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Judgment
Bhagwati, C.J.—These two references raise a short question as to the interpretation of the Explanation to section 271(1)(c) of the Income
Tax Act, 1961. The assessee is a registered firm which carries on business as a retail dealer in medicinal drugs and preparations. The assessee
showed in its return for the assessment year 1964-65 total sales of Rs. 2,88,602 and gross profit of Rs. 16,400 which worked out at
approximately five per cent of the total sales and net income of Rs. 14,738. Similarly, for the assessment year 1965-66, the assessee showed in
the return submitted by it, total sales of Rs. 3,34,000 and gross profit of Rs. 26,595 which worked out at approximately 7.9 per cent. of the total
sales and net income of Rs. 19,434. The Income Tax Officer assessing the assessee to Income Tax for the assessment years 1964-65 and 1965-
66 found that though the books of account were maintained by the assessee according to the mercantile method of accounting, it was not possible
to accept the figure of profit appearing from the books of account because, in the first place, no quantitative stock account was maintained by the
assessee, secondly, a majority of the sales were not supported by vouchers and, thirdly, the gross profit disclosed by the books of account was
low. The Income Tax Officer accordingly proceeded to make best judgment assessment u/s 145(2) by estimating the total sales and applying a
rate of 7 1/2 per cent. to the sales to doctors and a rate of 12 1/2 per cent. to the other sales for the purpose of arriving at the gross profit in each
assessment year. The result was that for the assessment year 1964-65 a sum of Rs. 20,420 was added to the returned income of Rs. 14,738
making a total assessed income of Rs. 35,158 and similarly for the assessment year 1965-66, the returned income of Rs. 19,434 was augmented
to Rs. 38,416, by the addition of a sum of Rs. 18,982. Since the income returned was less than eighty per cent. of the total income assessed in
each assessment year, the Income Tax Officer was of the views that the Explanation to section 271(1)(c) was attracted and by reason of that
Explanation, the assessee must be deemed to have concealed the particulars of its income so as to be liable for penalty u/s 271(1)(c). The Income
Tax Officer, accordingly, issued show-cause notices to the assessee and in view of the fact that the minimum penalty imposable exceeded a sum of
rupees one thousand, he referred the case for each assessment year to the Inspecting Assistant Commissioner u/s 234. The Inspecting Assistant
Commissioner issued fresh notices to the assessee calling upon the assessee to show cause why penalty should not be imposed u/s 271(1)(c) read
with the Explanation. The assessee showed cause but the Inspecting Assistant Commissioner was not satisfied and taking the view that the
assessee had not proved that the failure to return the correct income did not arise from any fraud or any gross or willful neglect on its part, he made
a separate order for each assessment year imposing a penalty of Rs. 5,000 on the assessee. The assessee preferred appeals against the orders of
penalty to the Tribunal. The Tribunal disagreed with the view taken by the Inspecting Assistant Commissioner and observing that :
The difference between the income returned and the income assessed is mainly due to the fact that the profit has been estimated by the Income
Tax Officer for both the years. On the facts of the case no finding of any fraud or any willful neglect on the part of the assessee can be recorded.
The revenue authorities noted that the quantitative details were not available. They also noted that all the sales were to vouched. These cannot be
sufficient reason to justify the finding of any gross or willful neglect on the part of the assessee. There is no other factor which could justify any
finding in regard to fraud by the assessee. We must in the circumstances hold that the assessee cannot be deemed to have concealed the particulars
of its income or furnished inaccurate particulars of such income within the meaning of section 271(1)(c).
allowed the appeals and cancelled the orders of penalty. This view taken by the Tribunal is challenged in the present references at the instance of
the revenue.
In order to appreciate the question which arises for determination before us, it is necessary to examine the language of section 271(1)(c) with
the Explanation and to construe its meaning and effect. Section 271(1)(c) provides - and here we are setting out the section as it stood during the
relevant assessment years prior to its amendment by Finance Act, 1968 :
(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.... 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, - ...
in the cases referred to in clause (c), in addition to any tax payable by him, a sum which shall not be less than twenty per cent. but which shall not
exceed one and a half times the amount of the tax, if any, which would have been avoided if the income as returned by such person had been
accepted as the correct income.
Then there is the Explanation to section 271(1)(c), which reads as follows :
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 u/s 143 or section 144 or section 147 (reducted 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 gorss or wilful neglect on his part, be deemed to have
concealed the particulars of his income or furnihsed inaccurate particulars of such income for the purposes of clause (c) of this sub-section.
