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PETITIONER: COMMISSIONER OF INCOME TAX

       Vs.

RESPONDENT: MUSSADILAL RAM BHAROSE

DATE OF JUDGMENT28/01/1987

BENCH: MUKHARJI, SABYASACHI (J) BENCH: MUKHARJI, SABYASACHI (J) NATRAJAN, S. (J)

CITATION:  1987 AIR  814            1987 SCR  (2)  67  1987 SCC  (2)  39        JT 1987 (1)   307  1987 SCALE  (1)196  CITATOR INFO :  F          1992 SC 591  (7,8)

ACT:     Income  Tax Act, 1961, s.271(1)  (c)--Assessee--Conceal- ment  of particulars of his income or furnishing  inaccurate particulars--Assessee to prove that failure to file  correct return  of income did not arise from fraud, gross or  wilful neglect to the satisfaction of assessing authority.

HEADNOTE:     The Income-tax Officer rejected the account books of the respondent-assessee  on  the ground that the sales  and  ex- penses were not verified and the margin of profit shown - was  low. He adopted the net profit rate at 8% thereby  com- puting  the  profit at Rs.60,800 and the  total  income  was computed at Rs.60936 after addition of Rs. 136 for  interest receipts.  On  appeal the Appellate  Assistant  CommiSsioner confirmed this order of the Income-tax Officer. As the total income  returned  was less than 80% of  the  correct  income computed, he held that the case feb within the ambit of s.27 1(1)  of the Act, and issued a show cause notice under  sec- tion  274  read  with section 271 to the  assessee.  It  was contended  on  behalf of the assessee before  the  Appellate Assistant Commissioner (i) that the assessee did not conceal the  particulars of income nor furnish  inaccurate  particu- lars;  (ii) that the income returned was based on the  books of  account  maintained in the regular course  of  business; (iii)  that  the assessee could only declare the  income  as ref1ected in the books of account; (iv) that the  difference between the returned income and the assessed income did  not arise  from  any fraud or gross or unlawful neglect  on  the part  of the assessee; and (v) that it could not be  consid- ered in the circumstances that the assessee came within  the mischief of s.27 1(1)(c) of the Act. The Appellate Assistant Commissioner rejected these contentions, confirmed the order of the Income-tax Officer and in view of the Explanation  to section  271(1) levied a penalty of Rs.8,300  under  section 271(D(c) read with section 274(2) of the Act.     The respondent-assessee went up in appeal to the  Tribu- nal  which cancelled the penalty order ’and  finally  deter- mined  the income of the assessee at Rs.50,750 holding:  (a)

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that  the assessee had maintained certain types of books  of account and had honestly believed that the same were  suffi- cient for the true ascertainment of his profits and, from 68 the  facts  he disclosed, it could not be said that  he  had been  grossly or wilfully negligent in filing the return  of income and as such there was no fraud; (b) that the  differ- ence  between  the income returned and the  income  assessed arose  mainly  on account of excess profit, in view  of  the various defects in the account books and the application  of a higher profit rate on estimated turnover.     The application of the appellant-revenue seeking  refer- ence under s.256( D of the Act, was rejected by the Tribunal on the ground that no question of law arose.     The  appellant-revenue went before the High Court  under section  256(2) of the Act seeking a reference on the  ques- tion of cancelling the penalty imposed under sec.  271(1)(c) of  the Act, and this application was also dismissed on  the ground  that the finding of the Tribunal that  the  assessee acted  honestly notwithstanding the defective nature of  the account  books maintained by him was a finding of  fact  and therefore no question of law arose. Dismissing the appeal of the appellant-revenue, this Court,     HELD:  1. I If the Income tax Officer and the  Appellate Assistant Commissioner were satisfied that the assessee  had concealed the particulars of his income or furnished inaccu- rate  particulars  of such income, he can direct  that  such person  should pay by way of a penalty the amount  indicated in sub-clause (ii) of clause (c) of section 271(1).       Under  the law as it stood prior to the  amendment  of 1964, the onus was on the revenue to prove that the assessee had  furnished inaccurate particulars or had  concealed  the income.  Difficulties were found to prove the positive  ele- ment required for concealment under the law prior to  amend- ment.  This  positive element had to be established  by  the revenue.  To  obviate that difficulty, the  explanation  was added. The effect of the Explanation is that where the total income returned by any person is less than 80% of the  total income  assessed, the onus is on such person to  prove  that the  failure to file the correct income does not arise  from any  fraud  or any gross or wilful neglect on his  part  and unless he does so, he should be deemed to have concealed the particulars  of his income or furnished inaccurate  particu- lars,  for  the purpose of section 271(1). The  position  is that  the  moment the stipulated difference was  there,  the onus that it was not the failure of the assessee or fraud of the  assessee  or neglect of the assessee  that  caused  the difference shifted on 69 the assessee but it has to be borne in mind that though  the onus shifted, the onus that was shifted was rebuttable.     1.3  If in an appropriate case the Tribunal or the  fact finding body was satisfied by the evidence on the record and inference  drawn from the record that the assessee  was  not guilty  of fraud or any gross or wilful neglect and  if  the revenue had not adduced any further evidence then in such  a case  the  assessee cannot come within the mischief  of  the section  and suffer the imposition of penalty. That  is  the effect of the provision.     1.4  Presumptions raised by the Explanation  to  section 271(1)(c) are rebuttable presumptions. The initial burden of discharging  the onus of rebuttal is on the  assessee.  Once that initial burden is discharged, the assessee would be out of the mischief unless further evidence was adduced.     1.5  If  the  returned income is less than  80%  of  the

