Commissioner of Income Tax, Tamil Nadu-1 vs Jayashankar Traders

Padmanabhan, J.—The Income Tax Appellate Tribunal has referred the following questions for the opinion of this court under s. 256(2) of

the I. T. Act, 1961 :

Whether, on the facts, and in the circumstances of the case and having regard to the Explanation u/s 271(1)(c) of the Income Tax Act, 1961,

the Appellate Tribunal was right in cancelling the penalty levied for the assessment year 1965-66?

Whether, on the facts and in the circumstances of the case and having regard to the Explanation u/s 271(1)(c) of the Income Tax Act, 1961, the

Appellate Tribunal was right in cancelling the penalty levied for the assessment year 1966-67?

Whether, on the facts and in the circumstances of the case and having regard to the Explanation to section 271(1)(c) of the Income Tax Act,

1961, the Appellate Tribunal was right in cancelling the penalty levied for the assessment year 1968-69?

The assessment years covered by the three tax cases are 1965-66, 1966-67 and 1968-69. The assessee, M/s. Jayashankar Traders, is a

partnership firm carrying on business in machinery, stores, spares, looms, etc. On October 19, 1963, an agreement was entered into between M/s.

Ranee Mills and one S. R. M. S. Narrayan Chettiar. Under the said agreement, certain properties including some machinery and 312 looms were

to be sold by Ranee Mills to Narayanan Chettiar''s nominee or nominees, for a sum of Rs. 12,01,000. On November 16, 1963, the said

Narayanan Chettiar requested M/s. Ranee Mills to sell some of the machineries set out in list attached to the letter to the assessee or its nominee or

nominees for a sum of Rs. 4,55,000. 312 looms are admittedly included in the said list. As a result of this requisition by Narayanan Chettiar, M/s.

Ranee Mills sold the looms to the assessee. However, delivery of the property sold was taken on behalf of the assessee by Narayanan Chettiar

himself. While so, the assessee filed returns for the year 1965-66 disclosing a loss of Rs. 19,884. For the year 1966-67, the assessee returned an

income of Rs. 27,870 and for the year 1968-69, a sum of Rs. 22,960. The ITO held that the assessee had sold certain looms and omitted to

account for the profits derived by the sale of looms. The ITO, therefore, included a sum of Rs. 1,30,814, Rs. 49,589 and Rs. 27,575 as admitted

profits derived by the assessee by the sale of looms for the assessment year 1965-66, 1966-1967 and 1968-69. Accordingly, he determined the

total income for the assessment year 1965-66 at Rs. 1,36,814, for the assessment year 1966-67, are Rs. 27,869 and for the assessment year

1968-69 at Rs. 75,550. The ITo also initiated penalty proceedings against the assessee for the three assessment years on the ground that he had

concealed the income for the assessment years 1965-66 and 1966-67 to Rs. 1,24,250 and Rs. 25,091 respectively. As the matter fell under the

proviso to s. 271(1)(c) of the I. T. Act, 1961, the ITO referred the case to the IAC.

Before the IAC the assessee contended that it had not sold any looms to third parties, that it had acted only as an intermediary and the looms

were sold by Ranee Mills to various parties nominated by the assessee. The assessee also contended that the moment the ITO pointed out that the

profits derived by the assessee on the sale of looms should be included in the returns, it filed a revised return on May 30, 1970, disclosing an

income of Rs. 87,980 for the assessment year 1965-66. Consequently, in the submission of the assessee, there was no concealment of income.

Yet another contention that was urged by the assessee before the IAC was that even assuming that it had become the owner of the looms in

question and had sold them, it was under the bona fide impression that the profits arising from the sale of the looms could be assessed only when

all the looms had been sold. In the circumsances, it could not be said that the assessee had concealed any income. The IAC did not accept the

contentions urged by the assessee. By his order dated October 26, 1972, February 19, 1973 and February 12, 1974, he levied a penalty of Rs.

