1. The assessee is a public limited company carrying on business of manufacture and sale of yarn. Its managing agents were a firm called 'G. Krishna & Co.' One V. Ramaswami Naidu was a partner of that firm.
2. In the previous year ending on December 31, 1951, corresponding to the assessment year 1952-53 the assessee returned an income of Rs. 12,21,316. The assessment was completed by the Income-tax Officer by making the following additions :
Rs.inflation in cotton purchases 1,00,000 Black market profits on sale of yarn not brought into account 1,00,000The first item of addition of Rs. 1,00,000 represented Rs. (a)Inflation in the purchase price as per contract No. 103 dated 17-3-195124,132 (b)Cost of 100 candies of inferior quality cotton alleged to have been passed off as superior quality cotton50,000 (c)Inflation in Karunganni cotton purchases5,000 (d)Other items including probable bogus items according to the Income-tax Officer 25,500The total of Rs. 1,04,132 was rounded to Rs. 1,00,000
3. These additions were objected to by the assessee before the Appellate Assistant Commissioner,' who deleted the second item of addition of Rs. 1,00,000 representing the black' market profits as also items (c) and (d) of the first item of addition. He, however, held, that the addition by the Income-tax Officer of Rs. 24,132 as inflation in the purchase price in relation to contract No. 103 and of Rs. 50,000 being the cost of 100 candies of inferior quality passed off as superior quality cotton was justified. On appeal the Tribunal upheld the order of the Appellate Assistant Commissioner holding that there has been a deliberate and wholesale manipulation by the assessee and that the assessee has wangled his purchases and claimed larger outlay in Cambodia than what is warranted by the actual position. We are not now concerned with the validity of the said assessment.
4. The Income-tax Officer after conclusion of the said assessment proceeding initiated penalty proceedings under Section 28(1)(c) of the Indian Income tax Act, 1922, and levied a penalty of Rs. 40,000 for the alleged concealment of income by the assessee. The appeal against the levy of penalty was dismissed by the Appellate Assistant Commissioner holding that, on the facts, it was clear that the assessee has indulged in elaborate tactics to inflate the purchases and that there were no mitigating circumstances to reduce the amount of penalty. On further appeal, the Tribunal, however, held that it was not a case for the levy of penalty under Section 28(1)(c), that the materials produced showed that V. Ramaswami Naidu used U.G. Krishnaswami Naidu as a stooge to siphon off considerable amounts from the coffers of the assessee-mill to his private advantage and that as the payments have actually been made by the assessee to U.G. Krishnaswami, the cotton dealer, it cannot be said that the assessee had concealed income. In that view the Tribunal cancelled the penalty order. At the instance of the revenue the following question has been referred to this court under Section 66(2) of the Indian Income-tax Act, 1922:
'Whether, on the facts and in the circumstances of the case, the Appellate Tribunal was right in law in cancelling the penalty of Rs. 40,000 imposed on the assessee under Section 28(1)(c) of the Indian Income-tax Act, 1922?'
5. Before dealing with the relative contentions of the parties, it is necessary to set out the facts and circumstances leading to the addition of Rs. 25,000 towards inflation in the price of cotton purchased as per contract No. 103 and Rs. 50,000 towards the supply of 100 candies of inferior quality cotton as superior quality cotton. The assessee purchased cotton to the extent of Rs. 32,09,331 in the accounting year. Of this, Rs. 11,42,373 represented purchases from one U.G. Krishnaswami, who, according to the revenue, was a benamidar of V. Ramaswami Naidu, a partner in the managing agency firm. The addition of the said two sums was in respect of cotton purchased from the said U.G. Krishnaswami. One of the contracts entered into by the assessee with the said U.G. Krishnaswami on March 17, 1951, was contract No. 103 for the purchase of CO4 cotton. The price per candy shown originally in the contract was Rs. 1,451. But the said figure stood altered to Rs. 1,651. In pursuance of the said contract the assessee had purchased 76,256 lbs. of cotton. According to the Income-tax Officer by the said correction the cost of cotton in respect of contract No. 103 had been deliberately inflated from Rs. 1,451 per candy to Rs. 1,651 per candy. The assessee's case was that Rs. 1,651 per candy was really the market price as could be seen from the market reports, that the rates paid varied according to the quality of cotton actually delivered and the mere correction in the contract will not lead to the inference that the price paid had been actually inflated. The Income-tax Officer, however, did not accept the plea of the assessee and he, therefore, worked out the said inflation at Rs. 24,132. This accounted for the addition of Rs. 25,000.
