1980 PLP 227 (PTD)

7. Mr. Iqbal Naeem Pasha has raised two‑fold contentions before us. He contends that the provisions of section 28 (I‑B) of the Act are Penal in nature and therefore a higher degree of proof clearly pointing to the guilty mind of an assessee has to be established before action is taken. He has further contended that the burden of establishing the necessary guilty intention on the part of the assessees is on the Revenue and the same never shifts. Such burden according to the learned counsel is equal if not higher than the burden which the prosecution has normally to discharge in criminal cases. He has contended that mere disparity in returns under section 18‑A and section 22 of the Act is not sufficient to attract penalty under section 28(1‑B) of the Act. He has further contended that since each one of the three assessee is only a partner in the concern and had not been shown to be actively managing the affairs of the partnership business the burden of establishing the guilt has not been discharged. Mr. Mansoor Ahmad Khan has, on the other hand, contended that the penalty imposed was valid and in spite of section 18‑A of the Act using the word "estimate", the use of such word in that section clearly implies that the estimate should be true. Additionally it is contended by Mr. Mansoor Ahmed Khan that penalty under section 28(1‑B) of the Act can be imposed by the Taxing Officer if he is satisfied in regard to the guilty mind of the assessee and such satisfaction according to the learned counsel is subjective satisfaction. He has also relied on the concept that a firm is after all the joint name of partners and therefore each partner of the firm would be liable. Mr. Mansoor Ahmad Khan has further contended that the fact of payment towards Super Tax and loss incurred on account of the sale of car having been shown in the manufacturing account is by itself indicative of the guilty mind of the assessees.

8. Counsel on either side have made a statement that there is at least no reported case from Pakistan on the point. Mr. Iqbal Naeem Pasha has, however, placed before us some cases from Indian jurisdiction and we shall examine the same in the latter part of this judgment. At this stage it would be necessary to reproduce the relevant provisions of the Income‑tax Act. Sub section (I) of section 18‑A of the Act reads as follows:‑ "18‑A. Advance payment of tax.‑‑(1) In the case of income (other than income to which the sixth Schedule applies and income) in respect of which provision is made under subsections (2) and (2‑B) of section 18 for deduction of Income‑tax at the time of payment, an assessee shall pay quarterly to the credit of the Central Government on the fifteenth day of September, the fifteenth day of December, the fifteenth day of March, and the fifteenth day of June, in each financial year, respec tively, an amount equal to one quarter of the Income‑tax and super‑tax payable on so much of such income as is included in his total income of the latest previous year in respect of which he has been assessed under section 23 or, where no assessment under section 23 has been under section 23‑B, as case may be, if that total income exceeded twenty‑five thousand rupees. Such Income‑tax and super‑tax shall be calculated at the rate in force in respect of the year in which he is required to pay the tax and shall bear to the total amount of Income tax and super‑tax so calculated on the said total income the same proportion as the amount of such inclusions bears to his total income or, in cases where under the provisions of subsection (1) of section 17 tax is chargeable with reference to the total world income, shall bear to the total amount of tax which would have been payable on his total world income of the said previous year bad it been his total income the same proportion as the amount of such inclusions bears to his total world income. The tax so calculated shall be reduced by the amount of the tax deducted during the said year under subsection (3), (3‑A), (3‑B), (3‑C) or (3‑E) of section 18." The provisos appearing under this subsection have not been reproduced as the same are not relevant for the determination of the question in this case. Subsection (2) of section 18‑A reads as follows: ‑ "(2) if any assessee who is required to pay tax under subsection (1) estimates at any time before the last instalment is due that the part of his income to which that subsection applies for period which would be the previous year for an assessment for the year next following is less than the income on which he is required to pay tax and accordingly wishes to pay an amount less than the amount which he is so required to pay, he may send to the Income‑tax Officer an estimate of the tax payable by him calculated in the manner laid down in subsection (1) on that part of his income for such period and shall pay such amount as accords with his estimate in equal instalments on such of the dates specified in subsection (1) as have not expired or in one sum of only the last of such dates has not expired: Provided that the assessee may send a revised estimate of the tax payable by him before any one of the dates specified in subsection (1) and adjust any excess or deficiency in respect of instalment already paid in a subsequent instalment or in subsequent instalments."

