TMI Blog2009 (4) TMI 499X X X X Extracts X X X X X X X X Extracts X X X X ..... the penalty provision, but then there has to be a contravention of the statutory obligation first-wilful or not - It is not of scriptural sanctity but of ratio-wise luminosity within the edifice of facts where the judicial lamp plays the legal flame - Appeal is allowed - IT APPEAL NO. 300(PUNE) OF 2007 - - - Dated:- 28-4-2009 - Member(s) : PRAMOD KUMAR., MUKUL SHRAWAT. ORDER-PRAMOD KUMAR, A.M.: This is an appeal filed by the assessee and is directed against the order dt. 30th Nov., 2006 passed by the CIT(A)-III, Pune, in the matter of penalty under s. 271(1)(c) of the IT Act, 1961 for the asst. yr. 2002-03. 2. Grievance of the assessee is that, on the facts and in the circumstances of the case, the CIT(A) has "erred in confirming the penalty of Rs. 2,00,00,000 under s. 271(1)(c) of the IT Act". This penalty is imposed in connection with a claim, made by way of a revised return, claiming a carry forward of loss of Rs. 5,36,27,048 in respect of loss incurred by one of the units and not claiming deduction under s. 10A on the aggregate of profits/losses of both the units that the assessee company has, but individually for the unit in which profit was earned. The AO r ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Rs. 5,36,27,048. This revised claim, however, did not impress the AO. The AO was of the view that while profit of each unit will have to be computed separately for the purposes of computing deduction under s. 10A, the deduction will have to be allowed from total income of the assessee which must take into account profits and losses of both the units. In other words, according to the AO, the losses incurred in Unit II get set off against profits of Unit I, before deduction under s. 10A can be allowed, and, therefore, the assessee cannot carry forward the loss incurred by Unit II. On this basis, the AO computed total income of the assessee as follows: A : Profit of Unit I 9,27,00,772 B : Profit of Unit II (-) 5,37,11,891 Total income A + B 3,89,88,881 Less : Deduction under s. 10A computed with respect profits of Unit I at Rs. 9,26,15,929, however, restricted to total income 3,89,88,881 ----------- Taxable income Nil ----------- 4. The AO thus conclude ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... orm consists of a phrase 'deduction' and that the provision of s. 10A does not have any absurdities and anomalies for computation of deduction as opined by the assessee. Further the A.O held that the assessee's arguments of 'claim of deduction undertaking-wise before the computation of total income of the assessee' is not tenable in view of the amended provisions of s. 10A. It was brought out on record that though Chapter III mentions 'income which do not form part of the total income', s. 10A after the amendments w.e.f. 1st April, 2001 contains the word 'a deduction of such profit and gains as are derived by an undertaking'. Therefore s. 10A emphasizes a deduction and not exemption as being understood by the major heading of Chapter III. It was held that since the provisions of s. 10A are specific and clearly worded, the spirit and intent of the legislature cannot be ignored and that the substance of the words used in the provisions of s. 10A cannot be taken away or eroded. The AO relied on the judgment of the Hon'ble Supreme Court in the case of Pandian Chemicals Ltd. vs. CIT wherein it was held that: 'the rules of interpretation would come into play only if there is any doubt ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... (Rs. 9.27 - Rs. 5.37 crores). On which the deduction under s. 10A of Rs. 9.26 crores was to be allowed. However, since the total income was at Rs. 3.90 crores, the deduction was restricted to this resultant total income of Rs. 3.90 crores. The loss of Rs. 5.37 crores as claimed by the assessee, pertaining to Unit II was not allowed since the same was fully set off against the profits of Unit I. While competing the assessment. penal proceedings under s. 271 (1)(c) of the Act were initiated for furnishing inaccurate particulars of income. The assessee did not prefer an appeal against the said assessment competed for the asst. yr. 2002-03. A notice under s. 271(1)(c) was issued on 31st March, 2005 and served upon the assessee. In response, the assessee filed a letter on 7th April, 2005 requesting for an adjournment of 10 working days and the hearing was fixed for 4th May, 2005. However, within the meantime, the assessee filed a written submission on 25th April, 2005 in connection with the penalty proceedings." 