ITAT, BANGALORE BENCH ‘B’ DCIT v. Prabhavathi Dharam Singh

Imposition of penalty for omission of an item of receipt from return of income



When there is a doubt as to the assessability of the receipt, it cannot be stated that by not including the same in the return, the assessee concealed his income or furnished inaccurate particulars thereof.



ITAT, BANGALORE BENCH ‘B’

DCIT

v.

Prabhavathi Dharam Singh

ITA NOS. 1134 TO 1137/Bang/07

August 14, 2008

RELEVANT EXTRACTS:

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25. We now turn to the merits of the levy of penalty. There are two aspects to the merits. The first is that according to the CIT (Appeals),

his income" in section 271(l)(c) would itself require the mental element to be established. His Lordship observed that the word "concealed" would itself import this requirement. This view found approval in the judgment of the Supreme Court in K.C. Builders & Ann V. ACIT 2004 265 ITR 562 (SC) where it was held that "concealment" inherently carries with it the element of mens rea and mere omission of an item of receipt from the return of income cannot amount to concealment and deliberate furnishing of inaccurate particulars of income, unless and until there is some evidence to show or circumstances are found from which it can be gathered that the omission was attributable to an intention or desire on the part of the assessee to hide or conceal the income so as to avoid levy of tax thereon. The judgment of the Supreme Court in Dilip N. Shroff (supra) cited by the Id. representative for the assessees in a different context supports the view that concealment of income and furnishing of inaccurate particulars refer to deliberate acts on the part of the assessee and a mere omission or negligence would not constitute a deliberate act of suppression veri or suggestion faisi. In T. Ashok Pai (supra), a judgment of the Supreme Court cited on behalf of the assessees in a different context, it was held that the Assessing Officer is required to arrive at a finding that the explanation offered fey the assessee was false. In light of these judgments, it is the duty of the Assessing officer to record a clear finding In the penalty order that the assessee was guilty of concealment of income or furnishing inaccurate particulars of income. We have already seen that the penalty orders in the present cases are identically worded, except in the case of Vijay Dharam Singh for the assessment year 2003-04. So far as the forfeiture of the deposit made by the developer is concerned, it was the view of the Assessing Officer in the penalty order that the assessee should have offered the same as income. So also, as regards the other two additions, viz., the capital introduced during the year and the net sale proceeds of old materials, all that the Assessing Officer has stated in the penalty orders is that these amounts ought to have been offered as income. The assessees' explanation that the deposit amount was under long dispute and was not still settled with the developer and that the additions were accepted by them merely to avoid protracted litigation has not been specifically addressed by the Assessing Officer. Since the requirement in law is that deliberateness should be proved in order to establish the charge of concealment, it was incumbent upon the Assessing Officer to demonstrate how the additions actually represented income of the assessees which they deliberately did not include in the return. This requirement has not been satisfied in the present penalty unders as rightly observed by the CIT(Appeals). The Id. Addl. CIT(DR) drew our attention to the judgment of the Supreme Court in K.P. Madhusudhanan v. CIT (2001) 251ITR 99 to contend that the ratio of the judgment of the Supreme Court in the case of K.C. Builders (supra) is no longer valid after the judgment in Madhusudhanan (supra), A perusal of the judgment in Madhusudhanan (supra) shows that what was held there was that there was no requirement that the Explanation (1) to section 271(l)(c) should be specifically referred to in the penalty notice and so long as the notice is issued u/s. 271(l)(c), it would include all the clauses and Explanations of the section and the penalty notice cannot be invalidated on that score. This case did not deal with the question which was before the Supreme Court in JC.C Builders' case (supra),

