P.D. Desai, J.
1. The assessee is a registered firm which carries on business as a dealer in radio and radio accessories. In the course of proceedings for assessment to income-tax for the assessment year 1965-66, corresponding accounting year being calendar year 1964, the ITO found various cash credits in its books of account amounting to Rs. 35,459. As the assessee failed to satisfactorily explain the nature and source of the said cash credits, the ITO brought to tax the said amount as the assessee's income from undisclosed sources. The ITO also initiated action for levy of penalty for concealment of such income by giving the following directive :
'Also issue show-cause notice for concealment of income.'
2. As, however, the minimum penalty imposable exceeded a sum of Rs. 1,000, the ITO referred the case to the IAC. Before the penalty proceedings reached hearing before the IAC, the appeal preferred by the assessee, against the assessment order passed by the ITO, before the AAC was decided and the AAC deleted an amount of Rs. 10,750 out of the sum of Rs. 36,459 which was added on account of unexplained cash credits by the ITO.
3. The IAC, in the course of the penalty proceedings, was of the view that the assessee's case was governed by the substantive provision of Section 271(1)(c) of the I.T. Act, 1961, and, in the alternative, that it was also covered by Section 271(1)(c) read with the Explanation to the said section as the income returned was less than 20% of the assessed income. In the light of the said findings, the IAC imposed a penalty in the sum of Rs. 40,190.
4. The assessee feeling aggrieved by the decision of the IAC preferred an appeal before the Tribunal. The Tribunal took the view that the IAC erred in levying penalty on the basis of Section 271(1)(c) read with the Explanation. The view of the Tribunal was that having regard to the decision in D.M. Manasvi v. CIT : 86ITR557(SC) and CIT v. A.K. Das : 77ITR31(Cal) , the satisfaction in penalty proceedings was required to be that of the ITO and not that of the IAC and that, therefore, the levy of penalty by the IAC on a conjoint reading of Section 271(1)(c) and the Explanation was unsustainable inasmuch as the ITO was not shown to have been satisfied with regard to concealment of income by the assessee as per the provisions of Section 271(1)(c) read with the Explanation. As regards the levy of penalty under the substantive provision of Section 271(1)(c), the Tribunal opined that in view of the decision of the Supreme Court in CIT v. Anwar Ali : 76ITR696(SC) on the basis merely of the addition of certain amount reflected in cash credits, the nature and source of which was not satisfactorily explained, no penalty could have been levied under Section 271(1)(c). In the light of these findings, the Tribunal set aside the penalty order passed by the IAC.
5. The revenue, aggrieved by the decision of the Tribunal, preferred an application under Section 256(1) for stating a case to this court. The Tribunal, however, rejected the said application on the ground that no question of law arose out of its order. The revenue thereupon moved this court under Section 256(2) and the Tribunal was directed to refer to this court the following question of law :
'Whether, on the facts and in the circumstances of the case, the Tribunal was justified in law in finding that the levying of penalty by the Inspecting Assistant Commissioner relying on the Explanation to Section 271(1)(c) was unsustainable ?'
6. It would appear from the frame of the question that a limited controversy arising out of the order of the Tribunal is brought before this court, namely, whether the Tribunal's view that since the satisfaction in penalty proceedings is the satisfaction of the ITO and not that of the IAC, it was not open to the IAC, in the instant case, to levy penalty under Section 271(1)(c) read with the Explanation inasmuch as the ITO had not recorded a satisfaction with regard to the applicability of the Explanation in the facts and circumstances of the case, is correct in law. Since the Tribunal has not gone into the question of the applicability of the Explanation in the facts of the present case on merits, we are not called upon to examine that aspect of the matter nor is the decision of the Tribunal that the levy of penalty under the substantive provision of Section 271(1)(c) was not justified in the facts of the case, is brought in challenge before this court and even on that point, therefore, we are not required to express any opinion.
7. In order to appreciate the point which arises for determination, it would be necessary first to read the relevant provisions as they stood at the material time. The material part of Section 271(1), as it stood during the relevant assessment year, was as under:
'271. (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,--......... (iii) in the cases referred to in Clause (c), in addition to any tax payable by him, a sum which shall not be less than twenty per cent. but which shall not exceed one and a half times the amount of the tax, if any, which would have been avoided if the income as returned by such person had been accepted as the correct income.'
8. Then, there is the Explanation to Section 271(1)(c), which was introduced by the Finance Act, 1964, which at the material time read as follows:
'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 144 or 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 gress 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.'
9. Under Section 274(1) no order imposing a penalty under Chap. XXI could be made unless the assessee had been heard or had been given a reasonable opportunity of being heard. Under Section 274(2), which has since been deleted by the Taxation Laws (Amendment) Act, 1975, but which was at the material time in the statute book, notwithstanding anything contained in Clause (iii) of Sub-section (1) of Section 271, if in a case falling under Clause (c) of that sub-section, the minimum penalty imposable exceeded a sum of Rs. 1,000, then, the ITO was required to refer the case to the IAC who was to have, for the purpose, all the powers conferred under the said Chapter for the imposition of penalty.
