Holding

The Court held that a voluntary, good‑faith disclosure of concealed income prior to detection obliges the Commissioner to exercise the power under Section 271(4A) to waive or reduce the penalty, and the Board’s refusal without proper consideration was unlawful.

Summary

The appellants, a firm, voluntarily disclosed undisclosed income for the years 1958-65 before any tax authority detection and filed a statement of affairs. The Assessing Officer initiated penalty proceedings under Section 271(1)(c) of the Income Tax Act, imposing a penalty of Rs. 4,90,365, which was upheld by the Income Tax Appellate Tribunal. While the penalty proceedings were pending, the appellants applied for waiver under Section 271(4A); the Commissioner recommended reduction, but the Central Board of Direct Taxes refused. The Supreme Court held that the voluntary, good‑faith disclosure satisfied the conditions of Section 271(4A) and that the Board had not applied its mind before rejecting the waiver. Consequently, the Board’s order was quashed and the matter was directed to be re‑examined, and the appeals were allowed.

Issues considered

Whether the voluntary disclosure made by the assessee before detection entitled it to waiver or reduction of penalty under Section 271(4A) of the Income Tax Act, 1961.
Whether the Central Board of Direct Taxes correctly exercised its discretion in refusing to reduce the penalty despite the Commissioner’s recommendation.

Legislation cited

Income Tax Act, 1961s. 271(1)(c), s. 271(4A)

Subjects

penaltyvoluntary disclosureSection 271(4A)Income Tax ActCentral Board of Direct TaxesCommissioner of Income Taxwaiver of penaltyappellate jurisdiction

Judgment

JASW ANT RAJ AND ANR. A
·- v.
CENTRAL BOARD OF DIRECT TAXES AND REVENUE AND ORS.

MAY 4, 1998

[SUJATA V. MANOHAR ANDS. RAJENDRA BABU, JJ.] B

Income Tax Act, 1961 :

Sections 271(J)(c) and 271(4A)-Power of Commissioner of Income
Tax to reduce or waive penalty-Commissioner sending report to Central c
Board of Direct Taxes to reduce penalty-Board declining to reduce penalty-
Held, in view qf the finding recorded by the Income Tax Appellate Tribunal
and the circumstances explained by the Commissioner further scrutiny of the
matter is required-Order of the Board quashed-Board would restore the
proceedings to its file and would re-examine the matter.
D
The second appellant Firm made an application on 12.2.1965 that it
t'
would place before the Income Tax Officer a true statement of its financial
assets, transactions etc. and would file a statement of affairs. The statement
of affairs was filed disclosing certain amount as income from 1958-59 upto
31.3.1965. The Inspecting Assistant Commissioner issued notices to the E
appellants with a view to initiate proceedings under s.271(1)(c) of the Income
Tax Act, 1961 for non -disclosure of the income relating to the relevant
periods. A penalty of Rs. 4,90,365 was imposed on the appellants for the
years 1958-59 to 1964-65. The appeal filed by the assessee was dismissed
by the Income Tax Appellate Tribunal.
J F
During the pendency of the penalty proceedings the assesee filed an
application under s.271(4A) of the Act for waiver of the penalty; and the
Commissioner of Income Tax sent a report to the Central Board of Direct
Taxes to reduce the penalty as according to him the assessee was entitled
to the benefit ofs.271(4A). The Board refused to reduce the penalty. G
The assessee filed a writ petition before the High Court contending
-~
that the imposition of the penalty was premature inasmuch as the application
under s.271(4A) was still pending and that the condition precedent for the
satisfaction of the Income Ti:x Officer that the assessees had concealed the
income was not satisfied as the assessee had made the voluntary disclosure. H
139
140 SUPREME COURT REPORTS (1998] 3 S.C.R.
A The High Court dismissed the writ petition. Aggrieved the assessee filed the
present appeals.

It was contended for the assessee that imposition of penalty under · ·
s.27l(l)(c) would not take away the discretion of the Commissioner of Income
Tax if certain conditions for waiver under s.271(4A) were satisfied to which
B the Commissioner had adverted to in his report sent to the Board for prior
approval for waiver or reduction of the penalty; that the Board did not
consider the matter in the manner required under the law.

