A.V. Thomas and Co. (India) Ltd. vs The Commissioner of Income Tax

Venkatadri, J.—This is an income tax reference on a direction by this Court u/s 66 (2) of the income tax Act and the question we are called

upon to consider is:

Whether on the facts and in the circumstances of the c case the levy of penalty u/s 28(1) (c) of the income tax Act was justified and whether there

was material on record to support the findings that there was deliberate concealment of the Assessee''s income in the two years in question.

The facts giving rise to this reference may be stated as follows: The Assessee is a public limited company dealing in rubber, tea and radios. Tor

the years 1944-45 and 1945-46 they were assessed on the declared income of Rs. 26,259 and Rs. 33,251 respectively. The second additional

income tax officer, Calicut, by his letter, dated 27th February 1951, informed the Inspecting Assistant Commissioner of income tax, Western

Range, Coimbatore, that the Assessee derived income from the Vellarmalai Plantations Ltd., Calicut, for the period 13th September 1942 to 21st

April 1944. On the basis of this information, the income tax officer issued Section 34 notice to the Assessee for the years 1944-45 and 1945-46.

The Assessee returned the same figures. The income tax officer came to the conclusion that the Assessee company did not disclose the income

from the Vellarmalai Plantations Ltd., which was determined at Rs. 13,500 and added it to the income originally assessed. Subsequently, action u/s

28(1) (c) was taken for concealment of income. The income tax officer was of the opinion that the Assessee failed to disclose the income in its

return and levied a penalty of Rs. 9,000 for each of the assessment years. The Assessee preferred an appeal, but was unsuccessful. The matter

was carried further to the Tribunal and the Tribunal also came to the conclusion that the Assessee concealed particulars of its income un its returns

for both the years and thereby brought itself within the mischief of Section 28 (1) (c). The Tribunal confirmed the penalty imposed. The attempt of

the Assessee to cause a reference to be made u/s 66(1) of the Act failed. Then the Assessee filed an application u/s 66(2) and this Court directed

the Tribunal to refer the question as stated above.

While directing the Tribunal to state a case, this Court observed:

What exactly was the scope of the information the income tax officer sought at that stage is not clear from the material placed before us.... The

Tribunal will give an opportunity to the Assessee to disclose by an affidavit what was the scope of the further information that was called for by the

income tax officer in response to which the letter, dated 3rd December 1944 was addressed by the Assessee company to the income tax officer

and that aspect of it will also be taken into account in preparing the statement of the case to be submitted to this Court.

Now it is necessary for us to state briefly the circumstances under which the penalty was levied from the Assessee company for the years 1944-

45 and 1945-46. As stated already, the Assessee is a public limited company dealing in rubber, tea and radios. A.V. Thomas is the managing

director of the Assessee company. One M.C. Chandy entered into a contract with Parry & Co., Ltd., to purchase Vellarmalai Estate. M.C.

Chandy had an option to assign to his nominee his right to purchase. It was at this stage that A.V. Thomas, the managing director of the Assessee

company, negotiated with M.C. Chandy for an assignment of the latter''s right to purchase Vellarmalai Estate. This Vellarmalai Estate was not

intended to be purchased for and on behalf of Messrs. A.V. Thomas and Co. (India) Ltd., but to float a separate company called The Vellarmalai

Plantations Ltd. As the formation of the new company would take time, the Assessee company paid the consideration therefore and obtained

possession of the estate on 13th September 1942. The sale deed was taken on 22nd November 1944. During this period the Assessee company

was dealing with the estate for and on behalf of the Vellarmalai Plantations Ltd., to be formed. While the Assessee was dealing with this estate, all

the receipts and expenses were recorded in the Assessee''s books of account in a separate folio styled Vellarmalai Estate. This account is for the

period 1st October 1942 to 21st April 1944. At no time did the company draw up the accounts and ascertain the results of the estate; nor were

the results taken into the profit and loss account of the company. Even assummg that there were profits in the Vellarmalai Estate, it was neither

available to the Assessee nor distributed to the share-holders of the Assessee company. Even at the time of the original assessment, the Assessee

company sent a letter on 8th December 1944, giving details regarding (i) schedule for other finance, (ii) investments and (iii) reconciliation for

furniture account appearing in the balance-sheet as at 30th June 1943. In the schedule detailed by the Assessee company under annexure B-2, at

the time of the assessment proceedings, it disclosed the following figures to the income tax officer; Vellarmalai lorry upkeep account Rs. 1,655-3-

10 and Vellarmalai capital account Rs. 41,196-12-0. The income tax officer evidently did not probe into this matter in greater detail in regard to

the character of the entry Vellarmalai capital account, though he called upon the Assessee to explain various other matters such as investment

account, latex case, profit and sale investments and other miscellaneous income and the details for the loss in crude oil account.

