No penalty on possession of high denomination notes if period to encash expired

By | November 22, 2016
(Last Updated On: November 22, 2016)

Facts of the case

The Income-tax Officer for the assessment year, namely, 1978-79 had levied a penalty of Rs. 95,000 after completion of the assessment proceedings for the relevant assessment year by invoking the provisions under section 271(1)(c) of the Income-tax Act, 1961 (‘Act’ for short), on the ground, that though the assessee is the owner and in possession of high denomination notes of the value of Rs. 1,35,000, has not recorded the same in the books of account maintained by him and has failed to offer any explanation about the nature and source of acquisition of money and therefore, the said amount is ‘unexplained money’ and concealed income for the relevant assessment year. The levy of penalty is confirmed by the Commissioner of Income-tax (Appeals), by rejecting the appeal filed by the assessee against the order of penalty passed by the Income-tax Officer.

Income-tax Appellate Tribunal has allowed the assessee’s second appeal and thereby has set aside the order passed by the Income-tax Officer in levying penalty under section 271(1)(c) of the Act. Tribunal held that ” In terms of the ordinance issued by the Government of India those notes had already cease to become legal tenders and on the top of it, it was also not possible to get those notes exchanged through RBI inasmuch as the time period for doing so had already elapsed on 20-1-1978.  since on the day, namely, on 24-1-1978, when the assessee was found to be in possession of high denomination notes of Rs. 1,35,000, the same had no value as ‘money’ and therefore, the said amount cannot be deemed to be the income of the assessee and therefore, cannot be inferred as concealed income warranting levy of penalty under section 271(1)(c) of the Act.

Issue

Whether, on the facts and in the circumstances of the case, the Appellate Tribunal was right in holding that the provisions of section 69A were not applicable to the present case inasmuch as when the high denomination notes of the face value of Rs. 1,35,000 were attempted to be encashed by the assessee by tendering the same to the RBI, they had ceased to remain legal tenders and had thus become valueless and in that view, in cancelling the penalty of Rs. 95,000 levied under section 271(1)(c) ?”

Held by High Court

‘Money’ is defined as, that metal, be it gold or silver, which receives authority by the prince’s impress to be current; for as wax is not a seal without print, so metal is not money without impression.

Therefore, the currency notes on the day when it was found to be in possession of the assessee should have had the representative value, namely, it could be tendered as a money, which has intrinsic value. In the instant case, the final fact finding authority, namely, the Income-tax Appellate Tribunal, after noticing the ordinance issued by the Central Government, coupled with the fact of Reserve Bank of India refusing to exchange the high denomination notes when it was tendered for exchange, has come to the conclusion, that on the day, when the assessee was found to be in possession of high denomination notes, they were only scrap of paper and they could not be used as circulating medium in general use as the representative value and therefore, it could not be said that the assessee was in possession of unexplained money, appears to us, correct, proper and reasonable conclusion. Therefore, the high denomination notes which were in possession of the assessee as on 24-1-1978 cannot be said as ‘unexplained money’, which the assessee had not disclosed in his return of income and therefore, it would not warrant levy of penalty under section 271(1)(c) of the Act.

HIGH COURT OF KARNATAKA

Commissioner of Income-tax*

v.

Andhra Pradesh Yarn Combines (P.) Ltd.

H.L. DATTU AND H.N. NAGAMOHAN DAS, JJ.

IT REFERRED CASE NO. 588 OF 1998

JANUARY 16, 2006

JUDGMENT

H.L. Dattu, J. – At the instance of the revenue, the Income-tax Appellate Tribunal has referred a question of law for our consideration and decision arising out of the orders passed in ITA No. 1876/1988, dated 31-10-1995.

  1. The Income-tax Officer for the assessment year, namely, 1978-79 had levied a penalty of Rs. 95,000 after completion of the assessment proceedings for the relevant assessment year by invoking the provisions under section 271(1)(c) of the Income-tax Act, 1961 (‘Act’ for short), on the ground, that though the assessee is the owner and in possession of high denomination notes of the value of Rs. 1,35,000, has not recorded the same in the books of account maintained by him and has failed to offer any explanation about the nature and source of acquisition of money and therefore, the said amount is ‘unexplained money’ and concealed income for the relevant assessment year. The levy of penalty is confirmed by the Commissioner of Income-tax (Appeals), by rejecting the appeal filed by the assessee against the order of penalty passed by the Income-tax Officer.
  2. Income-tax Appellate Tribunal has allowed the assessee’s second appeal and thereby has set aside the order passed by the Income-tax Officer in levying penalty under section 271(1)(c) of the Act. The findings and the conclusion reached by the Tribunal is as under :

