TMI Blog1997 (9) TMI 168X X X X Extracts X X X X X X X X Extracts X X X X ..... from ice estimated: 5,000 ----------------- 1,82,929 ----------------- 3. The accounts of the assessee were audited. Total receipts from cold storage were shown at Rs. 85,788, which was a steep decline compared to receipts of Rs. 2,69,074 in the immediately preceding assessment order. It was explained that the season for storage of potato starts from last week of February every year and in this year a large number of customers came in May 1986 because the purchase of potato itself was late. The Assessing officer did not find the explanation to be satisfactory. He found that expenses like power and fuel increased to Rs. 94,899 as against Rs. 69,209 in the preceding year. Further, the auditor in the audit report itself had mentioned that there was storage to the extent of 5,960 qtls. whereas the assessee had shown storage of 3,063.87 qtls. only. Another case of M/s. Motipur Cold Storage had shown tremendous increase of receipts in this year compared to the preceding year. The Assessing Officer held that the storage was actually 5,960 qtls. as per Audit Report and this led to an addition of Rs. 71,092 to the Cold Storage receipts. 4. The Assessing Officer further noticed tha ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... examined on the basis of 1985 season and 1986 season, it would have been found that there was no substantial fall in cold storage. The following figures were given in support of the contention : Storage and rent during the 1985 and 1986 season : Storage (Q. Kg.) Rent Season 1985 : Up to 31-3-1985 : 7,665.37 2,14,630 = 36 From 1-4-1985 : 1,236.95 34,634 = 60 Season 1986 : Up to 31-3-1986 : 1,826.92 31,153 = 76 From 1-4-1936 : 4,327.52 1,21,170 = 56. 10. It was further explained that if financial year was taken as a unit, then there would appear to be a decline in storage and rent as following figures will show, which were really derived from the earlier figures : Storage and rent during the asstt. Yr. 1986-87 : (1-4-1985 to 31-3-1986) Qt. Rs. 1,236.95 34,634 = 60 1,826.92 51,153 = 76 3,063.87 85,788 = 36. 11. It was next submitted that M/s Motipur Cold Storage was not a comparable case, since it had a storage capacity of 40,000 qtl. whereas the capacity of the assessee-company was 10,000 qtls. only. Further, payment of electricity bill was no measure for storage because expenditure under this head was shown as and when bills were received. 12. It was f ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e Financial Corporation, and the material collected behind the assessee's back, in course of penalty proceedings, could not be utilised against the assessee. It was further submitted that no such half-yearly demand notices had been served on the assessee by the Bihar State Financial Corporation. 19. In the end, a legal objection was also raised before the CIT (Appeals). It was stated that there was no tax sought to be evaded, since the assessment had resulted in a loss and, therefore, penalty could not be levied under section 271(1)(c). Such penalty could be levied only if there was a positive income in the completion of the assessment. Reliance was placed on the decision of the Punjab Haryana High Court in CIT v. Prithipal Singh Co. [1990] 183 ITR 69 and the decision of the Madras High Court in CIT v. C.R. Niranjan [1991] 187 ITR 280. 20. After stating the facts and the arguments before him, the CIT(Appeals) cancelled the penalty after a very brief observation which is reproduced below: "8. I have carefully considered the above submissions. Considering the totality of the facts and the legal provisions as discussed above I am of the opinion that this is not a fit case fo ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... only when the changes in law relating to levy of penalty from time to time are noticed. The decisions of various courts should then be related to the law as it existed at the relevant time. A chart giving a comparative account of the changes right from section 28(1)(c) of the Indian Income-tax Act, 1922 to section 271(1)(c) of the Income-tax Act, 1961 has been given, pointing out the law prior to 1-4-1968, the law from 1-4-1968 to 31-3-1976 and the law from 1-4-1976. We are concerned here with the law from 1-4-1976 when sub-clause (iii) of section 271(1) stood amended as under : "(iii) in the cases referred to in clause (c), in addition to any tax payable by him, a sum which shall not be less than, but which shall not exceed twice, the amount of tax sought to be evaded by reason of the concealment of particulars of his income or the furnishing of inaccurate particulars of such income." Simultaneously w.e.f. 1-4-1976, the measure of penalty became "Tax sought to be evaded" and this phrase was defined by clause (a) of Explanation 4 below section 271(1)(c) of the Act as under : "Explanation 4: For the purposes of clause (iii) of this sub-section, the expression 'the amount of ta ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nnings" was not confined to games of gambling nature or races and prizes or prizes received in car rally for testing skill and endurance. The question whether income would include "Loss" was not under consideration by the Hon'ble Supreme Court in this case. Therefore, it does not support the assessee. 