Supreme Court relaxes rigour of penalties

DIRECT TAX

When a taxpayer faces an upward assessment or addition to his income, more than the pain of additional tax, the quantum of consequential penalty (varying between 100 and 300 per cent of such tax) acts as a major deterrent from indulging in tax evasion or creative tax avoidance scheme.

The statutory provisions for levy of penalty has been made more stringent over the years, besides empowering the taxman to impose penalties arbitrarily and in a mechanical fashion.

Though several courts have interpreted the draconian penal provisions, two recent decisions of the Supreme Court lay down clear and emphatic guidelines to be followed by the Revenue authorities to ensure that penalties are not levied indiscriminately and the onus is on the Revenue to prove concealment of income. Further, penalty cannot be levied merely because addition to income made in an assessment is upheld.

As a practice, the process of initiation of penalty proceedings commences with addition to the income and is virtually automatic. Indiscriminate levy of penalties are forcing taxpayers to defend themselves through higher appeal proceedings to get them quashed. Every variation made to the income/loss is considered concealment of income.

In so far as the judiciary is concerned, the law is well settled in the sense that an order imposing penalty is a quasi-criminal proceeding and penalty should not be ordinarily imposed unless the taxpayer either acted deliberately in defiance of law or was guilty of conduct contumacious or dishonest or acted in conscious disregard of his obligation. No penalty can be imposed if the taxpayer was acting in honest and genuine belief.

The well-reasoned recent judgment of the Supreme Court in Dilip N Shroff's case is an eloquent and elaborate authority on how liability to penalty for "alleged concealment or furnishing of inaccurate particulars" should be examined and dealt with.

The court ruled that a duty may be enjoined on the taxpayer to make correct disclosure of income but if such a disclosure is based on opinion of an expert, (a registered valuer in this case) only because his opinion is not accepted or another expert gives a contrary opinion, same by itself may not be sufficient for arriving at conclusion that the taxpayer has furnished inaccurate information warranting penalty.

The taxpayer in this case had an undivided 1/4th share in immovable property from which capital gains were derived. For valuing the property for the purpose of computing capital gains, the taxpayer appointed a registered valuer who in its report gave all the requisite particulars. The taxpayer relying on the valuation report filed the tax return showing capital loss on account of the sale of the property and also filed the registered valuer's report along with the return.

The Revenue department referred the matter to the valuation cell and based on the District Valuation Officer's report, the Revenue assessed capital gain. Consequently, the Revenue imposed a minimum penalty of 100 per cent of tax on the basis that the taxpayer had furnished inaccurate information. All the appellate authorities including the high court dismissed the taxpayer's appeal.

On appeal, the Supreme Court reversed the decision of the Bombay High Court and cancelled the penalty. The Supreme Court was called upon to interpret the law as it stood in fiscal 1997-98.

While delivering the judgment, the Supreme Court, reiterating the Wanchoo Committee principles, observed that penalty proceedings are not to be initiated to harass taxpayers and the approach of the Revenue must be fair and objective. The burden of proof lies on the department to establish that the taxpayer had concealed his income.

Interestingly, the court further observed that even where the burden is shifted and required to be discharged by the taxpayer, it would not be heavy as in prosecution cases. A mere finding in assessment proceedings that a particular receipt is income cannot constitute good evidence in penalty proceedings.

Since the levy of penalty is discretionary, such discretion is required to be exercised keeping the relevant factors in mind.

Furnishing of an assessment of value of a property may not by itself be furnishing of inaccurate particulars. The taxpayer must be found to have failed to give relevant information relating to the income. The Revenue will have to give a specific finding on both the conditions.

To avoid any confusion on burden of proof and shifting of such burden, the court has laid down guidelines, to ensure that the tax administrators and taxpayers don't indulge in a hide-and-seek game.

The primary burden of proof is on the Revenue. The statute requires the Revenue to demonstrate that there is primary evidence that the taxpayer has concealed income or furnished inaccurate information and this onus has to be mandatorily discharged by the Revenue. Once the primary burden of proof is discharged, the secondary burden of proof would shift to the taxpayer since proceedings are of penal nature in the sense that its consequences are intended to act as effective deterrent and against public interest.

On another important principle, the court further held that "concealment of income" and "furnishing of inaccurate particulars" are different concepts. Ofcourse the law imposes the levy of penalty under either of the conditions. The Revenue is required to arrive at a satisfaction about "falsity" in explanation furnished by the taxpayer.

A duty is enjoined on the taxpayer to make a correct disclosure but if such disclosure is based on the opinion of an expert, appointed in terms of a statutory scheme, only because his opinion is not accepted the same by itself may not be sufficient for arriving at a conclusion that the taxpayer has furnished inaccurate information.

The Revenue's case failed since the only plank that the valuation certificate submitted was inaccurate did not convince the court.

Another judgment delivered by the Supreme Court on the same day in T Ashok Pai's case has further amplified the meaning of the expression "furnishing of inaccurate particulars of income".

Whilst the twin decisions besides laying down the correct principle of law also pave the way for cleaning several penalty cases laying in the jurisdictional tribunals and high courts.

An important principle it enunciates is with respect to a taxpayer's reliance on expert opinion. Professional chartered accountants are expected to certify taxpayers' data on a variety of issues, more particularly claim of fax benefits, transfer pricing documentation, tax audit disclosure etc.

Will such opinions lead to a reasonable assurance (to the taxpayers) that in the event the Revenue department undertakes addition to income, no case for penalty can be brought out?

I guess, this will need more analysis and the jury is open.....