Holding

Explanation I to Section 271(1)(c) is part of Section 271 and need not be expressly invoked in the notice before the penalty provisions can be applied.

Summary

The appellant, a partnership firm, filed its 1986-87 return showing a total income of Rs.6,76,890, but the Assessing Officer added Rs.93,000 as unexplained investment after noting that certain rice purchase transactions were not entered in the books on the correct dates. The assessee explained that cash shortages forced it to obtain hand loans, which it could not substantiate, and therefore offered the amount as additional income. The Assessing Officer, finding the explanation unsatisfactory, invoked Explanation I to Section 271(1)(c) of the Income Tax Act and levied a penalty of Rs.37,975. The Income Tax Appellate Tribunal set aside the penalty on the ground that the assessing officer had not expressly referred to the Explanation in the penalty notice, a view upheld by the Kerala High Court. The Supreme Court held that Explanation I is an integral part of Section 271, and a notice under Section 271 itself brings the Explanation into play; no separate invocation of the Explanation is required before imposing the penalty. Consequently, the Supreme Court dismissed the appeal and upheld the penalty.

Issues considered

Whether the penalty under Section 271(1)(c) should be deleted because the assessing officer did not expressly refer to Explanation I in the notice.
Whether the assessment was an agreed assessment, rendering the penalty inapplicable.
Whether the lack of express invocation of Explanation I defeats the levy of penalty under Section 271(1)(c).

Legislation cited

Income Tax Act, 1961s. 143, s. 144, s. 147, s. 271(1)(c), s. 27(l)(c), s. Explanation I

Subjects

Income TaxPenaltySection 271Explanation IConcealment of incomeNotice requirementTax assessmentBurden of proof

Judgment

MIS. K.P. MADHUSUDHANAN A
v.
COMMISSIONER OF INCOME TAX, COCHIN
>
AUGUST 21, 2001

[S.P. BHARUCHA, Y.K. SABHARWAL AND BRIJESH KUMAR, JJ.] B

- Income Tax Act, 1961: Section 271 (I) (c)-Explanation (JB) Income-
Concealment by assessee-Penalty-Notice under Section 27/(J)(c)-No
express reference to Explanation (I BJ-Effect of-Held Explanation to Section
271 (I) (c) is part of Section 271-Express invocation of the Explanation in
c
.. notice under Section 271 not necessary.

Appellant, a partnership firm, filed its return for the year 1986-87.
During the course of proceedings the Assessing Officer noticed that the
assessee had not made entries on relevant dates in the Books of Accounts in D
respect of transactions relating to purchase of rice. In its explanation submitted
to Revenue the assessee offered the amount of Rs. 93,000 as additional income
and the said amount was treated as unexplained investment. However, the
Assessing Officer found the assessee's Explanation unacceptable and applying
Explanation (18) of Section 271(1) (c) of the Income Tax Act, 1961 imposed
upon the assessee a penalty of Rs. 37,975. The Income Tax Appellate Tribunal E
held that penalty cannot be levied as the Assessing Officer in the proposal
under Section 271(1)(c) had not referred to Explanation (18) to Section
271(l)(c). A Division Bench of the High Court reversed the view taken by
Tribunal. Hence this appeal by assessee.

Dismissing the appeal, the Court F

HELD: Explanation to Section 271(1)(c) is a part of Section 271. When
the Income-tax Officer or the Appellate Assistant Commissioner issues to an
assessee a notice under Section 271, he makes the assessee aware that the
> 1. - J.-:sions thereof are to be used against him. These provisions include the
G
Explanation. The assessee is, therefore, by virtue of the notice under Section
J.l 1, pllt to notice that if he does not prove, in the circumstances stated in the
Explanation, that his failure to return his correct income was not due to fraud
or neglect, he shall be deemed to have concealed the particulars of his income
or furnished inaccurate particulars thereof and, consequently, be liable to the
H
2 SUPREME COURT REPORTS [2001] SUPP. 2 S.C.R.

A penalty provided by that Section. No express invocation of the Explanation
to Section 271 in the notice under Section 271 is necessary before the
provisions of the Explanation therein are applied. (SH; 6-A, Bf

Commissioner ofIncome Tax v. P.M Shah 203 ITR 792 and Commissioner
of Income Tax v. Dharamchand L. Shah 204 ITR 462, overruled.
B
Sir Shodila/ Sugar and General Mills Ltd and Anr. v. Commissioner of
Income Tax, Delhi 168 ITR 705, held inapplicable.

