R.L.GULATI, J. - (1.) THE assessee is a registered partnership firm engaged in the business of cloth. For the asst. yr. 1968 -69, it declared an income of Rs. 14,642. The ITO found that the assessee's accounts were defective. He, accordingly, computed the total income at Rs. 21,650 by assuming a flat rate of profit of 7.5 per cent to the wholesale and 12.5 per cent to the retail sales. As the income returned was less than 80 per cent. of the income assessed he initiated penalty proceedings under S. 271(1) (c) of the IT Act, 1961 (hereinafter referred to as "the Act"). As the minimum imposable penalty exceeded Rs. 1,000, the case was referred to the IAC as required by the proviso to S. 274(2) of the Act. Before the IAC it was represented on behalf of the assessee that he had not committed any concealment of income and his profit was less because he was a wholesale dealer. It was also pleaded that in any case the assessee had not been guilty of any fraud or gross or wilful neglect and, as such, no penalty is called for. The IAC did not accept the assessee's claim that he was a wholesale dealer and held that the gross profit of 7 per cent disclosed by it was ridiculously low and as the sales, purchases and closing stocks were not verifiable, the assessee had not accounted for its entire transactions in books of accounts and, as such, was guilty of concealment under S. 271 (1)(c) of the Act. He, accordingly, levied a penalty of Rs. 7,010,an amount equal to the concealed income. On appeal, the Tribunal set aside the order of the IAC on the view that the provisions of s. 271(1)(c) of the Act were not attracted. At the instance of the CIT, however, the Tribunal has referred the following question of law for the opinion of this Court : "Whether, on the facts and circumstances of the case, the provisions of S. 271(1)(c) of the IT Act, 1961, read with the Explanation thereto are applicable - Provisions of S. 271(1)(c) of the Act are attracted only if an assessee is found to have concealed the particulars of his income or has furnished inaccurate particulars of such income. It is thus clear that before a penalty is levied under S. 271(1)(c) of the Act, a finding must be recorded that the assessee had been guilty of concealment or of furnishing inaccurate particulars. This being a penal provision, the onus clearly lies upon the Department to bring home the guilt to an assessee. Whenever income returned by the assessee is enhanced by the ITO the penal provision is not automatically attracted. The penal provision is applicable only if the enhancement is on account of some income which the assessee is found to have earned and concealed. This proposition is now well settled after the decision of the Supreme Court in the case of CIT vs. Anwar Ali (1970) 76 ITR 696 (SC). In that case the assessee was a partner of a firm. During the course of assessment proceedings for the year 1947 -48, the ITO discovered an undisclosed bank account of the assessee where a cash deposit of Rs. 87,000 had been made. He was asked to explain the source of the deposit. The assessee's explanation that he had received certain amount from relations for deposit in the bank account was not accepted and the ITO held that the sum of Rs. 87,000 represented the assessee's income from undisclosed sources. In due course he levied upon the assessee a penalty of Rs. 66,000 under S. 28(1)(c) of the Indian IT Act, 1922, which corresponds to S. 271(1)(c) of the Act. The Supreme Court held that : "But one of the principal objects in enacting S. 28 is to provide a deterrent against recurrence of default on the part of the assessee. The section is penal in the sense that its consequences are intended to be an effective deterrent which will put a stop to practices which the legislature considers to be against the public interest ....... It appears to have been taken as settled by now in the sales -tax law that an order imposing penalty is the result of quasi -criminal proceedings ....... .." The Supreme Court proceeded to examine the question that when the proceedings under s. 28 are penal in character, what would be the burden upon the Department for establishing that the assessee is liable to penalty. In this connection while answering the question the Supreme Court held (p. 701): "It must be remembered that the proceedings under S. 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." In the end the Supreme Court observed : "In the present case, it was neither suggested before the High Court nor has it been contended before us that, apart from the falsity of the explanation given by the assessee, there was cogent material or evidence from which it could be inferred that the assessee had concealed the particulars of his income or had deliberately furnished inaccurate particulars in respect of the same and that the disputed amount was a revenue receipt". and agreeing with the High Court the Supreme Court set aside the penalty order.
(2.) IN Anwar Ali's case (supra), a particular amount had been found by the ITO to be the assessee's income which had been disguised as a deposit in a bank. The assessee's explanation with regard to the source of the deposit was found to be false ; even then the Supreme Court hold that there was no cogent material for holding that the amount in question was really the assessee's income which the assessee had concealed. The instant case stands on a much stronger footing. Here, the ITO, had enhanced the income of the assessee not because he discovered any concealed amount of income but because the assessee's account books had not been properly maintained and the ITO chose to make a best judgment assessment. In the first place there is no positive material on the basis of which it could be held that the sum of Rs. 7,000 and odd added by the ITO to the assessee's income was really the income of the assessee, and, secondly, there is no evidence that the assessee had concealed this income. The assessee had produced the books of accounts and the ITO had not discovered any positive material of suppression of sale or concealment of income. It is in this context that the Tribunal has remarked that cases of estimates ordinarily did not attract penal provision.
(3.) PARLIAMENT has, however, added an Expln. to S. 271(1)(c) which provides that if income returned by an assessee is less than 80 per cent of the income assessed as reduced by the expenditure bona fide claimed by the assessee and disallowed by the ITO it shall be deemed to be a case of concealment unless the assessee proves that the difference is not due to fraud or gross or wilful neglect on his part. This Explanation lays down a rule of evidence and the onus which ordinarily lies upon the Department has been shifted to the assessee in cases to which the Explanation applies. It is true that the Explanation will cover even the cases of estimate or the best judgment assessment but nevertheless a finding has to be recorded that the difference in the income returned and the income assessed is due to the fraud or gross and wilful neglect on the part of the assessee, even though the onus lies upon the assessee. In the instant case, the IAC has not recorded any such finding even though he purports to have relied upon the Explanation. The only reason which prevailed with the IAC was that the assessee was not a wholesale dealer and, as such, the rate of profit shown by him was too low to be accepted. The Tribunal found that the finding that the assessee was not a wholesale dealer was not based upon any evidence. If it be accepted that the assessee was a wholesale dealer, as has been found by the Tribunal, then the rate of profit disclosed by the assessee cannot be said to be ridiculously low. The rate of profit disclosed by the assessee was 7 per cent whereas the ITO applied a flat rate of profit of 7.5 per cent on wholesale. Taking these facts into consideration the Tribunal held the assessee cannot be said to be guilty of fraud or wilful neglect in the following words : "True, sales and purchases are not wholly amenable to verification. That at best can only lead to the inference that the results shown by the books of accounts are inconclusive. But that is far from saying that there is any fraud or gross or wilful neglect on the part of the assessee." The Tribunal has also found that while there may be justification for making an addition to the assessment there was no justification for imposing penalty because the Revenue had not established that what was added by them in the assessment represented the income of the assessee. The finding recorded by the Tribunal that the assessee was not guilty of fraud or gross or wilful neglect is a finding of fact and having regard to the facts and the circumstances of the case we are not prepared to interfere with it. A similar view was taken by this Court in CIT vs. Harnam Singh & Co. (1977) 106 ITR 532 (All).;