1985 (7) TMI 44 - HC - Income Tax

Penalty proceeding u/s 271 against a partnership firm - substantial clandestine business - non-production of books of account and non-compliance of the notice - Whether the Tribunal were correct in law in cancelling the penalties levied u/s 271(1)(b) in spite of their finding that the assessee was in default in not complying with the notice u/s 142(1)? - HELD THAT - The observation of the Tribunal that there had been failure of the Department to show that there had been deliberate default on the part of the assessee in failing to comply with the notice u/s 142(1)(i) of the Act was equally erroneous. The onus was on the assessee to answer the charge of having failed to comply with the notice u/s 142(1) of the Act. The words of section 271(1)(b) of the Act that if the Revenue is satisfied that any person has without reasonable cause failed to comply with a notice u/s 142(1) he shall be liable to penalty are rather crucial. It is obvious therefore that the assessee was required to show reasonable cause. That was a matter within the special knowledge of the assessee. The Revenue could not have known what cause the assessee had for failure to comply with the notice. The Appellate Assistant Commissioner categorically held that the story of loss of account books was wholly unreliable. He also held in agreement with the Income-tax Officer that the appellant failed without any reasonable cause to comply with the terms of the notice u/s 142(1)(i) of the Act. It must be added that in the instant penalty proceeding as well the assessee took no steps to establish that there was any reasonable cause for not complying with the notice u/s 142 of the Act. Despite the findings in the assessment and the registration proceedings we would have been inclined to consider whether there was any reasonable cause or not but the entire record shows that no effort worth the name was made by the assessee to show that there was any reasonable cause. The last aspect which must be considered is the observation of the Tribunal that the imposition of penalty u/s 271(1)(b) is discretionary. This is clearly erroneous. It is true that the words used in section 271 are that the Income-tax Officer or the Appellate Assistant Commissioner may direct that such person shall pay by way of penalty. The expression may in the context in which it has been used must be held to be mandatory. The Tribunal therefore erred in that regard as well. Reference to the case of CIT v. Khoday Eswarsa and Sons 1971 (9) TMI 19 - SUPREME COURT where it was held that it was for the Revenue to show that there had been any deliberate default on the part of the assessee for imposition of penalty is entirely misplaced. That is a case prior to the introduction of the Explanation to section 271(1)(c) of the Act. That case therefore has no relevance for the present case before us. Thus we are of the view that the Tribunal erred in law in setting aside the penalty levied u/s 271(1)(b) of the Act. The question referred to us is therefore answered in favour of the Revenue and against the assessee.

Issues:
Penalty proceeding against the assessee for non-compliance with notice under section 142(1)(i) of the Income-tax Act, 1961.

Detailed Analysis:

1. Background and Assessment Years:
The judgment concerns a penalty proceeding against a partnership firm for non-compliance with a notice under section 142(1)(i) of the Income-tax Act, 1961, for the assessment years 1962-63, 1963-64, and 1964-65. The firm's books of account were seized by the Sales Tax Department, and the firm failed to produce them, claiming they were lost in transit.

2. Procedural History:
The firm was also involved in a registration proceeding under section 182 of the Act, where the benefit of registration was extended but later forfeited due to non-compliance. The penalty proceeding under section 271(1)(b) was initiated parallel to the assessment and registration proceedings, leading to the current reference before the High Court.

3. Assessee's Defense and Tribunal's Decision:
The firm failed to provide a satisfactory explanation for non-compliance in the penalty proceeding. The Tribunal allowed the appeal against the penalty, citing reasons such as lack of deliberate default, absence of mens rea, and discretionary imposition of penalties by the taxing authority. The Tribunal's decision was based on the firm's failure to establish any reasonable cause for non-compliance.

4. Onus of Proof and Legal Interpretation:
The High Court emphasized that the onus of proving reasonable cause for non-compliance lies with the assessee, similar to the burden of proof in a criminal case. The court highlighted that the absence of mens rea is irrelevant in tax matters and that the firm's failure to comply without reasonable cause warranted penalty imposition.

5. Error in Tribunal's Decision:
The High Court found errors in the Tribunal's decision, emphasizing that the Tribunal's discretion in imposing penalties under section 271(1)(b) is not absolute. The court clarified that the word "may" in the section should be construed as mandatory, and the firm's failure to demonstrate a reasonable cause for non-compliance justified the penalty.

6. Conclusion and Judgment:
Ultimately, the High Court ruled in favor of the Revenue, overturning the Tribunal's decision to set aside the penalty levied under section 271(1)(b). The court held that the firm's failure to comply without reasonable cause warranted the penalty. The judgment concluded without awarding costs and directed the transmission of the judgment to the Tribunal promptly.

This detailed analysis provides a comprehensive overview of the legal judgment, covering the issues, procedural history, legal interpretations, and the final ruling by the High Court.

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