Deletion Of Penalty Resulting In Deletion Of Addition: Supreme Court’s Converse Logic In Basir Ahmed Sisodia’s Case

Advocate Rahul Sarda has pointed out that the recent judgement of the Supreme Court in Basir Ahmed Sisodia vs. ITO 116 TM.com 375 (SC) upholds the fundamental tenet of taxation that tax proceedings are not adversary proceedings. Tax authorities are engaged only in the administrative act of adjusting a taxpayer’s liability. A taxpayer who has failed to bring on record all facts in the assessment proceedings to justify his claim can do so during the penalty proceedings and expect to succeed in the assessment proceedings

Introduction

1. In the midst of the lockdown imposed by the Government of India due to the COVID-19 pandemic, the Supreme Court of India has passed an important and a first-of-its-kind judgement on 24th April 2020 in the case of Basir Ahmed Sisodiavs. ITO reported in [2020] 116 taxmann.com 375 (SC) (hereinafter referred to as the/ this “Judgement”).

2. What makes this Judgement a first-of-its-kind is that the Supreme Court relied solely on the findings of the income-tax first appellate authority(i.e. the “CIT (A)”) during penalty proceedings for granting relief to an assessee from additions made in assessment/ quantum proceedings in a case where the assessee had unsuccessfully contested the quantum addition at all levels including the High Court. While findings of income-tax authorities in assessment/ quantum proceedings have always been considered important for deciding whether penalty should be levied or not in a given case, this case thus represents a converse. The importance of this Judgement stems from the fact that it potentially gives assessees – and tax professionals – another bite at the cherry and use favourable findings in penalty proceedings to seek reliefs from quantum additions.

The Judgement –Basir Ahmed Sisodia vs. ITO

Facts of the case

3. The Supreme Court was concerned with the correctness of addition of Rs. 2,26,000/- made by the Assessing Officer under section 68 of the Income-tax Act, 1961 (the “Act”). During the assessment proceedings for AY 1998-99, on finding that the credits aggregating to Rs. 2,26,000/- shown in the name of 15 persons was incorrect and without any proof, the Assessing Officer rejected the books of accounts, treated the said credits as unexplained and added them to the income of the assessee. The Assessing Officer also imposed penalty under section 271(1)(c) of the Act in respect of this addition. The CIT (A) and the Income-tax Appellate Tribunal (the “Tribunal”) upheld the quantum addition of Rs. 2,26,000/-.

4. On further appeal by the assessee to the High Court, the High Court upheld the addition of Rs. 2,26,000/- observing that though being called upon to prove the correctness and genuineness of his claim, the assessee failed to do so. The High Court inter alia further observed that the amount standing to the credit of the 15 persons was shown in a bogus manner.

5. Before the Supreme Court, the assessee made various submissions, including inter alia a legal submission that, after rejecting the books of accounts, the Assessing Officer could not have relied on the same books of accounts to make the impugned addition. By the time, the Supreme Court was hearing the appeal of the assessee, the assessee had succeeded in getting the penalty on the said addition deleted. The assessee filed an Interim Application for permission to bring on record these subsequent developments and more particularly the order passed by the CIT (A) in penalty proceedings deleting the said penalty.

6. In this order of the CIT (A), the CIT (A) noted that during penalty proceedings, the assessee had filed additional evidence in the form of affidavits from 13 creditors & their identity proofs and sales tax order showing purchases made from them. The CIT (A) also observed that the Assessing Officer had recorded the statements of 12 out of the 13 persons wherein they have admitted that the assessee made purchases from them and the Assessing Officer had not doubted their identity or made any adverse comments in respect of purchases made by the assessee from them. With the above observations, the CIT (A) deleted the penalty; consequently, the amount of penalty paid by the assessee was refunded to him by the Income-tax Department (the “Revenue”).

What has the Supreme Court held on the merits of the addition?