10. Now, it is beyond the pale of controversy, having regard to the opening part of Section 271(1), that it is the ITO or the AAC who has to be prima facie satisfied, in the course of any proceedings under the Act, that any person has concealed the particulars of his income and it is upon such prima facie satisfaction that he has to initiate proceedings for levy of penalty. Once the proceedings are initiated and the person concerned has been heard or has been given a reasonable opportunity of being heard and the ITO or the AAC is duly satisfied about the concealment of the particulars of income, he can proceed to impose penalty as prescribed in Clause (iii) of Sub-section (1) of Section 271. In certain class of cases covered by Section 274(2), however, the ITO has no power to impose penalty and in such cases, having initiated the proceedings for penalty, the ITO has to refer the case to the IAC who shall, for the purpose, have all the powers 'in respect of the imposition of penalty. Even in such a case, however, it is only upon the prima facie satisfaction of the ITO that the proceedings for imposition of penalty could be initiated.
11. In D.M. Manasvi's case : 86ITR557(SC) , the Supreme Court had an occasion to consider the provisions of Section 271(1)(c) and this is what is observed in that context (pp. 562, 563):
'The proceedings for the imposition of penalty in terms of Sub-section (1) of Section 271 have necessarily to be initiated either by the Income-tax Officer or by the Appellate Assistant Commissioner. The fact that the Income-tax Officer has to refer the case to the Inspecting Assistant Commissioner if the minimum imposable penalty exceeds the sum of rupees one thousand in a case falling under, Clause (c) of Sub-section (1) of Section 271 would not show that the proceedings in such a case cannot be initiated by the Income-tax Officer. The Income-tax Officer in such an event can refer the case to the Inspecting Assistant Commissioner after initiating the proceedings. It would, indeed, be the satisfaction of the Income-tax Officer in the course of the assessment proceedings regarding the concealment of income which would constitute the basis and foundation of the proceedings for levy of penalty...It may also be observed that what is contemplated by Sections 271 and 274 of the Act is that there should be, prima facie, satisfaction of the Income-tax Officer or the Appellate Assistant Commissioner in respect of matters mentioned in Sub-section (1) before he hears the assessee or gives him an opportunity of being heard. The final conclusion on the point as to whether the requirements of Clauses (a), (b) and (c) of Section 271(1) have been satisfied would be reached only after the assessee has been heard or has been given a reasonable opportunity of being heard.'
12. It would thus appear that the Tribunal was right, in so far as it took the view, that the prima facie satisfaction for initiation of penalty proceedings even in cases covered by Section 274(2) is the satisfaction of the ITO and not that of the IAC. The question, however, is whether the Tribunal was not satisfied in the present case on account of the fact that whereas at the stage of the initiation of the penalty proceedings the ITO was prima facie satisfied with regard to concealment of income in terms of the substantive provision of Section 271(1)(c), the IAC reached the conclusion, inter alia, that there was concealment of income within the meaning of Section 271(1)(c) with the aid of the Explanation The Tribunal appears to have proceeded on the view that unless the ITO himself was prima facie satisfied that this was a case in which there was concealment of income within the meaning of Section 271(1)(c) read with the Explanation, the IAC could not have arrived at such a conclusion in the course of the penalty proceedings, for, the satisfaction at which he thus arrived finally was at variance with the prima facie satisfaction arrived at by the ITO at the stage of the initiation of proceedings, which it was not open to him to do. The question, then, is whether this view of the Tribunal is justified in law.
13. The reasoning underlying the Tribunal's decision, though it has not expressed itself in so many words, is that the concealment of income within the meaning of Section 271(1)(c) read with the Explanation is a different kind of concealment substantively provided for by the Legislature than the concealment contemplated by the provisions of Section 271(1)(c) standing by themselves and that, therefore, unless the ITO at the stage of initiation of penalty proceedings was prima facie satisfied that this distinct kind of concealment separately provided for was present in the facts and circumstances of the case, the IAC to whom the case came to be referred under Section 274(2) could not possibly arrive at such a conclusion. This immediately raises the question as to the true nature and character of the Explanation and as to whether it enacts a rule of substantive law or whether it is merely a rule of evidence. If the Explanation enacts a rule of substantive law, then, there is no manner of doubt that the IAC could not have invoked its aid unless the ITO at the stage of initiation of the penalty proceedings had been prima facie satisfied about the applicability of the Explanation in the facts and circumstances of the case. If, however, the Explanation enacts a mere rule of evidence and merely shifts the burden of introducing evidence as to the proof of the ingredients of Section 271(1)(c) on the assessee in the case covered by it, then, the Tribunal must be held to have fallen into an obvious error in holding that the ITO was required to be satisfied even about the applicability of the Explanation in the circumstances of the case inasmuch as it was the function of the IAC to reach the final conclusion on the question of concealment by the application of a rule of evidence which formed part of procedural law.
