INCOME TAX REVIEW

1. Introduction

   In this Special Story on ‘Penalties under Income-tax Act, 1961’ this article on ‘Penalty for concealment of income’ assumes importance in view of the fact that it is directly related with the income an assessee is obliged to disclose and the assessed income. An attempt is made to analyse the provisions of section 271(1)(c) and the deeming provisions in the Explanations therein and to explain the same in the light of the judicial pronouncements.
    

2. Section 271(1)(c)

   Section 271(1)(c) of the Income-tax Act, 1961 provides for penalty for concealment of income. The main section 271(1)(c) reads as under:

   "271. Failure to furnish returns, comply with notices, concealment of income, etc.

   1. If the Assessing Officer or the Commissioner (Appeals) or the Commissioner in the course of any proceedings under this Act, is satisfied that any person-

      1. ............

      2. ............

      3. 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,-

      1. ..............

      2. ..............

      3. in the cases referred in clause (c), in addition to tax, if any, payable by him, a sum which shall not be less than, but which shall not exceed three times, 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."

   This main provision is supported by the Explanations providing for deeming fictions. Explanations 1 to 5 have been dealt with hereinafter in this article and Explanation 7 is covered in article on ‘Transfer pricing’. Explanation 6 is in respect of the adjustment u/s 143(1)(a), which is now not relevant, and hence not covered.
    

3. Satisfaction of authority for initiation of penalty

1. The authorities for levy of penalty u/s 271 have been listed as the Assessing Officer, the Commissioner (Appeals) and the Commissioner. The said provision further uses the phrase "in the course of any proceedings under this Act, is satisfied", meaning thereby that the authority concerned should be satisfied in the course of the proceeding before him that the default for penalty has been committed. In the case of the Assessing Officer such proceedings would mean the assessment proceedings and in the case of the Commissioner (Appeals) the appellate proceedings. Further in the case of the Commissioner such proceedings would be the proceedings for revision.
    

2. It is in this context the phrase ‘in the course of the assessment proceedings’ becomes important. Courts have interpreted that the levy itself need not be in the course of assessment proceedings and that the initiation is enough, but such initiation should be consequent on satisfaction in the course of assessment proceedings, of the liability of penalty. There should be a prima facie case for levy of penalty. The requirement that the action should be in the course of assessment proceedings and that such requirement is satisfied once there is valid initiation of proceedings would mean that there is an implied time prescribed for initiation of penalty proceedings.


 

3. In CIT vs. Ram Commercial Enterprises Ltd 246 ITR 568 (Del) it was held that the Assessing Officer has to form his own opinion and record his satisfaction before initiating the penalty proceedings and that it cannot be assumed that such a satisfaction was arrived at merely because the penalty proceedings had been initiated. In this case the Assessing Officer had directed in the assessment order that the penalty proceedings will be initiated separately. The Tribunal cancelled the penalty holding that the assessment order did not record the satisfaction as warranted by section 271 for initiating penalty proceedings. The Delhi High Court upheld the decision of the Tribunal and held as under:

   1. "The satisfaction as to the assessee having concealed the particulars of his income or furnished inaccurate particulars of such income is to be arrived at by the Assessing Officer during the course of any proceedings under the Act, which would mean the assessment proceedings, without which, the very jurisdiction to initiate the penalty proceedings is not conferred on the assessing authority by reference to clause (c) of sub-section (1) of section 271 of the Income-tax Act, 1961.

   2. The law is clear and explicit. Merely because this court while hearing this application may be inclined to form an opinion that the material available on record could have enabled the initiation of penalty proceedings that cannot be a substitute for the requisite finding which should have been recorded by assessing authority in the order of assessment but has not been so recorded.

   3. A bare reading of the provisions of section 271 and the law laid down by the Supreme Court makes it clear that it is the assessing authority which has to form its own opinion and record its satisfaction before initiating the penalty proceedings. Merely because the penalty proceedings have been initiated, it cannot be assumed that such a satisfaction was arrived at in the absence of the same being spelt
      out by the order of the assessing authority."

Following the above judgment of the Delhi High Court, the Allahabad High Court has laid down the same principle in Diwan Enterprises vs. CIT 246 ITR 571 (All). In this case, it was found that till the conclusion of the assessment proceedings the assessing officer had nowhere recorded his satisfaction that the assessee had concealed income. This failure on the part of the Assessing Officer was held to be jurisdictional defect for imposition of penalty u/s 271(1)(c). This principle has also been followed in CIT vs. Super Metal Re-rollers (P) Ltd. 265 ITR 82 (Del).
 

