ivil Appeal No 2083 of 1972
70 From the Judgment and Order dated 249
1971 of the Allahabad High Court in Income Tax Appeal No 535 of 1970
SC Manchanda and Mrs A Subhashini for the Appellant
Ms Rachna Gupta and SK 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 2491971
The High Court by the order impugned dismissed an application under section 2562 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 2711c read with section 2742 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 Rs582234 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 Rs760000 being Rs650000 in Lakhibagh shop and Rs 110000 in Magra shop and adopted the net profit rate at 8 thereby comput ing the profit at Rs60800 and the total income was comput ed at Rs60936 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 2711 of the Act
In pursuance to the notice under section 274 read with section 271 of the Act for default under section 2711c 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 Rs760000 ie at Rs699200 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 2711 the provisions of section 2711c were clearly attracted
On this basis the Inspecting Assistant Commissioner levied a penalty of Rs8300 under section 2711c read with sec tion 2742 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 Rs625000 for Lakhi Bagh shop and of Rs 100000 for the Magra shop
In view of this order the income finally deter mined for the assessment year was Rs50750
It is the case of the appellant that 80 of the income finally assessed is Rs40600 which is much higher than the income returned at Rs30138
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 2711c of the Act
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 2561 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 2711c 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 2561 was therefore rejected
The revenue went up before the High Court under section 2562 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           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 2711 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 2711
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
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 vs Commissioner of 75 Income Tax Amritsar 1 is a decision of the Full Bench of the Punjab and Haryana High Court where Sand hawalia CJ speaking for the Full Bench observed that the object and intent of the legislature in omitting the word deliberately from clause c of section 2711 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 2711 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 vs Lakshmi Industries and Cold Storage Co Ltd 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
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 vs
H Abdul Bakshi  Bros again reiterated that the presumption spelt out becomes a rule of evidence
Presumptions raised by the Explanation to section 2711c 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 vs Nathulal Agar wala and Sons 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 vs Chhaganlal Shankarlal 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 vs Nadir Ali and Company There the court observed that under section 271 1c 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 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 relevancyand 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 2561 and the High Court correctly did not entertain the application for reference under section 2562 of the Act
The appeal therefore fails and is accordingly dismissed with costs
MLA Appeal dis missed


Summary:
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 Rs60800 and the total income was computed at Rs60936 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 s27 11 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 s27 11c 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 2711 levied a penalty of Rs8300 under section 271Dc read with section 2742 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 Rs50750 holding a 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 s256 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 2562 of the Act seeking a reference on the ques tion of cancelling the penalty imposed under sec
2711c 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 2711
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 2711
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
13 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
14 Presumptions raised by the Explanation to section 2711c 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
15 If the returned income is less than 80 of the 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 2561 and the High Court correctly did not entertain the application for reference under sec tion 2562 of the Act
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