GOVINDAN NAIR J. - This is a reference by the Income-tax Appellate Tribunal, Madras Bench, under section 66 (1) of the Indian Income-tax Act, 1922. The question referred is this :
'Whether, on the facts and in the circumstances of the case, the levy of penalty on the assessee under section 28 (1) (c) of the Act was justified ?'
The relevant part of section 28 (1) (c) is in these terms :
'If the Income-tax Officer, the Appellate Assistant Commissioner or the Appellate Tribunal, in the course of any proceedings under this Act, is satisfied that any person -...
(c) has concealed the particulars of his income or deliberately furnished inaccurate particulars of such income,
he or it may direct that such person shall pay by way of penalty,... in the cases referred to in clause (b) and (c), in addition to any tax payable by him, a sum not exceeding one and a half times the amount of the income-tax and super-tax, if any, which would have been avoided if the income as returned by such person had been accepted as the correct income.'
For the year of assessment 1952-53, in assessing the petitioner the question arose as to whether the income, profits or gains can be ascertained from the accounts maintained by him and whether any additions should be made to the income returned by the assessee. Dealing with this question, the Income-tax Appellate Tribunal, as is seen from their order which is annexure 'A' to the case, came to the conclusion that there is no reason for rejecting the accounts and for applying the proviso to section 13. They, however, expressed the view that certain additions will have to be made on what they termed 'to be specific discrepancies' and observed :
'The Income-tax Officer has cited three instances of stock discrepancies in the stock books produced. These discrepancies are indeed real and call for a proper attention in this context.
By the above discrepancies, sales have been overshown in the stock account and to that extent the stock shown in the inventory has been reduced. The exact quantity that has to be considered for this purpose and the valuation thereof for purposes of the addition have been the subject-matter of argument before us. If is true there is an arithmetical mistake in the casting of the stock book and any one of these or all of them could have contributed to it. In the manner in which these entries have been specifically made, however, such a contribution cannot be much. The valuation too must be only at the market rate prevailing at about the time of the discrepancy and not the average rate for the year.'
They finally came to the conclusion that :
'Having due regard to all the foregoing facts and circumstances, in our opinion, an addition of Rs. 30,000 would meet all the requirements of the case.'
In paragraph 4 of the statement of the case, the discrepancies referred to by the Tribunal in their order, annexure 'A', have been stated thus :
'According to the account sales from the consignees the weight of first consignment of 208 bags (seven bags found short in packing) was cds. 42-9 mds. 5lbs., and the weight of the other consignment of 72 bags was cds. 11-11 mds. 9 lbs. There was thus a difference of 14 candies and odd in the stock as between the quantities entered in the stock register and the account sales. The difference between the stock register and the weight as per railway receipt was nearly 12 candies. The value of the above 12 candies of pepper would be about R. 43,000.'
The assessee had an explanation in regard to these discrepancies. His case was that the clerk had converted 208 bags relating to the first consignment at 5 thalamus per bag (165 lbs.) whereas the weight was 137 lbs. as it contained both light and good pepper. The Income-tax Officer did not accept this explanation and taking some other factors also into consideration he added Rs. 87,400 towards the income returned by the assessee and this addition was confirmed by the Appellate Assistant Commissioner in appeal. As mentioned already, the Tribunal for the reasons which they have stated and which we have extracted above, reduced the addition to Rs. 30,000.
Thereafter, a notice was issued to the assessee under section 28 (3) to show cause why a penalty should not be imposed on the assessee. The assessee contended that he had not concealed the particulars of his income or deliberately furnished inaccurate particulars thereof and tried to explain the discrepancies found on the stock register by putting forward the contention that it was a clerical error and also that the weight of the bag was wrongly taken as 165 lbs., whereas it should have been 137 lbs. This explanation of the assessee has not been accepted and penalty has been imposed by the Income-tax Officer. In appeal, however, the order imposing penalty was set aside by the Appellate Assistant Commissioner and in further appeal, the Tribunal restored the order passed by the Income-tax Officer. The three orders are, respectively, annexure 'B', 'C' and 'D' to the statement of the case.
