1982 (1) TMI 27 - HC - Income Tax

Summary

Issues involved: Assessment of income, imposition of penalty u/s 271(1)(c) of the Income Tax Act, 1961.

Assessment of Income: The assessee, engaged in the business of buying and selling fruits, reported a total income of Rs. 35,957 for the assessment year 1964-65. However, the Income Tax Officer (ITO) estimated the profit at Rs. 88,800, based on sales of Rs. 22,00,000, as opposed to the net profit of Rs. 23,000 on sales of Rs. 21,94,223 declared by the assessee. The ITO contended that proper account books were not maintained, leading to the assessment of higher profit. This assessment was upheld by the Appellate Authority Commission (AAC).

Imposition of Penalty u/s 271(1)(c): Subsequently, invoking the Explanation to u/s 271(1)(c) of the Income Tax Act, 1961, the case was referred to the Income Tax Appellate Tribunal (ITAT). The ITAT found that the assessee had maintained books to the best of its ability and had not suppressed sales or inflated purchases. It was held that the assessee could not be compelled to do the impossible, and the difference in income could not be attributed to gross neglect. The ITAT set aside the penalty imposed by the Income Tax Commissioner (IAC) of Rs. 7,164.

Judgment: The High Court clarified that the burden of proof lies on the assessee to show that the failure to report correct income did not result from fraud or gross neglect. In this case, the ITO's estimation of profit higher than the declared amount did not automatically imply fraud or neglect by the assessee. The Court emphasized that the absence of sales suppression or purchase inflation indicated no deliberate wrongdoing. The Court distinguished previous cases where penalties were upheld due to manipulation of accounts, which was absent in the current scenario. Consequently, the Court upheld the ITAT's decision to set aside the penalty, ruling in favor of the assessee.

Conclusion: The High Court ruled against the Revenue, affirming the ITAT's decision to annul the penalty imposed u/s 271(1)(c) for the assessment year 1964-65. The Court highlighted the importance of evidence and lack of manipulation in maintaining accounts, leading to the rejection of the penalty.