1. This is a departmental appeal challenging the order of the learned Commissioner (Appeals) deleting the imposition of penalty by the ITO amounting to Rs. 24,183 in terms of Section 271(1)(c) of the Income-tax Act, 1961 ('the Act') in respect of the assessment year 1978-79.
2. The circumstances in which the aforesaid penalty came to be levied may be noted. The assessee-company derives income from its business of manufacture and sale of multi-stage and single-stage steam turbine condensing and back pressure type turbo-generating sets, etc., mentioned in detail by the ITO in paragraph No. 2 of his order. While scrutinising the accounts of the assessee-company, the ITO noted that the assessee-company had debited Rs. 41,875 by way of special commission paid to the following two parties :Mr. A.N. Shukla, 2/32, Darya Ganj, Delhi 11,875Sunder Electric Mart, 22 BrabourneRoad, Calcutta 30,000 ------- The ITO required the assessee to explain as to what was the special commission and the supporting bills and vouchers in respect of the above payment may be produced before him. The assessee replied to the ITO stating, inter alia, as follows : The commissions of Rs. 11,875 and Rs. 30,000 were paid to Mr. A.N. Shukla and Sunder Electric Mart by account payee cheques. The commissions were paid for securing orders procured by them.
The assessee did not produce before the ITO either supporting evidence or details regarding the nature of orders procured by the above two parties in support of the above claim. The ITO, therefore, inferred that the above amount could not be accepted as a legitimate deduction from the total income in the absence of any details in support thereof.
The above order of the ITO was upheld in appeal both by the Commissioner (Appeals) and the Tribunal. The Commissioner (Appeals) made the following observations while upholding the order of the ITO : The only justification for paying these amounts has been given as a board's resolution authorising these payments. Regarding the nature of the payment, the only evidence was letter dated 23-9-1981 by the appellant to Price Waterhouse & Co. stating that their canvassers' commission of Rs. 41,875 paid to Sunder Electric Mart (P.) Ltd. and Mr. A.N. Shukla, 'was paid on lump sum basis towards execution of orders worth Rs. 5.05 lakhs'. On these facts, I agree with the ITO that sufficient justification was not made out for these payments, even though these may have been authorised by the board of directors. Items of actual sale of Rs. 5.05 lakhs, the rate of commission, etc., have not been furnished. The ITO could not verify these amounts and was within his rights in not allowing these as an allowable expenditure.
The Tribunal while sustaining the above addition made the following observations : The assessee's learned counsel was unable to produce before us any evidence in regard to the actual services rendered by the two selling agents. It is also found from the IAC's order that the assessee, in spite of opportunity given, as per letter dated 6-3-1981, did not furnish any supporting evidence nor details in regard to the exact nature of the orders produced by the two selling agents. Besides stating that the payments have been authorised by the board of directors and that the two sums of Rs. 30,000 and Rs. 11,875 have been paid by account payee cheques, no other evidence has been produced to show that Sunder Electric Mart and Mr. A.N. Shukla procured orders by rendering special service to the assessee-company and, consequently, we are satisfied that the expenditure claimed was not laid out or expended wholly and exclusively for the purpose of assessee's business. Both the additions are, accordingly, upheld.3. The ITO had initiated action under Section 271(1)(c), while finalising the assessment and after the disallowance in question was upheld in appeal, he imposed penalty on the assessee for concealment of income. While doing so, he made, inter alia, the following observations : But with regard to claim for expenses mentioned under Clause (i) above, the position is quite different. Claim for special commission with regard to sales could be allowed only when it could be shown that services were actually rendered by the parties to whom the alleged commission is shown to have been paid. Rendering of service by way of booking of order, etc., is a question of fact, which is to be proved by leading positive evidence. In this case, the assessee has failed to produce any evidence about the necessity or justification for payment of any commission to the parties concerned. Mere authorisation by the board of directors or payment by cheque does not prove the genuineness of claim for special commission. Nor can it be said to constitute the service rendered.
Allowability or otherwise of the claim for special commission depends on question of fact and no point of law is involved therein.
