Patna High Court
Commissioner Of Income-Tax vs Novelty Bar And Restaurant on 18 January, 1985
Equivalent citations: [1985]154ITR338(PATNA)
JUDGMENT Uday Sinha, J.
1. This is a reference under Section 256(2) of the I.T. Act. The question falling for consideration and which has been referred to this court is :
"Whether, on the facts and in the circumstances of the case, the Tribunal was justified in law in cancelling the penalty of Rs. 10,000 imposed by the Inspecting Assistant Commissioner under Section 271(1)(c) of the Income-tax Act, 1961 ?"
2. The assessee is a partnership firm, the partners being Dwarka Das, Karamchand Kulier and Meharchand Kulier. While assessing for the year 1968-69 (A.Y.), the ITO found that the assessee had introduced a sum of Rs. 1,10,000 in the business and had deposited it in the names of the three partners in equal proportion. The assessee explained it by contending that the partners had agricultural properties at their native place, Sarala, in the State of Punjab which had been sold for Rs. 1,00,000. Copies of the registered deeds were filed in support of this stand. The sum of Rs. 10,000 was claimed to be sale proceeds of agricultural produce of the lands which had been sold. The aforesaid sums had been received by two bank drafts--one for Rs. 1,00,000 and another for Rs. 10,000. The ITO accepted the explanation of the assessee in regard to the receipt of Rs. 1,00,000 being the value of lands sold and which had been transmitted to the partners by bank draft. He, however, did not accept the explanation of the assessee in regard to Rs. 10,000 being receipt from the sale proceeds of agricultural produce of lands which had been sold under three deeds. The said sum of Rs. 10,000 was added as income of the assessee and assessed as such. The order of the ITO is annexure A to the statement of the case. The assessee agitated against the adding back of the said sum of Rs. 10,000 in appeal and before the Tribunal, but without any success.
3. The returned income of the assessee being less than 80% of the assessed figure, penalty proceeding under the Explanation to Section 271(1)(c) of the I.T. Act (hereinafter referred to as "the Act") was initiated. In the penalty proceeding, besides other matters, the assessee disputed the correctness of the order of the ITO in regard to the addition of Rs. 10,000 as credits in the partners' account. The assessee struck to its explanation in regard to receipt of Rs. 10,000. The IAC did not find any merit in the explanation of the assessee in regard to Rs. 10,000 being receipt from sale of agricultural produce. The order of the IAC is annexure B to the statement of the case. The IAC observed that "the assessee did not prove that the partners had sold agricultural produce for this value (Rs. 10,000). They should have been able to produce details regarding the names and addresses of the persons to whom agricultural produce was sold. Nothing of this kind has been done before the ITO". In those circumstances, he held that the assessee was guilty of concealment and, therefore, it was liable for penalty. A penalty of Rs. 10,000 under Section 271(1)(c) read with Section 274(2) of the Act was imposed.
4. On appeal, the Tribunal, however, took a different view of the matter. The imposition of penalty was set aside. The entire reasoning of the Tribunal for setting aside has to be found out from the following observations of the Tribunal :
"The addition of Rs. 10,000 was made by rejecting the explanation given by the assessee regarding the source of these credits. The explanation given was quite plausible. Merely because the Income-tax Officer was not satisfied with that explanation, it could not mean that the assessee concealed any income as such while filing the return. The decision of the Supreme Court in the case of Anwar Ali supports the assessee's case. We, therefore, cancel the order imposing penalty upon the assessee."
5. The Revenue being aggrieved by the order of the Tribunal setting aside the penalty upon the assessee prayed for making a reference to this court. The prayer for reference under Section 256(1) of the Act was rejected, as the judgment of the Tribunal had proceeded upon the finding that there was no concealment of income and that the explanation of the assessee was a plausible one. The Revenue then moved this court for calling for a reference under Section 256(2) of the Act. That application having been allowed, the Tribunal referred to this court the question referred to above as directed by the High Court.