CIVIL APPELLATE JURISDICTION : Civil Appeal No. 6465 of
-
2000
c
From the Judgment and Order dated 27.1.2000 of the Kerala High
Court in !TR No. 177/97.
..
T.L.V. Iyer and Subramonium Prasad for the Appellant.

D B.B. Ahuja, Rajiv Nanda, Nikhil Sakhardande and B.V.B. Das for
Sushma Suri for the Respondent.

The Judgment of the Court was delivered by

BHARUCHA, J. The High Court answered in the negative and in
E favour of the Revenue the following questions :
"I. Whether, on the facts and in the circumstances of the case, the
Tribunal is right in law and fact, in deleting the penalty levied
under Section 27l(l)(c) of the I.T. Act?

2. Whether, on the facts and in the circumstances of the case, the
F Tribunal is right in law and fact, in holding that this is an agreed
assessment on the basis of which penalty is not leviable?
3. Whether, on the facts and in the circumstances of the case, the
Tribunal is right in law and facts, ii) holding that penalty cannot
be levied as the assessing officer in the proposal under Section
G 271(1)(c) had not referred to Explanation (IB) to Section
271(1)(c)?"

The assessee is in appeal by special leave. For the assessment year
1986-87 the assessee, which is a partnership firm, filed a return of income
H which stated that its total income was Rs. 6, 76,890. The assessment was
K. P. MADHUSUDHANAN v. C.J.T. [BHARUCHA, J.] 3
completed determining the total income of the assessee at Rs. 7,90,170. This A
included a sum of Rs. 93,000 assessed as income from other sources.

;. The assessee purchased rice from suppliers in Andhra Pradesh. The rice
was some times sent directly and payment therefore was made by demand
draft or telegraphic transfer. During the course of the assessment proceedings
the Assessing Officer noticed that a demand draft and a telegraphic transfer B
were not entered by the assessee in its cash book on the dates on which the
same were purchased and made, respectively. A demand draft of Rs. 50,000
had been purchased on 27th January, 1986 in favour of Mis. Sree Jayalaxmi
Enterprises, Byravapatanam, Andhra Pradesh, but, in the assessee's accounts,
this amount was entered only on 4th February, 1986. The assessee had made C
a telegraphic transfer through the Andhra Bank, Calicut on 24th March, 1986
to Madavenkataratanam and Others, Bhimavaram, Andhra Pradesh; this
transaction again was entered only on 24th April, 1986, when these were
pointed out to the assessee, it submitted a letter dated '28th August, 1989
stating that as sufficient cash balance was not available to it on the dates of
the transactions, it had obtained hand loans from friends and, as it expected D
to repay such loans within a short time, no entries were made in the books
of accounts in respect thereof. The letter also stated that since it was unable
to furnish evidence for such loans, it offered the amount of Rs. 93,000 as
additional income. The assessment was accordingly made treating the sum of
Rs. 93,000 as unexplained investment.
E
Penalty proceedings were then initiated against the assessee under Section
271(I)(c) of the Income Tax Act, 1961. The Assessing Officer found the
assessee's explanation in regard to the loans to be unacceptable and noted
that it had itself offered the addition of Rs. 93,000. Applying Explanation
(IB) of Section 271(1)(c), the Assessing Officer imposed upon the assessee p
the penalty of Rs. 37,975.

The appeal filed by the assessee was dismissed. The assessee then
preferred an appeal to the Income Tax Tribunal. The Tribunal allowed the
appeal. Arising out of the order of the Tribunal the questions noted above
were placed for the consideration of the High Court. The High Court was not G
persuaded to agree with the view that had been taken by the High Court at
Bombay in Commissioner of Income-Tax v. P.M Shah, (203 ITR 792) in
regard to the Explanation to Section 271 (I)(c), and that this is the principal
question that we are called upon to consider.

The relevant portion of Section 271 reads thus : H
4 SUPREME COURT REPORTS [2001] SUPP. 2 S.C.R.

A "271(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
B
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 tax sought to be evaded by reason
c of the concealment of particulars of his income or the furnishing of
inaccurate particulars of such income :
.
Provided that, if in a case falling under clause (c), the amount of
income (as determined by the Income Tax Officer on assessment) in
respect of which the particulars have been concealed or inaccurate
D particulars have been furnished exceeds a sum of twenty-five thousand
rupees, the Income Tax Officer shall not issue any direction for
payment by way of penalty without the previous approval of the
Inspecting Assistant Commissioner.

