TMI Blog1977 (8) TMI 15X X X X Extracts X X X X X X X X Extracts X X X X ..... re the penalty proceedings reached hearing before the IAC, the appeal preferred by the assessee, against the assessment order passed by the ITO, before the AAC was decided and the AAC deleted an amount of Rs. 10,750 out of the sum of Rs. 36,459 which was added on account of unexplained cash credits by the ITO. The IAC, in the course of the penalty proceedings, was of the view that the assessee's case was governed by the substantive provision of s. 271(1)(c) of the I.T. Act, 1961, and, in the alternative, that it was also covered by s. 271(1)(c) read with the Explanation to the said section as the income returned was less than 20% of the assessed income. In the light of the said findings, the IAC imposed a penalty in the sum of Rs. 40,190. The assessee feeling aggrieved by the decision of the IAC preferred an appeal before the Tribunal. The Tribunal took the view that the IAC erred in levying penalty on the basis of s. 271(1)(c) read with the Explanation. The view of the Tribunal was that having regard to the decision in D. M. Manasvi v. CIT [1972] 86 ITR 557 (SC) and CIT v. A. K. Das [1970] 77 ITR 31 (Cal), the satisfaction in penalty proceedings was required to be that of the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... court and even on that point, therefore, we are not required to express any opinion. In order to appreciate the point which arises for determination, it would be necessary first to read the relevant provisions as they stood at the material time. The material part of s. 271(1), as it stood during the relevant assessment year, was as under : " 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-- . ...... (c) 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,-- . . ......... (iii) in the cases referred to in clause (c), in addition to any tax payable by him, a sum which shall riot 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 s. 271(1)(c), which was introduced by the Finance Act, 1964, which at the material time read as follows : " Explanation.--Where the total ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... prima facie satisfaction of the ITO that the proceedings for imposition of penalty could be initiated. In D. M. Manasvi's case [1972] 86 ITR 557, the Supreme Court had an occasion to consider the provisions of s. 271(1)(c) and this is what is observed in that context : " The proceedings for the imposition of penalty in terms of sub-section (1) of section 271 have necessarily to be initiated either by the Income- tax Officer or by the Appellate Assistant Commissioner. The fact that the Income-tax Officer has to refer the case to the Inspecting Assistant Commissioner if the minimum imposable penalty exceeds the sum of rupees one thousand in a case falling under clause (c) of sub-section (1) of section 271 would not show that the proceedings in such a case cannot be initiated by the Income-tax Officer. The Income-tax Officer in such an event can refer the case to the Inspecting Assistant Commissioner after initiating the proceedings. It would, indeed, be the satisfaction of the Income-tax Officer in the course of the assessment proceedings regarding the concealment of income which would constitute the basis and foundation of the proceedings for levy of penalty ... It may also be o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ely provided for was present in the facts and circumstances of the case, the IAC to whom the case came to be referred under s. 274(2) could not possibly arrive at such a conclusion. This immediately raises the question as to the true nature and character of the Explanation and as to whether it enacts a rule of substantive law or whether it is merely a rule of evidence. If the Explanation enacts a rule of substantive law, then, there is no manner of doubt that the IAC could not have invoked its aid unless the ITO at the stage of initiation of the penalty proceedings had been prima facie satisfied about the applicability of the Explanation in the facts and circumstances of the case. If, however, the Explanation enacts a mere rule of evidence and merely shifts the burden of introducing evidence as to the proof of the ingredients of s. 271(1)(c) on the assessee in the case covered by it, then, the Tribunal must be held to have fallen into an obvious error in holding that the ITO was required to be satisfied even about the applicability of the Explanation in the circumstances of the case inasmuch as it was the function of the IAC to reach the final conclusion on the question of concealm ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rate particulars of income and held that before penalty could be imposed, the entirety of circumstances must reasonably point to the conclusion not only that the disputed amount represented income of the assessee (the burden of proving which fact was on the department) but also that the default of the assessee consisted of such type of concealment or furnishing of inaccurate particulars. The word " conscious " was not to be found in s. 28 but the word " deliberately " did find place in the said section. Still, however, the Supreme Court spelt out from the expression " concealed " the requirement of conscious concealment having regard to its etymology and the context in which it was used and held that it was that ingredient which was required to be established before an assessee could be penalized under s. 28 of the old Act. When the present Act was enacted, s. 271(1)(c) was re-enacted verbatim without any change or modification. However, by the Finance Act, 1964, two changes were brought about, so far as s. 271(1(c) is concerned ; first, the word " deliberately " preceding the expression " furnished inaccurate particulars of such income" was deleted and, secondly, the Explanation w ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... That is achieved by the legal fiction enacted in the Explanation. But, this legal fiction can be displaced if the assessee proves that the failure to return the correct income, that is the total income assessed, did not arise from any fraud or gross or wilful neglect on his part. If the assessee wants to repel the legal fiction and throw the burden of bringing the case within section 271(1)(c) again on the revenue, as it would be in the absence of the Explanation, the assessee has to show--and this burden is upon him--that his failure to return the correct income did not arise from any fraud or gross or wilful neglect on his part. Now, this burden is not of the same nature as the burden which rests on the prosecution in a criminal case where the prosecution has to establish the guilt of the accused beyond reasonable doubt nor is it of the same nature as the burden which lies upon the revenue in establishing that the assessee has concealed the particulars of his income or furnished inaccurate particulars of such income. It is a burden akin to that in a civil case where the determination is made on preponderance of probabilities. It is also not necessary that any positive material sh ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... f substantive law or rule of evidence is a matter which is no longer in doubt or debate. In Izhar Ahmad Khan v. Union of India [1962] AIR 1962 SC 1052, Gajendragadkar J., as he then was, speaking for the majority, examined this question in the context of r. 3, Sch. 3 of the Citizenship Rules, 1956, which were enacted under s. 9(2) of the Citizenship Act, 1955. Section 9(2) of the said Act empowered the competent authority to enact rules of evidence, having regard to which any question as to whether, when or how any person has acquired the citizenship of another country, was to be determined and, under the powers so conferred, the Central Government enacted r. 3 which provided that the fact that a citizen of India has obtained on any date a passport from the Government of any other country shall be conclusive proof of his having voluntarily acquired the citizenship of the country before that date. The argument before the Supreme Court inter alia, was that whereas s. 9(2) authorised the Central Govt. to prescribe rules of evidence subject to which the relevant inquiry could be held, what the Central Govt. had purported to do in framing r. 3 was to enact a rule of substantive law. Gaj ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... iew of the majority of the court in the following words : " If fact A is inherently relevant in proving the existence of fact B and to any rational mind it would bear a probative or persuasive value in the matter of proving the existence of fact B, then a rule prescribing either a rebuttable presumption or an irrebuttable presumption in that behalf would be a rule of evidence. On the other hand, if fact A is inherently not relevant in proving the existence of fact B or has no probative value in that behalf and yet a rule is made prescribing for a rebuttable or an irrebuttable presumption in that connection, that rule would be a rule of substantive law and not a rule of evidence. Therefore, in dealing with the question as to whether a given rule prescribing a conclusive presumption is a rule of evidence or not, we cannot adopt the view that all rules prescribing irrebuttable presumptions are rules of substantive law. We can answer the question only after examining the rule and its impact on the proof of facts A and B." This decision throws a flood of light on the approach which we must adopt in determining whether the Explanation, which raises a rebuttable presumption, is a rule ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... uestion which then falls for consideration is whether the fact that there is a difference of more than twenty per cent. in the income returned and the total income as assessed under the various provisions of the Act (as reduced in the manner provided in the Explanation) is a fact inherently relevant in proving the fact of concealment of particulars of income for the purposes of s. 271(1)(c) and whether such fact would bear to a rational mind a probative or persuasive value in the matter of proving the factum of concealment of particulars of income. In answering this question, certain considerations have to be borne in mind. In the first place, s. 139(1) of the Act provides for furnishing a return of income " in the prescribed form and verified in the prescribed manner ". Similar provision is also made in s. 139(2) and (3). Sub-rule (1) of r. 12 of the I.T. Rules, 1962, provides that the return of income required to be furnished under sub-ss. (1), (2) and (3) of s. 139 shall be in the prescribed form applicable to the class of the assessee concerned and be verified in the manner indicated therein. For persons other than companies return of income was required to be furnished at th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e covered within the margin of 20%. This is all the more so because, in terms of the Explanation, the income assessed, which has to be taken into account for the purpose of computing the difference of more than 20%, is different from the total income as assessed under the various provisions of the Act. The income assessed within the meaning of the Explanation is such total income minus the expenditure incurred bona fide by the assessee for the purpose of making or earning any income included in the total income but which has been disallowed as a deduction. If