Commissioner of Income Tax, Tamil Nadu-IV vs Imperial Automobiles

Balasubrahmanyan, J.—This reference concerns the correctness of a decision by the Income Tax Appellate Tribunal cancelling a penalty

levied in this case under s. 271(1)(c) of the I.T. Act, 1961. The question of law we are asked to consider is in the following terms :

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

Appellate Tribunal was right in law in cancelling the penalty of Rs. 9,200 levied u/s 271(1)(c) of the Act for the assessment year 1968-69 ?

The assessee is a firm of three partners. The firm carries on business in automatic spare parts. The firm filed a return for the assessment year

1968-69 disclosing an income of Rs. 26,740. In the course of the examination of the firm''s books of account the ITO found that there were credit

entries on various dated amounting in all to Rs. 8,000 in the name of one Sundari Bai. She is the wife of a partner in the assessee-firm. The account

in her name not only showed the credits as borrowings of the firm, but also carried an entry crediting interest to her in the sum of Rs. 1,200. When

the assessee was questioned about the nature and source of these credits entries, it was represented by the assessee that they were moneys

advanced by that lady to the assessee-firm. The ITO required proof for the genuineness of the credit entries. The assessee filed with the officer an

affidavit sworn to by Sundari Bai. Subsequently, the officer issued summons to that lady for appearing before him to be cross-examined on the

contents of her affidavit. The summons, however, was returned unserved by the postal authorities. No being able to examine Sundari Bai, the ITO

apparently thought he must reject her affidavit. Having done so, the officer added the sum of Rs. 9,200 representing the credits in Sundari Bai''s

account as the assessee-firm''s taxable income. The assessee, for some reason or other, did not appeal against the assessment made in this manner.

Side by side with that assessment, the ITO initiated penalty proceedings against the assessee under s. 271(1)(c) of the I.T. Act, 1961, treating

the credits of Rs. 9,200 in Sundari Bai''s account as representing suppression of the income by the assessee. The IAC who initiated the penalty

proceedings levied a penalty of Rs. 9,200 on the assessee. He rejected the assessee''s explanation that the credits represented advances made by

Sundari Bai. He held that the genuineness of the credits had not been properly proved, since Sundari Bai had not presented herself for cross-

examination on her affidavit.

The assessee appealed against this penalty order ; the Tribunal allowed the appeal and cancelled the penalty. They observed that this was

merely a case of rejection, by the taxing authorities, of the explanation offered by the assessee as to the nature and source of the credits. The

Tribunal referred to Sundari Bai''s affidavit which was in support of the assessee''s explanation and observed that the contends of her affidavit

cannot be rejected out of hand merely because she was not available for cross-examination. The Tribunal held that on the facts on record there

was no evidence of concealment of income on the part of the assessee. Before the Tribunal, the Department had invoked the Explanation to s.

271(1)(c) to sustain the penalty. The Tribunal, however, held that the Explanation did not apply. The Tribunal''s view was that when the assessee''s

case was that the amount in question represented a third party''s money advanced to the firm and that was supported by evidence, there can be no

question of any fraud or wilful neglect on the part of the assessee in excluding that amount from the return of income. On this basis the Tribunal

ruled out the applicability of the Explanation to s. 271(1)(c) of the Act.

Before us, Mr. Rangaswami, the Department''s learned standing counsel, submitted that the Tribunal was in error in thinking that the assessee

had offered an acceptable explanation of the credits by merely filing an affidavit from the so-called creditor and stopping short with that. Learned

counsel commented that the deponent was not produced for cross-examination. Learned counsel submitted that in these events the assessee''s

explanation was rightly rejected by the Department not only for the purposes of assessment, but also for purposes of penalty.

We do not accept this argument as tenable. We think it desirable to reiterate the correct legal position in matters of this kind. Where an assessee

offers an explanation as to the nature and source of a cash credit entry in his accounts and that explanation is, in the assessing officer''s opinion, not

satisfactory, then the assessing authority is at liberty to treat the cash credit as the taxable income of the assessee. This has been the view of our

Income Tax law for a pretty long time. The principle has been blessed by the courts in innumerable decisions down the years. This doctrine was

translated in statutory terms for the first time in 1961, and incorporated in s. 68 of the I.T. Act, 1961. But this is only so far as the assessment part

of the proceeding goes. Cases in the books have held, chief amongst which is the well-known decision of the Supreme Court in Commissioner of

Income Tax, West Bengal I, and Another Vs. Anwar Ali, , that what applies to assessment of cash credits does not apply to penalty proceedings

taken in the wake of the assessment. Court rulings have settled the position that by merely rejecting the assessee''s explanation concerning a cash

credit and treating the cash credit as income in the assessment, the Department cannot levy penalty on the assessee on the score that the credit

entry amounts to concealment of so much income. The Supreme Court and other courts have expressed the view that there must be some more

material with the Department, and that material must establish that the cash credit entry really is a mode of concealment and that what is sought to

be concealed is the income of the assessee taxable in his hands as such. Courts have held that the onus is on the Department to establish

concealment even in a case where the assessing officer has rejected the assessee''s explanation as to the nature and source of the cash credit. In

the present case, the assessee-firm adduced affidavit evidence to prove the genuineness of the credits in question. The ITO held the affidavit as

insufficient proof and rejected the assessee''s stand. Apart from rejecting the assessee''s explanation, there was no positive material with the

Department to show that the amount in question was really the firm''s income. The case, therefore, comes under the Anwar Ali rule. The Tribunal

was quite right in cancelling the penalty as not based on any evidence of concealment, not even on any evidence that the credit represented the

assessee''s income.

