1. The assessee-company, whose income was assessed during the assessment year 1958-59 at Rs. 99,565, was served with a notice under s. 18A(1) of the I.T. Act, 1922, whereby the ITO called upon the assessed to pay advance tax of Rs. 42,831 for the assessment year 1961-62, the accounting year being ending 31st December, 1960. The assessee instead of paying the advance tax filed an estimate disclosing a loss and thereby indicating that it was not liable to pay any advance tax. There is some confusion about the loss shown. In the statement of the case it is stated that the loss shown was Rs. 2,000 and in the order of the Tribunal the loss is stated to be Rs. 4,000. The assessment in respect of the assessment year 1961-62 was completed after the assessee filed a return declaring its income at Rs. 31,617 for the said year, The total income was, however, determined at Rs. 24,617. The ITO being of the view that the assessee had furnished an estimate of tax under s. 18A(2) which be knew or had reason to believe to be untrue issued on 30th August, 1962, a show-cause notice as to why penalty should not be levied. This notice was under s. 28(1)(c) read with s. 18A(9) of the I.T. Act, 1922. The ITO sent another letter dated 17th July, 1964 (sic), to the assessee indicating his intention to levy penalty on the basis of the notice issued earlier. The assessee in reply to the said notice submitted that it has already furnished an explanation and the predecessor-ITO had agreed to drop the penalty proceedings. Since the ITO was not satisfied that the proceedings were promised to be dropped, he sent a second letter dated 3rd July, 1964, calling upon the assessee to furnish its explanation in writing. The assessee then sent its reply dated 17th July, 1964, which is annexed to the statement of the case as annex. A. In this letter the explanation given by the assessee was that the assessee had shown that there was a loss as per trial balance as on 31st May, 1960, and, therefore, the estimate submitted by the assessee was correct. It had also stated that it was only in the year ending 31st December, 1960, that the assessee had earned a profit of Rs. 29,450 because the profit earned in the year ended 31st December, 1959, though amounted to Rs. 90,712, after setting off the losses carried over and making provision for taxation, the net profit was only Rs. 1,839. According to the assessee, profit for the year in question after providing for taxation and taking into account the balance of the profit of the previous year came only to Rs. 15,290 and this profit was earned after submitting the estimate under s. 18A(2).
2. The ITO had become doubtful as to whether the notice for levy of penalty issued on 30th August, 1962, was rightly issued under the provisions of the I.T. Act. 1922, and he, therefore, issued a fresh notice on 28th July, 1964, under s. 274(1) of the I.T. Act. 1961. The assessee in reply to this notice referred back to its reply dated 17th July, 1964.
3. The ITO found that the assessee had earned profits in the accounting year ending 31st December, 1960, but had not revised its estimate before 15th March, 1961. The ITO then proceeded to levy penalty of Rs. 2,242 under s. 273(a) of the I.T. Act. 1961.
4. The assessee filed an appeal against the order of penalty. The AAC, who dealt with the appeal in an extremely well written order, took the view that the penalty could be attracted only when the estimate filed by the assessee was a dishonest estimate and the ITO had sufficient reason to believe that such an estimate was incorrect. According to the AAC, the proceedings were penalty proceedings and the onus of proving the guilt of the assessee rested on the department. He took the view that if the estimate filed by the assessee under s. 18A(2) was proved to be correct as it stood on the date of filing of such estimate, no penalty under s. 18A(2) could be levied. On merits, the AAC found that the basis of the estimate, i.e., the trial balance for the period 1st January, 1960, to 31st May, 1960, was produced before the ITO and the estimate of loss of Rs. 2,000 (the figure appears to be a mistake) filed under s. 18A(2) was based entirely on the facts available with the assesses after the date of filing of the estimate. Thus, according to the AAC, the assessee honestly believed that the estimate was a correct and a bona fide one. The AAC noticed the fact that the ITO had not challenged the bona fides of the assessee as regards the estimate filed by him on 14th June, 1960. He, therefore, held that no penalty could be levied and set aside the order. Against this order, the ITO filed an appeal before the Income-tax Appellate Tribunal. The Tribunal posed a question as to whether the assessee did honestly believe by reason of the fact that there was a loss as on 31st May, 1960, that the whole year would result in a loss and took the view that, apart from a mere statement that profit was earned subsequently, no material was brought on the record to show that this was a fact. The Tribunal then took the view that as per books there was a profit of Rs. 15,290 in the year under consideration and, unless there was something to show that though as per accounts as on 31st May, 1960, there was a loss or Rs. 4,000, the assessee equally thought or believed that the year as a whole ended 31st December, 1960, would show a loss, the assessee cannot be said to have made a bona fide estimate on 31st March, 1960. It found that there was nothing in the present case to show that the assessee did honestly believe that there would be a loss for the whole year. The appeal filed by the ITO, therefore, came to be allowed.