9. On a reading of the provisions of subsection (1) and subsection (2) of section 18‑A of the Act one finds that when a person has been previously assessed in a regular manner under the provisions of Act, the Income‑tax Officer shall, by his order in writing require the person to pay advance tax and simultaneously a notice of demand shall also be issued to him. Subsection (2) contemplates cases when an assessee, who has been required to pay tax, estimates that his income for the next following year viz. the year for which the assessment has been regularly completed is less than the income on which he has been required by the Income‑tax Officer to pay the tax. In such cases the assessee has to express a wish to pay an amount lesser than the amount which he is required to pay and he has than to send to the Income‑tax Officer an estimate of the tax payable by him, It would thus 6"m that while under subsection (1) of section 18‑A of the Act the Income tax Officer has the power to require the assessee to pay the tax on the same slab as for the year for which he has been last assessed, the assessee has a power to demur on the premises that his income for the year in ques tion has depleted. In that case the assessee has to make an estimate of income and pay the tax which according to him is the tax which he would be liable to pay. Subsection (9) of section 18‑A, of the Act again provides for the assessee being considered to be in default in case he does not pay the amount which he has been required to pay under subsection (1) of the said section or does not send the estimate of the tax payable by him as contemplated by sub section (2) of the said section.

10. Subsection (1‑B) of section 28 deals with penalty in case of non -compliance with the provisions of section 18‑A of the Act and clause (a) of this subsection provides for a penalty in such cases in which the estimates of the tax payable by virtue of subsection (2) of section 18‑A of the Act are shown to be untrue according to the knowledge or belief of the as sessee. Subsection (1) (5) of section 28 reads as follows:‑ "(1‑B). If the Income‑tax Officer in the course of any proceedings in connection with an assessment under section 23 is satisfied that any persons‑‑ (a) has furnished under subsection (2) or subsection (3) of section 18‑A estimates of the tax payable by him which he knew or had reason to believe to be untrue; or (b) has without reasonable cause failed to comply with the provisions of subsection (1) or subsection (3) of the said section 18‑A; he may direct that such person shall pay by way of penalty, in the case re ferred to in clause (a), a sum not exceeding one and a half time the amount by which the tax actually paid during the year under the provisions of section 18‑A falls short of the tax that should have been paid by the assessee under subsection (1) of section 18‑A, or eighty per cent of the tax determined on the basis of the regular assess ment as modified in the manner provided in subsection (6) of section 18‑A whichever is the less; and in the case referred to in clause (b), a sum not exceeding one and a half time the said eighty per cent and the proviso to subsection (1‑A) shall so far as may be applied accordingly."

11. After reading the above‑quoted provisions from the Income‑tax Act the position that emerges is that the assessee may either pay the advance tax as is demanded and he has further the option to rely on a belief or knowledge that the tax by reason of lesser income would be reduced, in which case be could furnish estimate. Then at the time of assessment under section 23 of the Act the Income‑tax Officer has the power to ascertain whe ther the estimates of income or tax disclosed by the assessee under sub section (2) of section 18‑A of the Act are untrue to the knowledge or be lief of the assessee. In case the Income‑tax Officer is satisfied that such estimates were untrue to the knowledge or belief of the assessee, section 28 (1‑B) of the Act would empower the Income‑tax Officer to impose a penalty within the limits provided by that subsection.

