Commissioner Of Income Tax­I ­ vs Becharbhai P Parmar ­ Opponents

Revenue is in appeal against the judgment of the Tribunal dated 25th February 2009, by which the Tribunal was pleased to substantially allow the assessee's appeal and delete substantial portion of the penalty imposed by the Assessing Officer and confirmed by the CIT [A] on different additions made during the block assessment proceedings. On 11th April 2011, we had issued notice for final disposal, pursuant to which, learned sr. advocate Shri Soparkar appeared and argued on behalf of the respondent­assessee. For the purpose of this appeal, following substantial questions of law arise : [A] Whether or not penalty under sub­section (2) of Section 158BFA of the Income­tax Act, 1961 is of mandatory nature, or whether despite additions made in the Block Assessment, discretion still lies in the Assessing Officer whether or not to impose penalty; and

[B] If it is held that it is discretionary whether or not to impose penalty under Section 158BFA (2) of the Act, whether the Tribunal correctly exercised its discretion to delete the penalty imposed by the Assessing Officer and confirmed by the CIT [A].

2. Briefly stated, facts are as follow :

2.1 In case of the respondent­assessee, search and seizure operation under Section 132 of the Act was carried out on 31st May 2001 at his residence, giving rise to the block assessment proceedings. The assessee filed return of income.

The Assessing Officer, while carrying out the assessment proceedings vide its order dated 30th May 2003, made various additions over and above the income disclosed by the assessee in his return. The Assessing Officer determined the undisclosed income at Rs. 4.08 Crores [rounded off] against the disclosed income of the assessee of Rs. 45,00,000/= in the return for the block period.

2.2 Assessee carried the issue in appeal. CIT [A] vide its order dated 27th February 2004, restricted the additions and assessed the net income of the assessee at Rs. 97.30 lacs [rounded off]. In further appeal by the assessee, the Tribunal granted further relief. By virtue of the Tribunal's order, the assessee's total income for the block period came to Rs. 71.30 lacs [rounded off]. After giving benefit of the returned total income for the block period of Rs. 52.94 lacs [rounded off], which included Rs. 45.00 lacs of income declared by the assessee during the block assessment, the additions as per the Tribunal's final order worked out to Rs. 18.35 lacs [rounded off]. Assessee did not carry the matter any further. Tribunal's order thus became final.

2.3 On the basis of such concluded additions, the Assessing Officer issued notice for imposing penalty under Section 158BFA (2) of the Act, calling upon the assessee why penalty of Rs. 11.00 lacs being minimum @ 100% of the tax sought to be evaded should not be imposed on the assessee. No reply was received from the assessee. The Assessing Officer thereupon passed his order dated 10th April 2006 confirming the penalty of Rs. 11.01 lacs [rounded off].

2.4 The assessee, aggrieved by the said order of the Assessing Officer imposing penalty, carried the matter in appeal before the CIT [A] who confirmed the order of Assessing Officer, upon which the assessee approached the Tribunal.

2.5 The Tribunal, by the impugned order, retained a small portion of the penalty imposed. The Tribunal, however, deleted penalty totalling Rs. 10.04 lacs. Thereupon, the Revenue has approached this Court by filing the present Tax Appeal.

3. From the questions framed by us, it can be seen that there are two aspects of the matter. First issue is whether the penalty under Section 158BFA (2) of the Act is mandatory or discretionary in character; and secondly, if it is held to be discretionary, did the Tribunal exercise its discretion on legally sound principles so as to delete the penalty.

3.1 Though, we would be discussing both these questions separately after taking note of submissions made by the counsel for the parties and authorities cited before us, to complete the narration, it would be appropriate to take note of the reasons given by the Tribunal to delete the penalties.

4. From the impugned order of the Tribunal, it can be seen that the Tribunal has discussed different heads of additions, on the basis of which the penalties were imposed. With respect to the additions which were confirmed to the extent of Rs. 25,000/= and Rs. 2,00,000/= towards unexplained investment in residential house, compound wall and farm house, the Tribunal deleted the penalty holding that the findings of the Assessing Officer that the income was required to be treated as unaccounted, is a mere presumption. The Tribunal observed that nothing incriminating had been found which would reveal that the appellant had incurred the said expenses. Though additions were confirmed to the above extent, the same being on estimation basis, revenue failed to prove that the appellant is guilty of concealment. In that view of the matter, the penalty to the extent of Rs. 25,000/= and Rs. 2,00,000/= [of income] was required to be deleted.