4. Concealment of income

1. The default referred to in the title to the section is ‘concealment of income’. It is implicit in the word "concealed" that there has been a deliberate act on the part of the assessee. The word ‘conceal’ has been derived from the Latin word ‘concelare’ which implies ‘to hide’. The meaning of the word "concealment" as found in Shorter Oxford English Dictionary, 3rd Edition, Volume I, is as follows: "In law, the intentional suppression of truth or fact known, to the injury or prejudice of another". The section refers to the following two types of concealments.
    

   1. Concealment of particulars of income; and

   2. Furnishing of inaccurate particulars of such income.
       

   These two may be overlapping. In furnishing the return of income, an assessee is required to furnish particulars and accounts on which such returned income has been arrived at. These may be the particulars as per his books of accounts, if he has so maintained, or on any other basis upon which he had arrived at the returned figure of income. Any inaccuracy made in such books of accounts or otherwise which resulted in keeping off or hiding a portion of his income is punishable as furnishing inaccurate particulars of his income.


 

2. Such inaccuracies may or may not be on account of the deliberate act on the part of the assessee to conceal income. The inaccuracies may be on account of a mistake or inadvertence on the part of the assessee. On noticing such inaccuracy the assessee may rectify the inaccuracy and correct the returned income either by way of filing a revised return or offering the amount of discrepancy in the course of assessment by way of an offer letter. If the inaccuracy is on account of deliberate concealment penalty will be imposable u/s 271(1)(c) of the Act. If the inaccuracy is merely on account of mistake or inadvertence then there could be no concealment and the penalty is not leviable.
    

5. Mens rea, whether necessary?

   ‘Mens rea’, is an ingredient of a criminal offence or a penal (quasi-criminal) provision, unless it is expressly or by implication excluded from the provision. The term ‘concealment’ itself presupposes a deliberate act on the part of the assessee. Therefore, the Courts had taken the view that ‘mens rea’ is required to be proved by the revenue for levying penalty under this section. However with the introduction of the Explanation providing for the deeming fiction of concealment there is a change. In the case of Sir Shadilal Sugar & General Mills Ltd 168 ITR 705 (S.C.) the Supreme Court had observed that the admission by itself does not mean concealment. There may be hundred and one reasons for the admission, i.e. on the assessee realising the true position he does not dispute certain disallowance but that does not absolve the revenue from proving the ‘mens rea’ of a quasi-criminal offence. Over-ruling this decision the Supreme Court has held in K. P. Madhusudan vs. CIT 251 ITR 99 (S.C.) that after the introduction of the Explanation there was no question of proof of mens rea. However, in K. C. Builders vs. ACIT 265 ITR 562 (S.C.) the Supreme Court has held as under:

   "‘Concealment’ inherently carries with it the element of mens rea. The fact that some figure or some particulars have been disclosed, even if it takes out the case from non-disclosure, would not by itself take the case out of the purview of furnishing inaccurate particulars. Mere omission from the return of an item of receipt; amounts neither to concealment nor to 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 imposition of tax thereon."
    

6. Burden of proof

1. Burden of proof on revenue

It is well established principle that in the case of taxing provisions and penal provisions the onus is always on the revenue to establish its claim for levy of tax or imposition of penalty. It is for the revenue to establish that as per the provisions of law tax is leviable or that the penalty is justified. In CIT vs. Anwar Ali 76 ITR 696 (S.C.), the Hon’ble Supreme Court held as under:

"Proceedings under section 28 of the Income-tax Act, 1922, are penal in character. The gist of the offence under section 28(1)(c) is that the assessee has concealed the particulars of his income or deliberately furnished inaccurate particulars of such income and the burden is on the department to establish that the receipt of the amount in dispute constitutes income of the assessee. If there is no evidence on the record except the explanation given by the assessee, which explanation has been found to be false, it does not follow that the receipt constitutes his taxable income. It would be perfectly legitimate to say that the mere fact that the explanation of the assessee is false does not necessarily give rise to the inference that the disputed amount represents income. It cannot be said that the finding given in the assessment proceedings for determining or computing the tax is conclusive. However, it is good evidence. Before penalty can be imposed the entirety of circumstances must reasonably point to the conclusion that the disputed amount represented income and the assessee had consciously concealed the particulars of his income or had deliberately furnished inaccurate particulars."

This judgment of the Hon’ble Supreme Court has laid down the following principles as regards the penalty for concealment of income:

1. Before penalty can be imposed the entirety of the circumstances must reasonably point to the conclusion that the disputed amount represented income and the assessee had consciously concealed the particulars of his income or had deliberately furnished inaccurate particulars.

2. Finding given in the assessment proceedings is not conclusive. It is a good evidence.

3. If there is no evidence on the record, except the explanation given by the assessee (or offer made by the assessee) it does not follow that the receipt constitutes his taxable income.

