SUDARSHAN SILKS AND SAREESversusCOMMISSIONER OF INCOME TAX, KARNATAKA

                          (2008] 6 S.C.R 456


A           SUDARSHAN SILKS AND SAREES
                              v.
        COMMISSIONER OF INCOME TAX, KARNATAKA
           (Civil Appeal Nos. 5204-5207 of 2002)
                          APRIL 11, 2008
B
        [ASHOK BHAN AND DALVEER BHANDARI, JJ.]

         Income Tax Act, 1961:
         s.256 - Reference jurisdiction - Scope of- Question as
c to perversity of findings of facts recorded by Tribunal - Neither
  raised nor referred to High Court for its opinion - Held:
  Jurisdiction of High Court in reference application is to answer
  question of law that are referred to it - Since finding of fact
  recorded by Tribunal not challenged as being perverse,
D question of law did not arise.
          s.271(1)(c) - Penalty - Levy of - For concealment of
    income- Held: In facts and circumstances of the case, penalty
    not leviable.

E       The Department's case was that the appellant was
  maintaining double set of books and was accounting for
  only 50% of sales in the regular set of books, thus was
  guilty of concealment of income. The assessee came
  forward with an offer of additional income and filed a
  revised return. This was accepted and after verification,
F the assessment was completed. In the course of
  assessment proceedings, penal action under s.271(1)(c)
  of the Income Tax Act was initiated. The assessing Officer
  chose to levy maximum penalty under s.271(1)(c). On
  appeal, the CIT (Appeals) set aside the orders of
G Assessing Officer holding that in the facts and
  circumstances of the case, no case for levy of penalty
  under s.271(1)(c) was made out. The Tribunal upheld the             I
  findings recorded by CIT (Appeals). Revenue thereafter
  filed a reference application under s.256(1) of the Act. The
H                             456
    SUDARSHAN SILKS AND SAREES v. COMMISSIONER          457
            OF INCOME TAX, KARNATAKA

    Tribunal referred the question to the High Court for its A
    opinion as to whether on the facts and in the
    circumstances of the case Tribunal was right in law in
    upholding the orders of the CIT(A) cancelling the penalty
    levied u/s.271 (1 )(c).
)        High Court held that the findings recorded by the 8
    Tribunal and CIT (Appeals) were perverse, which no
    reasonable person could have taken and accordingly
    accepted the reference and held that in the facts of the
    case the penalty under s.271 (1)(c) is clearly exigible.
    Hence the present appeal.                                C
        Allowing the appeals, the Court
         HELD: 1. The question of law referred to the High
    Court for its opinion was, as to whether the Tribunal was
    right in upholding the findings of the CIT (Appeals) in D
    cancelling the penalty levied under s.271(1)(c) of the
    Income Tax Act, 1961. Question as to perversity of the
    findings recorded by the Tribunal on facts was neither
    raised nor referred to the High Court for its opinion. The
    Tribunal is the final court of fact. The decision of the E
    Tribunal on the facts can be gone into by the High Court
    in the reference jurisdiction only if a question has been
    referred to it which says that the finding arrived at by the
    Tribunal on the facts is perverse, in the sense that no
    reasonable person could have taken such a view. In F
    reference jurisdiction, the High Court can answer the
    question of law referred to it and it is only when a finding
    of fact recorded by the Tribunal is challenged on the
    ground of perversity, that a question of law can be said to
    arise. Since the frame of the question was not as to G
    whether the findings recorded by the Tribunal on facts
    were perverse, the High Court was precluded from
    entering into any discussion regarding the perversity of
    the finding of fact recorded by the Tribunal. [Para 16]
    [466-E, F, G, H; 467-A, B]
                                                              H
    458       SUPREME COURT REPORTS                [2008] 6 S.C.R.


