JUDGMENT
Untwalia, C.J.
1. The Income-tax Appellate Tribunal, Patna Bench, has stated a case and referred it to this court under Section 256(1) of the Income-tax Act, 1961 (hereinafter referred to as “the Act”), on the following question of law :
“Whether, on the facts and in the circumstances of the case, the Tribunal was correct in setting aside the penalty levied under Section 271(1)(c) of the Income-tax Act, 1961 ?”
2. I may take the necessary facts from the statement of the case. The assessee is a manufacturer of wooden electric boards and furniture. It filed the return showing an income of Rs. 29,508. Since the rate of gross profit shown in the trading account was low and the trading results were not verifiable, the Income-tax Officer made an addition in that account. After disallowing certain expenses, the total income computed by the Income-tax Officer chargeable to tax in the hands of the assessee was Rs. 80,586. The assessment was confirmed in appeal by the Appellate Assistant Commissioner. A copy of the assessment order of the Income-tax Officer is annexure “A” to the statement of the case.
3. A proceeding under Section 271(1)(c) of the Act was started against the assessee. The Inspecting Assistant Commissioner imposed a penalty of Rs. 6,000 by invoking the law engrafted in the Explanation appended to Clause (c) of Sub-section (1) of Section 271 of the Act. A copy of the order of the Inspecting Assistant Commissioner is annexure “B”. The assessee took up the matter in further appeal before the Tribunal. The Tribunal took the view that, since the addition in the trading account was made mainly on the basis of estimate and on the application of flat gross profit rate, there was no animus which could be attributed to the assessee for attracting the penalty provision under Section 271(1)(c) of the Act. The failure to return what the revenue had estimated as the correct income of the assessee is not as a result of any fraud or gross or wilful neglect on its part as the assessee had discharged the initial onus of proving what it was required to prove within the meaning of the Explanation. The Tribunal, therefore, set aside the order of the Inspecting Assistant Commissioner. On being asked to refer a case by the Commissioner of Income-tax, it has done so on the question of law afore-mentioned.
4. Under the Indian Income-tax Act, 1922, penalty could be imposed under Section 28. The law with certain variations was engrafted in Section 271 of the Act. It is not necessary to point out the various changes in the law brought about by the Act in that regard, because in this case we are concerned with Clause (c) of Sub-section (1) of Section 271 only, which, as originally enacted, was identical to the terms of Clause (c) of Sub-section (1) of Section 28 of the 1922 Act. The relevant portion of Section 271 as it originally stood read:
“(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–……
(c) has concealed the particulars of his income or deliberately furnished inaccurate particulars of such income…… ”
5. So long as Clause (c) of Sub-section (1) of Section 271 stood in identical terms with the corresponding provision of the 1922 Act, there was no difficulty in applying the law laid down by various authorities including those of the Supreme Court in a given case to find out whether penalty could be imposed under Clause (c). I may briefly refer to some of these cases.
6. In Commissioner of Income-tax v. Gokuldas Harivallabhdas [1958] 34 ITR 98 (Bom), it was held by Chagla C.J., delivering the judgment on behalf of the Bench of the Bombay High Court, that the proceeding under Section 28(1 )(c) of the 1922 Act was in the nature of a penal proceeding and although it was open to the department, where the explanation of the assessee was found to be false, to treat the receipts appearing in the account books of the assessee as income from undisclosed sources, it was not possible to infer from the falsity of the assessee’s explanation that the receipt necessarily constituted an income of the assessee; it was still necessary for the department to prove that it was his income which he had concealed or in respect of which he had deliberately furnished inaccurate particulars. The view of law expressed by the Bombay High Court was adopted by the Patna High Court in several cases, to wit, Khemraj Chagganlal v. Commissioner of Income-tax [1960] 38 ITR 523 (Pat), Murlidhar Tejpal v. Commissioner of Income-tax [1961] 42 ITR 129 (Pat) and Commissioner of Income-tax v. Mohan Mallah [1964] 54 ITR 499 (Pat). In one case the Madras High Court and the Allahabad High Court in several cases took a different view which was more in favour of the department. A Bench of the Calcutta High Court in Commissioner of Income-tax v. Anwar Ali [1967] 65 ITR 95 (Cal) reviewed all the cases and agreed with the Bombay and the Patna views. This case went up to the Supreme Court and the law was laid down authoritatively in Commissioner of Income-tax v. Anwar Ali [1970] 76 ITR 696 (SC). The view taken by the Bombay, Gujarat and Patna High Courts was approved and that of the Allahabad High Court was not accepted to be correct. In that case it was held at page 701 :
“It must be remembered that the proceedings under Section 28 are of a penal nature and the burden is on the department to prove that a particular amount is a revenue receipt. 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 furnished inaccurate particulars.”