14. The real question which, therefore, arises for determination is whether the Explanation enacts a rule of substantive law or a rule of evidence and it is to that question that we must address ourselves. Before we do so, however, we would always keep the provisions of the Explanation in the background of the well-settled legal position in connection with penalty proceedings.
15. The Supreme Court in Anwar Ali's case : 76ITR696(SC) made the following observations in the context of proceedings under Section 28 of the Indian I.T. Act, 1922, which, as regards the nature and character of the proceedings, must apply with equal force to proceedings under Section 271(1) (pp. 700, 701):
'The first point which falls for determination is whether the imposition of penalty is in the nature of a penal provision... ...The section is penal in the sense that its consequences are intended to be an effective deterrent which will put a stop to practices which the legislature considers to be against the public interest......It appears to have been taken as settled by now in the sales tax law that an order imposing penalty is the result of quasi-criminal proceedings (Hindustan Steel Ltd. v. State of Orissa : 83ITR26(SC) ). In England also it has never been doubted that such proceedings are penal in character. (Fattonni (Thomas) (Lancashire) Ltd, v. Inland Revenue Commissioners  AC 643;  11 ITR (Supp) 50 )... ...the burden is on the department to prove that a particular amount is a revenue receipt. It would be perfectly legitimate to say that the mere fact that the explanation of the assessee is false does not necessarily give rise to the inference that the disputed amount represents income. It cannot be said that the finding given in the assessment proceedings for determining or computing the tax is conclusive. However, it is good evidence. Before penalty can be imposed the entirety of circumstances must reasonably point to the conclusion that the disputed amount represented income and that the assessee had consciously concealed the particulars of his income or had deliberately furnished inaccurate particulars.'
16. It may be noted that in the aforesaid decision, the Supreme Court spoke of conscious concealment of the particulars of income and deliberate furnishing of inaccurate particulars of income and held that before penalty could be imposed, the entirety of circumstances must reasonably point to the conclusion not only that the disputed amount represented income of the assessee (the burden of proving which fact was on the department) but also that the default of the assessee consisted of such type of concealment or furnishing of inaccurate particulars. The word 'conscious' was not to be found in Section 28 but the word 'deliberately' did find place in the said section. Still, however, the Supreme Court spelt out from the expression 'concealed' the requirement of conscious concealment having regard to its etymology and the context in which it was used and held that it was that ingredient which was required to be established before an assessee could be penalized under Section 28 of the old Act. When the present Act was enacted, Section 271(1)(c) was re-enacted verbatim without any change or modification. However, by the Finance Act, 1964, two changes were brought about, so far as Section 271(1)(c) is concerned; first, the word 'deliberately' preceding the expression 'furnished inaccurate particulars of such income' was deleted and, secondly, the Explanation was added. The word 'concealed' was retained as it was. The position at the material time, therefore, was that so far as the first part of Section 271(1)(c) is concerned, no legislative change was effected therein which would straightaway undermine the ratio of the decision in Anwar Ali's case : 76ITR696(SC) . As to what the effect of the enactment of the Explanation is, is a matter to which we will presently address ourselves. Whether the legislative change which was effected by the deletion of the word 'deliberately' affected in any manner the ratio of the decision in Anwar Ali's case : 76ITR696(SC) , so far as it related to the second, part of Section 271(1)(c) is concerned, is a matter with which we are not concerned in this proceeding and on which we wish to express no opinion. It is against this background that we must examine the terms of the Explanation.
17. This court in CIT v. S.P. Bhatt : 97ITR440(Guj) had an occasion to construe the Explanation. It was there observed that the Explanation, which was enacted in the context of a highly penal provision, added to its rigour and that, therefore, its scope and ambit should not be so enlarged as to bring in every possible case within it. The Explanation was required to be construed in a fair and reasonable way with a view to achieving the purposes of the main provision, namely, that an assessee who has concealed the particulars of his income of 'furnished inaccurate particulars of such income should not escape penalty. This court then proceeded to observe (pp. 445, 446):
'The Explanation creates a legal fiction if the condition of its applicability is satisfied. The condition is an objective condition, namely, that the total income returned by the assessee should be less than eighty per cent. of the total income assessed subject to a certain reduction which is not material for our purpose...... The Explanation raises a legal fiction and the assessee is straightaway brought within the ambit of Section 271(1)(c). It is then not necessary for the revenue to show affirmatively by: producing the material that the assessee has in fact concealed the particulars of his income or furnished inaccurate particulars of such income. The fact of the total returned income being less than eighty per cent. of the total income assessed is sufficient to bring the assessee within the penal provision enacted in Section 271(1)(c). That is achieved by the legal fiction enacted in the Explanation, But, this legal fiction can be displaced if the assessee proves that the failure to return the correct income, that is the total income assessed, did not arise from any fraud or gross or wilful neglect on his part. If the assessee wants to repel the legal fiction and throw the burden of bringing the case within Section 271(1)(c) again on the revenue, as it would be in the absence of the Explanation, the assessee has to show--and this burden is upon him--that his failure to return the correct income did not arise from any fraud or gross or wilful neglect on his part. Now, this burden is not of the same nature as the burden which rests on the prosecution in a criminal case where the prosecution has to establish the guilt of the accused beyond reasonable doubt nor is it of the same nature as the burden which lies upon the revenue in establishing that the assessee has concealed the particulars of his income or furnished inaccurate particulars of such income. It is a burden akin to that in a civil case where the determination is made on preponderance of probabilities. It is also not necessary, that any positive material should be produced by the assessee in order to discharge this burden which rests upon him. The assessee may claim to have discharged the burden by relying on the material which is on record in the penalty proceedings, irrespective of whether it is produced by him or by the revenue......
