Sri Balaji Shivalingam V. Commissioner of Income Tax, A.P., Hyderabad

RC/109/2001

AI Insights

The case revolves around the imposition of a penalty under Section 271(1)(c) of the Income Tax Act, 1961, following the seizure of gold and cash from the applicant's premises by the Central Excise Department. The Income Tax Officer added the value of the seized gold and cash to the applicant's income and imposed a penalty for alleged concealment. The applicant contested the penalty, arguing that the gold belonged to his brother and was not concealed from the tax authorities. The court examined whether the imposition of the penalty was justified given the circumstances of the case, including the inconsistent treatment of the seized assets by different authorities.

• Counselvise Citation: [2014] 140 COUNSELVISE.COM (IT) 815875 (HC-ANDHRA_PRADESH)
• Appeal Type: Others
• Pronouncement Date: 08-08-2014
• Assessment Year: misc
• Other Referred Cases: UNION OF INDIA AND OTHERS v. DHARMENDRA TEXTILES PROCESSORS AND OTHERS, ANANTHARAM VEERASINGHAIAH & CO. v. C.I.T., LAGADAPATI SUBBA RAMAIAH v. CIT, S. KUPPUSWAMI MUDALIAR v. CIT, CIT v. S.C. KOTHARI, DR. T.A. QUERESHI v. CIT, CIT v. RELIANCE PETROPRODUCTS PVT. LTD., COMMISSIONER OF INCOME TAX, PATIALA v. PIARA SINGH
• Laws Referred To: Income Tax Act, 1961, Central Excise Act
• Result in Favour of: Others
• Court: HIGH COURT
• Department Lawyers: S R ASHOK
• Assessee Lawyers: Y RATNAKAR
• Keywords: Assessment; Concealment; Confiscation; Income Tax; Penalty; Seizure
• Section: 271(1)(c)

Judgement Text

"*THE HON’BLE SRI JUSTICE L. NARASIMHA REDDY AND HON’BLE SRI JUSTICE M. SATYANARAYANA MURTHY + REFERRED CASE No.109 of 2001 % 08-08-2014 # Sri Balaji Shivalingam … Applicant Vs. $ Commissioner of Income Tax, A.P., Hyderabad. … Respondent ! Counsel for the Applicant : Sri Y. Ratnakar Counsel for Respondent : Sri S.R. Ashok, Senior Counsel SC for Income Tax Dept. < Gist: > Head Note: ? Cases referred: 1. (2008) 306 ITR 277 (SC) 2. (1980) 123 ITR 457 (SC) 3. (2012) 349 ITR 196 (AP) 4. (1980) 124 ITR 40 5. (2006) 287 ITR 547 (SC) 6. (2010) 322 ITR 158 (SC) 7. (2008) 306 ITR 277 (SC) HON’BLE SRI JUSTICE L. NARASIMHA REDDY AND HON’BLE SRI JUSTICE M. SATYANARAYANA MURTHY REFERRED CASE No.109 of 2001 ORDER : (per Hon’ble Sri Justice L. Narasimha Reddy) Hyderabad Bench ‘B’ of Income Tax Appellate Tribunal passed order dated 21.7.1998 in R.A.No.268/Hyd/97 (in ITA.No.466/Hyd/94), referring the following question for opinion of this Court, at the instance of the assessee. Whether on facts and circumstances of the case, the Tribunal was right in confirming levy of penalty under Section 271 (1)(c) of the Income Tax Act, 1961? 2. The applicant is an assessee under the Income Tax Act, 1961 (for brevity “the Act”). He filed returns for the assessment year 1983-84 disclosing income of Rs.27,165/- and it was processed by the Income Tax Officer, B-Ward, Circle-I, Hyderabad. A revised return was filed showing the income of Rs.28,980/-. The authorities of the Central Excise Department conducted a search at the shop as well as the residence of the applicant on 5.5.1982. Gold worth Rs.3,30,400/- and cash of Rs.2,20,000/- in Indian currency was seized. On receiving intimation about this, proceedings under the relevant provisions of the Act were initiated. The seized gold was confiscated under the provisions of the Central Excise Act. A sum of Rs.1,50,000/- was levied as penalty. The balance of Rs.70,000/- that was found during the course of search, was requisitioned in favour of the Income Tax Department. 3. Through an order of assessment dated 29.11.1985, the Income Tax Officer dealt with gold worth Rs.3,30,400/- and currency of Rs.2,20,000/-; and ultimately a sum of Rs.3,30,400/- was added to the income. In addition to that, notice under Section 271 (1)(c) of the Act was issued requiring the applicant to explain as to why penalty of Rs.3,30,400/- be not levied. The explanation submitted by the applicant was deemed to be not satisfactory. The assessing authority passed order dated 26.2.1991 imposing penalty. The appeal filed before the Commissioner was dismissed through order dated 10.11.1993. Thereupon the applicant filed ITA Nos.466 and 467 of 1994. The appeals were dismissed through order dated 24.6.1997. Thereafter, the reference is made, on an application filed by the applicant. 