1. The question referred for this court's decision under Section 256(1) of the Income-tax Act, 1961, is as follows:
'Whether, on the facts and in the circumstances of the case, the levy of penalty under Section 271(1)(c) of the Income-tax Act, 1961, was valid in law ?'
2. The assessee carried on business in coffee, biscuits, etc. In the previous year ending with August 15, 1952, relevant for the assessment year 1953-54, he imported 1096 cases of chicory and also purchased 80 cases locally. The assessee submitted a return for the assessment year in question showing a total turnover of Rs. 1,05,152 in respect of sales of French coffee, i.e., mixture of coffee and chicory and a gross profit in relation to coffee business of Rs. 1,892. The Income-tax Officer, after enquiry, held that the assessee had sold chicory as such and that he did not manufacture French coffee as alleged by him. In that view, he estimated the net profit in sales of chicory at Rs. 25,000 and in sales of coffee at Rs. 2,000 as against the profit of Rs. 1,892 returned by the assessee. The result was that a sum of Rs. 25,108 was added as the net profit in the coffee-chicory business. In relation to the assessee's business in biscuits, the Income-tax Officer also estimated income at Rs. 27,000. He also initiated penalty proceedings under Section 28(1)(c) and levied a penalty of Rs. 36,000.
3. There was an appeal to the Appellate Assistant Commissioner, both against the original order of assessment as also against the order levying penalty. In that appeal it was contended by the assessee that some of his purchasers have been examined behind his back and that he should be given an opportunity to cross-examine those persons. In the light of this contention, the Appellate Assistant Commissioner felt that the assessee should be given an opportunity to cross-examine the various purchasers who had been examined by the Income-tax Officer and that the accounts of the assessee should also receive a further scrutiny. In that view, he set aside the assessment and directed the Income-tax Officer to make a fresh assessment after giving an opportunity to the assessee to cross-examine the various purchasers. He also set aside the orders levying penalty on the ground that the evidence so far collected did not establish definitely any concealment. He, however, expressed that it is open to the Income-tax Officer to initiate penalty proceedings if fresh materials are available to show that the assessee had concealed the particulars of income or had deliberately furnished inaccurate particulars.
4. As per the directions of the Appellate Assistant Commissioner the reassessment proceedings were taken up by the Income-tax Officer. At this stage six of the purchasers from the assessee were examined in the presence of the assessee's representative who did not choose to cross-examine them. The matter was adjourned from time to time to enable the assessee to cross-examine the six persons but the assessee did not avail of that opportunity. Thereafter, the Income-tax Officer gave an opportunity to the assessee to adduce evidence in support of his claim that he sold only French coffee and not chicory as such. The assessee did not adduce any material for the purpose of establishing his said claim. The Income-tax Officer, therefore, had no alternative except to complete the assessment on the materials on record. On a consideration of those materials, the Income-tax Officer held that the assessee's claim that he had roasted and ground the coffee seeds and mixed the same with chicory and sold French coffee, had not been proved. The Income-tax Officer took note of the fact that the assessee has not consumed any electricity for roasting and grinding coffee seeds and that some of the purchasers had deposed that they purchased only chicory as such from the assessee, for holding that the assessee has sold chicory as such and not French coffee. He, therefore, computed the income from the sale of chicory by adopting the market price of chicory at Rs. 107 per case, though the assessee's bills showed that he sold French coffee for a price of Rs. 90 per case. He, therefore, determined the assessment at Rs. 25,108 as in the original assessment. He also added a sum of Rs. 15,000 as the assessee's estimated profit in respect of his business in biscuits.
5. This revised assessment was challenged by the assessee before the Appellate Assistant Commissioner. Before the Appellate Assistant Commissioner it was contended by the assessee that there were no fresh facts or evidence apart from those available at the stage of the original assessment, that, those facts are quite insufficient to reject the assessee's plea of manufacture and sale of French coffee, and that even the evidence of the purchasers did not establish that any extra money was paid over and above the sale price mentioned in the bills. The Appellate Assistant Commissioner, however, agreed with the Income-tax Officer and held that the assessee should have sold chicory as such and not French coffee. But he found that, on a correct calculation, the addition in this regard should be Rs. 32,559 and not Rs. 25,108 as fixed by the Income-tax Officer.