If the material on record in the penalty proceedings fairly and reasonably leads to the inference that there was no fraud or gross or wilful neglect on the part of the assessee in not returning the total assessed income, it would almost be impossible for the revenue to contend, that the assessee has concealed the particulars of his income or furnished inaccurate particulars of such income so as to attract the applicability of Section 271(1)(c) on its own terms independently of the Explanation.'
18. These observations clearly indicate the true nature and scope of the Explanation, and they tend to suggest that the Explanation does not affect the content or structure of the offence or the ingredients of the offence and that all that it does is to lay down a mere rule of evidence for the proof of the default which is sought to be penalised by Section 271(1)(c). The observations clearly bring forth the point that by the enactment of the Explanation and the creation of a legal fiction therein, on the fulfilment of its terms, the assessee is deemed to have committed the default sought to be penalized by Section 271(1)(c) and that the fiction can be displaced if the assessee proves that the failure to return the correct income did not arise from any fraud or gross or wilful neglect on his part. It is true that the attention of this Court was not directed in S.P. Bhatt's case : 97ITR440(Guj) precisely on the question whether the Explanation enacts a rule of evidence or a rule of substantive law. However, the observations, which this court has made, while construing the terms of the said Explanation, and on the true construction of which alone the question as to the true nature and content of the Explanation can be determined, clearly point in the direction that the Explanation is really a rule of evidence and not a rule of substantive law. We shall not, however, rest our decision merely on what has been observed in S.P. Bhatt's case : 97ITR440(Guj) and shall independently proceed to examine the question under consideration.
19. As to when a particular provision can be treated as a rule of substantive law or rule of evidence is a matter which is no longer in doubt or debate. In Izhar Ahmad Khan v. Union of India : AIR1962SC1052 , Gajendragadkar J., as he then was, speaking for the majority, examined this question in the context of Rule 3, Schedule 3 of the Citizenship Rules, 1956, which were enacted under Section 9(2) of the Citizenship Act, 1955. Section 9(2) of the said Act empowered the competent authority to enact rules of evidence, having regard to which any question as to whether, when or how any person has acquired the citizenship of another country, was to be determined and, under the powers so conferred, the Central Government enacted Rule 3 which provided that the fact that a citizen of India has obtained on any date a passport from the Government of any other country shall be conclusive proof of his having voluntarily acquired the citizenship of the country before that date. The argument before the Supreme Court inter alia, was that whereas Section 9(2) authorised the Central Govt. to prescribe rules of evidence subject to which the relevant inquiry could be held, what the Central Govt. had purported to do in framing Rule 3 was to enact a rule of substantive law. Gajendragadkar J. referred to varying opinions of different jurists on the question as to when a provision can be said to be a rule of substantive law or rule of evidence and made the following pertinent observations expressing the view of the court on the subject (p. 1062):
'It is conceded, and we think, rightly that a rule prescribing a rebuttable presumption is a rule of evidence. It is necessary to analyse what the rule about the rebuttable presumption really means. A fact A which has relevance in the proof of fact B and inherently has some degree of probative or persuasive value in that behalf may be weighed by a judicial mind after it is proved and before a conclusion is reached as to whether fact B is proved or not. When the law of evidence makes a rule providing for a rebuttable presumption that on proof of fact A, fact B shall be deemed to be proved unless the contrary is established, what the rule purports to do is to regulate the judicial process of appreciating evidence and to provide that the said appreciation will draw the inference from the proof of fact A that fact B has also been proved unless the contrary is established. In other words, the rule takes away judicial discretion either to attach the due probative value to fact A or not and requires prima facie the due probative value to be attached in the matter of the inference as to the existence of fact B, subject, of course, to the said presumption being rebutted by proof to the contrary.'
