1. This is a reference under Section 256(2) of the Income-tax Act, 1961. In respect of the assessment year 1964-65, the assessee filed a return showing an income of Rs. 1,19,091 on the basis of accounts maintained by it. The Income-tax Officer was of the opinion that, having regard to the defective nature of book-keeping, the proviso to Section 145(1) was applicable and, consequently, he computed income by applying a rate of 11 per cent, on the sales disclosed by the assessee. In other words, the sales were accepted but the profits disclosed were not accepted. As the income returned was less than 80 per cent, of the assessed income, the Income-tax Officer started penalty proceedings against the assessee. These proceedings were transferred to the Inspecting Assistant Commissioner of Income-tax under Section 274(2) of the Act and he ultimately imposed a penalty of Rs. 18,000. The penalty was imposed because in the opinion of the Inspecting Assistant Commissioner of Income-tax the assessee was guilty of gross neglect in filing the return inasmuch as during the preceding years the assessee's income used to be computed on a flat rate of 14 to 15 per cent, and his books of account were always being rejected. The assessee still persisted in keeping the account books in a defective manner and disclosed a low rate of profit. On appeal the Income-tax Appellate Tribunal set aside the order of the Inspecting Assistant Commissioner of Income-tax by observing as follows :
'In our opinion, on the facts as they stand, it is not a fit case for penalty. It is no doubt true that the income as returned gave a net profit rate of only 7.1 per cent, of the turnover, yet merely because such rate was not accepted as the reasonable rate and a higher rate of profit was estimated by the department, it would not mean that the former was an incorrect income. After all, the assessment had proceeded on the basis of an estimate of the reasonable profit expected from this line of business and it could not be vouchsafed that the income under particular circumstances could not be less than that. In any event it does not prove that the assessee was guilty of wilful and gross negligence on its part when it returned an income, which gave a net rate of 7.1 per cent, only on its turnover. For the matter of that, the very fact that its turnover as disclosed by its books of account had been accepted supports the assessee's version that the income as returned by it could not be considered as having been returned with gross and wilful negligence.'
2. Under section 271(1)(c) a penalty can be imposed if the income returned by an assessee turns out to be less than 80 per cent, of the income assessed if the assessee does not prove that the disparity in the income assessed and returned is not due to gross neglect or fraud. The Income-tax Appellate Tribunal has, having regard to the facts of the case, come to the conclusion that the assessee has sufficiently discharged that burden inasmuch as the turnover of the sales disclosed by it was accepted by the department arid merely because a higher rate of profit was applied by the income-tax authorities in the past it could not be said that the higher income assessed by the department was due to any gross neglect on the part of the assessee. The finding recorded by the Tribunal is essentially a finding of fact and is based on relevant considerations. The same cannot be questioned in a reference. The fact that the assessee was not maintaining its books of account in a satisfactory manner does not show that he was guilty of gross neglect. The Income-tax Act does not prescribe the manner in which the account books should be maintained. When the assessee filed a return on the basis of accounts which are maintained in the regular course of business it cannot be said that he was guilty of gross negligence. It could not be expected from the assessee to file a return showing a higher income than what was worked out merely because the department applied a higher rate of profit in the earlier years. Thus, we are of the opinion that the Tribunal was perfectly justified in cancelling the penalty order.
3. We, accordingly, answer the question in the affirmative, in favour of the assessee and against the department. The assessee is entitled to costs which we assess at Rs. 200.