IN THE HIGH COURT OF JUDICATURE AT MADRAS DATED: 1.2.2006 CORAM: THE HONOURABLE MR.JUSTICE P.D.DINAKARAN AND THE HONOURABLE MR.JUSTICE P.P.S.JANARTHANA RAJA T.C.Nos.112, 174, 175, 194, 201 to 204 of 2000 (Reference Nos 65,119,120,139,146 to 149 of 2000) T.C.No.112 of 2000 1. M/s M.Sajjanraj Nahar 2. M/s M.Sajjanraj Nahar & Sons 277, Main Road, Mettupalayam 3. M/s M.Sajjanraj Nahar & Family 277, Main Road, Mettupalayam .. Applicants in all TC., Vs The Commissioner of Income Tax Coimbatore. .. Respondent in all TCs and batch cases. PRAYER: Tax case references under Section 256(2) of the Income Tax Act 1961 against the order of the Income Tax Appellate Tribunal, Madras Bench 'B', Chennai dated 25.9.1997 R.A.Nos.774 to 781/Mds/97 in I.T.A.No.878, 879, 880 and 909 to 913/Mds/1991 for the assessment years 1982-83, 1985- 86, 1986-87 and 1987-88 against the order of the Commissioner of Income Tax (Appeals) Coimbatore dated 26.2.1991 and made in I.T.Appeal No.594- c/90-91, 591-c, 599-c/90-91, 597-c & 598-c/90-91, 590-c, 585-c/90-91, 584- c/90-91 respectively against the order of the Assistant Commissioner of Income Tax, company circle II (1), Coimbatore, dated 9-3-1990 and made in No. 47-021-HX-5298 47-021-PY-2856 com.cir.II (1)/cbe/1987-88,1982-83, , com.cir.II (1)/CBE 1987-88 https://hcservices.ecourts.gov.in/hcservices/ 49-571-PU-2040 47-021-PY-2856 com.cir.II (1)/Cbe-1982-83,1986-87 , com.cir.II (1)/Cbe-1985-86, and 4-511-PV-2040 com.cir.II (1)/Cbe-1987-88 respectively For Applicants : Mr.J.Balachander For Respondent : Mr.N.Muralikumaran Senior Standing Counsel for Income Tax JUDGMENT (Delivered by P.D.DINAKARAN,J.) Pursuant to the directions of this court dated 3.8.1999 in T.C.P. Nos. 101 to 108 of 1999, the Appellate Tribunal has stated the case and referred to us the following questions of law: (i) Whether on the facts and in the circumstances of the case the Tribunal was correct in law in sustaining the levy of penalty under Section 271(1)(c) of the Income Tax Act? (ii) Whether on the facts and in the circumstances of the case, the Tribunal has any material to hold that the assessee in filing the revised return of income has not acted bonafide? and (iii) Whether on the facts and in the circumstances of the case the Tribunal was correct in holding that the levy of penalty is justifiable merely for the reason that no reasons were furnished by the assessee for filing an upward revision of income in the revised return of income? 2. The brief facts of the case are narrated as follows: 2.1. The case of all the assessees under reference is, admittedly, identical and therefore, the case of M/s.Sajjanraj Nahar & Sons is stated as a benchmark. 2.2. The assessee was carrying on the business in financing and hire purchase of vehicles. A return was filed on 28.7.1987 declaring taxable income of Rs.88,010/- which was arrived at after deducting a sum of Rs.61,200/- in respect of the interest paid on loans obtained from different parties in the earlier assessment years. https://hcservices.ecourts.gov.in/hcservices/ 2.3. After completing the assessment under Section 143(1) of the Act, the Assessing Officer reopened the case and issued a notice under Section 143(2) of the Act, and in response to the said notice the assessee appeared with the books of accounts and submitted a revised return on 18.1.1988 declaring total income of Rs.1,49,210/- which was arrived at after showing a further sum of Rs.61,200/- to Rs.88,010/- originally declared. 2.4. The Assessing Officer accepted the income returned in the revised return and completed the assessment in a sum of Rs.1,49,210/-. In each of the assessment orders even dated 9.3.1990, the Assessing Officer had made the following indication: "Penalty proceedings are initiated separately under Section 271(1) (c) and 273 (2)(a)" 2.5. Pursuant to the said assessment orders even dated 9.3.1990, the Assessing Officer initiated penalty proceedings under Sections 271(1)(c) and 273(2)(a) of the Income Tax Act, as proposed and called for explanation from the assessee. 2.6. Even after the receipt of the notice issued under Section 271(1) (c) of the Act, the assessee instead of offering explanation to the said notice, had stated that a petition under Section 273A of the Act had been made to the Commissioner of Income Tax and therefore, requested for a stay of all further penalty proceedings initiated already. As no other explanation was offered by the assessee, except as stated above, the Assessing Officer, by orders even dated 25.9.1990, came to the conclusion that the assessee had deliberately concealed the particulars of its income by introducing its own income as credits in fictitious names in the books of accounts and also claimed bogus payment of interest as expenditure, and issued demand notices for penalty from the respective assessees. 