Satish Chandra, C.J.
1. This reference raises an interesting question in respect of the levy of penalty.
2. The assessee is a registered firm. It carries on business in shoes. For the assessment 1968-69, the assessee filed a return of income on 31st October, 1968, disclosing an income of Rs. 65,691. The ITO included Rs. 71,834.95 as income from other sources in respect of credit balance existing in the assessee's account books in respect of six other firms. This addition was reduced on appeal. On further appeal, the Tribunal upheld the inclusion in relation to two cash credit items, namely :--
(1) of Rs. 16,350 relating to Sri Ram Lal, leather merchant, Agra,
(2) of Rs. 8,510 of Chimanlal, leather merchant, Agra.
3. Thus, the inclusion as income from other sources was reduced from Rs. 71,834-95 to Rs. 24,860. The Tribunal also upheld the inclusion of Rs. 8,423 on account of bonus received by the assessee as a result of the devaluation of Indian currency. This receipt was held to be clearly revenue in nature and includible in the total income of the assessee.
4. Meanwhile, the IAC initiated penalty proceedings, and ultimately levied a penalty of Rs. 57,000, because the amount of income concealed was, in his opinion, Rs. 56,823.
5. The assessee appealed to the Tribunal against the order imposing penalty.
6. The Tribunal held that penalty proceedings are criminal in nature. It was hence necessary for the person sought to be penalised to be informed of the exact charge against him. The assessee had never been intimated that he was being charged under the Explanation to Section 271(1)(c) of the I.T. Act, 1961. The revenue was hence not entitled to levy penalty after taking the aid of the Explanation. On the view that the assessee could only be charged for an offence against the substantive provision of Clause (c) of Section 271(1), the Tribunal held that, in the circumstances, the ratio of the Supreme Court decision in CIT v. Anwar Ali : 76ITR696(SC) is applicable, and applying the tests laid down in that case, it was apparent that the assessee could not be held guilty of concealing any income.
7. In the alternative, the Tribunal went on to consider whether the provisions of the Explanation were satisfied. It came to the conclusion that the assessee may be negligent but this negligence cannot be equated with gross negligence or that it was guilty of fraud. Even if the Explanation was applicable, the assessee was not liable to levy of penalty. On these findings, the assessee's appeal was allowed. The penalty order was cancelled.
8. At the instance of the Commissioner, the Tribunal has referred the following questions of law for our opinion :
'(1) Whether, on the facts and circumstances of the case, the Tribunal was right in cancelling the penalty levied under Section 271(1)(c) of the Act of 1961 ?
(2) Whether, on the facts and circumstances of the case, the Tribunal was right in holding that the Explanation to Section 271(1)(c) of the Act was not applicable to the instant case '
9. The Tribunal has dealt with the case also on the footing that the Explanation was applicable. We may at first deal with this aspect.
10. Ultimately, three items were added as income from undisclosed sources ;
Rs.(1) Ram Lal, leather merchant, Agra 16,350(2) Chimanlal, leather merchant, Agra 8,510(3) Bonus 8,423
11. In respect of the first two items, the assessee's case was that the amounts represented purchase of raw materials on credit, which were liquidated by payment subsequently.
12. The ITO disbelieved this explanation. He held that the purchases were made towards the end of the accounting period ; payments were made long after ; payments were made by bearer cheques and not by account payee cheques, and, lastly, that these firms were not identifiable. The assessee did not produce them. The income-tax inspector could not trace them out. The conclusion was that the parties were fictitious and purchases were made on credit, even though cash was available with the assessee or in the bank account.
13. In respect of the third item, the ITO repelled the assessee's plea that the claims were still half paid and were not fully settled. He held that the receipts were revenue in nature, and whatever amounts had been received should have been shown in the return.
14. On the quantum side the Tribunal agreed with these findings of the ITO. On the penalty side, in respect of the first two items, the Tribunal observed that there was nothing to show that the assessee got back the moneys in cash after making payments by bearer cheques. It was neither a case of fraud, nor of gross or wilful negligence even though the explanation offered by the assessee was disbelieved.