5. With respect to sum of Rs. 4.60 lacs, the Tribunal noted that the Assessing Officer added a sum of Rs. 70.92 lacs on the ground that the assessee had inflated his agricultural income. The addition was restricted to Rs. 11.28 lacs by CIT [A] and after giving set­off of the income added, the same was restricted to Rs. 4.60 lacs. With respect to penalty corresponding to this addition, the Tribunal observed that there is nothing on the record to prove that the assessee had disguised his tax bearing income as agriculture income, for which penalty can be levied. Though assessee had failed to furnish supporting evidence, however, it cannot be held that such agricultural income did not exist.

On this basis, the Tribunal directed deletion of penalty.

6. Regarding addition of a sum of Rs. 17.22 lacs, on account of investment in financial activities, the Tribunal noted that initially addition of Rs. 2.58 Crores was made by the Assessing Officer on the basis of jottings on the back side of various visiting cards. Finally, Tribunal restricted the addition to Rs. 35.73 lacs. After giving set­off for the sum of Rs. 18.50 lacs offered by the assessee to tax as unexplained investment, penalty was levied on difference of Rs. 17.22 lacs. The Tribunal deleted such penalty observing that, “..On perusal of facts of the case, we find that no doubt there is a difference in undisclosed investment in finance activities declared by the appellant and ultimately determined by the A.O., but for that the appellant has already demonstrated that there were estimates of additions by decoding the jottings and estimated rotation of funds by adopting six month's cycle as against appellant's contention of 1 to 2 months, we are of the opinion in view of the presence of large number of unavoidable factors which are co­related by logical imagination, no penalty could be levied. Hence, the penalty levied on this sum of Rs. 17,22,820/= is directed to be deleted.”

6.1 On the basis of the above facts, counsel for the Revenue vehemently contended that the penalty under Section 158BFA (2) of the Act is mandatory in nature. Once it is held that during the block assessment income is determined, which is higher than the declared income of the assessee, automatically penalty would follow. The only discretion of the Assessing Officer would be at the rate at which such penalty should be imposed. In other words, the Assessing Officer would have discretion only to impose penalty ranging between 100% to 300% on the income sought to be evaded. Inviting our attention to the different statutory provisions, counsel would contend that Section 158BFA finds place in Chapter XIVB which makes special provisions for undisclosed income. He, therefore, submitted that the word, “may ” used in sub­section (2) of the said section should be constructed as, “shall”. In this regard, counsel relied upon the decision of the Apex Court in Bachahan Devi & Anr. v. Nagar Nigam, Gorakhpur & Anr., reported in [(2008) 12 SCC 372], wherein the Apex Court observed as under :­ “17. The question, whether a particular provision of a statute, which, on the fact of it, appears mandatory inasmuch as it used the word “shall”, or is merely directory, cannot be resolved by laying down any general rule, but depends upon the facts of each case particularly on a consideration of the purpose and object of the enactment in making the provisions. To ascertain the intention, the court has to examine carefully the object of the statute, consequence that may follow from insisting on a strict observance of the particular provision and, above all, the general scheme of the other provisions of which it forms a part. The purpose for which the provision has been made, the object to be attained, the intention of the legislature in making the provisions, the serious inconvenience or injustice which may result in treating the provision one way or the other, the relation of the provision to other consideration which may arise on the facts of any particular case, have all to be taken into consideration in arriving at the conclusion whether the provision is mandatory or directory. Two main considerations for regarding a rule as directory are : (I) absence of any provision for the contingency of any particular rule not being complied with or followed, and (ii) serious general inconvenience and prejudice to the general public would result if the act in question is declared invalid for non­compliance with the particular rule.”

