2006 (8) TMI 175 - HC - Income Tax

Effect of insertion of explanation 1 to section 271(1) (c) - In the penalty proceedings itself the assessee can explain his bona fides and show that all the facts relating to the same and material to the computation of his total income had been disclosed by him- Tribunal was not justified in holding that the onus is on the Revenue to prove mens rea - no separate enquiry is necessary before imposing the penalty case remanded to tribunal with a direction to pass fresh order

Summary

Issues Involved:
1. Onus of proving mens rea under Explanation 1 to section 271(1)(c) of the Income-tax Act.
2. Necessity of independent enquiry into the assessee's explanation during penalty proceedings.
3. Justification of the Tribunal in canceling the penalty under section 271(1)(c) of the Act.

Issue-wise Detailed Analysis:

1. Onus of Proving Mens Rea:
The primary issue was whether the Tribunal was justified in holding that the onus is on the Revenue to prove mens rea, even when the primary onus is upon the assessee to prove that there was no concealment in view of Explanation 1 to section 271(1)(c) of the Income-tax Act. The court clarified that the combined reading of Explanation 1 to section 271(1)(c) and the Supreme Court's verdict in K. P. Madhusudhanan (2001) 251 ITR 99 indicates that the burden initially lies on the assessee to prove that there was no concealment. The Tribunal's reliance on the earlier decision in Sir Shadilal Sugar and General Mills Ltd. (1987) 168 ITR 705, which required the Revenue to prove mens rea, was found to be outdated due to the subsequent addition of Explanation 1 to section 271(1)(c).

2. Necessity of Independent Enquiry:
The second issue was whether the Tribunal was justified in holding that an independent enquiry should have been conducted into the explanation of the assessee by the Revenue during penalty proceedings. The court held that while the proceedings initiated by the Revenue for imposing the penalty under section 271(1)(c) should be considered as the necessary enquiry, the assessee is at liberty to show his bona fides during these proceedings. If the assessee fails to demonstrate bona fides, the penalty can be imposed by the Revenue. Thus, the Tribunal's insistence on a separate enquiry was deemed unnecessary.

3. Justification of Cancelling the Penalty:
The third issue was whether the Tribunal was justified in cancelling the penalty under section 271(1)(c) of the Act levied upon the assessee by the Assessing Officer. The court found that the Tribunal's decision was influenced by the outdated legal position from Sir Shadilal Sugar and General Mills Ltd. and did not consider the updated legal framework established by the addition of Explanation 1 and the Supreme Court's decision in K. P. Madhusudhanan. Consequently, the Tribunal's cancellation of the penalty was not justified.

Conclusion:
The appeal filed by the Revenue was allowed, and the impugned order passed by the Income-tax Appellate Tribunal was set aside. The case was remanded back to the Tribunal with a direction to pass a fresh order after hearing the parties, keeping in view the law laid down by the Supreme Court in K. P. Madhusudhanan. The court emphasized that the primary onus is on the assessee to prove no concealment, and no separate enquiry is necessary beyond the penalty proceedings initiated by the Revenue.