1. This is reference under section 66(2) of the Indian Income-tax Act, 1922, and at the instance of the Commissioner of Income-tax, Bombay City II, Bombay, as directed by this court by its order dated of March 10, 1964, the Tribunal has submitted the statement of case and referred to this court the following question of law for decision as having arisen out of the Tribunal's order dated January 23, 1962 :
'Whether, on the facts and in the circumstances of the case, penalty was leviable in law ?'
2. The facts giving rise t this question may be stated : The question relates to the assessment year 1949-50, the corresponding previous year beings S. Y. 2004, corresponding to November 13, 1947, to November 1, 1948. The assessee, M/s. M. Bhuta & Co., is registered partnership firm consisting of four partners, all members of the Bhuta family. In the course of examination of the accounts for the accounting year, viz, S. Y. 2004, relevant to the assessment year 1949-50, the Income-tax Officer noticed that the assessee-firm had an overdraft of Rs. 3,05,396-3-10 from the Mercantile Bank of India, Bombay, on October 31, 1948. To a query made by him the Income-tax Officer was informed that the overdraft was a clean overdraft sanctioned by the bank purely on the personal security of the partners. The Income-tax Officer, however, made enquiries with the bank and he learnt that the overdraft had been sanctioned on the hypothecation of stocks worth Rs. 7,68,325. When this information was put before the assessee-firm, the assessee-firm's explanation was that not all the stocks belonged to it and further that the stock might have also been over-valued by one of the partners of the firm who was no more but who alone was in the know of things. This explanation was not accepted by the Income-tax Officer. Since, according to the books of accounts, the assessee-firm had, on the relevant date, viz, October 31, 1948, stock worth Rs. 3,05,396-3-10 only, the Income-tax Officer considered that the assessee had suppressed stocks to the extent of Rs. 2,46,780. On the basis of this suppression of stocks he estimated the turn-over in respect thereof at Rs. 25 lakhs and estimating the net profit at 10% thereon made an addition of Rs. 2,50,000 in the assessment as the assessee's income from undisclosed sources. The assessee-firm preferred an appeal to the Appellate Assistant Commissioner. That officer by his order dated September 1, 1955, remanded the case to the Income-tax Officer observing as follows :
'In view of the subsequent enquiries made, the undisclosed stock will comprise of two items-175 bags of cotton and 28 bags of groundnuts worth Rs. 47,940 and the addition on account of undisclosed stocks may be taken at Rs. 47,940 in place of Rs. 2,50,000.'
3. Thereafter, in the course of negotiations for settling the assessment of the assessee with the income-tax department for the assessment year 1949-50, the chartered accountants of the assessee-firm wrote a letter dated January 18, 1956, on behalf of the assessee-firm recording a settlement arrived at between the assessee-firm and the department, inter alia, stating that Rs. 47,940 be substituted for the stock item in place of Rs. 2,50,000. The Income-tax Officer, by his remand report dated August 1, 1956, reported to the Appellate Assistant Commissioner that no explanation had been given by the assessee-firm for the items of 175 bags of cotton and 28 bags of groundnuts the value of which two items was Rs. 47,940. On receipt of the remand report the Appellate Assistant Commissioner, by his order dated March 14, 1957, retained the addition to the extent of Rs. 47,940 out of Rs. 2,50,000 made by the Income-tax Officer, inter alia, stating that the assessee had no evidence to explain the stock of the value of Rs. 47,940. The excess of Rs. 2,02,060 added in the assessment was directed to be deleted. The assessee-firm did not prefer any appeal to the Tribunal against the said addition of Rs. 47,940 maintained in the assessment by the Appellate Assistant Commissioner.