15. In respect of the third item relating to bonus it was observed that these amounts were received as a result of devaluation of Indian currency. The assessability of such a receipt was a highly debatable matter. It was not clear whether such receipts are incidental to trade or business. The explanation of the assessee in this respect was believable, and hence the assessee was not guilty of fraud or gross or wilful negligence, even though he may be guilty of ordinary negligence. It concluded that the levy of penalty under the Explanation was also not warranted.
16. The finding that the assessee was not guilty of fraud or gross or wilful negligence is based on a consideration of the relevant material and circumstances of the case. It is, in our opinion, a finding on a question of fact. We have heard learned counsel, but we are not satisfied that the finding is vitiated by any error of law. On this finding no penalty was leviable even under the Explanation. The assessee having discharged the burden which the Explanation placed upon him, it could not be held that he was guilty of concealment. The Tribunal was justified in cancelling the penalty.
17. In this view, the question whether the finding that the Explanation could not be utilised becomes academic. But since a specific question has been referred to us, we may deal with it briefly.
18. Section 271 authorises levy of penalty if default is committed within the meaning of either Clauses (a), (b), (c) or one or more of them. Clause (c) deals with concealment of particulars of income or furnishing inaccurate particulars thereof. The Explanation appended to Clause (c) carves out one category of cases for special treatment. The category is of persons whose total income returned is less than 80 per cent, of the assessed income. The assessed income has, however, to be reduced by the expenditure bona fide incurred for earning income though the same may have been disallowed as deduction. In such cases, the concealment or the furnishing of inaccurate particulars of income is presumed to be in existence. The assessee has been given a locus poenitentiae to get out of the presumption by affirmatively establishing that the failure to return the correct income did not arise from any fraud or any gross or wilful neglect on his part.
19. The Explanation does not confer any discretion on the assessing authorities to invoke it or not. It automatically applies to cases where the returned income is less than 80 per cent, of the assessed income. The consequence follows as a matter of law. The burden of proving lack of fraud or gross or wilful negligence is on the assessee. If he fails, the presumption that he concealed the income or furnished inaccurate particulars thereof is bound to be drawn.
20. Section 274 provides that no order imposing penalty shall be made under this chapter unless the assessee has been heard or has been given a reasonable opportunity of being heard. There is no provision for drawing up a charge sheet. The assessing authorities have to give notice and to afford an opportunity of hearing to the assessee. If the notice informs the assessee that penalty proceedings are being initiated because of his concealing the particulars of his income or furnishing inaccurate particulars, it is, in law, sufficient notice. We are unable to appreciate the Tribunal's view that the proceedings are criminal in nature and so a precise charge ought to be framed and the assessee informed of it. The Explanation appended to Clause (c) does not constitute an ingredient of the offence. It lays down a rule of evidence [See--(i) CIT v. S. Devendra Singh : 108ITR314(All) and (ii) Addl. CIT v. Jiwan Lal Shah : 109ITR474(All) ]. In cases covered by the Explanation the revenue does not have to prove anything other than that the returned income was less than 80 per cent, of the assessed income. Thereafter, the burden is on the assessee to affirmatively establish lack of fraud, etc. This has to be established by preponderance of probability, and not beyond reasonable doubt [See--(a) CIT v. Sankarsons & Co. : 85ITR627(Ker) , (b) CIT v. S.P. Bhatt : 97ITR440(Guj) , (c) Addl. CIT v. Noor Mohd. & Co. , (d) CIT v. Prafulla Kumar Mallik : 104ITR648(Orissa) , (e) CIT v. Narang & Co. : 98ITR462(Delhi) , (f) CIT v. Smt. Veerawali : 104ITR679(Orissa) ]. The Tribunal was clearly in error in holding that in the absence of the service of notice stating that the assessee was being proceeded against under the Explanation to Clause (c), the levy of penalty with the aid of the Explanation was invalid.
21. In the present case, it is not in dispute that the returned income was less than 80 per cent, of the assessed income. The Explanation was applicable as a matter of law.
22. We, therefore, answer the first question in the affirmative, in favour of the assessee and against the department, and the second question in the negative, in favour of the department and against the assessee. In the circumstances, the parties will bear their own costs.