1. This is an appeal by the assessee against the order of the Commissioner (Appeals) for the assessment year 1975-76 whereby he confirmed penalty of Rs. 1.08,084 levied under Section 271(1)(c) of the Income-tax Act, 1961 ("the Act"). The relevant facts in this case are these.
2. The assessee carries on business in handloom. For this assessment year it filed a return showing an income of Rs. 65,840. After the return was filed, the ITO required the assessee to produce the account books and other evidences on which the assessee relied in support of the return filed and the assessee produced the account books which included the ledger, day book and a register called sales book. It was noticed by the ITO on actual examination that the sales for the month of December 1974 (which was the last month of the accounting year for this assessment year) were not posted in the sales account in the register of the assessee. The sales for that month was a sum of Rs. 1,39,789. It may be mentioned at this stage that the assessee does not post the sales into the sales account every day. The sales account is entered in a register every day and the monthly totals are carried over to the sales account in the ledger. Thus the sales account in the ledger would contain 12 credit entries for the year, i.e., one for each month. The credit entry for the month of December 1974 was not made but the books were closed without making such posting. There is no dispute that the assessee had posted the sales in the sales register. It is not the case of the ITO that there was any omission to post in the sales register.
3. The ITO pointed out this omission to the assessee and called for an explanation for this omission. The books of account were detained by the ITO for a detailed examination. The entry in the order sheet details the reasons for impounding. An adjournment was granted to 9-12-1975. On 15th, the chartered accountant then representing the assessee appeared and requested for time to furnish the explanation and the assessee was granted time up to 31-1-1976. Subsequent to this the assessee-firm made a disclosure under Section 3 of the Voluntary Disclosure Scheme of a sum of Rs. 80,000. Then the assessee wrote to the ITO saying that the assessee had made a disclosure of Rs. 80,000, and that the balance of the sum of Rs. 1,39,789 would represent trade discounts allowed by the assessee to customers during the course of the entire year. It was claimed by the assessee that by making the disclosure of Rs. 80,000, he has made good the omission on account of not recording the sales in the sales account for the month of December 1974. The ITO made further enquiries with various banks and had gethered some evidence which would dispute the claim of the assessee that a sum of Rs. 45,000 added represented the trade discounts given by the assessee in the entire year. On 17-1-1977 a letter came from the assessee-firm admitting an understatement of sales of Rs. 1,39,789 out of which, it was explained, Rs. 80,000 had already been disclosed. A fresh return was filed covering the balance of the concealed income.
This return showed the sum of Rs. 1,19,793 in place of the earlier figure of Rs. 65,840. The ITO made the assessment on a sum of Rs. 2,03,040 but deduction of Rs. 80,000, representing the amount declared under the Voluntary Disclosure Scheme, was allowed by the AAC. The ITO also had initiated penalty proceedings. He held that the difference between the income finally assessed, namely, Rs. 1,23,040 and the amount declared in the first return filed Rs. 65,840, reduced by additions of items not concealed to the tune of Rs. 3,158, was the concealed income of the assessee. This was Rs. 54,042. He levied a penalty of double this amount, being the maximum penalty leviable.
4. It was contended by the assessee before the ITO and the Commissioner (Appeals) that the omission to record the sales pertaining to the month of December 1974 was only an honest mistake on the part of the assessee and, therefore, there is no question of levying any penalty. The Commissioner (Appeals) considered that it was not an honest mistake but a deliberate attempt on the part of the assessee to suppress this turnover from being entered into in the books of accounts. In coming to this conclusion, the Commissioner (Appeals) had taken note of the behaviour of the assessee subsequent to the filing of the return and the showing of the books before the 1TO in the early part of December 1975. He rejected the plea of the assessee that the statements, returns and accounts have been prepared by the chartered accountant. For this he relied upon the report of the auditor which said "prepared from books of accounts produced before us, viz., day book and ledger". It was considered by the Commissioner (Appeals) that the sales register had not been produced before the chartered accountant and if such register had been produced before the chartered accountant, this omission would have been noticed by the chartered accountant and there would not have been any escapement of this particular income from being included in the return originally filed. He, therefore, upheld the levy of penalty.
5. It is submitted on behalf of the assessee that the omission to post the sales of the month of December 1974 in the sales account from the sales register was a bona fide mistake on the part of the assessee and, therefore, the levy of the penalty is not justified. It is pointed out that the assessee has given the books of account to the chartered accountant for the preparation of the statements and the return. This has been done every year and such an incident had not taken place in earlier years. The assessee had produced all the relevant books maintained by it immediately on receipt of the notice under Section 143(2) of the Act on 1-12-1975. The assessee had produced along with the other books, the sales register also. If the omission was intentional on the part of the assessee, the assessee would not have produced the sales register and it might have escaped the notice of the ITO. The production of the sales register by the assessee before the 1TO was not accidental as made out by the lower authorities but it was intentional on the part of the assessee because the assessee wanted to co-operate with the department and produce all the evidence maintained by it in support of the return.
