B.K. Mehta, J.
1. The following question has been referred to us for our opinion by the Income-tax Appellate Tribunal :
'Whether, on the facts and in the circumstances of the case, the sum of Rs. 8,750 paid by the assessee to M/s. Pari Bechardas Ambaidas should be excluded for the purpose of finding out the difference between the assessed income and the returned income under the Explanation to section 271(1)(c) of the Income-tax Act 1961 ?'
2. In order to appreciate the question in the proper perspective, a few facts need be stated :
The assessee is a private limited company dealing in cloth, cotton, photographic materials, electrical goods and glassware. The relevant assessment year is 1964-65. The assessee-firm returned an income of Rs. 29, 229 for the relevant assessment year. However, it was finally assessed on a total income of Rs. 41,050. As the Income-tax Officer was of the opinion that the case of the assessee-firm would come within the mischief of the Explanation to section 271(1)(c) of the Income-tax Act, 1961, proceedings for levy of penalty were initiated and the matter was referred to the Inspecting Assistant Commissioner under section 274(2) of the said Act. The Income-tax Officer, while determining the income of the assessee firm at Rs. 41,050, made amongst others an addition of Rs. 8,750 said to be an amount paid for goodwill to M/s. Pari Bechardas Ambaidas for purposes of obtaining the premises occupied by the said M/s. Bechardas Ambaidas. It is only in relation to this amount of Rs. 8,750 that the entire controversy before the taxing authorities was centred. It is an admitted position that if the income assessed is allowed to be reduced by the aforesaid amount of Rs. 8,750 the income returned by the assessee-firm would not then be less than eighty per cent of the correct income assessed ultimately and, therefore, the asssessee-firm would not be within the mischief of the Explanation to section 271(1)(c), as he would not have been deemed to have concealed the income. The Inspecting Assistant Commissioner was of the opinion that due care was not taken in submitting the return and though he observed that the intention of the assessee-firm was not to defraud the revenue, the assessee was none-the-less guilty of gross negligence in submitting the return of the income, disallowed, it was none-the ending, a penalty of Rs. 1,500 was imposed. The assessee-firm, therefore, went in appeal before the Tribunal against the order of the Inspecting Assistant Commissioner. Amongst the contentions raised before the Tribunal, one with which we are concerned in this reference was relating to the aforesaid amount of Rs. 8,750 said to have been incurred by the assessee for the payment of the goodwill to the transferor-firm, M/s. Pari Bechardas. It was contended by the assessee-firm before the Tribunal that if this amount was reduced from the total income assessed ultimately, the assessee-firm would not be within the mischief of the Explanation to section 271(1)(c) and, therefore, not liable to be subjected to penalty. The Tribunal while examining this contention found that during the accounting year relevant to the assessment year 1964-65, a sum of Rs. 8,750 was paid on two dates, namely, March 29, 1963, and December 31, 1963, and the payment was made as 'a sort of premium' for occupying the premises vacated by M/s. Pari Bechardas Ambaidas, though entries made in the books of the assessee-firm showed the payment as if made for goodwill. The Tribunal was of the opinion that the Income-tax Officer has rightly disallowed that amount and added to the income as the amount was in the nature of capital expenditure. The assessee's reply was that, though the amount was in the nature of capital expenditure and, therefore, disallowed, it was none-the-less bona fide expenditure incurred for purposes of making or earning income and, therefore, one liable to be reduced from the total income ultimately assessed. The Tribunal, on examination of the relevant provisions of the Act, came to hold that, while construing the expression 'expenditure incurred for making or earning any income', it would also mean such capital expenditure which is necessary for making or earning any income. The Tribunal, therefore, held that in this particular case the premium or the goodwill paid by the assessee-firm to the firm of Pari Bechardas Ambaidas for occupying the premises vacated by the old firm was definitely for the purposes of making or earning an income, and that the assessee-firm was, therefore, entitled to the deduction of the said sum of Rs. 8,750 from the total income assessed for the purpose of determination of the question of penalty and, therefore, the assessee-firm was not within the mischief of the Explanation to section 271(1)(c) of the Act of 1961 and, therefore, cannot be said to have concealed the income. In that view of the matter, the Tribunal set aside the order of the Inspecting Assistant Commissioner levying a penalty of Rs. 1,500 on the assessee. At the instance of the Commissioner, this reference has been made on the question referred to hereinabove.
3. At the time of hearing of this reference, the following two contentions were raised by Mr. Kaji, the learned advocate, appearing on behalf of the revenue :
1. The expense being capital expenditure is not one which could be reduced from the correct income for purposes of determining the question of the penalty on the ground of income having been concealed as provided in the Explanation to section 271(1)(c) of the 1961 Act.
2. The expenses were, as found by the Tribunal, in the nature of payment of premium for obtaining possession of the premises vacated by M/s. Pari Bechardas Ambaidas and therefore, they could not be said to be expenses bona fide made.
4. None of the above contentions, in our opinion, has any merit in it. For purposes of determining whether the assessee had concealed the particulars of his income and, therefore, liable to penalty under section 271(1)(c), the taxing authorities have also to consider the Explanation to the said sub-section (1). The Explanation provides a fiction as under :
'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 purposes 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 raise 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.'
5. Mr. Kaji, on behalf of the revenue, wants us to restrict the expenditure which an assessee is entitled to reduce to one which is in the nature of revenue expenditure only. Mr. Kaji wanted us to read the clause in parenthesis in the Explanation about the expenditure which is liable to be reduced from the correct income assessed ultimately for purposes of determination of the question whether the assessee had concealed the income or not, as under :
'Reduced by the revenue expenditure incurred bona fide by him for the purposes of making or earning any income included in the total income but which has been disallowed as a deduction.'
6. In the first instance, there is no warrant to read more than what has been prescribed in the clause in the parenthesis by the legislature. Secondly, the legislature itself has suggested that, though the expenses might have been disallowed for purposes of computation of the income or profits, the same are liable to be deducted from the correct income assessed while determining whether the fiction as provided in the Explanation is attracted or not. In that view of the matter, therefore, the Tribunal was justified in holding that for purposes of determining whether the fiction provided in the Explanation is attracted or not, a bona fide expense, irrespective of the nature whether they are capital expenses or revenue expenses, is liable to be deducted from the correct income to be assessed ultimately for purposes of comparison with the income returned. The first contention of Mr. Kaji is therefore, rejected.
7. The second contention also is not of much substance, as the tribunal has in its order found, as a matter of fact, that the assessee-firm has paid the said amount of Rs. 8,750 in fact and there was no dispute about this payment. In paragraph 2 of the order, the Tribunal observes as under :
'... The same was rightly disallowed as capital expenditure but this would not change the character of the expenditure being necessary for the purpose of making or earning an income that the expenditure was bona fide expenditure is not in dispute..'
8. In view of the finding of the Tribunal, we do not think that this second contention is open to Mr. Kaji. The second contention is also, therefore, rejected.
9. In the result, we answer the question referred to us in favour of the assessee as under :
On the facts and in the circumstances of the case, the sum of Rs. 8,750 paid by the assessee to M/s Pari Bechardas Ambaidas should be excluded for the purpose of finding out the difference between the assessed income and the returned income under the Explanation to section 271(1)(c) of the Income-tax Act, 1961.
10. The Commissioner shall pay the costs of this reference to the assessee.