It is clear on a plain grammatical construction of the language used by the legislature that the condition which attracts the applicability of section
271(1)(c) is that the Income Tax authority should be satisfied in the course of any proceeding under the Act that any person has concealed the
particulars of his income or furnished inaccurate particulars of such income. It may be pointed out that, prior to its amendment by the Finance Act,
1964, section 271(1)(c) required that the assessee should have concealed the particulars of his income or deliberately furnished inaccurate
particulars of such income, but the word ""deliberately"" was omitted from the section by the Finance Act, 1964. What is the effect of this omission
does not fall for determination in this case because the assessee is sought to be brought within section 271(1)(c) not on the application of its own
terms but by resort to the deeming fiction contained in the Explanation. The Explanation which was not originally there when section 271(1)(c) was
enacted but which was introduced by the Finance Act, 1964, provides that where the total income returned is less than eighty per cent, of the total
income assessed, the assessee 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 within the
meaning of section 271(1)(c). It is an Explanation enacted in the context of a highly penal provision and there can, therefore, be no doubt that it
must be construed fairly and reasonably. This, of course, does not mean that if a case falls fairly and squarely within the language of the
Explanation, we should refuse to give effect to the mandate of the legislature as disclosed in the Explanation. But what is necessary to be borne in
mind is that when we are construing the true meaning and effect of the Explanation, we must not forget that it is the Explanation which adds to the
rigour of a highly penal provision and we must not, therefore, be over anxious to enlarge the scope and ambit of the Explanation by making an
effort to bring every possible case within it, but we should instead construe the Explanation and apply it in a fair and reasonable way with a view to
achieving the purposes of the main provision, namely, that an assessee who has concealed the particulars of his income or furnished inaccurate
particulars of such income should not escape penalty. The Explanation creates a legal fiction if the condition of its applicability is satisfied. The
condition is an objective condition, namely, that the total income returned by the assessee should be less than eighty per cent. of the total income
assessed subject to a certain reduction which is not material for our purpose. What the condition contemplates is merely a matter of arithmetical
calculation. The Income Tax authority is required to take the total income returned by the assessee and the total income as assessed by the revenue
authorities and if the former is less than eighty per cent. of the latter, the condition for the applicability of the Explanation is satisfied. The
Explanation then says that the assessee shall be deemed to have concealed the particulars of his income or furnished inaccurate particulars of such
income within the meaning of section 271(1)(c). The Explanation raises a legal fiction and the assessee is straightaway brought within the ambit of
section 271(1)(c). It is then not necessary for the revenue to show affirmatively by producing the material that the assessee has in fact concealed
the particulars of his income or furnished inaccurate particulars of such income. The fact of the total returned income being less than eighty per cent.
of the total income assessed is sufficient to bring the assessee within the penal provision enacted in section 271(1)(c). That is achieved by the legal
fiction enacted in the Explanation. But, this legal fiction can be displaced if the assessee proves that the failure to return the correct income, that is
the total income assessed, did not arise from any fraud or gross or wilful neglect on his part. If the assessee wants to repel the legal fiction and
throw the burden of bringing the case within section 271(1)(c) again on the revenue, as it would be in the absence of the Explanation, the assessee
has to show - and tis burden is upon him - that his failure to return the correct income did not arise from any fraud or gross or wilful neglect on his
part. Now, this burden is not of the same nature as the burden which rests on the prosecution in a criminal case where the prosecution has to
establish the guilt of the accused beyond reasonable doubt nor is it of the same nature as the burden which lies upon the revenue in establishing that
the assessee has concealed the particulars of his income or furnished inaccurate particulars of such income. It is a burden akin to that in a civil case
where the determination is made on preponderance of probabilities. It is also not necessary that any positive material should be produced by the
assessee in order to discharge this burden which rests upon him. The assessee may claim to have discharged the burden by relying on the material
which is on record in the penalty proceedings, irrespective of whether it is produced by him or by the revenue. The only question to which the
Income Tax authority has to address itself is, whether on the material on record in the penalty proceedings, can it be said on a preponderance of
probabilities that the failure to return the total assessed income has not arisen on account of any fraud or any gross or wilful neglect on the part of
the assessee. If the answer to the question is in the affirmative, the legal fiction enacted in the Explanation cannot arise and the revenue must fail in
its attempt to impose penalty on the assessee. If the material on record in the penalty proceedings fairly and reasonably leads to the inference that
there was no fraud or gross or wilful neglect on the part of the assessee in not returning the total assessed income, it would almost be impossible
for the revenue to contend that the assessee has concealed the particulars of his income or furnished inaccurate particulars of such income so as to
attract the applicability of section 271(1)(c) on its own terms independently of the Explanation. But that is not a matter on which we wish to
express any final opinion because, in the present case, the attempt to levy penalty on the assessee is founded only on the Explanation and it is the
applicability of the Explanation alone which requires to be considered by us in the present references.
