1. The Income-tax Appellate Tribunal, Delhi Bench 'B' in compliance with the direction of this court dated May 6, 1976, has referred the following question of law for our opinion :
'Whether, on the facts and in the circumstances of the case, the Tribunal was legally justified in cancelling the penalty ?'
2. The assessment year involved is 1965-66. The respondent-assessee, a private limited company, was engaged in the business of running a cold storage and manufacture and sale of kattha. For the aforesaid assessment year, the assessee filed its return showing an income of Rs. 1,74,613. During the course of the assessment proceedings the ITO found that the assessee had also purchased firewood trees at auction and that though transport charges in respect of firewood were debited in the accounts, the firewood transported from the jungle did not find a place in the books of account. On enquiry the assessee explained that it had consumed firewood in its boiler in the manufacture of kattha and part of the same was sold in the market for Rs. 28,624. Quantitative details of the firewood extracted and consumed in the manufacture of kattha were not available and hence the ITO estimated the assessee's consumption of firewood at Rs. 22,000 and estimated the excess firewood available for sale but not accounted for at 37,500 quintals. Taking the price of the firewood at Rs. 4 per quintal, the ITO made an addition of Rs. 1,50,000. On appeal, that addition was reduced to Rs. 1,06,000. From the order of the AAC appeals were filed, both by the Revenue and the assessee.
3. The Tribunal required the assessee to furnish a comparative statement of firewood consumed by it in the manufacture of kattha in some of the previous years. The assessee could not do so and also conceded that the quantity of firewood purchased was not mentioned in the books. The same was the position regarding the recovery of firewood from thejungle. The Tribunal found that the assessee had taken firewood trees from the Government. It had extracted firewood. Its claim that the firewood recovered was not available for sale was not satisfactory and, therefore, there was no alternative except to hold that approximately 25,000 quintals of firewood had remained unaccounted for. The Tribunal considered it fair and reasonable to estimate the value of the same at Rs. 50,000.
4. Apart from this, the ITO found cash deposits in various sets of accounts of the assessee. The details of these deposits were as under :
Head office get
Pooran Chand Mehra.
Jai Prakash Narain Singh.
Sri Ram Gulati.
Banshidhar Shyam Lal.
Lal Chand Ram Chand.
5. The ITO did not accept the assessee's explanation in regard to these cash deposits and added back the entire amount to the assessee's income as income from undisclosed sources. The AAC confirmed that addition. When the matter came in appeal before the Tribunal, the additions representing credits totalling Rs. 10,000 in the Bareilly set and Rs. 6,500 in the Asansol set were not pressed. As regards the credits appearing in the head office set, the assessee's explanation was that it had taken loans through one Chhaju Ram Sharma, an employee of Laxmiji Sugar Mills, and his affidavit was filed. The Tribunal found that the affidavit was vague and, without any supporting evidence, was not reliable. Hence, the addition in regard to these deposits was confirmed. As regards the remaining deposits appearing in the Asansol set, the addition of Rs. 15,000 representing credit in the name of Lal Chand Ram Chand was not seriously disputed. About the other two credits appearing in the names of Banshidhar Shyam Lal and Hasnanand Jiwandass, the Tribunal has held that the assessee had discharged the onus and these deposits were genuine. In the 'result, the addition of Rs. 41,500 on account of unexplained deposits was confirmed.
6. Since the income returned was less than eighty per cent, of the total income assessed, the ITO took action under Section 271(1)(c) read with the Explanation thereto of the I.T. Act, 1961, hereafter 'the Act', and referred the case to the IAC. The IAC issued a show-cause notice to the assessee in reply to which it furnished an explanation. After considering that explanation the IAC held that the assessee was guilty of concealment of its income and imposed a penalty in the sum of Rs. 1,60,000 which was almost one and one-half times of the difference between the income returned and the income assessed.
7. It was submitted before the Tribunal on behalf of the assessee that so far as the unexplained credits were concerned, it could not be held that merely because the assessee did not disclose this amount in its return, it was guilty of fraud or gross or wilful neglect.