7. Recently this very Bench followed the earlier cases on the point and reiterated the law in the case of Commissioner of Income-tax v. Meghraj Ramchandra [1974] 97 ITR 559 (Pat). To the same effect is the law laid down by the Supreme Court in 4 more cases–all to be found in the 83rd volume of the Income-tax Reports. The cases are Hindustan Steel Ltd. v. State o] Orissa [1972] 83 ITR 26 (SC), Commissioner of Income-tax v. Bharat Engineering and Construction Co, [1972] 83 ITR 187 (SC), Commissioner of Income-tax v. N.A. Mohamed Haneef [1912] 83 ITR 215 (SC) and Commissioner of Income-tax v. Khoday Eswarsa and Sons [1972] 83 ITR 369 (SC). I may quote one more passage from the decision of the Supreme Court in the last case, which occurs at page 376 :
“From the above it is clear that 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. No doubt the original assessment proceedings for computing the tax may be a good item of evidence in the penalty proceedings but the penalty cannot be levied solely on the basis of the reasons given in the original order of assessment.”
8. It would be further noticed from some of the decisions aforesaid that findings in an assessment order are materials in a proceeding for imposition of penalty in relation to the period in respect of which the assessment order was made. The findings, however, do not operate as res judicata. On the basis of the findings and the materials discussed in the assessment order and/or by further materials the penalty proceeding has got to be concluded in accordance with law in favour of either the department or the assessee.
9. If I were to apply the old law as originally engrafted in Clause (c) of Sub-section (1) of Section 271 of the Act, there would have been absolutely no difficulty in answering the question in favour of the assessee and against the revenue. But in this case the period of assessment was 1966-67. The word “deliberately” occurring in the second portion of Clause (c) was deleted by the Finance Act of 1964 (Act 5 of 1964) with effect from April 1, 1964, and an Explanation was added to it, which reads as follows :
“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 sub-section.”
10. The question for consideration is: what is the effect of the amendment brought about in the law by Act 5 of 1964 ?
11. The word “deliberately” was omitted from Clause (c) and it cannot be assumed that the legislature did it without any purpose; there must be a purpose behind it. The first part of Clause (c) was left intact. If the charge of concealment of the particulars of the income of the assessee has got to be proved, it goes without saying that there cannot be any concealment without any conscious act on the part of the assessee. To bring the case under the first part, it has got to be established by the department that the income in respect of which the charge is levelled is the income of the assessee and that by a conscious act he had concealed such income. When the word “deliberately” was in the second part of Clause (c), cases had not drawn any appreciable distinction between the two parts. Both the expressions were more or less kept at par and equated. If it were necessary to scan and dissect the matter any further, perhaps, it may be possible to find out the subtle distinction between the two phrases. But I do not propose to embark upon this useless exercise. Now, of course, when the word “deliberately” has been omitted from the second part of Clause (c), the difference in the two parts has assumed some significance. What is the meaning of the expression “furnished inaccurate particulars of such income” now ? Does it mean that merely because the particulars of income furnished by the assessee in his return were found by the department to be inaccurate, imposition of penalty is warranted ? Has the law been watered down to this extent by the omission of the word “deliberately” ? Or, has it still got a specific and different content in the expression which remains after the omission of the word “deliberately” ? The cue to the interpretation of the amended second part of Clause (c) is to be found in the Explanation appended to it by the same amending Act. I shall, therefore, first proceed to find out what is the meaning of the Explanation. If a case is not covered by the Explanation, the burden to prove facts to attract the imposition of penalty under Section 271 (1)(c) is still on the department. But in a case which is covered by the Explanation, the burden has been thrown on the assessee to prove absence of certain ingredients; otherwise it will be permissible to draw the presumption of fact that the assessee has concealed the particulars of his income or furnished inaccurate particulars of such income. In a case where there is a difference of more than 20 per cent. in the income returned by any person and the total income as assessed under the various provisions of the Act, the Explanation is attracted. While calculating the difference of 20 per cent. between the income returned and the income assessed, from the latter has got to be deducted the amount of expenditure incurred bona fide by the assessee for the purpose of making or earning income included in the total income but which has not been allowed as a revenue expense or a permissible deduction