1974 (8) TMI 10 - HC - Income Tax

Summary

Issues Involved:
1. Rejection of the assessee's account books by the Income-tax Officer (ITO).
2. Estimation of income by the ITO.
3. Imposition of penalty under section 271(1)(c) of the Income-tax Act.
4. Application of the Explanation to section 271(1)(c).
5. Burden of proof regarding fraud or gross or wilful neglect.

Detailed Analysis:

1. Rejection of the Assessee's Account Books by the Income-tax Officer (ITO):
The assessee, a registered firm, disclosed sales of books and paper, resulting in gross and net taxable profits. However, the ITO found defects in the account books, such as the absence of a day-to-day stock register, lack of quantitative details of book sales, and inability to bifurcate wholesale and retail sales. Consequently, the ITO rejected the book version of the assessee.

2. Estimation of Income by the ITO:
Due to the defects found, the ITO estimated the sales of books and paper at higher amounts than disclosed by the assessee. He applied specific gross profit rates to these estimated sales, resulting in a higher gross profit calculation. The ITO added extra profits and disallowed certain expenses, assessing the total taxable income at Rs. 80,263, significantly higher than the returned income.

3. Imposition of Penalty under Section 271(1)(c) of the Income-tax Act:
The ITO issued a notice under section 274/271(1)(c) as the returned income was less than 80% of the assessed income. The matter was referred to the Inspecting Assistant Commissioner, who imposed a penalty of Rs. 6,000, citing gross and wilful neglect by the assessee in maintaining accurate accounts.

4. Application of the Explanation to Section 271(1)(c):
The Tribunal noted that the mere rejection of accounts and estimation of income at a higher figure does not automatically imply fraud or gross or wilful neglect. It emphasized that the department had not provided material evidence of such neglect or fraud. The Tribunal cancelled the penalty, stating that the assessee had maintained accounts and returned income based on them, and the revenue authorities had only estimated higher profits without finding any specific concealment.

However, the High Court found that the Tribunal misconceived the real position. The Explanation to section 271(1)(c) clearly covers cases where the returned income is less than 80% of the assessed income. The burden is on the assessee to prove that the failure to return the correct income did not arise from fraud or gross or wilful neglect.

5. Burden of Proof Regarding Fraud or Gross or Wilful Neglect:
The High Court emphasized that in cases falling under the Explanation to section 271(1)(c), the burden shifts to the assessee to show that the failure to return the correct income was not due to fraud or gross or wilful neglect. The Tribunal erred by placing the burden on the department and not considering whether the assessee had discharged this burden. The High Court directed that the Tribunal should have examined if the assessment involved disallowance of any bona fide expenditure and whether the assessee proved the absence of fraud or neglect.

Conclusion:
The High Court answered the referred question in the negative, indicating that the Tribunal was not right in cancelling the penalty order. The Tribunal should have considered whether the income returned was less than 80% of the assessed income after accounting for bona fide disallowed expenditures and whether the assessee discharged the burden of proving no fraud or gross or wilful neglect. The parties were directed to bear their own costs of the reference.