all these considerations are borne in mind, it would appear that the fact that there is a difference of more than 20% between the income returned and the income assessed is a fact which can be generally treated as inherently relevant in proving concealment of income and it can be said to have, for a rational mind, a probative or persuasive value in the matter of the proof of such concealment. In the next place, one cannot lose sight of the fact that the circumstances under which and the reasons for which such difference in the returned income and assessed income has occurred is a matter within the knowledge of the assessee h ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... SC 1052. On behalf of the assessee, however, it was strenuously contended that there were two good reasons why the Explanation should be treated as enacting a rule of substantive law. It was urged, first, that the fact that there is a difference of more than twenty per cent. in the income returned and the income assessed is not a fact which is inherently relevant in proving concealment of income within the meaning of s. 271(1)(c) in each and every case which might come up before the income-tax authorities and that, therefore, the test laid down in Izhar Ahmad's case, AIR 1962 SC 1052, could not be said to have been satisfied and, secondly, that the Explanation creates a totally different kind of default from that contemplated by s. 271(1)(c) inasmuch as it affects the content,and structure of the offence and the ingredients of the default of concealment as understood in the context of s. 271(1)(c) and that, therefore, the Explanation also should be treated as a rule of substantive law. We are unable to persuade ourselves to accept this submission for the reasons which follow. It is in a way true that as to what will amount to concealment within the meaning of s. 271(1)(c) will ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n concerned, we are unable to hold that merely because, for the purposes of working out the difference of more than twenty per cent. between the income returned and the income assessed, the income assessed is required to be reduced as provided in the Explanation, the ingredients of concealment within the meaning of s. 271(1)(c) are in any manner affected. The first part of the Explanation, as earlier stated, merely lays down the objective condition which has to be satisfied before the presumption can be raised. It is true, as held in CIT v. Gujarat Textile Co. Pvt. Ltd. [1975] 99 ITR 514 (Guj) and CIT v. Nav Bharat Automobiles [1976] 102 ITR 278 (All), that some recomputation or reprocessing will have to be done under the Explanation in arriving at the income assessed and that it is not the income assessed in the course of assessment proceedings which has to be taken as the basis for working out the twenty per cent. difference. However, we are unable to appreciate as to how this requirement which has to be complied with before invoking the Explanation could be held to affect the ingredients of the penal default of concealment contained in s. 271(1)(c). The provision, in fact, is ma ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ere is avoidance or evasion of tax, it could be legitimately inferred that he is guilty of conscious concealment. This would be so because if the assessee failed to give accurate particulars as to his income even with this knowledge which the law presumes he has, he can hardly be held to be an honest blunderer or a stupid man. Such a person can legitimately be found to be acting dishonestly. The argument based on the definition of " good faith " in s. 3(22) of the General Clauses Act cannot assist the assessee. In Municipality of Bhiwandi and Nizampur v. Kailash Sizing Works, AIR 1975 SC 529, the Supreme Court was concerned with s. 167 of the Bombay District Municipal Act which confers protection on the Municipality in respect of anything in good faith done or intended to be done. The definition of the expression " done in good faith " as given in the General Clauses Act was referred to and it was pointed out that, accordingly, it would mean anything done honestly, whether done negligently or not. It was observed that an authority could not be said to be acting honestly where it has a suspicion that there is something wrong and does not make further enquiries. Being aware of poss ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d in good faith. In quasi-judicial proceedings like penalty proceedings under the I.T. Act, it is this definition which would in any case be more relevant in judging the state of mind of the person for the purpose of arriving at a conclusion whether or not there is conscious concealment. If this definition is borne in mind, it would be apparent that cases of gross neglect, which would necessarily involve want of due care and attention, would prove a guilty state of mind. It would thus appear that none of the three factors which an assessee has to prove under the Explanation, in order to get out of the clutches of s. 271(1)(c), affects the ingredients of the penal default. Penal default is conscious concealment and all that the Explanation does is to enact a rule of evidence whereunder the presumption as to conscious concealment is rebutted by evidence of this nature led by an assessee. It now remains to refer to the decisions cited at the Bar. We shall only refer to those decisions which are relevant. No decision has been pointed out to us where a view has been taken that the Explanation enacts a rule of substantive law and not a rule of evidence. However, there are three decis ..... X X X X Extracts X X X X X X X X Extracts X X X X
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