15,000, Rs. 2,464 and Rs. 52,590 for the assessment years 1965-66, 1966-67 and 1968-69, under s. 271(1)(c) of the Act. The assessee then

carried the matter in appeal to the Income Tax Appellate Tribunal. The Tribunal by its order dated August 30, 1975, set aside the orders passed

by the IAC and cancelled the levy of penlaties. The Tribunal found that the assessee was under the bona fide impression that it had not become the

owner of the looms in question and that it was only an intermediary and that it had to account for the profit by the sale of looms as an intermediary

only when all the looms were sold. In this view, the Tribunal came to the conclusion that the assessee could not be said to have concealed income

and that no levy of penalty could be made against the assessee. It is in these circumstances the questions of law already set forth have been

referred for our opinion by the Income Tax Appellate Tribunal at the instance of the Revenue.

Mrs. Nalini Chidambaram, the learned junior standing counsel raised the following contentions. The assessee had admitted the non-disclosure

on Mar 30, 1977, disclosing the said income for the assessment year 1966-67. That would itself show that the assessee had concealed that

income. Further, there is no basis at all for the stand of the assessee that it had acted only as an intermediary in the sale of the looms. M/s. Ranee

Mills had entered into an agreement with Narayanan Chettiar for the sale of looms and certain machinery to his nominee or nominees. It is admitted

that Narayanan Chettiar had taken delivery of the looms from Ranee Mills. Consequenly, there is clear evidence, according to the learned junior

standing counsel that the assessee was not acting as an intermediary only. The learned junior standing counsel further argued that the plea of the

assessee that it was under the bona fide impression that the profits on the sale of the looms need be accounted for only when all the looms had

been sold could not be sustained in view of the pronouncement of the Supreme Court on the question. The learned junior standing counsel also laid

stress upon the fact that since the case fell within the Explanation to s. 271(1)(c) of the Act, the burden of proof was on the assessee to show that

it had not concealed the income deliberately or fraudulently.

Mr. K. Srinivasan, the learned counsel for the assessee, urged that the finding given in an assessment proceeding could not automativally be

adopted as a finding to levy a penalty proceedings the taxing authority is bound to consider the matter a fresh in the light of the materials available

before it. The mere falsity of an explanation given by an assessee will be insufficient to sustain an order of penalty unless there is, in addition, cogent

materials or evidence from which the necessary conclusion attracting penalty could be drawn. Mr. Srinivasan emphasised upon the fact that the

Tribunal had factually found in this case that the assessee was under the impression that it had not become the owner of all the looms in question,

that it was only an intermediary and that it had to account for the profit obtained by it by the sale of such looms as an intermediary only when all the

looms had been sold. In the circumstances, the submission of Mr. Srinivasan was that, when, on taking into consideration the broad features of a

given case, the Tribunal had come to a conclusion that no penalty was exigible, no question of law could be said to arise out of the Tribunal''s order

and, therefore, the questions of law referred for our opinion had to be answered only in the affirmative. The learned counsel also pleaded that no

question of concealmetn at all would arise in this case, as, even before the ITO had initiated any proceedings, the assessee had filed a revised

return disclosing the profits derived from the sale of the looms.

No doubt, there is a solid obligation on the part of the assessee to file a correct return. The assessee is not expected to act in a careless and

light-hearted manner in filing his return. Deliberate and conscious lapses on the part of the assessee in filing a correct return in the first instance have

to be viewed seriously. However, the question whether an assessee has, in a given case, bona fide discharged his obligations in filing his returns, as

provided for under the Act, has to be considered by taking into account all the relevant circumstances and events that happened between the filing

of the original return and completion of the assessment. If the cumulative effect of all the facts and circumstances of the case between the filing of

the filing of the original return and completion of the assessment disclose that the failure to return the correct income was not due to any gross or

wilful negligence on the part of the assessee, then the latter cannot be penalised, unless the Revenue is able to establish by evidence that there has

been concealment of income. These principles can be splet out from the following decisions of courts.