5. Out of this order of the Tribunal allowing the appeal, the following question has been referred to this court under s. 256(2) of the I.T. Act, 1961, at the instance of the assessee :
'Whether, on the facts and in the circumstances of the case, the Income-tax Appellate Tribunal is correct in upholding the penalty imposed by the Income-tax Officer of Rs. 2,242 (Rupees two thousand tow hundred and forth-two) under section 273(a) of the Income-tax Act, 1961 ?'
6. Mr. Mehta appearing on behalf of the assessee has seriously challenged the approach adopted by the Tribunal and, according to the learned counsel, the whole basis of the order of the Tribunal appears to be that in the year under consideration there was a profit of Rs. 15,290 and that it was for the assessee to show that it believed that it would incur a loss even in the rest of the year.
7. Penalty in this case has been levied under s. 273(a) of the I.T. Act, 1961, because the Indian I.T. Act, 1922, was repealed. The liability, however, in respect of which penalty was levied was incurred under s. 18A(9) of the Indian I.T. Act, 1922.
8. We may refer to the provisions of s. 18A(9) which was the relevant section at the material time when the assessee was called upon to pay advance tax. The relevant part thereof reads as follows :
'If the Income-tax Officer, in the course of any proceedings in connection with the regular assessment, is satisfied that any assessee -
(a) has furnished under sub-section (2) or sub-section (3) estimates of the tax payable by him which he knew or had reason to believe to be untrue, or....
the assessee shall be deemed, in the case referred to in clause (a), to have deliberately furnished inaccurate particulars of his income, and in the case referred to in clause (b), to have failed to furnish the return of his total income; and the provision of section 28, so far as may be, shall apply accordingly.'
9. Section 28 was the penal section which provided for penalty and under s. 28(1)(c) it was provided that if the ITO, the AAC or the Appellate Tribunal, in the course of any proceedings under the Act, is satisfied that any person had concealed the particulars of his income or deliberately furnished inaccurate particulars of such income, he or it may direct that such person shall pay by way of penalty, in the case of clause (c), in addition to any tax payable by him, a sum not exceeding one and a half times the amount of the income-tax and super-tax, if any, which would have been avoided if the income as returned by such person had been accepted as the correct income.