A        K. Ravindranathan Nair v. Commissioner of Income Tax
    (2001) 247 ITR 78 (SC); T Ashok Pai v. Commissioner of
    Income Tax (2007) 292 ITR 11 (SC); CIT v. Mukundray K.
    Shah (2007) 290 ITR 433 (SC); Century Flour ills Ltd. v. CIT
    (2001) 247 ITR 276 (SC) - relied on.
B       2. In the facts and circumstances of the case, penalty
    under s.271(1)(c) was not exigible. [Para 17] [467-8, C]
         CIVIL APPELLATE JURISDICTION : Civil Appeal Nos.
    5204-5207 of 2002.
c        From the final Judgment and Order dated 06.10.2001 of
    the High Court of Karnataka at Bangalore in l.T.R.C. Nos. 684-
    687 of 1998.
                                WITH
D         Civil Appeal Nos. 5208-5209 of 2002.
         Dhruv Mehta, Harshvardhan Jha, Yashraj Singh and
    Gulshan Sharma (for Mis. K.L. Mehta & Co.) for the Appellant.
       K. Radhakrishnan, Neera Gupta (for B.V. Bairam Das) for
E the Respondent.
          The Judgment of the Court was delivered by
        BHAN, J. 1. These appeals have been filed by the
  assessee against the final judgment and order dated 5th October
F 2001 passed by the High Court of Karnataka at Bangalore in         /-
  ITRC Nos. 684/98, 685/98, 686/98 and 687/98 by which the
  High Court while setting aside the order of assessment passed
  by the Income Tax Appellate Tribunal (for short, 'the Tribunal')
  and that of the Commissioner of Income Tax (Appeals), held
G that the facts and circumstances of the case warranted levy of
  penalty under Section 271(1)(c) of the Income Tax Act, 1961
  (for short "the Act").
         2. The assessment years involved in the present Appeals
    are 1984-85, 1985-86, 1986-87 and 1987-88.
H
             SUDARSHAN SILKS AND SAREES v. COMMISSIONER                   459
                  OF INCOME TAX, KARNATAr\A [BHAN, J]
    'I
                  Facts:                                                        A
                   3. A search was conducted on the premises of the
             assesses on 14th and 15th of October, 1987 and incriminating
             documents evidencing concealment of income by the assessee
             were unearthed apart from cash and jewellery found at the time
             of search. It was found that the appellant was maintaining double B
;            set of books and was accounting for only 50% of sales in the
             regular set of books. This fact was admitted by Shri J.S.
             Ramesh, a partner of the firm in the statement recorded under
             Section 132(4) of the Aci. Shri J.S. Ramesh is the person-in-
             charge of the entire group. The total turn over suppressed by c
             the assessee for the assessment year 1987-88 was found to
             be to the tune of Rs44 07,"783/-. These have been discussed
             in detail in the order of assessment. Assessing Officer
             estimated that the sales of the assessee were Rs 50,000/- per
             day, whereas the accounted sales were not found even 50% of D
             the total sales. Apart from this, it was found that certain purchases
             were also not being accounted for. Similarly certain payments
             made were not being accounted for. All these were pointed out
             to the assessee. The assessee came forward with offer of
             additional income. Assessee filed a revised return on 31st March, E
             1989 declaring a total income for this year at Rs.3,74,226/- as
             against tre earlier amount of Rs.43,650/-. This was accepted
             and after verification the assessment was completed on 29th
             December, 1989.
                    4. During the course of recording the statement under F
-~           Section 132(4) of the Act, Shri Ramesh agreed to declare such
             additional income as had been estimated by the search party
             in the office of the appellant and its sister concerns. On the basis
             of these calculations, revised returns were filed by the appellant
             for all the years under appeal. The income as per revised returns G
             were also accept"d in toto. In the course of assessment
             proceedings, penal action under Section 27.1 (1) (c) of the Act
         ~
             was initiated and, after considering the reply filed by the
             appellant, the learned Assistant Commissioner of Income Tax I
             Assessing Officer chose to levy maximum penalty under Section H
    460        SUPREME COURT REPORTS                       [2008] 6 S.C.R.