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assessed  income,  the  presumption is  raised  against  the assessee that the assessee is guilty of wilful neglect or of fraud or gross or wilful neglect as a result of which he has concealed  the income but this presumption can be  rebutted. The rebuttal must be on materials relevant and cogent. It is for the fact-finding body to judge the relevancy and  suffi- ciency of the materials. If such a fact-finding body bearing the  aforesaid  principles in mind comes to  the  conclusion that  the  assessee has discharged the onus,  it  becomes  a conclusion of fact. No question of law arises.     In the instant case, the Tribunal has borne in mind  the relevant principles of law and has also judged the facts  on record. It is not a case that there was no evidence or there was  such  evidence on which no reasonable  man  could  have accepted  the explanation of the assessee. In that  view  of the  matter  the  Tribunal rightly rejected  the  claim  for reference under section 256(1) and the High Court  correctly did  not entertain the application for reference under  sec- tion 256(2) of the Act.     2. If a party comes within the mischief of the  Explana- tion to section 27 1 then there is a presumption against him and the onus to discharge the presumption lies on the asses- see but being a presumption ’ it is a rebuttable one and  if on  appropriate  materials, the Tribunal has  rebutted  that presumption, no question of law can be said to arise.

JUDGMENT:     CIVIL  APPELLATE JURISDICTION: Civil Appeal No. 2083  of 1972. 70     From  the  Judgment and Order dated 24.9.  1971  of  the Allahabad High Court in Income Tax Appeal No. 535 of 1970. S.C. Manchanda and Mrs. A Subhashini for the Appellant. Ms. Rachna Gupta and S.K. Bagga for the Respondent. The Judgment of the Court was delivered by     SABYASACHI  MUKHARJI, J. This appeal arises out  of  the decision  of the Allahabad High Court dated  24.9.1971.  The High  Court by the order impugned dismissed  an  application under section 256(2) of the Income-Tax Act, 1961  (hereinaf- ter called the ’Act’). The assessee, a firm of two  partners was at the relevant time a licence vender of country liquor. For  the  assessment year 1965-66, the  Income  tax  Officer rejected  its  account books on the ground  that  sales  and expenses  were not verified and the margin of  profit  shown was low. It may not be inappropriate in view of the  conten- tions urged before us, to refer to the order of the Inspect- ing  Assistant Commissioner for the assessment year  1965-66 under section 271(1)(c) read with section 274(2) of the Act.     For the assessment year 1965-66, the Income Tax Officer, as noted by the Inspecting Assistant Commissioner,  rejected the   book  result  showing  sales  of  country  liquor   at Rs.5,82,234 and the profit margin at 4% for lack of verifia- bility  of sales and expenses and low margin of profit.  The Income Tax Officer estimated the sales at Rs.7,60,000  being Rs.6,50,000  in  Lakhibagh shop and Rs.  1,10,000  in  Magra shop, and adopted the net profit rate at 8% thereby  comput- ing the profit at Rs.60,800 and the total income was comput- ed  at  Rs.60,936  after addition of Rs.  136  for  interest receipts.  On appeal, the Appellate  Assistant  Commissioner confirmed  the order of the IncomeTax Officer. As the  total income  returned  was less than 80% of  the  correct  income computed, the case fell within the ambit of the  Explanation to section 271(1) of the Act.

