Kerala High CourtCommissioner Of Income-Tax vs India Sea Foods on 9 April, 1976Equivalent citations: [1976]105ITR708(KER)Author:V. Balakrishna EradiBench:V. Balakrishna EradiJUDGMENT


 

 V. Balakrishna Eradi, J.1. In  this reference underSection 256(1)of the  Income-tax  Act,   1961   (hereinafter  called  the   Act),  the Income-tax

Appellate Tribunal, Cochin Bench (hereinafter referred to as the Tribunal), has referred to this court the following question:"Whether,  on  the  facts  and  in  the  circumstances  of the case, the Income-tax Appellate Tribunal is justified in law in holding-(i) that the word 'income' obtaining inSection 271(1)(c)of the Income-tax Act, 1961, should refer to a positive figure only and not to a loss;(ii) that the total income computation  circumscribes the quantum of concealment in penalty proceedings ?"2. The assessee is a registered firm engaged in the business of export of marine products like prawns, fish, etc.  For the assessment year 1968-69, the accounting period in respect of which was the year ending December 31, 1967, the assessee-firm had filed a return in which it had declared  a  net  loss of Rs. 3,29,304.    Certain investments made by  the partners of the assessee firm, who were also partners of two other firms, were the subject-matter of investigation by the income-tax department. The partners then approached the department by two petitions dated June 29,   1968, and February   12, 1969,  for a  settlement of  their  income-tax affairs and after discussions between the department and the assessee a settlement was  arrived at, the terms of which were incorporated in  an  agreement dated September 27, 1969.   Under that settlement the partners of the firm agreed that over and above the income returned by the three firms for the years  1964-65 to 1968-69, a sum of Rs. 7,00,000 may be added as income derived by  them from undisclosed sources and that the said amount may be spread over between the assessment years 1964-65 to 1968-69 in proportion to the turnover disclosed by the assessee in respect of each of those years.   The assessee had also agreed under that settlement that the minimum penalty prescribed under the Act may be levied against it for all those years.    Pursuant to the said settlement the Income-tax Officer while finalising the assessment of the firm for the year   1968-69  added  an  amount of Rs.   2,84,727  as concealed income derived by the  assessee during the relevant accounting period.    Certain items of expenses in respect of which the assessee had claimed deductions in the return filed by it were disallowed by the Income-tax Officer as inadmissible.    The net result of these additions was that in the place of the loss of Rs. 3,29,304 shown in the  return the assessee  was found to have made a profit of Rs. 18,460 and the assessment was finalised accordingly.    Annexure 'A' appended to  the statement of the case is a copy of the said assessment order.3. Penalty proceedings underSection 27l(1)(c)of the Act were initiated against the assessee by the Income-tax Officer and the matter was referred by him to the Inspecting Assistant Commissioner of Income-tax, Ernakulam. In response to the notice issued underSection 274, the assessee appeared before the Inspecting Assistant Commissioner through an authorised representative