6. The AO also observed that, as evident from the submissions made by the assessee in hearings, the main reasons as to why, in assessee's perception, it was not a fit case fo ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... particulars, does not hold good". The AO observed that the "case laws filed by the assessee are distinguishable from the case under discussion". A rather erudite discussion about the judicial precedents on concealment of income followed, even as the penalty was initiated for 'concealment of particulars'. The AO also noted that when, as held by Hon'ble Calcutta High Court in the case of CIT vs. Bijay Iron Stores (2001) 170 CTR (Cal) 145 : (2001) 252 ITR 408 (Cal), penalty is to be levied with respect to the addition which is sustained by the Tribunal and which has not been challenged before the High Court, and when "in the present case, the assessee did not even prefer the appeal against the assessment order, leave alone sustaining of such addition by the appellate authorities", it is a fit case for imposition of penalty. The AO thus concluded as follows: "13. Considering all the submissions made by the assessee and the facts and circumstances of the case and position of law as given in the provisions of s. 10A and in view of the positions brought out by the Hon'ble Courts in the judgments discussed above, it is evident that the assessee has furnished inaccurate particulars of inc ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... o. 794, dt. 9th Aug., 2000 [(2000) 162 CTR (St) 9] issued by the CBDT on Explanatory Notes to Finance Act, 2000. 4.3 The appellant has also submitted that the provisions of s. 10A are intended for industrial growth and development of the country. Therefore, while interpreting these provisions, a liberal view should be adopted and an interpretation which defeats the purpose of introducing a particular beneficial provision should not be accepted. By making this submission, the appellant has tried to plead that the bona fide of its wrong claim should not be doubted in view of the liberal interpretation made by the appellant company. In general, I agree with the view of the appellant. However, the case of the appellant is different. I find that the appellant has interpreted the provision so liberally that the actual meaning of the words used in s. 10A stand completely distorted. This, to me, is not permissible. A provision cannot be interpreted so loosely that the real connotation of the words is lost. Under such a situation, the genuineness of the claim does come under the shadow of doubt. No person can be allowed to deliberately twist the obvious meaning of a term and plead innocen ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... y forward of loss, worked out on the basis of a manner of computation on the basis of which original return was filed, occurred to the appellant with the objective of taking advantage of the amendment. For this purpose, the appellant deliberately and consciously adopted a wrong interpretation of the simple and plain provisions of s. 10A. 4.7 In view of the aforesaid, I hold that the AO is justified in holding that the appellant has furnished inaccurate particulars of income and accordingly levying penalty under s. 271 (1)(c). The order imposing penalty under s. 271(1)(c) is confirmed." 9. The assessee is not satisfied and is in further appeal before us. 10. We have heard Shri Golvala, learned counsel for the assessee, and Shri Kaushal, learned CIT-Departmental Representative. We have also carefully perused the material on record and duly considered factual matrix of the case as also the applicable legal position. 11. As we proceed to deal with the grievance raised in this appeal, we may mention that in the recent past, we have witnessed a very lively, though at times somewhat acrimonious, debate on paradigm shift in the scheme of s. 271(1)(c), claimed to have been brought a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... been disclosed by him, then, the amount added or disallowed in computing the total income of such person as a result thereof shall, for the purposes of cl. (c) of this sub-section, be deemed to represent the income in respect of which particulars have been concealed." 14. A plain reading of this provision of law makes it clear that so far as the scheme of penalty for concealment of income is concerned, it is like this. It is sine qua non for imposition of penalty that the AO or the CIT(A), during the course of any proceedings before him, should be satisfied that the assessee has (i) concealed his income, or (ii) furnished inaccurate particulars of income. As regards the quantum of penalty, the penalty imposed under s. 271(1)(c) can range between 100 per cent to 300 per cent of the tax sought to be avoided by the assessee, as a result of such concealment of income or furnishing of inaccurate particulars. The third and most important feature of this provision is deeming provision regarding concealment of income. Not only that the penalty provisions cover the situations in which the assessee has concealed income or furnished the inaccurate particulars, in certain situation, even wi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... urnishing of inaccurate particulars, or, under the extended definition by the virtue of Expln. 