under any provision of the Act. As soon as it is found that there was a difference of more than 20 per cent. in the income returned and the income assessed, Clause (c) comes into operation by the rule of presumption, in other words, by the rule of evidence engrafted in the Explanation, and it is for the assessee to prove that the failure to return the correct income, i.e., the assessed income did not arise from any fraud or gross or wilful neglect on his part. If he succeeds in discharging that onus, even though the difference in the amount of the returned income and the assessed income was more than 20 per cent., no penalty can be imposed under Section 271(1)(c). And, that, in my opinion, clearly gives a key to the interpretation of the main provisions contained in Clause (c) after its amendment in 1964. If a case is not covered by the Explanation then charge of furnishing inaccurate particulars of such income can be founded by recording a finding that the assessee had furnished such particulars due to his fraud, that means, deliberately or consciously, or such furnishing was a result of gross or wilful neglect on his part. The word “furnished” also imports some positive act on the part of the assessee. The dictionary meaning of the word “furnish”, according to the Chambers Dictionary, is “to fit up or supply completely or with what is necessary : to supply, provide : to equip”. If, therefore, the assessee while supplying the particulars of his income gives inaccurate particulars as a result of his fraud or gross or wilful neglect then and then only he can be subjected to the imposition of penalty under the second part of Clause (c)–otherwise not. Unless such ingredients are found, on the finding of a mere difference in the particulars of the income given and the figure of the income assessed, it cannot be said that the assessee furnished inaccurate particulars of such income.
12. What will amount to furnishing of inaccurate particulars with an element of fraud or gross or wilful neglect on the part of the assessee, will depend on the facts and circumstances of each case ; mere negligence in furnishing the particulars which are found to be inaccurate is not enough. The neglect must be either wilful or at least gross. The expression “wilful neglect” again imports neglect of a kind where is mixed with the neglect a conscious, wilful or deliberate act of the assessee. In the case of gross neglect, however, conscious or deliberate act may not be there but yet the negligence must be of a severe type. As, for example, non-inclusion of a particular item of income or inclusion of a particular item of expense under the notion that the former was not taxable or the latter was allowable as a revenue expense, was as a result of gross negligence; that is to say, the act or omission was patently wrong in the eye of law and if the assessee would have taken some care and exercised some diligence, he would not have committed the act or the omission. In other words, the particulars furnished were inaccurate to the knowledge of the assessee at the time of return or must be deemed to be inaccurate to his knowledge in the eye of law, because the act was done with wilful or gross neglect.
13. In my opinion, when a case is covered by the Explanation then, on the failure of the assessee to discharge the onus of proving absence of certain ingredients, the rule of presumption not only covers the matter of conscious concealment or furnishing of inaccurate particulars on the part of the assessee but, on a plain and grammatical meaning of the expression, it also ropes in the presumption of the assessed income being that of the assessee. It is difficult to bifurcate the rule of presumption into two and to say that it only affects the first part and not the second. As I have said above, if the Explanation is not attracted then the onus to prove all the ingredients which are required to be proved even under the amended law is on the department, including the burden of proving that the income is of the assessee.
14. I now proceed to refer to some of the cases which are of a period governed by the amended law. In Commissioner of Income-tax v. Sankarsons and Company [1972] 85 ITR 627 (Ker), it was pointed out by the Kerala High Court that the Explanation creates a presumption under certain circumstances when the assessee concealed the income or furnished inaccurate particulars of such income. The presumption can be displaced by the assessee by proving that failure to return the correct income did not arise from any fraud or gross or wilful neglect on his part. It is then said at page 629 :
“The quantum of proof necessary would be that required in a civil case, namely, preponderance of probability.”
15. In Additional Commissioner of Income-tax v. Sadiq Ali & Bros. [1973] 92 ITR 276 (J & K) a Bench of the Jammu and Kashmir High Court seems to have applied the old law although the assessment years were 1964-65 and 1965-66. Clause (a) of Sub-section (1) was quoted at page 279, perhaps, inadvertently and thereafter it was said :
“In the instant case the assessee’s conduct falls within the second part of Section 271(1)(c) and not the first part, that is to say, the assessee is alleged to have deliberately furnished inaccurate particulars of its income.”
