TMI Blog1973 (3) TMI 39X X X X Extracts X X X X X X X X Extracts X X X X ..... 3,34,000 and gross profit of Rs. 26,595 which worked out at approximately 7.9 per cent. of the total sales and net income of Rs. 19,434. The Income-tax Officer assessing the assessee to income-tax for the assessment years 1964-65 and 1965-66 found that though the books of account were maintained by the assessee according to the mercantile method of accounting, it was not possible to accept the figure of profit appearing from the books of account because, in the first place, no quantitative stock account was maintained by the assessee, secondly, a majority of the sales were not supported by vouchers and, thirdly, the gross profit disclosed by the books of account was low. The Income-tax Officer accordingly proceeded to make best judgment assessment under section 145(2) by estimating the total sales and applying a rate of 7 1/2 per cent. to the sales to doctors and a rate of 12 1/2 per cent. to the other sales for the purpose of arriving at the gross profit in each assessment year. The result was that for the assessment year 1964-65 a sum of Rs. 20,420 was added to the returned income of Rs. 14,738 making a total assessed income of Rs. 35,158 and similarly for the assessment year 19 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... f penalty. This view taken by the Tribunal is challenged in the present references at the instance of the revenue. In order to appreciate the question which arises for determination before us, it is necessary to examine the language of section 271(1)(c) with the Explanation and to construe its meaning and effect. Section 271(1)(c) provides and here we are setting out the section as it stood during the relevant assessment years prior to its amendment by Finance Act, 1968: "271. (1) If the Income-tax Officer or the Appellate Assistant Commissioner, in the course of any proceedings under this Act, is satisfied that any person ..... has concealed the particulars of his income or furnished inaccurate particulars of such income, he may direct that such person shall pay by way of penalty,---... in the cases referred to in clause (c), in addition to any tax payable by him, a sum which shall not be less than twenty per cent. but which shall not exceed one and a half times the amount of the tax, if any, which would have been avoided if the income as returned by such person had been accepted as the correct income." Then there is the Explanation to section 271(1)(c), which reads as fo ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... y. This, of course, does not mean that if a case falls fairly and squarely within the language of the Explanation, we should refuse to give effect to the mandate of the legislature as disclosed in the Explanation. But what is necessary to be borne in mind is that when we are construing the true meaning and effect of the Explanation, we must not forget that it is the Explanation which adds to the rigour of a highly penal provision and we must not, therefore, be over anxious to enlarge the scope and ambit of the Explanation by making an effort to bring every possible case within it, but we should instead construe the Explanation and apply it in a fair and reasonable way with a view to achieving the purposes of the main provision, namely, that an assessee who has concealed the particulars of his income or furnished inaccurate particulars of such income should not escape penalty. The Explanation creates a legal fiction if the condition of its applicability is satisfied. The condition is an objective condition, namely, that the total income returned by the assessee should be less than eighty per cent. of the total income assessed subject to to a certain reduction which is not material f ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... may claim to have discharged the burden by relying on the material which is on record in the penalty proceedings, irrespective of whether it is produced by him or by the revenue. The only question to which the income-tax authority has to address itself is, whether on the material on record in the penalty proceedings, can it be said on a preponderance of probabilities that the failure to return the total assessed income has not arisen on account of any fraud or any gross or wilful neglect on the part of the assessee. If the answer to the question is in the affirmative, the legal fiction enacted in the Explanation cannot arise and the revenue must fail in its attempt to impose penalty on the assessee. If the material on record in the penalty proceedings fairly and reasonably leads to the inference that there was no fraud or gross or wilful neglect on the part of the assessee in not returning the total assessed income, it would almost be impossible for the revenue to contend that the assessee has concealed the particulars of his income or furnished inaccurate particulars of such income so as to attract the applicability of section 271(1)(c) on its own terms independently, of the Expla ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... fiction enacted in the Explanation. That is what the Tribunal proceeded to consider and when the Tribunal observed that " on the facts of the case no finding of any fraud or any wilful neglect on the part of the assessee can be recorded ", what the Tribunal meant was that there was no fraud or gross or wilful neglect on the part of the assessee. We are, therefore, of the view that the charge made by the revenue against the Tribunal that it misconceived the correct position in regard to burden of proof cannot be sustained. We must, however, observe that it would have been better if the Tribunal had phrased its order properly so as to leave no scope for doubt that what it was holding was that the assessee had discharged the burden of showing that there was no fraud or gross or wilful neglect on its part in failing to return the total income assessed. The wording of the order, as it stands, does give rise to scope for misunderstanding. We hope and trust that the Tribunal will in future use language which is plain and unambiguous and disclose clearly that what it is considering is the question whether the assessee has discharged the burden of proof which lies upon him. So far as the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... eflecting the correct income in the absence of proper verificatory records and made additions in the income returned by it and yet the assessee persisted in not maintaining proper verificatory records and continued to keep the accounts on the same basis as in the past year. This, according to the revenue, constituted gross or wilful neglect on the part of the assessee and it was on account of such gross or wilful neglect that the assessee failed to return the total income assessed and the case, therefore, fell fairly and squarely within the language of the Explanation. This argument, plausible though it may seem, is, in our opinion, wholly fallacious. It proceeds on the assumption that if accounts had been properly maintained by the assessee, they would have disclosed the total income as assessed and in that event there would have been no failure on the part of the assessee to return the total assessed income. This assumption is not well-founded. It is clear law that neglect postulates breach of duty to take care and there is clearly no duty on the assessee to maintain books of account, he runs the risk of best judgment assessment and in a best judgment assessment, it is quite poss ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e shown that the accounts maintained by the assessee were correct and the income returned was the correct income. Failure to return the total assessed income could not, therefore, be said to be due to non-maintenance of proper verificatory records by the assessee. We are, therefore, of the view that in a case like the present, where assessment is made on the basis of an estimate and there is nothing on record to show that any particular entries in the books of account are false or incorrect or any particular items of purchase or sale are omitted to be entered in the books of account, the assessee must be held to have discharged the onus which rests upon him to show that the failure to return the total income assessed was not on account of any fraud or gross or wilful neglect on his part. This view is clearly supported by the decision of a Division Bench of the Kerala High Court in Commissioner of Income-tax v. Sankarsons Company. We must, in the circumstances, hold that the Tribunal was right in coming to the conclusion that there was no fraud or gross or wilful neglect on the part of the assessee in failing to return the total assessed income and the legal fiction enacted in t ..... X X X X Extracts X X X X X X X X Extracts X X X X
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