Penalty for concealment of income Under Section 271(1) (c)

[C.A. DEV KUMAR KOTHARI]

Penalty u/s 271(1) (c):

Penalty for concealment of income confirmed some points of learning in view of recent judgment of Calcutta High Court dated 2^nd August 2011 in the case of Shri Pankaj Rathi.

Relevant references and provisions.

Shri Pankaj Rathi Versus Commissioner of Income-Tax (Appeals), XXXVII. 2011 -TMI - 204887 - CALCUTTA HIGH COURT

Section 271(1) (c).

Section 15-17 relating to income from salary.

Section 192 relating to TDS from salary.

Computation of income under the head ‘salaries’ and TDS:

Computation of income under the head salaries is governed by provisions of section 15-17. Broadly speaking the taxable income includes salary for current period, untaxed arrears of salary realized, advance salary received, and value of perquisites etc. from any employer or ex-employer.

Tax is deductible at source from salary paid by the employer. The employee can also furnish details of certain other income for consideration of tax deduction at source after consideration of

Such incomes. In case an employee has earned income from some other employer simultaneously or for earlier period of the same previous year, he may inform about such income and tax deducted by other employer and request the employer/ one of employer to consider salary earned from other employer to determine tax payable and consider tax deducted by other employer and then deduct tax on total income for the year.

TDS when an individual earn salary from more than one employer relevant portion from provision and circular:

From section 192:.

(2) Where, during the financial year, an assessee is employed simultaneously under more than one employer, or where he has held successively employment under more than one employer, he may furnish to the person responsible for making the payment referred to in sub-section (1) (being one of the said employers as the assessee may, having regard to the circumstances of his case, choose), such details of the income under the head "Salaries" due or received by him from the other employer or employers, the tax deducted at source therefrom and such other particulars, in such form and verified in such manner as may be prescribed, and thereupon the person responsible for making the payment referred to above shall take into account the details so furnished for the purposes of making the deduction under sub-section (1).

From CIRCULAR NO.1/2010 [F.No.275/192/2009 IT (B)] NEW DELHI, dated the 11th January,2010

Salary From More Than One Employer:

3.4 Sub-section (2) of section 192 deals with situations where an individual is working under more than one employer or has changed from one employer to another. It provides for deduction of tax at source by such employer (as the tax payer may choose) from the aggregate salary of the employee who is or has been in receipt of salary from more than one employer. The employee is now required to furnish to the present/chosen employer details of the income under the head "Salaries" due or received from the former/other employer and also tax deducted at source there from, in writing and duly verified by him and by the former/other employer. The present/ chosen employer will be required to deduct tax at source on the aggregate amount of salary (including salary received from the former or other employer).

Authors  observations:

From the above  provision of section 192 (2) and the circular of the Board it is clear that it is at option of the salary earner to inform his employer / one of employer  about salary (and perquisites) earned by him from other employer/ ex-employer and get tax deducted on total income, by the employer to whom such information is provided. If the employee does not inform any of employer about such income from salary earned from other employers or ex-employers, any of the employers cannot deduct tax on total income and therefore  will not be liable to deduct tax after due consideration of income earned from other employers. Therefore, unless employee has requested one of employer to deduct tax on the basis of total income, the employee will be liable to pay his tax.

Ultimate tax liability is of person who has earned income:

Though there are provisions of TDS, however, TDS is generally provisional collection of tax. The ultimate liability to pay tax is on the person who has earned income. Therefore, even in case of persons mainly earning income from salary, and even if they have informed some types of income to the employer for consideration, still they would remain liable to pay tax if ultimate tax payable is higher than the amount of tax deducted. Particularly when employee has failed to inform the employer about salary earned from other employers he cannot plead that tax was deducted from salary. Based on inclusion of all salary earned, the tax rate may increase and therefore there is possibility that TDS falls short of tax payable. Particularly when salary is earned from two or more employers, unless the employee inform employers about salary earned from other employers there is likely hood of short deduction of tax for the following reasons:

1. Consideration of basic exemption, and also deductions under chapter VIA by all the employers.
2. On inclusion of salary of all employers higher average tax is likely to be applicable.
3. In some years tax rebate or deductions were not allowable or allowable at lesser rate on gross total income exceeding certain prescribed level.
4. Other provisions causing higher rate of tax, applicability of surcharge etc.