12. The leading case on which Mr. Iqbal Naeem Pasha has relied is of Commissioner of Income‑tax, West Bengal v. Anwar Ali (1970) 76 ITR 696 decided by the Supreme Court of India. The facts in this case were that during the assessment proceedings the Income‑tax Officer found an undis closed bank account of the assessee in which a cash deposit of Rs. 87,000 lay. The assessee in his explanation stated that the amount repre sented trust moneys of his relatives given to him at a time when communal riots had taken place. Such explanation was rejected by the Income‑tax officer and he added the amount to his income. Thereafter penalty of Rs. 66,000 was imposed for concealment of particulars of his income. The case came up before the Calcutta High Court on a reference under section 66 of the Act and the High Court held in favour of the assessee on the ground that there was absence of cogent material or evidence apart from the falsity of the explanation of the assessee. On circumstances the High Court held that the provisions underlying imposition of penalty were not fulfilled. While approving the decision of the High Court, the Supreme Court of India held that the imposition of penalty was in .the nature of a Penal provision and determination of the question of burden of proof would largely depend on the penalty proceedings being penal in nature or being merely meant for imposition of additional tax. The Supreme Court affirmatively held that the burden of proof was on the Department who must establish that the receipt of the amount in dispute constituted income of the assesee and in case no evidence was available except the explanation, of the assessee which may be false, it would not follow that receipt constitutes taxable income. In short, the Supreme Court of India took the view that provisions relating to penalty are penal in nature and the burden of proof of evasion of tax is glaringly on the Department and not on the assessee. In a subsequent case namely Commissioner of Income‑tax v. Khoday Eswara & Sons (1963) 50 I T R 36 the Supreme Court of India re‑affirmed the dictum in the earlier case of Anwar Ali and held that apart from the falsity of the explanation of the assessee, the department must have some cogent material or evidence which should raise an inference that the assessee had consciously concealed the particulars of his income or had furnished inaccurate particulars. It was reported by the Supreme Court of India that the mere fact of assessee's explanation being rejected and on establishment of a sum of money being in the hands of the assessee, an inference would not be necessarily available that the assessee had, by concealing his income or furnishing of inaccurate particulars, incurred a penalty in the case of Additio nal Commissioner of Income‑tax, Punjab v. Bipanlal (1975) 98 I T R 343 the Punjab High Court again considered concept of penalty and came to the conclusion that the burden of proving that an estimated income submitted by the assessee was false to his knowledge or was believed by him to be untrue is on the revenue In this case the assessee had estimated a loss of Rs. 21,852 but was assessed to an income of Rs. 1,71,943 and there was a wide gap ‑between the estimate and the actual income found by the Income tax Officer. A penalty had been imposed and the explanation of the assessee was found to be false but in spite of the wide split between the estimated income and the actual income as also the falsity of the assessee s explanation the penalty was remitted on the ground that the Revenue had failed to establish the guilt of the assessee. Again in another case namely P. Arunachhala Mudaliar v. Commissioner of Income‑tax (1963) 50 I T R 36 the Madras High Court considered a situation when the assessee was required to pay advance tax of Rs. 7,947.50 but the assessee acting under subsection (2) of section 18‑A of the Act assessed his income at a lower figure and calcula ted the tax payable at Rs. 3,

962. A revised return was also filed showing higher income. In his explanation the assessee had stated that there was a sudden spurt in business of his firm and for that reason he had estimated his income at a lower figure. A penalty was imposed under subsection (9) (a) of section 18-A read with section 28 (1-B) of the Act and the imposition of penalty was challenged. The penalty was remitted and we are tempted to reproduce such passage appearing in the judgment as clearly stated the principles underlying the imposition of penalty. The passage reads as follows: - "the point that arises for decision is whether the assessee furnished the estimate of the tax under section 18‑A on 13th September, 1962, knowing or having reason to believe that it was untrue. Now, section 18‑A (9) is one of the punishment sections of the Act. It is a common feature of every taxing statute to impose penalty for violation of all or any of the provisions therein. Such penal provision has to be construed so as not to affect the subject, unless he or she is plainly caught within the literal statutory language. In adjudging the culpa bility of the assessee under section 18‑A the Department has the uni fied role of both the prosecutor and the judge. We do not suggest that the said provision is uniform or invalid because of this circum stance. We only wish to emphasize the fact that every care and caution must be taken by the Department to see that the provision is not used against the assessee as an instrument of oppression. The proceedings are 4f a quasi‑Judicial character and it is unnecessary to point out that the authorities crust set in a fair and unbiased man ner. The accusation against the assessee is in the nature of criminal charge and it is obvious that the; guilt must be brought home to him by adopting the standard of proof, as far as may be possible, requisite to sustain a conviction in a Criminal Court." In the case of Kurisan v. Income-tax Officer (1961) 43 I T R 432 the facts were that estimate of income tinder section 18‑A (2) was shown at Rs. 10,000 but the assessee was assessed at Rs. 34,900 and this sutra included a sum of Rs.16,000 received by the assessee as interest on an amount awarded to him as compensation for some acquisition of land. The Single Judge of the Kerala High Court took the view that mere disparity between the estimates submitted by the assessee and the income which he himself disclosed to the Income-tax Officer at the time of final assessment did not warrant an inference of dishonesty so as to attract a penalty. The 1earned Judge came to the conclusion that in absence of other evidence it was not necessary to deduce an inference of dis honesty as to attract a penalty. Chagla, CJ in the case of Commissioner of Income‑tax v: Gokuldas Harivallabhdas (1958) 34 I T R 98 in such regard expressed as follows: ‑ "The proceedings under section 28 (1)(c) in their very nature are penal proceedings, and the elementary principles of criminal jurisprudence must apply to these proceeding, and nothing is more elementary cat least in this country in criminal jurisprudence than the principle that the burden of proving that the accused is guilty is always upon the prosecution . In that case the Income‑tax Officer had relied on the falsity of explanation of the assessee could (?) with a return showing higher income. These two circumstances were not found to be sufficient.