The main contention urged on behalf of the revenue was that the Tribunal had misconceived the legal position and erroneously cast on the
revenue the burden of showing that there was fraud or gross or wilful neglect on the part of the assessee in not returning the total assessed income.
The revenue urged that the burden of showing that there was no fraud or gross or wilful neglect on the failure to return the total income assessed
was on the assessee and it was not for the revenue to establish affirmatively that there was such fraud or gross or wilful neglect on the part of the
assessee. This error in regard to the burden of proof, contended the revenue, vitiated the order of the Tribunal because, if the Tribunal had
approached the case correctly and examined whether the assessee had discharged the burden of proof which lay upon it, the Tribunal would have
come to the conclusion that the burden was not discharged and it was not possible to say that there was no fraud or gross or wilful neglect on the
part of the assessee. Now, on a superficial reading of the order of the Tribunal, this contention of the revenue might seem to derive some support
but, reading the order of the Tribunal as a whole, we do not think it would be right to attribute any remissness to the Tribunal on the question of
burden of proof. It is clear from the order that the Tribunal was fully conscious of the terms of the Explanation and it was aware that the legal
fiction enacted in the Explanation could be displaced only if there was no fraud or gross or wilful neglect on the part of the assessee. That is why
the Tribunal addressed itself to the question whether or not there was fraud or gross or wilful neglect on the part of the assessee. The Tribunal
could come to either of two conclusions on this question : there was fraud or gross or wilful neglect on the part of the assessee or there was not. It
is only if the Tribunal came to the conclusion that there was no fraud or gross or wilful neglect on the part of the assessee that the Tribunal could
negative the applicability of the legal fiction enacted in the Explanation. That is what the Tribunal proceeded to consider and when the Tribunal
observed that ""on the facts of the case no finding of any fraud or any wilful neglect on the part of the assessee can be recorded"", what the Tribunal
meant was that there was no fraud or gross or wilful neglect on the part of the assessee. We are, therefore, of the view that the charge made by the
revenue against the Tribunal that it misconceived the correct position in regard to burden of proof cannot be sustained. We must, however,
observe that it would have been better if the Tribunal had phrased its order properly so as to leave no scope for doubt that what it was holding
was that the assessee had discharged the burden of showing that there was no fraud or gross or wilful neglect on its part in failing to return the total
income assessed. The wording of the order, as it stands, does give rise to scope for misunderstanding. We hope and trust that the Tribunal will in
future use language which is plain and unambiguous and disclose clearly that what it is considering is the question whether the assessee has
discharged the burden of proof which lies upon him.
So far as the facts of the present case are concerned, there is no doubt that the finding reached by the Tribunal that there was no fraud or gross
or wilful neglect on the part of the assessee is correct in law. Here it is significant to note that the difference between the returned income and the
total assessed income was entirely due to the fact that the Income Tax Officer estimated the profits supposed to have been earned by the assessee.
The Income Tax Officer found it difficult to accept the figure of profit appearing from the books of account maintained by the assessee because no
quantitative stock account was maintained, a majority of sales were not supported by vouchers and the gross profit disclosed in the books of
account appeared to him to be low. It was not the case of the Income Tax Officer that any particular entries in the books of account were false or
any particular items of purchase or sale were omitted to be entered in the books of account. It was only because the figures of profit appearing in
the books of account. It was only because the figures of profit appearing in the books of account could not be verified by him on account of lack
of maintenance of proper verificatory records that the Income Tax Officer estimated the sales and applied a percentage of 7 1/2 per cent. to sales
to doctors and a rate of 12 1/2 per cent. to the other sales. It is quite possible that if proper verificatory records had been maintained by the
assessee, the income returned might have been accepted as the correct income by the Income Tax Officer. These records might have shown that
the accounts maintained by the assessee were correct and reflected the correct income. It is difficult to see how in these circumstances where
assessment of total income is made on the basis of estimate it can be said that the failure to return the total assessed income was on account of
fraud or gross or wilful neglect on the part of the assessee and, if that be so, it must follow by necessary implication that the failure to return the
total assessed income was not on account of any fraud or gross or wilful neglect on the part of the assessee. The burden which lies upon the
assessee must be taken in such a case to be discharged so as to repel the applicability of the legal fiction enacted in the Explanation.
