Income-tax---

----Penalty---Concealment of income---Amounts shown as expenses ---ITO holding that the payments were payments to self and disallowing the same-- Consequently returned income becoming less than 80 per cent of assessee income---Practice followed by assessee and accepted by Department for several years----No concealment of income---Penalty cannot be posed-- Indian Income Tax Act, 1961, S.271(1)(c).

The assessee was a firm which manufactured bricks. The assessee-firm had acquired certain land which was used partly for agricultural purposes and partly for supplying earth for the business of the assessee. There y a water supply facility also for agricultural purpose, some water being utilised by the assessee for its own business of manufacture of bricks while the surplus water was being supplied to needy farmers for which the assessee was obtaining grain, that is, a consideration in kind. The assessee used to maintain a land purchase account and also agricultural account in respect of supplies of earth. Credit was given to the land purchase account and debit to the bricks manufacture account, and similar adjustments were made in respect of the agricultural account in regard to the supply of water for the assessee s business. The Income Tax Officer had taken the view that the payment for earth as well as for water were payments to self and in any case they could not b: treated as receipts from agriculture. The Income Tax Officer, therefore, disallowed an amount of Rs.18,291 for the payment for earth and Rs.6,098 for payment for water. As a result the returned income became less than 80 per cent of the assessed income and penalty was imposed under section 271(1 (c) of the Income Tax Act, 1961. The Tribunal confirmed the penalty. On a reference:

Held, that, considering the fact that all the relevant accounts were produced by the assessee before the income Tax Officer and further looking to the fact that the same practice was being followed by the assessee Dr the past several years and that it had been accepted by the Income Tax Department, it could not be said that the showing of incorrect particulars or the failure to return the correct income had arisen from any fraud or gross or w'1fW neglect on the part of the assessee. The Tribunal and the authorities below were not justified in levying penalty.

CIT v. Anwar Ali (1970) 76 ITR 696 (SC); CIT v. Bhatt (i-P.) (1974) 97 ITR 440 (Guj.); CIT v. Drapco Electric Corporation (1980) 122 ITR 341 (Guj.); CIT v. Khoday Eswarsa and Sons (1972) 83 TTR 369 (SC); CIT v Mussadilal Ram Bharose (1987) 165 ITR 14 (SC); Patel (D.V.) and CO. v- CIT (1975) 100 ITR 524 (Guj.) ref.

K.C. Patel for the Assessee.

M.J. Thakore and R.P. Bhatt for the Commissioner.

JUDGMENT

S.D. DAVE, J: --The Income Tax Appellate Tribunal, Ahmedabad Bench `A', has referred the under mentioned questions to us for 0tr answer at the instance of the assessee, under section 256(1) of the Income Tat Act, 1961:

"(1) Whether, on the facts and in the circumstances of the case, the Tribunal was right in law in holding that the imposition of penalty of Rs.29,968 is justified?

(2) Whether, on the facts and in the circumstances of the case, the finding of the Tribunal that the imposition of penalty is justified is sustainable in law?

(3) Whether, on the facts and in the circumstances of the case, the finding of the Tribunal that penalty is justified in law is not based on appreciation of irrelevant material and ignoring relevant evidence on record

(4) Whether the finding of the Tribunal that the penalty imposed is justified in law is based on application of correct principles of law and is not perverse and unreasonable?"