4. iv) Mere fact that the explanation of the assessee is false does not necessarily give rise to the inference that the disputed amount represents income.

5. The burden is on the department to establish that the receipt of the amount in dispute constitutes income of the assessee.

2. Explanation 1

   1. The above principles laid down by the Hon’ble Supreme Court put an extremely difficult task on the department to prove its case when most of the information and evidence is with the assessee. Therefore, Explanation 1 was inserted by the Finance Act, 1964, w.e.f. 1-6-1964, providing for rebuttable presumption, in the event of there being difference of more than 20% between the returned income and the assessed income. The Explanation was modified by the Taxation Laws (Amendment) Act, 1975, w.e.f. 1-4-1976 and by the Taxation Laws (Amendment & Miscellaneous Provisions) Act, 1986 w.e.f. 10-9-1986. The said Explanation 1 as in operation now reads as under:

      "Explanation 1. – Where in respect of any facts material to the computation of the total income of any person under this Act, –

      1. such person fails to offer an explanation or offers an explanation which is found by the Assessing Officer or the Commissioner (Appeals) or the Commissioner to be false, or

      2. such person offers an explanation which he is not able to substantiate and fails to prove that such explanation is bona fide and that all the facts relating to the same and material to the computation of his total income have 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 clause (c) of this sub-section, be deemed to represent the income in respect of which particulars have been concealed."

      Explanation 1 refers to two situations. Clause A contemplates failure to offer an explanation or offers an explanation which is found to be false. The second clause, Clause B, pertains to position where the assessee is not able to substantiate his explanation and fails to prove that the explanation was bona fide as also fails to show that all the material facts relevant to the income under dispute have been disclosed by him.

   2. Effect of Explanation 1; Shift of burden of proof:

   The Explanation 1 has modified the above mentioned principles laid down by the Hon’ble Supreme Court in CIT vs. Anwar Ali 76 ITR 696 (S.C.) and Sir Shadilal Sugar and General Mills Ltd. vs. CIT 168 ITR 705 (S.C.). In CIT vs. Mussadilal Ram Bharose 165 ITR 14 (S.C.), the Hon’ble Supreme Court observed as under:

   "Where the total income returned by the assessee is less than 80 per cent of the total income as assessed, the explanation to section 271(1)(c) of the Income-tax Act, 1961, shifts the burden to the assessee to show that the difference was not owing to fraud or gross or willful neglect on his part. This onus is rebuttable. If, in an appropriate case, the Tribunal or the fact-finding body is satisfied on relevant and cogent material on record and draws an inference thereupon that the assessee was not guilty of gross or wilful neglect or fraud, then, in such a case, the assessee cannot come within the mischief of the section and suffer penalty."

   In this case the Hon’ble Supreme Court was dealing with the A.Y. 1965-66. In CIT vs. Jeevan Lal Sah 205 ITR 244 (S.C.), the Hon’ble Supreme Court held as under:

   "Even after the amendment of 1964, penalty proceedings continue to be penal proceedings. Similarly, the question whether the assessee has concealed the particulars of his income continues to remain a question of fact. Where the Explanation has made a difference is while deciding that question the presumption created by it has to be applied, which has the effect of shifting the burden of proof. The rule regarding burden of proof enunciated in CIT vs. Anwar Ali (1970) 76 ITR 696 (S.C.), is no longer valid. Whether it is a case of undisclosed or unexplained cash deposit or any other concealment the standard is the same. The principle enunciated in Anwar Ali’s case that mere rejection of the explanation of the assessee is not sufficient for levying penalty no longer holds good and it is no longer necessary that the Department must go further and establish that there was conscious concealment of particulars of income or a deliberate failure to furnish accurate particulars. The cases to which the Explanation is attracted have to be decided in the light of the law enunciated in the case of Mussadilal Ram Bharose (1987) 165 ITR 14 (S.C.)."

   In K. P. Madhusudhanan vs. CIT 251 ITR 99 (S.C.), the assessee had relied on the judgment in the case of Sir Shadilal Sugar and General Mills Ltd. vs. CIT 168 ITR 705 (S.C.) and had submitted that the assessee had agreed to the additions to his income to buy peace and that it did not follow therefrom that the amount that was agreed to be added was concealed income and further that the revenue was required to prove the mens rea of a quasi-criminal offence. The Hon’ble Supreme Court held that it is because of the view taken in this and other judgments that the Explanation to section 271(1) was added and by reason of addition of that Explanation, the view taken in those case can no longer be said to be applicable. The Supreme Court also held that Explanation to section 271 is a part of section 271.
    

