Provisions of section include its explanations

Khanderao Dabke

The Supreme Court in KP Madhusudhan v CIT (2001 AIR SCW 3057) had to consider the scope of section 271 & in particular explanation to section 271 (1)(c) of the Income Tax Act (the Act) in respect of levy of penalty in respect of unexplained investment.

The facts of the case were as follows: The assessee was a partnership firm & had filed return of income declaring total income of Rs 676890. The assessment was completed determining total income of the assessee at Rs 790,170 which included sum of Rs 93,000 as income from other sources.

The assessee purchased rice from suppliers in Andhra Pradesh. The rice was sent directly and payment was made by demand draft or telegraphic transfer, which were not entered by the assessee in its cash books on the dates on which same were purchased and made respectively.

The assessee explained that as sufficient cash balance was not available to it on the dates of the transactions, it had obtained hand loans from friends and as it expected to repay such loans within shortime, no entries were made in the books of accounts in respect thereof. The assessee stated it was unable to furnish evidence for such loans it offered the amount of Rs 93,000 as additional income. Accordingly assessment was made.

Penalty proceedings were initiated against assessee under section 271(1)(c) of the Act. Assessee’s explanation with regard to loan was not acceptable and applying explanation (1B) of section 271(1)(c) the officer imposed a penalty of Rs 37,975. The appeal filed by the assessee against the above order was dismissed. The matter was then taken to the tribunal which allowed the appeal. A reference was made to high court which answered it in favour of the revenue. The high court was not persuaded to agree to the view taken by Bombay High Court in CIT v PM Shah (1993 203 ITR 792) in regard to the explanation to section 271(1)(c) of the Act.

The Supreme Court considered the relevant portion of section 271(1)(c) and considered the judgment of Bombay High Court in CIT v PM Shah. It was pointed out by the high court that explanation to section 271(1)(c) created a legal fiction.

The assessee would be deemed to have concealed the particulars of his income or furnished inaccurate particulars thereof in the circumstances set out in explanation. But for such legal fiction, it could not have been said that there was concealment of furnishing of inaccurate particulars of income simply because the return of income was less than 80 per cent of the assessed income. The explanation shifted burden to the assessee.

The high court concluded that “when the explanation is being resorted to by income tax officer or by inspecting assistant commissioner in penalty proceedings it is essential that the assessee must be informed that penalty proceedings against him are being commenced under it”. The court added that these are penalty proceedings and must be strictly construed. The assessee had no opportunity of meeting the case under explanation to section 271(1)(c).

In CIT v Dharamchand L Shah (1993 Tax LR 527), Bombay High Court following its earlier judgment in PM Shah’s case referred to the above and stated “in the absence of invoking the explanation specifically, the burden would remain on the revenue to bring the assessee’s case”. The apex court found it difficult to accept the above two judgments of Bombay High Court. The explanation to section 271(1)(c) is part of section 271 when income tax officer or the appellate assistant commissioner issues to the assessee a notice under section 271 he makes the assessee aware that the provisions thereof are to be used against him. These provisions include explanation. The assessee is therefore by virtue of the notice under section 271 put to notice that if he does not prove, in the circumstances stated in the explanation that his failure to return his correct income was not due to fraud or neglect he shall be deemed to have concealed the particulars of his income or furnished inaccurate particulars thereof and consequently be liable to the penalty provided by that section. No express invocation of explanation to section 271 is necessary before the provisions of the explanation therein are applied.

The Supreme Court then considered the case of Sir Shadilal Sugar & General Mills Ltd v CIT (AIR 1987 SC 2008). It was pointed out that in the above case the assessee had agreed to the addition to his income to buy peace & hence it did not follow that the amount added was concealed income & that the revenue was required to prove the mens rea of a quasi criminal offence.

However, Supreme Court added that because of the above view taken by it, the explanation to section 271 was added. By reason of addition of the explanation the view taken in Sir Shadilal Sugar’s case referred above can no long be said to be applicable. The appeal was dismissed.