The relevant assessment year is 1970-71 in respect of the assessee which is a firm and which manufactures bricks. The assessee-firm had acquired a certain land which was used partly for agricultural purposes and partly for supplying earth for the business of the assessee. There was a water supply facility also for the agricultural purpose, some water was being utilised by the assessee for its own business of the manufacture of bricks while the surplus water was being supplied to needy farmers for which the assessee was obtaining grain, that is, consideration in kind. The assessee used to maintain a land purchase account and also an agricultural account in respect of supplies of earth. Credit was given to the land purchase account and debit to the bricks manufacture account, and similar adjustments were made in respect of the agricultural account in regard to the supply of water for the assessee's business. The Income Tax Officer had taken the view that the payment for earth as well as for water were payments to self and in any case they cannot be treated as receipts from agriculture. The Income Tax Officer, therefore, disallowed an amount of Rs.18,291 of the payment of earth and Rs.6,098 for payment of water. The appeal against the above-said orders made by the Income Tax Officer before the Appellate Assistant Commissioner, was also dismissed. The assessee did not pursue the matter further before the Tribunal. Proceedings under section 271(1)(c) of the Act were also initiated and the matter was referred to the Inspecting Assistant Commissioner who, by application of the explanation to section 271(1)(c) of the Act, imposed penalty in a sum of Rs.25,968. The assessee thereafter had carried the matter in appeal before the Tribunal but the Tribunal has held that the assessee's case falls within the purview of section 271(1)(c) of the Act and that the burden was on the assessee to show that the shortfall between the income returned and the income assessed was not due to any gross or wilful neglect on the part of the assessee. The Tribunal has also taken the view that, if the assessee had disclosed these receipts, it would have been taxed in respect of the same; It was the view expressed by the Tribunal that the assessee's responsibility did not come to an end by filing a copy of the land purchase account and the manufacturing account, and it was the duty of the assessee to disclose the correct income. The Tribunal, in this view of the matter, has upheld the levy of penalty by the orders dated October 14, 1977. Later on, the necessary reference application was moved on behalf of the assessee for reference of the aforementioned questions to us. The said questions have been referred as indicated by us above,

The assessment orders pronounced by the concerned Income Tax Officer available at annexure "A", dated March 30, 1973, would go to show that the total income assessed by the Income Tax Officer comes to Rs.1,10,514. The above-said income includes an amount of Rs.27,221 which is in respect of the payments for the earth. An amount of Rs.18,291 paid by book credit to the land purchase account has also been taken into consideration. So far as this part of the income is concerned, it is the view taken by the Income Tax Officer that the amount was a payment to self and this amount was required to be disallowed. In the view of the Income Tax Officer, further payment to the tune of Rs.8,870 as water charges, when ,scrutinized, reveals that an amount of Rs.6,097 has been paid by book adjustment to kheti khata or the agricultural income account and the abovesaid amount of Rs.6,097 would also be a payment made to self, and, therefore, the above-said amount was required to be disallowed. Taking up the third branch of the income, the Income Tax Officer had come to the conclusion that the assessee used to sell water to needy agriculturists and, during the relevant year, the water was sold to three agriculturists, and that the assessee had received payment in kind, that is, in food grains, the receipt of which would work out to Rs.1,580. In the view of the Income Tax Officer, an amount of Rs.7,000 was also liable to be assessed as income from undisclosed sources. Lastly, according to the Income Tax Officer, there was income from business in land transactions amounting to Rs.688. Thus, in the view of the Income Tax Officer as expressed in the assessment orders at Annexure "A", for the year 1970-71, dated March 30, 1973, the total taxable income was of Rs.1,10,514.

The Appellate Assistant Commissioner by his orders dated June 7, 1974, has taken a similar view in respect of two of the items. So far as the principal amounts of Rs.18,291 and Rs.6,097 are concerned, the Appellate Assistant Commissioner has come to the conclusion that they are not payments made by the assessee to a third party, and that the abovesaid amounts cannot be said to be agricultural income. In the view of the Appellate Assistant Commissioner, the abovesaid disallowances made by the Income Tax Officer were required to be confirmed. Anyhow, in respect of two other amounts, namely, the amount of Rs.7,000, the, alleged income from undisclosed sources and in respect of an amount of Rs.688, the alleged income from business in land transactions, the Appellate Assistant Commissioner was of the opinion that the abovesaid amounts could not have been taken as the income of the assessee. It appears that because of the part allowance of the appeal by the learned Appellate Assistant Commissioner, the Revenue, feeling aggrieved, had filed an appeal before the Tribunal, which ultimately came to be dismissed by the Tribunal. The orders of the Tribunal are available at Annexure "C".