6. It is submitted that there could be no presumption as made out by the Commissioner (Appeals) that the sales register was not sent to the auditor. It is pointed out that the assessee had submitted along with the original return of income a statement of quantitative particulars for the assessment year in which the quantities of yarn and cloth dealt with by the assessee during the year had been shown under the various categories like opening stock, purchases, consumption, exchange, production, returns, sales, shrinkage, sample waste and closing stock.
The number of bundles of yarn dealt with during the previous year was shown at 10,159 in the statement and the quantity of cloth dealt with by the assessee during the year was shown at 6,34,446.25 metres. This statement was prepared along with the return with the help of the auditors. The value of the closing stock shown in this was Rs. 2,28,812.30. A revised statement of the quantitative particulars was appended by the assessee along with the revised return submitted in 1976. In this also, the value of the closing stock was shown at Rs. 2,28,812. The quantity of cloth dealt with as shown in this, after taking away the sales returns was 6,25,874.40 metres. The sales returns were 8,517.85 which accounts for this difference in the quantity of cloth shown originally and the quantity of cloth as shown in this. Thus there was no material difference in this statement and the statement submitted with the original return. It is submitted that the substantial tally in these two statements would indicate that the sales register was also before the chartered accountant when the original returns were prepared. It would follow, that the chartered accountant also did not notice the mistake in the non-posting of the sales of December 1974 to the sales account. If the chartered accountant could commit this error, the possibility of the assessee also committing that error as an error could not be ruled out.
7. It is further submitted that even the day book and ledger would have indicated this omission and the chartered accountant could have noticed this, namely, the absence of any sales for the month of December. This would show that the omission had been overlooked by the chartered accountant in the same manner as has been overlooked by the assessee itself.
8. The disclosure made by the assessee under the Voluntary Disclosure Scheme was of a sum of Rs. 80,000 while the actual omission in the sales account was about Rs. 1,40,000. The lower amount declared by the assessee was because of another mistake committed by the assessee in working out the omission. In any case the omission in the voluntary disclosure cannot be equated to the omission in the sales account and consequently in the return of income filed for the purpose of the levy of penalty. It is only the circumstances surrounding the omission that occurred at the time of filing of the return that would be relevant for the question whether the assessee is to be visited with a penalty under Section 271(1)(c) 9. The assessee had written a letter to the 1TO on 4-9-1976. In this letter the assessee has reiterated that the sales have been inadvertently left out. It is only in making out the quantum of such omission that the assessee has committed the error in this letter also.
It is because the assessee, even on that day was not able to exactly reconcile the position that it resorted to an explanation attributing the difference to trade discounts which was later found to be not true.
But it is submitted that penalty under Section 271(1)(c) is not intended to be levied for such omissions or such mistakes committed in the correspondence subsequent to the filing of the return. The ITO has no doubt considered this explanation given by the assessee and has pointed out in his letter dated 11-1-1977 certain discrepancies but the ITO has not himself added anything on account of this.
10. It is further pointed out that the bills collection account shown in the balance sheet submitted with the original return was at a figure of Rs. 2,06,993.89 while the same account was shown in the balance sheet accompanying the revised return at the figure of Rs. 3,41,035.30.
This amount represents the amount of bills that were sent for collection to the bank. On realisation the banks would credit the account of the assessee. with such realisation. The difference in the two figures of this account represents the bills submitted by the assessee to the bank in the month of December 1974 which were also entered in the sales register to be posted at the end of the month to the bills collection account. This was also omitted to be posted. If the assessee's intention was to leave out the sales for this month completely in order to suppress the income on such sales, the assessee would not have, in the first instance, sent the bills for collection to the bank because when the bills are realised the bank would have credited the accounts of the assessee and the bank account of the assessee would be in excess by this amount as compared to the bank account appearing in the ledger of the assessee. These bills would have been realised in the month of January 1975 or immediately thereafter and for the next accounting year the balance sheet would not have tallied as the bank account on the asset side would have shown a larger amount than in the books of the assesses. There could, therefore, be no suppression or concealing these facts. The intention of the assessee could not be, therefore, to suppress the sales and the resultant income for the month of December 1974. It is also pointed out that the turnover shown by the assessee does not compare unfavourably with the turnover shown for the preceding year and the assessee had returned a margin of profit when compared favourably with the margin for the previous year. The addition made by the ITO has, originally, nearly doubled the margin of profit which would not be possible in this line of business.