4. The Income-tax officer started penalty proceedings under section 28(1)(c) of the Act. Initially they were started in respect of the amount of Rs. 2,50,000 but they were later on continued only with regard to the amount of Rs. 47,940 as sustained in the assessment by the Appellate Assistant Commissioner. In reply the assessee-firm pleaded that, in view of its co-operative attitude and agreeing to the addition of Rs. 47,940 in the assessment, no penalty should be levied. This plea was contained in the assessee's letter dated May 21, 1957. The Income-tax Officer did not accept the plea and on the facts already found in the assessment proceedings held that the assessee-firm had deliberately concealed the particulars of its income in respect of the said sum of Rs. 47,940. He, accordingly levied a penalty of Rs. 40,000, i.e., equal to about 100% of the tax sought to be avoided by the assessee. On appeal, the Appellate Assistant Commissioner confirmed the penalty imposed by the Income-tax Officer. When the matter was finally taken to the Tribunal, the Tribunal took the view that the department had failed to establish mens rea and bring the guilt home and lay it at the assessee's door. It further took the view that the basis of the penalty proceedings was a statement made by the assessee-firm to the bank declaring certain stocks and that the bulk of the surplus stock had been satisfactorily explained except the two items in question, viz., stock of 175 bags of cotton and 28 bags of groundnuts, but there was no conclusive evidence that these two items in fact existed at all except in the declaration given by the assessee-firm to the bank. It further took the view that it was possible that the declaration of the assessee to the bank might have been made with a view to obtain more overdraft facilities. But on that account penalty proceedings could not be resorted to. In other words, it held that deliberate concealment as such had not been established and, therefore, the penalty was remitted in full. At the instance of the Commissioner, the question set out at the commencement of this judgment has been posed for decision.
5. Mr. Joshi, appearing for the revenue, has contended before us that during the assessment proceedings the chartered accountants of the assessee-firm had written a letter dated January 18, 1956, in which the assessee had clearly agreed to the substitution of the substitution of the figure of Rs. 47,940 in regard to the stock items in place of Rs. 2,50,000 and, according to Mr. Joshi, this clearly showed that the assessee could be said to have accepted the position that the addition was agreed to be made on account of the concealment of income. He, therefore, urged that since the concealment of income had been admitted by the assessee-firm, it was an error on the part of the Tribunal to throw the burden upon the department to establish positively that the stock of the value of Rs. 47,940 was in actual existence with the assessee-firm on October 31, 1948, and that the same had been suppressed or concealed by the assessee-firm. In support of his contention he relied upon the decision of the Delhi High Court in Durga Timber Works v. Commissioner of Income-tax. In that case the assessee was asked to adduce evidence to establish certain cash credits appearing in its books and was further asked to explain the source of investment of Rs. 14,100 and when challenged to do so, the assessee admitted that the amounts could be treated as its concealed income and included in its total income for the relevant year. In respect of such concealment of income penalty proceedings were initiated and ultimately an order imposing penalty of Rs. 3,000, was passed under section 271(1)(c) of the 1961 Act. The Delhi High Court held that under the circumstances of that case, it would amount to levying an impossible burden of proof on the department and making the provision for imposition of penalty wholly unworkable if, even after the assessee had admitted that the two amounts could be treated as its concealed income, the department had still to prove by independent evidence that the assessee had concealed its income. The court, therefore, upheld the penalty that was imposed upon the assessee. In our view, the decision of the Delhi High Court on which reliance has been placed by Mr. Joshi is clearly distinguishable on facts. In that case there was a clear-cut admission made by the assessee that the two amounts in question were concealed income and the assessee agreed that the same should be added to its income for the relevant year and its was on the basis of such clear-cut admission that the penalty proceedings were initiated and ultimately the penalty that was imposed upon the assessee was upheld by the Delhi High Court. In the instant case, the explanation which was offered by the assessee, which was initially disbelieved by the Income-tax Officer, has been found to be partially satisfactory and correct. The explanation given by the assessee-firm, when it was confronted with the information which the Income-tax Officer had initially obtained independently from the Mercantile Bank of India, was that not all the stocks belonged to it and further that the stock might have also been over-valued by one of the partners of the firm who was no more but who alone was in the know of things. This explanation was disbelieved by the Income-tax Officer. But when the matter was carried to the Appellate Assistant Commissioner, further enquiries were made and the Appellate Assistant Commissioner found that the undisclosed stock comprised of only two items, viz., 175 bags of cotton and 28 bags of groundnuts worth Rs. 47,940, and that, therefore, the amount of undisclosed stock should be taken at Rs. 47,940 in place of Rs. 2,50,000. Actually, when the matter was remanded by the Appellate Assistant Commissioner to the Income-tax Officer, in the remand report which was submitted by the Income-tax Officer, copy of which has been annexed as annexure 'D' to the statement of the case, the Income-tax Officer observed as follows :
'The addition made in the assessment for the concealed income of Rs. 2,50,000 was based on the excess of stock submitted to the bank for taking overdraft over the stock appearing in the books of accounts of M/s. Bhuta & Co. The details of the excess stock appearing in the statement as filed by the assessee-firm with the bank are............'