Care required when income is earned from several sources:

It is very important to take care when income from salary or other sources is earned from several sources. To take care of situations the following administrative practices should be adopted:

1. All income should be deposited in bank accounts.
2. There should not be any undisclosed bank account.
3. As far as possible income should be received by a/c payee cheques and should be deposited in bank accounts.
4. In case of cash receipts, practice of maintaining proper records and issuing receipts should be followed with due care and timely entries should be made.
5. All bank accounts should be maintained properly and all entries in bank should be properly accounted for and bank reconciliation statements should be prepared.  
6. When salary is earned from more than one employer, assessee/ employee should exercise his option to get tax deducted from one employer after considering salary earned from various employers by suitably and completely informing one of employer about salary earned from other employers and tax deducted by them.
7. In case of salary earners, it is advisable to inform the employer about other income which the employer can consider for deduction of tax. In respect of any other income the salary earner should be careful to disclose the same in his return of income filed to disclose all incomes.

Case of Pankaj Rathi Vs. CIT:

In view of  provisions and related aspects as discussed above it appears that the case of Pankaj Rathi is a case of gross negligence while complying with provisions and filing of return. From the facts noted in the judgment we find as follows:

a) The appellant is an individual

b) Assessment year involved is  the Assessment Year 2001-2002, for which the relevant previous year was the financial year ending on March 31, 2001.  

c) During the financial year 2000-2001, the appellant had  worked for two employers  up to November 30, 2000 he was employed with KPMG Consulting Pvt Ltd.  and afterwards he worked with PWC  he earned  gross salary of Rs.5,47,358/- and  Rs.4,18,555/-  from two employers respectively . Thus, Mr. Pankaj Rathi the appellant, earned a total gross income of Rs.9,65,913/-.

d) The appellant filed its return for the said period showing the gross income of only Rs.4,18,555/- and claimed TDS of Rs. 1,32,367/-.  

e) The appellant, did not include the gross income of Rs. 5, 47,358/- earned from KPMG.

f) There was  tax deduction at source from salary paid by KPMG also but  such deduction at source was also not mentioned in the return by the  appellant.  

Comments of author:

From the above facts we can notice that the appellant must be a highly qualified and successful professional in a senior position engaged by famous professional concerns of repute and big size at good salary. However, it also appears that the appellant   had not informed his new employer PWC about salary earned by him and tax deducted by his ex-employer KPMG. Had he informed PWC u/s 192(2), PWC would have considered his salary earned from KPMG and tax deducted by them. In that case entire income from salary would have come into picture. It also appears that the appellant has not even taken care to see his all bank accounts in which salary earned from KPMG was deposited.

It also appears that the tax deduction department of PWC has also not taken care to collect information from Mr. Pankaj Rathi about his other salary income, though PWC must be aware that Mr. Rathi worked with PWC earlier and in the same year also. Though it is not duty of employer (as noted earlier, as per section 192(2) it is option of employee to inform employer), but as a good practice and as measure of assisting employees, tax deduction department of employers request employees to provide such information about other income, investment etc. However, PWC cannot be defaulted, unless Shri Rathi has informed to them about salary eanred from KPMG.

   Facts about  reassessment and penalty:

1. a notice under Section 148 of the Act  was issued by the  Assessing Officer on obtaining information from the former employer (KPMG) had reason to believe that a part of the income of the appellant escaped assessment.
2. The appellant replied to the said notice requesting the Assessing Officer to treat his original return as the return filed in response to the aforesaid notice.
3.  Thereafter, the Assessing Officer ex parte assessed the appellant to the tune of Rs.6,43,900/ - and a penalty proceedings under Section 271(1)(c) of the Act was separately initiated.  
4.  Being aggrieved by the aforesaid order of assessment, the appellant preferred an appeal before the Commissioner of Income-tax (Appeals) wherein the appellant submitted that due to inadvertent mistake, he did not include the gross income of Rs. 5,47,358/- earned from the former employer though the tax on the said income was covered by TDS certificate.
5. The said Appellate Authority, by an order dated February 5, 2007 directed the Assessing Officer to recompute the income of the appellant in accordance with such income enhanced by the aforesaid appellate authority and to allow the rebate and TDS after due verification.  
6.   The Assessing Officer, subsequently, by his order dated November 22, 2007 recomputed the income of the appellant and initiated reassessment proceeding. The appellant in reassessment notice stated his correct income and filed return on May 7, 2007 disclosing total income of Rs.8,35,230/- and the Assessing Officer thereafter, by order dated November 22, 2007 assessed the appellant’s income accordingly as stated in the aforesaid return and also launched penalty proceedings under Section 271(1)(c) of the Act.  
7.  By another  order dated May 30, 2008, the Assessing Officer held that since there was a difference in tax of Rs.1,98,582/- between the original return and return dated May 7, 2007 filed in course of reassessment proceedings, tax on income to the extent of the said amount was concealed warranting invocation of penalty @ 100% and consequently, the appellant was served with a demand notice under Section 156 of the Act.  
8.   Aggrieved by the said order of penalty, the appellant preferred an appeal before the Commissioner of Income-tax (Appeals) and the said appellant authority by its order dated December 16, 2008 upheld the penalty levied by the Assessing Officer.
9. Being dissatisfied, the appellant preferred an appeal before the Income-tax Appellate Tribunal and the said Tribunal by the order impugned herein upheld the aforesaid order of imposition of penalty.  