16. Stress was laid on the word “satisfied” which is the basis of the earlier decisions. In my opinion, however, the deletion of the word “deliberately” from the second part of Clause (c) has brought about some change in law but only to the extent stated by me above. In the same volume at page 513 is the decision of the Punjab and Haryana High Court in Mahabir Metal Works v. Commissioner of Income-tax [1973] 92 ITR 513 (Punj). But the case is not of much help to either party. There is another decision of the Punjab and Haryana High Court in Additional Commissioner of Income-tax v. Karnail Singh V. Kaleran [1974] 94 ITR 505 (Punj). The purpose of the Explanation and its meaning has been pinpointed in this decision. But this case does not throw much light on the effect of the omission of the word “deliberately” from Clause (c). Passages occurring at pages 1037 and 1038 in The Law and Practice of Income Tax by Kanga and Palkhivala, 6th edition, volume I, seem to have been quoted with approval at the fag end of the judgment. I would venture to suggest that the first portion occurring at page 1038 that the Explanation has no bearing on the first point to be proved by the department, does not seem to be correct; the alternative view of the learned authors is commendable. Our attention has also been drawn to a decision of the Orissa High Court in Commissioner of Income-tax v. K.C. Behera [1976] 103 ITR 479 (Orissa). Although this concerned an earlier assessment year, since the penalty proceedings were started after the coming into force of the amended law, the said law was applied. It is not necessary for us to express any opinion in that regard in this case. But I would quote with approval a passage of the judgment at page 486:
“It is to be noted that the penalty proceeding continues to be penal in nature even after the introduction of the Explanation. The quantum of proof necessary to discharge the onus by the assessee would be as in a civil case, that is, by preponderance of probabilities. After applying the Explanation the taxing authorities would take into consideration all the facts and circumstances, pros and cons, and then determine whether the assessee has discharged the onus.”
17. I shall proceed to consider the facts of the instant case after pointing out one more matter and that is this. It is always to be remembered that the standard of proof applicable to prove a positive fact and the one which is required to prove a negative fact cannot be the same. A high standard is always applied for the proof of a positive fact while the standard of preponderance of probability is sufficient to prove a negative fact. The assessee, within the meaning of the Explanation, is required to prove that the failure to return correct income did not arise from any fraud or gross or wilful neglect on his part, that means, there is absence of fraud or gross or wilful neglect. Ordinarily and generally, there cannot be any direct evidence to prove such a fact. The assessee merely has to place materials of the primary facts or the circumstances which in all reasonable probability would show that he was not guilty of any fraud or gross or wilful neglect. He may discharge this onus by placing the facts found in the assessment order to show that the facts found therein had not in the least given an inkling of fraud or gross or wilful neglect on the part of the assessee and, therefore, it must be held without proof of any other fact that there was no fraud committed by the assessee in his failure to return the correct income nor was he acting grossly or wilfully negligently. In a given case it may be necessary for the assessee to prove certain more facts because the materials in the assessment order give some inkling of the commission of fraud or the assessee being grossly or wilfully negligent and in such a situation it will be necessary for the assessee, if his case is covered by the Explanation, to place some more materials in the shape of oral or documentary evidence or otherwise to prove the negative fact of absence of fraud or gross or wilful negligence. If he succeeds in doing so, the onus will shift back on the department to prove the positive fact that failure to return the correct income on the part of the assessee was as a result of his fraud or gross or wilful neglect. If I may attempt to explain my view-point by taking an example, I would do better. Supposing in the trading account maintained by the assessee an error is discovered in totalling the figures either on the credit side or the debit side, which has minimised the figure of the gross profit to an extent which brought the case within the Explanation, the error by itself does give an inkling of some fraud or gross or wilful neglect on the part of the assessee. In such a case, therefore, the materials in the assessment order may not be sufficient to enable him to discharge the onus cast upon him under the Explanation. He may be under a necessity of placing some more materials or of adducing some more evidence to show that the error committed in totalling was just accidental or merely due to negligence; it was neither a fraudulent act nor a result of gross or wilful neglect on his part.