The penalty proceedings as indicated above were initiated and the Inspecting Assistant Commissioner, by his orders, dated March 22, 1976, had come to the conclusion that the following amounts should be taken as concealed income.

The Inspecting Assistant Commissioner ("the IAC") had taken the view that the above-said addition to the income will attract the penal provisions of section 271 and particularly the Explanation thereto. The Inspecting Assistant Commissioner while passing the orders, had observed that the orders of the Appellate Assistant Commissioner which had become final clearly showed that, even though no expenditure was incurred by the firm, it made the above-said claims. In view of this position, the Inspecting Assistant Commissioner had taken the view that incorrect particulars were furnished by the assessee and, therefore, the Inspecting Assistant Commissioner has imposed the minimum penalty in a sum of Rs.25,968.

The above-said orders of imposition of penalty passed by the Inspecting Assistant Commissioner were challenged before the Income Tax Appellate Tribunal, Ahmedabad Bench `A'. After the consideration of the contention of the assessee and the Revenue, the Tribunal had come to the conclusion that, though copies of the land purchase account and bricks manufacturing account have been given to the Income Tax Officer, looking to the provisions contained under section 271(1)(c) of the Act of 1961, the onus was on the assessee to discharge the burden and that the assessee was required to have been more careful, Taking the above-said view, the Tribunal, by its orders dated October 14, 1977, has dismissed the appeal filed by the assessee.

It is in the background of the above-said facts that the questions referred to us require to be answered.

The relevant assessment year being 1970-71, the Explanation to section 271(1)(c), would become applicable. The above-said Explanation was on the statute book from April 1, 1964 to April 1, 1976. The said Uxn1anaflon runs thus:

"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 subsection." .

Mr. K.C. Patel, learned counsel who appears on behalf of the assessee, has urged that the Explanation to section 271(1)(c) of the Act of 1961, creates legal fiction, if the conditions for its applicability are satisfied, the conditions being that the total income returned by the assessee should be less than eighty per cent of the total income assessed and, if this condition is satisfied, the assessee is straightaway brought within the penal provision of section 271(1)(c). But, according to learned counsel, Mr. Patel, this legal fiction can be displaced if the assessee, proves that the failure to return the correct income did not arise from any fraud or gross or wilful neglect on his part, because this burden of gross or wilful neglect on his part is not of the same nature which rests on the prosecution in a criminal trial where the prosecution has to establish the guilt of the accused beyond reasonable doubt. It is the burden, according to Mr. Patel, akin to that in a civil case where the determination is made upon preponderance of probabilities. It is broadly on the above-said contentions that learned counsel, Mr. Patel, has urged that the facts and circumstances of the present case do not go to show any fraud or gross or wilful neglect on the part of the assessee, inasmuch as all the relevant accounts were duly submitted by the assessee. Learned counsel further points out that the same was the practice of the assessee in respect of last several years and, during the relevant year also, he had adopted the same practice, there being no intention of fraud or gross or wilful neglect on his part. Anyhow, learned counsel, Mr. Thakore, who appears on behalf of the Revenue has urged that the Explanation attached to section 271(1)(c) of the Act of 1961 is clearly attracted and that the assessee who was required to discharge the burden was not able to do so and, therefore, the Tribunal and the taxing authorities below were justified in imposing the penalty.

The Explanation appended to section 271(1)(c), which is the subject matter of consideration before us has come on the statute book with effect from April 1, 1964, and had remained there up to April 1, 1976, as indicated by us earlier. Anyhow, some decisions on which learned counsel for the assessee and the Revenue have placed reliance, for the period during which the above -said Explanation was not on the statute book, also require consideration. Mr. Patel, learned counsel for the assessee, has drawn our attention to the Supreme Court decision in CIT v. Anwar Ali (1970) 76 ITR 696. This decision considered the relevant provisions of the Indian Income-tax Act, 1922, and especially section 28(1)(c) of the same. While examining the same question, the Supreme Court has summed up the situation by saying thus (headnote):

