H.N. Seth, J.
1. The assessee is a registered firm carrying on business of confectionery. For the assessment year 1964-65, the assessee returned an income of Rs. 40,648 (subject to depreciation). The Income-tax Officer noticed certain defects in the books and trading accounts of the assessee. Accordingly, after rejecting those books, he estimated the total income of the assessee at Rs. 62,490. In appeal, the estimate made by the Income-tax Officer was modified and the assessee's taxable income was determined at Rs. 59,050. As the total income returned by the assessee fell short of 80% of its assessed income, and minimum penalty leviable exceeded Rs. 1,000, the Income-tax Officer, after initiating penalty proceedings, referred the matter to the Inspecting Assistant Commissioner. The Inspecting Assistant Commissioner, after issuing a show cause notice to the petitioner and hearing it, concluded that the assessee had concealed and had furnished inaccurate particulars of its income and imposed a penalty of Rs. 5,742 under Section 271(1)(c) of the Income-tax Act.
2. Being aggrieved, the assessee went up in appeal before the Income-tax Appellate Tribunal. The Appellate Tribunal observed that in this case penalty had been imposed purely on the basis of an addition made to the returned income by estimating sales and applying a gross profit rate thereon on the sole ground that the book results were not amenable to verification. The question whether penalty can be levied in such circumstances had come up for frequent consideration by a number of Benches of the Tribunal which had uniformly held that penalty in such circumstances was not leviable. It did not consider it necessary to discuss the issue any further. In the result the Tribunal allowed the appeal and set aside the order of the Inspecting Assistant Commissioner.
3. The Commissioner of Income-tax then made an application to the Appellate Tribunal requiring it to state the following two questions of law for the opinion of this court:
'1. Whether, on the facts and in the circumstances of the case, the assessee can be held to have concealed the particulars of its income or furnished inaccurate particulars thereof under the provision of the Explanation to Section 271(1) ?
2. Whether, on the facts and in the circumstances of the case, the Income-tax Appellate Tribunal is legally correct in holding that penalty is not leviable and vacating the penalty of Rs. 5,742 under Section 271(1)(c) of the Income-tax Act ?'
4. The Income-tax Appellate Tribunal was of opinion that both these questions arose from out of its appellate order but, while making the reference,' it consolidated the two questions into one and after refraining the same, referred the following question for the opinion of this court:
'Whether, on the facts and in the circumstances of the case, the assessee can be held to have concealed the particulars of its income andfurnished inaccurate particulars thereof under the Explanation to Section 271(1)(c)?'
5. We find that while imposing penalty under Section 271(1)(c) the Inspecting Assistant Commissioner observed thus:
'As mentioned in the assessment order the assessee has not maintained proper stock account and, therefore, in view of the decision of theSupreme Court in S.N. Namasivayam Chettiar v. Commissioner of Income-tax : [1960]38ITR579(SC) , the accounts have been correctly rejected. It is to be noted that theaddition made by the Income-tax Officer on estimate in respect of thehead office account was Rs. 14,153(which was reduced to Rs. 10,713 by theAppellate Assistant Commissioner) and the addition in branch officeaccount was Rs. 3,806. Even taking into account the assessee's furtherappeal preferred before the Income-tax Appellate Tribunal in respect ofthe additions in the branch account it is obvious that the assessee acceptedthe additions made by the Income-tax Officer in respect of the head officeaccount consequent to the Appellate Assistant Commissioner's order. It,therefore, follows that the income returned was incorrect and that theincome estimated was the correct income at least for the head office account.Therefore, there is no doubt that the assessee has concealed the particularsof his income or furnished inaccurate particulars thereof.'
6. There is nothing in the order of the Inspecting Assistant Commissioner toshow that in coming to the conclusion that the assessee had concealed orfurnished inaccurate particulars of its income, he relied upon the Explanation to Section 271(1)(c) of the Income-tax Act, 1961, The AppellateTribunal, however, did not go into the question whether, in the circumstances of the case, inference drawn by the Inspecting Assistant Commissioner that the assessee had concealed or furnished inaccurate particulars ofits income, was justified or not and observed that in a case where penaltyhad been levied purely on the basis of an addition made to the returnedincome by estimating sales and applying gross profit rate thereon, on thesole ground that the book results are not amenable to verification, nopenalty under Section 271(1)(c) could be imposed. It also did not apply itsmind to the question regarding the applicability of the Explanation to Section 271(1)(c) to the facts of the present case and, in case the Explanationto Section 271(1)(c) was applicable, whether the assessee had discharged theburden of showing that he had either not acted fraudulently or that hewas not grossly negligent in furnishing its return.
7. We are unable to share the view of the Tribunal that in a case where the assessee's books are rejected and a best judgment assessment after estimating sales and after applying gross profit rate thereon is made, no penalty under Section 271(1)(c) can be imposed. Section 143 of the Income-tax Act,1961, read with Section 145 of the Act clearly contemplates that in a case where the assessee files a return of its income and the Income-tax Officer is either not satisfied that the method employed by the assessee in maintaining its account books is such that its income can be properly deduced therefrom or about the correctness or completeness of its accounts or, where no method of account has been regularly employed by the assessee, it may make a best judgment assessment in the manner provided in Section 144 of the Act. In the instant case, the Income-tax Officer did make a best judgment assessment in the manner provided under Section 145, because he found that the assessee had not maintained proper books. Explanation to Section 271(1)(c), which provides that in a case where the total income returned by an assessee is less than 80% of its correct income assessed under Section 144(a)section which empowers the making of best judgment assessment) as reduced by certain expenditure, clearly indicates that an action for imposing penalty under Section 271(1)(c) can appropriately be taken even in a case where the assessee is assessed on best judgment basis. In the result we find that the Income-tax Appellate Tribunal was not justified in revoking the order of penalty on the ground that Section 271(1)(c) did not apply to a case where the assessee had been assessed on the basis of additions made to its returned income by estimating its sales and applying a gross profit rate thereon. The Income-tax Appellate Tribunal should have disposed of the appeal only after considering whether in the circumstances of the case the Inspecting Assistant Commissioner was justified in coming to the conclusion that the assessee had concealed or furnished inaccurate particulars of its income, and in case it found that the material on the record was not sufficient to justify an inference that the assessee had concealed or furnished inaccurate particulars of its income, whether the Explanation to Section 271(1)(c) was attracted to the facts of the case and if it was so attracted, whether the assessee had discharged the burden placed upon it and had shown that in furnishing the particulars of its income, it had neither acted fraudulently nor was it guilty of any gross or wilful neglect.
8. In the special circumstances of this case and in order to effectively resolve the real controversy between the parties we refrarae the question referred to us, and break it up into the following two questions, which were required by the Commissioner of Income-tax to be referred to this court and which, in the opinion of the Tribunal, were included in the question referred:
1. Whether, on the facts and in the circumstances of the case, the assessee can be held to have concealed the particulars of its income or furnished inaccurate particulars thereof under the provisions of Explanation to Section 271(1)(c)?
2. Whether, on the facts and in the circumstances of the case, the Income-tax Appellate Tribunal is legally correct in holding that penalty is not leviable and in vacating the penalty of Rs. 5,742 under Section 271(1)(c) as was originally prayed for on behalf of the Commissioner of Income-tax ?
9. In view of the aforementioned discussion, we answer the second question in the negative, and in favour of the department. So far as the first question is concerned, it is not possible to express any opinion on it on the basis of the material contained in the appellate order of the Tribunal. Accordingly, we return that question unanswered. Parties shall bear their own costs.