Allowing the appeal, this Court.

c HELD: 1.1. The provisions ofs.271(4A) of the Income Tax Act, 1961
indicate that it is a power coupled with a duty to do justice and the
Commissioner of Income Tax is under statutory obligation to exercise the
power in favour of an assessee who has fulfilled all the conditions of the
provisions, the principal condition being that the assessee should have
D voluntarily and in good faith made full disclosure of his income prior to the
detection of the same and such disclosure could be made even otherwise than
T
in the course of a return by submitting a petition to the Commissioner of
Income Tax. (145-C-E]

1.2. In the present case the assessee had made the disclosure prior to
E the coming into force of the voluntary disclosure scheme and long before the
Revenue could initiate any action in respect of the concealed income. The
levy of penalty under section 27l(l)(c) by itself will not be a circumstance
to take him out of the purview ofs. 271(4A) of the Act. [145-E-F]
2.1. In view of the findings recorded by the Tribunal it cannot be said
p that the assessee hau not disclosed its income at all before scrutiny by
assessing officer. The assessee on 12.2.1965 filed a declaration as to the '
correct position which may be seen from the statement of financial affairs
as on 31.3.1965. This declaration had been made by the assessee before the
provisions of the Finance Bill 1965 regarding voluntary disclosure scheme
were introduced and it was also true that the assessee acted voluntarily in
G coming forward with this declaration. Besides, it was also noticed by the
Tribunal that there was a confession made by the assessee voluntarily and
earnestly that it had not returned the full income earned by it in the relevant
years and had come forward with a disclosure of its escaped income.
[144-E-H]
H 2.2. The contention of the Revenue that the concealed income had not
'"-•
'
JASWANT RAI v. C.B.D.T& R. [RAJENDRA BABU, J.] 141
been disclosed voluntarily or in good faith prior to the initiation of the A
proceedings by the Revenue, if examined with reference to the findings
recorded by the Tribunal, cannot be accepted without further scrutiny of the
matter. Whether such scrutiny had been made by the Board in this case is
not clear from the endorsement issued to the Commissioner of Income Tax.
The Commissioner of Income Tax has explained each one of the circumstances B
arising in the case whether there has been concealment by the assessee and
its disclosure, the extent to which they were voluntary or the same had been
made prior to the detection of the same by the Revenue. Therefore, it does
not appear that the Central Board of Direct Taxes had duly applied its mind
.-1
or made an order revealing its mind by making a speaking order.
[145-G-H; 146-AI C
3. The order made by the Board is quashed. The Board would restore
the proceedings to its file and examine the matter once again in the light
of this judgement. The order made by the High Court shall stand modified
accordingly. ]146-B-C]

CIVIL APPELLATE JURISDICTION : Civil Appeal Nos. 435-441 D
of 1982.
'
1'
From the Judgment and Order dated 6.3.81 of the Delhi High Court in
W.P. No. 050of1970.

Dipankar Gupta and Mrs. A.K. Verma for the Appellants for JBD & C. E
B.B. Ahuja, S. Rajappa for B.K. Prasad for the Respondents.

The Judgment of the Court was delivered by

RAJENDRA BA BU, J. The appellants before us preferred a writ petition F
under Article 226 of the Constitution of India before the High Court of Delhi
seeking for a direction to extend the benefit of waiver of penalty arising under
Section 271 (4A) of the Income Tax Act. 1960 (hereinafter referred to as "the
Act"). Pursuant to a scheme, the second appellant, Firm made an application
on February 12, 1965 stating that they would place before the Income Tax G
Officer a true statement of their financial assets, transactions and they were
prepared to file a statement of the affairs as on March 31, 1965. The statement
of affairs filed on 20th May. 1965 disclosed an income of about Rs. 28,000,00
as the total accretion to its wealth over the eight years upto March 31 . 1965.
ultimately after some negotiations between the Department officials and the
appellants, the appellants agreed to be assessed at Rs. 66,56,000 subject to H
142 SUPREME COURT REPORTS [ 1998] 3 S.C.R.

A the usual allowance for depreciation etc. spread over eight assessment years
1958-59 to 1965-66. Assessments for the year 1958-59 to 1959-60 were to be ).
reopened inasmuch as they were complete by that time. The Inspecting
Assistant Commissioner issued notices to the appellants to initiate proceedings
under Section 271 (I )(c) of the Act for the non disclosure of the income
B relating to the aforesaid period. A penalty in a sum of Rs. 4,90,365 was
imposed on the appellants for the years 1958-59 to 1964-65. Appeal preferred
against the said order to the Income Tax Appellate Tribunal met with failure.