and objected to the proposed levy of penalty on two grounds. The first objection was that there was no evidence before the department to hold that the assessee had concealed particulars of its income. Secondly, it was urged that since even according to the order of assessment the assessee had been found to have derived an assessable income of only Rs. 18,460 during the year in question, the concealment, if any, could only be to the extent of the said amount and the quantification of the penalty should be only on that basis. The Inspecting Assistant Commissioner overruled these objections and held that the minimum penalty leviable was Rs. 2,84,727 which amount, in his view, represented the concealed income. Accordingly, he imposed the said penalty on the assessee as per his order dated 14th October, 1971, a copy of which has been appended to the statement of facts as annexure 'B'.4. The assessee took up the matter in appeal before the Tribunal. The contentions raised in appeal before the Tribunal were identical with those put forward by the assessee before the Inspecting Assistant Commissioner. On the first plea taken by the assessee that there was no evidence before the department to hold that the assessee had concealed any income, the Tribunal concurred with the Inspecting Assistant Commissioner and held that the unequivocal admission made by the assessee firm itself in the agreement dated September 27, 1969, that the sum of Rs. 7,00,000 could be treated as business profits of the assessee not disclosed in the returns filed by it for the assessment years 1964-65 to 1968-69 and that the said income may be spread over those years and subjected to assessment, constituted sufficient proof that there was concealment. The Tribunal, however, accepted the second contention put forward by the assessee and held that the word "income" occurring inSection 271(1)(c)"should normally refer to a positive figure only" and not a loss and that in a case where there is no total income at all there would be no scope for application of the provisions ofSection 271(1). The Tribunal also held that even where the total income is a positive figure the penalty proceedings cannot be in respect of any income higher than the total income as determined by the assessment proceedings and that, applying the said principle to the case on hand, the concealment by the assessee could not be said to be higher than Rs. 18,460. After having expressed the said view, the Tribunal, however, went on to hold that since in determining the total income of the assessee the Income-tax Officer had made some other additions aggregating to more than 1 1/2 lakhs of rupees by disallowing certain items of expenses in respect of which deduction had been claimed by the assessee, it could not be said that there was a concealment by the assessee even in respect of the amount of Rs. 18,460 on which the assessee had been finally assessed inasmuch as the amounts disallowed far exceeded the aforesaid

amount which was determined by the Income-tax Officer as the total income of the assessee. According to the Tribunal, no element of concealment was involved in putting forward the claims for deduction of the various items of expenses that were ultimately disallowed or in reporting a loss in the return, even though it had been ultimately found on finalisation of the assessment that the assessee had made a profit. On this basis, the Tribunal allowed the assessee's appeal and set aside in toto the order of the Inspecting Assistant Commissioner imposing the penalty on the assessee. A copy of the Tribunal's order has been appended to the statement of the case as annexure 'C'. Pursuant to a motion made before the Tribunal by the Commissioner of Income-tax, Kerala, underSection 256(1)of the Act, the aforesaid question has been referred by the Tribunal for decision by this court.5. Counsel for the revenue contended before us that the Tribunal having specifically held that the assessee had concealed its income and that hence penalty was impasable against the assessee underSection 271(1)(c), it has acted with manifest inconsistency in proceeding to cancel the penalty levied against the assessee by the Inspecting Assistant Commissioner on the ground that the word "income" occurring inSection 271(1)(c)of the Act should "normally refer to a positive figure only and not a loss as in the assessee's case" and that since the assessee had been more than covered by the additions made by the Income-tax Officer consequent on the disallowance of certain items of deductions claimed by the assessee it could not be said that there was a concealment by the assessee even to the extent of the income assessed. Counsel for the revenue submits that the view taken by the Tribunal regarding the scope ofSection 271(1)(c)is not warranted by the language of the section and that if the said interpretation is to be accepted as correct it would completely defeat the object and purpose of the said section.6. Vigorously supporting the legality and correctness of the Tribunal's decision setting aside the penalty levied against the assessee, the learned advocate for the assessee contended that the expression "income" occurring in Sub-clause (iii) ofSection 271(1)(c)should be understood to mean the amount determined by the Income-tax Officer in the assessment order as the taxable income of the assessee for the concerned assessment year and that, in cases where the net result of the computation of total income made by the Income-tax Officer is a negative figure or a loss and there is no taxable income, no penalty is leviable under Clause (c). According to the learned advocate, this is the only correct construction that can be placed on Sub-clause (iii) because there cannot be any question of "concealment" by an assessee unless he had taxable income in respect of which a "concealment" could take place. On this basis it was argued by the learned advocate that the Tribunal was fully right in its view that the word "income" occurring in Sub-clause (iii) "should normally refer to a positive figure only and not a loss" and that the total income computation made in the assessment order circumscribes the quantum of concealment for the purpose of proceedings underSection 271(1)(c)(iii). Referring to the deeming provision contained in the Explanation to Sub-clause (iii) as it stood at the relevant time the learned advocate sought to derive support for his contention from the fact that in cases governed by the Explanation it is the total income as assessed underSection 143,144or 147 that is to be deemed to have been concealed by the assessee. It was submitted by the assessee's learned advocate that the fact that in the agreement dated September 27, 1969, evidencing the settlement entered into between the assessee and the department the assessee had agreed that a particular amount may be treated as the business profit of the assessee and that minimum penalty may be levied for non-disclosure of the said amount in the return would not confer jurisdiction on the department to levy any penalty against the assessee underSection 271(1)(c)(iii)of the Act, otherwise than in strict conformity with the terms of the said section. Elaborating this point it was argued that underSection 271(1)(c), penalty can be lawfully levied only in cases where the assessee is found to have had taxable income during the concerned assessment year and the fact that the assessee had agreed that some amount may be added as its income from undisclosed sources is of no legal consequence if, even after the addition of such amount, the net result as determined by the Income-tax Officer is a loss. Lastly, it was contended that, in any event, the quantum of concealment can never exceed the amount of taxable income as finally determined in the order of assessment. On the basis of these arguments it was urged on behalf of the assessee that the correctness  of the decision of the Tribunal should be upheld by this court and reference should be answered in favour of the assessee.7. The question raised in this reference relates to the interpretation, scope and effect ofSection 271(1)of the Act which provides for the imposition of penalties for failure to furnish returns or to comply with notices and for concealment of income, etc. The said section as it stood at the material time, omitting such portions thereof as are not relevant for our present purpose, was in the following terms :"271. (1) If the Income-tax Officer or the Appellate Assistant Commissioner, in the course of any proceedings under this Act, is satisfied that any person-(a) has without reasonable cause failed to furnish the return of total income which he was required to furnish under Sub-section (1) of Section 139 or by notice given under Sub-section (2) of Section 139 or Section 148 or has

