H.N. Seth, J. - (1.) THE assessee is a registered firm carrying on business of confectionery. For the assessment year 1964-65, the assessee returned an income of Rs. 40,648 (subject to depreciation). THE Income-tax Officer noticed certain defects in the books and trading accounts of the assessee. Accordingly, after rejecting those books, he estimated the total income of the assessee at Rs. 62,490. In appeal, the estimate made by the Income-tax Officer was modified and the assessee's taxable income was determined at Rs. 59,050. As the total income returned by the assessee fell short of 80% of its assessed income, and minimum penalty leviable exceeded Rs. 1,000, the Income-tax Officer, after initiating penalty proceedings, referred the matter to the Inspecting Assistant Commissioner. THE Inspecting Assistant Commissioner, after issuing a show cause notice to the petitioner and hearing it, concluded that the assessee had concealed and had furnished inaccurate particulars of its income and imposed a penalty of Rs. 5,742 under Section 271(1)(c) of the Income-tax Act.
(2.) BEING aggrieved, the assessee went up in appeal before the Income-tax Appellate Tribunal. The Appellate Tribunal observed that in this case penalty had been imposed purely on the basis of an addition made to the returned income by estimating sales and applying a gross profit rate thereon on the sole ground that the book results were not amenable to verification. The question whether penalty can be levied in such circumstances had come up for frequent consideration by a number of Benches of the Tribunal which had uniformly held that penalty in such circumstances was not leviable. It did not consider it necessary to discuss the issue any further. In the result the Tribunal allowed the appeal and set aside the order of the Inspecting Assistant Commissioner. The Commissioner of Income-tax then made an application to the Appellate Tribunal requiring it to state the following two questions of law for the opinion of this court: "1. Whether, on the facts and in the circumstances of the case, the assessee can be held to have concealed the particulars of its income or furnished inaccurate particulars thereof under the provision of the Explanation to Section 271(1) ? 2. Whether, on the facts and in the circumstances of the case, the Income-tax Appellate Tribunal is legally correct in holding that penalty is not leviable and vacating the penalty of Rs. 5,742 under Section 271(1)(c) of the Income-tax Act ?" The Income-tax Appellate Tribunal was of opinion that both these questions arose from out of its appellate order but, while making the reference,' it consolidated the two questions into one and after refraining the same, referred the following question for the opinion of this court: "Whether, on the facts and in the circumstances of the case, the assessee can be held to have concealed the particulars of its income and furnished inaccurate particulars thereof under the Explanation to Section 271(1)(c)?"
(3.) WE find that while imposing penalty under Section 271(1)(c) the Inspecting Assistant Commissioner observed thus: "As mentioned in the assessment order the assessee has not maintain ed proper stock account and, therefore, in view of the decision of the Supreme Court in S.N. Namasivayam Chettiar v. Commissioner of Income- tax, [1960] 38 ITR 579, 588 (SC), the accounts have been correctly rejected. It is to be noted that the addition made by the Income-tax Officer on estimate in respect of the head office account was Rs. 14,153(which was reduced to Rs. 10,713 by the Appellate Assistant Commissioner) and the addition in branch office account was Rs. 3,806. Even taking into account the assessee's further appeal preferred before the Income-tax Appellate Tribunal in respect of the additions in the branch account it is obvious that the assessee accepted the additions made by the Income-tax Officer in respect of the head office account consequent to the Appellate Assistant Commissioner's order. It, therefore, follows that the income returned was incorrect and that the income estimated was the correct income at least for the head office account. Therefore, there is no doubt that the assessee has concealed the particulars of his income or furnished inaccurate particulars thereof." There is nothing in the order of the Inspecting Assistant Commissioner to show that in coming to the conclusion that the assessee had concealed or furnished inaccurate particulars of its income, he relied upon the Explanation to Section 271(1)(c) of the Income-tax Act, 1961, The Appellate Tribunal, however, did not go into the question whether, in the circum stances of the case, inference drawn by the Inspecting Assistant Commissioner that the assessee had concealed or furnished inaccurate particulars of its income, was justified or not and observed that in a case where penalty had been levied purely on the basis of an addition made to the returned income by estimating sales and applying gross profit rate thereon, on the sole ground that the book results are not amenable to verification, no penalty under Section 271(1)(c) could be imposed. It also did not apply its mind to the question regarding the applicability of the Explanation to Section 271(1)(c) to the facts of the present case and, in case the Explanation to Section 271(1)(c) was applicable, whether the assessee had discharged the burden of showing that he had either not acted fraudulently or that he was not grossly negligent in furnishing its return.;