1. Certain proceedings under Section 271(1)(c) of the Income-tax Act, 1961, gave rise to this reference. The assessee involved is a firm by name ' Gates Foam & Rubber Co., Kottayam ' doing business in rubber products. During the relevant period the firm had four partners and the managing partner was one Mrs. Achamma Sebastian. For the assessment year 1966-67, the firm filed a return showing an income of Rs. 34,480. The profit and loss account submitted by the firm disclosed, among other items debited, payment of commission of an amount of Rs. 39,121 to another firm by name ' Koolfoam Agencies ', referred to hereunder as the agent-firm. The assessment was completed on the basis that the payment of the aforesaid commission was genuine. When the agent-firm in its turn filed its income-tax return and claimed registration, the Income-tax Officer enquired in greater detail about its affairs. It was detected that the only partners of the agent-firm were the children of Mrs. Achamma Sebastian, the managing partner of the assessee-firm, of whom only two were adults. The Income-tax Officer felt that the agent-firm was spurious and that it was formed only for the purpose of diverting a portion of the profits of the assessee-firm and thereby reduce the assessee's tax liability. It appears that the Income-tax Officer called for the explanation of both firms, and the matter was discussed with the authorised representatives of the two firms. The agent-firm filed a letter stating that they have no objection in assessing the income returned by them in the hands of the assessee-firm and that a nil return under Section 139(5) was being enclosed. A similar letter was filed by the assessee-firm agreeing to the assessment at their hands, of the income returned by the agent-firm. Proceedings were thereupon initiated against the assessee under Section 147(a) of the Act and, in response to a notice under Section 148, the assessee filed a return showing a total income of Rs. 63,980 taking in the commission alleged to have been paid to the agent-firm. An assessment followed, and the Income-tax Officer simultaneously started penalty proceedings against the assessee under Section 271(1)(c)of the Act. As the minimum penalty leviable exceeded Rs. 1,000 the proceedings were referred to the Inspecting Assistant Commissioner (shortly called ' the I.A.C. '). The I.A.C. came to the conclusion that there was clearly a calculated attempt on the part of the assessee to reduce its tax liability and in consideration of the fact that the assessee agreed to the reassessment in writing and accepted the Income-tax Officer's finding that the agent-firm was only a bogus firm, he levied a penalty of Rs. 10,000 which was far below the maximum penalty leviable under the law.
2. The assessee filed an appeal before the Income-tax Appellate Tribunal. The Tribunal cancelled the penalty levied by the I.A.C. ; and the grounds relied on in support of its conclusion as summarised in paragraph 12 of the statement of the case are as follows :
' The Tribunal held that there were no materials to show that the payment to Koolfoam Agencies was bogus and merely because the assessee agreed to the inclusion of the income of that firm in its own total income, the inference that it represented the concealed income of the assessee cannot be drawn. According to the Tribunal, as the assessee had shown this commission payment in the statements of account filed before the Income-tax Officer, it had not kept anything back from the Income-tax Officer. The Tribunal also held the view that the reasons given by the Income-tax Officer for coming to the conclusion that no commission payment had really been made to M/s. Koolfoam Agencies and that the alleged payments were bogus, were of little significance to the point in issue. They also held the view that there was no fraud or gross or wilful negligence on the part of the assessee as it was perfectly open to the assessee to arrange its affairs in such a way as to attract the least liability.'
On motion by the revenue under Section 256(1) of the Act, the Tribunal referred for the opinion of the court the following question :
' Whether, on the facts and in the circumstances of the case, the Appellate Tribunal is right in law in cancelling the penalty imposed under Section 271(1)(c) of the Income-tax Act, 1961 '
Section 271(1)(c) of the Income-tax Act, so far as it is relevant for the purposes of this case is extracted below :
' (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,-- ....
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 144or 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 purposes of Clause (c) of this sub-section.'
The learned counsel appearing for the revenue contended that the Explanation to Section 271(1)(c) applies to the instant case and that the Tribunal has erred in overlooking that provision. From the last sentence in paragraph 11 of the statement of the case, it would appear that the attention of the Tribunal was drawn to the Explanation. It is not clear from the order of the Tribunal whether that contention of the revenue was seriously considered. For the purposes of the assessment under Section 147 of the Act, the income voluntarily returned by the assessee was Rs. 63,980. The amount of Rs. 34,480, initially returned by the assessee for the same period, was obviously much less than 80% of the income finally assessed under Section 147. Consequently, by the operation of the Explanation to Section 271(1)(c), the assessee shall be ' deemed to have concealed the particulars of his income or furnished inaccurate particulars of such income for the purposes of Clause (c) ' of Section 271(1); and the assessee could avoid this fiction only on proving that his failure to return the correct income did not arise from any fraud or any gross or wilful neglect on his part. We called upon the learned counsel appearing for the assessee to point out the evidence, if any, available in the case to prove such absence of ' fraud or any gross or wilful neglect ' on the part of the assessee. He could point out none, for the simple reason that no evidence was tendered at all in that respect. On the other hand, there is sufficient material in the case to show that ' fraud ' was perpetrated by the assessee. The assessee debited in the profit and loss account for the relevant period an amount of Rs. 39,120 as commission paid to the agent-firm. When the accounts of the agent-firm was examined, the Income-tax Officer detected that in the accounts of that firm the disputed amount was shown as debt due and that the debtor was none other than .the assessee-firm. There was thus no payment by the assessee and no receipt by the agent-firm of any commission. In the absence of the debit of the commission in the profit and loss account of the assessee-firm, that amount also would have formed part of its assessable income and hence returnable at the very outset. As correctly inferred by the I.A.C. it was only after the Income-tax Officer proved to the hilt that the agent-firm was only a bogus concern set up lor the purpose of diversion of more than half the profits of the assessee, that the firm agreed to the inclusion of the income so diverted in the reassessment and that there was clearly acalculated attempt on the part of the assessee to reduce its tax liability. The presumption provided for in Section 271(1)(c) applies to the facts of this case with full force and the penalty provision under Section 271(1)(c) must automatically apply.
