Commissioner of Income Tax vs Behari Lal Pyare Lal

R.N. Mittal, J.—This order will dispose of Income Tax References Nos. 39 to 41 of 1973 which involve common questions of law and fact.

Briefly, the facts of the references are that during the financial year relevant to the assessment year 1968-69, the firm known as Behari Lal Pyare Lal (hereinafter referred to as "the firm") received an amount of Rs. 4,498 as refund from the sales tax department. This amount was credited in the personal account of Lachhman Dass and Sat Parkash, the two partners of the firm, equally. It was not entered in the returns of income of the firm or the two partners. The reason stated by the assessees was that the refund related to the earlier period when the firm was constituted differently and that it was not the income of the present firm. The Income Tax Officer, however, treated it as "deemed income" u/s 41(1) of the Income Tax Act, 1961 (hereinafter referred to as "the 1961 Act"), and added the same in computing the total income of the firm. On appeal, the Appellate Assistant Commissioner confirmed the order of the Income Tax Officer. Further appeal to the Income Tax Tribunal was dismissed. The Inspecting Assistant Commissioner levied penalties on all the assessees u/s 271(1)(c) of the 1961 Act holding that they were defaulters for not showing that income in the returns. Appeals were filed before the Tribunal by the assessees against the orders of the Inspecting Assistant Commissioner. The Tribunal deleted the penalties imposed on the firm and also on each of the partners holding that the sums received by them u/s 41(1) of the 1961 Act were not included in the term "income" and that the said sums wore deemed to be income of the assessees under the aforesaid section. It further observed that an income which is deemed as income does not lead to concealment of income because the amount is taken as the assessees'' income by a legal fiction. In the opinion of the Tribunal, legal fiction does . not establish concealment. The Commissioner of Income Tax moved applications for making references u/s 256(1) to the High Court and the following question was referred for the opinion of this court in all the references :

"Whether for the non-disclosure of an income which is deemed to be an income u/s 41(1), penalty could be levied u/s 271(1)(c) of the Income Tax Act, 1961 ?"

This is how the matter is before us. From the perusal of the question, it is clear that it is an abstract question of law. In order to determine the question, it is necessary to refer to the following provisions of the 1961 Act.

"2. (24) ''income'' includes--...

(v) any sum chargeable to Income Tax under Clauses (ii) and (iii) of Section 28 or Section 41 or Section 59 ; ..."

(1) if the Income Tax Officer or the Appellate Assistant Commissioner in the course of any proceedings under this Act, is satisfied that any person--...

(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,--......

(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 twice, the amount of the income in respect of which the particulars have been concealed or inaccurate particulars have been furnished."

Section 4 is a charging section and says that Income Tax shall be charged for any assessment year at the rates prescribed by any Central Act in respect of the total income of the previous year or years, as the case may be of every assessee. Section 5 defines the total income of the assessee. According to Clause (a) of Sub-section (1) of Section 5, the total income of the previous year includes all income received or deemed to be received in India by an assessee in such year. Section 41(1) says that where deduction has been made in the assessment for any year in respect of expenditure incurred by the assessee and subsequently during any previous year the assessee has obtained any amount in respect of such expenditure, the amount obtained by him shall be deemed to be profits and gains of business and shall be chargeable to Income Tax as the income of that previous year, whether the business is in existence or not. Section 271 relates to imposition of penalties, in case of failure of an assessee to furnish returns, comply with notices, concealment of income, etc. Clause (c) of Sub-section (1) says that in case the Income Tax Officer or the Appellate Assistant Commissioner is satisfied regarding the concealment of particulars of any income or furnishing of inaccurate particulars of such income, he may direct such person to pay certain penalties.

The question to be resolved is whether the "deemed income" u/s 41(1) shall be taken as "income" as used in Section 271(1)(c) for the purposes of imposition of penalty. The question, in our view, does not present any difficulty as the word "income" has been defined in the Act and it includes income u/s 41. A reading of Sections 4 and 5 further shows that the "deemed income" u/s 41 shall be liable to tax u/s 4, as such an income will be as good an income as income from any other source mentioned in the definition clause. According to Section 271, the concealment of income or furnishing of inaccurate particulars regarding any income would entitle the Income Tax Officer and the Appellate Assistant Commissioner to impose penalty. Therefore, if income u/s 41 is concealed, the provisions of Section 271 are attracted provided other conditions in that section are fulfilled. The officers concerned have, however, to determine as to whether the income so received fulfilled other conditions for imposition of penalty. A learned Bench of this court in COMMISSIONER OF Income Tax, PUNJAB Vs. AYA SINGH ISHAR SING., has taken a similar view though on different grounds. It has been held by it that if an income has accrued, whether it actually accrued or whether it accrued as a result of the deeming provisions of the Act, will not make any difference. An income which has accrued as a result of the deeming provisions of the Income Tax Act, can form the basis for levy of penalty. We are respectfully in agreement with the conclusions arrived at by the learned Bench. The learned counsel for the respondents has referred to COMMISSIONER OF Income Tax, PUNJAB Vs. D. D. PURI., . The facts of that case are distinguishable and the observations made therein are of no assistance to him.

For the reasons recorded above, our reply to the question is that penalty can be levied u/s 271(1)(c) of the Income Tax Act, 1961, for non-disclosure of an income which is deemed to be an income u/s 41(1) in case other conditions of that section are held to be satisfied. In view of the circumstances of this case, we leave the parties to bear their own costs.

M.M.S. Gujral, J.

I agree.