8. As for the addition of Rs. 50,000 it was urged that the addition was at best made on estimate. It was also contended that the Explanation places a negative burden on the assessee which is comparatively very light in nature and that the facts of the case indicated that the assessee could not be held guilty of fraud or gross or wilful neglect in not returning its correct income. In the opinion of the Tribunal, the assessee's submission was well founded. To quote, the Tribunal observed :
'All said and done, the addition of Rs. 50,000 has been sustained by us on the basis of estimate. It is true, we have tried to make the estimate to the best of our judgment. All the same, however, it cannot be said that while making the estimate the element of guess-work has not been there. We are, therefore, inclined to give the assessee the benefit of doubt in the matter of the penal provisions only. As regards the credits added also, the position remains the same, i.e., the amounts have been added as the assessee's evidence has been found unsatisfactory. It is not a case of no evidence nor is it a case of false evidence basically. In the premises, merely because the evidence was rejected as not satisfactory, it will not make the assessee's conduct in not returning the credits as its income liable to penalty under the Explanation to Section 271(1)(c).'
9. It would appear that with regard to the addition of Rs. 50,000, in the opinion of the Appellate Tribunal, penalty could not be levied because this addition had been made on the basis of an estimate and in making an estimate an element of guess-work is involved. That being so, the assessee was entitled to the 'benefit of doubt'. As regards addition made on accountof unexplained credits, in the opinion of the Tribunal, penalty could not be levied because it was not a case of no evidence nor was it a case of false evidence basically and merely because the assessee's evidence was rejected, it could not be said that the assessee was guilty of fraud or gross or wilful neglect.
10. It was submitted before us on behalf of the Revenue by the learned standing counsel that the view taken by the Tribunal was wholly misconceived and erroneous in law, inasmuch as the Tribunal failed to notice that under the Explanation to Section 271(1)(c), since the income returned was less than eighty per cent, of the income assessed, a presumption shall have to be drawn that the assessee concealed the particulars of its income or furnished inaccurate particulars of the same. Of course, the assessee could have rebutted this presumption by proving that the failure to return the correct income was not due to any fraud or gross or wilful neglect on its part- The Tribunal did not apply these provisions to the facts of this case in coming to the above conclusions. It was also urged that even if the difference in the income returned and the income assessed has been due to estimate of income, the provisions of Section 271(1)(c) read with the Explanation thereto shall be attracted and the view to the contrary taken by the Tribunal was not legally correct.
11. On behalf of the assessee, on the other hand, its learned counsel, Sri S.P. Gupta, urged before us that in the first instance the question referred to this court does not include any of the following three aspects :
Firstly, that the Tribunal wrongly placed the onus on the Department, that the Explanation to Section 271(1)(c) is attracted to this case and the Tribunal did not apply its mind to it and, lastly, it was not a case of no evidence and, therefore, the burden on the assessee stood discharged. According to the learned counsel the question referred embraces only a pure question of fact which cannot be answered by this court. The second contention urged was that in the statement of the case it has not been stated that no evidence was led by the assessee or that there was no evidence on record and that being so, this court cannot look into the order passed by the Tribunal in the appeal.
12. After considering the respective submissions, in our opinion, the approach of the Tribunal, the reasonings given by it and the inferences drawn, are wholly misconceived and erroneous in law.
13. We would first refer to the relevant provisions in this behalf as contained in the Indian I.T. Act, 1922, and the I.T. Act, 1961. Section 28(1)(C) of the Act of 1922 provided for a case of concealment ofincome or improper distribution of profits. In so far as it is relevant for the present purpose, it read as under :
'If the Income-tax Officer, the Appellate Assistant Commissioner or the Appellate Tribunal, in the course of any proceedings under this Act, is satisfied that any person....
(c) has 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... and in the cases referred to in Clauses (b) and (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.'
14. It is not necessary to reproduce the proviso to this sub-section. Section 271(1)(c), as it originally stood, read as under:
'271. (1) If the Income-tax Officer or the Appellate Assistant Commissioner, in the course of any proceedings under this Act, is satisfied that any person--...
(c) has concealed the particulars of his income or deliberately furnished inaccurate particulars of such income,
he may direct that such person shall pay by way of penalty,--.... '
15. By Finance Act, 1964, the word ' deliberately' was omitted and the following Explanation was inserted :
'Explanation,--Where the total income returned by any person is less than 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.'