27. Regarding the provisions of section 167A of the Act, no doubt, the interpretation will have to be done considering the totality of facts and circumstances. In the present case, before us, it is not merely a question of substituting the word "Income" by the word "Loss" but interpreting the provisions of Explanation 4(a) below section 271(1)(c) of the Act. In view of above, we concur with the decision of the Bombay Bench of the Tribunal in the case of Laxmichand Bhagaji and hold accordingly that the penalty is leviable in the present case even though the returned income and assessed income were both losses. The preliminary objection is, therefore, rejected. 28. We now come to the merits of the case. The ld. D.R. reiterated the earlier arguments and added that after the order of the CIT (Appeals), the Tribunal had confirmed the addition of Rs. 71,092 in the quantum appeal by the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n 1986 and not season 1985. A corrigendum issued by the auditor was also filed and has been noted by the CIT (Appeals) in the quantum appeal and also by the Assessing Officer in the penalty order. The reason for decline in receipts was also given and relevant figures have been reproduced above. It is true that the Explanation was not accepted and the addition was confirmed in quantum appeal by the Tribunal also yet the fact remains that the Explanation was bona fide and all facts relating to the same and material to the computation of the total income were disclosed. We, therefore, hold that no penalty is leviable with respect to this addition. 32. The situation, however, is different as regards the addition of Rs. 1,01,300 being arrears of interest relating to earlier years. The amount was claimed as a deduction in this year as a lump sum deduction against capital subsidy and it was nowhere disclosed that it related to earlier years. This fact was revealed only when the Assessing Officer sought clarification from Bihar State Financial Corporation after the directions of the CIT (Appeals) in quantum appeal. Thus the proviso below section 1(b) to section 271(1)(c) cannot come to t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rk, was not accepted. In the facts and circumstances, we hold that here also the assessee is saved by the proviso below Explanation 1(b) to section 271(1)(c) and no penalty is leviable with respect to this amount. 36. In the result, the Departmental appeal is partly allowed. Per Shri Abdul Razack, Judicial Member --- The order passed by my ld. Brother (AM) has been studied in conjunction with the decision of Bombay Bench 'B' of this Tribunal in the case of Laxmichand Bhagaji which has been authored by my ld. Brother being a party on the Bench with the ld. Judicial Member. 2. I have also studied the decision of the Amritsar Bench of this Tribunal in the case of Victory P.H.M. Transport Co. (P.) Ltd. v. ITO [1986] 17 ITD 857 (Asr.) and that of the Allahabad Bench of this Tribunal in the case of Omrao Industrial Corpn. (P.) Ltd. v. ITO [1990] 35 ITD 42 on the strength of which the decision in the case of Laxmichand Bhagaji was delivered. The Judgments of different High Courts and that of the Apex Court have also been carefully studied and examined by me keeping in mind the controversy raised in this appeal. Since copies of orders of Bombay and Ahmedabad Benches in the case of Mu ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ase of Prithipal Singh Co. and the decision of the Amritsar Bench in the case of Victory P. H.M. Transport Co. (P.) Ltd. and the other decisions of the Bombay Bench in the case of Mutual Plastics , 5 Star Galvanizers as well the decision of the Ahmedabad Bench in the case of Khedut Sahakari Khand Udyog Mandal Ltd. amply support the case of the assessee and the view which I am taking. My reasons are like this : 4. Return was filed by the assessee declaring loss of Rs. 7,92,517 and the assessment was completed computing the loss in a sum of Rs. 5,82,220 owing to certain disallowances aggregating to Rs. 1,82,929. No tax was, therefore, levied or demanded by the Assessing Officer (A.O.) as no income resulted on account of the disallowances. I am deliberately mentioning this because it is relevant for the purpose of my view. My ld. Brother as stated by me earlier has adopted the view taken in the case of Laxmichand Bhagaji and has come to the conclusion in this case also that, though the returned and assessed figure was loss; yet the assessee is liable for penalty as provided in section 271(1)(c) read with Explanation 4(a) to that provision of the IT Act, 1961. My view is that in su ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... "in addition to any tax payable by him" a sum which shall not be less than, but which shall not exceed twice the amount of tax sought to be evaded by the reason of the concealment of particulars of such income or the furnishing or inaccurate particulars of such income. 7. A bare reading of the provisions contained in section 271(1)(c) clearly shows that the Legislature intended to penalise assessee's as a deterent to tax evasion and the tax payable is considered as a base and a measure for imposition of penalty. If correctly understood sub-clause (iii) following sub-section (c) to section 271(1) clearly makes out that if no tax is payable by an assessee then no penalty can be levied on him. 8. According to my ld. Brother in the case of Laxmichand Bhagaji the Judgment of Punjab Haryana High Court in the case of Prithipal Singh Co. is not applicable because their Lordships in that case have not considered the law which was prevalent after 1-4-1976 when Explanation 4(a) was added to section 271(1)(c) of the Act. I am unable to agree with this view. It is by now a well settled proposition that an Explanation added or inserted by the Legislature to clarify the main effect of th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ectly