6.2 Counsel further submitted that even if penalty under Section 158BFA (2) was held to be discretionary, the Tribunal committed serious error in deleting the penalty on the grounds which were not germane. He submitted that the Assessing Officer as well as the CIT [A] had found sufficient reasons to impose the penalty. The Tribunal erred in deleting such penalty without proper reasons.

7. On the other hand, learned counsel for the assessee contended that the penalty under Section 158BFA is not mandatory. Even if additions are sustained during the block assessment, it is still the discretion of the Assessing Officer whether or not to impose the penalty. In this regard, he invited our attention to the following decisions :

[a] Commissioner of Income­Tax v. Smt. Anju R. Innani, reported in [(2010) 323 ITR 626 (Bom)];

[b] Commissioner of Income­Tax v. Satyendra Kumar Dosi & Anr., reported in [(2009) 315 ITR 172 (Raj)];

[c] Commissioner of Income­Tax v. Harkaran Das Ved Pal, reported in [(2011) 336 ITR 8 (Delhi)].

8. Having thus heard learned counsel for the parties, we may take note of the relevant statutory provisions. Section 158BFA of the Act is part of Chapter XIVB, which lays down special procedure for assessment of search cases. Section 158BFA pertains to levy of interest and penalty in certain cases. Sub­ section (2) of Section 158BFA, which is relevant for our purpose, reads as under:­ “158BFA. Levy of interest and penalty in certain cases –

(1) xx xx xx xx

(2) The Assessing Officer or the Commissioner (Appeals), in the course of any proceedings under this Chapter, may direct that a person shall pay by way of penalty a sum which shall not be less than the amount of tax leviable but which shall not exceed three times the amount of tax so leviable in respect of the undisclosed income determined by the Assessing Officer under clause (c) of Section 158BC :

Provided that no order imposing penalty shall be made in respect of a person if ­

(i) such person has furnished a return under clause (a) of Section 158BC;

(ii) the tax payable on the basis of such return has been paid or, if the assets seized consist money, the assessee offers the money so seized to be adjusted against the tax payable;

(iii) evidence of tax paid is furnished along with the return; and

(iv) an appeal is not filed against the assessment of that part of income which is shown in the return :

Provided further that the provisions of the preceding proviso shall not apply where the undisclosed income determined by the Assessing Officer is in excess of the income shown in the return and in such cases the penalty shall be imposed on that portion of undisclosed income determined which is in excess of the amount of undisclosed income shown in the return.

8. Upon perusal of sub­section (2) of Section 158BFA of the Act, it would emerge that the Assessing Officer or Commissioner (Appeals) has the power to impose penalty in course of any proceedings under the said Chapter, which penalty would range between 100% to 300% of the tax leviable on the undisclosed income determined by the Assessing Officer under clause (c) of Section 158BC of the Act.

8.1 Proviso to sub­section (2) of Section 158BFA of the Act, however, provides for four conditions, upon satisfaction of which, the assessee would get immunity from such penalty. Such conditions are to be satisfied cumulatively. In essence, it provides that the penalty shall not be imposed if the assessee furnishes a return under clause (a) of Section 158BC; also pays tax on the basis of such return, or offers for adjustment any money seized, or produces evidence of having paid such tax, and also does not file appeal against assessment on that part of the income which is shown in the return. In other words, in cases of proceedings for block assessment, the assessee would have an additional chance to avoid penalty by furnishing a return, paying tax on such undisclosed return and accepting finality with respect to the same.

8.2 Further proviso to sub­section (2) of Section 158BFA is merely in nature of clarification and provides that the first proviso would not apply where undisclosed income determined by the Assessing Officer is in excess of the income shown in the return and in such cases, penalty shall be imposed on that portion of the undisclosed income determined, which is in excess of the amount of undisclosed income shown in the return.

8.3 Closely seen, sub­section (2) of Section 158BFA makes it clear that it is well within the discretion of the Assessing Officer, while framing the assessment for the block period, whether or not to impose any penalty or not. The words, “may direct” has to be given its normal meaning, leaving discretion to the officer. In absence of any special reason the word, “may” cannot be read as “shall”.