6. Then follows a list of several items of excess stock and in paragraph 2 the Income-tax Officer has categorically stated that 'for the two items on the list, viz., 175 bags of cotton and 28 bags of groundnuts, no explanation has been given by the authorised representative. The value of these two items as in the statement is Rs. 47,940'. It would thus appear clear that when the matter was remanded the explanation of the assessee-firm that part of the stock belonged to some other firm was found to be satisfactory to the extent of all the stock minus the two items, viz., 175 bags of cotton and 28 bags of groundnuts, and it was only in respect of these two items of 175 bags of cotton and 28 bags of groundnuts that no explanation could be offered by the assessee. This remand report was accepted by the Appellate Assistant Commissioner and the addition to the income was thereafter sustained by the Appellate Assistant Commissioner to the extent of Rs. 47,940, only. In other words, it was only in respect of part of the excess stock that no explanation could be offered by the assessee-firm and since the assessee-firm was not able to identify only those two items of stock worth Rs. 47,940, this figure was agreed to be added to the assessment. It may be stated that before the Tribunal a certificate from the Mercantile Bank dated January 22, 1962, was also produced and the certificate issued by the bank stated that M/s. M. Bhuta & Co. 'had overdraft facilities with us in the year 1948, for an amount of Rs. 1,50,000, for advance against hypothecation over stocks of seeds and/or cotton stored in up-country godowns at Bhavnagar, not under the bank's control with a margin of at least 50% to be maintained on current market value'. This certificate also clearly indicated that even the bank had permitted margin of 50% to be kept while it advanced moneys under the overdraft facilities granted to the assessee-firm. In view of these facts, which are very clear on record, it is difficult to accept Mr. Joshi's contention that there was an admission of concealment of income as such on the part of the assessee-firm either during the assessment proceedings or during the penalty proceedings and, therefore, the decision of the Delhi High Court on which reliance was placed by him would not apply to this case.
7. The Tribunal has categorically observed that the basis of penalty proceedings was the declaration or statement made by the assessee-firm to the bank declaring certain stock on the strength of which overdraft facility was obtained and it was only on the strength of such a statement or declaration given by the assessee-firm that the finding of suppression of stock was made and the addition in the assessment was also made. It is, therefore, clear that this could not be regarded as a case where there was any deliberate concealment or contumacious conduct on the part of the assessee-firm by way of furnishing deliberate incorrect particulars and, as such, the penalty proceedings could not have been resorted to by the department and the case would come within the ratio of the Supreme Court decision in Commissioner of Income-tax v. Anwar Ali.
8. We may usefully refer to a later decision of the Supreme Court in Commissioner of Income-tax v. N. A. Mohamed Haneef, where the principle or ratio of Anwar Ali's case was applied. In that case the facts were these : One M was managing the affairs of the assessee's business. There was a difference of Rs. 31,858.78 between the amount shown in the assessee's balance-sheet as due to a bank on key loans and overdraft and the information supplied by the bank. The discrepancy could not be reconciled and the assessee's explanation was that M made the borrowings and maintained the accounts and that the relationship between the assessee and M had become strained and, therefore, he was unable to explain the discrepancy. The sum of Rs. 31,858.78 was brought to tax as income from undisclosed sources. The question was whether penalty could be imposed on the assessee on the ground that he had deliberately supplied wrong particulars of his income. The court held that on the facts there was no basis for coming to a firm conclusion that the assessee deliberately supplied wrong particulars and, therefore, penalty could not be imposed.
9. In view of the aforesaid two decisions, we are of the view that the Tribunal was right in coming to the conclusion that there was no basis for levying any penalty. The question referred to us is, therefore, answered in the negative against the department. The revenue will pay the costs of the reference.