7. The Supreme Court noted that the quantum addition was made by the Assessing Officer and upheld by the appellate authorities and the High Court as despite sufficient opportunity being granted to the assessee, he failed to prove the correctness and genuineness of his claim in respect of the amount of Rs. 2,26,000/- as a result of which the said amount was treated as represented by bogus entries.

8. However, the Supreme Court observed that during penalty proceedings, the assesse had produced evidence to substantiate the correctness and genuineness of his claim which was accepted by the CIT (A) which made the CIT (A) return a finding that there was neither any concealment nor furnishing of inaccurate particulars of income by the assessee. While being conscious of the fact, and categorically observing, that the findings of the CIT (A) in favour of the assessee were rendered in penalty proceedings (and not quantum assessment proceedings), the Supreme Court held that the factual basis on which the Assessing Officer made the addition of Rs. 2,26,000/- stood dispelled in which circumstances the addition could not be justified. Accordingly, “on this count alone”, assessee’s appeal was allowed and the quantum addition of Rs. 2,26,000/- was deleted.

The converse logic of the Supreme Court

9. It is an accepted position under the income-tax law that though the findings rendered in assessment proceedings constitute good evidence, they do not constitute conclusive evidence in penalty proceedings [See: Vijay Power Generators Ltd. vs. ITO [2009] 180 Taxman 102 (Delhi) (Trib.) (MAG)]. The Supreme Court has unequivocally held inCIT vs. Reliance Petroproducts (P.) Ltd. [2010] 322 ITR 158 (SC) that merely because an assessee hasmade a particular claim, which was not accepted by the revenue, that, by itself, would not attract imposition of penalty under section 271(1)(c) of the Act. However, when an addition itself is made on account of lack of sufficient evidence to support a particular claim of the assessee or when a claim has been treated as bogus by the Revenue, levy of penalty on the same is quite routine in respect of such additions.

10. Deletion of quantum addition would obviously result in deletion of penalty [See: K.C. Builders vs. ACIT[2004] 165 ITR 562 (SC)]. In many cases, the Tribunal and the higher Courts have, notwithstanding the findings in assessment proceedings, deleted the penalty even though the quantum additions have been sustained. However, this is one of the rare cases where the deletion of penalty and findings in penalty proceedings have been used by an assessee to succeed against the quantum addition.

Key take-away from the Judgement

11. Tax professionals are aware that assessment proceedings precede penalty proceedings. Owing to the time-limits prescribed in the Act for passing of assessment orders, filing of appeals & levy of penalties, penalty proceedings are usually initiated and penalty is levied at a stage when the issue of quantum addition on merits is at large before the Tribunal. Assessees and tax professionals can rely on this judgement of the Supreme Court to bring on record favourable findings in penalty proceedings before the appellate authority/ Court before which an appeal against quantum addition is pending. Such findings should be brought on record before the appellate authority or the Court, as the case may be, by an appropriate application according to the applicable rules of such appellate authority/ Court. After this judgement, any favourable finding in the course of penalty proceedings should come to the aid of an assessee in appeals arising from assessment proceedings. However, it is imperative that the appeal against the quantum addition on merits must be pending before some forum. A favourable finding in penalty proceedings cannot resurrect a non-existent or a finally concluded proceeding against the quantum addition.

12. There can be a situation where an assessee has filed additional evidence in penalty proceedings but till the date of hearing of the appeal on quantum addition before any appellate authority or higher Court, no findings have been rendered on such additional evidence. In such cases also, assessees should inform the appellate authority or the higher Court, as the case may be, about the filing of additional evidence by way of an appropriate application. Since it is not impermissible to take into consideration findings rendered during penalty proceedings, in such situations, the appellate authority or the higher Court may remand the matter back for fresh consideration or defer the hearing till a finding of fact is rendered on such additional evidence.

13. It would be erroneous to assume that this Judgement lays down a general proposition that quantum addition/ disallowance ought to be deleted if penalty on that addition/ disallowance has been deleted. This Judgement can be relied on only in situations where additions have been made due to the assessee not producing adequate evidence during assessment proceedings but the same being filed subsequently in penalty proceedings.

