1. We are concerned in this reference under section 256(1) of the Income-tax Act, 1961, with the assessment year 1966-67. The assessee is the proprietor of M/s. Central Bakery. He had been assessed to income-tax from 1950 onwards but had not produced any books of account. In the course of the assessment proceedings for the assessment year 1966-67, the assessee produced before the Income-tax Officer a cash book and ledger. The Income-tax Officer found that the books produced were not genuine and had been written up only to explain away investments made by the assessee of about rupees two lakhs. In the account books, the assessee had shown a cash credit of Rs 40,000 as withdrawn from the 'Tijori', in driblets of Rs. 10,000 each on December 2, 1964, December 22, 1964, February 28, 1965 and October 22, 1966. The Income-tax Officer called upon the assessee to explain the source from which he became possessed of cash to the extent of Rs. 40,000. The assessee replied by letters dated January 5, 1970 and October 22, 1970, and pointed out that the cash came from his savings from business income earned by him since 1946 and that as he was an illiterate person, he had kept this amount in his safe. The Income-tax Officer allowed a sum of Rs. 10,000 as coming from past savings but added the balance of Rs. 30,000 to the total income of the assessee as income from an undisclosed source. The Income-tax Officer also estimated the assessee's income from business at Rs. 20,000 as against Rs. 16,312 declared by the assessee. On January 23, 1971, the Income-tax Officer thus determined the total income of the assessee at Rs. 50,000. The assessee disputed the addition of Rs. 30,000 in appeals before the Appellate Assistant Commissioner and the Income-tax Appellate Tribunal, both of which authorities rejected his contentions.
2. The Inspecting Assistant Commissioner served upon the assessee a notice to show cause under section 274(2) of the Income-tax Act, 1961. The assessee wrote in his explanation that the cash which was introduced into his books of account carne from his savings made from income earned by him since 1946 from his business. The Inspecting Assistant Commissioner did not accept the assessee's explanation and levied a penalty of Rs. 33,688 upon the assessee invoking the provisions of section 271(1)(c) of the said Act and the Explanation thereto.
3. The assessee carried the matter to the Income-tax Appellate Tribunal. The Tribunal considered the questions raised by the appellant, namely, whether the addition of Rs. 30,000 to his income was justified and whether the Inspecting Assistant Commissioner was in error in levying the penalty, together. As regards the second question the Tribunal said thus :
'8. The second appeal relates to the levy of penalty by the Inspecting Assistant Commissioner to the extent of Rs. 33,688. The penalty levied is 100%, i.e. the tax equivalent to the income declared by the assessee. So far as section 271(1)(c) is concerned, there must be proof of concealment of income or the deliberate furnishing of incorrect particulars of income. What the Income-tax Officer and the Appellate Assistant Commissioner did with regard to the addition of Rs. 30,000 is only by way of surmises and conjectures. Even now the assessee contends that he had Rs. 30,000 with him as his savings in the safe box and that he had advanced a loan of Rs. 40,000 to Rajendra Steel Traders. What is added by the Appellate Assistant Commissioner as concealed income of Rs. 30,000 was only because of the inability of the assessee to prove his contentions. That is not a sufficient cause for levying a huge penalty. On the materials placed before us, we find that the addition has been made only on surmises and provision of section 271(1)(c) is not attracted in the facts of this case. Hence, the penalty levied of Rs. 33,688 is cancelled.'
4. The question that is referred to us reads thus :
'Whether, on the facts and in the circumstances of the case, the Tribunal is justified in holding that the provision of section 271(1)(c) of the Income-tax Act, 1961, read with the Explanation was not attracted and thereby cancelling penalty levied of Rs. 33,688 ?'
5. It will be noted that the Tribunal held that the provisions of section 271(1)(c) of the Income-tax Act, 1961, were not attracted to the facts of the case, but it so held without taking into account the Explanation thereto which reads thus : -
'Explanation. - Where the total income returned by any person is less then 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. The effect of the Explanation is that where the total income returned by assessee is less than 80 per cent. of the total income as assessed. such assessee shall be deemed to have concealed the particulars of his income or furnished inaccurate particulars of such income for the purposes of clause (c), 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.
7. Having regard to the Explanation, there is little doubt that the assessee must be deemed to have concealed the particulars of his income or furnished inaccurate particulars thereof, unless he proved that the failure to return the correct income did not arise from any fraud or any gross or wilful neglect on his part. The Tribunal failed to consider whether the assessee, by the explanation that he furnished in answer to the show cause notice issued to him by the Inspecting Assistant Commissioner, had proved that the failure to return the correct income did not arise from any fraud or any gross or wilful neglect on his part.
8. In this view of the matter, we shall answer the question posed to us in the negative. The Tribunal shall consider whether the assessee has proved that the failure to return the correct income did not arise from any fraud or any gross or wilful neglect on his part and shall, unless it is satisfied that there has been such proof, proceed upon the basis that section 271(1)(c) of the Income-tax Act, 1961, is attracted.
9. The question is answered in the negative and in favour of the Revenue.
10. The Tribunal shall now proceed in the manner stated above.
11. The assessee shall pay to the Revenue the costs of the reference.