4. Sri Y. Ratnakar, learned counsel submits that the gold that was seized and confiscated by the Central Excise Department was owned by the brother of the applicant and that the contention was impliedly accepted when the claim of the applicant for treating the value of the gold as business loss was disallowed. He submits that the Income Tax Officer has taken inconsistent views in the matter while dealing with the gold. Learned counsel submits that on the one hand, the gold was treated as the property of the applicant and was assessed to tax; and on the other hand, equivalent amount was disallowed as business loss; resulting from confiscation. He contends that whatever be the circumstances under which such inconsistent views were taken, there was no basis for imposition of penalty, particularly when no finding was recorded to the effect that the Income Tax Officer was satisfied about the concealment of gold. He submits that the applicant was an ordinary assessee, not being under obligation to maintain any books of accounts and the question of concealment of the gold in the income tax returns or the books of account does not arise. He has placed reliance upon certain precedents. 5. Sri S.R. Ashok, learned Senior Standing Counsel for the Income Tax Department, on the other hand, submits that it is a matter of record that the gold is not only seized from the applicant, but also was confiscated, and once the order of confiscation became final, the necessary corollary thereof is that the gold must be treated as the asset acquired through unexplained income. He submits that in the context of levying penalty, the intention of the assessee hardly matters and mere giving of inaccurate information or particulars is sufficient to initiate proceedings under that provisions. He placed reliance upon the judgment of the Supreme Court in UNION OF INDIA AND OTHERS v. DHARMENDRA TEXTILES PROCESSORS AND OTHERS[1]. 6. The addition of a sum of Rs.3,30,400/-, as income of the applicant, was the result of the seizure effected by the authorities of the Central Excise Department. The said amount represented the value of gold that was seized. In other words, the so called concealment was not the one unearthed or discovered by the Assessing Officer. The applicant does not have any serious grievance about the addition of that amount to the income or levy of income tax thereon. It is about the levy of penalty of equivalent amount under Section 271 (1)(c) of the Act by the Assessing Officer. 7. The purport of Section 271 (1)(c) of the Act is fairly well settled and well explained. The consistent view is that in a proceeding initiated under that provision are quasi-criminal in nature and the burden to justify the exercise squarely rests upon the revenue. Reference in this context may be made to the judgment of the Supreme Court in ANANTHARAM VEERASINGHAIAH & CO. v. C.I.T.[2]. After referring to the judgment of this Court in LAGADAPATI SUBBA RAMAIAH v. CIT, reported in (1956) 30 ITR 593 (AP) and that of the Madras High Court in S. KUPPUSWAMI MUDALIAR v. CIT, reported in (1964) 51 ITR 757 (Mad), the Supreme Court held as under: “….. A number of circumstances of vital significance may point to the conclusion that the cash deficit or cash credit cannot reasonably be related to the amount covered by the intangible addition but must be regarded as pointing to the receipt of undisclosed income earned during the assessment year under consideration. It is open to the revenue to reply on all the circumstances pointing to that conclusion. What these several circumstances can be is difficult to enumerate and in deed, from the nature of the enquiry, it is almost impossible to do so. In the end, they must be such as can lead to the firm conclusion that the assessee has concealed the particulars of his income or has deliberately furnished inaccurate particulars. It is needless to reiterate that in a penalty proceeding the burden remains on the revenue of proving the existence of material leading to that conclusion.” 