicates that the said section has been enacted to provide for a remedy for loss of revenue. The penalty under that provision is a civil liability. Wilful concealment is not an essential ingredient for attracting civil liability as is the case in the matter of prosecution under Section 276C of the Income-Tax Act. The word ‘penalty’ by its nature will not be determinative to conclude the nature of proceedings being criminal or quasicriminal. That the intention of the legislature is to emphasise the fact of loss of revenue and to provide a remedy for such loss, although no doubt an element of coercion is present in the penalty. There is nothing in section 271(1)(a) which requires that mens rea must be proved before penalty can be levied under that provision. Mens rea is an essential or sine qua non for criminal offence. Mens rea is not essential element for imposing penalty for breach of civil obligations or liabilities. It was only on the point of mens rea that the judgment in Dilip N. Shroff V. Joint CIT’ was upset in Union of India V. Dharmendra Textile Processors. It was only the ultimate inference in Dilip N. Shroff v. Joint CIT 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. Joint CIT was overruled. For the appl icabil ity of Section 271(1)(c) conditions stated therein must exist. Therefore, it is obvious that it must be shown that the conditions under section 271(1)(c) exist before the penalty is imposed.

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Karnataka HC-Penalty for Concealment or Furnishing Inaccurate Income Particulars is not Automatic and Conditions Prescribed u/s 271(1)(c) must be Satisfied | 29-08-2015 |

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