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) 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 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.
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.
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 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 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.
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) 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 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.
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 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.
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.
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.
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 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.