be said that the Explanation 4, which is effective from 1-4-1976, is a substantive provision and, therefore, the Judgment of the Punjab Haryana High Court in the case of Prithipal Singh Co. is distinguishable or inapplicable to the facts of the case. 9. There is not a single provision under the entire Scheme of the IT Act casting an obligation upon a person to file a return where he has incurred or sustained loss during the previous year. The question then is, why countless assessees of all categories do file returns declaring loss incurred during the previous year and further scrupulously comply with the notices and requisitions issued by their respective Assessing Officer's from time to time laid down under different provisions of the Act. According to me such assessees file return of the loss sustained in a previous year in order to get it determined by the Assessing Officer in terms of section 80 of the Act so that he can get the benefit of such determined loss being set off from out of the income which he may earn in future coming years as per the provisions from sections 70 to 79(both inclusive) contained in Chapter VI of the Act. 10. Let me illustrate: Take the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ns which were referred by the Tribunal under section 256(1) and which I am extracting below for easy reference :--- "(1) Whether, on the facts and in the circumstances of the case, the Appellate Tribunal is right in law in holding: (a) that the provisions of the Explanation to section 271(1)(c) will not be attracted to the present case ? (b) that the word 'income occurring in clauses (c) and (iii) of section 271(1) refers to a positive income only and not to a loss? (2) Whether, on the facts and in the circumstances of the case, the Appellate Tribunal is right in law in cancelling the penalty order passed by the Inspecting Assistant Commissioner by holding that no penalty could be levied against the assessee?" While answering these questions their Lordships, though concerned with the assessment year 1970-71, were yet considering whether where the returned and assessed figure is loss penalty was still leviable. And in answering the referred questions their Lordships have read and considered the effect of Explanations 3 and 4 annexed to section 271(1)(c) of the Act. The observations are very pertinent and I also deem it useful to reproduce the same to support my view that t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nance and conformity with the intent, purpose, object and spirit of the entire scheme of an enactment as a whole and not in a piece-meal and truncated manner divorced from and in isolation with the main, basic and fundamental provisions of a statute or an enactment. I do not wish to discuss in detail here the various decisions of Courts in this regard and make my order lengthy and unweildy. It will be sufficient if a reference is made to the latest decision of the Kerala High Court in the ease of CWT v. Dominic Joseph [1992] 195 ITR 412 on which I could lay my hand. 15. I reiterate that the dominant, intent and purposes of enacting IT Act is to impose tax on income as defined in section 2(24) of the Act and not loss which cannot be described as income. Income means real income that is to say monetary gains which come in and which swell assessee's funds, capital, resources and boosts the economic prosperity of this country and not losses which in contradistinction to income, deplete funds, wealth and resources of citizens and ultimately Nation's prosperity. 16(a). According to my ld. Brother, the law relating to imposition of penalty for concealment of income or for furnishing i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... his order clearly shows that it has been introduced to define the phrase "tax sought to be evaded' which word is used in sub-clause (iii) of clause (c) of section 271(1) of the Act which has also been extracted by my ld. Brother at page 7 of his order. This Explanation 4(a) is not a substantive provision by itself or on its own. It does not fasten any penal liability upon an assessee. It merely explains and defines to avoid future disputes and controversies regarding the true meaning of the words 'tax sought to be evaded' which is contained in sub-clause (iii) of section 271(1)(c) of the Act. The Legislature could have defined this phrase anywhere in the definition section 2 of the Act. But the Legislature in its wisdom perhaps thought it fit and desirable to define these words near the penal provision itself. But that does not mean that by insertion of this Explanation 4(a) the law has changed from 1-4-1976 so as to deprive this assessee the benefit of the decisions discussed above. 17. If the Legislature intended that income include a loss for imposition of penalty under section 271(1)(c) of the Act then it could have easily done so by adding it in the main definition section 2 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... laid down therein vindicates the assessee's stand. The decision of the Supreme Court in the case of J.H. Gotla laying down that income would mean loss for the purposes of section 16(3) of the IT Act, 1922 which is analogous to section 64 of IT Act, 1961, also cannot be imported here because we are dealing with a penal provision which has to be construed strictly on the basis of the words, phrases and language used. Almost all Courts have unanimously laid down that penal proceedings being quasi-criminal in nature, the penal provisions should be strictly construed and there should not be any intendment or 'ifs' and 'buts' while, interpreting those provisions particularly in a fiscal statute like IT Act. The latest judgment of the Bombay High Court in the case of CIT v. P.M. Shah [1993] 203 ITR 792 and that of the Madras High Court in the case of TMT. Thangalakshmi v. ITO [1994] 205 ITR 176 can be usefully referred to in regard to this proposition. 