Income Tax Appellate Tribunal - Cochin
Income-Tax Officer vs Bakul Cashew Co. on 6 June, 1988
Equivalent citations: [1989]28ITD197(COCH)
ORDER
D.S. Meenakshisundaram, Judicial Member
1. This is an appeal by the revenue objecting to the order of the CIT (Appeals) canceling a penalty of Rs. 1,07,675 which was levied by the Income-tax Officer under Section 271(l)(c) of the Income-tax Act, 1961.
2. The assessee is a registered firm carrying on business in processing and export of cashew-nuts. It filed its return of income for the assessment year 1976-77 on 29-6-1976 declaring a total loss of Rs. 2,93,370 for the previous year ended 30th November, 1975. The assessee had claimed a sum of Rs. 5,07,328 as expenditure for processing of 9,630 bags of raw cashew-nuts with six outside parties.
3. The Income-tax Officer found on examining the said expenses that there was a wide variation in the expenditure claimed between Rs. 38.34 per bag at the lowest and Rs. 60.97 at the highest. The Income-tax Officer called upon the assessee to explain this variation. The assessee stated that the wages paid depended on the quality of output and that although the processing was entrusted to certain private parties, the wages were paid by the assessee directly to the workers depending on the quality and quantity of the output. When the Income-tax Officer enquired whether there was any agreement between the assessee and these private parties, the assessee replied that there was no written agreement with these six parties and that in order to honour its sales commitments, it had to get the work done expeditiously and therefore the assessee entrusted these six parties with this work on good faith on the understanding that the wages would be paid by them directly to the workers. The Income-tax Officer pointed out to the assessee a few other cases of cashew processors who got their processing done at Rs. 35 per bag. When this was put to the assessee, the assessee filed a revised return on 7-2-1979 declaring a loss of Rs. 1,82,804. The statement accompanying the return showed that the processing charges for 9,630 bags had been reduced to Rs. 3,37,050, i.e., at Rs. 35 per bag. Thus, there was a variation of Rs. 1,70,279 between the expenses accounted for the processing of 9,630 bags of raw nuts between the original return and the revised return. The Income-tax Officer completed the assessment under Section 143(3) read with Section 144B on 26-4-1979 and initiated penalty proceedings under Section 271(l)(c) of the Act. The assessee filed its reply to the penalty notice on 10-5-1979. After considering the said reply and after examining Shri M.R. Kamath, Managing Partner of the assessee on 26-8-1983, the Income-tax Officer held that he was satisfied that the assessee had furnished inaccurate particulars and that it resulted in concealment of income to the extent of Rs. 1,70,279. He therefore held that the amount of Rs. 1,70,279 was deemed to have been concealed in the original return filed by the assessee under Explanation 4(a) to Section 271(l)(c) of the Act. He therefore levied the penalty of Rs. 1,07,675 which was the minimum penalty of 100 per cent of the tax payable on the sum of Rs. 1,70,279 with the previous approval of the IAC.
4. The assessee preferred an appeal objecting to this penalty and contended before the CIT (Appeals) that there was no material with the Income-tax Officer for coming to the conclusion that the amount of Rs. 1,70,279 represented the income of the assessee. It was pointed out that the partner of the assessee-firm agreed to the addition not because they had really inflated the expenses, but because in the absence of an agreement it was difficult for them to establish that they had paid larger amounts of wages. It was argued by the learned counsel that the appellant had to get the cashew-nuts processed in outside factories in order to meet its export commitments and that if the appellant failed to meet its export commitments they would have to pay heavy damages for breach of contract. It was further pointed out that the appellant agreed to the aforesaid disallowance in order to buy peace with the department as the Income-tax Officer had informed the assessee at the time of the assessment that other dealers had claimed only Rs. 35 per bag as processing charges. It was pointed out that ultimately it turned out that in the various cases where the ITO disallowed the excess expenditure incurred by assessees over and above Rs. 35 per bag, such disallowances were deleted by the appellate authorities and therefore there was no basis at all for the finding of the Income-tax Officer that the assessee had inflated its expenses. It was next pleaded that when the assessee paid processing charges at a flat rate to outside agencies it did not have to make separate provision for (1) fuel for roasting, (2) rent or depreciation for shed, etc., and (3) expenditure on E.S.I., Provident Fund, gratuity, etc., of labourers and similar other expenses. It was argued that the rates paid at the same time to such agencies depended on (1) the quality of the products obtained, (2) the amount of wastage, and (3) the stage up to which the processing was done, etc. It was argued that the processing could be