"The gist of the offence under section 28(1)(c) is that the assessee has concealed the particulars of his income or deliberately furnished inaccurate particulars of such income and the burden is on the Department to establish that the receipt of the amount in dispute constitutes income of the assessee. If there is no evidence on the record except the explanation given by the assessee, which explanation has been found to be false, it does not follow that the receipt constitutes his taxable income. It would be perfectly legitimate to say that the mere fact that the explanation of the assessee is false does not necessarily give rise to the inference that the disputed amount represents income. It cannot be said that the finding given in the assessment proceedings for determining or computing the tax is conclusive. However, it is good evidence. Before penalty can be imposed the entirety of circumstances must reasonably point to the conclusion that the disputed amount represented income and that the assessee, had consciously concealed the particulars of his income or had deliberately P~; furnished inaccurate particulars."

The other decision referred to by the Supreme Court which is also, pressed into service relates to the period during which the abovesaid Explanation was not existing on the statute book. In CIT v. Khoday Eswarsa and Sons (1972) 83 TTR 369, the Supreme Court has pointed out that penalty proceedings are penal in character and, therefore, the Department must establish that the receipt of the amount in dispute constitute the income of the assessee. The Supreme Court has summed up the situation by observing thus (headnote):

"Penalty proceedings being penal in character, the Department must establish that the receipt of the amount in dispute constitutes income of the assessee. Apart from the falsity of the explanation given by the assessee, the Department must have before it before levying penalty cogent material or evidence from which it could be inferred that the assessee has consciously concealed the particulars of his income or had deliberately furnished inaccurate particulars in respect of the same and that the disputed amount is a revenue receipt."

After a glance at the above-said Supreme Court decisions referring to the period during which the Explanation under consideration was not on the statute book, reference now is required to be made to a Bench decision of this Court in CIT v. S.P. Bhatt (1974) 97 ITR 440. This decision, while considering the provisions contained in section 271(1)(c) and the Explanation appended thereto, makes it clear that the Explanation creates a legal fiction, the condition being that the total income returned by the assessee should be less than 80 percent. of the total income assessed. This decision also further says that this fiction can be displaced if the assessee proves that the failure to return the correct income did not arise from any fraud or gross or wilful neglect on his part. The principle laid down by the Bench decision in the aforesaid case can be deduced as under (headnote):

"The Explanation to that provision, 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). 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 percent. of the total income assessed and the assessee is straightway brought within the penal provision in section 271(1)(c). But this legal fiction can be displaced if the assessee proves and this burden is upon him that failure to return the correct income did not arise from any fraud or gross or wilful neglect on his part. This burden is not of the same nature 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 upon preponderance of probabilities."

The same view has been taken by another Bench decision of this Court in D.V. Pate, and Co. v. CIT (1975) 100 ITR 524. This decision says that the legal fiction enacted in the Explanation to section 271(1)(c) can be displaced if the assessee proves that the failure to return the correct income did not arise from any fraud or gross or wilful neglect on his part. This decision also points out that 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 arisen on account of fraud or gross or wilful neglect on the part of the assessee. In CIT v. Drapco Electric Corporation (1980) 122 ITR 341 (Guj.), it has been laid down that concealment for the purposes of section 271(1)(c) must be a conscious concealment. Unless the assessee proves that the failure to return the correct income did not arise from any fraud or any gross or wilful neglect on his part, he should be deemed to have concealed the particulars of his income. A similar view has been taken by the Supreme Court in CIT v. Mussadilal Ram Bharose (1987) 165 ITR 14. The Supreme Court, while dealing with section 271(1)(c) of the Income Tax Act, 1961, and the Explanation appended thereto, has pointed out that, when the total income returned by the assessee is less than 80 percent. of the total income as assessed, the Explanation shifts the burden to the assessee to show that the difference was not owing to fraud or gross or wilful neglect on his part. Anyhow, this onus, according to the Supreme Court, is a rebuttable one. It is also pointed out that the burden placed upon the assessee is not discharged by any fantastic explanation, but it must be an explanation acceptable to the fact finding body.

