Commissioner of Income Tax vs Bala I.M. Rao

Ratnam, J.—In this reference u/s 256(1) of the Income Tax Act, 1961 (hereinafter referred to as ""the Act""), at the instance of the Revenue,

the following question of law has been referred to this court for its opinion:

Whether, on the facts and in the circumstances of the case and having regard to the provisions of the Explanation to section 271(1)(c) of the

Income tax Act, the Appellate Tribunal was justified in cancelling the penalty of Rs. 12,011 levied u/s 271(1)(c) ?

The assessee is an individual. For the assessment year 1966-67 she filed a return on November 9, 1971, declaring an income of Rs. 5,505. In

the course of the examination of the accounts of the assessee, it was found that she had made investments during the year amounting to Rs.

22,140. The assessee stated that the investments were made out of her past savings out of the presents given at the time of her marriage in 1961,

and by her husband and the amounts realised by her arising out of the investments of those amounts. However, the Income Tax Officer accepted

the explanation offered by the assessee to the extent of Rs. 10,129 and with regard to the balance amount of Rs. 12,011, he took the view that

that amount represented unexplained investment and added that amount to the income returned and determined the total income at Rs. 13,920. It

transpires from the record that this addition to the extent of Rs. 12,011 was also later sustained for want of satisfactory evidence as well as

explanation by the assessee. Since the income returned by the assessee fell short of 80 per cent. of the income as determined, penalty, proceedings

were initiated u/s 271(1)(c) of the Act. In the course of penalty proceedings before the Income Tax Officer, the assessee contended that there was

no mala fide intention on her part to conceal the income and that penalty could not be levied in view of the principles laid down by the Supreme

Court in the case of Hindustan Steel Ltd. Vs. State of Orissa, . The Income Tax Officer, however, held that the addition made did represent the

concealed income of the assessee and that Explanation to section 27(1)(c) of the Act stood attracted and that, therefore, penalty u/s 271(1)(c) of

the Act was clearly eligible, as the decision relied on by the assessee would be inapplicable. Accordingly he levied a penalty of Rs. 12,011 for the

assessment year 1966-67 on the assessee. However on appeal by the assessee before the Appellate Assistant Commissioner, he took the view

that in view of the orders of the Tribunal in ITA Nos. 415, 2006 and 2007 (Mds) /1975-76, the penalty levied u/s 271(1)(c) of the Act for the

assessment year 1966-67 should be deleted. On further appeal to the Tribunal by the Revenue the Tribunal took the view that it would not suffice

to establish that the quantum of addition was sustained in the quantum appeal, but that there should be evidence to show that the explanation of the

assessee regarding the source of investment was false and that this amount represented concealed income of the assessee and that there was

nothing on record to show that the addition sustained represented concealed income and the rejection of the explanation earlier offered by the

assessee is not a ground to levy penalty u/s 271(1)(c) of the Act. The Tribunal also found that the assessee had negatively shown that there was no

fraud or willful neglect in returning the correct income and that apart from non acceptance of the explanation of the assessee, no material had been

placed on record to show that the assessee concealed any income or furnished inaccurate particulars thereof. On that reasoning the Tribunal

upheld the cancellation of penalty.

Learned counsel for the Revenue contended that the Tribunal had totally misdirected itself with reference to the scope and effect of the

applicability of the Explanation to seciton 271(1)(c) of the Act and that there were no materials whatever to hold that the presumption raised under

the Explanation to section 271(1)(c) of the Act stood rebutted. Reference, in this connection, was also made to the decision of the Supreme Court

in Commissioner of Income Tax Vs. Mussadilal Ram Bharose, . On the other hand, learned counsel for the assessee submitted that the Tribunal

had taken into account the explanation offered by the assessee at the stage of the assessment proceedings and had concluded that on the facts and

circumstances, no case was made out for levy of penalty and, therefore, the view of the Tribunal deserved to be upheld.

Earlier, it has been seen how the assessee had returned an income of Rs. 5,505 in respect of the assessment year in question and how the

Income Tax Officer made additions to the tune of Rs. 12,011 as income from undisclosed sources and computed the income of the assessee at Rs.