without reasonable cause failed to furnish it within the time allowed and in the manner required by Sub-section (1) of Section 139 or by such notice, as the case may be, or(b) has without reasonable cause failed to comply with a notice under Sub-section (1) of Section 142 or Sub-section (2) of Section 143, or(c) has concealed the particulars of his income or furnished inaccurate particulars of such income,   
 

 he may direct that such person shall pay by  way of penalty,--...(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 the income in respect of which the particulars have been concealed or inaccurate particulars have been furnished.Explanation.--Where the total income returned by any person is less than eighty per cent. of the total income (hereinafter in this Explanation referred to as the correct income) as assessed underSection 143orSection 144orSection 147(reduced by the expenditure incurred bona fide by him for the purpose of making or earning any income included in the total income but which has been disallowed as a deduction), such person shall, unless he proves that the failure to return the correct income did not arise from any fraud or any gross or wilful neglect on his part, be deemed to have concealed the particulars of his income or furnished inaccurate particulars of such income for the purposes of Clause (c) of this sub-section."8. The first part of the question raised in this reference is whether "the word 'income' obtaining in Clause (c) should refer to a positive figure only and not to a loss". We fail to see how on the basis of the facts set out in the statement of the case this question can be said to arise out of the Tribunal's order dated June 18, 1974 (annexure "C"). It is clearly seen from the statement of the case as well as from the Tribunal's order (annexure "C") that the assessee had been finally assessed on a total income of Rs. 18,460 for the concerned assessment year, namely, 1968-69, It was on the basis of the said assessment, the correctness of which had not been challenged by the assessee, that the penalty proceedings in question were initiated. When the case is thus one where the net result of the computation of the income of the assessee under the various heads, after making allowance for all the legitimate deductions and expenses as specified under the Act, was a profit of Rs. 18,460 which was determined to be the total income of the assessee, it was wholly unnecessary for the Tribunal to discuss on a purely hypothetical basis the question whether the word 'income' occurring inSection 271(1)(c)of the Act, refers only to a positive figure or whether the said provision would apply also to cases where the assessee has suffered a loss during the concerned assessment year. In its order dated June 18, 1964 (annexure "C") the Tribunal had categorically held that