20. The learned judge then referred to certain observations of Thayer in his book, A Preliminary Treatise on Evidence at the Common Law, and proceeded to state :
'According to the same author, legal presumptions of the rebuttable kind are definitions of the quantity of evidence or the state of facts sufficient to make out a prima facie case ; in other words, of the circumstances under which the burden of proof lies on the opposite party. Thus, the rule of rebuttable presumption adds statutory force to the natural and inherent probative value of fact A in relation to the proof of the existence of fact B and in adding this statutory value to the probative force of fact A, the rule, it is conceded, makes a provision within the scope and function of the law of evidence.'
21. The learned judge then proceeded to consider the question as to the nature and character of conclusive presumptions and ultimately recorded the view of the majority of the court in the following words (at p. 1063):
'If fact A is inherently relevant in proving the existence of fact B andto any rational mind it would bear a probative or persuasive value in thematter of proving the existence of fact B, then a rule prescribing either arebuttable presumption or an irrebuttable presumption in that behalf wouldbe a rule of evidence. On the other hand, if fact A is inherently not relevant in proving the existence of fact B or has no probative value in thatbehalf and yet a rule is made prescribing for a rebuttable or an irrebuttable presumption in that connection, that rule would be a rule of substantive law and not a rule of evidence. Therefore, in dealing with the questionas to whether a given rule prescribing a conclusive presumption is a ruleof evidence or not, we cannot adopt the view that all rules prescribingirrebuttable presumptions are rules of substantive law. We can answer the question only after examining the rule and its impact on the proof of facts A and B.'
22. This decision throws a flood of light on the approach which we must adopt in determining whether the Explanation, which raises a rebuttable presumption, is a rule of evidence or a rule of substantive law. It would appear that so far as the rule prescribing a rebuttable presumption is concerned it was conceded in that case, and the Supreme Court observed that it was rightly conceded, that such a rule is a rule of evidence. It would thus appear to be a principle of law of universal application in respect of all rebuttable presumptions that ordinarily such presumptions fall within the realm of the rule of evidence. No further inquiry is, therefore, necessary at all into the question whether the Explanation, which merely raises a rebuttable presumption in the instant case, is a rule of evidence or not. We would, however, still like to examine the question in some greater detail and to reach our conclusion on this point on independent examination and upon application of the test indicated by the Supreme Court in the said decision.
23. The Explanation consists of two parts. The first part sets out the facts which, if proved, give rise to a rebuttable presumption. It provides, in order to raise the presumption, that the case must be one where the total income returned by any person is less than eighty per cent. of the total income as assessed under Section 143 or Section 144 or 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). If these facts are shown to exist, a presumption would be raised that such person shall be deemed to have concealed the particulars of his income or furnished inaccurate particulars of such income for the purpose of Clause (c) of Section 271(1). This presumption would of course be a rebuttable presumption and it would be open to such person to establish that despite there being a difference of more than twenty per cent. between the income returned and the income assessed (such difference having been arrived at in the manner indicated in the first part of the Explanation), the failure to return the correct income did not arise from any fraud or gross or wilful neglect on his part. It is only if he fails to discharge the burden of displacing the presumption in the manner aforesaid on the basis of preponderance of probabilities by leading evidence or by relying on the material which is already on record that the penalty under Section 271(1)(c) for concealment of income would be attracted.
24. The question which then falls for consideration is whether the fact that there is a difference of more than twenty per cent. in the income returned and the total income as assessed under the various provisions of the Act (as reduced in the manner provided in the Explanation) is a fact inherently relevant in proving the fact of concealment of particulars of income for the purposes of Section 271(1)(c) and whether such fact would bear to a rational mind a probative or persuasive value in the matter of proving the factum of concealment of particulars of income. In answering this question, certain considerations have to be borne in mind.
25. In the first place, Section 139(1) of the Act provides for furnishing a return of income 'in the prescribed form and verified in the prescribed manner'. Similar provision is also made in Section 139(2) and (3). Sub-rule (1) of Rule 12 of the I.T. Rules, 1962, provides that the return of income required to be furnished under Sub-sections (1), (2) and (3) of Section 139 shall be in the prescribed form applicable to the class of the assessee concerned and be verified in the manner indicated therein. For persons other than companies return of income was required to be furnished at the material time in Form No. 2 and one finds that there is a verification clause in such form which requires the person furnishing the return to declare that 'to the best of my knowledge and belief the information given in this return and the annexures and statements accompanying it is correct and complete, that the amount of total income and other particulars shown are truly stated and relate to all the previous years relevant to the assessment year commencing on the 1st day of April, 19....' There is also a further declaration to be made to the effect that 'no other income accrued or arose to or was received by me/the family/the firm/the co-operative society/the association of persons/ the body of individuals/the local authority during the said previous years' and that such person or persons had no other source of income. Similar verification clause is also to be found in all other prescribed forms of return of income. Under Section 277, false statement in any verification under the Act or any rule made thereunder, which the person verifying knows or believes to be false, or does not believe to be true, is made punishable. Be it noted that in the prescribed form of return of income itself there is a note appended which requires the signatory to satisfy himself that the return was correct and complete in every respect and warns such person that any false statement in the return would attract punishment under Section 277. Be it noted also that the liability to prosecution under Section 277 is independent of or in addition to the liability of penalty in the proceedings under Section 271(1)(c). Ordinarily, a person, who has to furnish a return of income under such statutory requirement and face such statutory consequences in case the information furnished in the return is found to be false, is expected to be, and in all probability would be, extremely careful. Except for marginal difference creeping in on account of bona fide mistakes or difference arising out of genuine doubt as to taxability, there would not be any scope for a substantial variation as between the income returned and income assessed. The difference of more than 20% between the income returned and the income assessed, which is more than one-fifth of the assessed income, cannot be said to be insubstantial. All marginal differences or differences arising out of doubtful claims or contentions would ordinarily be covered within the margin of 20%. This is all the more so because, in terms of the Explanation, the income assessed, which has to be taken into account for the purpose of computing the difference of more than 20%, is different from the total income as assessed under the various provisions of the Act. The income assessed within the meaning of the Explanation is such total income minus the expenditure incurred bona fide by the assessee for the purpose of making or earning any income included in the total income but which has been disallowed as a deduction. If all these considerations are borne in mind, it would appear that the fact that there is a difference of more than 20% between the income returned and the income assessed is a fact which can be generally treated as inherently relevant in proving concealment of income and it can be said to have, for a rational mind, a probative or persuasive value in the matter of the proof of such concealment.
