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Issues: Penalty imposition for underreported income; Application of section 271(1)(c) of the Income-tax Act, 1961; Burden of proof on the assessee to show no gross neglect or fraud in income reporting.
Analysis: The case involved a reference under section 256(2) of the Income-tax Act, 1961, concerning the assessment year 1964-65. The assessee filed a return showing income based on its maintained accounts. However, the Income-tax Officer applied a rate of 11% on sales due to defective book-keeping, leading to penalty proceedings as the returned income was less than 80% of the assessed income. The Inspecting Assistant Commissioner imposed a penalty of Rs. 18,000, citing gross neglect by the assessee for persisting with defective book-keeping despite past rejections of accounts. However, the Income-tax Appellate Tribunal overturned this decision, emphasizing that the income returned, though showing a lower profit rate, was not necessarily incorrect. The Tribunal highlighted that the turnover was accepted, indicating no gross negligence in income reporting. The Tribunal reasoned that the burden under section 271(1)(c) to prove no gross neglect or fraud was met by the assessee, as the department's application of a higher profit rate in previous years did not imply negligence. The Tribunal's decision was based on factual findings and relevant considerations, which cannot be challenged in a reference. The court agreed, stating that maintaining unsatisfactory account books did not equate to gross neglect, especially when the return was based on regularly maintained accounts. The court concluded that the Tribunal was justified in canceling the penalty order, ruling in favor of the assessee and against the department. The assessee was awarded costs amounting to Rs. 200. The judgment highlighted the importance of assessing gross neglect or fraud in income reporting under section 271(1)(c) and the burden of proof on the assessee to demonstrate no such negligence.
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