6. The Income-tax Officer also found that there has been considerable alterations in the entries made in the weighment and mixing books by which the name of Karunganni originally written has been changed to C04 that these alterations supported the inference that the assessee had adopted some novel and ingenious device to inflate cotton purchases by purchasing inferior variety of cotton and passing them off as of superior quality, that the production of yarn was not as high as it ought to be if the assessee had used C04 cotton as claimed, and that the violent fluctuation as per the spindle register also showed that there should have been a manipulation of the quality of cotton purchased. On appeal, the Appellate Assistant Commissioner had further found that U.G. Krishnaswami from whom the cotton is said to have been purchased was the tool of V. Ramaswami Naidu, that the series of manipulations in the books of U.G. Krishnaswami as also in the weighment and mixing books of the assessee showed that there was collusion between the said two persons and that U.G. Krishnaswami with the connivance of the managing agent had passed off inferior quality of cotton as of higher quality and obtained a higher rate. On appeal the Appellate Assistant Commissioner conceded that the prices differ according to the quality of cotton delivered but observed that as the assessee has not shown that the cotton supplied in pursuance of contract No. 103 was of superior quality, the Income-tax Officer was justified in viewing with suspicion the alteration of the purchase price in that contract from Rs. 1,451 to Rs. 1,651 per candy. He, therefore, held that the alteration in price in contract No. 103 was deliberate and calculated to inflate the price of cotton purchased under the contract. The Tribunal also agreed with the view of the Appellate Assistant Commissioner. Before the Tribunal some test certificates were produced to show that the yarn produced from the cotton purchased was 40's special and that it was impossible to produce that kind of yarn if Karunganni cotton had been mixed with CO4 cotton. The Tribunal did not, however, feel impressed by the test certificates. The Tribunal observed :
'In the deliberate and wholesale manipulation that we have come across in this case one must be wary and cautious in basing decisions purely on arithmetical calculation. There must be fallacies or pitfalls somewhere as the source of the purchase is indisputably Krishnaswami Naidu. If the argument is to be accepted, it must follow that Krishnaswami Naidu must have obtained this Cambodia by means other than through the ginning he has shown which is an impossible position. There is also the close relationship of Krishnaswami Naidu with the management. We have accordingly to hold that the assessee has wangled the purchase and claimed larger outlay in Cambodia than what is warranted by the actual position.'
7. It is under these circumstances the Income-tax Officer initiated penalty proceedings under Section 28(1)(c) for deliberate concealment of income by the assessee.
8. In his order dated February 28, 1962, the Income-tax Officer merely referred to the assessment and appellate proceedings and after setting out certain extracts from the order of the Appellate Assistant Commissioner as justifying an inference that the assessee has deliberately concealed the said two sums of Rs. 25,000 and Rs. 50,000, he actually levied a penalty of Rs. 40,000 under Section 28(1)(c).
9. An appeal was filed before the Appellate Assistant Commissioner and the only point raised by the assessee's authorised representative was as regards the quantum of penalty levied. The Appellate Assistant Commissioner dismissed the appeal observing that the authorised representative had not put forward any convincing reasons showing that the levy of penalty is excessive, that there are no mitigating circumstance to interfere with the quantum of penalty levied and that a perusal of the assessment order will clearly show that the assessee had indulged in elaborate tactics to inflate the purchases.
