A taxpayer has the option to file a revised return within the prescribed time. This may be done either to correct a mistake or to reduce the income shown in the original return or to disclose additional taxable income. In a case where additional income is offered for taxation by filing a revised return, the question is whether penalty proceedings can be avoided.

Case in point

This point was considered in M. Sajjanraj Nahar vs. Commissioner of Income-Tax (2006; 155 Taxman 536). In this case, the assessee was carrying on a business in financing and hired-purchase of vehicles. The assessee filed return declaring taxable income of Rs 88,010, which was arrived at after deducting a sum of Rs 61,200 in respect of interest paid on loans obtained from different parties in the earlier financial years.

Subsequent to assessment under Section 143(1), the assessee filed a revised return declaring a total income of Rs 1,49,210, which was arrived at after showing a further sum of Rs 61,200 in addition to the Rs 88,010 originally declared. The Assessing Officer accepted the income returned in the revised return, while initiating penalty proceedings under Section 271(1)(c). He called for an explanation from the assessee. The assessee instead of offering any explanation to the notice stated that a petition under Section 273-A had been made to the Commissioner and requested for a stay of all penalty proceedings already initiated.

Deliberate concealment

As no other explanation was offered by the assessee, except as stated above, the Assessing Officer came to the conclusion that the assessee had deliberately concealed the particulars of the income by introducing its own income as credits in fictitious names in the books of account and also claimed bogus payment of interest as expenditure. He issued demand notices for penalty from the assessee.

On appeal, the Commissioner (Appeals) deleted the penalty levied upon the assessee. On the Revenue's appeal, the Tribunal set aside the order of the Commissioner (Appeals), disagreeing with the contention of the assessee that the filing of revised return voluntarily, without any detection of concealed income, exonerated the assessee from the penal consequences of Section 271(1)(c).

The Tribunal further held that the assessee did not act bona fide and honestly in returning the correct income originally; the filing of the revised return, offering additional income by way of adding interest expenditure could not be considered a bona fide act; and the Assessing Officer was fully justified in initiating penalty proceedings and levying penalty under Section 271(1)(c) after calling for explanation from the assessee.

The Madras High Court held that the indication in the assessment order by the Assessing Officer that penalty proceedings are to be initiated separately is sufficient to prove that the Assessing Officer had satisfied himself in the course of the assessment proceedings that the assessee had concealed his income.

Penalty proceedings

At the stage of initiating penalty proceedings, what is required is only a subjective satisfaction and not a finding as to the satisfaction based on materials. Therefore, penalty proceedings can be initiated only after an assessment order has been made. Passing of the assessment order cannot be held to be a bar for initiating penalty proceedings, as contended by the assessee. In other words, the acceptance of revised return itself cannot be a bar for initiating penalty proceedings under Section 271(1)(c) against the assessee for concealment of income.

In the facts and circumstances of the case, it was clear that the original return filed by the assessee, when compared with the revised return pursuant to the notice issued under Section 143(2) formed the basis for the satisfaction of the Assessing Officer for initiating penalty proceedings under Section 271(1)(c). The Assessing Officer, therefore, had rightly reached the satisfaction that the assessee had concealed income in the original return by way of indicating his satisfaction that the penalty proceedings were proposed to be initiated.

Following precedent

While taking this view, the Madras High Court relied on its earlier decision in Sivagaminatha Moopanar & Sons vs. C.I.T. (52 I.T.R. 591). In this case, the Court held that if an assessee makes a false return knowing it to be false, the fact that he subsequently discloses the true particulars of income cannot prevent the application of the Section, which is intended to punish fraud or contumacy (contempt of court) on the part of the assessee. Indeed, in such a case it would not even be open to the assessee to submit a revised return.

The point, therefore, is not whether all the particulars were given at the time of the return or before the assessment, but whether at any time the assessee deliberately concealed particulars or gave false particulars. That obviously is a question of fact.

In deciding this question, certain tests need to be applied to determine whether the suppression, etc., was deliberate. Where for example, the original return is incorrect, but the assessee voluntarily submits the correct return before the assessment, the Tribunal would be justified in coming to the conclusion that there was no concealment.

Attempt to conceal

This would be so even if the assessee puts forward a false case after giving the particulars voluntarily. However, where the disclosure is under circumstances, which make it not a voluntary act of the assessee, there would be justification for the finding that there was concealment because there was intention to conceal at the time when the original return was filed, the attempt having been frustrated by other causes. It cannot, therefore, be held that wherever particulars are given before the actual assessment, there would be no concealment.

Relying on this judgment, the Court held in M. Sajjanraj Nahar's case that the assessee did not act bona fide and honestly in returning the correct income originally and that the filing of the revised return, offering additional income by way of adding interest could not be considered a bona fide act. Hence, the Assessing Officer was fully justified in levying penalty under Section 271(1)(c).

These two decisions of the Madras High Court clearly place a heavy burden on taxpayers to ensure that the original return itself is correct and complete in all respects. A revised return declaring a higher amount subsequently would be of no usein saving penalty.

H. P. Ranina
(The author is a Mumbai-based advocate specialising in tax laws.)