8.4 In case of Hindustan Steel Limited v. State of Orissa, reported in 83 ITR 26, the Apex Court in connection with penalty prescribed in Orissa Sales Tax Act observed :

“.. ..An order imposing penalty for failure to carry out a statutory obligation is the result of a quasi­criminal proceeding, and penalty will not ordinarily be imposed unless the party obliged, either acted deliberately in defiance of law or was guilty of conduct contumacious or dishonest, or acted in conscious disregard of its obligation. Penalty will not also be imposed merely because it is lawful to do so. Whether penalty should be imposed for failure to perform a statutory obligation is a matter of discretion of the authority to be exercised judicially and on a consideration of all the relevant circumstances. Even if a minimum penalty is prescribed, the authority competent to impose the penalty will be justified in refusing to imposed penalty, when there is a technical or venial breach of the provisions of the Actor where the breach flows from a bona fide belief that the offender is not liable to act in the manner prescribed by the statute”.

9. The contention of the counsel for the Revenue that only upon satisfaction of the conditions contained in proviso to sub­section (2) that the assessee, in case of the block assessment can be spared of the penalty cannot be accepted. It is, of course, true that upon satisfying such conditions, the assessee would get immunity from penalty. Nevertheless, this is not a thing as to suggest that in no other case, or on no other ground, the Assessing Officer may at his discretion, not impose penalty the moment additions under clause (c) of Section 158BC are sustained. In other words, we are unable to hold that the penalty under Section 158BFA(2) is mandatory in nature.

9.1 It is true that Section 273B of the Act which provides that penalty shall not be imposed in certain cases on the assessee proving that there was reasonable cause for failure to pay tax refers to several provisions such as Section 271, 271A, etc., makes no mention of Section 158BFA(2). This still does not mean that penalty under Section 158BFA (2) is mandatory.

10. This view that we have taken gets support from various decisions of different High Courts cited before us. In case of Commissioner of Income Tax v. Smt. Anju R. Inani [Supra], it was observed as under :­ “9. The substantive part of sub­section (2) of Section 158BFA is an enabling provision by which the Assessing Officer or, as the case may be, the Commissioner (Appeals) is empowered to impose a penalty in the course of any proceedings under Chapter XIV B. Parliament has indicated its intent by using the expression “may direct that a person shall pay by way of penalty a sum...”. Consequently, under the substantive part of sub­section (2), the imposition of a penalty is not mandatory, but lies in the discretion of the Assessing Officer or, as the case may be, the Commissioner (Appeals). It is trite law that the imposition of a penalty is not mandatory merely because it is lawful. The imposition of a penalty is a matter which lies in the exercise of discretion which has to be determined judiciously.”

10.1 Same is also the view of the Rajasthan High Court in case of Commissioner of Income­Tax v. Satyendra Kumar Dosi & Anr. [Supra], wherein it was observed as under :­ “A bare perusal of section 158BFA (2) goes to show that by virtue of the said provisions, the Assessing Officer or the Commissioner (Appeals) is vested with the power to direct the assessee to pay the penalty as specified in respect of the undisclosed income determined by the Assessing Officer under clause (c) of Section 158BC, however, the Assessing Officer or the Commissioner of Income Tax (Appeals) is not empowered to impose the penalty in respect of the person who fulfills the conditions enumerated in the first proviso to section 158BFA. It is to be noticed that in the main provision providing for imposition of penalty, the word “may” has been used. It is settled law that the penal provision in the taxing statutes shall be construed strictly. From the plain reading of section 158BFA (2), it does not appear that in all the cases where the undisclosed income is determined by the Assessing Officer under clause (c) of Section 158BC, the imposition of penalty as specified under section 158BFA shall follow as a natural consequence thereof. In our considered opinion, in terms of Section 158BFA, a discretion is vested with the Assessing Officer to levy the penalty in respect of the undisclosed income but it cannot be inferred from the said provision that the liability for penalty is automatic. Of course, the proviso to section 158BFA (2) enumerates the circumstances wherein no penalty is leviable but from that also it cannot be inferred that the absence of the circumstances enumerated will attract the provision of penalty automatically.”

10.2 This view is also expressed by Kerala High Court in case of Dr. Attukal Radhkrishnan v. Assistant Commissioner of Income Tax & Ors., reported in 235 CTR p­384.