up to roasting or up to shelling, or up to grading and packing stages also. Accordingly, wages paid to each of these outside agencies was bound to vary depending on the experience of the workmen available and the facilities available for different stages of work. It was submitted that since the assessment was dragging on for a considerable period, the partners of the assessee-firm were anxious to close the issue as they found that even by agreeing to the proposed disallowance by the Income-tax Officer the assessee-firm would not have to pay any tax, as the firm had incurred a loss of nearly Rs. 2,93,370 as per its return of income. It was further argued that there was no material before the ITO to establish that the assessee had inflated its expenditure or had concealed its income. It was submitted that the roasting kernels in outside factories was a standard practice followed by all cashew exporters and that in the assessee's own case only 9,630 bags were roasted in outside factories out of the total of 69,185 bags processed by the assessee during this year. It was therefore submitted that the only basis for the addition was the revised return filed by the assessee which was submitted along with the letter dated 5-2-1979 where the assessee had made it clear that the revised return was filed on the understanding that no penal action would be taken. In support of this submission, the decision of the Madras High Court in CIT v. Prakasam Readymade Stores [1983] 140 ITR 601 was relied on. The assessee also relied on a number of decisions for the proposition that in penal proceedings the onus was entirely on the department to show that a particular receipt or amount was income of a revenue nature and that there was no finding by the Income-tax Officer in this regard in the assessee's case.
5. The CIT (Appeals) held on the facts of the case that he was convinced that the order of the Income-tax Officer did not show that there was any evidence for the conclusion that the addition involved in this ease represented undisclosed income of the assessee. He therefore cancelled the Income-tax Officer's order levying penalty and allowed the assessee's appeal. The department feels aggrieved by this order of the CIT(A) and has come on further appeal to the Tribunal
6. Shri K. Subramanian, the learned departmental representative relied on the findings of the Income-tax Officer in the penalty order and submitted that the Commissioner (A) erred in canceling the penalty levied by the ITO. He referred us to the assessee's letter dated 5-2-1979 at page 3 of the paper book wherein the assessee had agreed to the ITO's proposal for restricting the processing charges at Rs. 35 per bag and accordingly offering a sum of Rs. 1,70,279 for assessment. In the course of the penalty proceedings the ITO wrote a letter to the assessee on 8-7-1983, a copy of which is at page 4 of the department's paper book, in which he called upon the assessee to furnish the names and addresses of the persons to whom the said processing charges were paid. A reminder was also sent to the assessee on 27th July, 1983, a copy of which is at page 5. The assessee's reply is available at page 6. In this reply the assessee stated that it was not possible for it to furnish the present addresses of the parties as nearly eight years had elapsed and the whereabouts of those parties were not ascertainable by them. Shri Subramanian relied on the Notice Server's statement dated 26-8-1983 at page 7 of the department's paper book and also the statement recorded by the Income-tax Officer from M.R. Kamath, Managing Partner of the asses see-firm on 26-8-1983. On these materials, the learned departmental representative argued that it was clearly established that the assessee had furnished inaccurate particulars of its income by inflating a portion of its expenditure, that this was clear from its admission in the revised return of income filed before the ITO and that there was no further onus on the department to prove any concealment of income. He submitted that the decision of the Madras High Court in Prakasam Readymade Stores' case (supra) was distinguishable on facts as the assessee in the said case had produced discharged hundies before the Income-tax Officer. He pointed out that in the present case the assessee could neither furnish the addresses of the parties nor produce any material to prove the expenditure incurred by it in respect of the processing done through these parties. The learned departmental representative argued that the decision of the Madras High Court in CIT v. Krishna & Co. [1979] 120 ITR 144 was on all fours with the case of the assessee and that the CIT(A) ought to have followed this decision and confirmed the penalty levied by the Income-tax Officer. The learned departmental representative also relied on the decisions in CIT v. Dr. R.C. Gupta & Co. [1980] 122 ITR 567 (Raj.), Durga Timber Works v. CIT [1971] 79 ITR 63 (Delhi), CIT v. Haji P. Mohammed [1981] 132 ITR 623 (Ker.), CIT v. K. Mahim [1984] 149 ITR 737 (Ker.) and Banaras Chemical Factory v. CIT [1977] 108 ITR 96 (All.) in support of his submissions and contended that in the light of the above authorities the department was entitled to succeed in its appeal.