The question that arises for determination is whether the order annexure 'D', can be justified on the facts and in the circumstances of the case already referred to.
That the proceedings under section 28 are in the nature of a penal proceeding can no longer be doubted. This court stated in Maney and Co. v. Commissioner of Income-tax :
'The onus of proof is on the department and the degree of proof is that of a criminal prosecution; the mere preponderance of probability will not suffice as in the case of a civil action.'
Similar is the view taken by one of us in the judgment in Ramankutty v. Income-tax Officer, Alleppey, and we find that as early as 1958, the same view has been expressed perhaps in stronger terms by Chief Justice Chagla in Commissioner of Income-tax v. Gokuldas Harivallabhdas. It is significant that this case was sought to be appealed against before the Supreme Court and the Supreme Court declined to grant leave to appeal. It is not as though three is no difference of opinion in regard to this matter. The madras High Court and the Allahabad High Court, we are aware, have struck different notes. it seems to us unnecessary to consider these cases in detail, for the matter again came up for consideration before the Gujarat high Court in Commissioner of Income-tax v. L. H. Vora. Chief Justice Shelat, after an elaborate review of the various decision, had particular occasion to consider the view expressed by the madras High Court in P. K. Kalasami Nadar v. Commissioner of Income-tax, and his Lordship came to the conclusion that :
'The proceedings being of a penal nature and the burden being upon the department, it would be but legitimate to say that mere falsity of an explanation given in assessment proceedings would not necessarily lead to the inference that the disputed amount represented income, and that, besides that circumstance, there must be some addition material from which the Income-tax Officer has to satisfy himself whether the assessee was guilty of the charge against him under section 28.'
As we read the order of the Tribunal, which is annexure 'D', the only question that they have considered in the order is an to whether the explanation made out by the assessee is acceptable or not and they have come to the conclusion that such an explanation is not acceptable. This, we do not think, would necessarily lead to the conclusion that the assessee had furnished wrongful particulars of his income, or deliberately furnished inaccurate particulars of his income, or deliberately furnished inaccurate particulars of such income, one of which at least is essential in order to apply section 28 (1) (c) under which proceedings had been taken. We may extract in extenso the paragraph in annexure 'D' which deals with that question :
'The assessees learned counsel submitted that the question ultimately turned on the point of the shortage; that having regard to the total handling of pepper the shortage claimed could not be said to be excessive; that the department had not pointed out to any omission of sale; that having regard to the large turnover disclosed by the assessee, there could not be any ulterior motive behind these discrepancies. It was further sub-mitted that the sale proceeds in respect of these two consignments had been fully accounted for in the accounts. We were also referred to the observations of the Appellate Tribunal in the quantum appeal in regard to the nature of the books maintained and their sufficiency for proving the profit. It was urged that, in all these circumstances, there was no case for levy of penalty and that the Appellate Assistant Commissioners order should be upheld.'
We see nothing in this excepting the conclusions stated thus :
'It will thus be seen that there is a difference in quantity which has not been accounted for. By putting a higher figure on the credit side, the assessee had under-stated the closing stock... We consider that the assessee had deliberately refrained from placing all the facts before the Income-tax Officer. It was only after the enquiry had started that he came forward with this theory of clerical mistake... Having regard to all the facts, we consider that the penalty order was justified and that the Appellate Assistant Commissioner was not correct in canceling the same.'
These we consider are hardly sufficient to posit that there has been such default on the part of the assessee as contemplated by section 28 (1) (c). It is not as though that the discrepancies found in the stock register cannot have any explanation whatever. In fact, the Appellate Assistant Commissioner found the explanation made by the assessee acceptable. Even otherwise we feel that there must be a positive element of proof in such matters. There must be some material available from which it is possible to draw the inference that either the goods were with the assessee in kind or were converted into cash and thus he had acquired income during the accounting period. Not only there is no such material but the approach has not been on those lines. It has not been recognised that this positive element must be established.
We, there, answer the question that has been referred to us in the negative, that is, in favour of the assessee and against the department. We direct the parties to bear their costs in this income-tax referred case.
Question answered in the negative.