Commissioner of Income Tax vs Swadeshi Cotton Mills Co. Ltd.

M. Katju, J.—This reference has been made u/s 256(2) of the income tax Act, 1961 (''the Act''). The questions referred to are as follows:

Whether, on the facts and in the circumstances of the case, the Tribunal was legally correct in holding the onus of proving that the estimate filed by the assessee u/s 18A(2) / 221(2) was false to his knowledge or he had reasons to believe to be untrue, is on the department?

Whether, on the facts and in the circumstances of the case, the Tribunal was justified in cancelling the penalty of Rs. 2 lakhs imposed u/s 273(a) of the income tax Act, 1961?

We have heard the learned standing counsel and Shri R.S. Agarwal, the learned counsel for the assessee.

The facts of the case are that the assessee-company derives income mainly from the manufacture of cotton textiles and the sale thereof. A notice u/s 18A(1) of the Indian income tax Act, 1922 was served on the assessee on 22-5-1961 demanding advance tax of Rs. 21,567 during the financial year 1961-62, on the basis of the latest completed assessment for the assessment year 1956-57. The company did not pay the tax as demanded, instead it filed an estimate u/s 18A(1) and (2) on 15-6-1981 declaring its income at Rs. 20 lakhs and the tax payable thereon at Rs. 9 lakhs. The sum of Rs. 9 lakhs was paid between 28-6-1961 and 24-3-1962. The assessment was made on 29-3-1967 on total income of Rs. 66,04,762. Before the completion of the assessments notice u/s 274 of the Act, was issued and served on the assessee on 31-3-1967 requiring the assessee to show cause as to why penalty should not be imposed u/s 273 of the Act for filing an estimate which was untrue. In reply to this notice the assessee filed a letter dated 22-6-1967 in which it raised various contentions which are mentioned in the said letter and the assessee denied its liability to pay penalty. The ITO rejected the assessee''s contention holding that against the business, income as per revised return filed on 5-3-1963 which works out to Rs. 34,56,768 the income determined after giving effect to the order of the AAC comes to Rs. 58,17,031. On the above facts the ITO held that the company failed to furnish any reasonable ground for the difference between its estimated income and the income determined by the ITO. In view of this the ITO imposed a penalty of Rs. 2 lakhs u/s 273(a).

The assessee filed an appeal before the AAC against the order of the ITO but the same was rejected. The assessee filed second appeal before the Tribunal which was allowed. The Tribunal held that the burden was on the department to prove that the assessee knew or had reason to believe that the income shown in the estimate was not true. This burden was not discharged by the department.

The department filed an application u/s 256(1) before the Tribunal which was rejected. The department, therefore, filed an application u/s 256(2) before this Court for deciding two questions which have been stated above. Shri Shekhar Srivastava, the learned standing counsel for the department contended that the view of the Tribunal was not correct and that in fact the burden should be on the assessee to prove the correctness of the income shown by it and not on the department. We cannot agree with this submission. The Hon''ble Supreme Court in Commissioner of Income Tax, West Bengal I, and Another Vs. Anwar Ali, has held that penalty proceedings are penal in nature, and hence the burden of proof is on the department and not on the assessee. Penalty proceedings are different from assessment proceedings. So far as the question of burden of proof is concerned assessment proceedings are like ordinary civil proceedings inasmuch as burden of proof is always on the department except if some explanation is carved out by the Legislature. The Parliament has enacted the Explanation u/s 271(1) (c) of the Act but the department has not based its case on the explanation in this case. Hence burden of proof is clearly on the department. Thus, there is no infirmity in the Tribunal''s order. We, therefore, answer the questions referred to us in the affirmative, i.e., in favour of the assessee and against the department. There is no order as to costs.