In Commissioner of Income Tax Vs. Ramdas Pharmacy, , the assessee omitted to disclose a sum of Rs. 28,618 in the original return. However

before the assessment was completed, the assessee filed a revised return making a true disclosure of the said income also. The ITO initiated

penalty proceedings under s. 28(1) (c) of the Indian I. T. Act, 1922, for alleged concealment of income and furnishing of false particulars. Before

this court on a reference under s. 66(1) of the 1922 Act it was contended on behalf of the assessee that penalty could be levied only if the ITO had

acted upon the false return and completed the assessment and that inasmuch as a fresh return had been filed by the assessee, the penalty

proceedings could not invoked under s. 28(1) (c) of the 1922 Act with reference to the omission or concealment in the original return. The

assessee in this context relied upon the decision of the Supreme Court in Commissioner of Income Tax, Madras Vs. S. Raman Chettiar, . On the

other hand, an equally extreme contention was raised on behalf the Revenue that the filing of a second return was of no consequence at all while

considering the liability of the assessee under s. 28(1) (c) of the 1922 Act. Ramanujam J., speaking for the Bench, observed as follows (p. 289) :

We are not in a position to accept the view of the learned counsel for the assessee that the decision of the Supreme Court in Commissioner of

Income Tax, Madras Vs. S. Raman Chettiar, , had changed the entire legal position enunciated in the decisions set out above that the revised

return should be voluntary to avoid penalty u/s 28(1)(c) and that the filing of a revised return under s. 22(3) will not expatiate the contumacious

conduct, if any, on the part of the assessee in not having disclosed a true income in the original return. We are, at the same time, not willing to

accept the contention put forward on behalf of the Revenue that the filing of the assessee u/s 28(1) (c) of the Act. As expressed by this court is not

possible to consture the original return alone in isolation without reference to the assessee''s conduct subsequent to the filing of the original return.

We are of the view that all the facts and circumstances commencing with the filing of the original return and ending with the assessment may be

taken as relevant for considering the assessee''s liability for penlaty u/s 28(1) (c).

The above decision was followed by the Gujarat High Court in D.V. Patel and Co. Vs. Commissioner of Income Tax, Gujarat-III, . In that

case, the assessee filed an original return on 29th June, 1964. Thereafter, it filed a revised return by adding certain admissible expenses on 13th

September, 1965. The ITO passed an order of assessment on 24th July, 1968. In this situation, the question arose whether the assessee was liable

for penalty. The learned judges of the Gujarat High Court, after extracting the relevant passage from the judgment of this court in Commissioner of

Income Tax Vs. Ramdas Pharmacy, , observed as follows (p. 530) :

In that state of evidence, therefore, it is difficult for us to appreciate how the Tribunal has brushed aside the filing of a revised return as of no

consequence. It is no doubt true, as held by the Madras High Court in Commissioner of Income Tax Vs. Ramdas Pharmacy, , that it was not

possible to construe the original return in isolation without reference to the assessee''s conduct subsequent to the filing of th original return and that

all the facts and circumstances commencing with the filing of the original return and ending with the assessment may be taken as relevant for

considering the assessee''s liability for penalty under s. 28(1) (c).... We think it appropriate to decline to answer the question on the ground that the

Tribunal has failed to consider and decide the question whether the revised return was filed by the assessee of his own volition before the

concealment was detected in the course of the proceedings and what was his entire conduct from the filing of his original return to the completion

of the assessment proceedings including the filing of the revised return, and it also failed to determine on preponderance of probabilities that the

burden case on the assessee is discharged or not.

In Commissioner of Income Tax Vs. J.K.A. Subramania Chettiar, , Ismail J. (as he then was), sitting with Sethuraman J., had to consider the

question of penalty. There, for the assessment year 1963-64 the assessee filed a return of income on March 16, 1964, disclosing a total income of

Rs. 27,566. This included a business income of Rs. 21,655. Thereafter, the assessee filed a second return of income for the same year in which he

disclosed a total income of Rs. 75,044 and that included a business income of Rs. 69,143. He also filed a petition under s. 271(4A) of the Act.

