CONCEALMENT PENALTY

Concealment and penaltyV. K. SUBRAMANI Share  ·   print   ·   T+
The very purpose of filing tax returns is to record the legal
compliance by taxpayers. At times, administrators resort to verifying
the correctness of the return which is technically called as
‘assessment'. Per se, necessary and relevant details are called for
and the tax officers pass their judgments on the returns filed by the
taxpayers. It is more often than not, that the litigations start upon
such assessment and there would be no fanfare if the returns filed are
accepted passively on their face value by the department.
In assessment, the tax officers add entire purchases as unproved
purchases without applying logical reasoning that there could not be a
sale without a preceding purchase. The purchase at the most might be
inflated in order to deflate the profit for tax purposes but entire
purchases could never be treated as bogus when the subsequent sale is
taken as genuine.
There could be innumerable instances for enhancing the income
chargeable to tax or reducing the loss where the return depicts
negative income. One such addition which goes to increase the taxable
income is trading addition which means the operating results prima
facie are correct but the tax officer is not happy with the income
admitted or the taxpayer is not able to give reasons as to why the
income from the regular business activity is low or reduced from the
preceding year or years tax return.
Yet another addition to the taxable income of a taxpayer might arise
from credits shown by way of borrowal which are negatived by the tax
officers. When tax officers seek confirmation of the amount borrowed
and the taxpayer or the lender had not given adequate information or
explanation about the genuineness of the loan or lending, it could be
treated as the deemed income of the taxpayer. Unexplained credits
In Grover Fabrics India (P) Ltd's case (ITA No.860 of 2008 dated
November 4, 2009) the taxpayer was subjected to twin additions viz.
addition towards trading results and unexplained credit entries in the
books of account. In first appeal, the trading addition was deleted by
reasoning that the unexplained credit entries when taxed as income it
goes to increase the trading income and a separate addition towards
trading results was hence held as unwarranted.
Nexus theory
The taxpayer argued that when trading additions were deleted the
unexplained credit entries too would be automatically deleted. But the
court held that merely because trading additions were found to be
unsustainable it does not mean that unexplained credit entries have to
be excluded for tax assessment.
The court held that the unexplained credit entries may or may not have
nexus to the trading results. Where the trading additions are
sustained it might shield the addition towards credit entries but the
reverse may not be possible. When credit entries are added still the
trading results may also be subjected to upward revision.
When trading additions are made it is possible that the credits
appearing could be telescoped to those trading additions. Where such
addition is made in the earlier year if such telescoping is resorted
to in the later year the taxpayer could be subjected to concealment
penalty on the reasoning that the trading additions were the result of
conscious concealment of income and the act of subsequent cash credits
confirm the deliberate suppression of income earlier.
V. K. SUBRAMANI
(This article was published in the Business Line print edition dated
January 2, 2012