26. In the next place, one cannot lose sight of the fact that the circumstances under which and the reasons for which such difference in the returned income and assessed income has occurred is a matter within the knowledge of the assessee himself and evidence as to which would be only in his own power to produce. It would be exceedingly difficult, if not impossible, for the department to prove facts which are specially within the knowledge of the assessee and, therefore, in the absence of any explanation from the assessee as to why such difference has occurred, the very fact of the occurrence of such difference could legitimately be considered as inherently relevant in the matter of proof of concealment of income. True it is that the burden of proving concealment is on the department. But two kindred principles, no less fundamental, have to be borne in mind in appreciating the scope and nature of the onus cast on the department. First, that the department is not expected to prove its case with mathematical precision to a demonstrable degree and, secondly, that the sufficiency or weight of the evidence is to be considered according to the proof which it was in the power of the department to produce and in the power of the assessee to have contradicted. The burden to establish those facts which contradict the suspicious circumstances giving rise to a prima facie presumption of guilt is on the assessee and his failure to explain might lead to an adverse inference (See Collector of Customs v. D. Bhoormull : 1975CriLJ545 ). Therefore, even if such a presumption had not been statutorily raised, in cases where the assessee failed to explain such difference, the department could have urged with some force that it would be rational to found upon such circumstance a conclusion as to concealment of income within the meaning of Section 271(1)(c).
27. It would thus appear that all that the Explanation does is to put upon the shoulders of the assessee, in whose case such difference is found, the burden of introducing evidence, in the face of circumstances which raise considerable suspicion, with a view to rendering an explanation, which might reconcile such suspicious appearance with perfect innocence. The burden of introducing such evidence is put on the shoulders of the assessee since it is a matter within his own knowledge and evidence as to which is in his own power to produce. Such a statutory provision raising a rebut-table presumption must necessarily fall within the realm of a rule of evidence and not a rule of substantive law, as per the test laid down in Izhar Ahmad's case : AIR1962SC1052 .
28. On behalf of the assessee, however, it was strenuously contended that there were two good reasons why the Explanation should be treated as enacting a rule of substantive law. It was urged, first, that the fact that there is a difference of more than twenty per cent. in the income returned and the income assessed is not a fact which is inherently relevant in proving concealment of income within the meaning of Section 271(1)(c) in each and every case which might come up before the income-tax authorities and that, therefore, the test laid down in Izhar Ahmad's case : AIR1962SC1052 , could not be said to have been satisfied and, secondly, that the Explanation creates a totally different kind of default from that contemplated by Section 271(1)(c) inasmuch as it affects the content and structure of the offence and the ingredients of the default of concealment as understood in the context of Section 271(1)(c) and that, therefore, the Explanation also should be treated as a rule of substantive law. We are unable to persuade ourselves to accept this submission for the reasons which follow.
29. It is in a way true that as to what will amount to concealment within the meaning of Section 271(1)(c) will depend on the facts and circumstances of each case and that, therefore, the fact that there is a difference of more than twenty per cent. between the income returned and the income assessed may not necessarily lead to the conclusion of concealment of income in all cases. We are not prepared to hold, however, that the test laid down in Izhar Ahmad's case : AIR1962SC1052 , must be satisfied in relation to each and every conceivable or hypothetical case which may arise for consideration. No such test laid can be held, to be satisfied only if it is of universal application. If, by and large, the test is found to be applicable in relation to the cases which are intended to be covered by the statute under consideration, then, such statute will ordinarily have to be held as having satisfied the test. One cannot overlook, when the said test is being applied, as to which cases the statute under consideration covers. In a case like the present, where the Explanation governs cases in which, having regard to the circumstances aforementioned, a prima facie presumption as to concealment of income can even ordinarily be raised in the absence of any explanation from the assessee, it would be futile to urge that the test is not satisfied. The argument urged on behalf of the assessee, therefore, that the Explanation should not be treated as a rule of evidence on the ground aforesaid, cannot be accepted.