13. Some cases in which the superior Court of India have decided penalty proceedings adversely to the assessee were cited by Mr. Iqbal Naeem Pasha to show under which circumstances the orders of penalty have been upheld. The first case is of Damadaran v. Commissioner of Income‑tax in which a Division Bench of Kerala High. Court upheld the penalty as in five continuous years the estimates which were given practically at the end of the relevant accounting year disclosed wide disparity between the estimated income and the assessed income. The learned Judges considered such disparity to be a consistent feature rather than a casual lapse and there is an inference that the circumstances showed that the assessee deliberately estimated his income at low 'figure. The learned Judges did refer to the case of Anwar Ali but held that the entirety of circumstances repelled to in ference favourable to the assessee. In the case of United Asian Traders v. Commissioner of Income‑tax 26 Taxation 28 the Calcutta High Court was dealing with a case in which an assessee had in the last preceding year disclosed an income of Rs. 10,763 and the assessment was made at Rs. 17,

052. For the year in question the assessee was required to deposit a sum of Rs. 7,568 under sub section (1) of section 18‑A of the Act. The assessee filed an estimate showing his income as "nil". The assessment was completed on his total income of Rs. 12,

974. It was contended on behalf of the assessee that his account had shown losses and therefore a "nil" estimate had been submit ted. The High Court came to the conclusion that the circumstances of that case clearly showed that the assessee had reason to believe that the estimates submitted by him were untrue. In the case of Commissioner of Income‑tax v. U. P. Tannery Company 1937 Taxation 282 the facts were that two months before the esti mate was submitted the assessee had received a huge amount of Rs. 4,96,808 but in the estimate such amounts had not been accounted for the assessee had no other explanation and for the obvious reason set up a case that he did not consider this amount as taxable income. The High Court or Allaha bad came to the conclusion that there was no element chance or estimate in a case of that nature and the failure of assessee to account for that amount was definitely deliberate. In the case of Commissioner of Income‑tax v. A. B. (1965) 57 I T R 41 imposition of penalty was upheld because the assessee was sole pro prietor of the assessee‑firm.