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   In  pursuance to the notice under section 274 read  with section  271 of the Act for default under section  271(1)(c) the  assessee  showed cause. It was urged on behalf  of  the assessee  before the Inspecting Assistant Commissioner  that the  returned income was based on the books of accounts  and excise  registers  maintained by the assessee firm  and  the income was estimated. It was further urged that the  failure to return the correct income if any, did not arise from  any fraud or gross 71 or  wilful  neglect on the part of the  assessee  firm.  The Inspecting  Assistant  Commissioner, however, held  that  by producing what the Inspecting Assistant Commissioner  termed to be defective account books, it could not be said that the assessee had shown correct income. The Inspecting  Assistant Commissioner further noted that the sales and expenses  were unverifiable.  The  Inspecting  Assistant  Commissioner  was further  of  the  opinion  that the  addition  made  by  the Income-tax Officer was due to non-production of the material data  which  the assessee firm ought to  have  produced  for proper  determination of its income. In arriving at the  net profit  @ 8%, the Income-tax Officer had made the  allowance for   expenses  and  purchases  at  92%  of  the  sales   at Rs.7,60,000  i.e. at Rs.6,99,200 which covered all  the  ex- penses  and purchases found reasonable. The  Inspecting  As- sistant Commissioner was, therefore, of the opinion that the assessee  firm was grossly negligent and had not  discharged the  onus  of proving that the said difference  between  the income returned and the correct come did not arise from  any gross  or wilful neglect on the part of the assessee and  as such,  in  view of the Explanation to  section  271(1),  the provisions  of section 271(1)(c) were clearly attracted.  On this  basis the Inspecting Assistant Commissioner  levied  a penalty  of Rs.8,300 under section 271(1)(c) read with  sec- tion 274(2) of the Act.     The assessee went up in appeal before the Tribunal.  The Tribunal noted the facts. It may be noted that subsequent to the order of the Inspecting Assistant Commissioner, that  is to say on 26th September, 1968, the quantum appeal was heard and  partly allowed by the Appellate Tribunal. By its  order dated  26th  September,  1968 the Tribunal  held  that  when viewed in the light of the licence fee paid by the assessee, estimates  of the turnover were on the high side. The  lower rates  of profit were placed in cases of other  liquor  con- tractors  and  that in the circumstances, the  rate  of  net profit for both the shops should be 7% on estimated sales of Rs.6,25,000 for Lakhi Bagh shop and of Rs. 1,00,000 for  the Magra shop. In view of this order, the income finally deter- mined for the assessment year was Rs.50,750.      It is the case of the appellant that 80% of the  income finally assessed is Rs.40,600 which is much higher than  the income  returned  at Rs.30,138. However, on  behalf  of  the assessee, it was contended that the assessee did not conceal the particulars of income nor furnish inaccurate particulars thereof, that the income returned was based on the books  of account  maintained in the regular course of business,  that the  assessee could only declare the income as reflected  in the  books of account, that the difference between  the  re- turned income and the 72 assessed  income  did not arise from any fraud or  gross  or wilful neglect on the part of the assessee and that it could not  be  considered in the circumstances that  the  assessee came within the mischief of Explanation to section 271(1)(c) of the Act.