As the assessee has failed to produce any evidence regarding the justification or necessity for payment of special commission, I am of the opinion that it was not a genuine business expenditure and that the assessee could not entertain a bona fide belief that it was so. The assessee has failed to substantiate the explanation offered in support of the claim and this amount is deemed to represent the income in respect of which particulars have been concealed within the meaning of Explanation 1 to Section 271(1) (c).
I, therefore, hold that with regard to this claim for expenses of Rs. 41,875 on account of special commission (as alleged), the assessee is guilty of concealment of particulars of income in the matter of reducing its income by the said amount and, consequently, reducing its liability for income-tax thereon and the provisions of Section 271(1)(c) read with Explanation 1 are clearly attracted.
4. The assessee challenged the above order before the learned Commissioner (Appeals) and pleaded before him that the assessee was not guilty of concealment of particulars of income and that 'all that had happened was that the claim made by the appellant-company was disallowed by the ITO, because according to the IAC, no evidence or details were forthcoming.... The mere fact of disallowance by the IAC of the appellant's claim did not justify the levy of penalty under Section 271(1)(c), particularly when no mens rea was proved....' The learned Commissioner (Appeals) accepted the above plea of the assessee.
While doing so, he made, inter alia, the following observations : In this case, the IAC rejected the appellant's claim because supporting evidence and details were not produced. It is significant that the IAC has not brought on record any material to show that the claim was fraudulent or deceitful. It must, therefore, be held that even though the IAC might have been justified in rejecting the appellant's claim in this regard in the quantum assessment, the impugned penalty lacks basis. The basic ingredient of the main provisions of Section 271(1)(c) is the existence of mens rea.
Therefore, unless the assessing authority establishes the existence of mens rea, the penalty cannot be said to be exigible. And as pointed out earlier, the IAC has not brought on record any material to prove the existence of mens rea.
5. The department challenges the correctness of the above finding of the learned Commissioner (Appeals) and points out that while deleting the penalty as above, the learned Commissioner (Appeals) has clearly misdirected himself in law for he has not taken into note of Explanation 1 to Section 271(1)(c) as incorporated in the said section with effect from 1-4-1976. The said Explanation reads as under: Where in respect of any facts material to the computation of the total income of any person under this Act,- (A) such person fails to offer an explanation or offers an explanation which is found by the Income-tax Officer or the Appellate Assistant Commissioner to be false, or (B) such person offers an explanation which he is not able to substantiate, then, the amount added or disallowed in computing the total income of such person as a result thereof shall, for the purposes of Clause (c) of this sub-section, be deemed to represent the income in respect of which particulars have been concealed.
It is the contention of the learned departmental representative that with the aforesaid change in the law, with effect from 1-4-1976, the onus of proving the mens rea no more lay with the ITO as presumed by the learned Commissioner (Appeals). The ITO had merely to show that in respect of any facts material to the computation of total income of the assessee, the explanation offered by the assessee could not be substantiated by him. An explanation is substantiated by leading cogent evidence.
When there is no evidence in support of an explanation, it cannot be said that the fact has been proved or substantiated. Once the ITO was able to show that the assessee did not substantiate the explanation given by him, the assessee was caught within the aforesaid Explanation and it had to be presumed by the fiction of law that there was concealment of income. It is upon the assessee to show in terms of the aforesaid proviso that the explanation given by the assessee was bona fide and that all the facts relating to the same and material relevant to the computation of his total income had been disclosed by him before the ITO. The assessee has not been able to prove the aforesaid position. Admittedly, the assessee had not disclosed all the material, which was necessary for the computation of the total income and had not brought on record all the facts relating to the aforesaid claim. The assessee knows that the claim in question was in regard to the sales of Rs. 5.09 lakhs and yet the assessee did not specify those sales, nor did the assessee indicate the names of the persons to whom the said sales had been made. The assessee also did not indicate the nature of services rendered by the two parties for obtaining the orders in question for the sale of the goods as alleged. It is not conceivable that the assessee was not aware of the facts on the basis of which it had made its claim, yet it decided to withhold the facts from the ITO and this being so, the explanation of the assessee cannot be regarded bona fide and in any case, it cannot be said that all the facts relating to the assessee's explanation and material to the computation of its total income had been disclosed by the assessee before the ITO.The escape route provided by the proviso was, thus, closed to the assessee and as such, the ITO was right in imposing the penalty on the assessee.