Comments of author:

From above facts in relation to reassessment it is seen that the appellant has been careless when he replied to notice u/s 148 to treat original return of income as return of income in response to the notice u/s 148. It seems that while doing so also, the appellant did not take care to verify his records including computation of income, salary certificates, bank statements etc. Had he taken a bit of care, he could have filed return of correct income.

Before the High Court:

 Against the order of the Tribunal, the appellant filed appeal under Section 260A of the Act.  Division Bench of the High Court by order dated February 8, 2010 formulated the following substantial question of law:

“Whether on a true and proper interpretation of section 271(1)(c) of the Income Tax Act, 1961, the learned Tribunal was justified in upholding the penalty levied by the Assessing Officer @ 100% on a mere bona fide and/or inadvertent mistake committed by the appellant and its finding to this extent is arbitrary, unreasonable and perverse?”  

High Courts observations and order:

1. There is no dispute that during the relevant assessment year, the appellant worked for 8 months before the earlier employer and 4 months before the new employer.
2. Appellant totally suppressed the income from salary availed of from the earlier employer but only disclosed the salary of 4 months received from the new employer.
3. The only explanation given is that due to oversight he forgot to disclose the salary received from the earlier employer including the T.D.S deducted by the earlier employer.
4.  An impression was given that the full amount of tax payable from salary concealed was deducted by the earlier employer and thus, the appellant had no intention to deceive.
5. Although mens rea to deceive is irrelevant for our purpose, that such fact is wrong would appear from the fact that in the original return, the appellant claimed refund of Rs.82,243/- on the allegation that excess amount of tax at source was deducted by his new employer after suppressing the fact that he worked for further 8 months before the earlier employer and the TDS deducted by the earlier employer, if taken into consideration along with the salary paid by such employer, the actual refund should be Rs.37,314/-. Thus, he claimed an excess amount of about Rs. 45,000/- by way of refund even if the TDS by the former employer was taken into account.
6. Although Mr. Khaitan, the learned counsel appearing on behalf of the appellant tried to convince  the court that there was no concealment of income but  the court was not impressed by such submission because the court found that :

(i) on a plain reading of the  Section it is clear that for application of Section 271(1) (c) of the Act, all that is necessary is that either there must be concealment of income or furnishing of inaccurate particulars of such income.

(ii) In this case the aforesaid provision has been definitely attracted as the appellant failed to disclose his salary for 8 months he received from his former employee.

(iii) If an employee does not disclose the salary of 8 months and shows only the salary of 4 months in a year notwithstanding the fact that he worked as employee for full 12 months, such act definitely comes within the meaning of concealment so as to attract the aforesaid provision.

(iv) Court held that “we are quite conscious that element of mala fide is an insignificant factor for the application of the said provision”.  

(v) The Court  refered to the following observations of the Supreme Court in the case of C. I. T., Ahmedabad vs. Reliance Petro products Pvt. Ltd., 2010 -TMI - 75701 - SUPREME COURT while elucidating the scope of Section 271(1) (c) of the Act;  

Quote:

