Gopalan Nambiyar, C.J.
1. This is a reference sent up by the Income-tax Appellate Tribunal, Cochin Bench, at the instance of the revenue under Section 256(1) of the I.T. Act. The assessee is an individual and the assessment year is 1970-71. The assessee has income from purchase and sale of latex. The ITO found that the total sales during this year were of the value of Rs. 15.64 lakhs and gross profit thereon, 9.7%. This was less than the gross profit rate for the earlier year. He, therefore, made an examination of the accounts and found that there was heavy inflation of expenses under the latex collection account and transport account and that the amount shown in the account had no relation to the actuals. To support his conclusion he had referred to the instances of collection and transport charges being shown even during periods of rainy months when there was no rubber tapping. He had also found that the Claim for expenses was disproportionate to the dry rubber content of the latex collected. He was of the view that the expenses debited were not really incurred by the assessee, and that the plantation owners do not generally permit coolies of the purchasers of the latex to do the collection work. But, he observed on this last aspect, that he was not going into the merits of the question, whether this expenditure was actually incurred by the assessee or not, as the assessee contended that the collection was done by his coolies, and as it was not necessary to enter into this controversy, he was definitely of the view that the expenditure shown was hjghly inflated. The officer scrutinised the transport expenses for carrying latex from various estates to the assessee's factory premises. He was of the view that the expenses were disproportionate to the amount of latex transported and were, besides, artificial and arbitrary. During certain months, where the number of barrels transported did not vary, the expenditure incurred was found varying. In view of these circumstances and grounds disclosed, the ITO rejected the books of accounts and estimated a gross profit rate of 17.5% and made an addition of Rs. 1,22,000. The officer also noted that there were a number of credits in the capital account of the assessee, and the explanations offered by him were unsatisfactory.
2. The ITO also initiated penalty proceedings and referred the matter to the IAC. The assessee, in his turn, had appealed to the AAC. While the penalty proceedings were pending before the IAC, the appeal was taken up and the AAC disposed of the same on 31st March, 1975. The AAC referred in his order to certain materials and circumstances which would strengthen the additions made by the ITO. These were brought to his notice in the course of hearing of the appeal, and were the result of enquiries made by him regarding the ITO's contention that the expenses debited were bogus or fictitious or exaggerated. It was stated by the AAC that he had contacted several estate owners from whom latex had been purchased and these owners had stated that the expenditure was borne by them for collecting latex and for putting the same into the tank for being heated with ammonia gas. The gas alone was provided by the assessee. Till the barrels reach the assessee's lorry, all the expenses were met by the estate owners. The correspondence and letters on this subject from the estate owners were shown to the assessee and were referred to by the AAC in his order. The AAC concurred in the conclusion that the expenses were inflated and upheld the additions to the trading account. He also upheld the additions made by way of cash credits.
3. The IAC took up the penalty proceedings for hearing and passed orders imposing a penalty of Rs. 2,57,826 on August 29, 1975. In his order, he referred to the findings of the ITO regarding the low gross profit and the inflated expenditure for latex collection and transport and to the materials gathered by the AAC in the course of the appeal proceedings which were transmitted to him by the ITO. On these materials, he issued the penalty order.
4. There was an appeal to the Income-tax Appellate Tribunal, both against the order of assessment and against the order imposing penalty. The Tribunal reduced the additions made to the trading account as well as to the cash credit to a sum of Rs. 75,000. In that process, it reduced the cash credit of Rs. 61,045 and telescoped the same with the addition to the trading account. In regard to the penalty proceedings, the Tribunal held that the addition made to the trading account was merely on an estimate of the G.P. rate (gross profit rate) and no penalty proceedings could be passed on such materials. It was of the view that the evidence led in before the AAC cannot be used by the IAC for the levy of a penalty. The Tribunal's order itself did not disclose any authority for this proposition. The omission has been made good in the statement of the case, where the Tribunal has stated that it had based itself on the decision of the Gujarat High Court in CIT v. Lakhdhir Lalji : 85ITR77(Guj) . It was of the view that the materials gathered by the AAC would be available to that officer to impose a penalty but cannot be used by the ITO ; and bereft of the evidence gathered by the AAC, there was no material to sustain the levy of a penalty. In regard to the credits in the capital account also, the Tribunal held that no case has been made out and that the department has not discharged the burden of proof to show that there had been a concealment of income by the assessee.
5. It was against the above background of the orders passed by the Appellate Tribunal that it referred the following questions of law for our determination.
'(1) Whether, on the facts and in the circumstances of the case, the Income-tax Appellate Tribunal is right in law in cancelling the penalty imposed under Section 271(1)(c) of the Income-tax Act, 1961 ?
(2) Whether the Income-tax Appellate Tribunal is right in law in holding that the Inspecting Assistant Commissioner cannot in his order of penalty utilise the findings of the Appellate Assistant Commissioner ; also in ignoring the additional evidence gathered by the Appellate Assistant Commissioner and used by him in his appellate order '
6. Section 271(1)(c) of the I.T. Act, as it stood at the relevant time, reads:
'271. Failure to furnish returns, comply with notices, concealment of income, etc.-- (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 furnished inaccurate particulars of such income,
he may direct that such person shall pay by way of penalty,--......