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   After reviewing certain other cases, the Tribunal was of the  view that like the cases referred to by the  Tribunal’s order, the assessee had maintained certain types of books of account  and it had appeared that it had  honestly  believed that the same were sufficient for the true ascertainment  of his profits and from the facts he disclosed it could not  be said  that  he  had been grossly or  wilfully  negligent  in filing  such a return of income as he did and as such  there was  no fraud. In conformity with the other orders  referred to by the Tribunal in the impugned order, it was held by the Tribunal that in the instant case, the Inspecting  Assistant Commissioner  had  erred in his finding and  therefore,  the penalty  order  was  cancelled. From this  decision  of  the Tribunal under section 256(1), a reference was sought to the High Court on the following question: "Whether, on the facts and in the circumstances of the case, the  Appellate  Tribunal  was justified  in  cancelling  the penalty imposed under section 271(1)(c)?"     The  Tribunal found that it was clear from a perusal  of the  order passed by the Tribunal that it was not  in  doubt that  the assessee returned the income on the books  of  ac- count maintained in the regular course of business and  that the  difference between the income returned and  the  income assessed  arose mainly on account of excess profit, in  view of the various defects in the account books and the applica- tion  of  a higher net profit rate  on  estimated  turnover. Following  the  earlier orders of the  Tribunal  in  similar cases,  the  Tribunal held that if the  assessee  maintained certain types of books of account and honestly believed  the same  to  be sufficient for the true  ascertainment  of  his profits,  it  could be considered as making an  estimate  of income  on a proper basis and it could not be said  that  in filing  the  return of income as reflected in the  books  of account,  the  assessee was grossly or  wilfully  negligent, much less fraudulent. The penalty order was vacated on  this basis. The Tribunal was of the opinion that on this  finding no question of law arose and as such there was no scope  for reference of the said question to the High Court. the appli- cation under section 256(1) was, therefore, rejected. The  revenue  went up before the High  Court  under  section 256(2) 73 of  the  Act seeking a reference on the  question  mentioned hereinbefore.  The High Court by the judgment  under  appeal after  referring to the facts mentioned hereinbefore was  of the  view  that no question of law arose in this  case.  The High Court opined in the impugned judgment that the  finding of  the Tribunal that the assessee acted  honestly  notwith- standing  the  defective nature of the account  books  main- tained  by him was a finding of fact. In the  premises,  the reference application was dismissed. As mentioned  hereinbe- fore, this appeal arises from the said decision of the  High Court.     After amendment by the Finance Act, 1964, section 271 of the Act along with the Explanation reads as follows:                     "271:-Failure  to furnish returns,  com-               plying  with notices, concealment  of  income,               etc.  (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               (               i               i               )

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               ...............................................               (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 20% but shall not               exceed one and a half times the amount of tax,               if  any, which would have been avoided if  the               income  as  returned by such person  had  been               accepted as correct income.               Explanation:  Where the total income  returned               by  any person is less than 80% of  the  total               income  (hereinafter in this  explanation  re-               ferred  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               74               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 proved that the  failure  to               return  the correct income did not arise  from               any  fraud or any gross or wilful  neglect  on               his  part,  be deemed to  have  concealed  the               particulars of his income or furnished inaccu-               rate  particulars of such income for the  pur-               pose of clause (c) of this sub-section."     It  is  clear  that if the Income Tax  Officer  and  the Appellate  Assistant  Commissioner were satisfied  that  the assessee  had  concealed the particulars of  his  income  or furnished  inaccurate  particulars of such  income,  he  can direct  that such person should pay by a penalty the  amount indicated in sub-clause (ii) of clause (c) of section 271(1) of the Act. Before the amendment, difficulty arose and it is not  necessary to trace the history, under the law as  stood prior to the amendment of 1964, the onus was on the  revenue to prove that the assessee had furnished inaccurate particu- lars or had concealed the income. Difficulties were found to prove  the positive element required for  concealment  under the law prior to amendment, this positive element had to  be established  by the revenue. To obviate that difficulty  the explanation  was  added. The effect of the  explanation  was that where the total income returned by any person was  less than 80% of the total income assessed, the onus was on  such person to prove that the failure to file the correct  income did not arise from any fraud or any gross or wilful  neglect on  his  part and unless he did so, he should be  deemed  to have  concealed the particulars of his income  or  furnished inaccurate  particulars, for the purpose of section  271(1). The  position is that the moment the  stipulated  difference was  there,  the  onus that it was not the  failure  of  the assessee or fraud of the assessee or neglect of the assessee that  caused the difference shifted on the assessee  but  it has  to be borne in mind that though the onus  shifted,  the onus  that was shifted was rebuttable. If in an  appropriate case the Tribunal or the fact finding body was satisfied  by the  evidence  on the record and inference  drawn  from  the record  that  the assessee was not guilty of  fraud  or  any gorss  or wilful neglect and if the revenue had not  adduced any further evidence then in such a case the assessee cannot come  within  the  mischief of the section  and  suffer  the imposition of penalty. That is the effect of the provision.

