IN THE HIGH COURT OF GUJARAT AT AHMEDABAD INCOME TAX REFERENCE No 38 of 1986 For Approval and Signature: Hon'ble MR.JUSTICE A.R.DAVE and Hon'ble MR.JUSTICE D.A.MEHTA ============================================================ 1. Whether Reporters of Local Papers may be allowed : YES to see the judgements? 2. To be referred to the Reporter or not? : YES 3. Whether Their Lordships wish to see the fair copy : NO of the judgement? 4. Whether this case involves a substantial question : NO of law as to the interpretation of the Constitution of India, 1950 of any Order made thereunder? 5. Whether it is to be circulated to the Civil Judge? : NO -------------------------------------------------------------- COMMISSIONER OF INCOME TAX Versus JALARAM OIL MILLS -------------------------------------------------------------- Appearance: MR AKIL QURESHI for MR RP BHATT for Petitioner NOTICE SERVED for Respondent No. 1 -------------------------------------------------------------- CORAM : MR.JUSTICE A.R.DAVE and MR.JUSTICE D.A.MEHTA Date of decision: 21/06/2001 ORAL JUDGEMENT (Per : MR.JUSTICE D.A.MEHTA) At the instance of the Commissioner of Income-tax, Rajkot, the Income Tax Appellate Tribunal, Ahmedabad Bench 'A' has referred the following question for the opinion of this Court : "Whether, on the facts and in the circumstances of the case, the levy of penalty of Rs. 30,000/imposed by the I.A.C. under section 271(1)(c) of the 1961 Act was justified in law?" 2. The Assessment Year under consideration is 1971-72 and the accounting period relevant for the said Assessment Year is S.Y. 2026. The assessment under sec. 143(3) was framed by the Income-tax Officer on 28th March 1974. As against returned income of Rs. 9,720/-, the assessee was assessed on a total income of Rs. 40,189/- by making an addition of Rs. 27,500/- as income from undisclosed source in respect of certain amounts credited in the name of six different creditors, apart from various disallowances with which we are not concerned at present. The ITO initiated proceedings under sec. 271(1)(c) of the Income-tax Act, 1961 (hereinafter referred to as 'the Act') and referred the matter to the Inspecting Assistant Commissioner (IAC) as required under the provisions as they then stood. The IAC levied a penalty of Rs. 30,000/- under sec. 271(1)(c) of the Act read with Explanation thereto by his order dated 10th March 1976. 3. The said order was challenged by way of appeal before the Tribunal and the Tribunal, for the reasons stated in its order dated 16th November 1977, held that the penalty in question cannot be sustained and thus allowed the appeal. It is this order from which the aforesaid question has been referred to this Court. 4. Mr. Akil Qureshi, learned counsel appearing on behalf of the applicant, submitted that sec. 68 of the Act specifically provides that in case where a sum is found credited in the books of an assessee maintained for any previous year, and where the explanation offered by the assessee about the nature and source of such credits is not found to be satisfactory, the sum so credited had to be charged to income-tax as the income of the assessee for that previous year. Elaborating on this submission, it was contended that sec. 68 of the Act was absolute in terms and the language of the provision left no doubt whatsoever that once the explanation offered by an assessee was not found to be satisfactory, the ITO was entitled to treat the said sum as income of the year under consideration for the purposes of bringing the same to charge. 5. We may at this juncture refer to the Supreme Court decision in the case of CIT v. Smt. P.K. Noorjahan, 237 ITR 570, wherein the Supreme Court was called upon to interpret the word "may" occurring in sec. 69 of the Act. After referring to the recommendation of the Select Committee, it has been held that, though the word "shall" was used in the Bill while introducing sec. 69 of the Act, the said word was substituted by the word "may" and that this clearly indicated the intention of the Legislature that while enacting sec. 69, a discretion was conferred on the ITO in the matter of treating the source of investment which had not been satisfactorily explained, as income of an assessee and that the ITO was not obliged to treat such source as income in every case where the explanation offered was found to be not satisfactory. The same word "may" has been used in sec. 68 of the Act and applying the ratio of the aforesaid decision of the Apex Court, we can derive support to the effect that, if an addition is not warranted in each and every case, there can't be a situation where, merely because an addition has been made by invoking provisions of sec. 68 of the Act, penalty under sec. 271(1)(c) of the Act would follow as a natural corollary. 