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Judgment
B.K. Mehta, J.—At the instance of the assessee, the following two question have been referred to us for our opinion :
(1) Whether, on the facts and in the circumstances of the case, the order of penalty passed by the Inspecting Assistant Commissioner who had not
recorded his satisfaction in the course of assessment proceedings is valid in law ?
(2) Whether, on the facts and in the circumstance of the case the assessee was liable for penalty for default in original return it having filed a revised
return ?
We my state at the outset that the first question was not pressed on behalf of the applicant-assessee. In order to understand the rival contentions
in connection with the second question, a few facts need be stated.
The relevant assessment year is 1964-65. The assessee originally filed a return showing an income of Rs. 23,957 on June 29, 1964. A revised
return was filed by the assessee showing an income of Rs. 44,800 on September 13, 1965. The revised return was filed by adding certain in
admissible expenses as also profit which had arisen u/s 41(2) of the 1961 Act. The Income Tax Officer passed an assessment order on July 24,
1968, assessing the income of the assessee at Rs. 72,610. In the course of the assessment, proceedings for levy of penalty u/s 271(1)(c) read with
the Explanation were initiated. Since the minimum penalty leviable exceeded Rs. 1,000, the matter was referred to the Inspecting Assistant
Commissioner u/s 274(2). The Inspecting Assistant Commissioner found that the original return of the relevant assessment year showed an income
of Rs. 23,957 while the correct income assessed ultimately was to the tune of Rs. 72,610. As the onus was on the assessee to prove that the
income had been understated in the original return not on account of any fraud or gross or wilful negligence and as the assessee was represented all
throughout by a qualified Income Tax practitioner, it was difficult for the Assistant Commissioner to appreciate how a substantial amount of profit
u/s 41(2) could have been omitted unless for gross or wilful negligence on the part of the assessee. He, therefore, by his order of July 3, 1970,
levied a penalty of Rs. 6,000. The assessee, thereupon took the matter in appeal before the Tribunal. Meanwhile in the appeal by the Income from
the order of assessment the Appellate Assistant Commissioner had deleted the amount of Rs. 23,610 which were added by the Income Tax
Officer to the gross profit. It was, therefore, contended before the Tribunal that having regard to the subsequent revised return and after deleting
the amounts of Rs. 23,610 allowed in the appeal from the order of assessment by the Appellate Assistant Commissioner the case of she assessee
did not come within the mischief of the Explanation to section 271(1)(c) and, therefore, the assessee could not be deemed to the concealing the
income and the order of penalty was, therefore, bad.
The Tribunal did not accept the explanation of the assessee that there was no wilful or gross negligence in not including the profit u/s 41(2) at the
time of filing the original return, as according to the Tribunal, the assessee did not explain this omission either before the Inspecting Assistant
Commissioner or at the time of filing the revised return. In the opinion of the Tribunal, filing of subsequent revised return was not of much
consequence and could not absolve the assessee from liability to penalty. It, therefore, confirmed the order of the Appellate Assistant
Commissioner. At the instance of the assessee, therefore, the question set out hereinabove has been referred to us.
As stated by us earlier, it is only question No. 2 which survives for our opinion. What is the effect of filing a revised return on the question of
levying penalty on the ground of concealment of income has been considered by the courts in a number of judicial pronouncements. In
Commissioner of Income Tax v. Ramdas Pharmacy, the Madras High Court has, afters reviewing the entire case laws on the subjects held :
Though the decision of the Supreme Court in Commissioner of Income Tax v. Raman Chettiar (has not changed the entire legal position
enunciated in the various decisions that the revised return should be voluntary to avoid penalty u/s 28(1)(c) and that the filing a of revised return u/s
22(3) will not expatiate the contumacious conduct, if any on the part of the assessee in not having disclosed a true income in the original return, it is
not correct to state that the filing of the second return is of no consequence at all while considering the liability of the assessee u/s 28(1)(c) of the
Act. All the facts and circumstances commencing with the filing of the original return and ending with the assessment may be taken as relevant for
considering the assessee''s liability for penalty u/s 28(1)(c).
It is no doubt true that the Madras High Court as will as all the decisions the of the different High Court digested there in dealt with the question
of penalty u/s 28(1)(c) with reference to revised returns filed u/s 22 (3) of the 1922 Act. The present case with which we are concerned is a case
arising u/s 271(1)(c) read with the Explanation. The scope and with of the powers of the Inspecting Assistant Commissioner have been considered
by the Divisions Beach of this High Court in Income Tax Reference Nos. 70 and 76 of 1970 (Commissioner of Income Tax v. S. P. Bhatt), where
the assessee for the assessment year 1964-65 showed an income of Rs. 14,738. For the assessment year 1965-66, he showed an income of Rs.