“Therefore, it is obvious that it must be shown that the conditions under Section 271(1)(c) must exist before the penalty is imposed. There can be no dispute that everything would depend upon the Return filed because that is the only document, where the assessee can furnish the particulars of his income. When such particulars are found to be inaccurate, the liability would arise. In Dilip N. Shroff v. Joint Commissioner of Income Tax, Mumbai and Anr. [2007 -TMI - 6564 - SUPREME COURT] : (AIR 2007 SC (Supp) 1280 : 2007 AIR SCW 4323), this Court explained the terms "concealment of income" and "furnishing inaccurate particulars". The Court went on to hold therein that in order to attract the penalty under Section 271(1)(c), mens rea was necessary, as according to the Court, the word "inaccurate" signified a deliberate act or omission on behalf of the assessee. It went on to hold that Clause (iii) of Section 271(1) provided for a discretionary jurisdiction upon the Assessing Authority, inasmuch as the amount of penalty could not be less than the amount of tax sought to be evaded by reason of such concealment of particulars of income, but it may not exceed three times thereof. It was pointed out that the term "inaccurate particulars" was not defined anywhere in the Act and, therefore, it was held that furnishing of an assessment of the value of the property may not by itself be furnishing inaccurate particulars. It was further held that the assessee must be found to have failed to prove that his explanation is not only not bona fide but all the facts relating to the same and material to the computation of his income were not disclosed by him. It was then held that the explanation must be preceded by a finding as to how and in what manner, the assessee had furnished the particulars of his income. The Court ultimately went on to hold that the element of mens rea was essential. It was only on the point of mens rea that the judgment In Dilip N. Shroff v. Joint Commissioner of Income Tax, Mumbai and Anr. [2007 -TMI - 6564 - SUPREME COURT] : was upset. In Union of India v. Dharamendra Textile Processors 2007 (7) TMI 307 - SUPREME COURT OF INDIA (cited supra), after quoting from Section 271 extensively and also considering Section 271(1)(c), the Court came to the conclusion that since Section 271(1)(c) indicated the element of strict liability on the assessee for the concealment or for giving inaccurate particulars while filing Return, there was no necessity of mens rea. The Court went on to hold that the objective behind enactment of Section 271(1)(c) read with Explanations indicated with the said Section was for providing remedy for loss of revenue and such a penalty was a civil liability and, therefore, wilful concealment is not an essential ingredient for attracting civil liability as was the case in the matter of prosecution under Section 276-C of the Act. The basic reason why decision in In Dilip N. Shroff v. Joint Commissioner of Income Tax, Mumbai and Anr. [2007 -TMI - 6564 - SUPREME COURT] : was overruled by this Court in Union of India v. Dharamendra Textile Processors (cited supra), was that according to this Court the effect and difference between Section 271(1)(c) and Section 276-C of the Act was lost sight of in case of In Dilip N. Shroff v. Joint Commissioner of Income Tax, Mumbai and Anr. [2007 -TMI - 6564 - SUPREME COURT] :

Unquote:

Applying the aforesaid principles to the facts of the case of appellant the court found that the Tribunal correctly appreciated the facts and rightly affirmed the order of penalty.

The court further held that

“there is also no reason to interfere with the quantum of penalty as only an amount equivalent to 100% of the tax evaded has been imposed where as the maximum amount is 300%. We, thus, find no merit in the appeal and dismiss the same by holding that the point formulated by the Division Bench was not appropriate within the scope of Section 271(1) (c ) of the Act and hold that on a true and proper interpretation of section 271(1)(c) of the Income Tax Act, 1961, the learned Tribunal was justified in upholding the penalty levied by the Assessing Officer @ 100% as the question of bona fide intention or inadvertent mistake alleged by the assessee is not a relevant factor and the finding of the Tribunal cannot be said to be arbitrary, unreasonable and perverse justifying interference under Section 260 A of the Act.  We further make it clear we have not considered the question of mala fide intention or mens rea of the appellant in furnishing the inaccurate income or in concealing the real income as the same is beyond the scope of this proceeding. In the facts and circumstances, there will be, however, no order as to costs.”  

Author’s point of view- the assessee could have made his case on better footing:

It appears that in view of submissions made by the appellant the honorable High Court has rightly held that there was concealment of income. It can also be said that there was furnishing of inaccurate particulars of income because salary earned for eight months was totally suppressed. However, in this case the appellant by taking full care could have disclosed full income while replying to notice u/s 148 and at that time itself could have pleaded as follows:

1. There was no concealment of income it was simply inadvertent mistake because the assessee had informed his correct name, address and PAN to the ex-employer (KPMG) who deducted tax at source from his salary earnings.
2. The information got by revenue is based on such information furnished by assessee to his ex-employer (KPMG). There was no incorrect information furnished to ex-employer (KPMG).
3. The assessee being very busy in various assignments requiring lot of travelling, had relied on other persons who prepared return of income and mistake was committed by them. (This should be based on actual facts of his case).
4. When assessee has furnished correct particulars of his name, address, PAN etc. to his ex-employer, it can be said that there was only an inadvertent mistake, while preparing return of income. 
5. That mistake crept in due to various administrative and other reasons.
6. In the facts and circumstances an excessive claim of refund of about Rs. 45,000/-  may not be considered as an amount substantial enough for  a person of stature of the assessee to indulge into furnishing particulars of income inaccurately or concealing income. Therefore, there can be presumption that there was inadvertent mistake committed by concerned persons.