1. Both these references can be disposed of by a common judgment. They arise out of the order of the Income-tax Appellate Tribunal in relation to the assessment year 1965-66, in the case of M/s, Qammar-ud-din and Sons, Delhi. One of the references, namely, I.T.R. No. 30/72, was made by the Tribunal under Section 256(1) of the I.T. Act, 1961 (' the Act ' in short), referring the following question for the decision of this court :
' Whether, on the facts and in the circumstances of the case, the return filed on 20-10-1965 could be held to be an invalid return by reason of the fact that it was not accompanied by the profit and loss account '
2. Subsequently, under Section 256(2) of the Act, this court directed the Tribunal to refer also the following question for decision :
' Whether, on the facts and in the circumstances of the case, the Income-tax Appellate Tribunal was right in law in holding that there was concealment of income by the assessed and that the penalty was validly imposed '
3. This is how these two references are before us.
4. M/s. Qammar-ud-din and Sons (hereinafter referred as ' the assessed ') is a registered firm consisting of three partners. For the assessment year 1965-66, it filed a return of income on October 20, 1965, declaring an income of Rs. 35,000. In para. 7 of the return it was stated that the income was : ' as per the statement of account attached herewith '. No such statement of account was, however, attached.
5. On November 29, 1965, a notice under Section 143(2) of the Act was issued. Again, on December 9, 1966, another notice under Section 143(2) was issued fixing the case for hearing on December 22, 1966. It appears that, in the meanwhile, on some date (which is not known) the firm had filed before the ITO a profit and loss account pertaining to the above year. On looking into this account, the ITO found that the net profit of the firm was Rs. 83,790 as against Rs. 35,000 returned by the assessed. He, thereforee, called upon the assessed to file a revised return along with an Explanationn.
6. On December 24, 1966, the assessed filed a revised return showing an income of Rs. 83,790. The assessment was completed on a total income of Rs. 89,642 after making certain minor adjustments. Thereafter, the ITO initiated penalty proceedings and these culminated in an order of the IACdated October 14, 1968, imposing a penalty of Rs. 10,000 on the assessed under Section 271(1)(c) of the Act.
7. The assessed preferred an appeal to the Tribunal. The Tribunal came to the conclusion that the assessed was guilty of concealment of income and that the provisions of Section 271(1)(c) were attracted, But, having regard to the fact that one of the partners had died only a few days before the date of the original return, the Tribunal took a lenient view and restricted the penalty to the statutory minimum of 20%. It is out of this order of the Tribunal dated August 11, 1970, that these references have come up before us.
8. So far as the first question set out earlier is concerned, we do not think that the position admits of any doubt. Merely because, the assessed filed a return which was not accompanied by a statement of profit and loss account, it cannot be stated that the return itself was invalid. The contention of the assessed that because of this defect, the return itself should be treated as an invalid return was, in our opinion, rightly rejected by the Tribunal. The return filed on October 20, 1965, was certainly a valid return and the proceedings before the ITO were only on the basis of that return.
9. In regard to the second question, Shri P. N. Chopra who appeared for the assessed based his arguments on the decision of the Madras High Court in CIT v. Ramdas Pharmacy : 77ITR276(Mad) . Shri Chopra conceded that the figure of Rs. 35,000 returned by the assessed on October 20, 1965, was an incorrect figure and that he was not in a position to explain the basis thereforee. His submission was, however, that before imposing a penalty in the case, all the circumstances should he taken into account. He pointed out that the assessed had filed a profit and loss account showing an income of about Rs. 83,790 on his own volition and that at first an estimate had to be filed as the accounts were not complete and as one of the partners died a few days prior to the filing of the return and that the assessed did not have any previous history of concealment or fraud and that even for the year in question the income as shown by the assessed was practically accepted. He, thereforee, contended that, in the circumstances, the imposition of a penalty was not justified.
10. To start with, there is no doubt that the return filed by the assessed on October 20, 1965, did not have any factual basis. The obligation of filing of a return is a solemn and important One and should not be undertaken in a light-hearted and careless manner. It may be that, in some circumstances, an assessed may have to estimate its income, but if so, such estimate should have some basis thereforee. An assessed cannot escape its responsibility or escape penal action merely by filing a return showing an estimated income but without there being any real basis for that income. Inthe present case, the return filed on October 20, 1965, was stated to be based on a statement of account. But it is quite clear that there was no such statement in existence at that time. Having regard to the fact that the income returned has not been accepted but has been assessed at Rs. 89,642 and having regard to the Explanationn introduced to Section 271(1)(c) in 1964, the deeming provisions come into operation and we have to start with the presumption that the assessed had concealed particulars of the income or furnished inaccurate particulars thereof.