Explanation I. -Where in respect of any facts material to the
E computation of the total income of any person under this Act, -

(A) such person fails to offer an explanation or offers an explanation
which is found by the Income Tax Officer or the Appellate Assistant
Commissioner to be false, or

(B) such person offers an explanation which he is not able to
F
substantiate,

then, the amount added or disallowed in computing the total
income of such person as a result thereof shall, for the purposes of
clause (c) of this sub-section, be deemed to represent the income in
respect of which particulars have been concealed :
G
Provided that nothing contained in this Explanation shall apply to
a case referred to in clause (B) in respect of any amount added or
disallowed as a result of the rejection of any explanation offered by
such person, if such explanation is bonafide and all the facts relating
H to the same and material to the computation of his total income have
K. P. MADHUSUDHANAN v. C.J.T. [BHARUCHA, J.] s
been disclosed by him." A
In Commissioner of Income-Tax v. P.M. Shah, (203 !TR 792) the High
Court at Bombay observed that the Explanation to Section 271(J)(c) created
a legal fiction. It was that the assessee would be deemed to have concealed
the particulars of his income or furnished inaccurate particulars thereof in the
circumstances set out in the Explanation. But for such legal fiction, it could B
never have been said that there was any concealment or furnishing of inaccurate
particulars of income simply because the returned income was less than 80
per cent of the assessed income. The Explanation shifted the burden of proof
on the assessee. Therefore, it said, "when the Explanation is being resorted
to by the Income-tax Officer or by the Inspecting Assistant Commissioner in C
penalty proceedings, it is essential that the assessee must be informed that
penalty proceedings against him are being commenced under the Explanation
to Section 27l(J)(c)." It added, "The Inspecting Assistant Commissioner
could not have proceeded to levy the penalty under the Explanation to Section
27l(l)(c) in the absence of any initiation of penalty proceedings under the
Explanation to Section 27l(l)(c). These are penalty proceedings and the· D
section must be strictly construed. The assessee, in our view, had no
opportunity of meeting the case under the Explanation to Section 271 (I)( c)."

The Bench of the High Court at Bombay that delivered the judgment
in the case of P.M. Shah followed it in the case of Commissioner of Income-
Tax v. Dharamchand L. Shah, (204 !TR 462). It said," ...... in the absence E
of invoking the Explanation specifically, the burden would remain on the
Revenue to bring the assessee's case within the mischief of the main provisions
· of Section 271 (I)(c) of the Act."

We find it difficult to accept as correct the two judgments F
aforementioned. The Explanation to Section 271(1)(c) is a part of Section
271. When the Income-tax Officer or the Appellate Assistant Commissioner
issues to an assessee a notice under Section 271, he makes the assessee aware
that the provisions thereof are to be used against him. These provisions
- > include the Explanation. By reason of the Explanation, where the total income
returned by the assessee is less than 80 per cent of the total income assessed G
under Sections 143 or 144 or 147, reduced to the extent therein provided, the
assessee is deemed to have concealed the particulars of his income or furnished
inaccurate particulars thereof, unless he proves that the failure to return the
correct income did not arise from any fraud or neglect on his part. The
assessee is, therefore, by virtue of the notice under Section 271 put to notice H
6 SUPREME COURT REPORTS (2001] SUPP. 2 S.C.R.

A that if he does not prove, in the circumstances stated in the Explanation, that
his failure to return his correct income was not due to fraud or neglect, he
shall be deemed to have concealed the particulars of his income or furnished
inaccurate particulars thereof and, consequently, be liable to the penalty
provided by that Section. No express invocation of the Explanation to Section
271 in the notice under Section 271 is, in our view, necessary before the
B provisions of the Explanation therein are applied. The High Court at Bombay
was, therefore, in error in the view that it took and the Division Bench in the
impugned judgment was right.

Learned counsel for the assessee then drew our attention to the judgment
C of this Court in Sir Shadilal Sugar and General Mills ltd. and Anr. v.
Commissioner of Income-Tax, Delhi (168 !TR 705). He submitted that the
assessee had agreed to the additions to his income referred to hereinabove to
buy peace and it did not follow therefrom that the amount that was agreed
to be added was concealed income. That it did not follow that the amount
agreed to be added was concealed income is undoubtedly what was laid
D down by this Court in the case of Sir Shadilal Sugar and General Mills Ltd.
and that, therefore, the Revenue was required to prove the mens rea of a
quasi-criminal offence. But it was because of the view taken in this and other
judgments that the Explanation to Section 271 was added. By reason of the
addition of that Explanation, the view taken in this case can no longer be said
E to be applicable.
The appeal is, therefore, dismissed wiih costs.

T.N.A. Appeal dismissed.