(iii) in the cases referred to in Clause (c), in addition to any tax payable by him, a sum which shall not be less than, but which shall not exceed twice, the amount of the income in respect of which the particulars have been concealed or inaccurate particulars have been furnished.'
7. The section authorises the AAC (who is the relevant authority in the instant case), if he is satisfied in the course of any proceedings, to levy a penalty on grounds, inter alia, that a person has concealed the particulars of his income or furnished inaccurate particulars of such income. The Explanation to the section, as it stood at the relevant time, has also relevance to the questions at issue. We shall therefore quote the same:
'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 purpose of Clause (c) of this sub-section .'
8. The section appears to us to be quite wide in scope. The satisfaction of the IAC can be derived in the course of any proceedings under the Act. In order to warrant the imposition of penalty the satisfaction derived must be either in regard to concealment of particulars of income, or to the furnishing of inaccurate particulars. As would be seen from the facts that we have detailed, the materials available to the IAC were principally the order of the ITO, confirmed by the AAC. The AAC, in dealing with the appeal against the order of assessment, had obtained certain statements from the estate owners and others and had based his conclusion on these materials. There is nothing in the record, including the order passed on appeal from the assessment proceedings by the Tribunal, to show that these additional materials looked into by the AAC were wrongly admitted in appeal or looked, into by that officer. We are, therefore, left with the position that the IAC, when dealing with the question of imposition of penaly, had rightly before him the order of the ITO and the order of the AAC which disclosed the additional material that the latter officer had looked into while dealing with the appeal. The Tribunal had made a point that penalty proceedings could not be passed on the material gathered by the AAC. It has referred in the statement of the case to the decision of the Gujarat High Court in CIT v. Lakhdhir Lalji : 85ITR77(Guj) . We have examined that case. We think the said decision has really no application. That decision only ruled that where the penalty proceedings had commenced against the assessee on a particular footing, namely, concealment of particulars of income, but the final conclusion for levying penalty was based on a different footing altogether, namely, on the footing of furnishing inaccurate particulars of income, it could not be said that the assessee had been given a reasonable opportunity of being heard before the order imposing the penalty was passed. The very basis of the penalty proceedings against the assessee initiated by the ITO had disappeared when the AAC held that there was no suppression of income. It was, in such circumstances, that it was held that the imposition of penalty could not be sustained. This principle has no application to the facts disclosed.
9. On the other hand, counsel for the revenue drew our attention to the decision of the Allahabad High Court in CIT v. Babu Ram Chander Bhan : 90ITR230(All) , which has ruled that evidence which has come into existence subsequent to the assessment proceedings, but before the penalty proceedings are finalised, is admissible in penalty proceedings, and the parties may bring on record such additional material for determining if the penalty should be imposed. The same principle is also accepted by the Madras High Court in K. R. S. Gurumurthy Pather v. CIT : 96ITR404(Mad) . It was ruled that merely because a partition deed which is not shown to be sham or nominal had come into existence after the assessment proceedings had commenced, that document cannot be said to have no evidentiary value and the levy of penalty, based, inter alia, on the said partition document, was lawful.
10. Prom the recitals in the assessment proceedings it would be found that the ITO had gone through the whole of the assessee's accounts, and had rejected the same, and found that the entries as to expenses were bogus or fictitious or exaggerated. It was on this basis that he made an addition to the income and passed the assessment order. That was sustained by the AAC, who at that stage, went into the matter carefully, by examining the statements of the owners of rubber estates and other material, which we have already referred to. To elaborate the position, the ITO found that the expenditure incurred in the trading account under the various heads were not capable of verification, and that when the assessee was asked to explain how the expenditure was shown to have been incurred even in months when no latex collection was possible, he only stated that they might have been incurred in respect of some earlier or later collection of latex. The officer concluded that the expenditure under the heads ' Production expenses' and 'Collection expenses' are heavily inflated, and that has accounted for a steep fall in the gross profit in trading account. The above conclusion of the ITO was sustained and put on a firmer basis by the AAC who examined the statements of the owners of the rubber estates and looked into many other materials at the stage of appeal. These materials were certainly available to the IAC in the proceedings in which he had imposed a penalty under Section 271(1)(c) of the I.T. Act. We find that the officer was justified in looking into these materials and in passing the order of imposition of a penalty. We think the Tribunal was wrong in holding otherwise, and laying down the proposition that the imposition of penalty cannot be based on material gathered by the AAC. There is no warrant for such a proposition.
11. In the result, we answer the questions referred in the negative, i.e., in favour of the revenue and against the assessee. There will be no order as to costs.
12. A copy of this judgment under the seal of the court and the signature of the Registrar will be sent to the Income-tax Appellate Tribunal, as required by law.