26 The other aspect on merits may now be looked into. The Id. representative for the assessees in the course of the arguments submitted that the assessees were not in the business of real estate or construction of properties and therefore the amount of security deposit made by the developer and forfeited by the assessees cannot be considered as their income, but it was a capital receipt in their hands. When, we asked him whether in an appeal against penalty proceedings, it was open to the assessee to contend that the addition itself was wrong, even though the addition had not been appealed against, it was submitted by the Id. representative for the assessees that the assessees were not questioning the addition in the present proceedings, but were merely pointing out that a capital receipt has been added as income for which no penalty could be imposed, notwithstanding that the addition of the receipt had become final. In Jainarayan Babulal v. CIT (1988) 170 ITR 399, it was held by the Bombay High Court that assessment proceedings are taxing proceedings and penalty proceedings are criminal proceedings in their very nature and that a decision given in an assessment proceeding cannot be possibly bind the parties and it is open to the ITO in penalty proceedings to consider his earlier finding that a particular receipt constituted income for a particular assessment year, but he is not bound by that finding and if any other evidence is produced in penalty proceedings, it is open to the ITO to come to a different conclusion. In this case, an addition was made for the assessment year 1950-51 even though in law it ought to have been made in the assessment year 1949-50. When this point was urged before the High Court by the assessee, contesting the penalty levied for the assessment year 1950-51, the Bombay High Court, referring to its earlier decision in CIT v. Gokuldas Harivallabhdas (1958) 34ITR 98 (Bom) and the judgment of the Supreme Court in CIT v. Anwar Ali (1970) 76 ITR 696 (SC) held that it was open to the assessee to question the very addition itself in an appeal filed against the levy of penalty since before penalty could be imposed, the entirety of circumstances must reasonably point to the conclusion that the disputed amount represented income for the year under consideration and that the assessee had consciously concealed the income or deliberately furnished inaccurate particulars. In view of this legal position, the Bombay High Court examined the assessee's contention and held that since the amount could not have been added in the assessment year 1950-51, no penalty can be imposed for concealment of income for that year. Reiterating this legal position, the Supreme Court has held in Ashok Pais case (supra) that since the burden of proof in penalty proceedings varies from that in the assessment proceedings, a finding in an assessment proceeding that a particular receipt is income, cannot automatically be adopted in the penalty proceedings, though a finding in the assessment proceedings may constitute good evidence in the penalty proceedings. It was mandated that in the penalty proceedings the authorities must consider the matter afresh as the ' question has to be considered from a different angle. Such a view had earlier been taken by the Supreme Court in CTT, Madras v. Khoday Eswarsa & Sons (1972) 83 TTR 369 (SC) and by a Bench of three Judges in Anantharam Veenasinghaiah & Co. (1980) 123 TTR 45?' (SC). In the light of these authorities, we must accept the submission of the Id. representative for the assessees that no penalty can be imposed with reference to the addition of a capital receipt as income in the assessment proceedings, notwithstanding that the addition was accepted by the assessee. In the present cases, there is no evidence to show that the three assessees were carrying on a business in real estate or construction of property. It appears to be an isolated instance where the assessees who all belong to the same family and were co-owners of the property had decided to develop the same under a development agreement with S.B. Constructions, retaining 70% of the developed properties for themselves and also having a right to buy the balance of 30% from the developer at the market price. The security deposit was taken from the developer in connection with the development of the property, but due to non-compliance of the terms of the development agreement regarding the time frame, the deposit was forfeited. It is a highly arguable question as to whether in these circumstances the amount forfeited can be taxed as the income of the assessees. When there is a doubt as to the assessabilty of the receipt, it cannot be stated that by not including the same in the returns, the assessees concealed their income or furnished inaccurate particulars thereof. In Cement Marketing Co. of India Ltd. v Asst. Commissioner of Sales Tax, Indore, and others (1980) 124 ITR 15, the Supreme Court held, while construing the penalty provisions for filing a false return under the M.P.General Sales Tax Act, 1958 that where the assessee does not include a particular item in the taxable turnover under a bona fide belief that he is not liable to do so it would not be right to condemn the return as a "false" return inviting imposition of penalty. It was further held that if the view canvassed by the revenue were accepted, the result would be that even if the assessee. raises a bona fide plea that a particular item is not includible in the return he would have to show At as forming part or the return and pay tax thereon on pain on being hauled up for penalty in case his contention is ultimately found by the court to be not acceptable which, accordingly to the court, "surely could never have been intended by the legislature". This judgment supports the assessee’s case, albeit indirectly.

27. So fare as the net sale proceeds of the old materials obtained on demolishing the property is concerned, the same reasoning would hold good and it must be held that the question whether the net sale proceeds constitute income of the assessee is again an arguable matter, which takes it out of the realm of penalty proceedings.

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