The assessment was completed on 31st December, 1968. Thereafter, the ITo initiated proceedings under s. 271(1)(c) of the Act. The Tribunal

cancelled the penalty on the ground that the assessee had filed a revised return even before he had started investigation into the bogus nature of the

hundi transactions in the course of the earlier assessment year and consequently there was no concealment of income. The Tribunal relied upon the

decision in Commissioner of Income Tax Vs. Ramdas Pharmacy, . Ismail J. (as he then was), speaking for the Bench, held that the assessee had

intentionally and deliberately concealed income in the first return as well as in the second return and that consequently he could not escape the

liability to penalty under s. 271(1)(c) of the Act. The learned judge took the view that the fact that the assessee furnished a second return even

before an investigation was started by the I. T. Dept. could not be of assistance to him if the case did not fall within the scope of s. 139(5) of the

Act. The learned judge further held that the question whether the assessee furnished the particulars before any detection was made by the

Department or not might be relevant only when the Commissioner was considering the question as to whether the minimum penalty imposable

under s. 271 should be waived or reduced on an application by the assessee under s. 271(4A) of the Act. Notwithstanding these observations, we

are of the opinion that the above decision does not run counter to the ratio in Commissioner of Income Tax Vs. Ramdas Pharmacy, . After

extracting a passage from p. 289 of the judgment, which we have already extracted, the learned judge observed as follows (p. 616) :

We are of the opinion that the above observation has to be understood against the background of the facts of that case. As a mater of fact, all the

facts and circumstances commencing with the filing of the original return and ending with the assessment may be taken as relevant for considering

whether the assessee had concealed particulars of income or furnished inaccurate particulars of income, as contemplated by section 28(1) (c) of

the 1922 Act and only when there is a finding that the assessee had concealed particulars of income or return, the question as to his liability to

penalty will arise.

The decision of this court in Commissioner of Income Tax Vs. Ramdas Pharmacy, , has been followed by a Bench of the Delhi High Court in a

recent case in Qammar-Ud-Din and Sons Vs. Commissioner of Income Tax, . The assessee-firm filed a return without enclosing the profit and loss

account and the same was filed subsequently. On a scrutiny of the profit and loss account, the ITO found the profit to be Rs. 83,790 as against Rs.

35,000 which had been returned. Accordingly, the Accordingly, the assessee filed a revised return at the instance of the ITO showing an income of

Rs. 83,780. The assessment was completed accordingly. Thereafter, penalty under s. 27(1)(c) of the Act. It was contended on behalf of the

assessee that though the figure of Rs. 35,000 returned by the assessee in the first instance was an incorrect figure and no explanation could be

offered for the same, in view of the fact that the assessee had filed a revised return before the assessment was completed, no penalty could be

levied. Ranganathan J., in his judgment, observed as followed (p. 708) :

We should not be understood as minimising the importance of filing a correct return. The obligation of filing a return should be discharged

scrupulously and sincerely. But at the same time before an assessee is mulcted with penalty, all the circumstances and developments till the

assessment is completed should be taken into account and if the collective effect of the situation is to show that the failure to return the correct

income was not on account of gross or wilful neglect, the assessee should not be penalised.

Khanna J., by his separate judgment, agreed that the assessee was not liable to any penalty.

In this case, the Tribunal has found that the assessee was under the impression that it has not become the owner of all the looms in question,

that it was only an intermediary and that it had to account for the profit obtained by it by the sale of such looms as an intermediary when all the

looms had been sold and that consequently they were unable to hold that the assessee concealed income, derived by it by the sale of such looms,

in the returns filed by it for the three assessment years under consideration. In this context, the Tribunal also took into account the fact that even

before the STO, Cannanore, who was dealing with the assessment years 1964-65 and 1965-66, the assessee had taken the stand that it had not

sold the looms, though the contention was not accepted by the assessing officer. On appeal by the assessee the AAC had directed the STO to

consider the matter de novo. The Tribunal had also taken note of the fact that the assessee had filed a revised return when the ITO pointed out that

the profits derived by the assessee on the sale of the looms should be included. When the entire facts and circumstances of the case are taken into

account in the light of the finding of fact rendered by the Tribunal, we are of the view that the Tribunal approached the question from the correct

standpoint and rightly found that the assessee was not liable to penalty under s. 27(1)(c) of the Act. It will be useful to refer in this connection to

the decision of the Patna High Court in Commissioner of Income Tax Vs. P.A. Patel, , in which the ratio is stated in the following terms (p. 396) :