concealment of income on the part of the assessee was fully established and that a penalty was, therefore, imposable against the assessee firm. Reiterating this in the statement of the case the Tribunal has mentioned thus :9. "We have given a clear finding in paragraphs 7, 8 and 9 that the department has established concealment and a penalty could be imposed." When on the facts of the case which arose for decision before it, the Tribunal had already come to the specific finding that concealment of income by the assessee had been proved by the department and that a penalty could, therefore, be imposed against the assessee, there was no scope or occasion for raising and considering the question whether penalty would be leviable in cases where an assessee is found to have suffered a net loss and hence not to have had any "total income" for the concerned assessment year. We are, therefore, of the view that the first part of the question formulated by the Tribunal and referred to this court, namely, "whether the word 'income' obtaining inSection 271(1)(c)of the Income-tax Act, 1961, should refer to a positive figure only and not to a loss ?", cannot be said to be a question of law arising out of the order of the Tribunal and hence we decline to answer the same.10. The second part of the question does really arise in the case and that concerns the quantum of the penalty leviable against the assessee who had been found guilty of concealment of income underSection 271(1)(c). Sub-clause (iii) of the section lays down the principle to be applied in respect of the said matter. As per that sub-clause an assessee whose case falls within Clause (c) may be directed to pay by way of penalty a sum which shall not be less than, but which shall not exceed twice, the amount of the income in respect of which the particulars have been concealed or inaccurate particulars have been furnished. It was contended by the assessee's learned advocate that the "income" referred to in this sub-clause should be taken to mean the "total income" of the assessee as determined by the Income-tax Officer in the order of assessment, that the minimum penalty prescribed by the said sub-clause is the amount of such "total income" and that the maximum penalty prescribed is twice that amount.In support of this contention counsel for the assessee relied strongly on certain observations of a Division Bench of the Lahore High Court inNagin Chand Shiv Sahai v. Commissioner of Income-tax, [1938] 6 ITR 534, 535 (Lah).In our opinion that decision is of no assistance at all to the assessee. The question that fell to be considered by the Lahore High Courtin that casewas whether underSection 28of the Indian Income-tax Act, 1922, a penalty could be imposed against an assessee who had deliberately put forward certain false claims for deductions. Rejecting the contention put forward by the assessee that the word "income" was used inSection 28(Indian
 Income-tax Act, 1922) in its popular sense as meaning only money received by the assessee and that it did not refer to any deduction or exemption claimed by him, the Division Bench stated as follows  [1938] 6 ITR 534, 535 (Lah):"If the interpretation put upon the word by the assessee be adopted it would lead to absurd and anomalous results. An assessee would in those circumstances be at liberty to forge his return with impunity in any manner that he likes so far as the expenditure, deduction or exemptions are concerned and would escape the consequences of the law so long as he furnishes true particulars of his income in the narrower sense of the term. This, however, could never be the intention of the legislature.We are fortified in our conclusion by the remarks made by their Lordships of the Privy Council inCommissioner of Income-tax v. S.M. Chitnavis, [1932] 2 Comp Cas 464 ; LR  59 IA 295-297; AIR 1932 PC 178. That case is on all fours with the present case inasmuch as it particularly relates to bad debts. Those remarks are :'Although the Act nowhere in terms authorises the deduction of bad debts of a business, such a deduction is necessarily allowable. What are chargeable to income-tax in respect of a business are the profits and gains of a year ; and in assessing the amount of the profits and gains of a year account must necessarily be taken of all losses incurred, otherwise you would not arrive at the true profits and gains'.Falsehood in accounts can take only two forms : either an item may be suppressed dishonestly or an item may be claimed fraudulently, and in penalising concealment of the particulars of one's income as well as deliberate furnishing of inaccurate particulars,Section 28penalizes both forms of falsehood. In the case before us it has been found as a fact that the assessee deliberately claimed a false deduction and in the light of the remarks made above, we are disposed to hold that the case of the assessee fell within the ambit ofSection 28. We accordingly dismiss this petition with costs."11. What this decision has laid down is only that the liability for penalty underSection 28of the Indian Income-tax Act, 1922 (corresponding toSection 271(1)(c)of the Act), will be attracted if there has been a concealment or furnishing of false particulars by the assessee either in respect of monies received by the assessee or in respect of any expenditure or claims for deductions and exemptions. It was in this context that the court observed that the word "income" was used inSection 28not in the narrower popular sense as meaning only "money received" but in a much wider technical sense so as to take in all items including expenditure and deductions, etc., that are to be taken into account before the assessable figure is arrived at. We fail to see how the said observation made by the learned
	