   3. Even after Explanation 1 burden to justify penalty is on revenue

   Prior to the insertion of the Explanation the burden cast on the revenue was extremely difficult. The Explanation has cast certain reasonable obligations on the assessee to explain the discrepancy of the additional income. In case the addition represents the income earned by the assessee it is the obligation of the assessee to explain as to how it was a mere case of mistake or inadvertence and not a case of concealment of income. If the addition does not represent the income earned by the assessee and the offer or acceptance of addition is merely to avoid litigation and to buy peace of mind the assessee will have to give an explanation to that effect. The assessee need not have to establish the explanation. Explanation must be reasonable, probable and bonafide. In Mussadilal Ram Bharose (1987) 165 ITR 14 (S.C.), the Hon’ble Supreme Court held that the burden placed upon the assessee is not discharged by any fantastic explanation and that it must be an explanation acceptable to the fact finding body. The assessee will have to provide the evidence in support of his explanation. In each case decision will have to be taken on the basis of the material on record. If the revenue proves that the explanation is false then it would be justified in levying penalty. Thus it could be seen that the last two principles ((iv) and (v)) in paragraph 6.1 above have changed in view of the Explanation 1 but the first three principles as enumerated therein continue to hold good. That is to say the levy of penalty has to be justified on the basis of entirety of circumstances and the material on record. Mere findings in the assessment proceedings are not sufficient. Some times the nature of addition itself could be self explanatory to show that the penalty is not justified. As for example, an ad hoc addition made merely on the basis of suspicion and without any supporting material would not justify levy of penalty. Section 271(1)(c) still continues to be penal provision. Therefore, the burden to prove that the penalty is justified still continues to be on the revenue.
    

   4. CIT vs. Suresh Chandra Mittal: 251 ITR 9 (S.C.)

   1. Recently, the Hon’ble Supreme Court has considered the provisions of section 271(1)(c) with Explanation. In this case, for the A.Ys. 1983-84 to 1986-87 the assessee had filed returns of income showing meagre income ranging between Rs. 10,000/- and
      Rs. 12,000/-. After search action u/s 132 of the Income-tax Act, 1961 the Assessing Officer issued notices u/s 148 of the Act. In response to the said notices the assessee filed revised returns showing higher income. Assessment orders were passed accepting the revised returns. In penalty proceedings u/s 271(1)(c), the assessee claimed that he had offered additional income to buy peace of mind and to avoid litigation. However, penalty u/s 271(1)(c) read with Explanation 1 was imposed.

   
    

   2. The Tribunal cancelled the penalty and held that the department had not discharged its burden of proving concealment and had simply rested its conclusion on the act of voluntary surrender done by the assessee in good faith. The Tribunal held as under:

      "The assessee had no chance of carrying through his explanation and the Assessing Officer too did not record any finding as to the acceptability or otherwise of the explanation of the assessee. Under these circumstances the proviso to Explanation 1 to section 271 is not attracted. The Revenue did not at all discharge the burden to prove that there was concealment of income by the assessee. It simply rested its conclusion on the act of voluntary surrender by the assessee, which obviously was done in good faith and to buy peace."

      The Tribunal also relied on the judgment of the Supreme Court in Sir Shadilal Sugar and General Mills Ltd. vs. CIT 168 ITR 705 (S.C.) and in particular the following observations of the Supreme Court at page 713:

      "We find that the assessee admitted that these were the incomes of the assessee but that was not an admission that there was deliberate concealment. From agreeing to additions, it does not follow that the amount agreed to be added was concealed income. There may be a hundred and one reasons for such admission, i.e., when the assessee realises the true position, it does not dispute certain disallowances but that does not absolve the Revenue from proving the mens rea of a quasi-criminal offence."

   
    

   3. In reference, the following question was raised before the Madhya Pradesh High Court:

      "Whether, on the facts and in the circumstances of the case, the Tribunal was justified in cancelling the penalty levied under section 271(1)(c) of the Income-tax Act, 1961?"

   
    

   4. The Madhya Pradesh High Court (241 ITR 124) upheld the decision of the Tribunal and held as under:

      1. "We find ourselves in agreement with the view taken by the Tribunal. It is well settled that under section 271(1)(c), the initial burden lies on the Revenue to establish that the assessee had concealed the income or had furnished inaccurate particulars of such income. The burden shifts to the assessee only if he fails to offer any explanation for the undisclosed income or offers an explanation which is found to be false by the assessing authority. However, the proviso to Explanation 1 provides for shifting of this burden again where the explanation offered by the assessee is found to be bona fide.