6. There was a further appeal to the Tribunal by the assessee. The Tribunal, on a consideration of all the facts and circumstances, held that the assessee did not in fact manufacture or sell a mixture of chicory and coffee as claimed but that he sold only chicory as such, but that the estimate made by the Appellate Assistant Commissioner at Rs. 32,559 was not justified as the materials available were not sufficient to find that the assessee sold chicory in excess of the price mentioned in his bills. Therefore, the Tribunal proceeded to make an estimate on the basis that chicory was sold for the amounts mentioned in the assessee's bills, and reduced the addition from Rs. 32,559 to Rs. 20,000 and the reasons given by the Tribunal may be set out in their own words :
'We consider that there is no justification for making any estimate of the sale proceeds. It had not been brought out that the parties had paid anything extra. In our opinion the only reasonable conclusion is that the assessee had sold the chicory as such and did not incur any expenditure towards roasting and grinding of the coffee seeds. It has been found that the expenses are not borne out by any documentary evidence. The average purchase price of chicory comes to Rs. 70 and the sale price was about Rs. 90. The assessee should have made not less than Rs. 20 per case of imported chicory. We hold that an addition of Rs. 20,000 would be justified in the circumstances of the case.'
7. The addition as regards the biscuits business was also modified and the Income-tax Officer was directed to estimate the gross profit at 25 per cent.
8. Consequent on the said reassessment, penalty proceedings had also been initiated against the assessee by the Inspecting Assistant Commissioner. He felt that in so far as the addition to the income in respect of the biscuit business was concerned the penal provisions were not applicable. He, however, held that in respect of the coffee business, the materials available conclusively established that there was deliberate concealment of income. In that view, he levied a penalty of R's. 36,000 under Section 271(1)(c) of the Income-tax Act, 1961.
9. This penalty order was challenged by the assessee in an appeal before the Appellate Tribunal on two grounds: (1) that in respect of any concealment of income which had taken place before the Income-tax Act, 1961, came into force, the provisions of Section 271 of that Act cannot be invoked, and (2) that the materials available cannot justify the levy of penalty as the finding of deliberate concealment of income cannot be arrived at on the basis of the said materials. The Tribunal considered the legal submission and held that Section 271(1)(c) can be invoked even in respect of the concealment having taken place earlier to the coming into force of the Act, On the merits the Tribunal held that the materials are sufficient to disclose deliberate concealment of income on the part of the assessee. The Tribunal, however, reduced the penalty to a sum of Rs. 10,000 having regard to the fact that it had reduced considerably the additions made in respect of the chicory business.
10. Before us the learned counsel for the assessee concedes that he cannot sustain the legal plea that Section 271 cannot be invoked in this case, in view of the decision of the Supreme Court in Jain Brothers v. Union of India, : 77ITR107(SC) . But the learned counsel is very vehement in his submission that the materials available cannot form the basis for a finding that there has been a deliberate concealment of income in this case. It is pointed out by the learned counsel that the addition made in relation to coffee business was due to the fact that the assessee's explanation has not been accepted and that the mere non-acceptance of the explanation offered by the assessee will not lead to the inference that there has been a deliberate concealment of income. It is true that in this case the addition came to be made by the Income-tax Officer, in relation to the coffee business, after rejecting the plea of the assessee that he sold French coffee and not chicory as such. But the addition was not merely on the basis of rejection of the assessee's explanation. The Income-tax Officer has referred to the evidence of the purchasers from the assessee to the effect that they have purchased only chicory and not French coffee. He also referred to the fact that the assessee has not shown to have used electricity for the purpose of roasting and grinding coffee seeds and this showed that the assessee did not in fact undertake the operation of roasting and grinding coffee seeds for making French coffee. It is not, therefore, possible to say that the Income-tax Officer proceeded to make the assessment merely on the basis of the rejection of the assessee's explanation. The evidence of the purchasers and the fact that the assessee has not shown to have used electricity for the purpose of roasting and grinding coffee seeds clearly leads to the inference that the assessee 'should have sold chicory as such, without manufacturing French coffee.
11. The learned counsel refers to the decision of, the Supreme Court in Commissioner of Income-tax v. Anwar Ali, : 76ITR696(SC) , in support of the submission that the mere rejection of the assessee's explanation cannot form the basis for finding that the assessee is guilty of deliberate concealment of the income. But, as pointed out already, the assessment has not proceeded merely on the basis of the rejection of the explanation but on other relevant materials. Therefore, the said decision cannot be of any help to the petitioner.
