Decided on April 20,1979


Cited Judgements :-



Brishketu Saran Sinha, J. - (1.)ON the direction of this court, the Income-tax Appellate Tribunal, Patna Bench, has stated a case with regard to the following question of law :
" Whether the order of the Tribunal setting aside the imposition of penalty of Rs. 10,000 upon the assessee is in accordance with law provided in Section 271(1)(c) of the Income-tax Act, 1961, as it stood amended at the relevant time with effect from the 1st April, 1964 ?"

(2.)THE assessee is a registered firm and the assessment year is 1966-67. For the return of the aforesaid period, the ITO made an estimated addition of Rs. 20,000 in the mustard oil account, Rs. 7,200 in the arhat account and Rs. 9,000 under Section 68 of the I.T. Act respectively. THE assessee had shown Rs. 9,000 as deposit of Rs. 1,500 each from the six partners. In the absence of necessary and conclusive evidence regarding the nature of these deposits, the same were added as income of the assessee. In rejecting the assessee's case of deposit, the ITO took certain circumstances into consideration. In appeal before the AAC of Income-tax, the assessee disputed the aforesaid additions. THE additions of Rs. 20,000 and Rs. 7,200 were maintained by the AAC. With regard to Rs. 9,000, the unexplained deposit, the case of the assessee was that Rs. 1,500 was introduced by each of the six partners from their past savings and that was in keeping with their status and such introduction could not be ruled out. In the alternative, it was argued that if the explanation about the deposits was not accepted, the assessee be given the advantage of telescoping of this amount in view of the substantial addition made in the trading accounts. As there was an addition of Rs. 27,200 in the trade accounts for the deficiency of profit, the AAC deleted the addition of Rs. 9,000 and gave the assessee " the benefit of telescoping ".
A notice was thereafter issued to the assessee under Section 274(2) read with Section 271 of the I.T. Act, 1961, in which apart from other grounds it was urged that the introduction of Rs. 9,000 in the cash credit by the partners could not be ruled out. It was further urged that Section 271(1)(c), being penal in nature, the onus was on the revenue to prove beyond doubt that the additional sum of Rs. 9,000 introduced as cash credit was the concealed income of the firm and that by adopting the test of probabilities, the case of the assessee should have been accepted. The IAC of Income-tax, by his order dated the 5th of August, 1969, held that as before the AAC the assessee requested for the benefit of telescoping the clear inference was that the assessee had admitted that it had made substantial profit in the mustard oil account which was not disclosed. Hence, it was concluded that the assessee had falsified its accounts and what it had kept out of its trading accounts had been reintroduced in the books in the shape of deposits in the names of the six partners. The IAC, therefore, held that the assessee had all along endeavoured to conceal its income by giving false explanation. Therefore, the assessee had not discharged the onus cast upon it to show that it was not due to any fraud or gross or wilful neglect on its part. The provisions of Section 271(1)(c) of the I.T. Act was evidently attracted and a penalty of Rs. 10,000 was imposed.

Aggrieved by the aforesaid order the assessee went up before the Tribunal which, by its order dated 29th June, 1978, held that although the explanation of the assessee with regard to the introduction of Rs. 9,000 was rejected, the " benefit of telescoping " had been allowed. But by mere falsity of the explanation it could not be inferred that the assessee had concealed the amount or furnished inaccurate particulars. By rejecting the explanation the amount could be added in the assessment but the penalty could not be sustained in the absence of proof that the assessee had concealed the amount which was in the nature of income. In coming to this conclusion, the Tribunal relied on the case of CIT v. N. A. Mohamed Haneef [1972] 83 ITR 215 (SC). The penalty, therefore, was held to be improper and was deleted and it was ordered that if the penalty had been collected it should be refunded.

In support of this case, the senior standing counsel for the revenue has urged that the Tribunal erred in relying upon the case, CIT v. N. A. Mohamed Haneef [1912] 83 ITR 215 (SC), inasmuch as that was a case under Section 28 of the Indian I.T. Act, 1922, and not under Section 271(1)(c) of the I.T. Act, 1961. It was urged that the word "deliberately" having been deleted from Section 271(1)(c), that case would have no application to the facts of this case.

In CIT v. Gokuldas Harivallabhdas [1958] 34 ITR 98 (Bom), Chagla J., delivering the judgment on behalf of a Bench of the Bombay High Court, held that proceedings under Section 28(1)(c) of the Indian I.T. Act, 1922, was in the nature of penal proceedings and 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 further observed that it was 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. This view was followed by our High Court in a number of cases but in some cases the Madras and Allahabad High Courts took a different view. In the case of CIT v. Anwar Ali [1970] 76 ITR 696, the Supreme Court laid down the law holding the Patna and the Bombay views to be the correct views.. In doing so they followed the earlier decision of the Supreme Court in the case of Hindustan Steel Ltd. v. State of Orissa [1972] 83 ITR 26, in which the Supreme Court was called upon to interpret the provisions relating to penalty proceedings under the Orissa Sales Tax Act. Anwar Ali's case [1970] 76 ITR 696 (SC) has thereafter been followed in three other decisions of the Supreme Court, as also in the case of CIT v. N. A. Mohamed Haneef [1972] 83 ITR 215 (SC). In the case of CIT v. Khoday Eswarsa and Sons [1972] 83 ITR 369, the Supreme Court observed (p. 376) :

" 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."

(3.)IT was further laid down that penalty could not be levied solely on the basis of the reasons given in the original order of assessment.
In the case of CIT v. Patna Timber Works [1977] 106 ITR 452 (Pat), a Bench of this court in considering the law as engrafted in Section 271(1)(c) of the I.T. Act, 1961, considered as to what was the effect of the deletion of the word " deliberately " occurring in the second portion of Clause (c). This deletion was the result of the Finance Act of 1964 when an Explanation was also added to it. Untwalia C.J. (as he then was) held that 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 which has to to prove that the particulars furnished were inaccurate to the knowledge of the assessee at the time of the 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.

It seems, therefore, that under Section 271(1)(c) before penalty can be imposed the revenue must establish that the return furnished was inaccurate to the knowledge of the assessee or was the result of wilful or gross neglect on its part. Mere negligence in furnishing the particulars which are found to be inaccurate will not be enough and the neglect must be either wilful or at least gross, that is to say, the act or omission was patently wrong in the eye of law and if the assessee had taken care and exercised diligence, he would not have committed the act or omission.

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