M.C. Pathak, Actg. C.J.
1. This is a reference under Section 256(1) of the Income-tax Act, 1961, at the instance of the Commissioner of Income-tax. The question of law referred is :
' Whether, on the facts and circumstances of the present case, and on a proper construction of the Explanation in Section 271 introduced by the Finance Act, 1964, the levy of a penalty on the assesses under Section 271(1)(c) of the Income-tax Act, 1961, is justified '
2. The assessee is a registered firm carrying on business in utensils and yarn. The case is with regard to assessment year 1964-65. In the assessment year 1964-65, the assessee filed a return showing an income of Rs. 25,925. The assessment, however, was completed on a total income of Rs. 42,546. Additions were made mainly to the yarn account and the utensils account. The Income-tax Officer was of the opinion that the gross profit rate in the utensils account was low and that there were defects in the account books. He estimated the profits at 10 per cent. in respect of utensils as against the rate of 9 per cent. disclosed by the assessee. This resulted in an addition of Rs. 5,649. In the yarn account also the Income-tax Officer estimated the profits at 7 per cent. resulting in an addition of Rs. 10,074. The assessee preferred an appeal to the Appellate Assistant Commissioner, who dismissed the assessee's appeal.
3. As a result of the addition made to the income returned, the returned income was less than 80 per cent. of the assessed income of the assessee. Resorting to the provisions of the Explanation to Section 271(1)(c) of the Income-tax Act, 1961, the Inspecting Assistant Commissioner imposed a penalty of Rs. 9,000 on the assessee. The assessee appealed to the Income-tax Appellate Tribunal from the order of the Inspecting Assistant Commissioner.
4. The Tribunal was of the opinion that the Explanation to Section 271(1)(c) of the Income-tax Act, 1961, itself provided the assessee with an opportunity to rebut the presumption of concealment by showing that it was not guilty of any fraud or any gross or wilful neglect. The Tribunal further held that while the Explanation cast an onus on the assessee, it was an onus to prove the negative. The only way of discharging the onus was by emphasising the manner in which the assessee had kept its accounts and by attempting to show that the assessee made a bona fide return on
the basis of regularly maintained account books. For the reasons stated in its order, the Tribunal came to the conclusion that in a case of the present type an assessee could not be said to be grossly or wilfully negligent merely because its return was based on the books of account but the assessment was completed on the basis of certain estimates. In view of the Explanation taken by it, the Tribunal held that a penalty was not justified in the circumstances of the case and allowed the assessee's appeal.
5. The Explanation to Section 271(1)(c) may be quoted :
'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.'
6. In the instant case, the income returned was less than eighty per cent. of the total income assessed. In the circumstances, there is no doubt that the Explanation in question is attracted to the case. But the Explanation itself lays the burden on the assessee to prove that the failure to return the correct income did not arise from any fraud or any gross or wilful neglect on his part. So, the question that was required to be considered by the Tribunal was whether in the facts and the circumstances of the case the assessee has been able to discharge the burden, namely, whether it has been able to prove to the satisfaction of the Tribunal that the failure to return the correct income did not arise from any fraud or any gross or wilful neglect on its part.
7. On going through the order of the Tribunal, we find that the Tribunal's construction of the Explanation cannot be said to be bad in law or unreasonable. The Tribunal has found that it was the burden of the assessee to prove that the failure to return the correct income did not arise from any fraud or any gross or wilful neglect on his part. In that light the Tribunal examined the facts of this particular case.
8. It appears that the rate of income shown by the ass'essec in the accounts was not accepted by the Income-tax Officer who, however assessed the income on general estimates. The Tribunal found that the accounts were regularly maintained and return was submitted bona fide on the basis of such regularly maintained accounts, then even though the assessed income was more than eighty per cent. of the returned income, it could not be held that for that reason only the assessee was guilty of any fraud or
any gross or wilful neglect in submitting the return. The Tribunal further considered the facts of the particular case and came to the conclusion as follows :
' We are of opinion that in a case of this type an assessee cannot be said to be grossly or wilfully negligent merely because his return is based on his own books of account but the results thereof are not acceptable to the Income-tax Officer,'
9. In the instant case the Income-tax Officer calculated the income on the basis of the sales shown by the assessee in his accounts but at a higher rate than the rate found on calculation of the income shown by the assessee. This higher rate or the additional income was on general estimation. The Tribunal found that the facts and circumstances of the case and the manner of finding the higher income by the Income-tax Officer did not by themselves prove that there was any fraud or any gross or wilful neglect on the part of the assessee in filing the return. The Tribunal arrived at this finding on a careful consideration of the materials of the particular case.
10. In the circumstances, we find that the Tribunal was justified in its opinion that the penalty in the instant case, in view of the particular facts and circumstances of the case, was not justified.
11. The facts of this case appear to be similar to the facts of the case in Commissioner of Income-tax v. Sankarsons and Company : 85ITR627(Ker) , a case decided by the Kerala High Court. We respectfully agree with the observations made by the Kerala High Court regarding the question of law raised in that case, which are equally applicable to the facts of the present case.
12. In the result, we answer the question referred in the negative and against the department. In view of the facts and circumstances of the case, we make no order as to costs.
D. Pathak, J.
13. I agree.