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    Our  attention was drawn to several decisions to  which out of deference, to Shri Manchanda who argued before us  on behalf  of the revenue, we shall refer.  Vishwakarma  Indus- tries v. Commissioner of 75 Income-Tax, Amritsar-1, 135 I.T.R. 652 is a decision of  the Full Bench of the Punjab and Haryana High Court where  Sand- hawalia, C.J. speaking for the Full Bench observed that  the object  and intent of the legislature in omitting  the  word "deliberately"  from  clause (c) of section  271(1)  of  the Income  Tax Act, 1961 and adding an Explanation  thereto  by the  Finance Act, 1964, was to bring about a change  in  the existing  law regarding the levy of penalty so as  to  shift the  burden of proof from the department on to the  assessee in  the  class  of cases where the returned  income  of  the assessee  was  less  than 80% of the  assessed  income.  The learned Chief Justice noted that the significant thing about the  change  made in clause (c) of section  271(1)  was  the designed  omission  of the  word  "deliberately"  therefrom, whereby the requirement of a designed furnishing of  inaccu- rate particulars of income was obliterated. According to the learned  Chief  Justice,  the language  of  the  Explanation indicated  that  for  the purposes of  levying  penalty  the legislature had made two clear-cut divisions. This had  been done by providing a strictly objective and an almost  mathe- matical test. According to the Chief Justice, the touchstone therefor was the income returned by the assessee as  against the  income assessed by the department which was  designated as "the correct income". The case where the returned  income was  less  than 80% of the assessed income can  be  squarely placed  into one category. Where, however, such a  variation is below 20% that would fall into the other category. To the first  category,  where  there is a  larger  concealment  of income,  the  provisions of the Explanation become  at  once applicable with the resultant attraction of the presumptions against such an assessee. Once the Explanation is held to be applicable  to  the  case of an  assessee,  it  straightaway raises three legal presumptions, viz. (i) that the amount of the assessed income is the correct income and it is in  fact the income of the assessee himself; (ii) that the failure of the  assessee to return the correct assessed income was  due to  fraud;  or  (iii) that the failure of  the  assessee  to return  the  correct  assessed income was due  to  gross  or wilful  neglect on his part. But it must be emphasised  that these  are presumptions and become rule of evidence but  the presumptions raised are not conclusive presumptions and  are rebuttable.     We are of the opinion that the view of the Full Bench of the Punjab and Haryana High Court is a correct view when  it states that it only makes a presumption but the  presumption is  rebuttable one and if the fact-finding body on  relevant and  cogent materials comes to the conclusion that in  spite of the presumption the assessee was not guilty, such conclu- sion does not raise any question of law. 76     Our attention was drawn to the decision of the  Division Bench  of the Allababad High Court in Addl. Commissioner  of Income-Tax,  Lucknow v. Lakshmi Industries and Cold  Storage Co.  Ltd., 146 I.T.R. 492. There the High Court  found  that the assessee had not given any explanation. So, on the facts found,  the inference of the Tribunal that the  amounts  had been  added and the evidence had been  found  unsatisfactory was  not correct. Penalty was exigible in that case and  the High  Court found that the Tribunal was wrong in  cancelling the penalty.