14. The next aspect of the case depends upon the interpretation of the word "estimates". Subsection (2) of section 18‑A of the Act permits an asses see to estimate his income for the purpose of payment of advance tax. Mr. Mansoor Ahmad Khan has referred to Words and Phrases Legally Defined, Vol. II to contend that this word envelops the concept of true disclosure as‑distinct from untrue disclosure. At page 184 of the volume appears an extract from the judgment in the case of Rex v. Cambridge County Council (1937) 1 K B 201 which reads as follows: ‑ "But that seems to involve, if I may say so, the fallacious suggestion that, in order that a calculation may properly fulfil the character of an estimate, there must be in it some ingredient of necessary inaccuracy and uncertainty. I cannot possibly take that view." This case in our opinion will not help the learned counsel for the revenue because the rate at which payment was to be made was strictly allowed at the rate of two pence in the pound. In the case of the assessee firm such principles cannot be applied. Stroud's Judicial Dictionary, Vol. II at page 942 under the caption "estimated; estimation" by reference to the case of Bacon v. Grimsby Corporation (1949) 2 E R 875 states that in determination of estimated cost of works only detailed item of an estimate was a condition precedent for consideration. One cannot overlook that by the very use of the words "estimates" in subsection (2) of section 18‑A in juxtaposition with a specified payment of amount under subsection (l) of the said section the Legislature seem to intend a laxity in so far as the accuracy of the return under section 18‑A of the Act is concerned. The position is highlighted by the provision of section 28 (2‑B) of the Act which use the strict terms "which he knew or bad reason to believe to be untrue". If the Legislature had intended that the estimates must strictly conform to the income at which the assessee would be finally, assessed the concept of knowledge or belief enunciated in section 28 (2‑B) of the Act would be meaningless. It is no doubt correct that the estimates should not be grossly false or exhibit a ridiculously depleted figure but there is no warrant for the proposition that a discrepancy between the estimated return and the final assessment must inevitably be deemed sufficient for holding the estimated return to be untrue to the knowledge or belief of the assessee.

15. Mr. Mansoor Ahmad Khan's argument that the use of the words "is satisfied" in subsection (1) (b) of section 28 would imply only a sub jective satisfaction has also not impressed us. If mere satisfaction of the Income‑tax Officer would be the final criterion for decision the results would be disastrous. The question of satisfaction inevitably depends upon the material available before the Income‑tax Officer and such material would always be looked into by this Court dealing with cases coming before it under section 66 of the Act. No doubt if sufficient and cogent material is available before the Income‑tax Officer this Court would normally decline in favour of the assessee but on other hand if this Court comes to the conclusion that the words "is satisfied" are being used only as a clog to advance hardship or to base findings in cases of no evidence or incre dible evidence, this Court would always extend relief.

16. To sum up, our conclusions are that the provisions of section 281 (2‑B) are of a penal nature, almost corresponding to provisions contained in criminal statutes. Penalty can be imposed only when the revenue estab lishes a case indicating dishonest motive of an assessee in making the return under section 18‑A of the Act. The mere discrepancy between a re turn under subsection. (2) of section 18‑A and a final return under section 22 of the Act or the final assessment under section 23 of the Act would no by itself be sufficient to found a case for imposition of penalty under section 28 (2‑Bl of the Act. The mere falsity of the explanation of the assessee is also not relevant consideration for the imposition of penalty. The wrong mode of accounting by treating taxable income as non‑taxable, unless the same be in flagrant violation of all norms of business honesty would also not be sufficient to attract the provisions of penalty. We have further formed the opinion that there should be evidence apart from discrepancy or falsity of explanation to base the case for penalty. In addition, in cases for imposition of penalty it is also to be considered whether the indivi dual assessee has maintained accounts or merely relied on information supplied to him by other partners or his servants.

17. In the instant case we find that there is a discrepancy between the estimated income disclosed by the assessee and their final returns. Such discrepancy is not very wide. We further find that the revenue relied on the circumstance of the proceeds of sale of car and payment of super‑tax having been shown in manufacturing account. The assessees were definitely entitled to deduction on account of this loss suffered by them in the sale of car and for the super‑tax that they had paid. The mere fact of these expenses or losses having been mentioned in the manufacturing account is not sufficient to raise an inference that the assessee intended to avoid the payment of tax. Section 13 of the Act clearly states that the assessee has an option of employing any method of accounting provided the same is regularly employed. It is not the case of revenue that the method employed in this particular year was divergent or motivated. Further to this there is no evidence that any one of the three partners was himself managing the affairs of the concern Messrs Muslim & Company or was personally maintaining the accounts of the said firm. There is no evidence before us that the sale of the car was entered into by any one of these three assessees.

18. In these circumstances we are of the view that penalty imposed on the three assessees was not justified. For the above reasons we answer question No. (ii) in the negative. Question No. (iii) would need no answer in view of the answer to question No. (ii). Question answered in the negative.