1. This is a reference at the instance of the Commissioner of Income-tax under Section 256(1) of the Income-tax Act; and the question of law referred is :
'Whether, on the facts and in the circumstances of the case, the Appellate Tribunal was right in holding that the assessee is not guilty of any fraud or gross or wilful negligence in furnishing the return and in cancelling the penalty under Section 271(1)(c) of the Income-tax Act, 1961?'
2. The assessee is a firm doing business in the manufacture and sale of horn, ivory and rose-wood curios. For the assessment year 1964-65--the relevant previous year being the year ended March 3-1, 1964--the assessee returned an income of Rs. 44,614 under the head 'business'. The Income-tax Officer held that the gross profit of Rs. 1,50411 on the admitted turnover of Rs. 5,60,565 was too low as it worked out only at 24.3%. He found several defects in the accounts and rejected the accounts and estimated the gross profit at 30% which resulted in an addition of Rs. 31,814. The Income-tax Officer also found that the expenses claimed in the assessee's Bombay branch was Rs. 32,555 during the relevant year even though the increase in turnover was only rupees one lakh over that of the earlier year. He, therefore, disallowed an amount of Rs. 15,000 out of Rs. 32,555 claimed as the expenditure in the Bombay branch. The total income of the assessee was computed at Rs. 92,010. As the income returned was less than 80% of the income assessed, penalty proceedings were initiated under Section 271(1)(c) of the Income-tax Act. After giving an opportunity to the assessee to show cause why a penalty should not be imposed the Inspecting Assistant Commissioner found that the assessee had not proved that the large difference between the income assessed and the income returned was not due to its wilful negligence or fraud and that the Explanation to Section 271(1)(c) was applicable and imposed a penalty of Rs. 15,000. The assessee filed an appeal before the Appellate Tribunal from the order and contended that the addition of Rs. 31,814 was merelyfor deficiency of gross profit, that it was based on estimate and that the rejection of the assessee's books of accounts was based on mere suspicion and surmise. It was also contended that the disallowance of a sum of Rs. 15,000 out of the expenditure incurred at the Bombay branch could hardly be taken as a circumstance to infer suppression or concealment of income. The Tribunal found that the finding regarding the defective nature of the account and suppression of stock was based on mere suspicions and conjectures, and that the reasons given by the Income-tax Officerfor his conclusion that the assessee had suppressed stock to a large extent was not supported by any evidence. The Tribunal, therefore, found that the assessee was not guilty of any fraud or gross or wilful negligence. It, therefore, cancelled the order imposing the penalty.
3. The Explanation added to Section 271(1)(c) is as follows :
'Where the total income returned by any person is less than eightyper 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 thepurposes of making or earning any income included in the total income butwhich has been disallowed as a deduction), such person shall, unless heproves that the failure to return the correct income did not arise from anyfraud or any gross or wilful neglect on his part, be deemed to have con- cealed the particulars of his income or furnished inaccurate particulars ofsuch income for the purposes of Clause (c) of this sub-section.'
4. The object of the Explanation was to get over the difficulty created bythe decisions which placed the burden of proving concealment of the particulars of income on the revenue. Now the Explanation places the burdenof proving that the failure to return the correct income did not arise frcmany fraud or gross or wilful neglect upon the assessee. The purpose of theExplanation is to create a presumption that where the total income returned is less than 80% of the total income as assessed, the assessee hasconcealed the income or furnished inaccurate particulars of such income.This presumption can be displaced by the assessee proving that failure toreturn the correct income did not arise from any fraud or gross or wilfulnegligence. The quantum of proof necessary would be that required in a civilcase, namely, preponderance of probability. In the light of the Explanationthe question for consideration is whether in this case the assessee has discharged the burden thrown upon it. The Appellate Tribunal has referredto the explanation given by the assessee and said that the conclusion in theassessment order regarding the defective nature of the account andsuppression of stock is based on mere suspicion and conjecture. It alsofound that the Income-tax Officer's statement that the figures of openingand closing accounts shown in the trading account are highly suspicious andthat in a business of this type the stock available with the assessee shouldhave been much more in view of the turnover shown in the books, are meresurmises. The Tribunal was also of opinion that the finding of theIncome-tax Officer that in a business of this type it can never happen that there would be no closing stock, was also a mere conjecture. These andother circumstances mentioned in the order of the Appellate Tribunal readin the light of the explanation given by the assessee led the Tribunal to theconclusion that the assessee has proved that there was no fraud orgross or wilful negligence on its part in the failure to return the correct income.
5. We think that the explanation given by the assessee read in the light of the facts and circumstances of the case was sufficient to warrant the conclusion that the assessee was not guilty of fraud or gross or wilful negligence in furnishing the return.
6. We answer the question in the affirmative and against the department. We make no order as to costs.
7. A copy of this judgment will be sent to the Appellate Tribunal under the seal of the High Court and signature of the Registrar.