10. There was a further appeal to the Tribunal. Before the Tribunal it was urged on behalf of the assessee that, once the inflated prices have been paid out by the assessee, the assessee cannot be said to have deliberately inflated the cotton purchases, and the decision of this court in Sri Ramalinga Choodambikai Mills Ltd. v. Commissioner of Income-tax,  28 I.T.R. 952 was relied on in support of that submission. The Tribunal found that the materials available showed that V. Ramaswami Naidu who was in charge of the mill as a partner of the managing agency firm had used U.G. Krishnaswami Naidu as a stooge to siphon oft considerable amounts from the coffers of the assessee-mill to his private advantage, that the assessee had actually been made to part with the higher price under false pretence or on holding out that the cotton was of superior quality and that the money representing the inflated price having gone out of the assessee for the personal advantage of V. Ramaswami Naidu through U.G. Krishnaswami, the assessee cannot be said to have concealed its income by showing a larger outlay. In addition, the Tribunal stated in regard to the price difference in contract No. 103 that the payment of a higher price may be due to the fact that a higher quality of cotton was delivered but that the assessee was not in a position to prove the same. The Tribunal, therefore, set aside the penalty levied on the assessee.
11. According to the revenue the Tribunal was in error in overlooking its own findings rendered in the course of the assessment proceedings while upholding the addition of two sums of Rs. 25,000 and Rs. 50,000, that the Tribunal's finding that the money has gone out of the assessee's coffers for the personal benefit of V. Ramaswami Naidu, the managing agent, is not supported by any material and that as regards the difference in price so far as contract No. 103 is concerned, the Tribunal was not justified in making out a new case for the assessee by saying that the addition of Rs. 25,000 may not be due to a deliberate attempt at inflation on the part of the assessee but may be due to increase in price as well as higher quality of cotton delivered. It is said that the findings given by the Tribunal sustaining the addition of the two sums in the assessments proceedings are simply contrary to the findings given in the penalty proceedings, and that in the face of the said earlier findings which are clearly relevant in relation to penalty proceedings, the penalty order was quite justified. The learned counsel for the revenue refers to the decision in Gnanambika Mills Ltd. v. Commissioner of Income-tax, : 58ITR802(Mad) to show that the findings in the assessment or reassessment proceedings constituted relevant and prima facie evidence in the penalty proceedings, though such findings may not be conclusive. In that case certain additions were made to the assessable income of the assessee for the assessment year 1949-50, on the ground that there has been an under-statement of the sales of yarn. The Income-tax Officer, thereupon, purported to levy penalty for concealment of income. In the penalty proceedings it was found by all the authorities including the Tribunal that the assessee has suppressed his profits to the extent of the additions made to his assessable income. The validity of the penalty order was challenged by the assessee on a reference to this court. It was contended for the assessee that Section 28 being a penal provision, the burden entirely lay on the department to show that the assessee had concealed the particulars of his income or deliberately furnished inaccurate particulars of such income, that though the addition to the profits could be made even on broad probabilities, a higher degree of proof is required to establish concealment and that concealment of income should be proved beyond doubt by the department. In the light of these contentions the court considered the scope of Section 28(1)(c) and expressed :
'The penal character of the proceedings in Section 28 necessarily implies a strict construction and unless the requisites of the levy are clearlyestablished, there could obviously be no levy. The burden of proof is, therefore, naturally on the department to prove beyond doubt that there has been a concealment or deliberate furnishing of inaccurate particulars of the income.'
12. On the question whether the findings given by the authorities in the assessment proceedings are conclusive in the matter of levy of penalty, the court expressed :
'We are of the opinion that the relevancy to and the evidentiary value in penalty proceedings of an assessment order will depend on the kind of findings and the materials on which they are based. The scope of the two proceedings being different, it is obvious that the findings in an assessment order may not conclude the assessee in the penalty proceedings. Often materials for both the proceedings may be identical. In the course of making additions to chargeable income either in assessment or reassessment proceedings, it is possible that observations relating to concealment or deliberate furnishing of inaccurate particulars are incidentally made though they are not necessary for the purpose of making the addition. We do not see why such observations, provided they are based on materials, are not relevant and may not furnish prima facie evidence to prove the charge under Section 28. It is of course true that such evidence is not conclusive in penalty proceedings and it will be quite open to the assessee to show that the observations in the assessment or reassessment orders are not supported by material or otherwise unsupportable. '
13. We are of the view that the question whether the findings in assessment or reassessment proceedings can be used as prima facie evidence in penalty proceedings will depend upon the facts and circumstances of each case and 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. The learned judges in that case, have clearly pointed out that the nature and scope of the enquiry and the findings arrived at in the two proceedings are not common and that though the findings in assessment proceedings may be relevant and may even be prima facie evidence in proceedings under Section 28, they are by no means conclusive in the latter proceedings.