13,920 and this was also sustained. On a consideration of the income returned by the assessee as well as that determined by the Income Tax

Officer and later sustained, it is seen that the total income returned by the assessee was less than 80 per cent, of the total income as assessed. By

virtue of the Explanation to section 271(1)(c) of the Act, which it was not disputed, would govern this case, a presumption is raised against the

assessee that the assessee is guilty of fraud or gross or willful neglect as a result of which income has been concealed. This no doubt, is a

rebbutable presumption, but such rebuttal must be on materials relevant and consent. That this is the position has been clearly laid down by the

Supreme Court in CIT v. Mussadilal Ram Bharose [1986] 165 ITR . The Supreme Court, after referring to the decision of the Full Bench of the

Punjab and Haryana High Court in Vishwakarma Industries Vs. Commissioner of Income Tax, and Commissioner of Income Tax Vs. Nathulal

Agarwala and Sons, held that once the provisions of the Explanation become applicable, three legal presumptions are raised viz., (i) that the

amount of the assessed income is the correct income and it is 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 he assessee to return the correct assessed income was due gross or wilful

neglect on his part. It has also been further pointed out that these are only presumptions and become the rule of evidence but such presumptions

are not conclusive but rebuttable. Unfortunately, the Tribunal in dealing with the propriety of the levy of penalty on the assessee, has not adverted

to the presumptions arising as a result of the Explanation and had also not considered whether the assessee had, in any manner, dislodged those

presumptions. On the contrary the Tribunal had approached the question of levy of penalty from the point of view that evidence should be placed

to show that the explanation of the assessee regarding the source of investment was false and that this amount represented the concealed income of

the assessee and further that there was nothing on record to show that the addition made and sustained represented concealed income. In so

doing, the Tribunal has clearly misdirected itself since the scope and effect of the Explanation to seciton 271(1)(c) of the Act has been completely

lost sight of and the matter had been dealt with as if the Revenue had to establish that the explanation of the assessee was false and that the amount

represented by the addition was the concealed income of the assessee and that there was no material in support thereof. The Tribunal in our view,

clearly overlooked the scope and effect of the Explanation as construed by the Supreme Court in the decision referred to above and had

approached the question for decision on the basis of the position in law as it stood prior to the amendments effected by the deletion of the word

deliberately"" and the addition of the Explanation. The explanation offered by the assessee, relying upon the decision in Hindustan Steel Ltd. Vs.

State of Orissa, , proceeded on that footing and it is this that has been erroneously accepted by the Tribunal in the disposal of the appeal resulting

in the deletion of the penalty. The Tribunal has also stated that nothing has been placed on record to show that the assessee has concealed any

income. We have earlier pointed out that this approach is erroneous. Indeed, it can be said that the assessee had not placed on record any material

to rebut any one of the three presumptions referred to earlier. The first of the presumptions if to the effect that the amount of the assessed income is

the correct income and that that, in fact, represented the income of the assesseef It may be that at the stage of assessment, the assessee had some

explanation to offer, but that had not been accepted and additions had been made and the income assessed at a particular figure and by reason of

the presumption referred to earlier, it follows that the correct income of the assessee is what has been determined. The view taken by the Tribunal

that the mere fact that the explanation of the assessee was not accepted is not a ground to levy penalty is, therefore, unacceptable. Further the

Tribunal has stated that the Explanation to section 271(1)(c) of the Act cannot also apply as the assessee had negatively shown that there was no

fraud or willful neglect in returning the correct income. We do not find any material to support this reasoning of the Tribunal and there is nothing on

record to establish that even negatively the assessee had established that there was no fraud or willful neglect in returning the correct income.

Under those circumstances, the Tribunal cannot be stated go have approached the question of levy of penalty on the assessee in the proper

perspective with reference to the applicability of the Explanation and its reasoning that evidence should be placed to show that the explanation of

the assessee was false and that the addition represented concealed income is clearly opposed to the provision in the Explanation regarding the

raising of presumptions and the rebuttal by the assessee. Likewise, the Tribunal was also in error in venturing to think that materials should be made

available presumably by the Revenue, to show that the assessee had concealed her income or furnished inaccurate particulars thereof. We are of

the view that, on the facts and circumstances of this case, the Tribunal has totally misdirected itself and has also not adverted to considerations

which would be relevant with reference to the applicability of the Explanation and had, on an erroneous view that the Revenue should establish

concealment of income or the furnishing of inaccurate particulars by the assessee, deleted the penalty. We also hold also that there has been no

explanation at all by the assessee with reference to the unexplained part of the additions and there was, therefore, no justification whatever for the

deletion of the penalty. We therefore, answer the question referred to us in the negative and against the assessee. The Revenue will be entitled to

the consents of this reference. Counsel''s fee Rs. 500.