6. It is patent from a bare perusal of annexure-C, the order of the Appellate Tribunal, that the decision proceeded upon Anwar Ali's case [1970] 76 ITR 696 (SC). For some years, the Income-tax Appellate Tribunals were of the view that the introduction of Explanation to Section 271(1)(c) had made no difference in law in regard to imposition of penalty. The law on the subject has now been set at rest. The Explanation had been introduced precisely to set at naught the law laid down in Anwar Ali's case [1970] 76 ITR 696 (SC). It does not need much argument to persuade one to the view that the law laid down in Anwar Ali's case [1970] 76 ITR 696 (SC), is no longer the law of the land. The law now is that where the difference between the assessed income and the returned income is more than 20% of the assessed income, it will be for the assessee to prove that the failure to return the correct income was not due to any fraud or gross or wilful neglect on his part. Prior to the introduction of the Explanation which came into effect from April 1, 1964, the law was that it was for the Department to show that the assessee had deliberately concealed the particulars of his income or failed in furnishing accurate particulars of such income. The onus now has shifted on to the assessee to establish that there was no fraud or gross or wilful neglect on the part of the assessee in not returning the correct income. It is no doubt true that by the Explanation, the assessee is required to prove a negative fact, namely, want of fraud or gross or wilful neglect. The standard of proof of a negative fact must be certainly much lighter than the proof required of a positive fact. That was the law laid down by Untwalia J. in CIT v. Patna Timber Works [1977] 106 ITR 452 (Pat) and there has been no departure from that law up till now in any court. The real question, however, is, is dishing out any kind of explanation sufficient ? Is the requirement of the law calling upon the assessee to explain satisfied by merely setting out an explanation without any consideration for its credibility. ? In my view, the assessee is required to give a probable explanation with regard to the sum not returned. If he brings forth a plausible or probable explanation, he will have discharged the onus placed upon him by the Explanation. Thereafter, the onus will shift to the Department in reply to the rebuttal in regard to the presumption of gross and wilful neglect or fraud on the part of the assessee in not returning the correct income, The obligation of the Department is the second step in regard to imposition of penalty, but until the first step has been satisfactorily taken by the assessee, namely, until some material has been produced to show that the explanation of the assessee is probable or plausible, there can be no obligation upon the Department to establish that there was fraud or gross or wilful neglect on the part of the assessee. The assessee merely by putting forth an explanation without regard to credibility cannot put the Department on the mat. Such a view would be negativing the effect of the Explanation to Section 271(1)(c) of the Act. That would amount to bringing in the ratio in Anwar Ali's case [1970] 76 ITR 696 (SC), through the back door. That is not permissible. I am not for a moment contending that the assessee must prove his explanation positively, but I am certainly of the view that if the negative requirement of the law can be established by positive facts, the onus upon the assessee will not have been discharged, if he did not produce positive materials. I shall illustrate my point of view by an analogy where a cash credit amount of Rs. 10,000 is found in the books of the assessee. The assessee explains it by asserting that it was given to him by his uncle. Will his mere explanation as to the source of the said sum be sufficient to hold that it was not his income, but was a gift from his uncle and must some evidence be adduced or circumstances shown to lead to the conclusion that the assessee's uncle in all probability gave that sum as gift. In my view, the mere assertion which is the explanation dished out by him cannot be sufficient to discharge the onus expected of him in terms of the Explanation to Section 271(1)(c) of the Act where the stand or assertion of the assessee can be established by positive evidence. It may be established by oral evidence or by documentary evidence or both. That will not amount to expecting the assessee to prove the negative. It will be proof of the positive by the standard of probability or reasonability or the standard applied to civil cases. In my considered opinion, the mere dishing out of an explanation will not be sufficient to discharge the onus on the assessee. It cannot be denied that the circumstance showing the probability of explanation may be existing on the record itself and need not necessarily be external materials adduced during penalty proceedings, but there must be something on record to make the explanation probable. Take another situation, where the assessee explains it by asserting that while he was sitting in his Gaddi, a crow had barged in five years earlier with a bundle of notes of the value of Rs. 10,000. Question arises, will this explanation be sufficient to shift the onus from the assessee to the Department ? In my view, merely asserting this claim will not satisfy the law. It would be obligatory on the assessee to prove some more materials to show that his explanation is a probable one. Until the explanation has been probabilised, no burden is cast on the Department. It must be conceded that it is not for the Department to sit back and go on rejecting every explanation of the assessee. Nor is it the law that any and every explanation of the assessee must be accepted by the taxing authorities calling upon the Department to prove fraud or wilful neglect on the part of the assessee.