11. It is, however, contended on behalf of the assessed that in the circumstances of the present case the failure to return the correct income did not arise from any fraud or gross or willful neglect on it part.
12. Sri Kirpal, learned counsel for the respondent vehemently contended that the onus is on the assessed to show that there has been no fraud or gross or willful neglect and further that the question whether he has so proved is also a pure question of fact and that we should not interfere with a finding on this matter unless the conclusion of the Tribunal can be said to be perverse or unreasonable.
13. We agree with Sri Kirpal that normally it would be a question of fact as to whether the assessed is guilty of fraud or neglect. In the present case, however, we are of the opinion that, though the assessed has not disclosed the clear basis for a return of the income at Rs. 35,000, there was no fraud or gross or willful neglect on its part and that the Tribunal's finding to the contrary is vitiated by failure to consider certain material facts. At the time when the original return was filed one of the partners of the firm had just died as mentioned in the order of the Tribunal. The assessed had explained both at the time of the assessment and in reply to the penalty notice that the final accounts had not been prepared as some adjustments were yet to be made and so the statement of account could not be attached with the return filed on October 20, 1965. But the most important fact in the case is that as soon as the ITO issued the notice under Section 143(2), the assessed filed a profit and loss account which showed the income of Rs. 83,790, very much more than the income shown in the return. The exact date when this account was prepared or filed is not clear. But there is no doubt that this profit and loss account was before the ITO on December 22, 1966, when he took up the consideration of the return for the first time. It was only in view of the discrepancy between the returned income and the income according to the profit and loss account filed by the assessed that the ITO called upon the assessed to file a revised return which was filed two days later. In other words, this is a case in which the assessed, on account of certain handicaps, was not able to set out the correct income in its return. But before the ITO investigated the matter or discovered anything wrong with the assessed's accounts or returnthe assessed itself came forward with a correct profit and loss account (which has been also subsequently accepted with only slight adjustments). If, on December 22, 1966, when the case had been fixed for hearing by the ITO, the assessed had filed a voluntary return on its own, then, in all probability, no penalty proceedings would have been initiated against the assessed. But though no revised return as such was filed, the assessed did give the ITO an information regarding the correct income voluntarily. We think that these facts show that the failure to return the correct income in the first instance did not arise from fraud or gross or willful neglect. In this context, it should be appreciated that the onus cast on an assessed by this section is to prove a negative and all that is possible for him to do is to indicate certain circumstances on the basis of which the absence of fraud or gross or willful neglect can be reasonably inferred.
14. We find that the Tribunal has based its conclusion essentially on the ground that the return filed on October 20, 1965, was not shown to have had any basis. In regard to the subsequent circumstances, the Tribunal has observed that no attempt has been made by the assessed to correct the originally returned figures on its own. This statement is not correct. While it is true that the revised return was not filed by the assessed until the officer called for it, the Tribunal has itself found that the assessed had voluntarily filed the profit and loss account showing the higher income of Rs. 83,790. The Tribunal has, in our opinion, erred in failing to take into account the subsequent conduct of the assessed by which it came forward to set right the mistake or under statement in the original return. Sri Kirpal contends that this was done by the assessed not voluntarily but only in response to a notice under Section 143(2). This is no doubt technically correct. But the notice under Section 143(2) is only a formal notice calling upon the assessed to produce evidence to enable the officer to verify the correctness of the return. There is nothing on record to indicate that prior to the issue of this notice the ITO had carried out any investigations or discovered the understatement made by the assessed. In the case decided by the Madras High Court the facts were much more adverse to the assessed but still the conclusion of the Tribunal that there had been no concealment because the assessed had filed a revised return was upheld by the High Court. In the present case, there was no doubt a certain amount of carelessness on the part of the assessed while filing the return but, before the department discovered anything remiss therewith, the assessed came forward with a true disclosure. Such subsequent conduct is very relevant to the issue and the failure to take it into account has vitiated the Tribunal's conclusion.
15. We should not be understood as minimising the importance of filing a correct return. The obligation of filing a return should be dischargedscrupulously and sincerely. But at the same time before an assessed is mulcted with penalty, all the circumstances and developments till the assessment is completed should be taken into account and if the collective effect of the situation is to show that the failure to return the correct income was not on account of gross or willful neglect, the assessed should not be penalised.