2.7. It is apparent on the face of the respective orders even dated 25.9.1990 issued under Section 271(1)(c) of the Act that the assessee, on learning that during the search operation at Madras on 25.6.1985 at the premises of some other persons dealing with hawala transactions, had introduced bogus credits in the books of accounts and filed revised return on 18.1.1988 disclosing additional income being bogus credits and interest on bogus credits. It is further alleged in the said orders even dated 25.9.1990 that the assessee had deliberately and with due knowledge and intention to defraud the Revenue had credited his own cash outside the books in fictitious names and also claimed payment of interest thereon and did not disclose the correct income in his return filed on 28.7.1987. 2.8. In the meanwhile, the assessees also preferred appeals against the assessment orders before the Commissioner of Income Tax (Appeals), who, by order dated 26.2.1991, allowed the appeals following the decision https://hcservices.ecourts.gov.in/hcservices/ of the Apex Court in Sir Shadilal Sugar and General Mills Ltd. v. CIT, [1987] 168 ITR 705. 2.9. The said order of the Commissioner of Income Tax (Appeals) dated 26.2.1991 was appealed before the Tribunal by the Revenue. The Tribunal, by order dated 25.9.1997, set aside the order of the Commissioner of Income Tax (Appeals) disagreeing with the contention of the assessee that the filing of revised return voluntarily, without any detection of concealed income, exonerates the assessee from the penal consequences of Section 271(1)(c) of the Act. The Tribunal, in detail discussed the facts and circumstances of the cases, the conduct of the assessee and came to the conclusion that: (i)the assessee did not act bonafide and honestly in returning the correct income originally; (ii)the filing of the revised return offering additional income by way of adding interest expenditure cannot be considered as bonafide act; and (iii)the Assessing Officer was fully justified in initiating and thereafter, levying penalty under Section 271(1)(c) of the Act, after calling for explanation from the respective assessees, as the assessees failed to offer any convincing explanation. Hence, these references. 3.1.1. Mr.J.Balachander, learned counsel for the applicants contends that the Tribunal erred in setting aside the well-considered orders of the Commissioner of Income Tax (Appeals) following the decision of the Apex Court in Sir Shadilal Sugar and General Mills Ltd. v. CIT, [1987] 168 ITR 705, which was also followed by the Delhi High Court in (a) Commissioner of Income-tax Vs. Ram Commercial Enterprises Ltd, [2000] 246 ITR 568; and (b) Diwan Enterprises Vs. Commissioner of Income Tax and Others, [2000] 246 ITR 571. 3.1.2. According to the learned counsel for the applicants, since the assessment orders suffer from jurisdictional defects, which cannot be cured, the consequential penalty proceedings are not sustainable in law. Elaborating his contention and deriving support from the decisions of the Delhi High Court in (a) Commissioner of Income-tax Vs. Ram Commercial Enterprises Ltd, [2000] 246 ITR 568; (b) Diwan Enterprises Vs. Commissioner of Income Tax and Others, [2000] 246 ITR 571, he submits that the satisfaction for initiating penal proceedings has to be before the issue of notice or initiation of any step for imposing penalty; or otherwise, the very jurisdiction to initiate penalty proceedings is questionable and consequently all the subsequent proceedings leading up to the passing of the penalty order must fail. In this context, it is added https://hcservices.ecourts.gov.in/hcservices/ that the Tribunal erred in sustaining the levy of penalty under Section 271(1)(c) of the Act in the respective case of the assessee, as each of the assessee had fairly disclosed income in the revised returns supported with their books of accounts, which were also accepted by the Assessing Officer without rejection. 3.2. Incidentally, with regard to the second question of law, the learned counsel for the assessee contends that the Tribunal has erred in holding that the assessee had not acted bonafide in filing the revised return of income. 3.3. With regard to the third question of law, the learned counsel for the assessee contends that the Tribunal erred in justifying the levy of penalty, merely for the reason that the assessee failed to submit reasons for filing an upward revision of income in the revised return. 