TMI Blog1986 (3) TMI 23X X X X Extracts X X X X X X X X Extracts X X X X ..... not admit of check. The Income-tax Officer further noticed that there was no check on closing stock either. In the course of assessment proceedings for the assessment year 1968-69, the Income-tax Officer observed that the state of the books of account was the same as in the earlier years. He noticed the following defects in the maintenance of accounts : " (i) Admittedly, no quantity details are maintained regarding the consumption of the various items of raw materials used and the various preparations made therefrom. (ii) The list of closing stock filed is as per inventory and admits of no check as to its correctness qualitatively or quantitatively. (iii) The assessee's auditors, M/s. K. V. Patel, themselves have observed in their report that " daily collection slips or cash memos have not been produced to us for our verification." The Income-tax Officer, therefore, refused to accept the book result in both the said assessment years. He held that the sales disclosed and the income returned for the said assessment years were not reliable and that position was admitted by the assessee. The Income-tax Officer further pointed out that the book results were not accepted fro ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e did not arise from any fraud or gross or wilful neglect on its part. (4) So far as the assessment year 1968-69 was concerned, the assessee had paid tax under section 140A of the Act on estimated income of Rs. 2,81,000 and consequently the amount of tax paid was in excess of what was demanded by the Income-tax Officer as per his assessment order. The Inspecting Assistant Commissioner observed that the books of account maintained by the assessee were such as they could not be relied upon. The book result disclosed by the assessee was rejected from year to year and the additions made were accepted by the assessee. The Inspecting Assistant Commissioner set out a table in which the income returned, the income assessed and the additions made in the assessment years 1963-64 to 1967-68 were stated. The Inspecting Assistant Commissioner observed that in spite of the rejection of the book result from year to year and additions of substantial amounts to the total income of the assessee, the assessee persisted in maintaining the books of account which were such that true income could not be derived. The Inspecting Assistant Commissioner refused to accept the explanation of the assessee ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... sessed income. In the result, the Tribunal cancelled the penalties imposed on the assessee in the assessment years 1967-68 and 1968-69. The Revenue being dissatisfied with the findings recorded by the Tribunal, the following questions have been referred to us for our opinion at its instance for each of the aforesaid assessment years, namely, 1967-68 and 1968-69: Assessment year 1967-68 (Income-tax Reference No. 125 of 78). " 1. Whether, on the facts and in the circumstances of the case, the finding of the Tribunal that the assessee was not guilty of any fraud or gross or wilful neglect in returning the income, which resulted in the income being returned at a figure lower than 80% of the income assessed, is contrary to the weight of the record and was arrived at without considering the entire evidence and material on the record ? 2. Whether, on the facts and in the circumstances of the case and in view of the provisions contained in section 271(1)(c) of the Income-tax Act, 1961, and the Explanation thereto, the Tribunal was right in law in cancelling the penalty imposed on the assessee ? " Assessment year 1968-69 (Income-tax Reference No. 126 of 78). " 1. Whether, on ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... vided in section 144, which reads as under: "144. If any person (a) fails to make the return required by any notice given under subsection (2) of section 139 and has not made a return or a revised return under sub-section (4) or sub-section (5) of that section, or (b) fails to comply with all the terms of a notice issued under subsection (1) of section 142 or fails to comply with a direction issued under sub-section (2A) of that section, or (c) having made a return, fails to comply with all the terms of notice issued under sub-section (2) of section 143, the Income-tax Officer, after taking into account all relevant material which the Income-tax Officer has gathered, shall make the assessment of the total income or loss to the best of his judgment and determine the sum payable by the assessee or refundable to the assessee on the basis of such assessment." It would thus appear that in the cases covered by section 145(2), the Income-tax Officer has to make assessment of the total income or loss to the best of his judgment. The assessment made under section 144 would necessarily be made on the basis of estimate of income or loss. The next provision which we may advert t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... icability of section 271(1)(c) is that the income-tax authority should be satisfied in the course of any proceeding under the Act that any person has concealed the particulars of his income or furnished inaccurate particulars of such income. It may be pointed out that, prior to its amendment by the. Finance Act, 1964, section 271(1)(c) required that the assessee should have concealed the particulars of his income or deliberately furnished inaccurate particulars of such income, but the word ' deliberately ' was omitted from the section