20. The essence of my view is that if the definition, charging, machinery and penalising provisions all are properly synchronised, aligned, read, understood and applied correctly in a proper perspective, then this assessee surely cannot ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... TATEMENT FOR THIRD MEMBER REFERENCE AS PER SUB-SECTION (4) OF SECTION 255 OF THE IT ACT, 1961 As we have differed in our views in the above-mentioned IT. Appeal, we refer the below given point for the consideration of Third Member as provided in sub-section (4) of section 255 of the Act and request the Hon'ble President accordingly. Point for Preference : "Whether, in law and on the facts and in the circumstances of the case, relating to assessment year 1986-87, the assessee can be penalised under section 271(1)(c) read with Explanation 4(a) of the IT Act, 1961 for disallowance of expenditure amounting to Rs. 1,82,929 resulting in lesser loss of Rs. 5,88,220 being determined and assessed as against the returned loss of Rs. 7,92,517 THIRD MEMBER ORDER Under sub-section (4) of section 255 of the Income -tax Act, 1961 (hereinafter referred to as the 'Act' for brief), I have been nominated by the Hon'ble President of the 'Appellate Tribunal' to act as a Third Member due to dissent in the disposal of the aforesaid appeal by the learned Members who originally heard it. 2. The point for reference runs as under :--- "Whether, in law and on the facts and in the circumstances o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... to be evaded by reason of the concealment of particulars of his income or the furnishing of inaccurate particulars of such income." He also referred to the fact that simultaneously w.e.f. 1-4-1976 itself, the mode/measure of penalty was changed to "tax sought to be evaded", which phrase was defined by clause (a) of Explanation 4 appended below section 271(1)(c) of the Act. It runs as under : "Explanation 4: For the purposes of clause (iii) of this sub-section, the expression 'the amount of tax sought to be evaded' --- (a) in any case where the amount of income in respect of which particulars have been concealed or inaccurate particulars have been furnished exceeds the total income assessed, means the tax that would have been chargeable on the income in respect of which particulars have been concealed or inaccurate particulars have been furnished had such income been the total income;" Meeting the ratio of Prithipal Singh Co.'s case on which strong reliance was placed on behalf of the assessee, the learned Accountant Member observed that in that case, the assessment year involved was 1970-71 when Explanation 4 appended below section 271(1)(c), reproduced hereinbefore, had ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Court of Patna in the case of CIT v. Nathulal Agarwala Sons [1985] 153 ITR 292 /22 Taxman 199 (FB). 9. As against this, the learned counsel for the assessee submitted that the term 'income' always meant a positive figure and wherever loss was intended to be included in this term, it had been specifically said so by the Legislature as in sub-section (2) of section 64 of the Act. 10. I have given my utmost consideration to the facts and circumstances of the case. Without being repetitive and providing bulk to my opinion on the controversy, which has been elaborately dealt with by my learned Brothers in their own manner, I would straightaway refer to the fact that penalty under section 271(1)(c) is imposable on a person who has concealed the particulars of his income or furnished inaccurate particulars of such income. The scale of penalty is provided in sub-clause (iii) of sub-section (1) of section 271 of the IT Act. The base is "the amount of tax sought to be evaded" by reason of the concealment of particulars of the income or the furnishing of inaccurate particulars of such income. The real question for consideration is as to what would constitute "the amount of tax sought to ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rground and start business in benami names. Unduly harsh penalties thus breed only defiance of the law and have to be eschewed. The purpose of penalty should, however, be only to bend and not to break the taxpayer. We recommend that the quantum of penalty imposable for concealment of income should be with reference to the tax sought to be evaded, instead of the income concealed. Moreover, the minimum penalty imposable for concealment of income should be the amount of tax sought to be evaded and the maximum penalty imposable should be fixed at twice the said amount. It may also be clarified that 'tax sought to be evaded' in this context means the difference between the tax determined in respect of total income assessed and the tax that would have been payable had the income other than the concealed income been the total income. This would ensure that taxpayers are not made to pay penalty in respect of certain additions of income, which are not in the nature of concealment but are made only for certain technical reasons. 2.74 We are not unaware that linking concealment penalty to tax sought to be evaded can, at times, lead to anomalies. We would recommend that in cases where the co ..... X X X X Extracts X X X X X X X X Extracts X X X X
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