“7. We find that in the instant case not only the penalty has been levied but also the addition had been made in respect of finding of high denomination notes of the face value of Rs. 1,35,000 by resorting to the provisions of section 69A. This particular section comes into operation only when some valuable article be found to be under the ownership of the assessee. The article concerned is required to be valued at the time when it is found. In the instant case, the assessee tendered the high denomination notes to the RBI on 24-1-1978 only. In terms of the ordinance issued by the Government of India those notes had already cease to become legal tenders and on the top of it, it was also not possible to get those notes exchanged through RBI inasmuch as the time period for doing so had already elapsed on 20-1-1978. This is borne out by the discussions made by the Additional Secretary to Government of India (Ministry of Finance, Department of Economic Affairs, Banking Division) in her communication dated 2-7-1980 addressed to the assessee, a mention of which has been made by the CIT(A) in her order. It is thus clear that when the high denomination notes were first of all found out to be in possession with the assessee, they had been reduced merely to scraps of paper and had no value in the market at all. That is why, the assessee was not ultimately able to get anything out of those high denomination notes. It is not the departmental case that as per the assessee’s own version, the assessee had given a sum of Rs. 1,35,000 to the broker in Haryana sometime in November, 1977, the source of which was unexplained inasmuch as the transaction was outside the books of the assessee. Had the addition been made in that way, the departmental case might have some legs to stand. However, the addition has been made in the instant case in respect of the high denomination notes, which were tendered by the assessee to the RBI on 24-1-1978. It cannot be said that the assessee was the owner of any valuable article at that time. It is also not the version of the assessee that it was the owner of those high denomination notes even prior to 16-1-1978 when those notes were actually valuable. Nor has the department found out any evidence on its part about the assessee being the owner of such amount of money on 16-1-1978. On the basis of the facts of the present case, we are clearly of the opinion that the addition of Rs. 1,35,000 as unexplained money found with the assessee by applying the provisions of section 69A itself is unsupportable. The question of levying penalty for concealment on the said amount, therefore, cannot arise. Taking into consideration all these facts, therefore, we reverse the decisions of the lower authorities and cancel the penalty.”

  1. On the request made by the revenue, the Tribunal has referred the following question of law said to be arising out of the orders passed by the Tribunal in ITA No. 1876/1988, dated 31-10-1995 for the assessment year 1978-79. It is as under :

“Whether, on the facts and in the circumstances of the case, the Appellate Tribunal was right in holding that the provisions of section 69A were not applicable to the present case inasmuch as when the high denomination notes of the face value of Rs. 1,35,000 were attempted to be encashed by the assessee by tendering the same to the RBI, they had ceased to remain legal tenders and had thus become valueless and in that view, in cancelling the penalty of Rs. 95,000 levied under section 271(1)(c) ?”

  1. In order to answer the aforesaid question of law, reference to section 69A of the Act requires to be made. Therefore, the said provision is extracted and the same reads as under :

Unexplained money, etc.—Where in any financial year the assessee is found to be the owner of any money, bullion, jewellery or other valuable article and such money, bullion, jewellery, or valuable article is not recorded in the books of account, if any, maintained by him for any source of income, and the assessee offers no explanation about the nature and source of acquisition of money, bullion, jewellery or other valuable article, or the explanation offered by him is not, in the opinion of the Income-tax Officer, satisfactory, the money and the value of the bullion, jewellery or other valuable article may be deemed to be the income of the assessee for such financial year.”