1 to s. 271(1)(c), for a deemed concealment of income. As a corollary to this legal position, unless it is established that there is concealment of income or furnishing of inaccurate particulars or it is established that, on the facts of the case, concealment of income can be deemed in accordance with the provisions of law, the penalty provisions cannot be invoked at all. 16. There is a school of thought, however, to the effect that to successfully impose penalty under s. 271(1)(c) of the Act, the burden of the Revenue is not discharged simply by demonstrating that the above conditions are satisfied and that the Revenue must also establish mens rea on the part of the assessee. There have been significant developments with regard to this school of thought in the recent past, and we must take note of these developments so as to appreciate the true scope of penalty provisions under s. 271(1)(c) of the Act. 17. The first significant recent development that we must take note of is Hon'ble Supreme Court's judgment in the case of Dilip N. Shroff vs. Jt. CIT (2007) 210 CTR (SC) 228 : (2007) 2 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the property as on 1st April, 1981 is a matter of fact, and the value furnished by the assessee was held to be factually incorrect". Their Lordships then added that "If the computation of long-term capital gains by the assessee was found to be wrong, obviously the findings of the Revenue authorities and the Tribunal that the assessee furnished inaccurate particulars cannot be faulted". Aggrieved even by the judgment of Hon'ble Bombay High Court, the assessee carried the matter in appeal before the Hon'ble Supreme Court. 18. Hon'ble Supreme Court were of the considered view that on the facts and circumstances of the case, the imposition of penalty was not warranted. Their Lordships made following significant observations on merits of the case: "79. The assessee could get the valuation done through any other mode of index value, or the assessee could have engaged any other valuer other than a registered valuer also. In the instant case, the assessee had chosen to obtain the opinion of a registered valuer. 80. The registered valuer has arrived at its opinion on certain basis. He while making the valuation report, disclosed all the particulars. He disclosed that he had chosen to ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ment laid emphasis that he had dealt with both the situations. 84. The impugned order, therefore, suffers from non-application of mind. It was also bound to comply with the principles of natural justice." 19. That was only one of the aspects of the matter. On the broad principles governing the imposition of penalty under s. 271(1)(c), and before dealing with the specific facts of the case, Their Lordships also observed as follows: "35. ............it appears that there is distinct line of authorities which clearly lay down that in considering a question of penalty, mens rea is not a relevant consideration. Even assuming that when the statute says that one is liable for penalty if one furnishes inaccurate particulars, it mayor may not by itself be held to be enough if the particulars furnished are found to be inaccurate is anything more needed but the question would still be as to whether reliance placed on some valuation of an approved valuer and, therefore, the furnishing of inaccurate particulars was not deliberate, meaning thereby that an element of mens rea is needed before penalty can be imposed, would have received serious consideration in the light of a large number of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... come is on Revenue authorities, as also for the proposition that an element of mens rea is needed before penalty under s. 271(1)(c) can be imposed. 21. Let us see how would this proposition affect the working of s. 271(1)(c). Let us take a case in which in respect of any facts material to the computation of total income under the provisions of the Act, the assessee does not give an explanation, gives a false explanation or is not able to substantiate the explanation given by him, and the assessee also fails to prove that the explanation, if given by the assessee, is bona fide and that the assessee had disclosed all the facts relating to the same and material to the computation of total income. Going by the language of Expln. 1 to s. 271(1)(c), it will be a fit case for imposition of penalty, but, in case one is to apply the aforesaid proposition emerging out of Dilip N. Shroff's case, the onus will still be on the Revenue to show that there was a mens rea on the part of the assessee. Where this onus is not discharged, according to this proposition, penalty under s. 271(1)(c) could not be imposed. 