Commisioner Of Income Tax vs Hari Machines Limited
2007 Latest Caselaw 1782 Del

ORDER

1. In this reference under Section 256(1) of the Income Tax Act, 1961 ('Act'), relevant for the assessment year 1974-75, the following question has been referred for our opinion:

Whether on the facts and in the circumstances of the case, the Income Tax Appellate Tribunal was correct in law in holding that the penalty provisions of Section 271(1)(c) with its amendment are not applicable in this case by ignoring the material fact that the addition responsible for levy of penalty was confirmed by the ITAT itself and held to be a device to claim a non existent loss?

2. The assessed had a paid up capital of Rs. 25 lakhs. According to the assessed, the intrinsic value of the equity shares was Rs. 19,53,680/- and therefore, taking a realistic view of the matter, the assessed decided to reduce the share capital to Rs. 20 lakhs. In accordance with the provisions of the Companies Act, 1956 the assessed applied to the Calcutta High Court for permission to reduce the share capital. By its order dated 21st December, 1972, the Calcutta High Court permitted the reduction of capital and cancellation of 5000 fully paid-up equity shares of Rs. 100/- each.

3. The Assessing Officer was of the view that the reduction of share capital did not represent a loss incurred by the assessed and therefore, taxed the amount of Rs. 5 lakhs. This was upheld both by the Commissioner of Income Tax (Appeals) [CIT (A)] as well as by the Income Tax Appellate Tribunal ('Tribunal').

4. The Tribunal, in its order dated 20th August, 1980 somewhat harshly came to the conclusion that there was a fictitious loss of Rs. 5 lakhs shown by the assessed with the intention of creating a scheme or device to defraud the Revenue.

5. In the meanwhile, the Assessing Officer had initiated penalty proceedings against the assessed under the provisions of Section 271(1)(c) of the Act. After hearing the assessed, the Assessing Officer imposed a penalty on the assessed.

6. At the relevant point of time, the provisions of Section 271(1)(c) of the Act along with the Explanation thereto read as follows:

271. Failure to furnish returns, comply with notices, concealment of income, etc.-

(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-

(a) ____ ______ _____

(b) ___ _____ ____

(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) __ ____ _____

Explanation ___ ___ _____

(ii) ____ ____ _____

(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.

EXPLANATION: Where the total income returned by any person is less than eighty per cent of the total income (hereinafter in this Explanation referred to as the correct income) as assessed under Section 143 or Section 144 or Section 147 (reduced by the expenditure incurred bonafide by him for the purpose of making or earning any income included in the total income but which has been disallowed as deduction), such person shall, unless he proves that the failure to return the correct income did not arise from any fraud or any gross or willful neglect on his part, be deemed to have concealed the particulars of his income or furnished inaccurate particulars of such income for the purposes of Clause (c) of this sub-section.

7. On an appeal filed by the assessed, the CIT (A) cancelled the levy of penalty and this decision was upheld by the Tribunal. It is under these circumstances that the question of law, as mentioned above, has been referred for our opinion.

8. We find that in so far as the substantive portion of Section 271(1)(c) of the Act is concerned there must be concealment or furnishing of inaccurate particulars of such income by an assessed. There is no dispute about the fact that in the present case, all the relevant material was placed before the Assessing Officer came to the conclusion that the assessed did not incur a loss. There is nothing to suggest that the assessed concealed any income or furnished any inaccurate particulars.

9. In so far as the Explanation to Section 271(1)(c) of the Act is concerned, there is no doubt that the onus to prove that there is no failure to return the correct income is on the assessed. If there is any fraud or any gross or willful neglect the assessed will be deemed to have concealed the particulars of his income or furnished inaccurate particulars of income.

10. In the present case, there is no allegation that there was any gross or willful neglect on the part of the assessed to declare the correct income. The question that arises is whether the assessed has committed any kind of fraud.

11. It is difficult to say, on the facts of the present case, that the assessed had committed any fraud notwithstanding the strong words used by the Tribunal in the quantum matter. The assessed was entitled to determine the intrinsic value of its shares, which it did. Thereafter, in order to reduce its share capital, the assessed is obliged to proceed in accordance with law and so the assessed approached the Calcutta High Court for reduction of its share capital. After considering the materials on record, the Calcutta High Court permitted the assessed to reduce its share capital in terms of its order dated 21st December, 1972.

12. It is nobody's case that the Calcutta High Court was defrauded by the assessed. That being the position we must proceed on the basis that the decision rendered by the Calcutta High Court was correct and there was no attempt on the part of the assessed to mislead the Calcutta High Court. On the other hand, the Calcutta High Court could have refused to entertain the prayer made by the assessed, if the assessed had tried to mislead the Court.

13. Under these circumstances, we are of the opinion that the Tribunal was correct in upholding the order passed by the CIT (A) cancelling the levy of penalty against the assessed and holding that the assessed had not committed any fraud.

14. The question of law referred to us is answered in the affirmative, that is in favor of the assessed and against the Revenue.

15. The reference is, accordingly, disposed of.