14. The learned counsel also refers to the decision of the Supreme Court inD.M. Manasvi v. Commissioner of Income-tax,  83 I.T.R. 557 , to show that the findingsgiven in collateral proceedings have also been taken as constituting aprima facie evidence of concealment in the penalty proceedings. In thatcase a firm constituted with four major partners including the assessee andthree minors who were his grand-children applied for registration. Inthose proceedings the Tribunal ultimately found: (1) that the three othermajor partners of the firm were dummies and the only real and effective partner was the assessee; and (2) that the accumulated profits of the business run in the guise of the firm were taken over by the assessee for use according to his own sweet will. In his individual assessment for income-tax it was held that the business of the firm was the proprietary concern of the assessee and that the firm's income was in reality the assessee's income. Thereafter, penalty proceedings under Section 271(1)(c) of the Income-tax Act, 1961, were initiated and penalty was actually imposed. The Tribunal upheld the penalty. The matter ultimately came before the Supreme Court. The Supreme Court expressed the view that the findings given by the Tribunal in the firm's registration proceedings on a consideration of the relevant evidence that the business of Kohinoor Mills said to be run by the firm was entirely the assessee's individual business, that the income of the said concern actually belonged to the assessee himself though the business was run in the guise of a firm and that the whole scheme was to disguise the profits of the assessee as those of the firm, constituted a relevant material or evidence in the penalty proceedings and that the inference of concealment of income has not been drawn from the mere falsity of the assessee's explanation in the assessment proceedings.
15. The learned counsel for the assessee, however, disputes the stand taken by the revenue that the findings of the authorities in the assessment proceedings constitute prima facie evidence in the penalty proceedings and submits that the penalty proceedings being quasi-criminal, the onus is always on the revenue to establish conclusively that there has been deliberate concealment of income or the particulars of such income, that a finding of concealment of income cannot be solely based on the findings rendered in the assessment proceedings, that though an addition could be made to the assessee's income after rejection of the assessee's explanation on probabilities, that may not be sufficient to support a finding of concealment of income, and that, in this case, there is no material apart from the orders of the assessing and the appellate authorities in the course of the assessment proceedings to establish that there has been, in fact, a concealment of income by the assessee. It is also pointed out that the Income-tax Officer merely refers to the orders relating to assessment and proceeds to levy the penalty without any fresh material to support a finding of deliberate concealment and that the Tribunal was justified in holding that in view of the fact that the assessee has actually paid out the inflated value for the purchase of cotton there cannot be any concealment of income by the assessee. The learned counsel for the assessee places reliance on the following decisions in support of his stand that the orders relating to assessment may not be conclusive on the question of penalty.