The finding that the failure to disclose the entire income or to furnish full particulars of the income was due to a bona fide belief of the assessee not

attributable to any gross or wilful negligence, that the income omitted to be included was not his income which had to be included in his return

precludes a finding that he had deliberately concealed that income or furnished inaccurate particulars of his income as a result of fraud or gross or

wilful neglect.

Further, it is now settled law that proceedings under s. 27(1)(c) of the Act are penal in character. The gravamen of the offence is that the

assessee has consciously concealed the particulars of his income or deliberately furnished inaccurate particulars. The burden of proof of the charge

of concealment is on the Revenue. 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. The mere falsity of an explanation given by

the assessee without cogent and positive evidence on the side of the Revenue would not render the assessee liable to penalty. Grover J., in

Commissioner of Income Tax, West Bengal I, and Another Vs. Anwar Ali, , with reference to s. 28 (1) (c) of the 1922 Act, has observed as

followed (p. 700) :

But one of the principal objects in enacting section 28 is to provide a deterrent against recurrence of default on the part of the assessee. The

section is penal in the sense that its consequences are intended to be an effective deterrent which will put a stop to practices which the legislature

considers to be against the public interest. It is significant that in C.A. Abraham, Uppoottil, Kottayam Vs. The Income Tax Officer, Kottayam and

Another, , this court was not called upon to determine whether penalty proceedings were penal or of quasipenal nature and the observations made

will regard to penalty being an additional tax were made in a different context and for a different, purpose. It appears to have been taken as settled

by now in the sales tax law that an order imposing penalty is the result of quasi-criminal proceedings : Hindustan Steel Ltd. Vs. State of Orissa, . In

England also it has never been doubted that such proceedings are penal in character : [Fattorini (Thomas) (Lancashire) Ltd. v. IRC [1942] 1 All

ER 619 ; [1943] 11 ITR 50.... As has been rightly observed by Chagla C.J. in Commissioner of Income Tax, Ahmedabad Vs. Gokuldas

Harivallabhdas, , the gist of the offence u/s 28(1) (c) is that the assessee had concealed the particulars of his income or deliberately furnish

inaccurate particulars of such income and, therefore, the Department must establish that the receipt of the amount in dispute constitutes income of

the assessee. If there is no evidence on the record except the explanation given by the assessee, which explanation has been found to be false, it

does not follow that the receipt constitutes his taxable income.

Vaidialigam J.,

speaking for the court in The Commissioner of Income Tax Madras Vs. Khoday Eswarsa and Sons, , observed thus (p. 370) :

Penalty proceedings being penal in character, the department must establish that the receipt of the amount in dispute constitutes income of the

assessee. Apart from the falsity of the explanation given by the assessee, the department must have before it before levying penalty cogent material

or evidence from which it could be inferred that the assessee has consciously concealed the particulars of his income or had deliberately furnished

inaccurate particulars in respect of the same and that the disputed amount is a revenue receipt. No doubt, the original assessment proceedings for

computing but penalty cannot be levied solely on the basis of the reasons given in the original order of assessment.

It is, therefore, clear that in cases where the Explanation to s. 27(1)(c) of the Act is not attracted, the burden of proof is on the Revenue to

establish by positive and cogent evidence that the assessee had consequently and deliberately concealed any part of his income. The burden on the

Revenue in such cases is akin to, although not quite the same as, the burden which lies on the prosecution in criminal cases.