The revenue relied very strongly on the fact that in the past years also, the Income Tax Officer had declined to accept the books of account of
the assessee as reflecting the correct income in the absence of proper verificatory records and made additions in the income returned by it and yet
the assessee persisted in not maintaining proper verificatory records and continued to keep the accounts on the same basis as in the past year.
This, according to the revenue, constituted gross or wilful neglect on the part of the assessee and it was on account of such gross or wilful neglect
that the assessee failed to return the total income assessed and the case, therefore, fell fairly and squarely within the language of the Explanation.
This argument, plausible though it may seem, is, in our opinion, wholly fallacious. It proceeds on the assumption that if accounts had been properly
maintained by the assessee, they would have disclosed the total income as assessed and in that event there would have been no failure on the part
of the assessee to return the total assessed income. This assumption is not well-founded. It is clear law that neglect postulates breach of duty to
take care and there is clearly no duty on the assessee to maintain books of account, he runs the risk of best judgment assessment and in a best
judgment assessment, it is quite possible that the total income assessed by the Income Tax Officer may be more than the income earned by the
assessee. But, apart from this risk of enhanced assessment which the assessee account shall be maintained by an assessee on pain of penalty. Since
there is no duty laid by the Income Tax law on the assessee to maintain books of account, failure to maintain books of account cannot be said to
constitute neglect. But this does not mean that the assessee can escape liability if he maintains false or incorrect accounts. If the assessee maintains
books of account, he is under an obligation to see that the accounts shown in the books of account are correct. There would clearly be neglect on
the part of the assessee if he maintains accounts which are false or incorrect and on the basis of such false or incorrect accounts he returns income
which is not found to be the correct income. But, here, in the present case, there is nothing to show that the accounts maintained by the assessee
were false or incorrect. The Income Tax Officer did not find that any particular entries in the books of account were not genuine or any particular
items of purchase or sale were omitted to be entered in the books of accounts. The only grievance of the Income Tax Officer was that in the
absence of proper verificatory records, it was not possible to verify the figures of profit appearing in the books of account and hence he was not in
a position to accept the income returned by the assessee. There was no obligation on the assessee to maintain any verificatory records so that lack
of maintenance of such records could be regarded as neglect on the part of the assessee. The assessee could tell the Income Tax Officer that the
accounts maintained by it were correct and they reflected the correct profit. The Income Tax Officer might very well say that, in the absence of
proper verificatory records, he would not accept the figures of profit appearing in the books of account and make best judgment assessment by
making an estimate but from that it does not follow that the accounts maintained by the assessee were false or incorrect or that the income returned
by the assessee was not the correct income. Moreover, as pointed out above, it is quite possible that if proper verificatory records had been
maintained, they would have shown that the accounts maintained by the assessee were correct and the income returned was the correct income.
Failure to return the total assessed income could not, therefore, be said to be due to non-maintenance of proper verificatory records by the
assessee.
We are, therefore, of the view that in a case like the present, where assessment is made on the basis of an estimate and there is nothing on
record to show that any particular entries in the books of account are false or incorrect or any particular items of purchase or sale are omitted to
be entered in the books of account, the assessee must be held to have discharged the onus which rests upon him to show that the failure to return
the total income assessed was not on account of any fraud or gross or wilful neglect on his part. This view is clearly supported by the decision of a
Division Bench of the Kerala High Court in Commissioner of Income Tax v. Sankarsons & Company. We must, in the circumstances, hold that the
Tribunal was right in coming to the conclusion that there was no fraud or gross or wilful neglect on the part of the assessee in failing to return the
total assessed income and the legal fiction enacted in the Explanation was not attracted and the assessee was accordingly not liable to penalty u/s
271(1)(c).
We, therefore, answer the question referred to us in each of the references in the affirmative. The Commissioner will pay the costs of each
reference to the assessee.