7. Shri S. Prabhakaran, the learned Chartered Accountant for the assessee relied on the finding's of the CIT(A) and reiterated the arguments that were urged before the CIT(A). He submitted that the assessee placed before the ITO in the course of the assessment proceedings full and complete particulars regarding the processing charges paid to outside parties and that the assessee had not withheld any information that was available with it from the ITO. The learned counsel relied on the assessee's letter dated 5-2-1979 which clearly explained the assessee's case and also brought out the circumstances in which the assessee agreed to the disallowance of Rs. 1,70,279 by filing a revised return on the specific understanding that there would be no penal proceedings taken against the assessee for alleged concealment of income. Shri Prabhakaran also relied on the assessee's reply to the penalty notice dated 10-5-1979 at page 13 of the assessee's paper book. He also relied on the assessee's reply dated 6th August, 1983 addressed to the Income-tax Officer wherein the assessee had explained its inability to produce the parties due to lapse of time. He also pointed out that one of the parties, Shri Hamsa of Chennapetta had appeared before the Income-tax Officer, as mentioned in the assessment order. The learned Chartered Accountant further submitted that the partners of the assessee-firm agreed to this disallowance as they were anxious to complete the assessment which was dragging for a long time and even after the disallowance the result was only a loss, there being no liability to pay tax either by the firm or by its partners. The learned counsel further relied on the order of the Appellate Tribunal, Calcutta Bench-C, Camp : Trivandrum, in the case of L. Kunju Kunju v. ITO [IT Appeal No. 174 (Coch.) of 1976 and CO. No. 12 (Coch.) of 1979, dated 15-6-1981] to point out that the disallowance made by the ITO by restricting the processing charges at Rs. 35 per bag was clearly unsustainable as the Appellate Tribunal had confirmed the orders of the CIT(A) in the said case deleting the disallowance of Rs. 3,62,238 made by the Income-tax Officer by restricting the expenses to Rs. 35 per bag. He therefore contended that there was no basis for the disallowance made by the Income-tax Officer in the assessment and that the assessee had agreed to the disallowance under a misapprehension and to buy peace with the Dept. The learned Chartered Accountant further submitted that the total expenditure incurred by the assessee in the manufacturing process including bonus amounted to Rs. 45.2 lakhs, besides provident fund and ESI contributions of Rs. 3.14 lakhs. He pointed out that the average cost of processing in the assessee's own factories worked out to Rs. 72.66 per bag as against the average cost of Rs. 51.50 per bag in the six outside factories in respect of 9,630 bags as mentioned in the assessment order by the Income-tax Officer. The learned Chartered Accountant submitted that there was no inflation of expenditure as the expenses claimed would vary according to the various processes carried out in the factories and depending upon the output and the quality of the output and that no adverse inference could be drawn against the assessee only from the fact that it had agreed to this disallowance in the course of the assessment proceedings. The learned counsel submitted that the assessee had not furnished any inaccurate particulars of its income, much less concealed the particulars of its income to justify the imposition of penalty and that the CIT(A) was justified in accepting the assessee's case and in canceling the penalty levied by the Income-tax Officer. In this connection the learned counsel for the assessee relied on a number of decisions, out of which it would be sufficient to refer to two decisions, namely, CIT v. Saraf Trading Corpn. [1987] 167 ITR 909 (Ker.) and Sir Shadilal Sugar & General Mills Ltd. v. CIT [1987] 168 ITR 705 (SC). The learned Chartered Accountant further submitted that the decisions relied on by the learned departmental representative were inapplicable to the facts of the present case.
8. In his reply, Shri Subramanian, the learned departmental representative submitted that the decision of the Kerala High Court relied on by the learned counsel would not be applicable to the facts of the present case, as it referred to Explanation to Section 271(l)(c) as it stood at the material time, whereas the present case was governed by the provisions of Section 271(l)(c) with its new Explanations after its amendment with effect from 1-4-1976. He also argued that the decision of the Supreme Court relied on by the assessee's learned counsel would be of no assistance to the assessee in the present case.
9. We have carefully considered the submissions urged on both sides in the light of the materials placed before us and in the light of the authorities relied on by them.