3. The conclusion reached above may perhaps be sufficient to dispose of this case. But, even assuming that the taxing authorities should have in their possession sufficient material to support their conclusion, we are of the view that there is enough material available and that the reasonings of the Tribunal are clearly erroneous. The Tribunal held that there was no material to show that the payment to the agent-firm was bogus. The order of the I.A.C., which is annexure ' B ', extracts in extenso the findings of the Income-tax Officer containing the materials on the basis of which he came to the conclusion that the agent-firm was a bogus concern and that registration cannot be granted. It is not necessary for us to narrate those facts and circumstances over again and we agree with the conclusion of the taxing authorities as to the nature of the agent-firm. If the agent-firm was a bogus concern, the alleged payment to such a firm cannot stand on a better footing. The taxing authorities held further that the agent-firm did not do any work for the assessee and that actually there was no payment of any commission by the assessee to the agent-firm. It cannot be held that such a conclusion was not warranted by the facts of the case.
4. According to the Tribunal, as the assessee had shown the commission payment in the statement of accounts filed before the Income-tax Officer, it has not kept anything back from the Income-tax Officer. We are unable to subscribe to the view that non-disclosure alone can constitute concealment of income for the purposes of Section 271(1)(c) of the Act. Explanation 2 of Section 147 enjoins that production before the Income-tax Officer of account books or other evidence from which material evidence could with due diligence have been discovered by the Income-tax Officer will not necessarily amount to disclosure within the meaning of that section. If such a statutory inference is available in the matter of assessment of escaped income, there is no reason why it should not be applied for the purpose of Section 271(1)(c) also if the false entry in the accounts was deliberate and made with a view to suppress the actual income. A false inflation of expenditure or any item deductible under the Act for computing the income will undoubtedly affect the taxable income to the detriment of the revenue and to the manifest advantage of the assessee. The Income-tax Officer cannot start on the presumption that every entry in the assessee's accounts is false and pursue all possible avenues for ascertaining whether the entry is true. In the present case, the Income-tax Officer had no reason to believe that the entry in the assessee's accounts relating to the payment of the commission to the agent-firm was spurious. The falsity of the entry wasundoubtedly a matter kept back from the income-tax Officer; and the reasoning of the Tribunal in this respect is not convincing. Even assuming that there was no concealment as such, there can be little doubt that the conduct Of the assessee, namely, placing for the acceptance of the Income-tax Officer a bogus debit as genuine, will constitute the furnishing of inaccurate particulars of the assessee's income so as to attract Section 271(1)(c).
5. The Tribunal's view that the reasons given by the Income-tax Officer for coming to the conclusion that no commission payment had really been made to the agent-firm and that the alleged payments were bogus were of little significance to the point in issue, is hardly acceptable. If the alleged payment was untrue, the amount so debited. will have to be deleted and when the balance is struck afresh, the income will stand augmented to that extent. As already pointed out, real income can be suppressed by spurious items of expenditure or deductions and to attract Section 271(1)(c) it is sufficient that the assessee had furnished inaccurate particulars of his income.
6. The setting up of a bogus firm and the subsequent agreement of the assessee to assess the alleged income of such a firm in its own hands are, according to the Tribunal, essentially arrangements made by the assessee with respect to its affairs ' to attract the least tax liability ' and that such a course is permitted by law. We do not feel that the rights of an assessee to arrange his matters so as to reduce his tax liability to the minimum includes a right to conceal his true income or to furnish inaccurate particulars of his income before the taxing authorities.
7. Again, the Tribunal has observed that they do not see any fraud or gross or wilful negligence on the part of the assessee. The taxing authorities also do not state that the assessee was guilty of gross or wilful negligence ; they proceed on the basis that fraud has been committed by the assessee though that expression as such is not used by the I.A.C. The assessee has no case that the debit entry in the accounts with respect to commission payment was inadvertent. It is conclusively established in this case that the entry was false and that it was made for the purpose of diverting a large portion of the taxable income of the assessee. Fraud can properly be inferred under such circumstances.
8. It, therefore, follows that the Tribunal has erred in law in cancelling the penalty imposed by the I.A.C.
9. In the result, the question referred is answered in the negative and in favour of the revenue. The assessee shall pay the costs to the revenue.
10. A copy of this judgment will be sent to the Appellate Tribunal under the seal of the High Court and the signature of the Registrar.