      2. In the present case, though it is true that the assessee had not surrendered at all and that he had done so on the persistent queries made by the Assessing Officer, but once the revised assessment was regularised by the Revenue and once the assessing authority had failed to take any objection in the matter, the declaration of income made by the assessee in his revised returns and his explanation that he had done so to buy peace with the Department and to come out of vexed litigation could be treated as bonafide in the facts and circumstances of the case. Therefore, the Tribunal was justified in cancelling the penalty levied by the Assessing Officer and affirmed by the Commissioner of Income-tax (Appeals) in the facts and circumstances of the case. This reference is accordingly answered in the affirmative holding that the Tribunal was justified in doing so."

      
       

      On appeal by the revenue, the Supreme Court dismissed the appeal holding that no interference with the order of the High Court was called for. The Supreme Court held as under:

      "We have read the order of the High Court and the statement of case. Given the facts and circumstances, we do not think that any interference with the order of the High Court is called for.

      The civil appeals are dismissed.

      No order as to costs."

      Thus, the Supreme Court approved the judgment of the High Court and the said judgment of the High Court merged into the judgment of the Supreme Court.

3. Summary

From the above discussion, following principles could be laid down as regards concealment penalty and burden of proof:

1. Mere agreeing for an addition or offering of an income does not amount to evidence of concealment of income.

2. If there is no evidence on record except the offer made by the assessee it does not follow that the offered income constitutes the concealed income.

3. Findings given in the assessment proceedings are relevant but not conclusive.

4. If the offered income is the real income of the assessee then the assessee has to explain as to how it was a case of mistake or inadvertence and not a case of concealment of income. If the addition does not represent the income earned by the assessee and the offer or acceptance for addition is merely to avoid litigation and to buy peace of mind, the assessee will have to give an explanation to that effect.

5. Assessee is not required to establish the explanation. Explanation must be reasonable, probable and bona fide. The burden placed on the assessee is not discharged by any fantastic or unacceptable explanation. It must be an explanation acceptable to the fact finding body.

6. In view of the Explanation 1, the burden which otherwise was on the revenue shifts to the assessee.

7. The presumption can be rebutted by placing on record material relevant and cogent. It is for the fact finding body to judge the relevancy and sufficiency of the materials. Material already on record can also be used and sometimes it may be self explanatory.

8. If the revenue proves that the explanation is false then it would be justified in levying penalty

9. Before penalty can be imposed the entirety of the circumstances must reasonably point to the conclusion that the disputed amount represented income and the assessee had consciously concealed the particulars of his income or had deliberately furnished inaccurate particulars.

7.  Agreed addition

1. Sometimes, there is no inaccuracy in fact. However, at a certain point of time, on account of lack of explanation, it is felt that there is an inaccuracy and in such an event an assessee agrees to offer the amount of the discrepancy as income and actually offers the amount as income and pays tax on such income. If he subsequently finds that there is no inaccuracy in fact then there would be no justification for levy of penalty under this section. In such a case the assessee can establish that there was no inaccuracy and that the addition of income itself was unwarranted. In such a case clearly, penalty cannot be justified.


 

2. In some circumstances inaccuracy is not detected but the accuracy is doubted or suspected and that would lead to litigation as regards the correctness of the returned income. In such circumstances, so as to avoid litigation and to buy peace of mind an assessee may agree to an addition to the income. There could be many other situations where the assessee agrees for an addition either by way of offer or by not disputing the addition in appeal or otherwise. In all such circumstances a question arises as to whether penalty for concealment would be justified in respect of such agreed addition. The simple answer to this question is that if the addition is on account of deliberate concealment of earned income then the penalty would be justified and in all other cases where there is no deliberate concealment there is no justification for the penalty.


 

3. Deliberate concealment is only one of many possible reasons for the inaccuracy in respect of the agreed addition. In Sir Shadilal Sugar and General Mills Ltd. vs. CIT 168 ITR 705 (S.C.) the Hon’ble Supreme Court observed as under:
    

   "From agreeing to additions, it does not follow that the amount agreed to be added was concealed income. There may be a hundred and one reasons for such admission; i.e., when the assessee realises the true position, it does not dispute certain disallowances but that does not absolve the Revenue from proving the mens rea of a quasi-criminal offence."

   Therefore, merely because there is an agreement to addition or an offer is made for addition it would not imply that there is concealment. However, the assessee would be required to give an explanation as contemplated in Explanation 1 to section 271(1).


