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Whether penalty u/s.271(1)(c) can be levied in case of a minor

Subject : Income Tax Law
Month-Year : Apr 2003
Author/s : Chetan A. Karia
Chartered Accountant
Topic : Whether penalty u/s.271(1)(c) can be levied in case of a minor
Article Details :

1. Facts of the case :

The querist was born on 10-7-1988. During the course of assessment proceedings of his father, the assessing officer found that an amount of Rs.1,00,000/- was deposited on 09-01-1991 in querist’s bank account and the same was in turn advanced as loan to partnership firm where his father was a partner. It was explained that the said amount was received as gift from time to time since his birth. Not satisfied with the explanation, the assessing officer issued notice u/s.148 on 9-8-1995 in the name of the minor for A.Y. 1991-92. The querist did not have any taxable income and was not liable to tax in the said year or in any of the earlier years and therefore return of income was not filed prior to notice u/s.148. With a view to buy peace and avoid litigation, return of income was filed in response to notice u/s.148 offering the sum of Rs.1,00,000/- being gift received as income in addition to interest and other income earned during the year amounting to Rs.2,600/-

In the assessment order, the Assessing Officer treated the gift as income of the querist u/s.69A of the Act as the genuineness of the same was not proved. Notice has been issued initiating penalty proceedings u/s.271(1)(c). The Assessing Officer is of the view that the querist had taxable income for A.Y. 1991-92 and that he was required to file his return u/s.139 and though the querist has filed his return in response to the notice u/s.148, the Assessing Officer has stated that Explanation 3 to S. 271(1)(c) is attracted in the querist’s case.

2. Query :

On the above facts the querist has sought opinion as to whether penalty u/s.271(1)(c) is leviable in his case?

Reply :

3. Before dealing with the legal provisions, certain peculiar facts of the case need to be reiterated and those are that the querist was a minor below age of six years at the relevant time and but for offer and treatment of Rs.1,00,000/- as income, the querist did not have taxable income. The assessee was a minor aged 2 years and 6 months when the amount was deposited in his bank account. Even if one considers expiry of last date of filing return of income u/s.139(4) as the date of offence, his age on the said date was 4 years and 8 months. Similarly, if one considers the last date for filing return in terms of explanation 3 to S. 271(1)(c), his age was only 5 years and 8 months.

4. Penalty u/s.271(1)(c) — nature of, and necessary ingredients before penalty can be levied :

It is now well settled that penalty proceedings are penal and quasi criminal in nature. Following are some of the necessary ingredients before penalty can be levied :

(i) Elementary principles of criminal jurisprudence would apply to penalty proceedings,

(ii) Presence of mens rea, or guilty mind behind the violation is essential for levy of penalty,

(iii) No penalty is leviable where breach flows from bonafide belief,

(iv) Amount added in assessment proceedings must represent assessee’s income, and

(v) Though findings in assessment are relevant they are not final for levy of penalty and that penalty proceedings are independent of assessment proceedings.

The above propositions have been laid down by following landmark cases :

(i) Hindustan Steel, 83 ITR 26 (SC)

(ii) Anwar Ali, 76 ITR 696 (SC)

(iii) Khoday Eswarsa, 83 ITR 369 (SC)

(iv) Anantharam Veerasinghaiah, 123 ITR 457 (SC)

(v) Gokuldas Harivallabhdas, 34 ITR 98 (Bom.) which was approved in Anwar Ali’s case, 76 ITR 696 (SC).

To this basic proposition, various explanations to S. 271(1)(c) have only cast onus of proof on the assessee as laid down in Mussadilal Rambharose, 165 ITR 14 (SC). Various explanations have not made levy of penalty mandatory in specified circumstance, but it only provides that in specified circumstance, concealment would be deemed except when the assessee proves otherwise. All the above stated ingredients are still necessary before levy of penalty, it is only that its presence or absence has to be proved by the assessee and if the assessee fails to discharge burden of proof, the department need not prove anything further before levy of penalty. The recent decision of the Supreme Court in S. C. Mittal, 251 ITR 9 (SC) and K. P. Madhu-sudhan, 251 ITR 99 (SC) have reiterated the said proposition.

5. Whether amount of gift income is income of the querist :

As noted earlier, querist was just two years of age when the amount was deposited in his bank account. Even if the source of deposit could not be explained, the fact remains that the querist was incapable of having earned the said amount. As held in Noorjahan’s case, 237 ITR 570 (SC), merely because explanation is not satisfactory, provision of S. 69 is not mandatory in every case and the fact that assessee could not have earned the income is also a relevant consideration. As such, but for the offer of Rs.1,00,000/- in return of income, possibly the amount could not have been treated as income of the querist at all.

As noted earlier, findings in assessment proceedings are not final and if amount treated as income in assessment proceedings is not income of the assessee, then assessee cannot be made liable to penalty.

6. Mens rea — minor is ‘Doli incapax’ :

As noted earlier, mens rea is an important ingredient for levy of penalty u/s.271(1)(c), though now the onus is on the assessee to prove absence of mens rea. The querist was aged just two years and six months when the amount was deposited in his bank account and even if one considers expiry of last date for filing of return, his age was 5 years and 8 months. At the relevant time when the offence took place, the querist was below six years of age and therefore he was incapable of guilty mind. It is a settled principle of criminal jurisprudence that a minor is ’doli incapax’, he is incapable of guilt as laid by the Supreme Court in Hiralal Mallick v. State of Bihar, AIR 1977 SC 2236. The said principle has also been laid down in S. 82 and S. 83 of Indian Penal Code as a general exception to definition of an offence and would apply even to special Act like Income-tax Act, 1961.

The querist being a minor below seven years of age at the relevant time was incapable of guilt and therefore in the absence of mens rea, penalty u/s.271(1)(c) cannot be levied.

7. Applicability of explanation 3 to S. 271(1)(c) :

Coupled with failure to file return of income before the specified time, for explanation 3 to apply, it is also required that the Assessing Officer is satisfied that such person has taxable income and also that failure to file return was without reasonable cause. Both the conditions are cumulative in as much as the assessing officer should be satisfied that the querist has taxable income and also that failure of querist to file return was without reasonable cause.

Firstly, as discussed earlier, even if genuineness of gift could not be explained, the same could not have been treated as income of the querist.

Secondly, and in any case, querist can be said to have a reasonable cause for the failure to file return of income. As held in Hindustan Steel’s case, 83 ITR 26 (SC), bonafide belief that one is not liable is a reasonable cause for non levy of penalty. In view of decision in Noorjahan’s case, 237 ITR 570 (SC), it can be said that querist was under a bonafide belief that his income did not exceed maximum amount not chargeable to tax and therefore it is a reasonable cause for not filing return within the specified time. Some of the other judgments where it has been held that bonafide belief that one does not have taxable income is a reasonable cause are as follows :

(a) P. S. Mohideen Abdul Khader, 210 ITR 735 (Mad.).

(b) Co-operative Cane Development Union, 101 ITR 368 (All.).

(c) V. R. Dalmia, 128 ITR 399 (Del.).

8. Conclusion :

In view of the above discussion, the querist has a good case to contend that penalty u/s.271(1)(c) read with explanation 3 is not attracted in his case.

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