10. We are concerned in the present appeal with the levy of penalty under Section 271(l)(c) of the Income-tax Act, 1961 for the assessment year 1976-77. By the Taxation Laws (Amendment) Act of 1975 Clause (iii) and Explanations 1 to 4 were substituted for the original clause and its Explanation with effect from 1-4-1976. As a result of these amendments, penalties have to be levied with reference to the amount of tax sought to be evaded by reason of the concealment of particulars of income or the furnshing of inaccurate particulars of such income by the assessee with the previous approval of the IAC. There is no dispute that the penalty in the present case has been levied under the provisions of Section 271(l)(c) as amended by the Taxation Laws (Amendment) Act of 1975 which came into force from 1-4-1976. We set out below the relevant portion of Section 271(l)(c) and Clause (in) together with its proviso and Explanation 1 as they are material for the purpose of this case. We have not set out the other three Explanations as they are not relevant for our purpose except that the calculation of penalty has been done under Explanation 4 in the present case :
271. Failure to furnish returns, comply with notices, concealment of income, etc.-(1) If the Income-tax Officer or the Appellate Assistant Commissioner or the Commissioner (Appeals) in the course of any proceedings under this Act, is satisfied that any person-
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(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,-
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(iii) in the cases referred to in Clause (c), in addition to any tax payable by him, a sum which shall not be less than, but which shall not exceed twice, the amount of tax sought to be evaded by reason of concealment of particulars of his income or the furnishing of inaccurate particulars of such income :
Provided that, if in a case falling under Clause (c), the amount of income (as determined by the Income-tax Officer on assessment) in respect of which the particulars have been concealed or inaccurate particulars have been furnished exceeds a sum of twenty-five thousand rupees, the Income-tax Officer shall not issue any direction for payment by way of penalty without the previous approval of the Inspecting Assistant Commissioner.
Explanation 1 - Where in respect of any facts material to the computation of the total income of any person under this Act,-
(A) such person fails to offer an explanation or offers an explanation which is found by the Income-tax Officer or the Appellate Assistant Commissioner or the Commissioner (Appeals) to be false, or (B) such person offers an explanation which he is not able to sub-stantiate, then the amount added or disallowed in computing the total income of such person as a result thereof shall, for the purpose of Clause (c) of this sub-section, be deemed to represent the income in respect of which particulars have been concealed :
Provided that nothing contained in this Explanation shall apply to a case referred to in Clause (B) in respect of any amount added or disallowed as a result of the rejection of any explanation offered by such person, if such explanation is bona fide and all the facts relating to the same and material to the computation of his total income have been disclosed by him.
11. The finding of the Income-tax Officer in the penalty order is that the assessee-firm had furnished inaccurate particulars which had resulted in concealment of income to the extent of Rs. 1,70,279 which would justify the imposition of the minimum penalty of Rs. 1,07,675 under Section 271(l)(c) read with its Explanation 4(a) of the Act. A perusal of the final assessment order passed on 26th April, 1979 for this assessment year 1976-77 shows that the Income-tax Officer felt that there was reason to suspect inflation in processing charges of raw cashew-nuts. He found that the assessee had processed a total quantity of 9,630 bags of raw cashew-nuts through six parties and that the total processing charges paid by the assessee to these parties amounted to Rs. 5,07,328, which worked out to an average rate of about Rs. 51.50 per bag. As against this, the average rate of processing charges paid by other exporters, came to Rs. 35 only per bag for this assessment year, according to the Income-tax Officer. The ITO further referred to the fact that the Income-tax Officer B-Ward, Quilon had summoned and examined one of the processors Shri Hamsa, who was not able to give convincing answers to the Income-tax Officer's queries as to the genuineness of the alleged payment of the inflated processing charges paid by the assessee and that he had also not been keeping accounts. It appears, there was a change of jurisdiction of the case and on receipt of the records the new ITO posted the case for fresh hearing. After examining the accounts the ITO issued a letter to the assessee on 16-1-1979 calling for further details with regard to the alleged payment of processing charges at the inflated rates. On receipt of this letter, the assessee filed a revised return of income on 7-2-1979 after adding back a sum of Rs. 1,70,279 to the income as per books by way of "difference between the processing charges to private processors booked and the agreed amount of Rs. 35 per bag on 9,630 bags thus processed--as per letter dated 1-2-1979 - Rs. 5,07,329 (-) Rs. 3,37,050 = Rs. 1,70,279". The Income-tax Officer accepted this revised return and completed the assessment on 26th April, 1979 under Section 143(3) read with Section 144-B of the Act. Thus, it is clear that the ITO's enquiry was regarding possible inflation in the expenses claimed by the assessee for processing raw cashew-nuts with six outside parties. In fact, on 6-1-1979 the assessee stated in its letter addressed to the ITO, B-Ward, Quilon, as follows :
Now parties have done processing on our behalf on commission basis. We had got certain quantity of raw nuts processed through certain private parties whose names and addresses are given in the enclosures. The workers employed for processing the nuts under their care were paid wages as per normal rates and the details of the names and addresses of the person concerned, number of bags of raw nuts processed are given in the enclosure. The work was supervised by our own people. As already stated wages were paid according to the normal rates. However, payments towards P.p., B.S.I, etc., was not paid by us. The persons who took over responsibilities of engaging workers were allowed to appropriate the shell and husks. The above method was followed so as to conform to the export commitments and because we could not get these quantity of bags processed in our own factories within the prescribed time.