When the income tax department started proceedings u/s 28, the Assessee sent a letter, dated 15th April 1952, complaining that the officer was

aware that all the receipts and expenses of Vellarmalai Plantations Ltd., were treated as distinct from its own receipts and expenses and the

balance was transferred to the new company after its formation. The Assessee company made it very clear to the income tax officer by placing all

the materials before him that it did not treat the estate as its own but it only financed on behalf of the company to be formed. Nevertheless, the

income tax officer treated the receipts as the income of the Assessee company and added it to the original return. The addition of this amount to

the return submitted is not disputed. But what the Assessee company complains is that it was never the intention of the Assessee to conceal any

particulars. It had brought all the receipts and expenses relating to the estate into its accounts and all the particulars called for by the department,

both during the original assessment proceedings and after issuing notice u/s 34, have been duly furnished. Therefore, there is no justification for the

income tax officer taking proceedings u/s 28.

In pursuance of the directions given by this Court at the time of passing the order u/s 66 (2), an affidavit was filed by the manager of the

Assessee company to the effect that the income tax officer accepted the return of the income and there was an elaborate enquiry. The existence of

Vellarmalai Estate was clearly disclosed to the income tax officer. The company bona fide believed that the income from the estate was held for the

benefit of the company to be formed. All receipts and expenses relating to the Vellarmalai Estate had been entered in the books of account and this

account was included under other finances in the balance sheet, as is evident from the schedule. The income tax officer also filed an affidavit to the

following effect. It is true that the Assessee, at the time of the original assessment proceedings, placed the balance sheet and also the schedule to

the balance sheet exhibiting Vellarmalai lorry upkeep account and capital account and also the other particulars called for by the income tax officer

at the time of the assessment. Beyond that he did not state anything. Now it is on these facts that we have to consider whether the Assessee has

concealed the particulars of its income or deliberately furnished inaccurate particulars of such income [Section 28(1) (c) of the Income tax Act],

The word conceal implies something more than mere failure to disclose and it pertains to an affirmative action likely to prevent or intended to

prevent knowledge of fact and refers to some advantage to the con"" cealing party or disadvantage to some interested party from whom the fact is

withheld. Webster in his dictionary gives the meaning for the word conceal as to hide, withdraw from observation or to cover to keep from sight.

Secrecy is an essential ingtedient of the act of concealment. To constitute concealment, it must appear that the statements or act of the person was

calculated and designed to prevent discovery of the act with which he is charged. This act must be misleading, false or deceptive. There is an

element of mens rea in the matter of furnishing particulars. When interpreting the statutory offence, it is very difficult to procure adequate proof of

guilty knowledge ; that is the doctrine of mens rea. All that it involves is the principle that the act must be attributable to the person, that is, it must

have been done intentionally and not accidentally. To involve persons in statutory offences, it must be in the form of wilfully, knowingly, permitting,

suffering, allowing or causing.

The Assessee, at the time of its original assessment and again at the time of Section 34 proceedings, took pains to explain, clarify and clear the

doubt regarding the character of the revenue receipt to the revenue authorities and said that the entry under the heading Vellar Malai Estate did not

concern with the dealings of the Assessee company and that it related to the Vellar-malai Plantations Limited, to be formed. As a matter of fact,

this amount was transferred to the new company after its formation. The profits and loss of the Vellarmalai Estate were not at all taken into

consideration while preparing the balance sheet of the Assessee company. But the income tax authorities, except adding the amount to the original

return did not attempt to make any enquiry or call for the details. about the disputed entry regarding the Vellarmalai Estate. The revenue authorities

refrained from making further enquiries in regard to this entry. When the income tax officer was careful enough to call for particulars, at the time of

assessment, in regard to latex, secretarial fee, payment to the supply department, motor car and vehicles account, etc., he did not call for any

explanation regarding this estate, probably he neither suspected nor doubted the character of the entry. Again, at the time of Section 28

proceedings, the Assessee explained that it was not the intention of the Assessee to treat the receipts and expenses of the Vellarmalai Estate as

part of its dealing in the books of the company, on the other hand, it was treated as distinct and separate from its own receipts. There is no

reasonable explanation by the revenue authorities for not accepting this explanation. The uncou-troverted facts are that at the time of the entry in

the accounts, the company was in the formation stage and that capital account of Vellarmalai Estate was transferred to the new company after its

formation. The Assessee might have made this entry under the bona fide belief, as it was managing the estate for and on behalf of a new company

to be formed. It cannot be said that the Assessee made this entry with the conscious and deliberate intention of suppressing the income from the

estate. Nor can it be said that the entry was made with a deceptive intention to mislead the Revenue. At the time of the original assessment the

Assessee placed before the assessing authorities all the available materials in connection with the estate. The Appellate Assistant Commissioner

says-

Though the Appellant was conscious of the receipts of revenue nature from the estate and of the facts that the receipts were earned by him, he did

not declare income either in his own return or submit a separate return making his position clear.

No man can prove the state of another man''s mind. George Spencer Bower in his Law of Actionable Misrepresentation at page 32 observed

as follows:

The state of a man''s mind, according to Bowen L.J., in Edgington v. Fitzmaurice (1885) 29 Ch.D. 459, 483 is as much a fact as the state of his

digestion. It is true that it is very difficult to prove what the state of a man''s mind at a particular time is, but, if it can be substantiated, it is as much

fact as anything else. A misstatement of the state of a man''s mind is a misrepresentation of fact.