16. In P.S.S. Bommanna Chettiar v. Commissioner of Income-tax, : 73ITR26(Mad) , , this court took the view that as the main limb of Section 2 8(1)(c) reflects a wanton overt' act on the part of the assessee in concealing the particulars of income or in the deliberate furnishing of inaccurate particulars or primary facts, penalty would be attracted only in cases of designed concealment of income and want on avoidance of the particulars or primary facts, that it cannot be generalised that whenever and howsoever the explanation given by the assessee is found to be false and improbable, that would amount to the assessee exposing himself to the penalty leviable under Section 28(1)(c), and that it is imperative that the department should establish the assessee's guilt without requiring the assessee to prove his innocence. In that case the assessee gave an explanation in respect of certain cash credits found in his accounts. This explanation, however, did not find favour with the revenue which held that the assessee's version was not worthy of credence. The explanation given by the assessee was that the cash credits were from the sale of jewels by the wives or the money-lending business of the mother-in-law of the assessee, which was found to be unacceptable. In the assessment proceedings, after rejecting the assessee's explanation, the revenue proceeded on the basis that the properties purchased by the assessee during the relevant years came from the assessee's undisclosed source of income. Later, penalty was levied under Section 28(1)(c) of the Act. In those proceedings it was urged by the assessee that there was no fresh fact before the revenue and that merely because the assessee's explanation was not accepted, it cannot be stated that the assessee had deliberately suppressed the investments in the names of himself, his wife and mother-in-law. Dealing with the assessee's contention the court expressed:
' When the assessee furnishes a reasonable and a plausible explanation of the source and nature of the credits shown in his books, it cannot be said that his explanation which did not find favour with the revenue, though false, should not be equated to a deliberate suppression of the particulars of his income within the meaning of Section 28(1)(c).........In a case where the explanation of the assessee is found to be false, he is not being charged for having given a false explanation. In fact, that is not the sine qua non of the offence under Section 28(1)(c). The ingredients of the offence under Section 28(i)(c) are that the assessee concealed the particulars of his income, or deliberately furnished inaccurate particulars of such income.'
17. In Commissioner of Income-tax v. Anwar Ali, : 76ITR696(SC) the Supreme Court has also stated:
'Proceedings under Section 28 of the Indian Income-tax Act, 1922,are penal in character. The gist of the offence under Section 28(1)(c) isthat the assessee has concealed the particulars of his income or deliberately furnished inaccurate particulars of such income and the burden is on the department to establish that the receipt of the amount in dispute constitutes income of the assessee. If there is no evidence on the record except the explanation given by the assessee, which explanation has been found to be false, it does not follow that the receipt constitutes his taxable income. 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.'
18. In Commissioner of Income-tax v. Khoday Eswarsa & Sons, : 83ITR369(SC) the SupremeCourt had again expressed that penalty proceedings being penal in character the department must establish that there has been a deliberate concealment of income, that apart from the falsity of the explanation givenby the assessee the department must have before it before levying penaltycogent material or evidence from which it could be inferred that the assessee has consciously concealed the particulars of income or had deliberatelyfurnished inaccurate particulars in respect of the same and that eventhough the original assessment proceedings for computing the tax may bea good item of evidence in the penalty proceedings, penalty cannot belevied solely on the basis of the reasons given in the original order ofassessment. The above decisions of the Supreme Court clearly indicatethat penalty cannot be levied solely on the basis of the findings given inthe assessment proceedings and that for attracting penalty the circumstances must reasonably point to the conclusion that the disputed amountrepresented income and the assessee had consciously concealed the particulars of such income, or had deliberately furnished inaccurate particularsof the same. In this case the penalty has been levied by the Income-taxOfficer only on the basis of the findings rendered in the assessment proceedings. The Tribunal, however, considered the question as to whether theassessee had parted with the inflated sale price of cotton and found thatthere has been actually payment by the assessee of the inflated price forthe benefit of its managing agent, V. Ramaswami Naidu, and that therefore, there has been no deliberate attempt on the part of the assessee toconceal its income by showing a larger outlay. If this finding is accepted,then the principle of the decision in Sri Ramalinga Choodambikai Mills Ltd.v. Commissioner of Income-tax will apply. In that case it was foundthat a company sold some of its goods to its managing agency firm, toone of its directors and to a firm in which one of the directors was apartner, at rates much lower than the market rates. The revenue tookthe view that the sales were effected to benefit the purchasers at the expense of the company and it included the difference in price in the assessment of the company. The High Court held that the additions were not justified. It observed that a right might accrue to the company to proceed against its directors or managing agency or whoever was responsible for these sales for reimbursement of the loss caused to it but these would be no addition to the income of the company. The same view has also been taken by the Supreme court in Commissioner of Income-tax v. A. Raman and Co., : 67ITR11(SC) In that case the assessee was a firm composed of the managers of two Hindu undivided families. After the original assessments were made on the assessee for 1959-60, 1960-61 and 1961-62, proceedings were commenced by the Income-tax Officer under Section 147(b) of the Income-tax Act, 1961, to reopen those assessments on the ground that the assessee had effected sales of goods to the two Hindu undivided families, that those families had earned substantial profits on the resale of those goods over and above the margin of profits earned by the assessee and that the creation of the family business was merely a subterfuge or a contrivance of the partners of the assessee to divert the profits. The reassessment proceedings were challenged and the matter ultimately came to the Supreme Court. The Supreme Court said:
'But the law does not oblige a trader to make the maximum profit that he can out of his trading transactions. Income which accrues to a trader is taxable in his hands; income which he could have, but has not earned, is not made taxable as income accrued to him. By adopting a device, if it is made to appear that income which belonged to the assessee had been earned by some other person, that income may be brought to tax in the hands of the assessee, and if the income has escaped tax in a previous assessment, a case for commencing a proceeding for reassessment under Section 147(b) may be made out. Avoidance of tax liability by so arranging commercial affairs that charge of tax is distributed is not prohibited. A taxpayer may resort to a device to divert the income before it accrues or arises to him. Effectiveness of the device depends not upon considerations of morality, but on the operation of the Income-tax Act.'