 

4. Conditional offer

Sometimes an offer for addition is persuaded by a promise from the authority that the penalty will not be levied. Many a times it may be difficult to establish such a promise. The circumstantial evidence may support the existence of such a promise. Sometimes we come across offers for addition made with a condition that penalty will not be imposed or that penalty will be waived. In view of such a conditional offer the question arises as to whether penalty could be imposed on the basis of an addition made pursuant to such conditional offer. In Ramnath Jagannath vs. State of Maharashtra 57 STC 46 (Bom), the Hon’ble Bombay High Court has held that the offer can be accepted along with the condition and in the alternative the offer must be rejected. The Hon’ble Bombay High Court held as under:

"On a plain reading of the letter of assessee’s counsel to the Deputy Commissioner and in the light of the facts, it was clear that the offer made in the letter to give up the claim of deduction under first proviso to section 9 of the Act was clearly a conditional offer on the post-assessment penalty levied and leviable being given up. If it was not possible to accept that condition the only result would be that the said offer must be rejected. If it was rejected by the Deputy Commissioner he was bound to deal with the claim of the assessees for deduction under the first proviso to section 9 of the Act on merits.

That an offer is coupled with conditions which are not reasonable or one which cannot be accepted in law completely would not render unconditional the offer which is in terms made on a condition. If it is not possible to accept that condition, the only result would be that that offer must be rejected. But where an offer is coupled with conditions which cannot be accepted fully, the offer cannot be treated as an unconditional offer merely on that count."
 

5. Case Laws

1. CIT vs. Pioneer Engineering Syndicate 188 ITR 287 (Mad)

In the course of assessment proceedings for A.Y. 1964-65 the assessee offered an amount of Rs. 3,25,000/- being peak credit in its hundi loan account on the ground that certain borrowings from the Multani Bankers had not been disclosed. The assessee claimed that the offer was made in order to avoid further complications and to purchase peace with the department and particularly in view of the fact that the Multani Bankers had made statements before the department denying the transactions. Penalty was imposed on such offered amount. The Tribunal held that the additions made on account of the unproved hundi loans on an agreed basis could not be a ground for holding that the assessee was guilty of concealment of income particularly when the assessee had specifically pointed out that it was only submitting the amount for assessment in order to buy peace with the department and not on the basis of any admission that a hundi loans were not genuine. The Tribunal accordingly cancelled the penalty. The Hon’ble Madras High Court held as under:

"The offer of the assessee for getting the amount of peak credit in hundi loans account assessed on the ground that it was taxable income could not by itself amount to an admission that income had been concealed, particularly in the context of the statements by the assessee in the petition before the Commissioner under section 271(4A) which made it clear that, though the hundi loans were genuine, the assessee’s willingness to get assessed on the amounts was only because it would be difficult to prove the genuineness of the credits under the conditions created by the denial by the Multani Bankers of their advances. The Tribunal was right in holding that the petition by itself would not furnish any evidence whatever of concealment of income and, consequently, the deletion of penalty was justified."
 

2. CIT vs. Haji Gaffar Haji Dada Chini 169 ITR 33 (Bom)

In this case the assessee offered cash credits with a letter stating that the penalty may be imposed on the basis of merits. The Tribunal cancelled the penalty. The Hon’ble Bombay High Court held that the offering of credits in respect hundi loans for assessment did not amount to an admission of concealment of income and that the levy of penalty on such basis was liable to be quashed.
 

3. CIT vs. Kiran and Co. 217 ITR 326 (Bom)

In this case the Hon’ble Bombay High Court observed that the amount was offered for assessment with a stipulation that penalty might be waived and that the offer was accepted by the revenue. The Hon’ble Bombay High Court held that the offer for the settlement was not an evidence of concealment of income and that the Tribunal was justified in deleting the penalty.
 

4. CIT vs. Jogibhai Mangalbhai 193 ITR 404 (Bom)

In this case the assessee agreed to the inclusion of the items disclosed in Part IV of the return of income so as to buy peace of mind. The Hon’ble Bombay High Court held that there is no evidence to show that income had been concealed and that the penalty cannot be levied. The High Court observed as under:

"The letter which was the basis of the settlement made it abundantly clear that the assessee was offering the amounts for taxation for buying peace and had asserted that the amounts in fact represented the prize money and the chandla receipts both in his case and in the case of his brother. There remained virtually nothing on record to suggest that the amounts offered for taxation really represented the assessee’s income in the sense that they would attract the penal provisions of section 271(1)(c) read with or without the Explanation thereto.
The cancellation of penalty was, therefore, valid."
 

5. Shiv Lal Tak vs. CIT 251 ITR 373 (Raj)

In this case the assessee agreed to an addition by estimation of gross profit as the assessee was not in a position to vouch each and every details of expenses entered in books of account. The assessee’s explanation was not accepted because the assessee failed to substantiate it. The Hon’ble Rajasthan High Court held that it is not a case of deliberate false explanation and that it does not raise a presumption about deliberate concealment and lakh of bonafides. The High Court held that penalty is not to be levied in such a case.
 