16. These amendments came into effect from April 1, 1964. It would be seen that in so far as the assessment year under consideration is concerned, two important amendments had been made in the relevant provisions, one, the deletion of the word 'deliberately' in Clause (c) aforesaid and the other, the insertion of an Explanation to Sub-section (1). The principles which emerge from the cases decided under the law prior to the enactment of the Explanation are that the findings given in assessment proceedings would be relevant andadmissible materials in penalty proceedings, but those findings cannot operate as res judicata because the considerations that arise in penalty proceedings are different from those in assessment proceedings. The fact that the assessee's explanation regarding a cash credit or other receipt is disbelieved and the amount is assessed in his hands, does not by itself justify the Department in imposing a penalty ; the circumstances of the case must be such as to lead to the reasonable and positive conclusion that the amount represents the assessee's income. Penalty on the ground of concealment can be imposed only if there is a conscious and deliberate concealment on the part of the assessee. In CIT v. Anwar Ali : 76ITR696(SC) , these principles were reaffirmed and in CIT v. Khoday Eswarsa and Sons : 83ITR369(SC) , it was further laid down that the penalty cannot be levied solely on the basis of the reasons given in the order of assessment. The question is whether the insertion of the Explanation with effect from April 1, 1964, brought any change in the law applicable in this behalf. As noted above, prior to the insertion of the Explanation two factors were required to co-exist: firstly, that there should be some materials or circumstances leading to the reasonable conclusion that the amount represented the assessee's income and for that purpose the finding given in the assessment proceedings alone was not sufficient and, secondly, that there was a conscious concealment or conscious furnishing of inaccurate particulars on the part of the assessee. The Explanation in terms does not make the assessment order conclusive evidence of the fact that the amount assessed was the income of the assessee but where the total income returned by an assessee is less than 80 per cent, of the total income assessed as 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, a presumption arises that the assessee concealed the particulars of his income or furnished inaccurate particulars of such income for the purposes of Clause (c) of that sub-section. This is a rebuttable presumption. The assessee can rebut this presumption by proving that the failure to return the correct income did not arise from any fraud or any gross or wilful neglect on his part. The degree of proof necessary under this Explanation is that required in a civil suit, viz., preponderance of probabilities. This onus can be discharged by leading oral evidence or pointing out the circumstances which may discharge the onus so placed (See Rukmani Bahu v. Addl. CIT : 116ITR468(All) ). We may also refer to another recent decision of our court to which both of us were parties, rendered in Addl. CIT v. Mangalsen Mohanlal : 136ITR905(All) . Following the decision in Rukmani Bahu's case in that case, we had occasion to observe that the onus placed on an assessee under the Explanation is of a negative nature. Its extent is that required in acivil case and not as in a criminal case where the prosecution is required to establish the guilt of the accused beyond all reasonable and probable doubt. The assessee can discharge this onus by relying on direct or circumstantial evidence. He can rely on evidence given in assessment proceedings and give further evidence in penalty proceedings. He can rely on circumstantial evidence also. Ultimately, the matter has to be decided on the preponderance of probabilities after considering the materials placed on the record. We do not think that after the insertion of this Explanation there arises any question of giving any benefit of doubt to an assessee. The penalty can be knocked off only in case the Tribunal holds that the assessee has established that the failure to return the correct income was not due to fraud or any gross or wilful neglect on his part. The Tribunal in the present case, therefore, erred in knocking off the penalty on the considerations adverted to above.
17. As noted above, penalty has been imposed with reference to two additions. There was an addition of Rs. 50,000 as sustained by the Appellate Tribunal on account of unexplained firewood. The Tribunal had found in the quantum appeal that the assessee had not maintained any proper account in regard to the firewood recovered by it. Of course, the addition was made on the basis of an estimate but that does not mean that penalty would not be exigible if the assessee fails to prove that the difference in the income returned and the income assessed on that account was not due to any fraud or gross or wilful negligence on his part in returning the correct income. In other words, even where additions had been made to the returned income on the basis of estimate, the Explanation is attracted and the penalty is leviable and in this behalf we may refer to the decisions of our court in Addl. CIT v. Swatantra Confectionery Works : 104ITR291(All) , CIT v. Kedar Nath Ram Nath : 106ITR172(All) . The ratio of these decisions is that the Explanation covers a case where a best judgment assessment is made under Section 144 of the Act and it is found that the income returned by the assessee falls short of 80% of the income so assessed as reduced by the bona fide expenditure incurred by the assessee for the purpose of earning any income included in the assessee's total income (Also see Addl. CIT v. Brij Nandan Pmsad Deen Dayal : 119ITR959(All) .
