Chhaganlal Suteriya vs Income Tax Officer and Another

Ms. Harsha Devani, J.—By this petition under Article 226 of the Constitution of India, the Petitioner has challenged the order dt. 15th Sept., 1999 passed by the ITO, Ward No. 2(5), Rajkot, imposing penalty of Rs. 83,640 against the Petitioner u/s 271(1)(c) of the Income Tax Act, 1961 (the Act). The Petitioner also challenged the order dt. 22nd Feb., 2002 passed by the CIT, Rajkot-III, rejecting the revision petition filed by the Petitioner u/s 264 of the Act.

The Petitioner, an individual, is a proprietor of a business by the name of M/s Rashmi Furniture in Rajkot. For the asst. yr. 1994-95, the Petitioner had not filed his return of income. The Respondent No. 1 issued notice u/s 148 of the Act on 10th March, 1997, notices u/s 142(1) of the Act which came to be issued on 15th Oct., 1997 and 19th March, 1999 as well as a show-cause notice under the first proviso to Section 144(1) of the Act on 19th March, 1999. However, since the Petitioner did not reply to the said notices, the AO finalized the assessment proceedings u/s 144 of the Act on 31st March, 1999, determining total income of the Petitioner at Rs. 2,39,190. The AO also initiated penalty proceedings u/s 271(1)(c) of the Act. Accordingly, a show-cause notice came to be issued to the Petitioner u/s 274 of the Act r/w Section 271(1)(c) of the Act on 31st March,. 1999 which came to be served upon the Petitioner. However, the Petitioner did not submit any reply to the same, hence, the Respondent No. 1 presumed that the Petitioner had accepted the assessment order and had nothing more to say in the penalty proceedings initiated u/s 271(1)(c) of the Act and imposed minimum penalty of Rs. 83,640. Being aggrieved, the Petitioner filed a revision petition u/s 264 of the Act before the Respondent No. 2, which came to be rejected vide the impugned order dt. 7th March, 2002 on the ground that the Petitioner had failed to comply with the show-cause notice as well as the reminder issued to him. Being aggrieved, the Petitioner has filed the present petition challenging the abovereferred orders.

Mr. J.P. Shah, learned advocate appearing on behalf of the Petitioner has principally assailed the impugned order on the ground that penalty u/s 271(1)(c) can be imposed provided the Petitioner has concealed particulars of his income in the return filed by him. It was submitted that failure to submit a return would not amount to concealment of particulars of income and as such, for failure to furnish return of income, penalty u/s 271(1)(c) of the Act could not have been levied on the Petitioner.

Attention was invited to Expln. 3 to Section 271(1)(c) of the Act, as it stood at the relevant time, to submit that in certain cases, non-furnishing of return of income has been deemed to be concealment u/s 271(1)(c) of the Act. It was further submitted that non-furnishing of a return of income would amount to concealment within the meaning of Section 271(1)(c) of the Act as envisaged under Expln. 3 thereof, provided the requirements of the Explanation are satisfied. According to the learned advocate, for the purpose of falling within the purview of Expln. 3 to Section 271(1) of the Act, as it stood at the relevant time, certain conditions precedent are required to be satisfied: firstly that such person should not have been previously assessed; secondly that such person should have failed to furnish return of income within the period specified under Sub-section (1) of Section 153, that is, within a period of two years in respect of any assessment year commencing on or after the 1st day of April, 1989; thirdly, that until expiry of such period no notice should have been issued to him under Clause (i) of Sub-section (1) of Section 142 or Section 148 of the Act; and fourthly that the AO or the Dy. CIT(A) should be satisfied that in respect of such assessment year, such person has taxable income.

It was submitted that the said conditions are cumulative in nature, and each one of them is required to be satisfied for the purpose of invoking the provisions of Expln. 3. Adverting to the facts of the present case, it was submitted that the period specified under Sub-section (1) of Section 153 of the Act, is two years, hence, Expln. 3 to Section 271(1) could have been invoked against the Petitioner if until the expiry of the period specified u/s 153(1) of the Act, that is by 31st March, 1997, no notice had been issued to the Petitioner u/s 142(1)(i) or Section 148 of the Act. However, in the facts of the present case, as is evident from the order made u/s 271(1)(c) of the Act, notice u/s 148 was issued to the Petitioner on 10th March, 1997, that is, before the expiry of the period mentioned in Section 153(1) of the Act. In the circumstances, Expln. 3 would not be applicable in as much as the condition that no notice should have been issued to such person u/s 142(1) or Section 148 of the Act within the period prescribed u/s 153(1) of the Act, is not fulfilled in the present case. It was submitted that unless a person falls within the purview of Expln. 3 to Sub-section (1) of Section 271 of the Act, failure to furnish a return would not amount to concealment within the meaning of Section 271(1)(c). In the circumstances, the impugned order levying penalty u/s 271(1)(c) of the Act on the Petitioner for failure to furnish return of income for asst. yr. 1994-95 without fulfilling the conditions of Expln. 3 to Section 271(1) of the Act, being contrary to the statutory provisions, cannot be sustained and deserves to be quashed and set aside.

