In this article, Arvind Athithan discusses Penalty Proceedings under section 271 of the Income Tax Act and How to Tackle It.
Imagine a situation where a person is doing a business and has a turnover of Rs. one crore p.a. approximately, and his auditor made a mistake in filing of returns due to which the total income for tax computation reduced. On realizing the mistake the person files a revised return u/s 139(5) but the Assessing Officer is not satisfied with the explanations given and declares that he has intentionally concealed the amount for reducing the tax payable. and imposed a penalty of three times the amount of difference between the return filed and the revised returns and an assessment order and demand notice was sent to the person. Now the person should accept his fault and pay the penalty amount as demanded by the income tax officials or he should fight against it to prove his innocence? Well I prefer the 2nd option.
Here in this article, we will discuss about what is concealment of income? and what amounts to concealment? and when it should not be treated as concealment? Whether the penalty proceedings are automatic in nature? how to face those forceful proceedings of such income tax departments and few legal precedents that favors the assessee.
Meaning of “Particulars of income” under Income Tax
Now whether the assessee falls either under the concealment category or under furnishing incorrect details category, one has to understand the meaning of the “Particulars of Total Income”.The Supreme Court in in the case of “Kanbay Software India (P) Ltd. 122 TTJ 721(Pune)” held that the expression ‘particular’ refers to facts, details, specifics or the information about someone or something. Thus, the details or information about the income would deal with factual details of income and cannot be extended to the areas which are subjective such as status of the taxability of an income, admissibility of a deduction, and interpretation of law. Thus, the terms which does not comes under the above mentioned definition will not be attracted by sec 271(1)(c) of Income Tax Act, 1961 proceedings.
Meaning Of Concealment And Inaccurate Details
The plain reading of section 271 (1) (c) of Income Tax act 1961 clearly states as follows “Concealment of particulars of income or fringe benefits or furnishing of inaccurate particulars of income or fringe benefits” and levies penalty of minimum 100% as a fine and maximum 300% of tax sought to be evaded in addition to tax payable. Now we can clearly see the intention of the provision, that it doesn’t want a person to evade two types of tax evaders; firstly, those who conceal and secondly those who gives the details found to be false and the details include about the documents, person, computers and it also includes the benefits like fringe benefits as well.
Firstly, the word concealment of particular income denotes the word ‘conceal’ as per Webster’s Dictionary means “to hide, withdraw, or remove from observation; cover or keep from sight; to keep secret; to avoid disclosing or divulging. That means non-disclosure of particulars of income. Here in the case of concealment a person will have an intention to hide, not to disclose and make himself less burdensome to the tax authorities and pays less tax and eventually caught up by the ITO in the event of assessment proceedings.
Secondly, where particulars are disclosed but such disclosure is not correct, true or accurate, it would amount to furnishing of inaccurate particulars of income. For example, sale is shown but at a lesser value, it would amount to the furnishing of inaccurate particulars of income.
It is important to note that the wrath of the act comes into play only when there is an assumption of two things i.e.
- An assessee have concealed any income,or
- He has furnished his wrong returns, with an intention to evade or pay less tax to the government.
Madras High Court in a recent case of Principal Commissioner Of Income … vs Trisha Krishnan held that the burden of proof shifts from the assessee to the ITO once the assessee have submitted her claim with relevant documents then she has intentionally concealed the income earned by them and in this case as the assessee have clearly provided the particulars of the income in the balance sheets and returns so she has no intention to conceal it. Thus, in the case of concealment proceedings, the burden of proof lies in the hands of the assessee to submit the relevant documents for the disclosed income by way of his returns, but once if he establishes it and the very same returns raises any doubt to the Assessing Officer, that the assessee has concealed the income or given the inaccurate details the burden of proof shifts to ITO.
In the landmark judgement “CIT-v- S.V.Angidi Chettiar 44 ITR 739 SC” the apex court held that the assessee has either concealed the particulars of income or has furnished inaccurate particulars of income is the condition precedent for imposing penalty and such satisfaction must be arrived at in the course of any proceeding under the Act.