18. Coming to the facts of this case now, it would be noticed that in the assessment order the Income-tax Officer has disallowed two items of expenses, namely, Rs. 1,000 and Rs. 500. The disallowance was such as will bring the case within the ambit of the words in the second parenthesis in the Explanation. The main item is an addition in the trading account. The addition was made on the ground that the assessee had not maintained any day-to-day manufacturing account or stock account; therefore, its performance was not at all amenable to verification. The Income-tax Officer applied the proviso to Sub-section (1) of Section 145 of the Act by enhancing the sale by about Rs. 8,000; figure of sale was shown at Rs. 3,82,000 and odd. The gross profit shown by the assessee in its trading account was about 13 per cent. as would appear from the order of the Inspecting Assistant Commissioner. As against this, the Income-tax Officer estimated the gross profit at 25 per cent. and applied the flat rate. In my opinion, the materials in the assessment order itself enabled the assessee to discharge its onus of proving that its failure to furnish the correct income, i.e., the assessed income, was not as a result of any fraud or gross or wilful neglect on its part. The Income-tax Officer did not find that it was possible for the assessee in the nature of its business to maintain a day-to-day manufacturing account or a stock account nor did he find any defect in the accounts maintained by the assessee. He did not reject the accounts as being incorrect or incomplete under Sub-section (2) of Section 145 of the Act. He merely applied the proviso to Sub-section (1) of Section 145 of the Act, which, in terms, did not attract Section 144. On the facts of this case, therefore, the denial of the assessee or its representative at the time of the argument before the Inspecting Assistant Commissioner was sufficient and thereafter it was necessary for the department to place further materials to show that over and above the materials in the assessment order there were facts and circumstances on which the failure of the assessee to return the correct income could be attributed to its act of fraud or gross or wilful neglect.
19. The Inspecting Assistant Commissioner gave four or five reasons in his order. I shall mention them seriatim and show that almost all of them are incorrect. The first reason given is that the gross profit rate shown by the assessee was a deliberate under-estimate. Merely enhancing the gross profit on the ground as it was done by the Income-tax Officer did not justify the conclusion that the rate shown by the assessee was a deliberate under-estimate. The second reason given is that the assessee did not “produce” stock account or manufacturing account. The Income-tax Officer had not said in his assessment order that the assessee maintained such account and did not produce it. In the absence of any further material placed before the Inspecting Assistant Commissioner–and none seems to have been placed before the Income-tax Officer–this was an order of record. The third reason given is that the books of account suffer from defects. The discussion of the order of the Income-tax Officer made above would show that this again is an error of record. No defect was found in the books of account maintained and produced by the assessee. Then the Inspecting Assistant Commissioner says that there was a good reason for presuming that the assessee preferred to keep all the cards close to its chest. It was a nice phrase to be used but the presumption was unwarranted. In the opinion of the Inspecting Assistant Commissioner, the assessee had failed to discharge the onus cast upon it within the meaning of the Explanation to Section 271(1)(c) of the Act.
20. On the same materials, when the case went up before the Tribunal, a different conclusion was drawn. The Tribunal may not be quite right in saying that penalty could be “imposed only if there is conscious and deliberate concealment on the part of the appellant”. It may not be quite correct to say that, in the absence of animus, the penal provision under Section 271(1)(c) could not be attracted. The law, as I have explained above, after the amendment brought about in 1964 is different to some extent. Though the magnitude of the difference may not be large enough, yet it is clear and appreciable. But, then, in the end, the Tribunal has applied the law correctly and stated that:
“In the circumstances, the appellant must be held to have discharged the initial onus of proving that there was no fraud or gross or wilful neglect on its part while submitting the return. On the materials placed before us, we are satisfied that the failure to return what the revenue has
estimated as the correct income of the appellant, is not as a result of any
fraud or gross or wilful neglect on the part of the appellant and in the circumstances we hold that penalty is not attracted in this case.”
21. After having perused the only materials which are available in the case, as
are to be found in the assessment order (annexure “A” to the statement
of the case), I have unhesitatingly come to the conclusion that the Tribunal, on the facts and in the circumstances of the case, arrived at the right
conclusion by rightly applying the law as enunciated above.
22. For the reasons stated above, I would answer the question under
reference in the affirmative, in favour of the assessee and against the
revenue and hold, that, on the facts and in the circumstances of the case,
the Tribunal was correct in setting aside the penalty levied under Section 271(1)(c) of the Act. There would be no order as to costs of this
reference.
S.K. Jha, J.
23. I agree.