1. This is a reference under Section 256(1) of the Income-tax Act, 1961, and the following question of law has been referred.
'Whether, on the facts and in the circumstances of the case, the Tribunal was legally correct in applying the provisions of the Explanation to Section 271(1)(c) of the Income-tax Act, 1961, as introduced by Section 40 of the Finance Act, 1964 ?'
2. The facts of the case may be briefly stated as follows I The relevant assessment year relates to 1964-65. The assessee-filed its return of income on October 17, 1964, showing an income of Rs. 50,146. The Income-tax Officer, however, completed the assessment at an income of Rs. 1,01,380. In doing so, he made certain additions in various trading accounts both in head office and branch and also disallowed certain expenditures claimed by the assessee as business expenditures. On appeal, the Appellate Assistant Commissioner allowed certain reliefs and the total income was reduced to Rs. 86,801. On second appeal the Income-tax Appellate Tribunal reduced the income to Rs. 70,050 in round figure.
3. After completing the assessment the Income-tax Officer referred the matter to the Inspecting Assistant Commissioner for levy of penalty as the minimum penalty leviable, according to him, exceeded Rs. 1,000. This was done because the returned income in the instant case fell short of 80 per cent. of the assessed income and hence the default was covered by the new Explanation inserted by Section 40 of the Finance Act, 1964. The Inspecting Assistant Commissioner after having heard the petitioner levied a penalty of Rs. 6,500 under Section 271(1)(c) of the Income-tax Act, 1961, by order dated February 9, 1967. Against this order of penalty the petitioner preferred an appeal before the Tribunal. The Tribunal after having heard both the parties held in its order that it could not be said that the assessee did not commit any gross or wilful neglect in not showing the item of charity and the interest in the return, that such expenses claimed by the assessee without mentioning in the return itself came within the purview of the Explanation to Section 271(1)(c) of the Income-tax Act, 1961, and that even assuming that there were certain other items also, which could not form part of the subject-matter of penalty under the Explanation to Section 271(1)(c) if there were some items which did come within the purview of the Explanation to Section 271(1)(c), the same would be applicable.
4. After the order of the Tribunal the Income-tax Officer calculated the minimum penalty leviable as Rs. 2,790 and held that Rs. 3,335 was refundable.
5. On the above facts, the abovementioned question of law has been referred.
6. The question that requires consideration in the instant case is whether, on the facts and in the circumstances of the present case, the Explanation to Section 271(1)(c) of the Income-tax Act, 1961, hereinafter referred to as 'the Act', is applicable.
7. Explanation to Section 271(1)(c) of the Act reads as follows ; 'Explanation.--Where the total income returned by any person is less than eighty per cent. of the total income (hereinafter in this Explanation referred to as 'the correct income') as assessed under Section 143 or Section 144 or Section 147 (reduced by the expenditure incurred bona fide by him for the purpose of making or earning any income included in the total income but which has been disallowed as a deduction), such person shall, unless he proves that the failure to return the correct income did not arise from any fraud or any gross or wilful neglect on his part, be deemed to have concealed the particulars of his income or furnished inaccurate particulars of such income for the purposes of Clause (c) of this sub-section.'
8. From the order of the Tribunal in the penalty appeal it is found that, according to the Tribunal, the Explanation to Section 271(1)(c) of the Act is applicable to the facts and circumstances of the case and, therefore, the burden of proof is on the assessee-petitioner as provided under the Explanation and that burden having not been discharged the assessee was deemed to have concealed the particulars of its income or furnished inaccurate particulars of such income for the purposes of Clause (c) of this sub-section. The Tribunal has not applied Clause (c) of Section 271(1) as such but only it has applied the deeming provision as per the Explanation. In order to apply the Explanation in question on the facts and circumstances of the case, the first thing that requires consideration is whether the total income returned by the petitioner was less than 80 per cent. of the total income as finally assessed.
9. The total income returned by the assessee is Rs. 50,146.47. The total income finally determined by the Tribunal is Rs. 70,050. If this figure of Rs. 70,050 is taken into consideration as the total income, then the returned income of Rs. 50,146.47 appears to be less than 80 per cent. of the total assessed income. But the total income determined by the Tribunal finally will be reduced by the expenditure incurred bona fide by the assessee for the purpose of making or earning any income included in the total income but which has been disallowed as a deduction. This aspect of the matter, which is clearly stated in the Explanation, has not at all been considered by the Tribunal.
10. From the orders of the taxing authorities it is found that the assessee
while showing an income of Rs. 50,146.47 claimed deductions of expendi
tures as follows: Rs.
(i) Interest account interest debited to the account of some partners
(ii) Salary account of partners
(iii) Expenses of non-trading nature included in partners' account
(iv) Car account
(v) Expenses account including charity and other non-trading items estimated
(vi) Salary account estimated
(vii) Charity and other personal non-trading expenses estimated
(viii) Charity account and miscellaneous expenses of personal and non-trading nature
(ix) Repair account
(x) Mess expenses of personal and non-trading nature
(xi) Mess and sundry expenses of personal and non-trading nature
(xii) Various personal and non-trading expenses
(xiii) Expenses on personal and non-trading items
11. All the above items were shown in the return as expenses but the taxing authorities have disallowed them. There is no finding in the order of the Tribunal that these expenses were shown to have been incurred not bona fide but mala fide. That being so, if the total income of Rs. 70,050 is reduced by these amounts, then the total income shown in the return will not come within the ambit of 80 per cent. as contemplated under the Explanation. That being so, the burden of proof will be on the department to show that the concealment of the particulars of income was not free from any fraud or any gross or wilful neglect on the part of the assessee. But, in the instant case, the Tribunal has incorrectly applied the Explanation as indicated, above. In the circumstances we hold that on the facts and in the circumstances of the case the learned Tribunal was not legally correct in applying the provisions of the Explanation to Section 271(1)(c) of the Act.
12. Accordingly, we answer the question referred in the negative and against the department. We, however, make no order as to costs.
13. I agree.