It is on the basis of the above-said decisions that learned counsel appearing on behalf of the assessee has urged that, though the Explanation comes into play and though the onus shifts on to the shoulders of the assessee due to legal fiction, the assessee in the instant case should succeed, if it is proved that the failure to return the correct income did not arise from any fraud or gross or wilful neglect on his part. After having satisfied us on the question of correct principles to be applied to the facts of the instant case, learned counsel, Mr. Patel, has taken us to the facts of the case. The return submitted by the assessee showed the accounts in respect of the land purchase account, the agricultural income account and the bricks manufacturing account. It, therefore, could not have been said that the true particulars or the accounts were not submitted by the assessee to the taxing authority. When the accounts submitted by the assessee which are available at Annexure "G" are perused, it becomes clear that in the bricks purchase and sales accounts for the assessment year 1970-71, a clear mention has been made in respect of the water expenses to the tune of Rs.8,870. In the same way, the earth charges of Rs.27,222 have been shown in the account. Moreover, it is an accepted position and common ground that the accounts in respect of the land purchase, agricultural income and bricks purchase and sale were produced and presented before the Income Tax Officer alongwith each other. It is, therefore, clear that the assessee had approached the taxing authority with all the relevant accounts. It is indeed true that he had shown the above-said amounts as expenses under the bricks purchase account. But, merely because of this position, it could not be urged that the assessee was guilty of any fraud or gross or wilful neglect on his part. In the same way, it cannot be urged that the failure to return the correct income had arisen from fraud or gross or wilful neglect on the part of the assessee. The Income Tax Officer who had assessed the income of the assessee for the relevant year has come to the conclusion that the above-said amounts could not have been accepted as the amounts representing the expenditure in the bricks manufacturing business. It is pertinent to notice that, while imposing the penalty by the orders, dated March 22, 1976, the Inspecting Assistant Commissioner had also taken the view that, though no expenditure had been incurred on the above-said two heads, the firm had sought to make the said claims. The orders of penalty proceed to say that this would show that incorrect particulars were furnished by the assessee. Therefore, even in the orders relating to the imposition of penalty, it has been stated that the assessee was guilty of showing incorrect particulars in the accounts submitted by him. The Tribunal also, by its order, dated October 14, 1977, while dismissing the appeal filed by the assessee, has observed that the assessee should have been careful enough to work out the correct income. It is no doubt true that, even after the above-said observation, the Tribunal had reached the conclusion that the imposition of penalty was a justifiable one. Nonetheless the fact remains that the Inspecting Assistant Commissioner was of the opinion that it was a showing of incorrect particulars by the assessee while, according to the 1 Tribunal, the assessee should have been careful enough to work out the correct income.

Thus, looking to the facts and circumstances of the case and especially looking to the fact that all the relevant accounts were produced by the assessee before the Income Tax Officer and further looking to the fact that, since last several years the same practice was being followed by the assessee and was recognized by the Department, it cannot be said that the showing of incorrect particulars or the failure to return the correct income had arisen from any fraud or gross or wilful neglect on the part of the assessee. In view of this clear position, both legal and factual, it appears that the Tribunal and the authorities below were not' justified in the orders of penalty. In view of this conclusion of ours, questions Nos. 1 and 2 shall have to be decided in the negative, in favour of the assessee and against the Revenue by saying that the Tribunal was not right in law in holding that the imposition of penalty of Rs.25,968 was justified, and by. further saying that the finding of the Tribunal that the imposition of penalty was justified as sustainable in law, is not correct.

Question No. 3 shall have to be answered in the affirmative, but again in favour of the assessee and against the Revenue, by saying that the finding of the Tribunal that the penalty is justified in law is not based on appreciation of relevant material.

Question No. 4 shall have to be answered in the negative, but once again in favour of the assessee and against the Revenue, by saying that the Tribunal was not justified in law in the imposition of penalty on the basis of the correct principles of law.

We, therefore, answer the referred questions as indicated above, with no order as to costs.

M.BA./226/T.F.Reference answered.