Concealment Proceedings are different and It must be in writing
Thus in order to initiate a concealment or penalty proceedings the assessing officer have to prove his satisfaction that the assessee have concealed his income and most importantly the reasons for his satisfaction must be communicated to the assessee through the assessment order. The AO have to record his reasons for such satisfaction in the assessment order., the situation where the concealment occurred or given with false details must be prerequisite for initiating penalty proceedings under the above section. Mere observations “penalty proceedings are being initiated separately” is not enough.
Satisfaction of AO is Important and it must be on record
The Satisfaction of the AO on the assessee is very much spine for Section 271(1)(c) penalty proceedings. The Assessing officer arrived to a conclusion by way of writing in the assessment order that either he got satisfied for the concealment of particulars of total income or inaccurate details it is held in “CIT vs. Mohinder Lal 168 ITR 101”. It is the very foundation of the penalty proceedings and thus the condition must be satisfied. If, the Assessing Officer to whom the assessee submits his true returns and the AO cannot levy penalty outside the books of accounts. It is mandatory to record the satisfaction into the books disclosed and the penalty for concealment cannot be levied where any income arising outside the books of account is disclosed voluntarily in the original return. For example, where ‘A’ had purchased a land ten years back out of undisclosed money but sold during the year resulting in capital gain and such capital gain is disclosed in the original return then penalty for concealment cannot be levied. Even a receipt of doubtful nature or a receipt in respect of which, no satisfactory explanation can be given, can be declared as income in the original return without inviting any penalty.
In the case of “Jeetmal Choraria Vs. ACIT” the Hon’ble Income Tax Appellate Tribunal (ITAT) of Kolkata held that before initiating the penalty proceedings the AO has to see the intention of the assessee, in the present case he doesn’t have any intention to conceal and the notice sent by AO doesn’t carry proper details whether the assessee have been initiated against the penalty proceedings are either under concealing or for furnishing inaccurate details hence the appeal has been allowed.
The Hon’ble Karnataka High Court in the case of “CIT v. Manjunatha Cotton & Ginning factory  359 ITR 565” took a view that imposing of penalty u/s 271(1)(c) of the Income Tax Act,1961 is bad in law and is invalid for the reason that the show cause notice u/s 274 of the Act does not specify the charge against the assessee as to whether it is for concealment of particulars of income or furnishing of inaccurate particulars of income. The court came to the conclusion that imposition of penalty on defective show cause notice without specifying the charge against the assessee cannot be sustained.
In the case of “Syamal Baran Mondal v. CIT  200 Taxman 107”, the Court opined that Section 271(1)(c) of the Income Tax, 1961 does not mandate the recording of satisfaction about concealment of income to be in specific terms. The satisfaction of AO must reflect from the order either with express words recorded by the AO or by his overt actions. In the present case, actions of the AO did not match the provisions of the Act, hence the case was allowed and the order of AO got struck down. This makes it clear that the AO has to provide in writing whether the person has concealed it or furnish accurate details in writing with explanation, otherwise the order will become invalid.
An Assessee shall be not penalized for two Charges
In “CIT-v- Lakhdhir lalji 85 ITR 77(Guj)” it was held that “If an assessee have initiated with the penalty proceedings u/s. 271(1)(c) of the Income Tax Act, 1961 for the purpose of concealment of Income the assessee cannot be charged for filing inaccurate details” in other words a single assessee cannot be assessed for two penalty proceedings for the same assessment year Manu engg. Works 122 ITR 306 (Guj).
It is much pertinent to note that the AO shall be clear by way of his assessment order that whether the penalty has been levied for concealment of income or for furnishing of inaccurate details. Failing which the assessment order shall be considered as an Order bad in law. The basis of satisfaction cannot be altered subsequently IAC.—CIT-v-Kejriwal Iron Stores 168 ITR 715 (Raj).
Likewise the AO has to be very clear about which category the order falls under, either under the concealment of income or furnishing of incorrect details; Absence of the same it will be considered as a bad in the eyes of law and on the other hand the basis of satisfaction cannot be altered subsequently.-CIT-v- Lakhdhir lalji 85 ITR 77(Guj)
What amounts to Concealment or Furnishing of Inaccurate Details?