14. From AY 2017-18 onwards, penalty under section 271(1)(c) for concealment or furnishing inaccurate particulars of income is not leviable; instead penalty under section 270A for underreporting or misreporting of income is leviable. However, assessees should be in a position to cite this Judgement even in cases where additional evidence is furnished during penalty proceedings for AY 2017-18 onwards.

Aspects not pointed out to the Supreme Court

15. As stated above, in this case, the assessee filed an application before the Supreme Court to bring on record the order of the CIT (A) passed in penalty proceedings deleting the penalty. This order of the CIT (A) was dated 13th January 2011 (1) and the tax-effect involved in the penalty appeal was Rs. 98,513/- (2) .On 13th January 2011 i.e. the date of the order of the CIT (A) deleting the penalty, Instruction No. 5 of 2008 dated 15th May 2008 issued by the Central Board of Direct Taxes regarding monetary limits for filing appeals by the Revenue was in force. As per this Instruction, unless the tax effect involved in an appeal exceeded Rs. 2,00,000/-, the Revenue could not have filed an appeal before the Tribunal. Therefore, due to low tax-effect involved, the Revenue could not have filed an appeal against the order dated 13th January 2011 passed by the CIT (A).

16. As per para 6 of the abovementioned Instruction, in a case where appeal before the Tribunal was not filed only on account of the tax-effect being less than the monetary limit of Rs. 2,00,000/-, it was directed that the Commissioner of Income-tax should specifically record that “even though the decision is not acceptable, appeal is not being filed only on the consideration that the tax effect is less than the monetary limit specified in this instruction”. Thus, one of the possibilities was that the order dated 13th January 2011 was not acceptable to the Revenue but it could not have challenged the said order. However, the Judgement does not throw any light on this aspect as the same was not argued on behalf of the Revenue before the Supreme Court.

17. It was also the contention of the assessee before the Supreme Court that the Revenue has allowed the order dated 13th January 2011 to become final and even refunded the penalty amount (3) . The said contention of the assessee was untenable in view of Instruction No. 5 of 2008 (supra) and the Revenue had no choice but to accept the said order& refund the penalty amount.

18. If the Revenue would have pointed out that due to the low tax-effect involved in the penalty matter, the Revenue could not have challenged the order of the CIT (A) deleting the penalty, the course of this Judgement could have been different.

Epilogue

19. It is important to note that the addition in respect of which the matter travelled till the Supreme Court was made under section 68 of the Act. The Supreme Court has, in Pr CITvs. NRA Iron & Steel (P) Ltd. [2019] 412 ITR 161 (SC), held that under section 68 of the Act, the primary onus to prove the genuineness of the transaction and the identity & creditworthiness of the transacting party lies on the assessee. Though certain aspects as stated above were not pointed out to the Supreme Court, the Judgement does not lose its binding nature or precedential value. This Judgement upholds the fundamental tenet of taxation that tax proceedings are not adversary proceedings and tax authorities are engaged only in the administrative act of adjusting taxpayer’s liability [See: State of Tamil Nadu vs. Arulmurugan& Co. [1982] 51 STC 381 (Mad.) (FB) and CIT vs. Indian Express (Madurai) (P.) Ltd. [1983] 140 ITR 705 (Mad.)].

20. Rather than taking a technical view and letting issues such as delay in filing evidence or that penalty proceedings being separate from assessment proceedings come in its way of permitting only the true income to be taxed, the Supreme Court correctly took cognisance of subsequent developments that adequate evidence had already been produced by the assessee albeit belatedly in penalty proceedings and adopted a just approach by deleting the addition. It is often said “facts are three-fourths of the law” (4) . This judgement of the Supreme Court gives hope to assessees who think they have missed the bus in bringing on record all facts by filing adequate evidence in the assessment proceedings or to those assessees who have been able to belatedly obtain evidence to justify their claims.