4.1.1. Per contra, Mr.N.Muralikumaran, learned Senior Standing Counsel appearing for the Revenue, submits that the Apex Court in K.P. Madhusudhanan Vs. Commissioner of Income-tax, [2001] 251 ITR 99, taking note of the explanation inserted to Section 271 of the Act, held that the decision in Sir Shadilal Sugar and General Mills Ltd. v. CIT, [1987] 168 ITR 705, which was relied upon by the Commissioner of Income Tax (Appeals), is no more good law. 4.1.2. It is further contended that the decisions relied upon by the assessee, namely (a) Commissioner of Income-tax Vs. Ram Commercial Enterprises Ltd, [2000] 246 ITR 568; and (b) Diwan Enterprises Vs. Commissioner of Income Tax and Others, [2000] 246 ITR 571, are not applicable to the facts and circumstances of these cases, as they are not at all related to the revised returns. 4.1.3. Inviting our attention to the ratio laid down by the Apex Court in CIT v. S.V.Angidi Chettiar [1962] 44 ITR 739, the learned Senior Standing Counsel for the Revenue contends that the decision in (a) Commissioner of Income-tax Vs. Ram Commercial Enterprises Ltd, [2000] 246 ITR 568; and (b) Diwan Enterprises Vs. Commissioner of Income Tax and Others, [2000] 246 ITR 571, do not hold good. 4.1.4. It is also contended that the case of assessee is squarely covered by the decision of this Court in (i)Commissioner of Income- tax Vs. Subramania Chettiar (J.K.A.), [1977] 110 ITR 602; and (ii) Ravi and Co. Vs. Assistant Commissioner of Income Tax, [2004] 271 ITR 286. 4.2.1. With regard to questions of law (ii) and (iii) under reference, it is contended that the said questions are purely related to the findings rendered by the Tribunal in its order dated 25.9.1997, viz., (i) the assessee did not act bonafide and honestly in returning the correct income originally; https://hcservices.ecourts.gov.in/hcservices/ (ii) the filing of the revised return offering additional income by way of adding interest expenditure cannot be considered as bonafide act; and (iii) the Assessing Officer was fully justified in initiating and thereafter, levying penalty under Section 271(1)(c) of the Act, after calling for explanation from the respective assessees, as the assessees failed to offer any convincing explanation. 4.2.2. According to the learned Senior Standing counsel, since the said findings do not need any interference, the questions of law (ii) and (iii) raised by the learned counsel for the appellants are liable to be answered against the assessees. 5. We have given our careful consideration to the submissions of both sides. 6. Question (i): Whether on the facts and in the circumstances of the case the Tribunal was correct in law in sustaining the levy of penalty under Section 271(1)(c) of the Income Tax Act? 6.1. In this regard, it is apt to refer Section 271 of the Income Tax Act, 1961 and the corresponding Section of the Income Tax Act, 1922, viz., Section 28, which read as under: Section: 271 of the Income Tax Act, 1961 "Section 271. Failure to furnish returns, comply with notices, concealment of income, etc.- (1) If the Assessing Officer or the Commissioner (Appeals) or the Commissioner in the course of any proceedings under this Act, is satisfied that any person-- (a) .... (b) has failed to comply with a notice under sub-section (1) of section 142 or sub-section (2) of section 143, or fails to comply with a direction issued under sub-section (2A) of section 142, or (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) .... https://hcservices.ecourts.gov.in/hcservices/ (ii) in the cases referred to in clause (b), in addition to tax, if any, payable by him, a sum of ten thousand rupees for each such failure ; (iii) in the cases referred to in clause (c), in addition to tax, if any, payable by him, a sum which shall not be less than, but which shall not exceed three times, the amount of tax sought to be evaded by reason of the concealment of particulars of his income or the furnishing of inaccurate particulars of such income. Explanation 1.--Where in respect of any facts material to the 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 Assessing Officer or the Commissioner (Appeals) or the Commissioner to be false, or (B) such person offers an explanation which he is not able to substantiate and fails to prove that such explanation is bona fide and that all the facts relating to the same and material to the computation of his total income have been disclosed by him, 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. Explanation 2.