18. Apart from this, as noted above, in Rukmani Baku's case : 116ITR468(All) , this court has taken the view that after the enactment of the Explanation, the burden of proof that the concealed items constituted assessable income of the assessee is no longer on the department. This is to be presumed where the returned income is less than 80% of the assessed income and the burden is on the assessee to prove that the failure to return the correct income was not due to fraud or any gross or wilfulneglect on his part. Anwar Ali's case : 76ITR696(SC) was held inapplicable in this situation. The same view was taken in CIT v. Gyan Prakash : 116ITR513(All) . Reference may also be made to the case of Durga Dutta Chunni Lal v. CIT : 120ITR319(All) .
19. We agree with Sri S.P. Gupta, learned counsel for the assessee, that in reference proceedings under Section 256(2) of the Act before this court, adjudicatory process starts from the point of findings given by the. Appellate Tribunal and not from the evidence. The facts found by the Tribunal are to be accepted by this court and it is on those facts that it is to be seen as to what legal conclusions can be drawn. We do not agree with the learned counsel in regard to his submission that the question referred to us does not embrace the aspect of the onus of proof in terms of the Explanation to Section 271(1)(c) of the Act or the application of the mind to it by the Tribunal or that it was not a case of 'no evidence'. The question referred is a wide question and we have to see as to whether, on the facts and in the circumstances of the case, the Tribunal was legally justified in cancelling the penalty. In other words, on the facts and in the circumstances found by the Tribunal, what is required to be seen is as to whether the penalty was exigible. It cannot be disputed that the Explanation to Section 271(1)(c) was attracted and it was considered by the IAC. The import of the Explanation, therefore, was very much involved in the case. In regard to the addition of Rs. 50,000, the Tribunal has not recorded any finding that the failure on the part of the assessee to return the same was not on account of any fraud or any gross or wilful neglect on its part. The reasoning of the Tribunal is that this addition was sustained on the basis of an estimate and since, in making the estimate, an element of guess work was involved, the Tribunal felt that the assessee was entitled to the benefit of doubt. This was a wholly erroneous and misconceived approach. We have shown above that in the case of a best judgment assessment, if the provisions of the Explanation are attracted, penalty is exigible. There is no question of giving any benefit of doubt to an assessee unless, of course, the onus placed on the assessee in terms of the Explanation stands discharged. As regards the credits of course, the Appellate Tribunal has observed:
'It is not a case of no evidence nor is it a case of false evidence basically.'
20. But, we find that the observation is not correct because in regard to credits of Rs. 10,000 appearing in the Bareilly set and of Rs. 6,500 in the Asansol set, the additions were not disputed by the assessee. The assessee's explanation in regard to the credit in the head office set was held as not reliable. As for the other credits in the Asansol set one addition ofRs. 15,000 was not seriously disputed. Thus, in regard to the additionsof Rs. 10,000 in the Bareilly set and Rs. 6,500 plus Rs. 15,000 in the Asansol set there was no explanation offered by the assessee. It was only in regard to the credits of Rs. 10,000 in the head office set that the assessee's explanation was not accepted. It was not correct, therefore, to say that it was not a case of no evidence. It was certainly a case of 'no evidence' in regard to the credits in the Bareilly set and some of the credits in the Asansol set. On the facts found by the Appellate Tribunal, therefore, the legal inference drawn was incorrect.
21. We may, now, refer to the cases cited before us on behalf of the assessee with a view to see as to whether they render any help to it. Much reliance was placed on the decision of this court in Addl. CIT v. Jiwan Lal Shah : 109ITR474(All) . In that case it has been laid down that 'the law laid down in Anw&r; Ali's case : 76ITR696(SC) , has really not been affected by the Explanation added to Section 271 on April I, 1964'. We have shown that in the case of Rukmani Bahu : 116ITR468(All) and Gyan Prakash : 116ITR513(All) , a different view has been taken on this point and that view has been followed in other cases aiso subsequently. The facts of the present case being very clear, we do not find it necessary to refer this particular aspect for decision to a larger Bench. Apart from this, in Jiwan Lal Shah's case : 109ITR474(All) , levy of penalty merely for the reason that the explanation given by the assessee was not acceptable, was not held as justified. In other words, the decision turned on the facts of the case.