  1. At the outset, we should notice that, it is not the case of the Income-tax Officer that the assessee has made investments in a sum of Rs. 1,35,000 in the preceding year relevant to the assessment year and the investments so made are not recorded in the books of account, if any, maintained by the assessee for any source of income, but it is the specific case of the Income- tax Officer that the assessee is found to be the owner of a sum of Rs. 1,35,000 on 24-1-1978 and that money is not recorded in the books of account, if any, maintained by the assessee for any source of income. In our view, it would have made substantial difference, if the Income-tax Officer had levied penalty for an offence under section 69 of the Act.
  2. Section 69A of the Act authorises the Income-tax Officer that, in any financial year, if the assessee is found to be the owner of any money, bullion, etc., and if the same is not recorded in the books of account, if any, maintained by him for any source of income, and if the assessee offers no explanation about the nature and source of acquisition of the money, bullion, etc., or if the explanation offered by the assessee, in the opinion of the Income-tax Officer is not satisfactory, the money, bullion, etc., may be deemed to be the income of the assessee.
  3. Under section 271(1)(c) of the Act, penalty is leviable, if an assessee has either concealed the particulars of his income or has furnished inaccurate particulars of such income. In the present case, the Income-tax Officer has levied a penalty in a sum of Rs. 95,000 on the ground, that, though the assessee was in possession of high denomination notes of the value of Rs. 1,35,000, the same is not recorded in the books of account maintained by him and the explanation offered by the assessee about the nature and source of acquisition is not satisfactory and therefore, the amount found in the possession of the assessee is unexplained money in the hands of the assessee and requires to be treated as taxable income of the assessee for the relevant financial year and secondly, that amount represents funds from undisclosed sources and therefore, the said amount is a concealed income of the assessee, warranting levy of penalty under section 271(1)(c) of the Act. The Tribunal has upset this finding of the Income-tax Officer on the ground, that for the purpose of section 69A of the Act, the assessee should be the owner of money and if the assessee offers no explanation about the nature and source of acquisition of money or the explanation offered by him is not satisfactory, the money may be deemed to be the income of the assessee and secondly, for the purpose of section 271(1)(c) of the Act, there must be concealment of income or furnished inaccurate particulars of such income by the assessee during the relevant assessment year and since on the day, namely, on 24-1-1978, when the assessee was found to be in possession of high denomination notes of Rs. 1,35,000, the same had no value as ‘money’ and therefore, the said amount cannot be deemed to be the income of the assessee and therefore, cannot be inferred as concealed income warranting levy of penalty under section 271(1)(c) of the Act.
  4. Having heard the learned Counsels for the parties to the lisand after carefully considering the findings and the conclusions reached by the Tribunal, we are of the view, that the Tribunal is justified in their conclusion. The reason being, the assessee was in possession of unexplained money of Rs. 1,35,000 during the previous year relevant to the assessment year and this amount was added to the return of income filed by the assessee while completing the assessments for the assessment year 1978-79. The assessment order so passed is accepted by the assessee, may be in view of smallness of the tax quantified by the Income-tax Officer in spite of such addition. However, in the penalty proceeding, the assessee had contended that the addition made did not represent the concealed income, since on the date, when he was found to be in possession of the aforesaid amount, the same did not have any value in view of refusal by the Reserve Bank of India to honour the high denomination notes when it was tendered for exchange. InTomlins Law Dictionary, ‘money’ is defined as, that metal, be it gold or silver, which receives authority by the prince’s impress to be current; for as wax is not a seal without print, so metal is not money without impression. Money is said to be the common measure of all commerce, throughout the world, and consists principally of three parts, the material whereof it is made, being silver or gold; the denomination or intrinsic value, given by the king, by virtue of his prerogative; and the kings stamp thereon. It belongs to the king only, to put a value as well as the impression on money.
  5. The expression ‘money’ has different shades of meaning. In the context of income-tax provisions, it can only be a currency token, bank notes or other circulating medium in general use, which has the representative value. Therefore, the currency notes on the day when it was found to be in possession of the assessee should have had the representative value, namely, it could be tendered as a money, which has intrinsic value. In the instant case, the final fact finding authority, namely, the Income-tax Appellate Tribunal, after noticing the ordinance issued by the Central Government, coupled with the fact of Reserve Bank of India refusing to exchange the high denomination notes when it was tendered for exchange, has come to the conclusion, that on the day, when the assessee was found to be in possession of high denomination notes, they were only scrap of paper and they could not be used as circulating medium in general use as the representative value and therefore, it could not be said that the assessee was in possession of unexplained money, appears to us, correct, proper and reasonable conclusion. Therefore, the high denomination notes which were in possession of the assessee as on 24-1-1978 cannot be said as ‘unexplained money’, which the assessee had not disclosed in his return of income and therefore, it would not warrant levy of penalty under section 271(1)(c) of the Act.
  6. Accordingly, the question of law referred for our consideration is answered in the affirmative i.e.,in favour of the assessee and against the revenue. Ordered accordingly.

Related Post

 

Leave a Reply

Your email address will not be published. Required fields are marked *