--Where the source of any receipt, deposit, outgoing or investment in any assessment year is claimed by any person to be an amount which had been added in computing the income or deducted in computing the loss in the assessment of such person for any earlier assessment year or years but in respect of which no penalty under clause (iii) of this sub-section had been levied, that part of the amount so added or deducted in such earlier assessment year immediately preceding the year in which the receipt, deposit, outgoing or investment appears (such earlier assessment year hereafter in this Explanation referred to as the first preceding year) which is sufficient to cover the amount represented by such receipt, deposit or outgoing or value of such investment (such amount or value hereafter in this Explanation referred to as the utilised amount) shall be treated as the income of the assessee, particulars of which had been concealed or inaccurate particulars of which had been furnished for the first preceding year ; and where the amount so added or deducted in the first preceding year is not sufficient to cover the utilised amount, that part of the amount so added or deducted in the year immediately preceding the first preceding year which is sufficient to cover such part of the utilised amount as is not so covered shall be treated to be the https://hcservices.ecourts.gov.in/hcservices/ income of the assessee, particulars of which had been concealed or inaccurate particulars of which had been furnished for the year immediately preceding the first preceding year and so on, until the entire utilised amount is covered by the amounts so added or deducted in such earlier assessment years. Explanation 3.--Where any person fails, without reasonable cause, to furnish within the period specified in sub-section (1) of section 153 a return of his income which he is required to furnish under section 139 in respect of any assessment year commencing on or after the 1st day of April, 1989, and until the expiry of the period aforesaid, no notice has been issued to him under clause (i) of sub-section (1) of section 142 or section 148 and the Assessing Officer or the Commissioner (Appeals) is satisfied that in respect of such assessment year such person has taxable income, then, such person shall, for the purposes of clause (c) of this sub-section, be deemed to have concealed the particulars of his income in respect of such assessment year, notwithstanding that such person furnishes a return of his income at any time after the expiry of the period aforesaid in pursuance of a notice under section 148. Explanation 4.--For the purposes of clause (iii) of this sub- section, the expression "the amount of tax sought to be evaded",-- (a) in any case where the amount of income in respect of which particulars have been concealed or inaccurate particulars have been furnished has the effect of reducing the loss declared in the return or converting that loss into income, means the tax that would have been chargeable on the income in respect of which particulars have been concealed or inaccurate particulars have been furnished had such income been the total income ; (b) in any case to which Explanation 3 applies, means the tax on the total income assessed ; (c) in any other case, means the difference between the tax on the total income assessed and the tax that would have been chargeable had such total income been reduced by the amount of income in respect of which particulars have been concealed or inaccurate particulars have been furnished. Explanation 5.--Where in the course of a search under section 132, the assessee is found to be the owner of any money, bullion, jewellery or other valuable article or thing (hereafter in this Explanation referred to as assets) and the assessee claims that such assets have been acquired by him by utilising (wholly or in part) his income,-- https://hcservices.ecourts.gov.in/hcservices/ (a) for any previous year which has ended before the date of the search, but the return of income for such year has not been furnished before the said date or, where such return has been furnished before the said date, such income has not been declared therein; or (b) for any previous year which is to end on or after the date of the search, then, notwithstanding that such income is declared by him in any return of income furnished on or after the date of the search, he shall, for the purposes of imposition of a penalty under clause (c) of sub-section (1) of this section, be deemed to have concealed the particulars of his income or furnished inaccurate particulars of such income, unless,-- (1) such income is, or the transactions resulting in such income are recorded,-- (i) in a case falling under clause (a), before the date of the search ; and (ii) in a case falling under clause (b), on or before such date, in the books of account, if any, maintained by him for any source of income or such income is otherwise disclosed to the Chief Commissioner or Commissioner before the said date ; or (2) he, in the course of the search, makes a statement under sub-section (4) of section 132 that any money, bullion, jewellery or other valuable article or thing found in his possession or under his control, has been acquired out of his income which has not been disclosed so far in his return of income to be furnished before the expiry of time specified in sub-section (1) of section 139, and also specifies in the statement the manner in which such income has been derived and pays the tax, together with interest, if any, in respect of such income. Explanation 6.