19,434 in his return. The Income Tax Officer found that though the books of accounts were maintained by the assessee according to the mercantile
system, it was not possible to accept the figure of profit appearing from the books of account and, therefore, made best judgment assessment u/s
145(2). He assessed the assessee for a sum of Rs. 35,158 for the assessment year 1964-65 and for a sum of Rs. 38,416 for the assessment year
1965-66. Since the income returned was less than eighty per cent. of the total income assessed in each assessment year, the penalty proceedings
were initiated and for each year a penalty of Rs. 5,000 was levied on the assessee. The division Beach considered clauses (c) of section 271(1)
with reference to the Explanation and observed :
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 cash 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 to of the Explanation we must not forget that it is an Explanation which adds to the rigour of a highly penal provision and
we must not, therefore, be over-anxious to enlarges 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.
After refereeing to the fiction created by the Explanation, the Division Bench proceeded to observe as under :
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 this 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 is not 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 a 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 the 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.
It appears to us that the Tribunal, while dealing with this question of penalty of the assessee, was of the opinion that the filing of revised returns
was of no consequence. In paragraph 4 of its order, the Tribunal replying to the contention urged on behalf of the assessee that the Explanation to
section 271(1)(c) can have no application if the subsequent return filed is taken into consideration, observed as under :
...... but we fail to understand why the subsequent return should be taken into consideration in judging whether the assessee liable for penalty u/s
271(1)(c) read with the Explanation.
After referring to the fact that there was no explanation for not including in the return of income the profit made u/s 41(2) by the assessee who
was carrying on business for the last 20 years and was represented and assisted by experienced chartered accountants in connection with the
Income Tax proceedings, the Tribunal found :
...... we, therefore, cannot but hold that the assessee is guilty of willful or gross neglect in not disclosing the income arising u/s 41(2) while filing the
original return. Mere fact that a revised return was field the assessee from the liability to penalty......
It is, therefore, clear to us that the Tribunal did not attach any importance or significance to the filing of the revised return by the assessee. It
should be recalled that the original return was filed on June 29, 1964, and the revised return was filed on September 13, 1965, in which the profit
u/s 41(2) was included. The Income Tax Officer has passed the assessment order on July 24, 1968. In that state to evidence, therefore, it is
difficult for us to appreciate how the Tribunal has brushed aside the filing of revised return as of no consequence. It is no doubt true, as held by the
Madras High Court in Commissioner of Income Tax v. Ramdas Pharmacy, that it was not possible to construe the original return in isolation
without reference to the assessee''s conduct subsequent to the filing of the original return and that all facts and circumstance commencing with the
filing of the original return and ending with the assessment may be taken as relevant for considering the assessee''s liability for penalty u/s 28(1)(c).
The Tribunal has not thought fit to attach any significance or importance to the filing of the revised return and merely proceeded on the fact that
there was no explanation by the assessee for not making a return of the income he has earned from the profit u/s 41(2) and as the assessee was
represented by experienced chartered accounts at various stages of Income Tax proceedings, he should be held guilty of gross, negligence and,
therefore liable to be subject to penalty. The Tribunal had, therefore, no occasion to find out and to address itself to the important question,
whether this revised return was made by the assessee of his valuation before concealment was detected in the course of the assessment
proceedings. The Tribunal has also failed to decide the question whether, on consideration of the entire conduct of the assessee right from
inception to the filing or revised return, the burden lying on the assessee is discharged having regard to preponderance of probabilities. In the
absence of such a finding by the Tribunal, therefore, it is difficult for us to answer the question which has been posed before us. In that view of the
matter, two courses are open to us as they were before the Supreme Court in Commissioner of Income Tax v. Indian Molasses Co. P. Ltd., either
to call for a supplementary statement of the case from the Tribunal and to leave the Tribunal to take appropriate steps to adjust its decision u/s
260(1) in the light of the established legal principles referred to in the order of the court. If we direct the Tribunal to submit a supplementary
statement, it would necessarily be restricted to the evidence on record and may not be entitled to take additional evidence. That may result in
injustice to either party. In the circumstances, we follow the course adopted by the Supreme Court in the said decision of Commissioner of Income
Tax v. Indian Molasses Co. P. Ltd. We think it appropriate to decline to answer the question on the ground that the Tribunal has failed to consider
and decide the question whether the revised return was filed by the assessee of his own volition before the concealment was detest in the course of
the proceedings and what was his entire conduct from the filing of his original return to the completion of the assessment proceedings proceedings
including the filing of revised return, and it also failed to determine on preponderance of probabilities that the burden cast on the assessee is
discharged or not. It would be open to the Tribunal to dispose of the appeal u/s 260(1) in the light of the observation made by this court after
determining the question which it ought to have decided.
There should be no order as to costs in this reference.