                                                                                I-
A   271 (1) (c ). While levying the penalty, the Assessing Officer
    repelled the contention of the appellant that a promise had been
    made not to levy the penalty, as there was no evidence to this
    effect on record. It was also held that the appellant was not
    entitled to the immunity given under Section 132(4) read with
s   Section 271 (1) (c) of the Act.
          5. Aggrieved against the levy, the appellant filed appeal
    before the CIT (Appeals). The CIT (Appeals) after detailed
    discussion and going through the appeal papers, recorded the
    following findings:
c
          "Besides there are several factors which would clearly
          show that the appellant filed the return merely for the
          purpose of purchasing peace. Although I have held that
          the provisions of Section 132 (4) r/w Explanation 5 to
          Sec. 271 (1 )(c) are not applicable, the record show very
D
          clearly that the appellant was under a strong impression
          that the statement by which he was disclosing additional
          amounts was made under the provisions of Section 132
          (4). Question 88, which has come at the end of an extremely
          long session of questioning (the record of which itself runs
E         to 30 pages) is as follows:-
                "I have explained to you the provisions of section
                132 (4) of the l.T. Act, 1961 would you like to make
                any disclosure?"
F         In the context of the pointed reference made to section
                                                                                     >-
          132 (4) by the interrogator, the appellant's partner indicated
          that he would like to offer additional incomes and then he
          proceeded to make estimates of the sales and the profits
          that would have arisen thereon. It is quite clear that at the
G         end of the long session of questioning (coupled with the
          fact that in respect of current period there had been
          discovery of suppression of sales) and inducement had
          been offered in the form of question 88. At the same time
          the appellant was quite apprehensive that there would be
H         a lot of difficulties, litigation, etc. in store, regard had of the
                SUDARSHAN SILKS AND. SAREES v. COMMISSIONER                 461
                     OF INCOME TAX, KARNATAKA [BHAN, J.]
     -:\
                     fact that for the current period, suppression had been A
                     discovered. Although the appellant's partner knew that no
                     books, documents etc. relating to the earlier periods had
                     been discovered, he was aware that the discovery of books
                     for the current period could lead to litigation in respect of
                     the earlier years incomes, by a process of extension. To B
                     avoid this litigation, and in order to purchase peace, he
                     offered additional amounts for taxation in the firm's hands.
                     A perusal of the statement accompanying the revised return
                     also Clearly showed that the higher incomes were returned
                     with the following legend "Total income as agreed before c
                     the DOI", (emphasis supplied). This coupled with the fact
                     that the statement made was in answer to question 88
                     (which question was a clear inducement to purchase
                     peace, with a pointed reference to section 132 (4) would
                      indicate that the appellant's offer of higher income was
                                                                                   D
                      only a preoccupation with agreed settlement.
                     In these circumstances I am of the view that the appellant
                     clearly offered the amount for taxation for the purpose of
                     purchasing peace. Together with this finding, I also notice
                     that no books of accounts or other documentary evidence E
                     was discovered, that proved any concealment for the
                     earlier years. I am of the view that the Supreme Court's
                     decision in 168 ITR 705 supporting the proposition that
                     no penalty is leviable when unproved income is offered to
                     purchase peace would be directly applicable, particularly F
    _,               considering that the additional income returned, have only
                     been on the basis of the appellant's own estimates and
1                    the appellant's own admission, unsupported by the
                     discovery of any other documentary evidence relevant to
                     years for which the higher incomes were returned."
                                                                                  G
                      6. On the basis of these findings, the CIT (Appeals)
                accepted the appeal and set aside the orders of the Assessing
           -~
                Officer. It was held that in the facts and circumstances of the
                case, no case for levy of penalty under Section 271 (1) (c) was
                made out.                                                         H
    462       SUPREME COURT REPORTS                    [2008] 6 S.C.R.


A        7. Aggrieved against the order passed by the CIT
    (Appeals}, the Revenue filed the appeals for all the assessment
    years before the Tribunal.
        8. The Tribunal upheld the findings recorded by the CIT
    (Appeals) and recorded a finding to the following effect:
B
          "...... Although there is nothing on record to show that he
          was given an assurance that no penalty would be levied,
          the fact however clearly suggest that such an inducement
          must have been given by the searching party. When only
c         partial evidence in support of concealment for a very limited
          period was detected during the search, why would a man
          go to offer much higher amounts for a large number of
          years unless he was promised some reciprocal benefit
          like not being visited with penalty? The learned DR has
          tried to argue before us that a change of heart might have
D
          taken place as a result of which Sri Ramesh came forward
          with all the disclosures for different years voluntarily. But
          looking into the hard facts of life and the general
          experience of mankind, especially with regard to financial
          affairs, it would be difficult to accept such a proposition.
E         Evidently, huge amount of unexplained investments
          including unexplained stock was found at the time of
          search. Ultimately, almost the same amount of income
          was offered by the assessees over a number of years. As
          the tax rates over the entire period was more or less the
F         same, the tax effect, either from the point of view of the
          Dept., or the assesses would have more or less the same,
          had the entire undisclosed assets been subjected to tax
          in the year ot search or the entire income was spread over
          a number of years as has been done in the present
G         assessments. In view of the deposition given u/s. 132 (4)
          followed by the cooperating attitude of the assesses in
          paying up the tax, it would be clear that no penalty u/s. 271
          (1) ©would have been leviable had the entire undisclosed
          income been assessed in the year of search. Instead of
H         going for that simple way, Sri Ramesh went into the
           SUDARSHAN SILKS AND SAREES v. COMMISSIONER                  463
                OF INCOME TAX, KARNATAKA [BHAN, J.]