19. The above two decisions seem to support the stand taken by the assessee that by payment of an inflated price for the cotton purchased from U.G. Krishnaswami, the assessee's profits had been reduced in view of larger outlay, but that will not lead to a finding that the assessee has concealed its particulars of income. The learned counsel for the revenue, however, states that this finding of the Tribunal that payment has been made at the inflated rate is not supported by materials and that, in any event, it should relate only to the addition of Rs.. 50,000 and not the addition of Rs. 25,000 which related to contract No. 103. But we find that even in the assessment proceedings such a finding has been given by the Appellant Assistant Commissioner in relation to both the items, on consideration of relevant materials. We are not also convinced that the Tribunal had no material to give such a finding The Tribunal has specifically referred to the circumstance that V. Ramaswami Naidu, the partner of the managing firm, has used the seller, U.G. Krishnaswami Naidu, as a stooge to siphon off considerable amounts from the coffers of the assessee-mill to his private advantage and that motive has been achieved by making excess payment to U.G. Krishnaswami Naidu, and, therefore, on the materials in this case, the finding of the Tribunal that the assessee has actually paid out the inflated value of cotton to U.G. Krishnaswami Naidu for the benefit of V. Ramaswami Naidu is justified. As already stated, this finding applies both to the sum of Rs. 50,000 as well as Rs. 25,000 relating to contract No. 103. The Tribunal gave an additional reason that, so far as contract No. 103 is concerned, the price paid is reasonable and in accordance, with the market rates. While saying that the price paid is reasonable, the Tribunal expressed the view that the prices were on the increase at the relevant time and that the price paid may be for a better quality of cotton, but the assessee was not in a position to prove the same. The Tribunal's view that the prices might have been paid for a better quality of cotton is a misdirection according to the revenue. It is said that no such plea was put forward even by the assessee and that the Tribunal is not justified in saying that the prices paid are reasonable having regard to the quality of cotton purchased. It is not possible for us to say that the Tribunal has misdirected itself in saying that the price paid for cotton by the assessee in relation to contract No. 103 is reasonable and that such a price might have been paid having regard to the quality of the cotton purchased. We do not construe the said observation of the Tribunal as a finding that the price paid was for a better quality of cotton. What the Tribunal seems to suggest is that it is possible that the increased price of Rs. 1,650 was paid in view of the increase in price and also of the quality of cotton purchased and that the mere that that the assessee is not able to explain to the satisfaction of the revenue the corrections made at the rates mentioned in contract No. 103 cannot automatically be taken as an excess or inflated payment. In our view, the Tribunal is right in holding that on the facts and in the circumstances of this case where the assessee is found to have paid for the cotton purchased at the inflated rates, it is not possible to say that the assessee has deliberately concealed its income. Therefore, we have to answer the reference in the affirmative and against the revenue and it is answered accordingly. The revenue will pay the costs of the assessee. Counsel's fee Rs. 250.