Facts of the Case

·         Parties and Assessment Year: The Revenue preferred an appeal against the assessee, Shri Shyam Sales, concerning the Assessment Year 1992-93.

·         Origin of Dispute: The Income Tax Officer levied a penalty on the assessee under the Income Tax Act. This penalty order was subsequently cancelled by the Commissioner of Income Tax (Appeals) [CIT(A)], and the cancellation was later confirmed by the Income Tax Appellate Tribunal (ITAT) (Delhi Bench "C", Delhi) in ITA No. 5645 (Del) 97. Aggrieved by the ITAT's order, the Revenue preferred this appeal (ITA No. 485/2003) before the Delhi High Court.

·         The Discrepancy: The bank had provided a pass book to the assessee which did not reflect the correct figures regarding two specific entries. While a copy of the bank ledger was produced to demonstrate that these two entries in the pass-book were incorrect, the assessee had relied upon the pass book entries.

·         Assessee's Conduct: Upon discovering the error, the assessee rendered an explanation and paid the tax due. The assessee explained that he did not engage any accountant and was in the habit of filing his own return of income, leading to an inadvertent mistake. Both the CIT(A) and the Tribunal accepted this explanation as bona fide.

Issues Involved

1.      Whether the Income Tax Appellate Tribunal erred in confirming the cancellation of penalty imposed under Section 271(1)(c) when there were discrepancies between the bank pass book and the bank ledger.

2.      Whether the reliance on incorrect entries in a bank-issued pass book by an assessee who files their own returns constitutes a bona fide explanation under Explanation 1 to Section 271(1) of the Income Tax Act, thereby absolving them from penalty liabilities.

Petitioner’s (Revenue's) Arguments

·         The learned counsel for the Revenue argued that the Tribunal seriously erred in dismissing the appeal preferred by the Revenue and deleting the penalty.

·         The Revenue heavily relied upon the judgment of the Supreme Court of India in K.P. Madhusudhanan vs. Commissioner of Income Tax (251 ITR 99) to argue that the penalty provisions were strictly applicable.

·         The Revenue contended that Explanation 1 to Section 271(1) must be applied, as there was an understatement or misstatement of figures material to the computation of total income.

Respondent’s (Assessee's) Arguments

·         The assessee contended that the mistake occurred inadvertently because the bank-issued pass book failed to reflect the correct figures in respect of two entries.

·         It was submitted that under the Banker's Books Evidence Act, a pass book serves as statutory documentary evidence to be acted upon, justifying the assessee's reliance on it.

·         The assessee maintained that he did not employ an accountant, habitually filed his own income tax returns, offered a transparent explanation immediately, and duly paid the necessary tax, showcasing complete bona fide intent.

Court Order / Findings

·         Status of Pass Book: The Delhi High Court observed that under the Banker's Books Evidence Act, a pass book is a standard piece of documentary evidence meant to be acted upon.

·         Interpretation of Explanation 1 to Section 271(1): The Court noted that action under Explanation 1 to Section 271(1) arises if a person fails to offer an explanation or offers a false explanation. However, if a bona fide explanation is offered within the totality of the case and accepted by the lower authorities, the assessee stands absolved of penalty liabilities.

·         Conclusion on Facts: The Court highlighted that there were two conflicting sets of evidence: the pass book produced by the assessee and the copy of the bank ledger. Since the pass book normally reflects the ledger, any error committed by the bank officials in the pass book which is then relied upon by the assessee constitutes a valid defense if the explanation is accepted as genuine.

·         Final Ruling: Finding no substantial question of law, the High Court dismissed the Revenue's appeal and upheld the cancellation of the penalty.

Important Clarification

·         Reliance on Bank Pass Book: An entry error committed solely by bank officials in an official pass book given to an assessee can serve as a valid, bona fide explanation against the concealment of particulars of income, provided the assessee acts in good faith and rectifies the tax liability upon detection.

Section Involved

·         Section 271(1)(c) read with Explanation 1 of the Income Tax Act, 1961.

·         The Banker's Books Evidence Act, 1891


 

Link to download the order –https://delhihighcourt.nic.in/app/case_number_pdf/2004:DHC:10969-DB/BCP12012004ITA4852003_124917.pdf

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