11. On behalf of the department, it is submitted that but for the alertness shown by the ITO the income returned by the assessee in the original return would not have been accepted especially as the results disclosed by the assessee was acceptable ex facie and could have passed muster normally. The assessee must have been aware of the value of its business and it could not have been a bona fide mistake. The further attempt on the part of the assessee to explain away the difference of Rs. 45,000 as trade discounts would only show that the assessee had originally intended to suppress this income. It is submitted that the omission either by the assessee or by the auditor must be considered to be deliberate and invites a penalty under Section 271(1)(c), It is also submitted that it is not necessary for the ITO to establish that the omission was deliberate. Even otherwise it is submitted that the assessee was guilty of gross negligence and, therefore, in view of the Explanation to Section 271(1) as obtaining at that time, the assessee was liable to penalty under Section 271(1)(c).
12. In reply it is submitted on behalf of the assessee that the omission of the word "deliberate" from Section 27l(1)(c) was only in respect of furnishing inaccurate particulars of income, that (his item considered in the penalty proceedings could not be categorised as furnishing inaccurate particulars of income, that it would more aptly come under the term "concealment" which term itself would indicate an active mind to keep back, to hide. It is also submitted that the assessee, like the ITO would have been lulled into a false sense of correctness of the trading results disclosed in the original return on the basis that the margin of profit resulting was reasonable and compared favourably with the results of the preceding years.
13. We have carefully considered the submissions. There is no dispute that in returning the income originally, the sales for the month of December 1974 were not taken, into account by the assessee. The question is whether this was an honest mistake on the part of the assessee or a conscious omission on its part. The act of omission consisted in not posting from the sales register the necessary entries in the ledger. Such entries would be crediting the sales account and debiting the bank account with the bills sent for realisation and the trade discounts account and. so on. The practice of the assessee, which has been accepted, is to post from the sales register every month. The posting for the month of December had not been done. The accounts in the ledger were closed without such posting and a profit and loss account and balance sheet drawn up. The accounts were given to the auditor for the preparation of the statement and the return of income.
The auditor has also prepared the statements without noticing the omission of the sales account in the ledger.
14. Even leaving aside the question whether the sales register was produced before the auditor or not, the fact that there were no sales recorded at all for the month of December 1974 in the sales account should have raised the curiosity of the chartered accountant as it has subsequently raised the curiosity of the ITO. The chartered accountant admittedly had not noticed this particular fact. This failure . on the part of the chartered accountant must be considered to be simply a mistake, i.e., an inadvertent act on his part not to notice it.
Considering that the chartered accountant is bound to notice such omissions but has not actually noticed this omission, there does not appear to be any improbability in the assessee and his employees committing a similar mistake inadvertently. It is not beyond the realm of probability for particular set of entries to be made at a particular time, namely, at the end of the month, to have been passed over by mistake.
15. The Commissioner (Appeals) considered that the sales register was not produced before the chartered accountant while he prepared the statements and the return of income. This conclusion of the Commissioner (Appeals) is based upon a mere narration given by the chartered accountant, appended to the statements, namely, that the statements are prepared on the day books and ledger of the assessee produced before him. This narration is a normal statement that is usually made by chartered accountants in such statements. No particular significance can be attributed to such statement and no inference that the sales register was not produced and the further inference that the non-production of the sales register was deliberate can be drawn from this mere statement.
16. On the other hand, the quantitative statements, appended to the two returns, the original and the revised, show the same quantity of closing stock and the value of the closing stock. The closing stock of the assessee is by inventory which is tallied with the quantities dealt in by the assessee during the year. This tally would have been possible only if the sales register was also before the chartered accountant.
The inference drawn by the Commissioner (Appeals) that the sales register was deliberately not produced before the chartered accountant cannot, therefore, be considered to be correct in the circumstances of the case.
17. That the assessee had not consciously suppressed the sales for this month appears to us to be obvious from the fact that the assessee had readily produced at the first hearing the sales register along with the other books of account. If the assessee had intentionally suppressed the sales for one month by not transferring the sales from the sales register to the sales account, then the assessee would not have also produced the sales register with the probability of the ITO not noticing such omission being greater and in favour of the assessee succeeding in his efforts at concealment. That the assessee has not resorted to the withholding of this register before the ITO points, in our opinion, to the fact that the assessee was not aware at that time that the sales for the month of December have not been posted from the sales register to the sales account. The assessee has almost within a short time disclosed a substantial part of the sales under the Voluntary Disclosure of Income and Wealth Act. This readiness on the part of the assessee to disclose, even though only part of the amount would also show, in our opinion, that the assessee's omission in this regard is only an inadvertent mistake on its part.
