1. This tax case raises the question whether, in the events that happened, the Income-Tax Appellate Tribunal was justified in canceling a penalty which had been levied on an assessee for concealment of income under s. 271(1)(c) of the I.T. Act, 1961.
2. The assessee is a firm carrying on business in readymade garments. In it books for the account year, relevant to the assessment year 1972-73, there were entries to show that the assessee had borrowed money on hundis from a number of Multani bankers. The assessee produced the discharged hundi papers in support of the genuineness of the transactions. The ITO, however, was disposed to reject this evidence, for two reasons. One was that the hundis had not been discounted by the lenders with scheduled banks. The other was that the lenders were notaries for indulging in havala transactions, that is to say, transactions which made it appear on fabricated evidence that here were loans advanced by them and repaid to them, without any money passing either way. At this stage of the assessment, to cut further proceedings short and to achieve finality to the tax liability, the assessee made an offer to the effect that the ITO might treat the peak credit in the hundi loans account a the assesse's taxable income for the year. The offer was made in a letter addressed to the ITO. In that letter, however, the assessee reiterated that the loans were genuine, and the offer was being made only in the interest of a speedy end to the assessment proceedings. The ITO acted on this letter, and without further ado he completed the assessment, adding to the returned income a sum of Rs. 65,000 which he worked out as the figure of peak credit in the hundi loan account. This addition, incidentally, was reduced to Rs. 46,000 by the commissioner, acting in exercise of his revisional powers.
3. Based on the ITO's assessment, the IAC levied a penalty of Rs. 10,693 on the score that the assessee had concealed particulars of its income in the form of hundi loans. The Assistant Commissioner particularly relied on the Explanation to s. 271(1)(c) to support the penalty.
4. On appeal, the Tribunal concealed the penalty. The Tribunal ruled out the application of the Explanation to the facts of this case, because according to the Tribunal, there was no fraud or gross or wilful neglect on the assessee's part while its return of income was filed as a figure lower than 80 per cent of the figure which the ITO adopted as the assessee's taxable income in his order of assessment. The Tribunal further pointed out that the assessment itself was made only on the basis of the assesse's offer to treat the peak credit in the hundi loan account as its income, and this offer was made not on an admission on the assessee's part that the hundi loans were not genuine and they represented its own income, but with a view to cut short further proceedings and achieve finality in the assessment. The Tribunal further observed that, apart from rejecting the assessee's explanation about the hundi loans, the Department had no independent evidence to show that Rs. 69,000 represented the assessee's concealed income. The Tribunal pointed out that even this amount of Rs. 69,000 was only an estimate of the peak credit, which was reduced by the Commissioner himself in revision. These were the reasons adduced by the Tribunal in their order while they set aside the penalty.
The question in this reference, which has been referred to us at the instance of the I.T. Dept., is as follows:
'Whether, on the facts and in the circumstances of the case, the Appellate Tribunal was right in law in canceling the penalty levied under section 271(1)(c) of the Income-Tax Act, 1961, and in holding that the Explanation to the provisions of section 271(1)(c) would not apply to this case ?'
5. The argument urged before us on behalf of the Department on this question was based wholly on the Explanation to s. 271(1)(c) and on a contention to the effect that the present case was governed by that Explanation. Mrs. Nalini Chidambaram, the Department's learned junior counsel, submitted that the Tribunal was in error in proceeding on the footing that this onus of establishing concealment was on the Revenue, when the matter was covered by the Explanation.
6. We think the error lies in the Department's view of the Explanation. This provision which was introduced by the Finance Act, 1964, lays down a special rule of evidence in certain penalty cases. The normal rule in matters of penalty is that it is for the taxing authorities to prove concealment of income on the part of an assessee. Under this evidentiary rule, which has long been established by judicial decisions, the onus would squarely lie on the Revenue from first to last. The Explanation which Parliament introduced for the first time in 1964, inverted the burden of proof laid down by the courts. But this inverted onus under the Explanation applied only up to a point, and also not in all cases, but only in those cases where the returned income is found to be lower than 80% of the assessed income. In such cases, the Explanation lays down only an initial presumption that the assessee had concealed his income as respects the difference between the returned income and the assessed income. But even this initial presumption the assessee can always rebut, by showing that the higher figure of income in his return or was owing to any fraud or neglect on his part, but was owing to a misunderstanding of the tax treatment of certain items of receipts, expenses, reliefs and the like, or owing to the inherent processes of assessment. Once the assessee establishes even in cases covered by the Explanation that his return of income at less that 80 per cent of the assessed income was neither fraudulent nor negligent, the onus at once shifts to where it properly belongs, namely, the Revenue. Thus, in every case where the Explanation is invoked it becomes a matter of inquiry whether the assessee's conduct in filing his return in the way he did rules out fraud or gross neglignece. Where fraud or negligence on the assessee's part is ruled out, then despite the fact that the returned income less than 80 per cent. of the assessed income, the inquiry must be whether the Department has established, on the basis of acceptable evidence, that the assessee had concealed particulars of his income to any extent whatever.
7. The same approach has been laid down in a recent decision of this court in Addl. CIT v. Smt. V. Kanakammal : 118ITR94(Mad) . The learned judges have expressed the view that the Explanation to s. 271(1)(c) of the Act does not require the assessee to prove that he had not concealed particulars of his income all he need show in order to rebut the initial presumption against him is that he was neither grossly negligent nor actuated by fraud in the preparation of his return.
8. We are satisfied that the Tribunal have examined the penalty order in this case from a proper perspective. They have found that the gap between the assessee's return of income and the officer's order of assessment was solely due to the addition of Rs. 65,000, which was made solely on the basis of the assessee's offer to settle the figure of assessment. The assessee's letter in that regard, which the Tribunal has quoted verbatim in their order, does not contain any admission that the hundi loans disclosed in its accounts are havala transactions. In the absence of an admission to that effect by the assessee, a finding of concealment, or, for that matter, a finding that the cash credits represent the assessee's income, can only be come to on the basis of materials. In this case, however, on the materials on record, the only thing which was said against Multani bankers was that they were 'persons who were indulging in havala transactions'. This remark was said generally, as to their general repute in the I.T. Dept. It was not said with particular reference to the transaction in the assessee's books for the year under consideration. Another adverse remark about the assessee's case is that the discharged hundi papers produced by the assessee had not been discounted or rediscounted by the Multani bankers with any of the scheduled banks. This, no doubt, might be a fact, but there is no rule of presumption that all undiscounted hundis are false documents, every one of them, without exception. Nor is there any evidence of an invariable practice amongst Multani money-lenders that all genuine hundis are always rediscounted with scheduled banks, and havala transactions are not so discounted.
9. Altogether, we are satisfied that this is only yet another case of the ITO having been disposed, or pre-disposed, to reject the assessee's explanation regarding the hundi credits. The assessee's offer to let the peak credit be treated as taxable income only hastened the process of assessment. It did not furnish any evidence, by way of admission or otherwise, to the effect that the hundi loans were only havala transactions and represented the assessee's concealed income.
10. For the reasons stated above, we answer the question of law st the Department with costs.