8. Explanation 2

   Explanation 2 was introduced by Taxation Laws (Amendment) Act, 1975. The Explanation reads as under:

   "Explanation 2. – Where the source of any receipt, deposit, outgoing or investment in any assessment year is claimed by any person to be an amount which had been added in computing the income or deducted in computing the loss in the assessment of such person for any earlier assessment year or years but in respect of which no penalty under clause (iii) of this sub-section had been levied, that part of the amount so added or deducted in such earlier assessment year immediately preceding the year in which the receipt, deposit, outgoing or investment appears (such earlier assessment year hereafter in this Explanation referred to as the first preceding year) which is sufficient to cover the amount represented by such receipt, deposit or outgoing or value of such investment (such amount or value hereafter in this Explanation referred to as the utilised amount) shall be treated as the income of the assessee, particulars of which had been concealed or inaccuratre particulars of which had been furnished for the first preceding year, and where the amount so added or deducted in the first preceding year is not sufficient to cover the utilised amount, that part of the amount so added or deducted in the year immediately preceding the first preceding year which is sufficient to cover such part of the utilised amount as is not so covered shall be treated to be the income of the assessee, particulars of which had been concealed or inaccurate particulars of which had been furnished for the year immediately preceding the first preceding year and so on, until the entire utilised amount is covered by the amounts so added or deducted in such earlier assessment years."

   This Explanation provides for penalty for concealment discovered in retrospect. Where additions are made on estimate basis; i.e., intangible additions, penalty may not be levied on the ground that the addition may not represent real income. However the assessee may rely on such additions to explain the cash credits or investments in the subsequent year or years. If such explanation is accepted, then the intangible addition will represent real income deserving penalty u/s 271(1)(c). However for technical reasons or on account of time such addition may escape penalty. This situation is taken care by this Explanation 2, and sub-section (1A) of section 271. In such an event the explanation provides that the intangible addition of the earlier year used for explaining the investment or cash credit will be treated as concealed income. Sub-section (1A) of section 271 further provides that the penalty proceeding could be initiated notwithstanding that any proceedings under this Act in the course of which such penalty proceedings could have been initiated under sub-section (1) have been completed.
    

9. Explanation 3

1. Prior to amendment by the Finance Act, 2002

The Explanation 3 was inserted by the Taxation Laws (Amendment) Act, 1975 w.e.f. 1-4-1976. Prior to the amendment by Finance Act, 2002 w.e.f. 1-4-2003 the said explanation read as under:

"Explanation 3. – Where any person who has not previously been assessed under this Act, fails, without reasonable cause, to furnish within the period specified in sub-section (1) of section 153 a return of his income which he is required to furnish under section 139 in respect of any assessment year commencing on or after the 1st day of April, 1989, and until the expiry of the period aforesaid, no notice has been issued to him under clause (i) of sub-section (1) of section 142 or section 148 and the Assessing Officer or the Commissioner (Appeals) is satisfied that in respect of such assessment year such person has taxable income, the, such person shall, for the purpose of clause (c) of this sub-section, be deemed to have concealed the particulars of his income in respect of such assessment year, notwithstanding that such person furnished a return of his income at
any time after the expiry of the period aforesaid in pursuance of a notice under section 148."

The said Explanation provided for a presumption of concealment of income in the case of a new assessee if the return of income is not filed within the period specified in section 153(1) which prescribes the period for completion of assessment. The presumption does not apply to the case of an assessee who has been previously assessed under the Act. The presumption does not apply if a notice
u/s 142(1) or u/s 148 is issued by the Assessing Officer within the said period specified in section 153(1). The presumption would be applicable where return of income is filed after the period specified in section 153(1) and in pursuance of a notice u/s 148.
 

2. Amendment by Finance Act, 2002

The Finance Act, 2002 has omitted the words ‘who has not previously been assessed under this Act’ w.e.f. 1-4-2003. By the said amendment the explanation would cover the case of an existing assessee also. The object of the said Explanation is to provide for deemed concealment and not to provide for penalty for delay in filing the return of income. As per the unamended Explanation 3, it was applicable only in a case where the assessee was not on the records of the department. If the assessee is already on the records then the presumption of concealment by non filing of the return in time was not applicable. As for example, where the assessee had already been assessed he is already on record and the presumption was not applicable. Even if the assessee has not been assessed but if a notice u/s 142(1) or u/s 148 is issued within the time prescribed u/s 153(1) then the presumption was not applicable. Thus the presumption of concealment was intended to be applicable only in a case where the assessee was beyond the knowledge of the department and has not filed the return of income till the period prescribed u/s 153(1) for completion of assessment. The said amendment would convert a penalty for concealment into a penalty for delay in filing the return of income. Up to A.Y. 1988-89 section 271(1)(a) provided for penalty for delay in filing the return of income which has been substituted by section 234A providing for interest in case of delay in filing the return. The said amendment to Explanation 3 would mean back door entry to the old section 271(1)(a) providing for penalty for delay in filing the return of income, in a different form. This is patently illogical and unreasonable. This also will result in duplication of penalty for not filing return in time which is also provided u/s 271F of the Act. The said amendment is contrary to the basic concept of concealment.
 