6. On behalf of the assessee, the aforesaid pleas were resisted and the pleas taken before the learned Commissioner (Appeals) were reiterated.
Our attention was drawn to the decision of the Hon'ble Gujarat High Court in CIT v. S.P. Bhatt  97 ITR 440, wherein it has been pointed out that by merely rejecting the explanation of the assessee, penalty could not be imposed. In the present case, the assessee has placed on record the resolution of the board of directors authorising the payments in question and the names of the persons to whom the payments were made were also disclosed. The explanation of the assessee was bona fide in the sense that it represented the truth and, therefore, the assessee should not be penalised. Reference was also made by the assessee to the decision in CIT v. Prafulla Kumar Mallik  104 ITR 648 (Ori.), wherein their Lordships have also expressed similar view as taken in the case of S.P. Bhat's case (supra).
7. In rejoinder, the learned departmental representative pointed out that the aforesaid decisions of the Hon'ble Gujarat High Court and the Hon'ble Orissa High Court were not relevant as they did not deal with the amended law. They were dealing with the law as stood prior to 1-4-1976 and, therefore, no guidance could be had from the aforesaid decisions, which were in the context of the Explanation to Section 271(1)(c), as it stood up to 31-3-1976.
8. We have given a careful consideration to the facts of the case and the rival submissions. In our opinion, there is merit in the contention of the learned departmental representative. Every payment is not an expenditure and in order to show that certain payment was expenditure, the onus lay on the assessee. In the present case, the assessee has not been able to substantiate his explanation that the aforesaid amounts were paid by the assessee for services rendered to the persons mentioned above. Neither the assessee has been able to indicate the details of the sales, the orders of which were procured by the aforesaid persons, nor the assessee has been able to indicate the names of the parties to whom the sales in question were made. The assessee did not disclose what was the actual nature of the activities and the services rendered by the aforesaid two persons for which they were remunerated by the assessee. No doubt, a resolution of the board of directors is on record supporting the said payments on the ground of alleged services but the resolution of the board of directors is not an evidence of the services having, in fact, been rendered. The said resolution is merely an authority to the cashier of the company to make the disbursement of the amounts in question. But the authority of the board of directors to make the payment would not turn the payment into an expenditure. Admittedly, the assessee has refrained from leading other evidence for reasons best known to it. Moreover, the ITO was able to show that the explanation given by the assessee was not substantiated. The onus of bringing the assessee's case within Explanation 1, Clause (B) to Section 271(1)(c), which was on the ITO, thus, stood discharged. The statute now created a fiction of concealment of income against the assessee by incorporating Clause (B) referred to above. It was not necessary for the ITO to have done anything more to bring the assessee's case within the aforesaid fiction of law, then to show that the explanation given by the assessee was not substantiated and that the assessee had deliberately refrained from leading evidence in support of the plea taken by it before the ITO.Thereafter, it was for the assessee to bring its case within the exception provided by the proviso to Explanation 1 to Section 271(1)(c). In order to bring its case within the said Explanation, the assessee was to show that the explanation given by it was bonafide and that all the facts relating to the same had been disclosed by the assessee to the ITO. In the present case, the record is eloquent on this point and it clearly goes to show that the assessee refused to place on record the relevant information which would substantiate the assessee's case. It is, therefore, not possible for the assessee to show that all the facts relating to the explanation and material to the computation of its total income had been disclosed by it. The assessee could have disclosed the details but did not disclose them and, therefore, the assessee could not avail of the escape route provided by the proviso from the fiction of law created by the Explanation referred to above. Therefore, the amount added or disallowed in computing the total income of the assessee amounting to Rs. 41,875, shall for the purpose of Clause (c) of Sub-section (1) of Section 271 be deemed to represent the income in respect of which particulars had been concealed.
9. In the face of the aforesaid finding, we have no option but to reverse the order of the learned Commissioner (Appeals) and restore that of the ITO.10. With regard to the quantum of penalty, the ITO has already imposed the minimum penalty. There is therefore, no scope for making interference in this regard.