12. Again when the ITO, A-Ward, Quilon, called upon the assessee by his letter dated 16th January, 1979 to substantiate its claim of payment of processing charges to the six parties at the varying rates, which ranged from Rs. 38.80 per bag in the case of Chadaya mangalam and Velamannoor factories and Rs. 60.90 per bag in the case of Nilamel Factory, the assessee stated as follows in its letter dated 5-2-1979 to explain the variation in the rates paid to the six factories :
With reference to your letter dated 16-1-79, and the discussions our representative has had with you on 1-2-79, we give below the information called for :
(1) Process of 9,630 bags of raw cashew-nuts through private parties :
(a) The variation in the total wages of each bag paid to each person is mainly due to the quality output of the nuts that was produced by the workers. Wages are paid according to the output of each worker. Further in most of the cases we had to pay the usual wages paid to the workers in factories except PF, ESI, leave with wages, etc. We were in urgent need of the processing being done quickly so as to meet the commitments of sales and the labour leaders helped to get things done for the purpose of getting the work done under their assurance that PF, ESI, leave with wages need not be paid. No agreements have been entered into with the persons concerned. Obviously it was not possible since it was done on faith.
(b) The information as to the percentages of PF, ESI and leave with wages, etc., is given below :
E.P.F. including" administrative charges 7% E.S.I. contribution 6% Leave wages 5% Bonus 15%
(c) Copies of accounts of all the processors' charges paid are attached. The total wages come to Rs. 5,07,328.80.
(d) Details of wages payable is given in the attached sheet.
(e) But having regard to the fact that we are not in a position to produce agreements or other evidence in support of the variation in the wages, at this distance of time, we are agreeing to your proposal for restricting the processing charges to private processors at Rs. 35 per bag, and accordingly an amount of Rs. 1,70,279 is offered for assessment. In this connection we wish to make it clear that this agreement is made in order to purchase peace with the department on the firm belief that no penal action will be initiated against us for alleged concealment of income. We are accordingly filing herewith a revised return of income. Further, the returns filed by the partners are to be treated as amended to this extent. We are also filing separately revised returns of wealth considering the above additions and consistent with the above offer.
13. The question for our consideration is whether this would amount to furnishing of inaccurate particulars of income by the assessee to justify the imposition of a penalty under Section 271(l)(c) of the Act. From a perusal of the two letters which we have quoted above, it would be seen that the assessee had furnished full and complete particulars regarding the processing charges paid by it to the six parties and also offered an explanation regarding the variation in the rates of payments to these six parties. There is no material which would establish or even indicate that the explanation offered by the assessee was also (sic). On the contrary, para (e) of the assessee's letter dated 5-2-1979, which we have quoted in para 12 (supra), would indicate that it was a case where the assessee was unable to substantiate its explanation with satisfactory evidence and proof, as contemplated in Clause (B) of Explanation 1 to Section 271(l)(c) of the Act.
14. The revenue contends that since the assessee had itself agreed to the addition by offering the said amount in the revised return, there was no further onus cast on the department to prove concealment of income on the part of the assessee before levy of penalty. To this, the assessee's answer is that its explanation is a bona fide one and that it had disclosed all the facts relating to the same and that it was a case of rejection of a bona fide explanation within the meaning of the proviso to Explanation 1 to Section 271(l)(c) of the Act.