22. The matter did not rest even there. This judgment was also viewed as an author ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... y". Their Lordships took note of Revenue's reliance upon Hon'ble Supreme Court's decision in the case of Chairman, SEBI vs. Shriram Mutual Fund (2006) 5 SCC 361, as also assessee's contention that "even r. 96ZQ(5) should be read down so as to include the requirement of mens rea particularly when the said clause begins with the expression 'if any independent processor fails to pay the amount of duty'." It was in this backdrop, and it was after setting out the provisions of s. 11AC of the Central Excise Act and of s. 271 (1)(c) of the IT Act, that their Lordships were of the view that "there is a conflict of opinion between the judgments of the Division Bench of this Court in the case of Dilip N. Shroff vs. Jt. CIT (2007) 210 CTR (SC) 228 : (2007) 8 Scale 304 (SC) on the one hand, and, on the other hand, we have another judgment of this Court in the case of Chairman, SEBI vs. Shriram Mutual Fund (2006) 5 SCC 361". Their Lordships were also of the view that "wilful concealment is not an essential ingredient for attracting civil liability as is the matter of prosecution under s. 276C of the Act" and that "while considering an appeal against an order made under s. 271(1)(c), what is req ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... first consequence is of course penalty under s. 271(1)(c), and the second consequence is, which is applicable only when it is a case of 'wilful attempt to evade tax, etc.', as title to s. 276C unambiguously sets out, and this deals with the prosecution of offence. Dilip N. Shroff's case was seen as authority for the proposition that establishing mens rea of the assessee was a sine qua non for imposition of penalty under s. 271(1)(c) even though the element of wilful violation of law was not referred to in the said section whereas s. 276C deals with wilful attempt to evade tax and provides for consequences to such an action of the assessee. In case, the proposition regarding establishing mens rea was to be accepted, it would follow that penalty under s. 271 (1)(c) could only be imposed in cases in which there was a wilful attempt to evade taxes, which is what mens rea practically implies, but then in such a situation the ground covered by s. 271(1)(c) and s. 276C was to be the same. It was in this context that their Lordships perhaps referred to s. 276C and doubted that Dilip N. Shroff decision has failed to take note of the same. On the issues of legal interpretation, these were t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... g to casus omissus and the other in regard to reading the statute as a whole has been considered in detail." 28. It is also important to note that in the process of deciding Dharamendra Textile Processors case, their Lordships also took note, with approval, of following observations finding place in the judgment in the case of Chairman, SEBI vs. Shriram Mutual Fund: "47. Thus, the following extracted principles are summarised: (A) Mens rea is an essential or sine qua non for criminal offence. (B) A straitjacket formula of mens rea 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 contradistinction to criminal or quasi criminal proceedings, the determination is of the breach of the civil obligation by the offender. The word 'penalty' by itself 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 determinati ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... epresentatives to place on record their stand on the impact of this judgment. Shri Kaushal, learned CIT-Departmental Representative reiterated the observations made by the Hon'ble Supreme Court, and politely reminded us of our duty to respectfully follow the law so laid down by their Lordships, instead of resorting to a process of creative interpretation which dilutes or whittles down the law so laid down. In addition to the oral arguments at length, learned Departmental Representatives filed two notes before us. In the first note, which was signed by Shri Kaushal, learned CIT-Departmental Representative, it was pointed out that the Tribunal was Widely following Hon'ble Supreme Court's judgment in the case of Dilip N. Shroff but now that Dilip N. Shroff judgment is no longer valid and stands overruled by a Larger Bench of the Hon'ble Supreme Court in Dharamendra Textile Processors case, the Tribunal must decide the appeals in the light of ratio decidendi of the Dharamendra Textile Processors case. The summary of views expressed by Hon'ble Supreme Court in the said Larger Bench was also set out in that note. We need not reproduce the summary as there is no, and there cannot be any, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ental Representatives, let us make our humble attempt to put the observations made by the Hon'ble Supreme Court in Dharmendra Textile Processors' case in the right perspective. In the entire discussions before us, a lot of emphasis was placed on certain observations made by the Hon'ble Supreme Court. These observations, seen in isolation, were sought to be canvassed as complete exposition of law on the scope of penalty proceedings under s. 271(1)(c). 