judges of the Lahore High Court is of any assistance to the  assessee in this case.12. In the present case, the liability of the assessee for being subjected to the imposition of a penalty underSection 271(1)(c)stands concluded by the finding recorded in that behalf by the Tribunal and the question raised before us relates only to the quantum of the penalty that may be levied under Sub-clause (iii) of the said section. The answer to the said question depends on the interpretation to be placed on the said sub-clause.13. It is a cardinal rule of statutory construction that where the language used in the statute is clear and free from ambiguity the court must interpret the words in accordance with their ordinary grammatical meaning and give full effect to the intention of the legislature as gathered from such a construction. This principle applies fully in the case of taxing statutes also and the court will not concern itself with the reasonableness or otherwise of the provision enacted by Parliament so long as it is within the ambit of its legislative competence. Sub-clause (iii) ofSection 271(1)(c)states that in cases where an assessee is found to have concealed particulars of his income or furnished inaccurate particulars of such income he may be directed to pay by way of penalty a sum which shall not be less than, but which shall not exceed twice, the amount of the income in respect of which particulars had been concealed or inaccurate particulars had been furnished. The. lower and upper limits prescribed by this sub-clause for the levy of the penalty are linked not to the total income of the assessee as determined in the assessment order but to the amount of the income in respect of which there has been a concealment of particulars or furnishing of inaccurate particulars. If, as contended by the assessee, the intention of Parliament was that the quantification of the penalty should be with reference to the assessee's "income" (meaning thereby the total income assessed) the concluding words occurring in the sub-clause after the expression "shall not exceed twice" need have been only "the income of the assessee" and it was wholly unnecessary for Parliament to use the words "the amount of the income in respect of which the particulars have been furnished". Parliament having deliberately added those words in the sub-clause it would be wrong to treat those words as a mere surplusage and the attempt of the court should be to find out the purpose underlying their use in the section. The words "in respect of which the particulars have been concealed or inaccurate particulars have been furnished" qualify the preceding expression "the amount of the income". By using those qualifying words the Parliament has made it clear that the quantification of penalty under Sub-clause (iii) is to be made with reference to that amount of the income of the assessee in respect of which there was concealment of particulars or furnishing of inaccurate particulars. Hence, it is not possible to construe the