10. Explanation 4


 

1. This Explanation was introduced by the Direct Tax Laws (Amendment) Act, 1975 to cover cases where the returned income is a loss. The Finance Act, 2002 has substituted clause (a) of the Explanation w.e.f. 1-4-2003. The said amended Explanation reads as under:

   "Explanation 4. – For the purposes of clause (iii) of this sub-section, the expression "the amount of tax sought to be evaded",–

   1. in any case where the amount of income in respect of which particulars have been concealed or inaccurate particulars have been furnished has the effect of reducing the loss declared in the return or converting that loss into income, 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;]

   2. in any case to which Explanation 3 applies, means the tax on the total income assessed;

   3. 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."

   
    

2. In CIT vs. Prithipal Singh 249 ITR 670 (S.C.) the Supreme Court had held that where both the returned income and the assessed income is a loss, the Explanation will not be operative and there will be no penalty u/s 271(1)(c) of the Act. In the memorandum explaining the amendments in the Finance Bill, 2002 it is stated that the amendment to Explanation 4 is to clarify that in case where the income in respect of which particulars have been concealed or inaccurate particulars have been furnished has the effect of reducing the loss declared in the return or of converting that loss into income, the tax sought to be evaded shall be the tax that would have been chargeable on the amount of such income as if it were the total income. After this amendment it is a matter of debate as to whether the above decision of the Supreme Court would be applicable. There is a difference of opinion on this point.
    

11. Explanation 5

1. Explanation 5 was introduced by the Taxation Laws (Amendment) Act, 1984 w.e.f. 1-4-1984. The said Explanation as existing reads as under:

   "Explanation 5. – Where in the course of a search under section 132, the assessee is found to be the owner of any money, bullion, jewellery or other valuable article or thing (hereafter in this Explanation referred to as assets) and the assessee claims that such assets have been acquired by him by utilising (wholly or in part) his income, –
    

   1. For any previous year which has ended before the date of the search but the return of income for such year has not been furnished before the said date or, where such return has been furnished before the said date, such income has not been declared therein; or

   2. for any previous year which is to end on or after the date of the search then, notwithstanding that such income is declared by him in any return of income furnished on or after the date of the search, he shall, for the purposes of imposition of a penalty under clause (c) of sub-section (1) of this section, be deemed to have concealed the particulars of his income or furnished inaccurate particulars of such income, [unless, –
       

      1. such income is, or the transactions resulting in such income are recorded,-

         1. in a case falling under clause (a), before the date of the search; and

         2. in a case falling under clause (b), on or before such date,

         in the books of account, if any, maintained by him for any source of income or such income is otherwise disclosed to the [Chief Commissioner or Commissioner] before the said date; or
          

      2. he, in the course of the search, makes a statement under sub-section (4) of section 132 that any money, bullion, jewellery or other valuable article or thing found in his possession or under his control, has been acquired out of his income which has not been disclosed so far in his return of income to be furnished before the expiry of time specified in sub-section (1) of section 139, and also specifies in the statement the manner in which such income has been derived and pays the tax, together with interest, if any, in respect of such income."

      
       

2. Prior to the insertion of this explanation, the assessee found to be the owner of any money, etc. was entitled to rebut the presumption of concealment by demonstrating that the same were acquired by him from his income of the previous year which was yet to end and thus could have escaped the liability to penalty. Explanation 5 was added to plug such a loop hole. The explanation deems that if such transaction resulting in the income is not recorded in the books of account he shall be deemed to have concealed the amount. The explanation has two aspects the first is that it deems concealment even before return is filed. The other is that it waives such penalty on the deemed concealment, where such concealment is admitted by the assessee. But then the period for which the protection of the Explanation would be available is unduly restricted in that it relates to the previous years which has ended before due date for search but the return of income for such year has not been furnished or the previous year has yet to end as on the date of search. Concealment is deemed where the transaction is either not recorded in the books or has been disclosed to the Chief CIT or CIT.
    

12. Conclusion

    The subject on ‘Concealment of income’ is very vast and never ending. It is practically impossible to cover each and every aspect very exhaustively. Taking into account the limitation on the length some important aspects have been dealt with in details and the remaining aspects have been dealt with in brief. We hope that it would reasonably satisfy the readers.