32. While we have made our humble efforts to put these observations in the correct perspective to the best of our ability, we must also put in a word of caution against the dangers inherent in drawing sweeping generalizations from the observations so made by a judicial authority. As was held by the Hon'ble Supreme Court in the case of CIT vs. Sun Engineering Works (P) Ltd. (l992) 107 CTR (SC) 209 : (l992) 198 ITR 297 (SC), "it is neither desirable nor permissible to pick out a word or a sentence from the judgment of this Court, divorced from the context of the question under consideration and treat it to be the complete law declared by this Court. The judgment must be read as a whole and the observations from the judgment have to be ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... a fit case for initiating the penalty proceedings, initiates the penalty proceedings under s. 271(1)(c) of the Act. It may be noted that in Dilip N. Shroff's case, Hon'ble Supreme Court has approved Hon'ble Delhi High Court's judgments in the cases of CIT vs. Ram Commercial Enterprises Ltd. (2001) 167 CTR (Del) 321 : (2000) 246 ITR 558 (Del) and Diwan Enterprises vs. CIT (2001) 167 CTR (Del) 324 : (2000) 246 ITR 571 (Del) which require that the AO must form his opinion and record satisfaction before initiating the penalty proceedings. This aspect of the matter has not been disturbed by the Larger Bench decision in the case of Dharamendra Textile Processors. Therefore, recording of such satisfaction is condition precedent for initiating the penalty proceedings. The next stage is the actual penalty proceedings under s. 271(1)(c). In the course of the penalty proceedings, the AO finds that if the assessee has concealed income or if the assessee has furnished inaccurate particulars, as also when the AO finds that the case of the assessee is covered by the deeming fiction of one of the Explanations appended to s. 271(1)(c), the AO proceeds to impose penalty under s. 271(1)(c). 34. Le ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... loss of individual liberty by jail sentence, follow. It is, however, incorrect to infer that just because a liability has been held to be 'civil liability' it cannot be penal in character. There is no contradiction in a liability being a civil liability and the same liability being penal liability as well, though a civil liability cannot certainly be criminal liability as well. As observed by Hon'ble Supreme Court in the case of Om Prakash Sheo Prakash vs. Union of India AIR 1984 SC 1194 @ 1209, "A penalty imposed by the sales-tax authorities is a civil liability, though penal in character". In this judgment also, in the immediately following sentence, their Lordships compared civil liability with criminal liability and observed that "It may be relevant to notice that sub-section............ specifically refers to certain acts and omissions which are offences for which a criminal prosecution would lie............" The expression 'civil liability', as contradistinction inherently involves, is used for contrasting different character of 'criminal or quasi criminal liability'. In the case of Guljag Industries vs. CTO (2007) 293 ITR 584 (SC), Hon'ble Supreme Court has observed as foll ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... chargeable to income-tax in that particular assessment year. It is thus clear that as long as the information given in the IT return is correct and complete to the best of assessee's knowledge and belief, it cannot be said that the statutory obligation under s. 139(1) is contravened which, even for a civil liability for penalty being imposed, is a sine qua non. An addition to income does not always have a cause and effect relationship with the discharge of assessee's obligations under s. 139(1), because even when an assessee duly discharges his obligations under s. 139(1), there can still be additions to, or disallowance from, the returned income due to a variety of reasons, viz. genuine variations in perceptions of the assessee vis-a-vis the AO about a legal interpretation, the changes in Judge made or statute law between the period when an IT return is filed and when the assessment is framed, extraneous factors affecting ability of the assessee to establish certain facts based on which deductions are claimed, and even plain inadvertent clerical errors. Except to the extent such cases will be caught by the mischief of Explanations appended to s. 271(1)(c), these cases cannot, ther ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... th the criminal offences under the Act and its punishment. Therefore, proceedings under Chapter VI are neither criminal nor quasi criminal. The penalty leviable under this chapter or under the sections is penalty in cases of default or failure of statutory obligations. In the provisions and the scheme of penalty under Chapter VI-A of SEBI Act, there is no element of any criminal offence or punishment as contemplated under the criminal proceedings. Therefore, there is no question of any mens rea by the appellant and it is not an essential element for imposing penalty under SEBI Act and Regulations............" 