word "income" occurring in Sub-clause (iii) as connoting the total income of the assessee as assessed underSection 143,144or 147. We have to understand the said word as having been used in the same wide sense in which it has been used in Clause (c) ofSection 271(1)of the Act. The quantification of penalty has, therefore, to be made not with reference to the total taxable income of the assessee as determined in the assessment order but with reference to the amount of the assessee's income, including expenditure, deductions, etc., in respect of which the assessee had either concealed particulars or furnished inaccurate particulars.14. It is quite conceivable that the amount of income in respect of which there has been concealment or furnishing of inaccurate particulars may, in certain cases, exceed the total income determined as assessable after making allowances for admissible expenses, other deductions and prior losses, if any, carried forward. The present case is a typical instance of that kind. Here, the amount of income in respect of which particulars had admittedly been concealed was Rs. 2,84,727, whereas the total income assessed was only Rs. 18,460. What Sub-clause (iii) enjoins is that even in such cases the quantification of the penalty has to be made with reference to the amount of the income in respect of which concealment of particulars or the furnishing of false particulars had actually taken place.15. It was argued on behalf of the assessee that the provision contained in the Explanation to Sub-clause (iii) lends support to the contention that the words "the amount of the income" occurring in the said sub-clause have to be understood to mean the total income as assessed to tax under the Act. We see no merit at all in this argument. All that the Explanation does is to lay down that even in the absence of any positive evidence regarding concealment of particulars of income or furnishing of inaccurate particulars of income by an assessee, such concealment on the part of the assessee shall be deemed to have taken place in all cases where the total income returned by him is less than 80% of the total income as assessed underSection 143,144or 147 unless it is proved by the assesses that the failure to return the correct income did not arise from any fraud or any gross or wilful neglect on his part. Far from furnishing any indication that the quantification of the penalty to be levied under Sub-clause (iii) is to be made with reference to the total income as assessed, the language used by Parliament in the Explanation shows that where it was intended to refer to the taxable income as determined in the assessment order Parliament had taken care to use the expression "the total income as assessed underSection 143, orSection 144orSection 147", which words are significantly absent in the main body of Sub-clause (iii).16. We may also refer to the recent amendment effected in Clause (iii) ofSection 271(1)(c)by theTaxation Laws (Amendment) Act, 1975, though the

amended provision is not applicable to the present case. The main body of the said sub-clause as it now stands after the amendment reads :"(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 :Provided that, if in a case falling under Clause (c), the amount of income (as determined by the Income-tax Officer on assessment) in respect of which the particulars have been concealed or inaccurate particulars have been furnished exceeds a sum of twenty-five thousand rupees, the Income-tax Officer shall not issue any direction for payment by way of penalty without the previous approval of the Inspecting Assistant Commissioner."17. There are four Explanations added to this sub-clause of which Explanation 4 alone is relevant for our present purpose. That Explanation reads:"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 ;(b) in any case to which Explanation 3 applies, means the tax on the total income assessed ;(c) in any other case, means the difference between the tax on the total income assessed and the tax that would have been chargeable had such total income been reduced by the amount of income in respect of which particulars have been concealed or inaccurate particulars have been furnished."Clause (a) of Explanation 4 extracted above makes it clear beyond doubt that in using the word "the amount of income in respect of which particulars have been concealed or inaccurate particulars have been furnished" what is intended to be referred to by Parliament is not "the total income assessed". This substantiates the correctness of the interpretation that we have placed on the provision of Sub-clause (iii) as it existed prior to the amendment.18. The conclusion that emerges from the foregoing discussion is that the Tribunal was in error in thinking that the word "income" occurring in Sub-clause (iii) ofSection 271(1)means the total income assessed to tax and that the total income computation made in the assessment order circum-scribes  the  quantum  of  concealment for the  purpose  of   proceeding for imposition of penalty underSection 271(1)(c)(iii).19. On the facts of the present case the minimum penalty imposable against the assessee on the basis of a correct application of Clause (iii) ofSection 271(1)was Rs. 2,84,727. The order passed by the Inspecting Assistant Commissioner imposing the said penalty against the assessee was perfectly valid. The interference made with the said order by the Tribunal on the basis of the erroneous assumption that penalty proceedings underSection 271(1)(c)(iii)of the Act cannot be taken in respect of any income higher than the total income as determined in the assessment proceedings was illegal and unwarranted.20. We, accordingly, answer the second part of the question in the negative, that is, in favour of the department and against the assessee. This reference is answered accordingly. There will be no direction regarding costs.21. A copy of this judgment under the seal of the High Court and the signature of the Registrar will be forwarded to the Tribunal as required by Sub-section (1) ofSection 260of the Act.