15. On an examination of the materials placed before us, we are inclined to accept the contentions of the assessee's learned Chartered Accountant, that it is a case of rejection of a bona fide explanation offered toy the assessee, for want of satisfactory evidence or material in support of the same and that the assessee's case comes within the proviso to Explanation 1 to Section 271(l)(c) of the Act. At the outset we must point out that the department does not dispute the fact that the assessee had actually got 9,630 bags of raw nuts processed through the six outside parties, whose names and addresses were furnished by the assessee in the course of the assessment proceedings. The dispute is only in regard to the rate of charges paid by the assessee to these six parties, which varied from Rs. 38.34 per bag to Rs. 60.97 per bag. The revenue's case is that the rate could not have been in excess of Rs. 35 per bag and that therefore there was inflation in the rate of expenditure claimed by the assessee in respect of these 9,630 bags. This argument of the revenue cannot be accepted for the following reasons : First, the department has not placed any comparable case where the processing charges admitted by that assessee in similar circumstances were Rs. 35 per bag only. Secondly, the order of the Appellate Tribunal, Calcutta Bench 'C' at its Trivandrum Camp, in the case of L. Kunju Kunju (supra) a copy of which is available at pages 17 to 22 of the assessee's paper book, shows that similar disallowances sought to be made by the Income-tax Officer in the said case were deleted by the CIT (Appeals) and that the said decision of the CIT(A) was affirmed by the Appellate Tribunal. Thirdly, this order of the Tribunal shows that at the relevant period the averge rate of processing charges per bag of raw cashew-nuts processed by the Kerala State Cashew Development Corporation Ltd., Quilon, for the year ended worked out to Rs. 87 per bag, that in the case of Janatha Cashew Industries (P.) Ltd., it worked out to Rs. 90 per bag for the year ended 31-12-1976, as against Rs. 97 per bag in the case of Revindranathan Nair, Vijayalakshmi Cashew Co., Quilon and that in the case of L. Kunju Kunju (supra) it was Rs. 82 per bag in his own factory, known as Premier Cashew Factory, Panampatta (own factory) and Rs. 70 per bag in his another factory known as Janatha Cashew Factory. We have referred to these figures just to show how the cost of processing raw cashew-nuts varied from factory to factory at the material time. Fourthly, the following observations from paragraph 3 of the order of the Appellate Tribunal at page 23 of the paper book are also relevant to be noted :
Further it has to be noted that labour in cashew trade in Kerala is very well organised. It has powerful trade unions led by eminent leaders. It is not so easy to deceive a labour." (DIG) Fifthly, the rates claimed by the assessee, L. Kunju Kunju's case (supra) for the five outside factories were Rs. 54 per bag in one case and Rs. 55 in the case of the remaining four factories. In the light of the above rates, the claim of the present assessee for processing charges for the six outside factories which ranged from Rs. 38.80 per bag to Rs. 60.90 per bag and which worked out to an average rate of Rs. 51.50 per bag cannot be considered to be either excessive or unreasonably high. In fact the assessee had offered an explanation for the varying rates in its letters which we have quoted above and no material has been placed before us to prove that this explanation is untrue or improbable. There is one more fact which should be noted, namely, the average cost of processing raw cashew-nuts in the assessee's factories, which worked out to Rs. 72.66 per bag in this year and this has been accepted by the revenue. Judged in the light of this average rate in the assessee's own factory also, it cannot be held that the processing charges paid by the assessee were excessive and inflated.
16. We have looked into the Notice Server's statement as well as the statement of M.R. Kamath, Managing Partner of the assessee, which were relied on by the learned departmental representative in the course of his arguments to contend that the assessee has been unable to prove its case in spite of opportunities offered to it in the course of the penalty proceedings. The Notice Server's statement, a copy of which is available at page 7 of the department's paper book, simply says that T.M. Hamsa was not available at the old address as he had sold away his property and that the neighbours in that locality stated that he was in Bombay. We are unable to see what inference adverse to the assessee could be drawn from this statement of the Notice Server. Similarly, the statement of M.R. Kamath, Managing Partner of the assessee-firm does not say anything which is inconsistent with the assessee's case. On the contrary, this statement of Mr. Kamath supports the assessee's case as he had clearly explained the circumstances in which he agreed to the restriction of the expenses to Rs. 35 per bag as suggested by the ITO, as he could not give any documentary evidence in support of the charges paid to the six outside parties. He has further explained that there were others who had paid as much charges as he had paid and even more and that the wages depended on local conditions and availability of cheap labour. We are unable to see what adverse inference could be drawn from this statement against the assessee as contended by the revenue. On the contrary, the statement of M.R. Kamath clearly establishes that this is a case of rejection of the assessee's explanation on account of its inability to substantiate its case with satisfactory-proof.