10.3 Delhi High Court in case of Commissioner of Income Tax v. Harkaran Das Ved Pal [Supra] also took a similar view, observing that ­ “It is apparent that in the course of any proceedings under Chapter XIV­B, the Assessing Officer “may direct” that a person shall pay by way of penalty a sum which shall not be less than the amount of tax leviable but which shall not exceed three times the amount of tax so leviable in respect of the undisclosed income “determined bythe Assessing Officer under clause (c) of section 158BC”. This, in our view, implies that the Assessing Officer has discretion in imposing a penalty. This is apparent from the use of the expression “may direct that a person shall pay by way of penalty”. Once the Assessing Officer, exercising his discretion, comes to the conclusion that penalty is imposable, the statute requires that such sum of penalty “shall” not be less than the amount of tax leviable but “shall” not also exceed three times the amount of tax so leviable in respect of the undisclosed income determined by the Assessing Officer as indicated above.

While it is discretionary for the Assessing Officer to direct that a person shall pay penalty, it is mandatory that, in case the Assessing Officer is of the opinion that such penalty is leviable, the penalty amount shall not be less than the amount of tax leviable in respect of the undisclosed income and not mor than three times of such tax. A plain reading of section 158BFA (2) gives us the indication that the Legislature did not intend that imposition of penalty by itself to be mandatory. The Legislature intended the same to be left to the discretion, which of course has to be exercised upon judicial considerations, of the Assessing Officer.”

11. Coming to the facts of the case, we have already noted the reasons recorded by the Tribunal for deleting the penalties under different heads. Principally, the Tribunal deleted the penalties on three grounds : firstly, that the addition was made only on estimation; secondly, there was no concealment proved by the Revenue, and thirdly, that according to the Tribunal, certain additions would not give rise to penalty proceedings.

12. We are afraid, none of the grounds were sufficient in facts of this case to permit the Tribunal to delete the penalties. Firstly, we are of the clear opinion that the concept of proving concealment of income can nowhere be traced in Section 158BFA (2). The penalty envisaged and imposable under Section 271 [1] (c) of the Act is different from the one that can be imposed under Section 158BFA. Section 271 [1](c) of the Act provides for penalty in case an assessee has concealed the particulars of his income or furnished inaccurate particulars of such income. It can be easily seen that during the course of assessment proceedings for normal assessment, large number of claims and deductions may be putforth by the assessee which may or may not be accepted in facts or on law by the Assessing Officer. Mere disallowance of a claim, therefore, would not give rise to the penal proceedings unless as provided in Section 271 [1](c) of the Act, the assessee had concealed the income or provided inaccurate particulars of such income. Under sub­section (2) of Section 158BFA, no such requirement is provided. None can be read therein. Significantly, as already noted, the said proviso is part of Chapter XIVB of the Act which makes special procedure for assessment of search cases. Additionally, we also notice that Section 158BF provides, inter alia, that no penalty under Section 271[1](c) of the Act shall be leviable with respect to undisclosed income determined in the block assessment. Thus, statutorily also, penalty provided under sub­section (2) of Section 158BFA is set apart from one imposable under Section 271 [1](c) of the Act. The concept of the onus on the Revenue to prove concealment of the income, therefore, cannot be imported while considering the question of penalty under sub­section (2) of Section 158BFA of the Act.

Recently, we had occasion to examine the provisions of Section 158BFA (2) and compare the same with penalty under Section 271[1](c) of the Act. In a decision dated 8th November 2011 in Tax Appeal No. 2467 of 2010, it was observed as under :­ “If we analyze the provisions contained in Section (2) of Section 158BFA, it would appear that penalty not less than the amount of tax leviable but not exceeding three times the amount of tax so leviable in respect of the undisclosed income determined by the Assessing Officer under clause [c] of Section 158BC of the Act is envisaged. First proviso to sub­section (2) of Section 158BFA, however, provides that no order imposing penalty shall be made if the conditions (i) to (iv) therein are satisfied. In essence, no penalty would be imposed if the assessee furnishes return of income; pays or offers tax by way of adjustment on such income; produces evidence of tax having been paid alongwith the return and also does not dispute by filing appeal against that portion of assessment which he has shown in his return. By a further proviso, however, it is clarified that such exclusion will not be available where the undisclosed income determined by the Assessing Officer is in excess of the income shown in the return and in such a case, penalty shall be imposed on that portion of the undisclosed income determined, which is in excess of the amount of undisclosed income shown in the return.

