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1. Application of Explanation to section 271(1)(c) of the Income-tax Act, 1961 in a penalty appeal. Detailed Analysis: The judgment by the High Court of GAUHATI involved a reference under section 256(1) of the Income-tax Act, 1961, regarding the correct application of the provisions of the Explanation to section 271(1)(c) of the Act. The case revolved around an assessment year of 1964-65 where the Income-tax Officer initially assessed the income at Rs. 1,01,380, which was later reduced to Rs. 70,050 by the Income-tax Appellate Tribunal. Subsequently, a penalty of Rs. 6,500 was levied under section 271(1)(c) based on the discrepancy between the returned income and the assessed income. The Tribunal held that the assessee had committed neglect by not disclosing certain expenses, applying the Explanation to section 271(1)(c) to deem concealment of income. However, the High Court noted that the Tribunal failed to consider whether the expenses disallowed were incurred bona fide, a crucial aspect outlined in the Explanation. The Explanation to section 271(1)(c) stipulates that if the returned income is less than 80% of the total income assessed, the burden of proof shifts to the assessee to show the discrepancy did not arise from fraud or neglect. In this case, the total income returned was Rs. 50,146.47, while the final assessed income was Rs. 70,050. The Tribunal did not factor in the legitimate expenditures disallowed when determining the discrepancy. The High Court highlighted that the disallowed expenses were not proven to be mala fide, indicating that the burden of proof should be on the department to establish fraud or neglect. Consequently, the High Court concluded that the Tribunal erred in applying the Explanation, ruling against the department and declining to award costs. In a concurring opinion, Judge LAHIRI agreed with the decision, affirming that the Tribunal's misapplication of the Explanation led to an incorrect legal conclusion. The judgment clarifies the importance of considering bona fide expenditures and the burden of proof in cases involving discrepancies between returned and assessed income under section 271(1)(c) of the Income-tax Act, 1961.
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