During the pendency of the penalty proceedings an application was
filed under section 271 (4A) of the Act and the Commissioner oflncome Tax
C sent a report on the said application on 23 .3 .1968 setting forth the circumstances
to reduce the penalty against the appellants in terms of provisions of Section
271(4A) of the Act. The Commissioner noticed that the said provision has
envisaged disclosure of income rliade (i) voluntarily; (ii) in good faith; (iii)
such disclosure being full and true; and (iv) is made prior to the detection
by the I.T.O. of the concealment in question and held that these circumstances
D to attract waiver or reduction under Section 271(4A) stood satisfied. He
referred to various items such as Hundi loans and the amounts surrendered,
accretion to wealth between different dates. However a communication was '
Y
sent by the Secretary of the Central Board of Direct Taxes on 28th March,
1968 refusing to reduce the penalty. Again another letter was sent on April
E 18, 1969 by the Commissioner pursuant to a letter received by him on 14th
April, 1969 making a further report on the matter, he set out the various details
thereto as to how the matter had been dealt with by the various authorities
and the manner in which the appellants would be entitled to the benefit under
the provisions referred to earlier. The Central Board of Direct Taxes has to
approve any action of the Commissioner to waive or reduce penalty in cases
F when the same is above Rs.50,000. Hence in this case reference was made by
the Commissioner of Income Tax to the Board for approval of his action to
reduce the penalty but the Board refused to reduce the penalty as suggested
by the former.

G Writ petition was preferred before the High Court. In the High Court two
contentions were put forth; firstly, that the imposition of the penalty on the
appellants was premature inasmuch as the application of the appellants filed
under Section 271(4A) of the Act for waiver of the penalty was still pending
disposal; secondly, that the condition precedent for the satisfaction of the
Income Tax Officer that the assessee had concealed his income had not been
H satisfied in view of the voluntary disclosure made. The High Court found no
JASWANT RA! v. C.B.D.T& R. [RAJENDRA BABU, J.] 143
•
substance in either of the contentions and dismissed the writ petition. The A
High Court took the view that the levy of penalty under section 271 (I) (c)
of the Act was not in any way dependent on the provisions of section
271(4A) of the Act and the question of reduction would arise only when the
penalty is imposed. Therefore, it was of the view that the imposition of
penalty was not premature. The High Court was also of the view that the B
penalty could be imposed under Section 271(1) (C) of the Act when an
assessee has concealed particulars of income of furnished inaccurate particulars
of such income. The assessee in the present case had concealed the income,
but later on disclosed the same in the statements of returns which had been
filed prior to the introduction to the voluntary disclosure scheme and that
circumstance would not make any difference so far as levy of penalty is C
concerned and dismissed the writ petition. Hence, these appeals by special
leave.

Shri Dipankar P. Gupta, learned Senior counsel submitted that Section
271(1) of the Act enables the assessing officer to impose penalty in three
different sets of circumstances and in the present case, we are concerned with D
the exercise of power under ciause (c) thereof which states that the assessee
'
'( has concealed the particulars of his income or furnished inaccurate particulars
of such income. provisions of Section 271(4A) enables the Commissioner in
his discretion to reduce or waive the amount of minimum penalty imposable
under the provisions in cases falling under clause (c) of sub-section (I) also. E
Therefore, he submitted that merely because a case of an assessee attracted
penalty under section 271 (I) (c) of the Act would not take away the discretion
of the Commissioner if certain conditions are satisfied to which the
Commissioner had already adverted to in the Report made by him to the board
in seeking the prior approval for waiver or reduction of the penalty. The Board
in the present case had not considered the matter in the manner required F
under law. He submitted that the Board had indicated that the proposal for
reducing or waiving the penalty was not approved as in the facts and
circumstances of the case section 271(4A) of the Act was not applicable. He
submitted that it is not clear form the communication sent by the Board to
the Commissioner as to how Section 271(4A) of the Act was not attracted to G
the facts of the case.