30. The further submission of the assessee that the Explanation should be treated 'as a rule of substantive law because it affects the ingredients of or the structure and content of the penal default prescribed in Section 271(1)(c) is equally groundless. The submission was founded on two grounds: first, that the first part of the Explanation, while prescribing the formula for computing the difference of more than twenty per cent. takes into account assessed income which is given an artificial meaning and, secondly, that a case of gross neglect, which the Explanation seeks to bring within the concept of concealment, is not ordinarily comprehended therein inasmuch as failure to return the correct income in good faith, that is to say, honestly, though negligently, cannot be treated as conscious concealment. Reliance was placed in this connection on the definition of 'good faith' contained in Section 3(22) of the General Clauses Act, 1897.
31. Now, so far as the first prong of this argument in concerned, we are unable to hold that merely because, for the purposes of working out the difference of more than twenty per cent. between the income returned and the income assessed, the income assessed is required to be reduced as provided in the Explanation, the ingredients of concealment within the meaning of Section 271(1)(c) are in any manner affected. The first part of the Explanation, as earlier stated, merely lays down the objective condition which has to be satisfied before the presumption can be raised. It is true, as held in CIT v. Gujarat Textile Co. Pvt. Ltd. : 99ITR514(Guj) and CIT v. Nav Bharat Automobiles : 102ITR278(All) , that some recomputation or reprocessing will have to be done under the Explanation in arriving at the income assessed and that it is not the income assessed in the course of assessment proceedings which has to be taken as the basis for working out the twenty per cent. difference. However, we are unable to appreciate as to how this requirement which has to be complied with before invoking the Explanation could be held to affect the ingredients of the penal default of concealment contained in Section 271(1)(c). The provision, in fact, is made for the benefit of the assessee, because it leaves a larger margin than what would have been the effective margin, had no provision for such reduction been made. This requirement in the first part of the Explanation cannot, therefore, be held to be affecting the content or structure of the penal default prescribed in Section 271(1)(c).
32. As regards the alternative argument, as we have seen earlier, concealment for the purposes of Section 271(1)(c) must be conscious concealment. Conscious concealment would mean concealment which is not accidental or unintentional but concealment with a guilty mind to evade or avoid tax. It would thus appear that for the purposes of bringing a case within the said sub-section, the state of mind of the assessee becomes relevant. The Explanation, in so far as it is relevant, provides that unless the assessee proves that the failure to return the correct income did not arise from any fraud or any gross or wilful neglect on his part, he should be deemed to have concealed the particulars of his income. The question is whether the absence of circumstances which the assessee is required to prove in order to escape from the clutches of Section 271(1)(c) introduces the proof of factors which are not inherently relevant in the proof of conscious concealment.
33. Now, the case of fraud would obviously be a case of conscious concealment. So also would be a case of wilful neglect, because neglect of that type would result from a deliberate act on the part of the assessee resulting in escapement or avoidance of tax and conscious concealment might ordinarily be inferred in such a case. As observed by the Patna High Court in CIT v. Pafna Timber Works : 106ITR452(Patna) , the expression 'wilful neglect' imports neglect of a kind, where it is mixed with the neglect, a conscious, wilful or deliberate act of the assessee. Gross neglect which is different from mere negligence and springs from utter want of care and diligence cannot, in our opinion, be put in a different class. When a person acts with reckless disregard of consequences, he could not be said to have acted honestly. Every assessee is bound to comply with the provisions of law and to know the consequences of non-compliance. The law presumes this knowledge whether it is present to the mind of the negligent person or not. If by his gross negligence the assessee brings about a situation where there is avoidance or evasion of tax, it could be legitimately inferred that he is guilty of conscious concealment. This would be so because if the assessee failed to give accurate particulars as to his income even with this knowledge which the law presumes he has, he can hardly be held to be an honest blunderer or a stupid man. Such a person can legitimately be found to be acting dishonestly.
34. The argument based on the definition of 'good faith' in Section 3(22) of the General Clauses Act cannot assist the assessee. In Municipality of Bhiwandi and Nizampur v. Kailash Sizing Works : 2SCR123 the Supreme Court was concerned with Section 167 of the Bombay District Municipal Act which confers protection on the Municipality in respect of anything in good faith done or intended to be done. The definition of the expression 'done in good faith' as given in the General Clauses Act was referred to and it was pointed out that, accordingly, it would mean anything done honestly, whether done negligently or not. It was observed that an authority could not be said to be acting honestly where it has a suspicion that there is something wrong and does not make further enquiries. Being aware of possible harm to others and acting in spite thereof is acting with reckless disregard of consequences. It is worse than negligence, for negligent action is that, the consequences of which, the law presumes to be present in the mind of the negligent person, whether actually it was there or not. This legal presumption is drawn through the well-known hypothetical reasonable man. The Supreme Court, in terms, observed (p. 531):
'Reckless disregard of consequences and mala fides stand equal, where the actual state of mind of the actor is relevant. This is so in the eye of law, even if there might be variations in the degree of moral reproach deserved by recklessness and mala fides.'
