Commissioner of Income Tax vs K. Govindarajulu Naidu

Ratnam, J.—At the instance of the Revenue, u/s 256(2) of the Income Tax Act, 1961 (hereinafter referred to as ""the Act""), the following

two questions of law have been referred to this court for its opinion, in respect of the assessment year 1964-65 :

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

was right in law in cancelling the penalty levied u/s 271(1)(c) for the assessment year 1964-65 ?

(2) Whether, on the facts and in the circumstances of the case, the Appellate Tribunal was right in law in holding and had valid materials to hold

that the assessee has not concealed his income for the assessment year 1964-65 ?

The assessee had not been assessed to Income Tax till the assessment year 1963-64. With effect from January 1, 1964, the assessee became a

partner of the firm, Messrs. Inden Bisellers, contributing a capital of Rs. 30,000. On January 5, 1965, the assessee filed a return disclosing an

income of Rs. 56,306, made up of Rs. 58,719 being the share income from the said firm, less Rs. 2,413 being the interest on borrowals for the

assessme nt year 1964-65. Though, initially, the return filed by the assessee was accepted, subsequently, the assessment was reopened by the

issue of a notice u/s 148 of the Act and in response to that notice, the assessee filed a return disclosing an income of Rs. 92,584 made up of Rs.

59,484 being his share of profits in the firm as determined in the assessment of the firm and Rs. 33,100 being the income under the head ""Other

sources"". A letter was also sent by the assessee to the effect that the had borrowed Rs. 33,100 from multani bankers by executing hundis for the

purpose of contributing his share of capital in the firm and that the whereabouts of the multani bankers were not known, as they had left the place

and, therefore, he was offering the amount covered by the borrowings for assessment under the head ""Other sources"". The Income Tax Officer

completed the assessment determining the total income of the assessee at Rs. 92,584 and initiated action for levy of penalty for alleged

concealment of income and referred the case to the Inspecting Assistant Commissioner who issued a noti notice to the assessee calling upon him to

show cause against the levy of penalty. A reply was sent by the assessee reiterating that the borrowings were true and as he was not in a position

to establish the genuineness of the borrowings, the amount borrowed bad been offered for assessment under the head ""Other sources"" and there

was no concealment of any income justifying the levy of penalty. The Inspecting Assistant Commissioner took the view that if the borrowings were

genuine, there was no reason for the assessee to come forward and admit the same as his own income and that between the time when the share

income was admitted and the assessment came to be reopened, the bankers had confessed before the Department that they had only let their

names and did not in fact pay any cash and that, as soon as the notice u/s 148 of the Act came to be served, the assessee had come forward to

admit the concealed income and, under these circumstances, the stand of the assessee that the loans were genuine was only an after-thought and,

under the Explanation to section 271(1) of the Act, the assessee had failed to prove that the failure to return the income was not on account of

fraud or any gross or wilful neglect on his part and levied a penalty of Rs. 4,688. On appeal by the assessee before the Tribunal, it referred to the

letter sent by the assessee wherein he had stated that he had borrowed Rs. 33,100 from bankers and that he was offering the amount borrowed

for assessment as he was not in a position to produce the bankers, and stated that that cannot be construed as an admission by the assessee that

the sum of Rs. 33,100 represented the concealed income of theassesseae for the assessment year in question and that the Department should

established the same, which had not been done. Adverting to the Explanation to section 271(1)(c) of the Act, the Tribunal was of the view that the

assessee had discharged the onus under the Explanation and, therefore, the levy of penalty was not proper. The Tribunal, therefore, directed the

deletion of the penalty and that is how the two question of law set out earlier have come up before us.

Initially, the assessment was completed accepting the income of Rs 56,306 returned by the assessee and, subsequently, as a result of the

reopening, the income was assessed at Rs. 92,584, including Rs. 33,100 offered by the assessee as income from ""Other sources"". Admittedly, the

income returned by the assessee earlier was less then eighty per cent. of the total income as assessed and the Explanation stood attracted. The

effect of that, as laid down in Commissioner of Income Tax Vs. Mussadilal Ram Bharose, , was to raise the following three legal presumptions,

viz., (1) that the amount of the assessed income is the correct income and it is in fact the income of the assessee himself; (2) that the failure of the

assessee to return the correct assessed income was due to fraud; and (3) that the failure of the assessee to return the correct assessed income was

due to gross or wilful neglect on his part. Again, in Chuharmal Vs. Commissioner of Income Tax, M.P., , the Supreme Court pointed out that, in a

case where the assessee had returned an income which was less then eighty per cent. of the assessed income and the Explanation applied, the

Revenue had discharged the onus of proving concealment of income. In Commissioner of Income Tax, Madras Vs. K.R. Sadayappan, , the

Supreme Court ruled that the moment it was found that the income returned was less then eighty per cent. of the income assessed, the onus of

proof that it was not the failure of the assessee that caused the difference shifted to the assessee, though the presumption of concealment was

rebuttable by cogent, reliable and relevant material. Bearing in mind the aforesaid principles which are applicable to this case also, we find that the

Tribunal had not considered the question of the propriety of the levy of penalty on the assessee adverting to the presumptions arising and the

dislodging of those presumptions by materials placed by the assessee. The Tribunal overlooked the fact that the assessee had not offered Rs.

33,100 for assessment earlier, but had done so between the time when he had admitted the share income and the time when the assessment came

to be reopened, as, in the meanwhile, the bankers from whom the assessee is stated to have borrowed, confessed before the Department that they

were merely name-lenders. Further, the Tribunal overlooked the fact that the assessee had not established what was reiterated by him even in the

course of the penalty proceedings, viz., that the borrowings were true and under these circumstances, the presumption raised by the application of

the Explanation cannot at all be said to had been rebutted by the assessee. Apart from merely stating that the stand of the assessee was that the

borrowals were true and that there were no other circumstances which would prima facie indicate that the version of the assessee cannot be true,

the Tribunal had not adverted to any material placed by the assessee to dislodge the presumption. The absence of a reference to such material is

obvious because the assessee did not place any material at all. When the assessee had not placed any material to dislodge the presumption, it is

difficult to understand the view of the Tribunal that the assessee had discharged the onus under the Explanation. On the basis of this misdirection,

the Tribunal further proceeded to hold that the Department had to establish the concealment of the assessee and that not having been done, there

was justification for the cancellation of the penalty. The reasoning of the Tribunal holding that the assessee had discharged the onus under the

Explanation and that the Department had not established the concealment clearly discloses that the Tribunal had misdirected itself regarding the

scope and effect of the Explanation. The Tribunal, in our view , had dealt with the matter as if the Revenue had to establish that the explanation of

the assessee was false and the amount represented by the addition was the concealed income of the assessee and there was no material in support

thereof. This approach-also overlooks the scope and effect of the Explanation as construed by the decisions of the Supreme Court referred to

earlier. We do not find any material to support the conclusion of the Tribunal that the assessee had not concealed his income for the assessment

year in question, especially in view of the applicability of the Explanation. We are of the view that, on the facts and circumstances of this case, there

had been a total misdirection on the part of the Tribunal which had also not adverted to considerations which would be relevant in relation to the

applicability of the Explanation and had, on an erroneous impression that the Revenue should establish concealment of income, deleted the penalty.

We also hold that there has been no explanation whatever by the assessee and there was, therefore, no justification whatever for the deletion of the

penalty for which also there were no materials. We, therefore, answer the questions referred to us in the negative and in favour of the Revenue.

There will be, however, no order as to costs.