H.N. Seth, J. - (1.) THE assessee in this case is a registered firm which derives income from publication of books and sale of paper. THE assessee disclosed that in the accounting year relevant to the assessment year 1966-67, it sold books worth Rs. 6,77,500 and paper worth Rs. 28,108. THEse transactions resulted in gross profits of Rs. 1,03,746 and net taxable profit of Rs. 54,628. On scrutiny the Income-tax Officer found the following defects in the account books maintained by the assessee: 1. It could not be ascertained how much paper was consumed as there is no day to day stock register. 2. Quantitative detail of sale of books has not been furnished. 3. THE wholesale and retail sales could not be bifurcated and gross profit rate could not be worked out separately.
(2.) HE, accordingly, rejected the book version of the assessee and as the gross profit shown in the books appeared to be on the lower side, estimated the sales of books and paper effected by the assessee at Rs. 6,90,000 and Rs. 35,000, respectively. HE applied a gross profit rate of 18% in respect of the sale of books and 7 1/2 per cent, in respect of sale of paper and calculated that the gross profit earned by the assessee in two counts was Rs. 1,24,200 and Rs. 2,625, respectively (total Rs. 1,26,625). Accordingly, he added a sum of Rs. 23,079 as extra profits to the net profit of Rs. 54,623 disclosed by the assessee. HE also added back a sum of Rs. 2,566 on account of certain expenses claimed and disallowed and assessed the total taxable income of the assessee at Rs. 80,263. As the assessee's returned income was less than 80% of its assessed income, the Income-tax Officer issued a notice under Section 274/27l(1)(c) of the Income-tax Act, and as the minimum amount of penalty imposable was to exceed Rs. 1,000 he referred the matter to the Inspecting Assistant Commissioner of Income-tax, Meerut. However, subsequently, in appeal the gross profit on account of sale of books and paper estimated by the Income-tax Officer was reduced by a sum of Rs. 2,175 only and the returned income continued to be less than 80% of the income ultimately assessed. Before the Inspecting Assistant Commissioner, the assessee pleaded that the difference between the assessed income and the returned income arose because the Income-tax Officer did not accept his books, even though he had maintained them regularly. The Income-tax Officer had not found any new source of income or pinpointed any definite concealment. In the circumstances, there was no fraud or gross or wilful neglect on his part. The Inspecting Assistant Commissioner rejected the explanation offered by the assessee and pointed out that the assessee who was a leading publisher of text books at Meerut had not been maintaining proper record about the consumption of paper in his publication business. Even the analysis of the wholesale and retail sale was not made available to the Income-tax Officer, the record showed that the account books had always been rejected and very minor relief was granted in appeals. For the year 1964-65 a penalty of Rs. 8,000 in terms of Section 271(1)(c) had been imposed upon the assessee. In spite of this, there was no improvement in accounts. In the year in question also it had been found that after taking into account the reduction made by the appellate court the assessee had made extra profit amounting to Rs. 21,904. These facts disclosed that the assessee had been delinquent in maintaining his books in a manner so as not to reflect the correct quantum of his income and thus he was guilty of gross and wilful neglect in the maintenance of accounts and that the case squarely fell within the ambit of the Explanation to Section 271(1)(c). Accordingly, the Inspecting Assistant Commissioner made an order imposing a penalty of Rs. 6,000 upon the assessee.
(3.) IN appeal, the INcome-tax Appellate Tribunal referred to its earlier decisions wherein it had been observed as follows : "Though for want of proper verification the book version has been held to be not proved, there is no material whatsoever on record to support the finding that there is any fraud or gross or wilful neglect on the part of the assessee. All that has happened is that since the book results were held by the revenue authorities to be low and not amenable to verification, the revenue authorities have determined the profit by making their own estimates of the turnover and the rate of profit. But the mere fact that the book version had not been accepted would not lead to any finding to the effect that there was any fraud or gross or wilful neglect on the part of the assessee. Since no good ground has been made out for holding that there was any fraud, gross or wilful neglect on the part of the assessee, the mere fact that the income returned is less than eighty per cent, of the income as finally assessed would not justify for the findings that there was concealment of income." and observed that "in the instant case the assessee had returned its income on the basis of the accounts maintained by it. The INcome-tax Officer did not record any finding that the assessee had suppressed its sales or purchases. Mere rejection of accounts and estimation of income at a higher figure by itself could not mean that there was either fraud or gross or wilful neglect on the part of the assessee in returning its aggregate income. IN cases where accounts had been maintained and the income returned was based on such accounts, the assessee would be considered to have discharged the onus so far as correctness of income returned is concerned. The department had not brought on the record any material or evidence from which it could be reasonably or positively inferred that the assessee's books and returns were not correct and complete. IN the circumstances, it is not possible to sustain the penalty. IN the result, I allow the appeal and set aside the penalty order". At the instance of the Commissioner of Income-tax the Tribunal has stated the case and referred the following question for the opinion of this court ; "Whether, on the facts and in the circumstances of the case, the Tribunal was right in law in cancelling the order of penalty passed by the Inspecting Assistant Commissioner of Income-tax ?" ;