Opposing the petition, Mr. K.M. Parikh, learned standing counsel appearing for the Respondents submitted that in the present case, the Respondents have not applied Expln. 3 to Section 271(1)(c) of the Act. According to the learned Counsel the Petitioner was duty bound to furnish the return of income within the prescribed period of time and that non-furnishing of the return itself amounts to concealment of income. The Petitioner not having disclosed his income for asst. yr. 1994-95 though he was assessable to tax for the said assessment year, the same amounts to concealment of income and as such, the non-furnishing of return of income per se amounts to concealment of particulars of income as envisaged u/s 271(1)(c) of the Act.

The next submission advanced by the learned Counsel for the Respondent was that the Petitioner had not raised the contention regarding the applicability or otherwise of Expln. 3 to Section 271(1) of the Act either before the Respondent No. 1 or before the Respondent No. 2 and as such, it is not permissible for the Petitioner to raise such contention before this Court for the first time. It was further submitted that reliance placed upon the provisions of Expln. 3 to Section 271(1) of the Act would not be of any avail to the Petitioner in as much as the Petitioner had not filed any return for the relevant year which amounts to non-disclosure of income and as such, the Petitioner having concealed the particulars of his income for the year under consideration, the Respondent No. 1 had rightly imposed penalty u/s 271(1)(c) of the Act. It was further submitted that once there is an actual concealment of income, there is no question of any deemed concealment and therefore, the provisions of Expln. 3 to Section 271(1) of the Act would not be applicable in the facts of the present case.

In the backdrop of the facts and contentions noted hereinabove, the question that arises for consideration is as to whether in the light of the fact that in the present case a notice u/s 148 of the Act had been issued to the Petitioner within the period specified u/s 153(1) of the Act, penalty could have been levied on him u/s 271(1)(c) of the Act for failure to furnish a return of income.

In this regard, it may be germane to refer to Section 271 of the Act as it stood at the relevant time, which insofar as the same is relevant for the purpose of the present petition, reads as under:

(1) If the AO or the Dy. CIT(A) or the CIT(A) in the course of any proceedings under this Act, is satisfied that any person--

(a)(..........)

(b) has failed to comply with a notice under Sub-section (1) of Section 142 or Sub-section (2) of Section 143 or fails to comply with a direction issued under Sub-section (2A) of Section 142, or

(c) 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,-

(i) (........)

(ii) in the cases referred to in Clause (b), in addition to any tax payable by him, a sum which shall not be less than one thousand rupees but which may extend to twenty-five thousand rupees for each such failure;

(iii) in the cases referred to in Clause (c), in addition to any tax 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:

Explanation. 1--.....

Explanation 2.--.....

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 u/s 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 AO or the Dy. CIT(A) or the CIT(A) is satisfied that in respect of such assessment year such person has taxable income, then, such person shall, for the purposes of Clause (c) of this subsection, be deemed to have concealed the particulars of his income in respect of such assessment year, notwithstanding that such person furnishes a return of his income at any time after the expiry of the period aforesaid in pursuance of a notice u/s 148.

A plain reading of Section 271(1) of the Act shows that if the AO or any of the officers specified under the said Sub-section, in the course of any proceedings under the Act is satisfied that any person has concealed particulars of his income or furnished inaccurate particulars of his income, he may direct that such person shall pay penalty in accordance with the provisions of the Act. In the facts of the present case, the failure on the part of the Petitioner is non-furnishing of return of income for the assessment year under consideration. As to whether failure to furnish return of income per se amounts to concealment of income, the law all along has been that mere failure to file a return of income is not tantamount to concealment of particulars of income. In S. Narayanappa and Brothers Vs. Commissioner of Income Tax, Mysore, the question arose as to whether the ITO could levy a penalty u/s 28(1)(b) of the Act where the Assessee failed to submit a return in response to a notice u/s 22(2) and further failed to produce his books of account when called upon to do so u/s 22(4). That was a case where there was a total failure to submit a return. The Mysore High Court held that for levy of maximum penalty u/s 28(1)(b) of the Income Tax Act, 1922, the indispensable condition precedent is that the Assessee should have furnished his return. The Madras High Court in the case of S. SANTHOSA NADAR Vs. FIRST ADDITIONAL Income Tax OFFICER, TUTICORIN AND ANOTHER., while dealing with a case where a voluntary return was filed after a period of four years from the close of the assessment year and as such, was not a valid return, held that such a case should be regarded as if no return had been filed at all. The Court held that it could not be said in such a case that there had been a concealment of the particulars of income or deliberate furnishing of inaccurate particulars and Section 28(1)(c) of the Indian Income Tax Act, 1922, would not be applicable, and that the case would come only within the scope of Section 28(1)(a) of the said Act. The Allahabad High Court, in the case of (2009) 120 ITD 567 held that mere failure to file a return of income does not amount to concealment of income or particulars of income.