40. In Chairman, SEBI's case, therefore, it was held that when there is a failure on the part of a person to discharge his civil obligations, mens rea need not be proved before imposing any penalty imposed on account of such civil obligations. Let us apply this proposition to the cases of the penalty for concealment of income or for furnishing of inaccurate particulars. Under the scheme of the IT Act, it is undoubtedly assessee's civil obligation to file a true and correct return of income, and the penalty under s. 271(1)(c) is imposed when there is a concealment of income, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... me of the Act permits or requires so; not only that it is not an automatic consequence of an addition being made to the income, but an addition made during the course of assessment proceedings, by itself, cannot be enough to initiate, leave aside conclude, penalty proceedings under s. 271(1)(c). Therefore, a finding recorded in the assessment order may constitute good evidence in the penalty proceedings but those findings cannot be regarded as conclusive for the purposes of penalty proceedings. 42. While dealing with the nature and kind of legal liabilities, 'Salmond on Jurisprudence (12th Edn.; by P.J. Fitzgerald @ 349)' has thrown some light on the connotations of 'civil liability': "He who commits a wrong is said to be liable or responsible for it. Liability or responsibility is the bond of necessity that exists between the wrongdoer and the remedy of the wrong. Where the remedy is civil one, the party wronged has a right to demand the redress allowed by the law, and a wrongdoer has a duty to comply with this demand. In the case of a criminal remedy, the wrongdoer is under duty to pay such penalty as the law through the agency of Courts provides." 43. The impact of penalty ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 6. While in Dilip N. Shroff's case, Division Bench of the Hon'ble Supreme Court had held that, "Before, thus, a penalty can be imposed, the entirety of the circumstances must reasonably point to the conclusion that the disputed amount represented income and that the assessee had consciously concealed the particulars of his income or had furnished inaccurate particulars thereof", in Dharamendra Textile Processors case, a Larger Bench, having taken note of the position that "The Explanations appended to s. 271(1)(c) of the IT Act entirely indicate the element of strict liability on the assessee for concealment or for giving inaccurate particulars while filing return" concluded that "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 s. 276C of the IT Act". The observations of wilful concealment of income not being an essential condition precedent for imposition of penalty and the penalty being a civil liability were made in the context of the question which was before their Lordships, i.e., whether or not before imposition of penalty, it is required f ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d to be applicable.' It is thus clear that, in the considered view of Hon'ble Supreme Court, it is no longer necessary that Revenue is required to prove mens rea and, therefore, independent finding about conscious concealment is no longer a condition precedent for imposition of penalty under s. 271(1)(c) r/w Expln. 1 thereto. The school of thought casting onus on Revenue to prove mens rea, as advocated by large number of judicial precedents relied upon by the assessee, has been thus specifically rejected by the Hon'ble Supreme Court." 47. The proposition that mens rea need, not be proved before penalty under s. 271(1)(c) can be imposed was not laid down by the Hon'ble Supreme Court for the first time in Dharamendra Textile Processors case. As we have noted above, there are earlier judicial precedents to that effect. K.P. Madhusudhanan's case is one such example, and incidentally that judgment was also rendered by a three Judge Bench. 48. The views expressed by their Lordships in Dharamendra Textile Processors case cannot be viewed as an authority for the proposition that a penalty under s. 271(1)(c) is an automatic consequence of an addition being made to income of the taxpay ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s brought about by Expln. 1 to s. 271(1)(c). The observations made in Dilip N. Shroff's case, on the need for the tax authorities to establish mens rea before a penalty can be imposed, were contrary to this school of thought and, to that extent, therefore, the Larger Bench overruled the Dilip N. Shroff decision. However, even when the liability under s. 271 (1)(c) is viewed as a civil liability, while the onus is certainly not on the tax authorities to establish mens rea of the assessee, the explanation of the assessee is still to be examined by the adjudicating authority on its own merits. 