6. Adverting to the facts from the order of the IAC, Mr. Qureshi submitted that this was a fit case where penalty was rightly levied under sec. 271(1)(c) of the Act read with Explanation thereto because - (i) the assessee had credited certain sums in its books of accounts maintained for the previous year, (ii) the creditors, in whose names those entries were made, did not support such entries, that is, some of them whom the ITO could contact, (iii) the assessee was informed of such denial by the creditors and yet the assessee failed to avail of the opportunity to cross-examine such creditors, and (iv) the assessee did not come forward with any further explanation. It was further contended that the IAC had rightly drawn a presumption that the amounts introduced in the books of accounts represented the assessee's concealed income and in view of the provisions of sec. 68 of the Act, it was not necessary for the department to prove anything further. 7. Referring to the Explanation under sec. 271(1)(c) of the Act, it was further submitted on behalf of the revenue that, admittedly, there was a difference of more than 20% as statutorily required to invoke the Explanation and that there was no explanation forthcoming from the assessee which could satisfactorily explain such difference and, alternatively, it was contended that the explanation tendered by the assessee did not discharge the burden which lay upon the assessee under the Explanation to show that there was no failure on part of the assessee to return the correct income. It was further submitted that, to the contrary, as held by the IAC, there was a fraudulent intention or a gross or wilful neglect on part of the assessee when it claimed that the credit entries represented advancing of loans from those persons who either did not appear before the ITO or did not support such entries. 8. Mr. Qureshi further stated that provisions of sec. 68 of the Act were not in the nature of a deeming provision and hence they should not be read to raise any fiction. However, it was contended that in case the said provision was read to be a deeming provision, it was a salutary principle of interpretation that a fiction should be carried to its logical end without permitting the mind to be boggled. Ins support of this proposition, the decision of the Apex Court in CIT, Delhi v. S. Teja Singh, AIR 1959 SC 352, was referred to and relied upon. We have no quarrel with the said proposition of law. At the same time, the law is well setled that the scope of a deeming provision cannot extend beyond the purpose for which it has been created. 9. The provisions of sec. 271(1)(c) and the Explanation with which we are called upon to deal, especially the Explanation as it then stood, is as under: "Explanation.- Where the total income returned by any person is less than eighty per cent of the total income (hereinafter in this Explanation referred 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 proves 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 inaccurate particulars of such income for the purposes of clause (c) of this sub-section." 10. The Explanation provides that, in case there is a difference, as statutorily provided, between the total income returned by any person and assessed, such person shall have to prove that the failure to return the correct income was not due to any fraud or any gross or wilful neglect on his part. In absence of such burden being discharged by the person concerned, it will be deemed that particulars of income have been concealed or inaccurate particulars of income have been furnished for the purposes of sec. 271(1)(c) of the Act. The nature of the Explanation has already been dealt with by courts and the settled legal position is that it raises a rebuttable presumption and the burden which is cast on an assesse is akin to a civil burden which may be discharged on a preponderance of probabilities. 11. Keeping this legal position in mind, is it possible to state with certainty that the assessee before us failed to return the correct income due to any fraud or any gross or wilful neglect on its part? On the facts found by the Tribunal, the answer has to be an emphatic "no". As can be seen from the facts on record, certain entries were found credited in the books of the assessee maintained for the previous year and the explanation offered by the assessee about the nature and source of such entries was not satisfactory in the opinion of the ITO and accordingly, in the assessment proceedings, the said sums were charged to income-tax as the income of the assessee for the assessment year under consideration. At the end of paragraph 2 in the assessment order it is stated by the ITO "in view of this fact, I treat the above income as income of the assessee as agreed and added to the total income." Therefore, it is a case where the assessee has conceded that the entries in question may be treated as his income and added by virtue of provisions of sec. 68 of the Act for the purposes of assessing the total income of the assessment year. From this concession, it is an entirely different matter, whether the said sum could be treated concealed income of the year under consideration. 