The next question that arise for consideration is what exactly is the legal position where, in a given case, the Explanation to s. 27(1)(c) is

attracted. The Explanation to s. 27(1)(c) which was added by the Finance Act 5 0f 1964, with effect from 1st April, 1964, reads as follows :

Where the total income returned by any person is less than eighty percent. of the total income (hereinafter in this Explanation referred to as the

correct income) as assessed u/s 143 or section 144 or section 147 (reduced by the expenditure incurred bona fide by him for the purpose of

making or earning any income included in the total income but which has been disallowed as a deduction), such person shall, unless he proves that

the failure to return the correct income did not arise from any fraud or any gross or wilful neglect on his part, be deemed to have concealed or any

gross or wilful neglect or furnished inaccurate particulars of such income for the purpose of clause (c) of this sub-section.

The Explanation creates legal fiction. It states that where the total income returned by the assessee is less than eighty per cent. of the total

income as assessed by the revenue authorities, it shall be deemed that the assessee has concealed the particulars of his income or furnished

inaccurate particulars of such income within the meaning of s. 27(1)(c). It will not then be necessary for the Revenue to affirmatively show in the

first instance by producing any material that the assessee had in fact concealed the particulars of his income or furnished inaccurate particulars of

such income within the meaning of s. 27(1)(c). It will not then be necessary for the Revenue to affirmatively show in the first instance by producing

any material that the assessee had in fact concealed the particulars of his income or furnished inaccurate particulars of such income. The initial

burden will be on the assessee to prove that the failure to return the correct income did not arise from any fraud or gross or wilful neglect on his

part. However, it is now settled that the burden of proof that is cast upon the assessee in a case where the Explanation to s. 27(1)(c) is attracted, is

a negative one and the matter has to be decided on the preponderance of probabilities. The Explanation only amounts to a rule of evidence which

is not absolute, but rebuttable. To rebut the presumption that may arise by reason of the applicability of the Explanation to s. 27(1)(c), it is not

necessary that the assessee should place any positive material before the authorities to show that the failure to file the correct return or the correct

particulars, was not due to any wilful neglect on his part or that he was not guilty of any fraud or gross or wilful neglect. The presumption can be

rebutted by the assessee by relying upon any material which is available on record in penalty proceedings irrespective of the fact whether it is

produced by him or by the Revenue. In other words, the test to be applied will be to find out whether, on the materials on record in the penalty

proceedings, it can be stated on a preponderance of probabilities that the failure to return the correct income is or is not the result of any fraud or

gross or wilful neglect on the part of the assessee. It the material on record in the penalty proceedings fairly and reasonably leads to the inference

that there is no fraud or gross or wilful neglect on the part of the assessee in not returning the correct total income, the assessee would not be liable

to any penalty, unless the Revenue is able to establish by positive evidence that there has been concealment of income.

The scope of the said Explanation came up for consideration before the Gujarat High Court in Commissioner of Income Tax, Gujarat I Vs.

S.P. Bhatt, . The assessee in that case was a registered firm dealing in medical preparations. or the years 1964-65 and 1965-66, the ITO did not

accept the returns of the assessee and made a best judgment assessment. The result was that the income returned by the assessee was less than

eighty per cent. of the total income assessed in each assessment year. Consequently, in the penalty proceedings the Revenue relied upon the

Explanation to s. 27(1)(c) of the Act. It was in this context that the Gujarat High Court had to consider the ambit of the Explanation to s. 27(1)(c).

Bhagwati C.J., as he then was, after referring to the Explanation to s. 27(1)(c), has observed as follows (p. 444) :

