1. As directed by this court, the I. T. Appellate Tribunal, Indore Bench, has referred the following question of law to this court for its opinion :
'(1) Whether, on the facts and in the circumstances of the case, the levy of penalty, at 25% of the tax avoided, under Section 271(1)(c) of the Income-tax Act, 1961, for the A. Y. 1959-60, was valid in law ?
(2) Whether, on the facts and in the circumstances of the case, the levy of penalty, at 25% of the tax avoided, under Section 271(1)(c) of the Income-tax Act, 1961, on the assessee for the A. Y. 1960-61, was valid in law ?
(3) Whether, on the facts and in the circumstances of the case, the levy of penalty, at 25% of the tax avoided, under Section 271(1)(c) of the Income-tax Act, 1961, on the assessee for the A. Y. 1961-62, was valid in law ?'
2. The material facts, giving rise to this reference, are briefly as follows:
The assessee is a contractor and the assessment years in question are 1959-60, 1960-61 and 1961-62. In the relevant assessment years, the assessee had undertaken contracts for the construction of certain works. The assessee claimed that out of the total receipts in connection with those contracts, he was entitled to 2% of the receipts by way of profits as he had assigned those contracts to sub-contractors. The ITO found that the story of sub-contracts as set out by the assessee was not genuine. Onappeal, the finding of the ITO in this behalf was confirmed by the AAC. On further appeal, the Tribunal took into consideration, inter alia, the facts that the assessee was an experienced contractor, that the assessee had parted with the entire work in favour of the sub-contractors, and that the alleged sub-contractors were not proved to be experienced contractors, and came to the conclusion that the assessee had tried to understate his taxable income by setting up the case of sub-contracts, which was not true.
3. While framing the assessment orders, the ITO had also initiated penalty proceedings against the assessee for having concealed his income. In reply to the notice in that behalf, cause was shown by the assessee and the matter was referred to the IAC for disposal. The IAC referred to the material on record and the reply furnished by the assessee and came to the conclusion that the assessee had concealed his income in the relevant assessment years. Penalty under Section 271(1)(c) of the Act was imposed on the assessee accordingly. On appeal, the Tribunal held as follows :
'In view of our findings in the assessment appeals for these two years, we must hold the assessee to be guilty of having concealed his income by setting up the story of sub-contracts. We, accordingly, hold that the provisions of Section 271(1)(c) are attracted.'
4. Aggrieved by the order of the Tribunal, the assessee submitted an application for making a reference to this court, but that application was rejected. The assessee thereupon submitted an application to this court under Section 256(2) of the I.T. Act, 1961. That application was allowed and the Tribunal was directed to refer the aforesaid questions of law to this court and state the case. That is how the aforesaid questions have been referred to us for our opinion.
5. Having heard learned counsel for the parties, we have come to the conclusion that this reference must be answered in the negative and in favour of the assessee. Before we proceed to appreciate the contentions advanced on behalf of the parties, it would be useful to refer to the following observations of the Supreme Court in Anantharam Veerasinghaiah and Co. v. CIT : 123ITR457(SC) :
'It is now settled law that an order imposing a penalty is the result of quasi-criminal proceedings and that the burden lies on the revenue to establish that the disputed amount represents income and that the assessee has consciously concealed the particulars of his income or has deliberately furnished inaccurate particulars: CIT v. Anwar Ali : 76ITR696(SC) . It is for the revenue to prove those ingredients before a penalty can be imposed. Since the burden of proof in a penalty proceeding varies from that involved in an assessment proceeding, a finding in an assessment proceeding that a particular receipt is income cannot automatically be adopted as a finding to that effect in the penalty proceeding. In thepenalty proceeding the taxing authority is bound to consider the matter afresh on the material before it and, in the light of the burden to prove resting on the revenue, to ascertain whether a particular amount is a revenue receipt. No doubt, the fact that the assessment order contains a finding that the disputed amount represents income constitutes good evidence in the penalty proceeding but the finding in the assessment proceeding cannot be regarded as conclusive for the purposes of the penalty proceeding. That is how the law has been understood by this court in Anwar Ali's case : 76ITR696(SC) , and we believe that to be the law still.'
6. In view of the aforesaid observations of the Supreme. Court, it is clear that the finding arrived at by the Tribunal in the assessment proceedings cannot be regarded as conclusive for the purposes of penalty proceedings. The authorities are expected to consider afresh all the materials available, either produced at the assessment stage or later, in the penalty proceedings in the light of the burden to prove, resting on the revenue, whether the assessee had consciously concealed the particulars of his income. In the instant case, the Tribunal, in the penalty proceeding, based its conclusion merely on the basis of the finding given in the assessment appeals. This approach cannot be held to be permissible in the light of the aforesaid decision of the Supreme Court.
7. In this connection, we may refer to the decision of the Mysore High Court in B. Mahesha Hegde v. CIT : 95ITR316(KAR) , relied upon by the assessee. The facts of that case are identical. In that case, the Tribunal was of the opinion that in view of the finding in the assessment proceedings penalty was exigible. The learned judges constituting the Division Bench, however, observed as follows (p. 320) :
'On the facts and circumstances of the case, in our opinion, it cannot be said that there was any concealment of income as such by the assessee. His case was that in respect of these two contracts he had given them out on a sub-contract, but the total receipts had been disclosed. His contention was that he was entitled to only 3 per cent. of the profits and the rest was to go to the two sub-contractors. That contention was not accepted by the authorities. Merely on this account it cannot be said that he had concealed any income as such or furnished any inaccurate particulars of such income. All that can be said is that the assessee was unable to establish satisfactorily his plea that the sub-contracts Were genuine and he was only entitled to a profit of three per cent. Because of such a failure, it cannot be said that the assessee concealed any income as such or furnished inaccurate particulars thereof.'
We respectfully agree with the aforesaid observation.
8. In our opinion, therefore, on the facts and in the circumstances of the case, the Tribunal was not justified in holding that penalty was exigible.
9. For all these reasons, our answer to the questions referred to this court are in the negative and in favour of the assessee. In the circumstances of the case, parties shall bear their own costs of this reference.