Mr. Rangaswami then argued that the rule in Anwar Ali [1970] 76 ITR 796 , cannot be applied after the introduction, in s. 271(1)(c) of the Act,

of the Explanation by the Finance Act, 1964. We do not think so. The Explanation has not the effect of altering the substantive law on the subject

of penalty for concealment. It only introduced a special rule of evidence applicable to cases coming within a particular penalty bracket. The rule of

evidence laid down by the Explanation might be regarded as an inversion of the initial burden of proof from the Department to the assessee under

the rebuttable presumption. According to the Explanation in cases where an assessee''s returned income is less than 80 per cent. of the income as

ultimately assessed, he will be presumed to have concealed particulars of his income unless he establishes that the hiatus between his return and his

assessment was not due to fraud or wilful neglect in the filing of the return. It is clear that this inverted burden of proof does not apply to cases

where the gap between the returned income and the assessed income of less than 20 per cent. It is further clear that even in cases where the

Explanation initially applies because the returned income is less than 80 per cent. of the assessed income, if the assessee established that this gap is

not due to any fraud or wilful neglect on his part he would have established the initial burden laid on him by the Explanation and rebutted the

presumption of concealment, and then the ball would be in the Department''s court, as it were, and the onus would be on the Revenue to establish

by cogent material that the assessee had concealed his income. Thus, Commissioner of Income Tax, West Bengal I, and Another Vs. Anwar Ali,

would govern the penalty proceedings even in such a case where the Explanation might be invoked. To start with, we do not, therefore, accept

Mr. Rangaswami''s thesis that Anwar Ali has become out of date after the Explanation introduced by the Finance Act, 1964. We may refer to a

recent Bench decision of this court in Additional Commissioner of Income Tax Vs. Smt. V. Kanakammal, , which has applied the law on the same

lines as we have adopted in this case.

The Explanation to s. 271(1)(c), on which Mr. Ranagaswami has relied in this case, has given way to a battery of four new Explanations which

have been introduced by the Taxation Laws (Amendment) Act, 1975. Since application to the penalty proceedings in the instant case which relate

to the assessment year 1968-69. We have held that the Anwar Ali decision Commissioner of Income Tax, West Bengal I, and Another Vs. Anwar

Ali, , had not been abrogated by the rule of evidence enacted in the Explanation to s. 271(1)(c) introduced by the Finance Act, 1964. But the

position may have to be considered in the context of Expln. I to s. 271(1)(c) which has come into the statute with effect from April 1, 1976, in

cases governed by it. This new Explanation is to the effect that where in respect of any fact material for purposes of his assessment an assessee

offers an explanation which is found by the ITO or the AAC to be false or where the assessee is unable to substantiate his explanation, then the

amount added back in his assessment shall be deemed to represent his concealed income. Incidentally, it is a matter for comment that although the

Appellate Tribunal may have accepted an assessee''s explanation of an item in his assessment as satisfactory and may have deleted the addition in

an appeal against his assessment, that may not avail the assessee in proceedings in which penalty might be imposed on him with reference to the

same item. Such are the terms of this Expln. I. Apart from this curious aspect, it would be seen that this Explanation considerably reduces, if not

altogether removes, the Department''s onus to prove concealment in assessments based on unexplained cash credits, unexplained investments and

the like. Closer examination of Expln. I in juxtaposition to the language of s. 68, for instance, might possibly reveal a vestige of burden left for the

Department to discharge even in such cases. Section 68, for instance, might enable the assessing officer to treat the cash credit as income if, in his

opinion, the assessee''s explanation is not satisfactory. But Expln. I to 271(1)(c) would require that the assessee''s explanation must be fond by the

ITO to be false. However, by and large, the doctrine of Commissioner of Income Tax, West Bengal I, and Another Vs. Anwar Ali, , might well be

regarded as having been eroded by Expln. I. The penalty under s. 271(1)(c) thus tends to become almost automatic, after Expln. I.

So far, however, as the present case is concerned, the Tribunal has found that there was no fraud or wilful neglect on the assessee''s part when

he excluded the credits in Sundari Bai''s account from his return of income. It follows, therefore, that the Tribunal was right in holding that the

Explanation, which governed s. 271(1)(c) at the material time, could not be relied on by the Department to invoke the presumption against the

assessee. With the result that the Anwar Ali approach made by the Tribunal has to be upheld as the proper one in this case.

Mr. Rangaswami, in the course of his argument, sought to make some point out of Sundari Bai not being available for cross-examination on her

affidavit. We do not think there is much to comment about this aspect of the case. The record does not show that she evaded service of the

subpoena. All that is said is that the summons was returned unserved by the postal authorities. We cannot put anything against this lady for her not

volunteering to give oral evidence. She was the wife of a partner of the firm, but she was entitled to expect a subpoena for her examination. We

cannot also accept the suggestion that the credit being in the name of the partner''s wife is conclusive evidence of the amount representing the firm''s

concealed income. It might be the income of the wife ; or it might be the income of the firm. Of these possibilities, excluding other possibilities,

whose income it is must be definitely known. Before penalty can be levied on the firm, it must be found on a preponderance of probabilities that the

credit represents the firm''s income. of such evidence the Tribunal found none in this case. Nor do we find any ourselves.

Mr. Rangaswami mentioned that the firm did not challenge the assessment of the cash credits by preferring an appeal against the assessment. In

our opinion, this is not a circumstances from which any adverse inference can be drawn against the assessee. Forbearance to file an appeal might

be motivated by many considerations. It will not unerringly indicate that the assessee thereby admits that the credits represent his income.

Having regard to all these consideration, we answer the question referred to us in the affirmative and against the Department. The assessee will

have its cost. Counsel fee, Rs. 500.