51. There can be three distinct mutually exclusive situations in the case of an addition to income. In the first scenario, the addition made could be on account of contumacious conduct of the assessee in which mens rea is established or can be reasonably inferred. As far as this situation is concerned, penalty was always leviable under s. 271 (1)(c). In the second scenario, while the addition is made to the returned income, neither is it established, or can be reasonably inferred, that the addition made to the income is on account of contumacious conduct of the assessee nor is it established, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... also been number of published opinions highlighting the correct perspective in which this judgment needs to be taken. Just as much as we have benefited from the lively debate in our Courtroom, we have also had benefit of perusing many such well reasoned opinions in the press, and we would like to take note of some such helpful material. Shri S. Rajarathnam, a well-known author and commentator on income-tax, has, in his column in 'The Hindu' (http://www.hindu.com/2008/12/08/stories/2008120850031400.htm), and while dealing with the impact of Dharamendra Textile Processors judgment on law relating to penalties under s. 271(1)(c), inter alia observed as follows: 'The view taken by the Full Bench that penalty is automatic for violation of rules under Central Excise law is rendered in the context of excise law. Reference to an income-tax penalty in such a case cannot be treated as a direct authority on the subject. Revenue itself had not contended with reference to income-tax penalty that it is automatic, but only questioned the onus of proving lack of bona fides on revenue. As regards approval by the Full Bench of the decision in Chairman. SEBI's case, this case dealt with an instan ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... sidered agreement with the views so articulated by the learned author. Similar are the views expressed by another eminent author in an article in the journal published by the Bombay Chartered Accountant Society (2008-40B-BCAJ-41l) which are reproduced below: "From the judgment of the Larger Bench, it seems that the same overrules the judgment of apex Court in Dilip N. Shroff's case only to the extent that deliberate act on the part of the assessee will have to be proved for levy of concealment penalty (i.e., mens rea is essential ingredient of the provisions) and the order imposing such penalty is quasi criminal in nature............" 55. In the light of the above discussions, and for the detailed reasons set out above, we are of the considered view that even post-Dharamendra Textile Processors' judgment by the Hon'ble Supreme Court, merely because an addition is made to the income declared by the assessee, penalty under s. 271 (1)(c) cannot be imposed. In our considered view, Hon'ble Supreme Court's judgment in the case Dharamendra Textile Processors' case does not bring about any radical change in the scheme of s. 271(1)(c) though it does nullify the earlier Division Bench ju ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... and a penalty under s. 271(1)(c). No doubt an addition to income is the starting point of this exercise, but not only that in the assessment proceedings itself the AO has to be satisfied that the additions are such that penalty proceedings under s. 271(1)(c) are required to be initiated but also before any penalty under s. 271(1)(c) can be imposed, each such case will have to be examined in the light of scheme of things envisaged by s. 271(1)(c) read along with Explanations thereto. 56. The scheme of s. 271 (1)(c), as we have noted earlier in this order, visualizes imposition of penalty when the assessee has concealed income or when the assessee has furnished inaccurate particulars of income. In addition to these two situations, penalty can also be imposed, inter alia, when assessee is deemed to have concealed particulars of income under Expln, 1 to s. 271(1)(c). This Explanation provides that the assessee will be deemed to have concealed particulars of income where in respect of any facts material to the computation of the total income of any person under this Act, (i) when the assessee fails to provide an explanation, (ii) when the assessee provides an explanation which is fou ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... epreciation losses Asst. yr. 2002-03 19,758,291 33,868,757 53,627,048" 58. It is this claim which did not find favour with the AO. The AO was of the view that since, post-2001 amendment of s. 10A, the benefit under s. 10A is no longer a tax exemption but only a deduction from total income, it can never exceed the total income. It was also noted that since total income of the assessee can only be computed after aggregating the profits and losses of various units, the losses of Unit 2 are set off against profits of Unit 1 and there is nothing left to be carried forward and that the deduction under s. 10A is to be restricted to the net income after the set off. The assessee's initial contention was that since s. 10A benefit is an undertaking specific tax benefit, the deduction under that section cannot be restricted to overall total income of the assessee and must be granted to with respect to the profits of the undertaking. The assessee has referred to the circulars issued by the CBDT as also a reference is made to the certain columns in forms prescribed in the IT Rules which support this interpretation of law. When the claim was rejected by the AO, the assessee let the mat ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ive