JUDGMENT
1. By this application under Section 256(2) of the Income-tax Act, 1961, the following questions are referred for our opinion :
“1. Whether, on the facts and in the circumstances of the case, the Tribunal was right in law to conclude that there was no mens rea on the part of the assessee-company to conceal the interest income from the Revenue ?
2. Whether, on the facts and in the circumstances of the case, the Tribunal was right in law in holding that the assessee did not conceal any income and, therefore, the imposition of penalty under Section 271(1)(c) of the Income-tax Act, 1961, was not proper ?”
2. The assessee is a company and maintains its accounts on the mercantile system. The assessment was completed under Section 143(3) of the Income-tax Act at nil income. All the assets of the tea estates were sold before the previous years relevant to all assessment years. After completion of the assessment, it came to the notice of the Income-tax Officer that some interest was receivable by the assessee on the amount of sale proceeds of the tea estates from Saharaj Tea Co. Ltd., and some interest from W. S. Cresswell and Co. Ltd. Therefore, in the reassessment, the interest receivable on the sale proceeds amount and the interest receivable from Cresswell Co. Ltd. were taxed and penalty proceedings for concealment, under Section 271(1)(c), were initiated and finally the penalties for the assessment years 1976-77, 1977-78, 1978-79, 1979-80 and 1981-82 were imposed.
3. The case of the assessee is that the amounts of sale proceeds payable by Saharaj Tea Co. Ltd., was under litigation. Only one instalment has been paid and the balance amount has not been paid even today, the matter is pending in the court. No interest has been received and similarly, no interest has been received from Cresswell and Co. Ltd. The assessee also brought to the notice of the Assessing Officer that the assessee had no income except this interest income in these relevant years and he changed his method of accounting from mercantile to cash. No amount of cash had been received during the previous year relevant to the assessment years, therefore, no taxable income arose in the hands of the assessee.
4. In appeal, the Commissioner of Income-tax (Appeals) has also confirmed the penalties imposed by the Income-tax Officer.
5. In appeal before the Tribunal, it was found that there was a bona fide belief of the assessee that after switch over of the system of accounting from mercantile to cash, there is no interest income taxable in the hands of the assessee. Therefore, the assessment was made at “nil” income and the penalty so imposed has been cancelled by the Tribunal
6. None appears for the assessee. Counsel for the Revenue only supports the orders of the Income-tax Officer and the Commissioner of Income-tax (Appeals). He further submits that not disclosing the income is enough for imposing of the penalty, even if he is in bona fide belief that such income is not taxable.
7. We are unable to accept the submission of counsel for the Revenue. In cases, where the assessee has bona fide belief that his income is not taxable and he failed to disclose such income under bona fide belief, no penalty should be imposed under Section 271(1)(c) of the Act.
8. In the case under consideration the facts are not in dispute that all the tea gardens were sold. The amount was payable in two instalments. One instalment has been paid of the sale proceeds. The second instalment was payable in the year 1976 relevant to the assessment year 1976-77. That has not been paid. The dispute was under litigation. The assessee has changed its system from mercantile to cash, though that has not been accepted by the Commissioner of Income-tax (Appeals). It had no other income except the interest income on the basis of accrual, the balance amount of sale proceeds has not been paid in all these previous years, relevant to the assessment years. Even, no interest has been received from W. S. Cresswell and Co. Ltd. The services of the agent of the assessee were terminated.
9. It appears that W. S. Cresswell and Co. Ltd. has gone into liquidation. There was no hope of recovery even of the principal amount, and the assessee switched over the system from the mercantile system to the cash system and had a bona fide belief that no interest income accrued. It has shown “nil” income and was assessed as such.
10. No case of penalty or concealment has been made out under Section 271(1)(c). For penalty under Section 271(1)(c), the Revenue has to prove that the assessee has knowingly concealed his income.
11. Accordingly, we answer both the questions in the affirmative, i. e, in favour of the assessee and against the Revenue.