Thus, the legal position that emerges is that mere failure to furnish a return of income does not tantamount to concealment u/s 271(1)(c) of the Act. In the circumstances, the contention raised on behalf of the Revenue that non-filing of the return of income per se amounts to concealment within the meaning of Section 271(1)(c) of the Act, being contrary to the settled legal position, does not merit acceptance.

But the introduction of Expln. 3 to Section 271(1) w.e.f. 1st April, 1976 has changed the law on the point in certain cases. Explanation 3 provides that if a person, who has not hitherto been assessed to tax under the Income Tax Act, 1961 does not file a return of income for an assessment year voluntarily within the normal period of limitation and no notice u/s 142(1) or 148 is issued to him till the expiry of the said period, he will be treated to have concealed his income and penalty will be leviable on him accordingly if he is later found'' to have had taxable income in that year. Thus, for the purpose of falling within the purview of Expln. 3, firstly, a person should not have been previously assessed (that is, a new Assessee); secondly, he should have failed without reasonable cause, to furnish return of income for asst. yr. 1989-90 or any year subsequent thereto within two years from the end of the assessment year concerned; thirdly, that no notice should have been issued to him u/s 142(1) or Section 148 of the Act till the expiry of the two year period; and lastly, the concerned officer is satisfied that in respect of such assessment year, such person had taxable income. In such cases, Expln. 3 provides that such person shall be deemed to have concealed the particulars of his income within the meaning of Clause (c) of Section 271(1) of the Act for such assessment year. In such an eventuality, even if the person concerned files a return after the expiry of the said period of two years in pursuance of a notice u/s 148 of the Act, the deeming provision of Expln. 3 shall still have application.

Though it has been contended on behalf of the Respondents that in the present case Expln. 3 has not been applied; as noticed earlier mere non-furnishing of a return per se is not tantamount to concealment within the meaning of Section 271(1)(c) of the Act. The only eventuality under which non-furnishing of return of income amounts to concealment is as provided under Expln. 3 to Sub-section (1) of Section 271 of the Act. Hence, unless Expln. 3 of Section 271(1) of the Act is attracted, there can be no concealment as envisaged u/s 271(1)(c) of the Act. In the circumstances, it is required to be examined as to whether the provisions of Expln. 3 to Section 271(1) could have been invoked in the present case. For the purpose of invoking the provisions of Expln. 3 to Section 271(1) of the Act, the conditions enumerated hereinbefore are required to be satisfied. If any of the said conditions is not satisfied, the provisions of Expln. 3 to Section 271(1) of the Act would not be applicable.

In the present case admittedly the Petitioner had not been previously assessed under the provisions of the Act, hence, the first requirement of Expln. 3 is duly satisfied. The Petitioner had not filed his return of income within the period specified under Sub-section (1) of Section 153 of the Act and as such, the second condition is also satisfied. However, as noted earlier, in the present case a notice had been issued to the Petitioner u/s 148 of the Act on 10th March, 1997 which was within the period specified u/s 153(1) of. the Act. In the circumstances, the third condition namely, that no notice u/s 142(1) or Section 148 of the Act should have been issued within the period specified under Sub-section (1) of Section 153 of the Act is clearly not satisfied. As discussed earlier, the. conditions for applicability of Expln. 3 to Section 271(1) are cumulative and each of the conditions has to be established for the purpose of invoking the said provision. In the present case, all the conditions are not cumulatively satisfied. The failure on the part of the Petitioner to furnish return of income within the specified period, therefore, cannot be deemed to be concealment within the meaning of the Expln. 3 to Section 27.1(1)(c) of the Act.

In the light of the aforesaid, it is apparent that the case of the Petitioner does not fall within the ambit of Expln. 3 to Section 271(1) of the Act and as such, no penalty could be levied on the Petitioner u/s 271(1)(c) of the Act for concealment of particulars of his income on the ground that the Petitioner had failed to furnish return of income for the year under consideration. The impugned order, therefore, being contrary to the provisions of the Act, cannot be sustained.

Insofar as the Sub-section order passed by the revisional authority is concerned, in the revision application the Petitioner has stated that the reason for not appearing in response to the notices issued under Sections 148 and 144 of the Act, was that he had handed over the said notices to the income tax practitioner, Shri K.J. Joshi to do the needful in the matter. However, for reasons best known to him he never attended and at the same time assured the Petitioner that everything had been followed up and cleared. That he being his tax consultant he relied upon his assurance while in fact he betrayed him. However, the revisional authority has without even considering the explanation put forth by the Petitioner, dismissed the revision petition merely on the ground that the Petitioner had not responded to the notices issued by the AO. In the order made by the revisional authority there is no discussion as regards the merits of the case. However, since the said order in effect and substance confirms the penalty order made by the AO, for the reasons recorded hereinabove the order passed by the revisional authority also cannot be sustained.

For the foregoing reasons, the petition succeeds and is, accordingly, allowed. The impugned order dt. 15th Sept., 1999 passed by the Respondent No. 1 as well as the impugned order dt. 27th Feb., 2002 passed by the Respondent No. 2 are hereby quashed and set aside. Rule is made absolute accordingly, with no order as to costs.