In essence, therefore, penalty under sub­section (2) of Section 158BFA of the Act is provided where the Assessing Officer computes income in excess of what is declared by the assessee for the block period.

This proviso thus is vitally different from the penalty provisions contained in Section 271 [1](c) of the Act, which provides for penalty where the assessee has concealed the particulars of his income, or furnished inaccurate particulars of such income. It is, therefore, often stated by different Courts that mere disallowances of a claim or additions made by the Assessing Officer would not ipso facto give rise to penalty proceedings under Section 271 [1](c) of the Act. What is further required to be established is that the assessee had either concealed the particulars of his income or furnished inaccurate particulars of such income. In contrast, no such language is used in Section 158BFA of the Act. We may recall that under Section 158BFA(2) of the Act, penalty proceedings would arise while the Assessing Officer had assessed income for the block period in excess of the income declared by the assessee.”

12.1 This was also the view of the Delhi High Court in case of Commissioner of Income­Tax v. Harkaran Das Ved Pal [Supra], wherein, it was observed that, “ However, with regard to question (b) we note that the Tribunal was concerned with concealment and/or furnishing of inaccurate particulars of income, which is an expression occurring in section 271[1](c) of the said Act but not in section 158BFA (2). The consideration of the question of concealment of income or furnishing inaccurate particulars of income was not a relevant consideration in the facts of the present case. To that extent, the Tribunal had misconstrued the scope of the penalty provisions applicable to the present case.”

13. We are further of the opinion that the Tribunal deleted penalty on the grounds which were simply not permissible. As already noted, penalty on the grounds of addition of Rs. 7.23 lacs and Rs. 2 lacs was deleted observing that the findings of the Assessing Officer is mere presumption and that nothing incriminating was found which would reveal that the assessee had incurred such an expenditure. We are afraid, such an observation would amount to re­ opening the question of quantum addition which had attained finality by virtue of the decision of the Tribunal.

13.1 Penalty on the income of Rs. 4.60 lacs was deleted observing that though the assessee had failed to produce supporting evidence, for mere absence of supporting evidence, it cannot be held that such agricultural income did not exist. Such observation again, in our opinion, would amount to re­opening the closed issues of addition sustained upto the level of the Tribunal. Surely, the Tribunal, while considering the penalty proceedings could not have overruled the previous findings which had attained finality.

13.2 Penalty corresponding to addition of Rs. 17.22 lacs was deleted on the ground that the assessee had demonstrated that there was estimation of additions and that therefore, no penalty could be levied. Here again, we are of the opinion that the Tribunal interfered with the penalty on the ground which was not permissible. Additions made on the basis of estimation may be one of the grounds on which discretion not to impose penalty may be exercised. However, in absence of any requirement to prove concealment or furnishing of inaccurate particulars found in Section 271 [1](c) of the Act cannot form the sole basis to delete penalty imposed by the Assessing Officer and confirmed by Commissioner [Appeals].

14. We are, therefore, of the opinion that the Tribunal committed a grave error in interfering with the penalties imposed by the Assessing Officer and confirmed by the CIT [A] on the grounds mentioned in the order. In other words, exercise of discretion by the Tribunal cannot be sustained. We are,therefore, inclined to set­aside the Tribunal's order and restore it to the Tribunal for fresh consideration and disposal in accordance with law.

15. In the result, we answer Question {A} in favour of the assessee and against the Revenue and hold that the penalty under Section 158BFA (2) is not mandatory. We answer Question {B} in negative ie., in favour of the Revenue and against the assessee and remand the proceedings to the Tribunal for fresh consideration, after quashing the impugned judgment of the Tribunal. Tax Appeal stands disposed of accordingly.

{Akil Kureshi, J.} {Ms. Sonia Gokani, J.} Prakash*