12. The learned counsel then contends that the penalty proceedings being penal in character, it is for the revenue to conclusively establish that there has been deliberate concealment of income by producing fresh materials at the stage of penalty proceedings, without merely relying on the materials gathered earlier and the findings rendered at the stage of the assessment proceedings. In this connection he refers to the decision of the Supreme Court in Commissioner of Income-tax v. Khoday Eswarsa and Sons, : 83ITR369(SC) . In that case, their Lordships of the Supreme Court, after referring to their earlier decision in Commissioner of Income-tax v. Anwar Ali, expressed :
'From the above it is clear that penalty proceedings being penal in character, the department must establish that the receipt of the amount in dispute constitutes income of the assessee. Apart from the falsity of the explanation given by the assessee, the department must have before it before levying penalty cogent material or evidence from which it could be inferred that the assessee has consciously concealed the particulars of his income or had deliberately furnished inaccurate particulars in respect of the same and that the disputed amount is a revenue receipt. No doubt the original assessment proceedings for computing the tax may be a good item of evidence in the penalty proceedings but the penalty cannot be levied solely on the basis of the reasons given in the original order of assessment.'
13. We are not able to construe the said decisions as lying down that there should be fresh materials at the stage of the penalty proceedings to establish that there has been a deliberate concealment of income and that the materials gathered at the stage of assessment have to be altogether eschewed. It will be clear from the passage above extracted, that the original assessment proceeding is a good item of evidence in the penalty proceedings as well, but that the penalty cannot be levied solely on the basis of the finding given in the order of assessment. Therefore, the materials gathered at the stage of the assessment proceedings cannot altogether be overlooked in the penalty proceedings. As a matter of fact it has been held in a series of decisions, that the evidence gathered at the stage of the assessment proceedings are prima facie material in the penalty proceedings and that so long as the assessee has not adduced any evidence to disprove or rebut the said prima facie material at the stage of the penalty proceedings, those can be acted upon and a finding of concealment of income could be based thereon, if the materials are such as to warrant an inference of wilful non-disclosure. In T.C. No. 100 of 1967 (Commissioner of Income-tax v. Kadri Mills Coimbatore Ltd., : 96ITR378(Mad) this court, after referring to an earlier decision in Gnanambika Mills Ltd. v. Commissioner of Income-tax,  58 I.T.R. 602 , expressed the view that the question whether the findings in the assessment proceedings can be used as prima facie evidence in penalty proceedings in a particular case will depend upon whether such findings are based on materials and on a high degree of probability and whether the assessee had a reasonable opportunity to show that such findings are incorrect or are not supported by materials, and that though the nature and scope of the enquiry and the findings arrived at in the two proceedings are different, the findings in assessment proceedings may be relevant and may even be prima facie evidence in penalty proceedings though they are by no means conclusive. The learned counsel for the assessee would contend that, apart from the materials gathered at the stage of the assessment proceedings and the findings rendered therein, there is no fresh material available at the stage of penalty proceedings, and no overt act on the part of the assessee so as to warrant a finding of deliberate concealment is found. The assessee at the stage of the penalty proceedings did not choose to adduce any evidence controverting the facts found at the stage of assessment proceedings and he merely stated that there should be fresh materials apart from those obtained at the assessment stage. As a matter of fact it is found from the order of the Inspecting Assistant Commissioner that no attempt was made by the assessee to challenge the findings rendered at the stage of assessment and the applicability of Section 271(1)(c) alone was contested. Even apart from this, we are of the view that the materials available in this case are sufficient to lead to the inference that there was deliberate concealment of income. As already stated, the evidence of the purchasers from the assessee who were examined by the Income-tax Officer shows that the assessee should have sold chicory as such without manufacturing French coffee. The assessee has not furnished any evidence at the stage of the penalty proceedings to prove that he in fact sold French coffee and not chicory as such. Therefore, the finding which is based on some positive materials which has not been challenged by the assessee in these proceedings, can form the basis for a finding that there is deliberate concealment. Even on the basis of the assessee's own bills, the profit earned in the sales of imported chicory alone, apart from the quantity of chicory purchased locally, should be to the tune of Rs. 20,000 at the rate of Rs. 20 per case as pointed out by the Tribunal. But the income returned by the assessee is only a sum of Rs. 1,892. This shows that there is deliberate concealment. On the materials on record we have to agree with the view taken by the Tribunal in this case.
14. The result is that the reference is answered in the affirmative and against the assessee. The revenue will have its costs. Counsel fee Rs. 250.