Again, the same noble Lord in Angus v. Clifford (1891) 2 Ch. 449, 470 expresses:

A man may tell a he about the state of his own mind just as much as he can tell a lie about the state of the weather, or the state of his own

digestion. It makes, to be sure, the inquiry a difficult and complicated one,....

In Commissioner of Income Tax, Ahmedabad Vs. Gokuldas Harivallabhdas, it was held that the proceedings for the levy of penalty under the

Income tax Act were in the nature of criminal proceedings. But subsequently the Supreme Court in C.A. Abraham, Uppoottil, Kottayam Vs. The

Income Tax Officer, Kottayam and Another, held that penalty was no more than an additional tax. The application of this principle has been

extended, by a recent decision of the Allahabad High Court in LAL CHAND GOPAL DAS Vs. COMMISSIONER OF Income Tax, U.P.

AND V.P., to cases of imposition of penalty for concealment of income. The decision laid down the following principles:

(i) There is no essential difference between a tax and a penalty. Additional tax imposed on an Assessee for his contumacious conduct is designated

as penalty.

(ii) A penalty is not a criminal proceeding. In England and the United States, actions for penalties are civil actions, recoverable in a civil Court. The

normal rules as to pleadings in civil actions apply, and the tax payer is required to furnish the particulars.

(iii) The finding in the assessment proceeding is not res judicata or conclusive in the penalty proceedings. Fresh evidence may be given by the

Assessee in the penalty proceedings, and the income tax authorities cannot refuse to consider it.

(iv) The onus of proof of non-concealment lies on the Assessee. There can be no question of the Income Tax Authorities leading evidence to prove

concealment. What is required under the law is that the Income Tax Authorities should have materials to justify their conclusion of concealment.

Applying the above principles to the instant case, we feel that the Assessee not only placed all the available materials before the income tax

authorities but the Revenue refrained either from probing further into the details of this disputed entry or making further enquiry about the same.

The Revenue cannot merely say that the assesses was conscious of the receipts of revenue nature from the estate. It is not stated that the

explanation offered by the Assessee either at the time of the original proceedings or at the stage of Section 28 proceedings was false or that the

authorities were not satisfied with the same. As observed in Khemraj Chaggan Lal Vs. Commissioner of Income Tax, , it is one thing to say that

the explanation of the Assessee with regard to the source and nature of the amount was not satisfactory ; it is another thing to say that the Assessee

is guilty of wilful suppression of the particulars of his income in the income tax proceedings. Having perused the orders of the Appellate Tribunal, of

the Assistant Commissioner and of the income tax officer in this case, we are satisfied that the Assessee has furnished a plausible explanation of the

source and nature of the credit entry. At this stage the following passage of Romer J., In Re: City Equitable Fire Insurance Co. (1925) 1 Ch. 407,

431 may usefully be referred:

...unless he knows that he is committing, and intends to commit, a breach of his duty, or is recklessly careless in the sense of not caring whether his

act or omission is or is not a breach of duty.

We feel that these observations apply to the instant case, as the income tax officer says that the Appellant was conscious of the receipts of

revenue nature from the estate, and the Appellate Tribunal observes:

the manner in which the account has been exhibited on the balance sheets and in the schedules cannot give a true picture of the transaction.

The Revenue must have assigned reasons for their conclusion that the balance sheet is not a true picture of the transaction and there must be

sufficient material for the conclusion that the Assessee concealed its income. It is true that the onus of proof of non-concealment is on the

Assessee. But, after the Assessee discharged that burden, the principle is, as stated by the House of Lords in Fattorini Ltd. v. Inland Revenue

Commrs. (1942) 11 ITR 50(Supp.) that the onus in such a proceeding was not of an ambulatory or shifting character but the onus was finally upon

the Crown to prove its right to impose what was a severe penalty. At page 249 of Mens Rea in Statutory Offences by J. LL. J. Edwards, the

learned author observes:

Where all that is meant is that the accused''s conduct must be a voluntary expression of his will, this is a basic principle which runs throughout the

whole field of criminal liability, whether the crime originated at common law or by statutory enactment, and whether the crime is one of absolute

prohibition or one involving proof of a guilty mind. All that it involves is the principle that the act must be attributable to the accused, i.e., it must

have been done intentionally and not accidentally.

We are of the opinion that the entry made by the Assessee in its books of account under the heading Vellarmalai Capital Account might have

been made under the bona fide belief that as they were maintaining the estate for the time being, that is, till the formation of the new company, there

was nothing wrong in making such an entry in their books of account. Further, the conduct of the Assessee in transferring whatever amount that

stood in its books to the newly formed company shows beyond doubt that the entry was made neither wilfully nor intentionally, but only

accidentally. The reference is answered against the department and in favour of the Assessee.