Madras High Court in Principal Commissioner Of Income … vs Trisha Krishnan Tax Case Appeal No.239 of 2017 held that the assessee will be deemed to be considered as concealed an income under the act only if he failed to include in the total income by way of returns for every assessment year and in a SC the supreme court says that “the Concealment takes place on the date when return is filed without disclosing the particulars of income of that year”. Thus in the above judgement it is very clear from the facts that the AO can consider your returns as a concealment if they find it strange or you have not mentioned it in your total income with an intention to not to disclose it.
In the Ranjith’s case the Assessee had concealed the capital gains and in the course of enquiry by the investigation against Assessee’s wife with regard to certain mutual fund transactions made by her, this concealment surfaced.
Whether failure or Non filing of the returns amounts to Concealment or Furnishing of inaccurate details?
The very same question was raised before the Madras High Court in “S.Santosh Nadar – v- Addl CIT reported in ITO 46 ITR 411” and it was held by the court that it is unwise to treat it as a concealment or furnishing of incorrect details. But non filing of returns and getting caught up makes it very worse. The Assessee has to face the scrutiny assessment under section 139 of the act. Thus the choice of not filing of returns rather than concealing it will definitely put you in the risk.
Whether the claims rejected by the AO can be treated as concealment or furnishing inaccurate details?
The mere rejection of ‘a’ legal claim would not amount to furnishing of inaccurate particulars of income or concealment of course as the very same will be treated as mere ejection and unintentional and it will not attract penalty proceedings.
The Supreme Court in Reliance Petroproducts 322 ITR 158 SC held the view that “mere making of the claim, which is not sustainable in law, by itself, will not amount to furnishing inaccurate claim of furnishing inaccurate particulars regarding the income of the assessee”. Let the concealment or furnishing of inaccurate details as the case may be, the AO can make it or levy fine only upto to the extent of the part where the assessee has unable to provide the clear details for the total income.
Penalty proceedings is independent to that of the Normal proceedings and it will not attract Automatic Penalty proceedings
The Penalty attracts depending upon the levy to levy as the case maybe and it differs from case to case. The Penalty proceedings is different than that of the normal concealment or filing inaccurate details. The Madras High Court observed in N. Ranjit Case that “It is not that every case of addition warrants levy of penalty. The application of penal provisions is not automatic and the levy itself depends upon the facts and circumstances of each case”. The act says that, it is not that every case of addition warrants levy of penalty. The application of penal provisions is not automatic and the levy itself depends upon the facts and circumstances of each case. As per the act the AO can levy upto the 3 times of the penalty for the amount concealed or given inaccurate details.
When there is a life there is a hope likewise when there is a process there will be a mistake. But in law mistake of fact is always forgiven but not mistake of law. The assessee may disclose everything and be faithful towards the law, whereas the law always shields him but not the one who commits with an intention. This is what the act says. Working hard is most important but knowing the law is much more to it. Because in many cases assessee have been earning really honest but due to their lack of knowledge of laws and getting stuck with the wrong people and wrong minds they have been treated as they have concealed the income and got verdicted against them. Beware of those people and make sure of yourself have not get cheated. Good luck!
Article on concealment of income K.C.Singhal.
CIT-v- S.V.Angidi Chettiar 44 ITR 739 SC.
Kanbay Software India (P) Ltd. 122 TTJ 721(Pune).
CIT Vs. Trisha Krishnan. TCA.239 of 2017.
New Sorathia Engg. Co 282 ITR, 642 (Guj).
CIT vs. Mohinder Lal 168 ITR 101.
Jeethmal Choraria Vs. ACIT.
Santosh Nadar – v- Addl CIT reported in ITO 46 ITR 411.
Reliance Petro products 322 ITR 158 SC.
—CIT-v-Kejriwal Iron Stores 168 ITR 715 (Raj).
Brijmohan-v-CIT 120 ITR 1.
CIT-v- Lakhdhir lalji 85 ITR 77(Guj).
CITManjunatha Cotton & Ginning factory  359 ITR 565.
Yamal Baran MondalCIT  200 Taxman 107.