10. Having regard to these provisions, unless an ITO is satisfied that the assessee, who had furnished a return under s. 18A(2), knew or had reason to believe that the estimate which he had filed was untrue, no penalty could be levied against him. In the instant case, the estimate was filed on 14th June, 1960. The assessee had produced before the ITO a copy of the trial balance on which it was apparent that as on 31st May, 1960, there was a loss. It is true that when an estimate is required to be filed under s. 18A(2), that estimate must necessarily show the estimated income for the year in question. Estimated income may or may not be the same as the ultimate returned income shown by the assessee. Just as it is possible that in a given case, the returned income may be more, it may also be that in a given case, the returned income may be less than the estimate. The very word 'estimate' implies the concept of approximation and it can never be accurate. Therefore, merely because at the end of the year, an assessee is show to have earned an income which is more than that shown in the estimate filed under s. 18A(2), that fact alone will not by itself indicate that the estimate was known to be untrue or that the assessee had filed an the estimate having reason to believe that it was untrue. It is not possible to ascertain the vicissitudes which a businessman might experience in the course of his business and a common sense approach will, therefore, have to be adopted in judging whether the estimate filed by an assessee can be said to be such that he had knowingly submitted an untrue estimate of his expected income during the year in question. While furnishing such an estimate, it will be perfectly reasonable for an assessee to take into account the normal trend of his business up to the time when he is required to file an estimate. If at the point of time when he is called upon to file an estimate the assessee has been incurring continuous losses, then unless there is material to show that he had reason to believe that in the months to come he has sure to make profits. am estimate filed on the basis of the trial balance showing a loss cannot be said to be untrue. Similarly, unless there is material to show that the assessee could reasonably have anticipated that there would be profits in the remaining part of the year, it cannot be said that the assessee had any reason to believe that the estimate which he had filed was untrue. The provision in s. 18(9) is a penal provision and it contemplates a deliberate conduct of filing an untrue estimate by the assessee. An incorrect or inaccurate view of the trend of the business in the future will not necessarily make the estimate with regard to income an untrue one. If the relevant material on the basis of which the estimate has been prepared is placed on record and if on the basis of that material it would be reasonably possible to conclude that the assessee could not be normally said to be expecting to make profits in the months to follow, an estimate showing that he was not liable to pay any advance tax, could not be said to become untrue merely because by reason of some circumstances subsequent to the date of the filing of the estimate, the assessee has earned profits.
11. We have already pointed out that the assessee was being made liable for penalty. A penal provision must always be construed very strictly and unless the conduct of the assessee falls squarely within the four corners of the penal provision, the penalty provision could not be made applicable to his case. Whether a person had knowingly filed a false estimate or he had reason to believe that the estimate is untrue is a question which has to be determined on the material appearing in each case. But once the assessee had produced on record the material on which he has based his estimate, then the burden will be on the revenue to show as to why a finding must be recorded in its favour that the estimate was untrue or that the assessee had reason to believe that the estimate was untrue. It is important to point out that the time with reference to which the knowledge of the assessee or his belief that the estimate was being filed correctly is the point of time when the return is filed. Subsequent events may not have much to do with the knowledge of the assessee at the time of filing of the estimate unless it is possible to say that the subsequent events which resulted in profits were such that they could be reasonably foreseen by the assessee.
12. It appears to us from the order of the Tribunal that its order is based on a misapprehension of facts. When the Tribunal observed that, apart from a mere statement that profit was earned subsequently, there is no material brought on record to show that this was a fact, is clearly contrary to the state of the record. The order of the AAC clearly shows that the trial balance on which the estimate was made by the assessee was produced before the ITO. The AAC in his order observed :
'In this case the appellant filed an estimate on 14-6-1960 and the appellant based this estimate on the basis of the trial balance taken for the period from 1-1-1960 to 31-5-1960. The basis of this estimate based on the accounts from 1-1-1960 to 31-5-1960 was produced before the Income-tax Officer...'
13. When the trial balance as on 31st May, 1960, which was produced before the ITO clearly showed that as on that date there was a loss, it is obvious that whatever income was disclosed at the end of the year was earned only after 31st May, 1960. Neither the ITO nor the Tribunal have doubted the veracity of the trial balance which was produced by the assessee. Apart from the bare statement made by the Tribunal that the assessee cannot be said to have made a bona fide estimate on 14th June, 1960, it is not possible to ascertain on what material this statement was based. It does not appear that the Tribunal had applied its mind to the letter of the assessee dated 17th July, 1964, where the state of the business of the assessee in the previous two years has been clearly disclosed. If only the Tribunal had cared to go through that letter, it would have been apparent to the Tribunal that the previous history of the business was one of losses. The same situation continued till 31st May, 1960, and if conclusion has on this basis been reached by the assessee that it was not likely to make any profits in the remaining part of the year, such an estimate could not have been termed as either mala fide or unreal. In our view, the Tribunal was clearly in error in concluding in the instant case that the assessee did not honestly believe that there could be a loss for the whole year. The Tribunal was, therefore, in error in setting aside the well considered order of the AAC.
14. In this view of the matter, the question referred to us must be answered in the negative and in favour of the assessee. The assessee to get the costs of this reference from the revenue.