It is an Explanation enacted in the context of a highly penal provision and there can, therefore, be no doubt that it must be construed fairly and

reasonably. This, of course, does not mean that if a case falls fairly and squarely within the language of the Explanation, we should refused to give

effect to the mandate of the legislature as disclosed in the Explanation. But what is necessary to be borne in mind is that when we are construing the

true meaning and effect of the Explanation, we must not forget that it is the Explanation which adds to the rigour to enlarge the scope and ambit of

the Explanation by making an effort to bring every possible case within it, but we should instead construe the Explanation and apply it in a fair and

reasonable way with a view to achieving the purposes of the main provision, namely, that an assessee who has concealed the particulars of his

income or furnished inaccurate particulars of such income should not escape penalty. The Explanation creates a legal fiction if the condition,

namely, that the total income returned by the assessee should be less than eighty per cent. of the total income assessed subject to a certain

reduction, which is not material for our purpose. What the condition contemplates is merely a matter of arithmetical calculation. The Income Tax

authority is required to take the total income returned by the assessee and the total income as assessed by the revenue authorities and if the

applicability of the Explanation is satisfied. The Explanation then says that the assessee shall be deemed to have concealed the particulars of his

income or furnished inaccurate particulars of such income within the meaning of section 271(1)(c). The Explanation raises a legal fiction and the

assessee is straightway brought within the ambit of section 271(1)(c). It is then not necessary for the Revenue to show affirmatively by producing

the material that the assessee has in fact concealed the particulars of his income or furnished inaccurate particulars of such income. The fact of the

total returned income being less than eighty per cent. of the total income assessed is 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 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 quit 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 should be produced by the assessee in order to discharge this burden which rests upon him. The assessee

may claim to have discharged the burden by relying on the material which is on record in the penalty proceedings, irrespective of whether it is

produced by him or by the Revenue. The only question to which the Income Tax authority has to address itself is, whether on the material on

record in the penalty proceedings, can it be said on a preponderance of probabilities that the failure to return the total assessed income has not

arise on account of any fraud or any gross or wilful neglect on the part of the assessee. If the answer to the question is in the affirmative, the legal

fiction enacted in the Explanation cannot arise and the Revenue must fail in its attempt to impose penalty on the assessee. If the material on record

in the penalty proceeding fairly and reasonably leads to the inference that there was no returning the total assessed income, it would almost be

impossible for the Revenue to contend that the assessee has concealed the particulars of his income or furnished inaccurate particulars of such

income so as to attract the applicability of section 271(1)(c) on its own terms independently of the Explanation.

This decision was followed by the Patna High Court in Commissioner of Income Tax Vs. Patna Timber Works, . Untwalia C.J. (as he then

was), speaking for the court observed that the question whether there was an element of fraud or gross or wilful neglect on the part of the assessee

or there was furnishing of inaccurate particulars, would depend upon the facts and circumstances of each case. The learned judge further observed

that the expression ""wilful neglect"" would import neglect of a kind where the neglect is mixed with a conscious, wilful or deliberate act of the

assessee. In other words, according to be learned judge, the particulars furnished should be inaccurate to the knowledge of the assessee at the

time of the law, because the act was done with wilful or gross neglect. Dealing with the Explanation to s. 271(1)(c) of the Act, the learned judge

observed as followed (p. 462) :

It is always to be remembered that the standard of proof applicable to prove a positive fact and the one which is required to prove a negative fact

cannot be the same. A high standard is always applied for the proof of a positive fact while the standard of preponderance of probability is

sufficient to prove a negative fact. The assessee, within the meaning of the Explanation, is required to prove that the failure to return correct income

did not arise from any fraud or gross or wilful neglect on his part, that means, there is absence of fraud or wilful neglect. Ordinarily and generally,

there cannot be any direct evidence to prove such a fact. The assessee merely has to place materials of the primary facts or the circumstances

which in all reasonable probability would show that he was not guilty of any fraud or gross or wilful neglect. He may discharge this onus by placing

the facts found in the assessment order to show that the facts found therein had not in the least given an inkling of fraud or gross 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 may be necessary for the assessee to prove

certain more facts because the materials in the assessment order give some inking 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 onuswill shift back on 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 his fraud or gross or wilful neglect.