--Where any adjustment is made in the income or loss declared in the return under the proviso to clause (a) of sub- section (1) of section 143 and additional tax charged under that section, the provisions of this sub-section shall not apply in relation to the adjustment so made. Explanation 7.— Where in the case of an assessee who has entered into an international transaction defined in section 92B, any amount is added or disallowed in computing the total income under sub-section (4) of section 92C, then, the amount so added or disallowed shall, for the purposes of clause (c) of this sub- https://hcservices.ecourts.gov.in/hcservices/ section, be deemed to represent the income in respect of which particulars have been concealed or inaccurate particulars have been furnished, unless the assessee proves to the satisfaction of the Assessing Officer or the Commissioner (Appeals) or the Commissioner that the price charged or paid in such transaction was computed in accordance with the provisions contained in section 92C and in the manner prescribed under that section, in good faith and with due diligence. (1A) Where any penalty is imposable by virtue of Explanation 2 to sub-section (1), proceedings for the imposition of such penalty may be initiated notwithstanding that any proceedings under this Act in the course of which such penalty proceedings could have been initiated under sub-section (1) have been completed. (2) When the person liable to penalty is a registered firm or an unregistered firm which has been assessed under clause (b) of section 183 then, notwithstanding anything contained in the other provisions of this Act, the penalty imposable under sub-section (1) shall be the same amount as would be imposable on that firm if that firm were an unregistered firm. (3) ... (4) If the Assessing Officer or the Commissioner (Appeals) in the course of any proceedings under this Act, is satisfied that the profits of a registered firm have been distributed otherwise than in accordance with the shares of the partners as shown in the instrument of partnership on the basis of which the firm has been registered under this Act, and that any partner has thereby returned his income below its real amount, he may direct that such partner shall, in addition to the tax, if any, payable by him, pay by way of penalty a sum not exceeding one and a half times the amount of tax which has been avoided, or would have been avoided if the income returned by such partner had been accepted as his correct income; and no refund or other adjustment shall be claimable by any other partner by reason of such direction. (5) The provisions of this section as they stood immediately before their amendment by the Direct Tax Laws (Amend.) Act, 1989, shall apply to and in relation to any assessment for the assessment year commencing on the 1st day of April, 1988, or any earlier assessment year and references in this section to the other provisions of this Act shall be construed as references to those provisions as for the time being in force and applicable to the relevant assessment year." (emphasis supplied) https://hcservices.ecourts.gov.in/hcservices/ Section: 28 of the Income Tax Act, 1922 Section: 28. Penalty for concealment of income or improper distribution of profits.-- (1) If the Income-tax Officer, the Appellate Assistant Commissioner or the Appellate Tribunal, in the course of any proceedings under this Act, is satisfied that any person-- (a) has without reasonable cause failed to furnish to return of his total income which he was required to furnish by notice given under sub-section (1) or sub-section (2) of section 22 or section 34 or has without reasonable cause failed to furnish it within the time allowed and in the manner required by such notice,or (b) has without reasonable cause failed to comply with a notice under sub-section (4) of section 22 or sub-section (2) of section 23, or (c) has concealed the particulars of his income or deliberately furnished inaccurate particulars of such income, he or it may direct that such person shall pay by way of penalty, in the case referred to in clause (a), in addition to the amount of the income-tax and super-tax, if any, payable by him a sum not exceeding one and a half times that amount, and in the cases referred to in clauses (b) and (c), in addition to any tax payable by him, a sum not exceeding one and a half times the amount of the income-tax and super-tax, if any, which would have been avoided if the income as returned by such person had been accepted as the correct