18. It is true that the assessee had in the course of the proceedings subsequent to the disclosure under the Voluntary Disclosure Act resorted to explaining the difference between the sales omitted and the income disclosed as due to trade discounts but even in that letter the assessee has admitted that the sales were omitted by a mistake. The explanation given could be considered in two lines it could be treated as an explanation bona fide believed by the assessee to be the reason for its having disclosed only Rs. 80,000 and not a sum of Rs. 1,40,000 or so. The other possibility is that the assessee still entertained or started to entertain a desire to suppress atleast part of this income.
The manner in which the assessee has proceeded to act before this letter and subsequently, i.e., the readiness with which he has made the disclosure under the Voluntary Disclosure Act and the filing of the revised return not very long thereafter, indicates to us that the assessee had also committed a further error in considering that the entire sales omission would not be equivalent to the income not returned by the assessee. Even assuming that the assessee had wanted to evade tax on the sum of Rs. 45,000 that was only at the time of the filing of the letter on 4-9-1976, it cannot be related back to the return that was filed by the assessee unless it was clearly shown that the assessee had a similar idea of suppressing a larger income at the time of filing the return. That possibility of the assessee having consciouly suppressed an income in the return filed originally, in our opinion, can be excluded. Therefore, the subsequent conduct of the assessee as embedded in the letter dated 4-9-1976 would have no relevance to the proceedings under Section 271(1)(c).
19. We also appreciate the argument advanced by the learned counsel for the assessee that there could have been no conscious attempt on the part of the assessee to suppress the entire sales of December in view of the fact that the assessee had sent some of the bills relating to the month of December 1974 to the bank for collection and realisation.
Such bills realised would definitely have been credited to the account of the assessee with the bank and the assessee would not be able to correctly tally the amounts of the balance sheet in the subsequent year. The assessee could not, therefore, have consciously used this as a method of evading tax.
20. We, therefore, consider that the omission on the part of the assessee to credit the sales for the month of December 1974 from the sales register to the sales account is only an inadvertent mistake.
21. It has been urged on the part of the revenue that in order to attract penalty under Section 271(1)(c) it is not necessary that the omission should be deliberate. It has been pointed out by the Kerala High Court in CIT v. Gujarat Travancore Agency  103 ITR 149 (FB) that it is not necessary for the revenue to establish mens rea in respect of the penalties in Section 271(1). This position will, however, have to be considered with reference to the Explanation to Section 271(1) as obtaining at that time. It may be that mens rea need not be established. But it does not, at the same time, amount to say that every mistake on the part of an assessee resulting in the omission to return a particular income would invite a penalty under Section 271(1)(c). It is necessary to consider the attendant circumstances and ascertain whether in fact there was an attempt on the part of the assessee to make such omissions. If it had happened without the assessee being aware of it, it cannot be said that a penalty under Section 271(1)(c) can be levied.
22. It has also been urged on behalf of the revenue that if the assessee is not guilty of wilful negligence, it is certainly guilty of gross negligence and since the vast difference between the income returned and the income finally assessed is more than the margin contemplated in the Explanation to Section 271(1)(c) as obtaining at that time, the burden is on the assesses to show that there was no gross negligence. It is claimed that the assessee has not been able to show that it was not guilty of gross negligence.
23. We are not able to accept this argument either. The assessee has taken all steps that it could be expected to take in order to avoid the negligence in the circumstances. It has produced account books before the chartered accountant. As pointed out by the learned counsel for the assessee, the omission to enter the sales for one month coupled with the fact of the practice of the assessee of entering sales in a bulk manner for every month should have indicated to the chartered accountant that there was something wrong in there being no sales at all for one month entirely. It is also for the purpose of such omissions being brought to the notice of the assessee that the assessee had in the past as well as in the previous year for this assessment year given the books of account to the chartered accountant for the purpose of the preparation of the statements and the return of income.
The mistake that was committed by the assessee can only be considered to have been committed by the chartered accountant. In entrusting this part of the work to the chartered accountant, it must be held that the assessee has freed itself of a possible charge of gross negligence as contemplated in the Explanation to Section 271(1)(c).
24. We, therefore, held that the assessee is not liable to penalty under Section 271(1)(c). The penalty of Rs. 1,08,084 levied by the 1TO and confirmed by the Commissioner (Appeals) is cancelled. The appeal is allowed.