35. It was further pointed out that the General Clauses Act helps only in so far as it lays down that negligence does not necessarily mean mala fides. Sometimes more than negligence is necessary. But the Act says 'honestly' and so, for the interpretation of that word, the legal meaning explained above became relevant. The ratio of this decision is that for the purposes of judging whether anything was done in good faith, what is to be seen is whether an authority or individual, being aware of possible harm to the others, acts in spite thereof in reckless disregard of consequences. If it is so, it would be a case, so far as the actual state of the mind of the actor is relevant, of mala fides. It would thus appear that even for the purposes of the definition of the expression 'done in good faith' as given in Section 3(22) of the General Clauses Act, any action taken by a person being aware of possible harm to others in total or reckless disregard of the consequences can be treated as not honest. It is this very test which we have applied. If the assessee, by his gross neglect, brings about avoidance or evasion of tax thereby causing loss to public revenue, he could not be said to have acted in good faith. The conclusion can be legitimately reached in that case that gross neglect is equal to lacking in bona fides.
36. It is pertinent to note in this behalf that Section 52 of the Indian Penal Code defines 'good faith' as under :
'Nothing is said to be done or believed in 'good faith' which is done or believed without due care and attention.'
37. Therefore, for the purpose of criminal liability, anything which is done or believed without due care and attention, cannot be said to have been done or believed in good faith. In quasi-judicial proceedings like penalty proceedings under the I.T. Act, it is this definition which would in any case be more relevant in judging the state of mind of the person for the purpose of arriving at a conclusion whether or not there is conscious concealment. If this definition is borne in mind, it would be apparent that cases of gross neglect, which would necessarily involve want of due care and attention, would prove a guilty state of mind.
38. It would thus appear that none of the three factors which an assessee has to prove under the Explanation, in order to get out of the clutches of Section 271(1)(c), affects the ingredients of the penal default. Penal default is conscious concealment and all that the Explanation does is to enact a rule of evidence whereunder the presumption as to conscious concealment is rebutted by evidence of this nature led by an assessee.
39. It now remains to refer to the decisions cited at the Bar. We shall only refer to those decisions which are relevant. No decision has been pointed out to us where a view has been taken that the Explanation enacts a rule of substantive law and not a rule of evidence. However, there are three decisions where it has been clearly ruled that the Explanation enacts a rule of evidence. In Saeed Ahmad v. IAC : 79ITR28(All) the Allahabad High Court, in Hajee K. Assainar v. CIT : 81ITR423(Ker) the Kerala High Court and in CIT v. Patna Timber Works : 106ITR452(Patna) the Patna High Court, have taken the same view which we have taken herein as regards the nature and character of the Explanation. It is true that the Kerala High Court, though it has taken the view that the Explanation enacts a rule of evidence and is, therefore, a part of the procedural law, it cannot still be applied to cases governed by Section 271(1)(c) as it stood prior to its amendment by the Finance Act, 1964, because the procedural amendment was closely and inextricably linked up with the change simultaneously introduced in Section 271(1)(c), viz., deletion of the word 'deliberately'. We do not desire to express any opinion on the question whether this reasoning, with respect, is correct or not. We are only referring to this authority for the limited purpose of showing that the Kerala High Court has also taken the same view as regards the nature and content of this Explanation as we have done.
40. Once this conclusion is reached, the answer to the question referred to us is obvious. The proceedings for penalty in this case must be held to have been validly initiated by the ITO at the proper time upon his being prima facie satisfied that there was concealment. Be it noted that the prima facie satisfaction was arrived at even without the aid of the Explanation, that is to say, upon viewing the conduct of the assessee in the light of the meaning of the word 'concealment', as explained in the authorities. In such validly initiated penalty proceedings the competent authority reached the conclusion with the aid of the rule of evidence enacted in the Explanation that there was concealment within the meaning of Section 271(1)(c) in the present case. We are of the view that since the Explanation enacts merely a rule of evidence, it was competent to the authority which imposed the penalty to invoke its aid in reaching the final conclusion on the question of concealment, although the ITO had not resorted to it at the stage when he made the reference. We say this only so far as the question of law is concerned. Whether on facts the Explanation was applicable or not is a matter on which the Tribunal has not applied its mind and that question remains open.
41. In the result, we answer the question referred to us in the negative, that is to say, in favour of the revenue and against the assessee. The assessee will pay the costs of this reference to the Commissioner.