1. At the instance of the revenue, the following question has been referred to us for our determination :
'Whether, on the facts and in the circumstances of the case, the Tribunal was justified in law in cancelling the penalty of Rs. 8,750 imposed by the Income-tax Officer ?'
2. Murlidhar Chiranjilal, the assessee, is firm doing business in woollen yarn at Bombay, Ludhiana, Amritsar, etc. On going through the accounts relevant for the material assessment, namely, assessment year 1956-57, the ITO found that on June 25, 1955, the assessee had a stock of 8, 189 lbs. of yarn valued at Rs. 72,919-10-0 in the Ludhiana branch. This was as per the stock book of that branch. The ITO, it appears, had obtained information that on the same date, viz., June 25, 1955, the assessee had pledged 76 bales of yarn valued at Rs. 1,28,175 with the Ludhiana branch of the Punjab National Bank for securing an overdraft. This information was obtained from the bank. According to the ITO, each bale of mill-packed yarn consisted of 200 lbs. of yarn. From the stock book of the assessee, the ITO inferred that the assessee could have had only 33 bales of yarn of its own. There was thus an excess of 43 bales in the quantity pledged with the bank. Out of this, according to the ITO, the assessee was able to satisfy that 8 bales belonged to some other party. There was still an excess of 35 bales pledged with the bank, whose market value came to Rs. 52,175 and cost about Rs. 50,600. With a view to reconcile the difference, it was suggested by the assessee that some bales may have contained less than 200 lbs. each and the value was deliberately inflated to obtain a larger overdraft facility from the bank. This explanation was not accepted by the ITO. He held that the assessee purchased 35 bales of woollen yarn for Rs. 50,600 and did not enter the same in his books of account. According to him, the assessee also did not enter the same in his books of account. According to him, the assessee also did not explain where he got Rs. 50,600 for purchase of the said goods. He, under the circumstances, came to the conclusion that Rs. 50,600 represented the income of the assessee from undisclosed sources.
3. In an appeal preferred by the assessee, the AAC did not accept the view that was taken by the ITO. However, in the absence of a stock book being maintained in respect of the bales, the AAC was not prepared to accept the version of the assessee. The AAC felt that the bank allowed overdraft facility in excess of the cost of pledged goods held, and restricted the addition to Rs. 27,000.
4. In second appeal before the Tribunal, it restricted the addition to Rs. 12,500. This view was taken by it bearing in mind the failure of the assessee to prove satisfactorily the exact arrangement with the bank and a broad view of the matter.
5. In view of the concealment of particulars of income to the extent of Rs. 12,500, the penalty proceedings were adopted and the I.T. authorities levied a penalty Rs. 8,750. The Tribunal, however, did not accept the view that any concealment within the meaning of s. 28(1)(c) had been established. The Tribunal pointed out that the addition of Rs. 12,500 was made by assessing the income of the assessee, because the assessee-firm did not explain wherefrom it got the amount required for purchasing the excess stock. The Tribunal took the view that, so far as the question of imposing the penalty was concerned, the matter was liable to be decided in accordance with the decision of the Bombay High Court in the case of CIT v. Gokuldas Harivallabhdas : 34ITR98(Bom) . Following this decision, the Tribunal took the view that even assuming that the assessee did not properly explain how it obtained the funds for any excess stock pledged with the bank, the matter is not one which would attract penalty under s. 28(1)(c). Accordingly, the order imposing penalty was set aside. It is from this order of the Tribunal that the above question has been referred to us for our determination.
6. Mr. Joshi, on behalf of the revenue, submitted that the Tribunal was in error in cancelling the order of the taxing authorities imposing the penalty of Rs. 8,750. He urged that the assessee had concealed the particulars of its income to the extent of Rs. 12,500 and the taxing authorities were justified in imposing the penalty of Rs. 8,750.
7. The Tribunal has set aside the order of penalty even on the assumption that the assessee did not properly explain how he had obtained the funds for any excess stock pledged with the bank. It is settled law that where an explanation offered by the assessee has not been accepted, it is not open to the revenue to treat a particular income as income from undisclosed sources. From the mere fact that the explanation offered by the assessee has not been accepted, it cannot be inferred necessarily that the amount constituted an income of the assessee. The proceedings under s. 28(1)(c) being in the nature of penal proceedings, the duty to prove that the assessee was guilty of the offence was upon the department. Where except for the explanation given by the assessee there was no evidence on record to lead to the inference that the amount was income, the Tribunal was justified in coming to the conclusion that the offence was not proved.
8. In the present case, apart form rejecting the explanation offered by the assessee, no material has been brought forward by the revenue with a view to show that the assessee concealed the particulars of its income or deliberately furnished inaccurate particulars of such income. The Tribunal was also right in its view that the onus has not been discharged and, therefore, the order imposing the penalty cannot be sustained.
9. Under the circumstances, the question referred to us is answered in the affirmative and in favour of the assessee. The revenue shall pay the costs of the assessee.