1974 (8) TMI 7 - HC - Income Tax

Summary

Issues Involved:
1. Reliability of the assessee's account books.
2. Applicability of the Explanation to Section 271(1)(c) of the Income-tax Act, 1961.
3. Imposition of penalty under Section 271(1)(c) for concealing income or furnishing inaccurate particulars.

Detailed Analysis:

1. Reliability of the Assessee's Account Books:
The Income-tax Officer (ITO) scrutinized the assessee's account books and found several discrepancies, including that the cash book was not written from day to day, daily balances were not struck, and particulars of closing stock were not furnished correctly. The ITO deemed the account books unreliable and proceeded to make the assessment based on available material, rejecting the books of accounts.

2. Applicability of the Explanation to Section 271(1)(c) of the Income-tax Act, 1961:
The ITO applied the Explanation to Section 271(1)(c), which presumes concealment of income if the returned income is less than 80% of the assessed income unless the assessee proves that the failure to return the correct income did not arise from fraud or gross or willful neglect. The ITO found the returned income to be significantly lower than the assessed income and initiated penalty proceedings.

The Tribunal, however, opined that merely because the income was estimated higher than disclosed, it does not automatically attract the Explanation to Section 271(1)(c). The Tribunal emphasized that the assessee's explanation was plausible and reasonable, shifting the onus to the department to prove concealment by independent evidence. The Tribunal found no material indicating fraudulent intent or willful neglect by the assessee.

The High Court agreed with the Tribunal, stating that the Explanation to Section 271(1)(c) applies only when the returned income is less than 80% of the assessed income after deducting bona fide incurred expenses disallowed by the ITO. The ITO and Inspecting Assistant Commissioner (IAC) did not investigate whether the disallowed expenses were bona fide incurred for earning the income. Thus, the basis for applying the Explanation was not established.

3. Imposition of Penalty under Section 271(1)(c):
The ITO imposed a penalty of Rs. 5,000 on the assessee, which was upheld by the IAC. The IAC rejected the assessee's explanation and relied on the fact that the returned income was less than 80% of the assessed income. The Tribunal, however, canceled the penalty, stating that the department did not bring any material to prove fraudulent intent or willful neglect.

The High Court upheld the Tribunal's decision, noting that the department failed to establish the applicability of the Explanation to Section 271(1)(c) and did not provide evidence of concealment or inaccurate particulars. Therefore, the penalty was unjustified.

Conclusion:
The High Court answered the referred question in the affirmative, in favor of the assessee, and held that the Tribunal was right in holding that the assessee is not liable to penalty under Section 271(1)(c) of the Income-tax Act, 1961. The assessee was entitled to costs assessed at Rs. 200.