7. The Tribunal has observed in paragraph 5 of its order (annexure-C) that the addition of Rs. 10,000 was made by rejecting an explanation given by the assessee regarding the source of his credits. The Tribunal seemed to be labouring under the impression that mere rejection of an explanation is not sufficient to impose the liability of a penalty. In making that observation, it is obvious that the Tribunal was following the law laid down in Anwar Ali's case [1970] 76 ITR 696 (SC). If the explanation was not probable by any standard, the Revenue was fully justified in rejecting his explanation and proceeding to levy penalty. The view of law propounded by the Tribunal was clearly erroneous.
8. Learned counsel for the assessee submitted that even by the standards laid down above, the Tribunal had found the explanation to be plausible and, therefore, the imposition of penalty was not justified. The plausibility of the explanation being a question of fact, this court cannot alter that finding of fact. The submission has force and has to be accepted. The Tribunal observed that the explanation was plausible. This is certainly a finding of fact although I must observe that it is rather a halting finding on a question of fact. A judicial tribunal is expected to give a better finding after discussing the pros and cons of the evidence on any particular issue. Merely giving a one line finding does not do credit to a judicial tribunal. I have not the least doubt that the observation or finding "the explanation given was quite plausible" was given just to circumvent the Explanation in Section 271(1)(c) under the impetus of Anwar Ali's case [1970] 76 ITR 696 (SC). Even so, the finding is a finding of fact and is binding upon us. The finding in regard to the explanation of the assessee being plausible, the order of penalty must be struck down.
9. Learned standing counsel for the Revenue submitted that the explanation of the assessee having been rejected in the assessment proceeding, it was not open to the Tribunal to accept the same in the penalty proceeding. The proposition is rather wide. The same topic had cropped up for consideration in Anwar Ali's case [1970] 76 ITR 696 (SC) and the Supreme Court observed as follows (p. 701) :
"It cannot be said that the finding given in the assessment proceedings for determining or computing the tax is conclusive. However, it is good evidence. Before penalty can be imposed, the entirety of circumstances must reasonably point to the conclusion that the disputed amount represented income and that the assessee had consciously concealed the particulars of his income or had deliberately furnished inaccurate particulars."
10. It was the law then. After the introduction of the Explanation to Section 271(1)(c), the assessee has to explain by evidence or circumstances that the disputed amount did not represent his income and that he had not concealed the particulars of his income or had not deliberately furnished inaccurate particulars. Therefore, the law as it now stands, in my view, is that the Appellate Tribunal in a penalty proceeding is not bound by the conclusion of the Tribunal in the assessment proceeding in regard to the credibility of the explanation, but the fact of rejection is good material against the assessee and is entitled to respect, and if no fresh material or evidence is brought on record or no material exists on the record from before, it would be highly improper for the Appellate Tribunal to hold that the explanation rejected earlier in the proceeding was good explanation for the penalty proceeding. The submission urged on behalf of the Revenue must, therefore, be modified in the background of the Explanation. In CIT v. Habibullah [1982] 136 ITR 716, a Bench of the Allahabad High Court observed as follows (p. 719) :
"In the present case, the assessee did not produce any evidence in penalty proceedings. The findings in assessment proceedings were against him. The circumstances, on which the Tribunal placed reliance, had already been considered in the assessment proceedings and disbelieved. We fail to understand as to how a different interpretation could be put on those circumstances in penalty proceedings without the assessee producing any fresh evidence or placing any additional and fresh circumstance in penalty proceedings. Evidently, the assessee failed to discharge the onus and, on the facts of the instant case, the Tribunal was not justified in cancelling the penalty orders."
11. The correct law, in my view, in regard to the imposition of penalty seems to be that the order in the assessment proceedings in regard to the explanation of the assessee is not conclusive, but is entitled to weight. It cannot be brushed aside lightly. The Allahabad decision has, therefore, to be toned down.
12. The explanation of the assessee having been found plausible by the Appellate Tribunal, it has to be held that the Tribunal was justified in cancelling the penalty. The reference must, therefore, be answered in favour of the assessee and against the Revenue. In the circumstances of the case, there will be no order as to costs.
Nazir Ahmad, J.
13. I agree.