by the Finance Act, 1964. What is the effect of this omission does not fall for determination in this case because the assessee is sought to be brought within section 271(1)(c) not on the application of its own terms but by resort to the deeming fiction contained in the Explanation. The Explanation which was not originally there when section 271(1)(c) was enacted but which was introduced by the Finance Act, 1964, provides that where the total income returned is less than eighty per cent. of the total income assessed, the assessee shall, unless he proves that the failure to return the correct income did not arise from any fraud or any gross or wilful n ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... iculars of such income. The fact of the total returned income being less than eighty per cent. of the total income assessed is sufficient to bring the assessee within the penal provision enacted in section 271(1)(c). 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 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 f ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of the Act covers also a case where the accounts are rejected and a best judgment assessment is made under section 144 of the Act and it is found that the income returned by the assessee falls short of 80 per cent. of the income so assessed as reduced by expenditure incurred bona fide by the assessee for the purpose of earning any income included in the assessee's total income. It was observed that the Explanation clearly provides that, in such a case unless the assessee proves that failure to return the correct income did not arise from any fraud or gross or wilful neglect on his part, it will be deemed that he has concealed the particulars of his income. The burden of showing that failure to return the income correctly did not arise from any fraud or gross or wilful neglect is upon the assessee. Accordingly, in a case where the income returned by the assessee was less than 80% of the income assessed as reduced in the manner specified in the Explanation to section 271(1)(c) of the Act, law would deem it that the assessee had concealed or furnished inaccurate particulars unless the assessee is able to bring something on record to show that the failure on its part to return the corr ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... or wilful neglect on the part of the assessee and, therefore, it must be held without proof of any other fact that there was no fraud committed by the assessee in his failure to return the correct income nor was he acting grossly or wilfully negligently. In a given case, it was observed, it may be necessary for the assessee to prove certain additional facts because the materials in the assessment order give some inkling of the commission of fraud or the assessee being grossly or wilfully negligent and in such a situation, it will be necessary for the assessee, if his case is covered by the Explanation to place some more materials in the shape of oral or documentary evidence or otherwise to prove the negative fact of absence of fraud or gross or wilful negligence. If he succeeds in doing so, the onus will shift back to the Department to prove the positive fact that failure to return the correct income on the part of the assessee was as a result of fraud or gross or wilful neglect. It would be clear from the aforesaid decisions that the Explanation creates a legal fiction if the condition of its applicability is satisfied. The condition is an objective condition, namely, that the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e Revenue. The Tribunal has observed that all that has happened in the instant case is that the book version of the assessee's profits had been held by the revenue authorities as not amenable to verification and consequently the provisions of section 145 were invoked and the income was determined by estimate. Under the Tribunal accepted the contention of the assessee that the Explanation to section 271(1)(c) was wrongly invoked and that no finding would be recorded that the assessee was guilty of any fraud or gross or wilful neglect which resulted in the income being returned at a figure lower than 80 per cent. of the assessed income. As pointed out above, once it is proved that the total income returned by the assessee is less than 80 per cent. of the total income assessed by the revenue authorities, the condition for the applicability of the section is satisfied, and the assessee is deemed to have concealed the particulars of his income or furnished inaccurate particulars of such income within the meaning of section 271(1)(c). It is then for the assessee to repel the legal fiction to establish that his failure to return the correct income did not arise from any fraud or gross or ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... f argument that the approach of the Tribunal has not been correct and that it has not considered certain important aspects while allowing the assessee's appeals against the imposition of penalty, no penalty could have been levied in a case like this. It was urged that admittedly this was a case where assessment is made on the basis of estimate and there is nothing on record to show that any particular entries in the books of account are false or incorrect or any items of purchase or sales are omitted to be entered in the assessee's accounts. Therefore, the assessee must be held to have discharged the onus which rests upon it to show that failure to return the correct income was not on account of any fraud or gross or