8. It was also pointed out that a mere intangible addition to the assessee’s book profits, cannot by itself, lead to the conclusion that there was any concealment. 9. Recently, this Court in CHENNAKESAVA PHARMACEUTICALS v. CIT (AP)[3] held that before an Assessing Officer initiates proceeding under Section 271 (1)(c) of the Act, he must record his satisfaction that the assessee concealed the income or furnished inaccurate particulars of income, in his return. 10. In COMMISSIONER OF INCOME TAX, PATIALA v. PIARA SINGH[4], the Supreme Court took the view that if the business activity of an assessee is found to be illegal, neither the profits earned nor the losses incurred thereon can constitute the subject matter of Income Tax Act and, conversely, if the profits of an illegal business can be brought or dealt with under the Act, equally the lossess also must be deducted as legitimate expenses in the business. The following paragraph was extracted from the judgment of the Supreme Court in CIT v. S.C. KOTHARI, reported in (1971) 82 ITR 794: “If the business is illegal, neither the profits earned nor the losses incurred would be enforceable in law. But, that does not take the profits out of the taxing statute. Similarly, the taint of illegality of the business cannot detract from the losses being taken into account for computation of the amount which can be subjected to tax as ‘profits’ under Section 10(1) of the Act of 1922. The Tax collector cannot be heard to say that he will bring the gross receipts to tax. He can only tax profits of a trade or business. That cannot be done without deducting the losses and the legitimate expenses of the business.” 11. To overcome the effect of this situation, Section 37 of the Act was amended by the Parliament. The amended provision reads: “37. General:-- (1) Any expenditure (not being expenditure of the nature described in Sections 30 to 36 and not being in the nature of capital expenditure or personal expenses of the assessee), laid out or expended wholly and exclusively for the purposes of the business or profession shall be allowed in computing the income chargeable under the head “Profits and gains of business or profession”. (Explanation.)—For the removal of doubts, it is hereby declared that any expenditure incurred by an assessee for any purpose which is an offence or which is prohibited by law shall not be deemed to have been incurred for the purpose of business or profession and no deduction or allowance shall be made in respect of such expenditure. The following Explanation 2 shall be inserted after renumbered Explanation 1 to sub-section (1) of Section 37 by the Finance (No.2) Act, 2014, w.e.f. 1.4.2015: Explanation 2.—For the removal of doubts, it is hereby declared that for the purpose of sub-section (1), any expenditure incurred by an assessee on the activities relating to corporate social responsibility referred to in section 135 of the Companies Act, 2013 (18 of 2013) shall not be deemed to be an expenditure incurred by the assessee for the purposes of the business or profession.” 12. However, recently, the Supreme Court in DR. T.A. QUERESHI v. CIT (SC)[5], did not find much of difference. Their Lordship treated that the Heroin, a prohibited drug, found in possession of the assessee, is stock in trade and the result of seizure thereof was treated as business loss. In this context, the Supreme Court observed: “….. the Tribunal has held that the heroin seized was the assessee’s stock-in-trade it is implicit that the Tribunal reiterated the view that the assessee was doing the business of manufacture and sale of heroin. Once the income tax authorities record such a finding of fact, it follows that any loss from such a business is a business loss.” A specific reference was made to Section 37 of the Act, as amended. 13. In CIT v. RELIANCE PETROPRODUCTS PVT. LTD.[6], the Supreme Court held that a mere incorrect claim cannot be treated as a concealment or furnishing inaccurate particulars under Section 271 (1)(c) of the Act. 14. Learned Senior Counsel for the respondent, relied upon a judgment of the Supreme Court in UNION OF INDIA v. DHARMENDRA TEXTILES PROCESSORS[7], wherein it was held that the assessee would be exposed to strict liability, once it is found that there was a concealment or furnishing of inaccurate particulars, and that the penalty under Section 271 (1)(c) is a civil liability. It was also held that the concealment or furnishing of inaccurate particulars need not be wilful. 