              question of admitting undisclosed income on estimated           A
              basis for the different past years. He must have felt that in
              that process alone, he would avoid the levy of penalty by
              the departmental authorities. The facts and circumstances
              strongly indicate that an inducement and an allurement
              had been provided to him at the time of search in that          B
 )            matter.

              Again, although incriminating materials were found out
              during the search, such materials were however ultimately
              not used by the departmental authorities in making the
              assessments. The assessments were made totally on the           c
              basis of estimation income for the earlier years as
              disclosed in the revised returns. The revised returns should
              therefore be considered as having been filed in good faith.
              So far as assessment of the undisclosed income is
              concerned. such revised returns would be sufficient             D
)             evidence for that purpose. However, for levying penalty,
              some further and stronger evidences were surely required
              In the cases relied upon by the learned DR, the search
              itself discovered the undisclosed income. In the instant
              cases, the search merely led to certain clues to the            E
              undisclosed income and but for the statement made by
              Sri Ramesh, it would perhaps have not been possible for
              the Dept. to assess the undisclosed income over all these
              years in the way in which such assessments have been
              made. The only way for the dept. in such a case would           F
              have been to assess the entire amount of undisclosed
·"'           investments for the year of search as has been discussed
              by use above, the Dept. could not have been in a position
              to levy penalty for concealment in such a case. We are
              therefore of the opinion that the case laws as cited by the
                                                                              G
              Dept., do not exactly support its case, so far as the present
              appeals are concerned. On the other hand, most of the
              judgments cited by the learned counsel for the assesses
      ••      support the case of the assesses that on account of strong
              circumstantial evidences being there about inducement
                                                                              H
    464       SUPREME COURT REPORTS                     [2008) 6 S.C.R.


A         having been given by the departmental authorities for not
          levying penalty in case of disclosure of income over the
          earlier years, no penalty can actually be levied by the Dept."
       9. Revenue thereafter filed a reference application under
  Section 256(1) of the Act. The Tribunal referred the following
B question t.o the jurisdictional High Court for its opinion:

          "Whether on the facts and in the circumstances of the
          case ITAT is right in law in upholding the orders of the
          CIT(A) canceling the penalty levied u/s.271 (1 )(c)?
c        10. High Court on consideration of the matter concluded
  that the findings recorded by the Tribunal and CIT (Appeals)
  being perverse, which no reasonable person could have taken,
  are liable to be set aside and accordingly accepted the reference
  and held that in the facts and circumstances of the case, Tribunal
0 was not right in upholding the order of the CIT (Appeals) in
  canceling the penalty levied under Section 271 (1)(c). It was
  held that in the facts of the case the penalty under Section 271
  (1)(c) is clearly exigible. Reference was answered in favour of
  the Revenue and against the assesee.
E        11. Being aggrieved, the assessee has filed these appeals.
        12. The only contention raised by the learned counsel for
  the appellant is that the Tribunal is the final fact-finding authority
  and its decision on the facts can be gone into by the High Court
F only if a question has been referred to it which says that the
  finding of the Tribunal on facts is perverse, in the sense that it is    ,..
  such as could not reasonably have been arrived at on the
  material placed before the Tribunal. In the absence of such a
  question having been claimed, the High Court was obliged to
G accept the findings of fact arrived at by the Tribunal and then
  proceed to decide the question of law referred to it. Relying
  upon the two judgments of this Court in K. Ravindranathan
  Nair v. Commissioner of Income Tax, (2001) 247 ITR 178
  (SC) and T. Ashok Pai v. Commissioner of Income Tax,
  (2007) 292 ITR 11 (SC), it was contended that the High Court
H
SUDARSHAN SILKS AND SAREES v. COMMISSIONER                   465
     Of INCOME TAX, KARNATAKA [BHAN, J.]