16. For the reasons discussed above, we answer the first question in favor of the revenue, by saying that the return dated October 20, 1965, was a valid return. The second question is answered in the negative and in favor of the assessed. We, however, make no order as to costs.
D.R. Khanna, J.
17. I am inclined to concur with the conclusions arrived at by my learned brother. As observed by my lord, the obligation of filing a return is a solemn and important one and should not be taken in a lighthearted and careless manner. The prescribed return-form too enjoins verification of the correctness of the income and the particulars furnished. In the present case, the narration of the facts by the Tribunal had brought out how the assessed had without any basis filed the original return disclosing an income of Rs. 35,000. In this return, it was mentioned that a statement of account was attached therewith. This tends to show that the assertion made later by the assessed that accounts were not complete, was not correct. What has happened to that statement of account is not known. Whether it was lost in the I.T. office or done away with, or was erroneously so stated, while in reality no such statement was filed, is difficult to say. In the last eventuality, in case the assessed wanted to negative the presumption created by the categorical mention in the return that the statement of account had been attached, the proper course was to have filed an affidavit clarifying the entire position.
18. In case, as later asserted by the assessed, the accounts were not complete and the return was simply filed on estimate basis, the income disclosed should have had some relevance or close proximity to the extent of business undertaken in the previous year. The assessed knew very well the nature and extent of that business. The same had shown an upward trend from the preceding year. At least, thereforee, the assessed could have filed the return keeping in view the income disclosed and assessed in the preceding year which was around Rs, 83,000. None of this was done. Instead, an extremely low figure of Rs. 35,000, which had little bearing on or nexus with the business results, was mentioned in the return.
19. The practice of accepting returns as they are, under the assumption they should not be taken with suspicion and invite investigation, is being progressively adopted in India. This is a healthy sign. The same, at the same time, casts a corresponding duty on the assesseds also that they should as well, like gentlemen, display a conduct which is honest, straightforward and above board. Now, in the present case, had the original return filed by the assessed been accepted, considerable income assessable to tax would have been evaded. The assessed further managed to escape with much less deposit of advance tax by representing that low figure of its income. Its contention, thereforee, that no mala fides were involved from its side and its conduct was throughout above board does not appear to be correct.
20. The necessity of issuing a notice under Section 143(2) of the Act arises where the ITO is not satisfied with the correctness of the income returned, and wants to verify and probe into the affairs by looking into the account books and otherwise. Two such notices had been issued to the assessed and it was then found that the assessed had filed a profit and loss account showing an income of Rs. 83,790. As to when this profit and loss account was prepared, or when the same was filed, is not clear. The assessed should have come out with a clear stand about this. Even at the stage of the hearing of this reference, all that was stated was that this account was filed before the assessment was actually taken up in pursuance of the notice under Section 143(2) of the Act. As to when that profit and loss account had been prepared was still not clarified. In case it had been prepared before the second notice under Section 143(2) of the Act, it has remained unexplained why the assessed did not hasten to file the revised return on its basis instead of waiting for the ITO to require it to do so. This revised return was itself an admission on its part of the incorrectness of the original return.
21. A profit and loss account can only be a supplement to the return. It is corroborative and a sort of evidence supporting the version of income disclosed in the return. It, however, cannot in any circumstance take the place of the return itself, nor can be attached to it a greater sanctity than to the return. Section 271(1)(c) of the Act, when it provides for penalty, refers to the concealment or suppression effected in the return. At the same time there can be cases of bona fide errors where some mistakes by inadvertence creep into the returns although the profit and loss accounts stand already attached with the returns or are filed before the assessments are taken up. No means read in such cases need essentially be imputed. The question to be considered is in which of the categories the present case falls.
22. My learned brother has in this regard observed that the filing of the profit and loss account was a voluntary act of the assessed, and this negatived any intention on its part to conceal income, as it had substantially brought out the true income. The misfortune of the death of one of the partners before the filing of the return has also been taken note of. Considering these, circumstances, I am inclined in concur with the final conclusion that the penalty be quashed.
23. Before concluding I may add that so far as the Explanationn added to Section 271(1)(c) of the Act with effect from April 1, 1964, is concerned, the same on its own did not create any independent offence. This Explanationn only embodies a rule of evidence and places the onus on the assessed of proving that the understatement of income in the return, where such income falls short of 80 per cent. of the assessed income, was not on account of any fraud or any gross or willful neglect on his part. This burden, however, is not of the same nature which rests on the prosecution in a criminal case. It is a burden akin to that in a civil case, where the determination is made on the preponderance of probability.