1. The facts giving rise to this reference are, shortly stated, as under :
The assessee is a registered firm, for the assessee year 1967-68 ; it made a return of income of Rs. 25,854. According to s. 139(1) the said return should have been filed by August 15, 1967. The ITO, in the course of the assessment, was of the opinion that the closing stock was not properly valued and he, therefore, made an addition on that count and assessed the assessee on the total income of Rs. 69,080. The ITO directed the issuance of a notice, for the late submission of the return of income, under s. 271(1)(a) of the I.T. Act, 1961. In reply to the show-cause notice, the assessee, inter alia, stated that since the income returned for the assessment year in question was only Rs. 25,854, which was below the limit prescribed under s. 271(3) of the Act for levying a penalty, no notice for an initiation of penalty proceedings was competent. The assessee further contended that it was only on account of the substantial addition made by the ITO that the assessee's default to file the return was aggravated and, therefore, there was a genuine cause for not filing the return which was filed on being appraised of the correct position in law. The ITO, however, rejected the contention that since the valuation of the closing stock had been accepted by the assessee there was no justification for the filing of the return of income so late. He, therefore, levied a penalty of Rs, 15,090 under s. 271(1)(a) of the Act.
2. The assessee, therefore, carried the matter in appeal which did not find favour with the AAC. The assessee, therefore, carried the matter in further appeal before the Tribunal. It was, inter alia, contended before the Tribunal that since the business of the assessee-firm was the purchase and sale of land, the assessee valued the closing stock at the end of the previous year, relevant to the assessment year in question, on the balance of the land at 60 paise per sq. yard which was the ruling market price then, and the assessee relied in that behalf on the certificate from the registered valuer, one Shri N.B. Patel. He also urged that the quality of the land which remained with him at the end of the previous year relevant to the assessment year in question was such that the valuation was justified. On behalf of the Department, the Tribunal's attention was invited to the decision of the Kerala High Court in CIT v. Gujarat Travancore Agency : 103ITR149(Ker) . The Tribunal rejected the contentions of the assessee since no material regarding the reasonable cause about the late submission of the return had been produced by the assessee. The Tribunal observed as under in para. 9 of its order rejecting the appeal :
'5. No doubt the penalty proceedings are quasi-criminal but the material regarding reasonable cause has to come from the assessee in the first instance. The assessee's reply to the show-cause notice, according to out thinking, does not bring out any reasonable cause. Considering all these aspects, we do not see any substance in the assessee's appeal.'
3. The assessee, therefore, moved the Tribunal for a reference and one of the questions submitted by the assessee for the reference to this court was in the following terms :
'Whether, on the facts and in the circumstances of the case, the Tribunal was justified in placing the burden of proof on the assessee to prove that the failure to furnish the return was with reasonable cause within the meaning or section 271(1)(a) of the Income-tax Act, 1961 ?'
4. The Tribunal, however, was of the view that the questions suggested by the assessee required to be reframed so as to bring out the controversy between the parties. The Tribunal, therefore, reframed the questions and has referred them to us for our opinion. The questions are in the following terms :
'1. Whether the Tribunal was justified in holding that in proceedings for penalty under section 271(1)(a) material regarding reasonable cause has to come from the assessee in the first instance
2. Whether, on the facts and in the circumstances of the case, the Tribunal was correct in holding that the total income contemplated in section 271(1)(a) was the total income as defined under section 2(45) of the I.T. Act and as worked out under the Act ?'
3. Whether, on the facts and in the circumstances of the case, the Tribunal was justified in holding that imposition of penalty under section 271(1)(a) was justified ?'
5. We are of the opinion that this reference should be accepted and questions Nos. 1 and 3, which are material questions, should be answered in favour of the assessee and against the Revenue, obviously for the reasons which follows hereunder presently.