17. The revenue heavily relies on the fact the assessee had agreed to this addition by filing a revised return. We have already quoted the entire letter dated 5-2-1979 in para 12 supra. The letter is self-explanatory. It clearly shows the circumstances in which the asses-see-firm agreed to the proposal of the ITO for restricting the processing charges to private processors at Es. 35 per bag. The assessee-firm did not admit that the amount proposed to be disallowed by the ITO, namely Rs. 1,70,279 represented its concealed income. We are therefore unable to agree with the revenue that the acceptance by assessee of this disallowance of a portion of the expenditure claimed by it, would necessarily lead to the conclusion that the assessee had furnished inaccurate particulars of its income to merit the imposition of a penalty under Section 27l(l)(e). To our mind, such an adverse inference against the assessee does not follow, on the facts and circumstances discussed above. We are supported in our conclusion by the decision of the Supreme Court in the case of Sir Shadilal Sugar & General Mills Ltd. (supra) at pp. 713 and 714 wherein it has been held as follows :
In this case, the Tribunal had taken into consideration the fact that the assessee had admitted the additions as its income when faced with non-disclosure in assessment proceedings. The High Court accused the Tribunal of not considering the time when the assessee admitted the additions. We find that it was duly considered by the Tribunal. We find that the assessee admitted that these were the incomes of the assessee but that was not an admission that there was deliberate concealment. Prom agreeing to additions, it does not follow that the amount agreed to be added was concealed income. There may be a hundred and one reasons for such admission, i.e., when the assessee realises the true position it does not dispute certain disallowances but that does not absolve the revenue from proving the mens rea of a quasi-criminal offence.
** ** ** It is for the income-tax authority to prove that a particular receipt is taxable. If, however, the receipt is accepted and a certain amount is accepted as taxable, it could be added but it was not accepted by the assessee, however, that it had deliberately furnished inaccurate particulars or concealed any income.
18. The decision of the Kerala High Court in the case of Saraf Trading Corpn. (supra) also supports the assessee's case. In this case, the Kerala High Court held as follows as set out in the head-note of the case at pages 909 and 910 of the reports :
Penalty proceedings are penal in nature. The elementary principles of criminal law will apply. It is a quasi-criminal proceeding. There should be conscious concealment. The provisions should be construed strictly. Penalty proceedings are distinct and different from assessment proceedings. The findings in the assessment proceedings are not conclusive but are relevant. The entire materials available should be considered afresh by the authorities before imposing the penalty. Even after the addition of the Explanation to Section 271(l)(c), conscious concealment is necessary. The Explanation provides only a rule of evidence raising a rebut table presumption in certain circumstances. No substantive right is Created or annulled thereby. The substantive law relating to levy of penalty is preserved. The initial burden of proof is cast on the assessee to displace the presumption arising in certain cases. The assessee can discharge the onus, either by direct evidence or circumstantial evidence, or both. The cumulative effect of all facts should be taken into consideration. The assessee is entitled to show and establish by the material and relevant facts which may go to effect his liability or the quantum of penalty. As to whether there is concealment to make the penalty exigible is normally a question of fact. Whether the burden of proof in a given case has been discharged on a set of facts is also a question of fact. The burden is cast on the assessee to prove a negative fact. This can be discharged either by independent evidence led during the penalty proceedings or by a closer scrutiny or appraisal of the existing facts and data available. This will take in even the materials available at the assessment stage. The presumption under the Explanation to Section 271(l)(c) can be displaced by the assessee proving that the failure to return the correct income did not arise from any fraud or gross or willful neglect and the quantum of proof necessary would be that required in a civil case, namely, preponderance of probabilities.
19. Though these two decisions were rendered under the old Explanation to Section 271(l)(c) of the Act, the ratio of these decisions would apply with equal force in respect of the Explanation 1 to Section 271(1)(c) also. In view of these authoritative decisions of the Supreme Court and the Kerala High Court, we do not consider it necessary to examine the other cases cited at the Bar.
20. We therefore respectfully follow the ratio of the two decisions of the Supreme Court and the Kerala High Court and hold that the assessee-firm had not furnished any inaccurate particulars of its income to justify the imposition of a penalty under Section 27l(l)(e) of the Act. Accordingly, we confirm the order of the Commissioner of Income-tax (Appeals) canceling the penalty levied by the Income-tax Officer and dismiss this appeal.