wilful neglect on its part. It was urged that this case is on all fours with S. P. Bhatt's case [1974] 97 ITR 440 (Guj) and, therefore, as held in that case, it must be held that the assessee has discharged the burden which lay upon it under the Explanation. We are afraid, we cannot accept this argument. We have already adverted to the ratio of the decision of this court in S. P. Bhatt's case [1974] 97 ITR 440. In that case, the Explanation to section 271(1)(c) of the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 143 or section 144 or section 147, and if the view canvassed on behalf of the assessee is accepted, it would mean that though the Explanation specifically mentions section 144, in all cases where the assessment is made under section 144, the assessee should be deemed to have discharged the burden of establishing that failure to return the correct income did not arise from fraud or gross or wilful neglect on his part. In other words, by the mere fact that assessment is made under section 144, the assessee is deemed to have discharged the burden which lay upon it and, in effect and substance, the Explanation is made non-applicable to a case where assessment is made under section 144. In the instant case also, as pointed out above the assessment is made under section 144 read with section 145(2) of the Act. Therefore, if the argument advanced on behalf of the assessee is correct and if the assessee is held to have discharged the burden which lay upon it to prove that failure to return correct income did not arise from any fraud, or gross or wilful neglect on its part, in effect and substance, the Explanation is made non-applicable. We do not think that this court meant or intended to ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rden which lay upon it to prove that failure to return correct income did not arise from any fraud or gross or wilful neglect on its part. Coming back to the Tribunal's order, as pointed out above, the whole approach of the Tribunal in examining the question whether levy of penalty was justified, is erroneous and illegal. It has not considered various aspects which weighed with the Inspecting Assistant Commissioner in reaching the conclusion that the assessee had failed to discharge the burden which lay on it under the Explanation. It has proceeded on the wrong assumption that it was for the Revenue to prove that the assessee was guilty of fraud or gross or wilful neglect and then to hold that since the assessee's income was estimated because its book result was not amenable to verification, it could not be held guilty of fraud or gross or wilful neglect. As the Explanation to section 271(1)(c) itself makes it clear and as held by the Allahabad High Court in Addl. CIT v. Swatantra Confectionery Works[1976] 104 ITR 291, and CIT v.Kedarnath Ramnath [1977] 106 ITR 172, the Explanation applied even in the case of best judgment assessment under section 144 of the Act. Therefore, the m ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ified. It would appear from the judgment of the Madras High Court that the assessee must prove that his own estimate of income was bona fide or proper when he filed his return of income. In other words, one way of discharging the burden of proving that failure to return the correct income did not arise from fraud or gross or wilful neglect, would be to show that the income returned was bona fide and proper. It is also important to bear in mind that under section 145(2), the income chargeable under the head " Profits and gains of business or profession " or " Income from other sources " has to be computed in accordance with the method of accounting regularly employed by the assessee, unless in the opinion of the Income-tax Officer, the income, profits and gains cannot properly be deduced therefrom or the Income-tax Officer is not satisfied about the correctness or completeness of the accounts of the assessee. Under the proviso to subsection (1) of section 145 in any case where the accounts are correct and complete to the satisfaction of the Income-tax Officer but the method employed is such that, in the opinion of the Income-tax Officer, the income cannot properly be deduced therefr ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ome-tax Officer or before the Inspecting Assistant Commissioner. In the absence of vouchers or proper maintenance of stock, how could the taxing authorities have verified the correctness or otherwise of the various entries made in the books of accounts. No evidence was led before the Inspecting Assistant Commissioner and the assessee placed reliance on the facts found in the assessment order to discharge the onus of proving that there was no fraud or gross or wilful neglect on its part. It was the duty of the Tribunal on appreciation of the facts found in the assessment order to find whether they did not in the least give an inkling of fraud or gross or wilful neglect on the part of the assessee. If these facts gave some inkling of commission of fraud or the assessee being grossly or wilfully negligent, the Tribunal should have considered whether it was necessary for the assessee to place some more materials in the shape of oral or documentary evidence or otherwise to prove the negative fact of absence of fraud or gross or wilful negligence, and when such material was not placed on record whether the assessee could escape penalty. Merely because the accounts were not amenable to ve ..... X X X X Extracts X X X X X X X X Extracts X X X X
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