22. In CIT v. Nadir Ali and Co. : 106ITR151(All) , on the facts, it was found that the assessee had sufficiently discharged the burden which lay on him. The turnover of the sales disclosed was accepted by the Department and merely because a higher rate of profit was applied by the I.T. authorities in the past, it was held, that 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 Appellate Tribunal in favour of the assessee being essentially a finding of fact and based on relevant considerations, it was held, could not be questioned in a reference. In Addl. CIT v. Chatur Singh Taragi : 111ITR849(All) , also, income had been estimated because the account books had not been properly maintained and were not open to verification. At the same time there was no particular item of income which the assessee could be said to have omitted to include in its income. Thus, merely because some addition had been made on account of some shortcomings in the account, it was held that penalty could not be imposed and the assessee had been able to discharge the onus cast on him under the Explanation to Section 271(1)(c) of theAct. It would be seen that both these cases proceeded on their own facts and they are of no assistance to the petitioner.
23. Our attention was next invited to two other decisions of our court, viz., Appellate Commissioner of Income-tax v. Jai Jawan Radios : 146ITR504(All) (infra.) and Addl. C1T v. Smt. Vimla Mali : 109ITR555(All) , respectively. In Jai Jawan Radios, the conclusion of the Tribunal was based on the circumstantial evidence and it was held that the order was not vitiated in law so as to call for a reference to the High Court. In Smt, Vimla Mali's case : 109ITR555(All) , there was a clear finding of the Tribunal that there was no concealment of income by the assessee. The assessment years involved were 1958-59 to 1962-63, for which returns were filed by the widow of the assessee after April 1, 1964. On the aforesaid finding it was held that the question whether the Explanation to Section 271(1)(c) was attracted, was academic and unnecessary to answer. These decisions also do not help the assessee.
24. We were next referred to the decision in Addl. CIT v. Rawalpindi. Flour Mitts (P.) Ltd. : 125ITR243(All) . The ratio of that decision is that the material collected during the assessment proceedings and findings arrived at therein can be relied upon in penalty proceedings but on their basts alone the imposition of penalty cannot be sustained. The dispute was in regard to certain hundi loans which fell into two categories. The Explanation with regard to loans of one of the categories was accepted whereas the explanation with regard to the loans of the other category was found to be not reasonable. The IAC while imposing penalty relied only on the material collected during the assessment proceedings and the findings arrived at therein. On appeal, the Tribunal cancelled the proceedings and, on a reference, this court agreed with that view. It would be seen that that was a case where the only material available was the assessee's explanation, which, of course, had not been accepted. That also proceeded on its own facts.
25. We were next referred to a decision of the Andhra Pradesh High Court in Addl. CIT v. China Krishna Murthy : 121ITR326(AP) . In that case, the view taken is that even after the omission of the word 'deliberately' by the Finance Act of 1964, the legal position that is applicable to penalty proceedings as enunciated by the Supreme Court in the cases of Anwar Ali : 76ITR696(SC) and Khoday Eswarsa and Sons : 83ITR369(SC) , does not materially alter. The import of the Explanation was considered and it was observed that the fiction created by the Explanation can be displaced by the assessee by proving that the failure to return the correct income did not arise from any fraud or gross or wilful neglect on his part. As regards the nature of the burden it has been observed that it is only aninitial burden akin to that in civil cases and the same is not absolute and that it does not absolve the Department from establishing the necessary facts for levying penalty under Section 271(1)(c). With respect, we do not agree with this view. As we have noted above, and this court has taken this view in a large number of cases that the Explanation has brought about a material change in the situation, inasmuch as in a case where it is found that the income returned was less than 80 percent, of the income assessed as reduced by the expenditure incurred bona fide for earning any income included in the total income but which has been disallowed as deduction, unless such person 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 thereof. The Department is now only required to show that the difference in the income returned and the income assessed was more than 20 per cent, and if that is so, the onus is on the assessee to prove that the failure to return the correct income did not arise from any fraud or any gross or wilful neglect on his part. It is another thing that this onus is as in a civil case and the matter is to be decided on preponderance of probabilities.
26. To conclude, therefore, in our opinion, in the present case, the Appellate Tribunal erred in cancelling the penalty. The question is, therefore, answered in the negative, in favour of the Commissioner and against the assessee. The Commissioner is entitled to costs, which we assess at Rs. 250.