exceeded its jurisdiction in coming to the conclusion that the       A
finding recorded by the Tribunal were perverse as no question
of law to that effect had been either claimed or referred by the
Tribunal to the High Court for its opinion.
'
     13. We find substance in this submission. In K.
Ravindranathan Nair's case (supra) the question referred to          8
the High Court was:

     "Whether on the facts and in the circumstances of the
     case, the assessee is entitled to claim deduction of Rs.
     4, 18, 107, under section 37 of the Income Tax Act, 1961."      c
      14. The High Court instead of answering the question of
law referred to it came to the conclusion that the Tribunal had
misdirected itself in law in arriving at the findings as according
to the High Court the Tribunal had overlooked or ignored a
clinching document present on record to prove to the contrary        D
and because it had wrongly cast the burden of proving the facts
on a party. Reversing the finding recorded by the High Court, it
was held as under:-
     'The High Court overlooked the cardinal principle that it
     is the Tribunal which is the final fact-finding authority A E
     decision on fact of the Tribunal can be gone into by the
     High Court only if a question has been referred to it
     which says that the finding of the Tribunal on facts is
     perverse, in the sense that it is such as could not
     reasonably have been arrived at on the material placed F
     before the Tribunal. In this case, there was no such
     question before the High Court. Unless and until a finding
     of fact reached by the Tribunal is canvassed before the
     High Court in the manner set out above, the High Court
     is obliged to proceed upon the findings of fact reached G
     by the Tribunal and to give an answer in law to the
     question of law that is before it.
     The only jurisdiction of t~e High Court in a reference
     application is to answer the questions of law that are placed   H
    466       SUPREME COURT REPORTS                     [2008] 6 S.C.R.

                                                                            t
A         before it. It is only when a finding of the Tribunal on fact is
          challenged as being perverse, in the sense set out above,
          that a question of law can be said to arise."
                                                  (Emphasis supplied)

B         15. To the similar effect is the judgment of this Court in
    T. Ashok Pai's case (supra). Relying upon the judgments of
    this Court in CIT v. Mukundray K. Shah, (2007) 290 ITR 433
    (SC), Century Flour Mills Ltd. v. CIT. (2001) 247 ITR 276 (SC)
    and K. Ravindranathan Nair's case (supra), it was held: -
c         "Reference of the question to the High Court as noticed
          hereinbefore was general in nature. No question was
          referred as to whether the finding of the Tribunal was
          perverse or not. Existence of mens rea is essentially a
          question of fact. The Tribunal alone, as the highest authority
D         empowered to determine the question of fact, would be
          entitled to go thereinto. We may, however. hasten to add
                                                                                 4
          that the same would not mean that tile High Court will have
          no jurisdiction in this behalf. The High Court, it is well
          known, should not ordinarily disturb the finding of fact
E         arrived at by the Tribunal. The question of law should
          generally arise only accepting the finding of fact to be
          correct."

         16. In the present case, the question of law referred to the
  High Court for its opinion was, as to whether the Tribunal was
F right in upholding the findings of the CIT (Appeals) in canceling
  the penalty levied under section 271 (1 )(c). Question as to
  perversity of the findings recorded by the Tribunal on facts was
  neither raised nor referred to the High Court for its opinion. The
  Tribunal is the final court of fact. The decision of the Tribunal on
G the facts can be gone into by the High Court in the reference
  jurisdiction only if a question has been referred to it which says
  that the finding arrived at by the Tribunal on the facts is perverse,
                                                                            it
  in the sense that no reasonable person could have taken such
  a view. In reference jutisdiction, the High Court can answer the
H question of law referrti:d to it and it is only when a finding of fact
SUDARSHAN SILKS AND SAREES v. COMMISSIONER                  467
     OF INCOME TAX, KARNATAKA [BHAN, J]

recorded by the Tribunal is challenged on the ground of A
perversity, in the sense set out above, that a question of law can
be said to arise. Since the frame of the question was not as to
whether the findings recorded by the Tribunal on facts were
perverse, the High Court was precluded from entering into any
discussion regarding the perversity of the finding of fact recorded B
by the Tribunal.
      17. Accordingly, the Orders under appeal are set aside
and that of the CIT (Appeals) and Tribunal restored. It is held
that in the facts and circumstances of the case, penalty under
Section 271 (1)(c) was not exigible. The appeals are accepted C
with costs.
D.G.                                          Appeals allowed