such as the status of taxability of an income, admissibility of a deduction and interpretation of law. The furnishing of inaccurate information thus relates to furnishing of factually correct (sic-incorrect) details and information about income. In the present case, however, what has been treated as furnishing of inaccurate particulars is making of a claim which was not admitted by the AO-an action not contested by the assessee. The admission or rejection of a claim is a subjective exercise and whether a claim is accepted or rejected has nothing to do with furnishing of inaccurate particulars of income. The authorities below have apparently proceeded to treat assessee's making an incorrect claim of income as furnishing of inaccurate particulars. What is a correct claim and what is an incorrect claim is a matter of perception. In our considered view, raising a legal claim, even if it is ultimately found to be legally unacceptable, cannot amount to furnishing of inaccurate particulars of income. 'Inaccurate', as we have noted above, is something factually incorrect and interpretation of law can never be a factual aspect. Just because an AO does not accept an interpretation, such ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of income per se. Viewed in the light of the discussions in the preceding para, wherein we have held that there cannot be any 'concealment of particulars of income' on the issues of legal interpretation, and viewed in the light of the fact that the deeming fiction is to provide for a deemed furnishing of inaccurate particulars, the reference to the facts material to the computation of the total income is quite in harmony with the scheme of s. 271(1)(c). 64. In the present case, there is no dispute that all the relevant facts material to the computation of total income are duly furnished by the assessee and no deficiencies in furnishing of such facts are pointed out by the authorities below. There is thus no cause of action for deeming fiction being triggered by the conduct of the assessee. 65. Be that as it may, even assuming that deeming fiction under Expln. 1 to s. 271(1)(c) can be triggered by a wrong legal claim, it cannot be the case that merely because there is a wrong claim, even if that be so, penalty under s. 271(1)(c) can be imposed. This deeming fiction under s. 271(1)(c) only shifts the onus of proof on the assessee, as this explanation itself provides that a penal ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... not carried in appeal the rejection of his claim by the AO is sought to be used against the assessee's claim of bona fides. We are unable to see any rationale in this. The decision to go in litigation or not does not depend on the merits alone, and merely because an assessee does not challenge a particular addition or disallowance in appeal does not mean that the claim for such exclusion from income or deduction lacked bona fides. The decision not to go into a litigation or not is dependent on a variety of factors, and the merits of the legal issue involved is only one such factor. In our considered view, therefore, the decision to the assessee to pursue or not to pursue legal remedy against rejection of his stand is not the safe indicator about bona fides of such stand. The authorities below clearly erred in holding that merely because the assessee has accepted the stand of the AO, so far as rejection of assessee's claim was concerned, it would show that action of the assessee lacked bona fides. 68. In any event, when an explanation is offered by the assessee in discharge of the onus cast upon him by Expln. 1 to s. 271(1)(c), it is not for the AO to ponder over what should have ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... absence of any mens rea, on the facts of this case, the assessee could have been imposed penalty under s. 271(1)(c) would have been relevant only if it was found to be a fit case for imposition of penalty under the scheme of s. 271(1)(c). Since we have come to the conclusion that under the scheme of s. 271(1)(c), it was not a fit case for imposition of penalty, and in view of our analysis of legal position set out earlier in this order, we hold that the facts and circumstances of the case did not warrant or justify any imposition of penalty. We, therefore, direct the AO to delete the impugned penalty of Rs. 2,00,00,000. The assessee gets the relief accordingly. 70. Before we part with the matter, we would like to make a couple of observations. Firstly, we may mention that, as we have stated earlier in this order as well, this appeal was taken up for hearing along with several other appeals relating to penalties under s. 271(1)(c) of the Act. While deciding one aspect of this appeal i.e., impact of Hon'ble Supreme Court's judgment in the case of Dharamendra Textile Processors on the legal framework relating to imposition of penalty under s. 271(1)(c), we also had the benefit of a ..... X X X X Extracts X X X X X X X X Extracts X X X X
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