1973 (3) TMI 39 - HC - Income Tax

These two references raise a short question as to the interpretation of the Explanation to section 271(1)(c) of the Income-tax Act, 1961 - ITO makes the assessment at higher percentage than that declared by the assessee on the ground that the assessee did not maintain proper records - whether levy of penalty under section 271(1)(c) is justified

Summary

Issues Involved: Interpretation of Explanation to Section 271(1)(c) of the Income-tax Act, 1961, burden of proof regarding fraud or gross/wilful neglect, applicability of penalty under Section 271(1)(c).

Issue-wise Detailed Analysis:

1. Interpretation of Explanation to Section 271(1)(c):
The core issue in the judgment was the interpretation of the Explanation to Section 271(1)(c) of the Income-tax Act, 1961. The court examined the language of Section 271(1)(c), which provides for penalties if a person has concealed particulars of income or furnished inaccurate particulars. The Explanation states that if the returned income is less than 80% of the assessed income, the person shall be deemed to have concealed income unless they prove the failure did not arise from fraud or gross/wilful neglect. The court emphasized that this is a legal fiction, and if the condition is met, the assessee is deemed to have concealed income unless they can disprove fraud or neglect.

2. Burden of Proof Regarding Fraud or Gross/Wilful Neglect:
The court clarified that the burden of proof lies with the assessee to show that the failure to return the correct income did not arise from fraud or gross/wilful neglect. This burden is akin to that in civil cases, determined on a preponderance of probabilities, and not as stringent as in criminal cases. The assessee can discharge this burden using the material on record in the penalty proceedings, regardless of who produced it. The court noted that the Tribunal must decide whether, on the material available, it can be reasonably inferred that there was no fraud or gross/wilful neglect by the assessee.

3. Tribunal's Misconception of Legal Position:
The revenue argued that the Tribunal erroneously placed the burden of proving fraud or gross/wilful neglect on the revenue, rather than the assessee. However, the court found that the Tribunal was aware of the correct legal position and had considered whether there was fraud or gross/wilful neglect by the assessee. The court suggested that the Tribunal should have used clearer language to avoid any misunderstanding about its findings.

4. Facts of the Case and Tribunal's Findings:
The Tribunal found that the difference between the returned income and the assessed income was due to the Income-tax Officer's estimation of profits, not because of any false entries or omissions in the books of account. The court agreed with the Tribunal that the assessee's failure to maintain proper verificatory records did not constitute fraud or gross/wilful neglect, as there was no obligation under the law to maintain such records. The court noted that the assessment was based on estimates and there was no evidence of false or incorrect accounts.

5. Past Conduct of the Assessee:
The revenue contended that the assessee's failure to maintain proper records despite previous assessments on similar grounds indicated gross/wilful neglect. The court rejected this argument, stating that there is no duty under the Income-tax Act to maintain books of account, and failure to do so does not constitute neglect. The court emphasized that the assessee's accounts were not found to be false or incorrect, and the lack of verificatory records alone did not imply fraud or neglect.

Conclusion:
The court concluded that in cases where the assessment is based on estimates and there is no evidence of false or incorrect entries, the assessee can be deemed to have discharged the burden of proving no fraud or gross/wilful neglect. The Tribunal's finding that the assessee was not liable for penalty under Section 271(1)(c) was upheld. The court answered the reference in the affirmative, ruling in favor of the assessee and awarding costs to be paid by the Commissioner.