6. It should be noted at the outset that the Tribunal had not the benefit of the decision of a Full Bench of this court in Addl. CIT v. I. M. Patel & Company : 107ITR214(Guj) , when it rejected the appeal of the assessee. The Full Bench of this court has considered the question as to whether the absence of a reasonable cause for a failure to file a return is an ingredient of the offence and, therefore, the burden of proof is on the Revenue or whether it is an extenuating circumstance which can be pleaded by way of defence of the assessee for his default in filing the return in time. The Full Bench was concerned in I.M. Patel's case : 107ITR214(Guj) , with penalty proceedings initiated under s. 271 of the I.T. Act, 1961. In that context the Full Bench ruled as under (Headnote) :
'Whenever a statute defines an offence and provides a punishment for it, it is for the prosecution to prove all the ingredients of the offence. In penalty proceedings under section 271(1)(a) of the Act, the assessee upon whom the penalty is sought to be imposed is in the position of an accused in a criminal trial and, therefore, all the ingredients of the offence for which the penalty can be imposed must be established by the Revenue. It is from this aspect that one has to consider the question whether the words 'failure without reasonable cause' in section 271(1)(a) constitutes an ingredient of the offence or not. Looking to the wording of the section and on a plain reading of section 271(1)(a) it is obvious first that the failure to file the return may be with reasonable cause or without reasonable cause, but the offence for the which the penalty is imposable is failure without reasonable cause to file the return within the time specified in the section and, therefore, it is for the Revenue to establish as an ingredient that the failure in the particular case was without reasonable cause. Once the Department has discharged that initial burden, it will be for the assessee to show that there was reasonable cause on his part in failing to furnish the return in time. On the principles underlying section 106 of the Evidence Act, since the facts which constitute a reasonable cause are specially within the knowledge of the assessee it will be for him to establish those facts, but the Department must first lead evidence which would go to show, prima facie, that the assessee had no reasonable cause in failing to file the returns within the time specified. Mere failure to file the return within the time without anything more will not expose the assessee to penalty. Mere falsity of the explanation on the part of the assessee is not enough to constitute an offence under the section. In view of the decisions of the Bombay High Court in Commissioner of Income-tax v. Gokuldas Harivallabhdas : 34ITR98(Bom) , and of the Supreme Court in Commissioner of Income-tax v. Anwar Ali : 76ITR696(SC) , it is clear that the burden of proving all the ingredients of the offence is upon the Department and if the Department fails to lead any evidence on the point, besides merely pointing out that there was failure to furnish the returns within time, the Department would fail so far as the penalty proceedings under section 271(1)(a) are concerned.
Therefore : (1) Under section 271(1)(a) of the Act, failure 'without reasonable cause' to furnish the return is an ingredient of the offence. (2) Section 271(1)(a) provides for penalty in cases where the assessee has either acted deliberately in definance of law or was guilty of conduct, contumacious or dishonest, or acted in conscious disregard of his obligation. (3) The legal burden is on the Department to establish by leading some evidence that prima facie the assessee has without reasonable cause failed to furnish the return within the time specified in section 271(1)(a) read with the other relevant sections referred to in that section. Once this initial burden, which may be slight, has been discharged by the Department, it is for the assessee to show, as in a civil case, on a balance of probabilities, that he had reasonable cause for failing to file the return within the time specified. (4) Mere falsity of the explanation furnished by the assessee cannot help the Department in establishing its case against the assessee at the time of imposition of penalty.'
7. In view of this settled legal position so far as this court is concerned, we do not think that the Tribunal was justified in upholding the penalty on the ground that the material regarding reasonable cause had to come from the assessee in the first instance. The Tribunal has, therefore clearly committed an error of law in placing the burden of proof upon the assessee and if the Tribunal has wrongly placed the burden of proof on the assessee where it does not lie, the conclusion is inescapable that the order made in pursuance of such a wrong onus of proof would be vitiated. On that count alone, the order of penalty was not sustainable.
8. We have also examined as to whether, on the facts and in the circumstances of the case, the Tribunal was justified in holding that the imposition of penalty under s. 271(1)(a) was justified . In the first place it should be noted that the contention of the assessee in his explanation to the showcause notice for the initiation of penalty proceedings was, inter alia, that in the case of a registered firm unless the income is to the tune of Rs. 26,500, no penalty could have been levied in view of s. 271(1)(a) of the ACT and the income which was returned by the assessee was only Rs. 25,854. It is not doubt true that the ITO has assessed him in the total income of Rs. 69,080 by making an addition of Rs. 43,006, being under valuation of the closing stock. The Tribunal, however, overlooked the fact that the addition which has been made by the ITO in the course of the assessment on account of under valuation of the closing stock, could not have been a fact to the knowledge of the assessee and, therefore, not filing a return on the basis of the income which he believed to be true would (not ?) expose him to the penalty proceedings as a result thereof. It should be recalled that even the ITO had resorted merely to the provisions contained in s. 271(1)(a) for purposes of initiation of the penalty proceeding and he has not resorted to s. 271(1)(c). It, therefore, cannot be urged successfully that the assessee, in not filing the return on the due date acted without bona fide.
9. In CIT v. N. Khan and Brothers : 92ITR338(All) , the Allahabad High Court held that the return of income contemplated under s. 139(1) is that income which the assessee believed to be his income and not be income as finally assessed by the ITO. We are, therefore, of the opinion that having regard to these two significant facts, namely, (1) the assessee believed it bona fide that since its income was to the tune of Rs. 25,854 it was not necessary for it to file the return on the due date ; and (2) the addition had been made by the ITO on account of a difference in the valuation according to the ITO, of the closing stock of the land, the Tribunal was not justified in concluding that the assessee was liable to be penalised.
10. In that view of the matter, therefore, question No. (3) also must be answered in the negative.
Question No. (2), in our opinion, therefore, would not be necessary to be answered.
11. The result is that this reference should be accepted by answering questions Nos. (1) and (3) in the negative, that is, in favour of the assessee and against the Revenue. Question No, (2) does not require to be answered at all. The Commissioner shall pay costs of this reference to the assessee.