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   As mentioned hereinbefore, it depends upon the facts and circumstances  of  each case. If a party  comes  within  the mischief  of  the Explanation then there  is  a  presumption against  him and the onus to discharge the presumption  lies on  the assessee but being a presumption it is a  rebuttable one  and  if on appropriate materials, that  presumption  is found  to  be  rebutted no question of law can  be  said  to arise.     The  Full  Bench  of the Andhra Pradesh  High  Court  in Commissioner  of Income-Tax v.H. Abdul Bakshi &  Bros.,  160 I.T.R.  94 again reiterated that the presumption  spelt  out becomes  a  rule  of evidence. Presumptions  raised  by  the Explanation  to  section 271(1)(c) are  rebuttable  presump- tions. The initial burden of discharging the onus of  rebut- tal  is  on the assessee. Once that initial burden  is  dis- charged,  the assessee would be out of the  mischief  unless further evidence was adduced. Here there was none.     Similarly, the Full Bench of the Patna High Court in the case of Commissioner of Income-Tax, Bihar v. Nathulal  Agar- wala  and  Sons, 153 I.T..R. 292 had  occasion  to  consider this.  The High Court reiterated that the onus to  discharge the presumption raised by the Explanation was on the  asses- see and it was for him to prove that the difference did  not arise  from  any fraud or wilful neglect on  his  part.  The court should come to a clear conclusion whether the assessee had discharged the onus or rebutted the presumptions against him.  The Patna High Court emphasised that as to the  nature of  the explanation to be rendered by the assessee,  it  was plain  on principle that it was not the law that the  moment any  fantastic  or unacceptable explanation was  given,  the burden placed upon him would be discharged and the  presump- tion rebutted. We agree. We further agree that it is not the law  that any and every explantion by the assessee  must  be accepted.It must be acceptable explanation, acceptable to  a fact-finding body. 77     Mrs. Gupta, appearing for the assessee, drew our  atten- tion  to the observations of the Division Bench of the  Gau- hati High Court in Commissioner Income-Tax, Assam, Nagaland, Manipur & Tripura v. Chhaganlal Shankarlal, 100 I.T.R.  464. Our  attention was also drawn on behalf of the  assessee  to the  decision  of the Division Bench of the  Allahabad  High Court in Commissioner of Income-Tax v. Nadir Ali and Company 106 I.T.R. 151. There the court observed that under  section 271(  1)(c)  read with the Explanation, a penalty  could  be imposed  if  the income returned was less than  80%  if  the assessee did not prove that the disparity between the income assessed and the income returned by him was not due to gross neglect  or fraud. The fact that the assessee was not  main- taining  his  books of account in a particular way  did  not show that he was guilty of gross neglect. The Income-tax Act did  not  prescribe the manner in which  the  account  books should be maintained. When the assessee filed his return  on the  basis of accounts which were maintained in the  regular course  of business it could not be said that he was  guilty of  gross  negligence.  It could not be  expected  from  the assessee to file a return showing a higher income than  what was  worked out merely because the department had applied  a higher  rate of profit in the earlier years. It was held  by the Allahabad High Court that on the facts, the assessee had sufficiently discharged the burden.     The position therefore in law is clear. If the  returned income is less than 80% of the assessed income the  presump- tion  is  raised against the assessee that the  assessee  is guilty  of  wilful neglect or of fraud or  gross  or  wilful

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neglect as a result of which he has concealed the income but this  presumption can be rebutted. The rebuttal must  be  on materials  relevant and cogent. It is for  the  fact-finding body  to judge the relevancy.and sufficiency of the  materi- als.  If  such  a fact-finding body  beating  the  aforesaid principles in mind comes to the conclusion that the assessee has discharged the onus, it becomes a conclusion of fact. No question of law arises. In this case the Tribunal has  borne in  mind the relevant principles of law and has also  judged the  facts  on record. It is not a case that  there  was  no evidence  or there was such evidence on which no  reasonable man could have accepted the explanation of the assessee.  In that view of the matter, in our opinion, the Tribunal tight- ly rejected the claim for reference under section 256(1) and the  High Court correctly did not entertain the  application for  reference under section 256(2) of the Act. The  appeal, therefore, fails and is accordingly dismissed with costs. M.L.A.                                         Appeal   dis- missed. 78