15. Keeping in view the principles enunciated in the precedents referred to above, the case of the applicant needs to be dealt with. 16. The applicant filed returns by disclosing the income of Rs.27,165/- and a revised return was filed showing the income at Rs.28,980/-. It is not the case of the Assessing Authority that the figures so furnished are wrong or that he detected any undisclosed income or profit. The search of the shop was undertaken by the authorities of Central Excise Department on 5.5.1982 and gold worth Rs.3,30,400/- and cash of Rs.3,400/- was found. The plea of the applicant through out was that the gold and cash are owned by his brother. That plea was not accepted and not only the entire gold was seized, but also a penalty of Rs.1,50,000/- was levied by the authorities. 17. To the extent the Assessing Authority under the Act added the value of the gold and the cash and added the same to his income, the applicant did make an effort to question it, but is reconciled to the situation. The controversy is now about the levy of penalty. 18. In case there existed any admission on the part of the applicant that the gold was held by him and, being under an obligation to furnish its value in the income tax returns, he did not do so, the allegation as to the concealment would have become acceptable. Though the impact of the proceedings initiated under the Central Excise Act and the Income Tax Act can constitute the basis to add income, levy of penalty on the allegation of concealment cannot be sustained. The reason is that concealment was not from the authorities of the Income Tax Department. It has already been mentioned that the applicant was not maintaining books of accounts and there was no occasion to disclose or conceal the gold from the point of view of Income Tax. 19. The matter needs to be examined from another angle. If the value of the gold was to be taken into account, the seizure thereof ought to have been treated as a loss in business. Though the applicant did not have the benefit of having the gold, its value was computed as income, instead of taking the seizure thereof as loss. Once it is treated as loss, non-disclosure thereof cannot be the subject matter of Section 271 (1)(c) of the Act. The provision concerned does not deal with the concealment of losses. 20. The cumulative effect of the steps taken by the authorities of the Central Excise Department and the Income Tax Department vis-à-vis the applicant are that— (a) gold worth Rs.3,30,400/- was seized; (b) a sum of Rs.1,50,000/- was levied as penalty under the Central Excise Act; (c) the value of the gold being Rs.3,30,400/- was added to income of the applicant by the Assessing Officer and tax was levied under the Act; (d) penalty was levied under Section 271 (1)(c) of the Act. 21. Though the applicant may not have much grievance about the seizure of gold since, according to him, it was owned by his brother, he felt brunt of levy of penalty of Rs.1,50,000/-, tax on Rs.3,30,400/- and penalty of Rs.3,30,400/-. For all practical purposes, he was treated as a fugitive criminal, and was subjected to so many punitive steps. 22. We are of the view that the levy of penalty of Rs.3,30,400/-, in the circumstances of the case, runs contrary to the provisions of the Act as well as the law laid down by the Supreme Court. 23. Accordingly, the question is answered in favour of the applicant and against the Department. _______​__________________________ JUSTICE L. NARASIMHA REDDY _____________​__________________________ JUSTICE M. SATYANARAYANA MURTHY 08.08.2014. NOTE: L.R. Copy be marked. (B/O) Msr HON’BLE SRI JUSTICE L. NARASIMHA REDDY AND HON’BLE SRI JUSTICE M. SATYANARAYANA MURTHY REFERRED CASE No.109 of 2001 08.08.2014 Msr [1] (2008) 306 ITR 277 (SC) [2] (1980) 123 ITR 457 (SC) [3] (2012) 349 ITR 196 (AP) [4] (1980) 124 ITR 40 [5] (2006) 287 ITR 547 (SC) [6] (2010) 322 ITR 158 (SC) [7] (2008) 306 ITR 277 (SC) "