It will be necessary to explain the background in which the penalty
under section 27l(l)(c) vis-a-vis section 271(4A) of the Act was levied and
those circumstances are ascertainable from the order made by the Income Tax
Appellate Tribunal to which we may advert to in some detail. It was contended H
144 SUPREME COURT REPORTS (1998] 3 S.C.R.
•
A that the Tribunal could take into consideration Section 271(4A) of the Act in
determing the penalty arising under Section 271 ( 1)( c) of the Act. The Tribunal
noticed that in view of the fact that such a power could be exercised only
by the Commissioner and not by the Tribunal and the order made by the
Commissioner thereto being final, they could not examine the said contention.
A contention was raised before the Tribunal as to whether a penalty as
B provided under Section 271 ( 1)(c) of the Act was attracted at all or not on the
basis that in the circumstances of the case there was no deliberate concealment
of income or furnished any inaccurate particulars of its income and, therefore,
the Department had not discharged its burden. The Tribunal proceeded to ,l_
hold that the Inspecting Assistant Commissioner had based his findings of
C concealment on the sole consideration that the assessee had itself returned
and assessed the higher figures of income than those admitted in its returns
originally. The Tribunal noticed that the argument addressed by the learned
counsel for the appellants that in such a case there was no concealment of
income was very plausible, but in the circumstances of the case the concealment
or furnishing of inaccurate particulars by the assessee had been established.
D The Tribunal also noticed that the evidence led and the conclusions arrived
at in the course of assessment proceedings are not conclusive of the penalty
proceedings. Later on it may come to light that an item of income had been
assessed wrongly or that the assessee is able to furnish additional or new
material, it may change the factual position of the case. After noticing the
E returns filed by the assessee and setting out a table as to the assessment
years, the date of filing of the return and the income returned stated that the
picture that emerges was that the assessee had on the whole incurred a loss
of about Rs. IO lakhs, that is the capital with which he had started on 1.4.1957.
The assessee on 12.2.1965 filed declaration as to the correct position which
may be seen from the statement of financial affairs as on 31.3.1965. This
F declaration had been made by the assessee before the provisions of the
Finance Bill 1965 regarding voluntary disclosure scheme was introduced and
it was also true that the assessee acted voluntarily in coming forward with
this declaration and that in the return for its cooperative attitude the assessee
expected to be let off lightly in regard to the penalty proceedings and also
G in regard to payment of tax'. The voluntary nature of the declaration was all
the more sincere and was beyond doubt since the statement of affairs sent
by the assessee with its letter dated 20th of May. 1965 represented really the
income earned by the assesses during the aforesaid period. It was also
noticed by the Tribunal that there was a confession made by the assessee
voluntarily and earnestly that it had not returned the full income earned by
H it in those years and ha.ct come forward with a disclosure of its escaped
JASWANT RA! v. C.B.D.T& R. [RAJENDRA BABU, J.] 145
income. The disclosure might not have revealed the full extent of assessee's A
.;.·
concealment as the assessee was also disclosing its activities over a period
of time and expecting that the escaped income would be distributed over a
period of ten years and would be avoiding penal actions and possibilities of
investigations and searches with a further expectation of some concession in
regard to payment of tax. The Tribunal concluded that after scrutinising the
circumstances in which the disclosure was made, it is impossible to believe B
that at that stage the assessee had any motives to disclose what was not its
income really and hence penalty under Section 271(1) (c) of the Act was
attracted. If we bear this aspect in mind, we cannot say that the appellant had
not disclosed its income at all before scrutiny by assessing officer.
c
A reading of the provisions of Section 271 (4A) (after deletion of the
said provisions by Taxation Laws (Amendment) Act, 1975 with effect from
I. I 0.1975 such power is now conferred upon the Commissioner under Section
273A of the Act) will indicate that it is a power coupled with a duty to do
justice and the commissioner is under statutory obligation to exercise the
power in favour of an assessee which has fulfilled all the conditions of the D
,.' provisions. Jn deciding such a matter, therefore, cannot take into account
factors or reasons which are invalid or extraneous to the said provisions. The
principle condition for grant of relief under the said provision is that the
assessee should have voluntarily and in good faith made full disclosure of
his income prior to the detection of the same and such disclosure could be E
made even otherwise than in the course of a return by submitting a petition
to the Commissioner. In the present case, we have already noticed that the
assessee had made the disclosure prior to the coming into force of the
voluntary disclosure scheme and long before the Department could initiate
any action in respect of the cancealed income. The levy of penalty under
Section 271(1) (c) by itself will not be a circumstance to take him out of the F
purview of section 271(4A) of the Act.

However, the learned counsel for the Department submitted that in the
present case the records disclose that the concealed income had not been
disclosed voluntarily or in good faith prior to the initiation of the proceedings G
by the Department. If this contention is examined with reference to the
findings recorded by the Tribunal to which we have made detailed reference,
it becomes clear that the same cannot be accepted without further scrutiny
Lof the matter. Whether such scrutiny had been made by the Board in this case
is not clear from the endorsement issued to the Commissioner of Income Tax.
The Commissioner of Income Tax has explained each one of the circumstances H
146 SUPREME COURT REPORTS [1998) 3 S.C.R.

A arising in the case whether there has been concealment by the assessee and
its disclosure, the extent to which they were voluntary or the same had been -._
made prior to the detection of the same by the Department. Therefore, it does
not appear that the Board had duly applied its mind or made an order
revealing its mind by making a speaking order.

B In the circumstances, we have no hesitation to quash the order made
by the Board and direct the Board to restore the proceedings to its file and
examine the matter once again in the light of what we have stated above. In
the result, the order made by the High Court which is under appeal before
us shall stand modified in terms stated above. The appeals are allowed. No
C costs.

R.P. Appeals allowed.