12. In almost similar situation, this Court in the case of CIT, Gujarat-III v. Vinaychand Harilal, 120 ITR 752, has held thus : "That, normally, the revenue must establish that the receipt of the amount in question constituted the income of the assessee. The Explanation to s. 271(1)(c) of the Act enables the revenue to discharge this burden of proof laid on it if the condition regarding the returned income being less than 80 per cent of the assessed income is satisfied. But the presumption can be rebutted by the assessee. It was because of the admission made on behalf of the assessee before the AAC that the revenue could proceed upon the footing that the amount of Rs. 60,000 belonged to the assessee. It was, therefore, by the deeming provision under s. 69A that the AAC could assess the amount of Rs. 60,000 as the income of the assessee for the financial year in question. But that does not discharge the onus on the revenue of proving that the amount of Rs. 60,000 represented the income of the assessee for the particular financial year. In view of the series of decisions culminating in CIT v. Anwar Ali (1970) 76 ITR 696(SC) and Khoday Eswarsa's case (1972) 83 ITR 369 (SC) the mere fact that the explanation of the assessee in the assessment proceedings was rejected is no ground for levying penalty against the assessee in connection with that particular assessment year. On the facts and circumstances of this case, reading the admission of the assessee before the AAC, it cannot be said that he had admitted that the amount of Rs. 60,000 was his income from business in the particular year in question. It has not been established by the revenue that there was accretion to the net wealth of the assessee during the relevant year under consideration. There is nothing on the record to show what was the wealth of the assessee before the commencement of the year under consideration and what was the accretion to his net wealth in the course of that particular year. It is only if these materials are available that it will be possible to say that there was a case of accretion to the net wealth of the assessee which was not properly explained by the assessee and a presumption would arise that the net accretion represented income of the assessee during the year under consideration. No such material exists so far as the record of the case is concerned." 13. Applying the aforesaid ratio to the facts of the present case, it can be stated that on the basis of the assessee agreeing to have credit entries in its books of accounts treated as its income, by virtue of provisions of sec. 68 of the Act, the said sums shall be deemed to be income of the year under consideration. However, de hors the said provision, it is not possible to state with certainty that the said sums would be "concealed income" of the assessee for the year under consideration. The Tribunal has found, as a matter of fact, that "it was further necessary for the Department to prove that the amount in question was the assessee's income of the year under consideration. In that regard there is no material to prove the said fact." Thereafter, the Tribunal has tested the levy of penalty by applying provisions of the Explanation and recorded a finding of fact to the effect that there is no past history of the assessee to show that the assessee had been earning business income outside the books, nor is there in the books relating to the year under consideration any instance pointed out indicating any transaction outside the books. 14. In light of the aforesaid findings of fact, it is not possible for this Court to take any other view of the matter in the light of the settled legal position. We, therefore, hold that the tribunal was justified in law, on the facts and in the circumstances of the case, in holding that the penalty of Rs. 30,000/- imposed by the Inspecting Assistant Commissioner under sec. 271(1)(c) of the Act could not be sustained. We have borne in mind the ratio of decisions cited on behalf of the revenue while arriving at the aforesaid decision. 15. The question referred to us is answered in the negative, that is, in favour of the assessee and against the revenue. The reference is disposed of accordingly with no order as to costs. (A.R. Dave, J.) (D.A. Mehta, J.) (hn)