The Patna High Court decision in Commissioner of Income Tax Vs. Patna Timber Works, , was followed by a Bench of this court in

Additional Commissioner of Income Tax Vs. Smt. V. Kanakammal, , wherein also the Explanation to s. 27(1)(c) of the Act applied. After

referring to the deeming provision contained in the Explanation to s. 271(1)(c) of the Act, Govindan Nair C.J. has observed as follows :

Now, in attempting to prove a negative, as an assessee in a case where the Explanation is attracted is called upon to do, it must be borne in mind

that the element of proof that is required for establishing a positive fact is different from the element of proof that is required for establishing a

negative fact. The casting of a burden, such as the one cast by the Explanation, bring in its wake difficulties, for it is often very difficult to establish a

negative fact and that perhaps may be the reason why the law does not insist on that degree of proof in establishing a negative fact. The assessee is

called upon to prove that there has been no fraud on his part, and if he is able to establish that he has not been guilty of fraud and that he did not

intend to defraud and that he did not intend to conceal his income or furnish inaccurate particulars thereof, that will be sufficient for the purpose of

showing that he has not been fraudlent.

The Andhra Pradesh High Court had occasion to consider the scope of the Explanation in Additional Commissioner of Income Tax Vs.

Burugupalli China Krishnamurthy (decd.) and Others, . C. Kondaiah C.J. observed as follows (p. 334) :

The initial burden imposed by the legal fiction, which is enacted in the Explanation, is akin to that of one in civil cases. Where the determination is

made on preponderance of probabilities, the assessee need not prove by any positive evidence, to discharge this burden. He may rely upon the

material already on record. The burden placed on the Revenue to bring a case within the four corners of s. 271(1)(c) is akin to that of the

prosecution in criminal cases. To put it differently, the onus created by the legal fiction under the Explanation is not absolute but it is rebuttable,

whereas the burden on the Revenue to prove the penal character of the provision so as to entitle it to very penalty on the assessee is absolute and

of irrebuttable nature. This difference must be kept in view while examining the provisions of the Explanation.

In spite of the Explanation, the penalty proceeding being penal in character, the original statutory onus cast on the Department to establish that the

assessee has concealed his income or furnished consciously inaccurate particulars of his income still remains to be discharged. The aforesaid

burden is akin to that of the prosecution to establish the guilt of the accused beyound reasonable doubt. The mere fact that the word ''deliberately''

was omitted by the Finance Act, 1964, would not in any way alter the legal position with regard to the Revenue''s burden to prove that the

assessee has concealed his income or furnished inaccurate particulars of such income. The assessee need not adduce specific evidence in this

regard as to absolve himself from it being held that he has failed to return the total assessed income on account of any fraud or gross or wilful

neglect on his part. He can certainly taken advantage of the material available on record and substantiate his stand in this regard. Where there is no

material other than the falsity of the explanation relating to the addition of income in the assessment proceedings, it cannot be said that the Revenue

had discharged its onus to establish that the assessee has concealed particulars of his income or furnished inaccurate particulars of such income, so

as to attract the penal provisions of s. 27(1)(c).

The nature of proof required to be established by the assessee under the Explanation being of a negative character is different from that of the

Revenue to prove the positive fact relating to income.

Applying the above principles to the facts of this case, we find that the assessee has established to the satisfaction of the Tribunal that it was

under the impression that it has not become the owner of all the looms in question, that it was only an intermediary and that it had to account for the

profit obtained by it by the sale of such looms as an intermediary only when all the looms had been sold. The failure on the part of the assessee to

return the correct income was not due to any fraud or gross or wilful neglect on its part. As against this, the Revenue has not established by any

positive evidence that the assessee had deliberately and consciously concealed the profits derived by it by the sale of the looms. We are not

satisfied that the Tribunals finding is based on no material or that the finding arrived at by the Tribunal is such that no reasonable person would have

arrived at such conclusion on a consideration of the entire facts and circumstances of the case. We, therefore, see no reason to interfere with the

order of the Tribunal. We are satisfied that the Tribunal was correct in holding that the assessee was not liable to penalty under s. 27(1)(c) of the

Act, We, Therefore, answer all the three questions which relate to the assessment years 1965-66, 1966-67 and 1968-69, in the affirmative and

against the Revenue. The assessee will be entitled to its costs. Counsel''s fee is fixed at Rs. 500 one set.