Y.V. Anjaneyulu, J.
1. This reference made by the Income-tax Appellate Tribunal, Hyderabad ('the Tribunal', for short), under section 256(1) of the Income-tax Act, 1961 ('the Act', for short), at the instance of the Commissioner of Income-tax came up for hearing before a Division Bench consisting of P. A. Choudary and Upendra Lal Waghray JJ. During the course of arguments, the assessee relied on an earlier Division Bench judgment of this court in Addl. CIT v. China Krishnamurthy : [1980]121ITR326(AP) . The learned judges were of the view that the decision in China Krishnamurthy's case : [1980]121ITR326(AP) requires 'reconsideration in part'. Accordingly, the Division Bench directed the matter to be referred to a Full Bench and the matter is accordingly laid before us for consideration.
2. The facts may be noticed briefly. The assessee is a registered firm carrying on business in purchase and sale of tanned skins. For the assessment year 1967-68, the Income-tax Officer included a sum of Rs. 4,25,000 under the head 'Other sources'. This sum represented the sum total of some cash credits appearing in the names of several persons which, according to the Income-tax Officer, were not properly explained. Before the completion of the assessment, the Income-tax Officer had also issued a notice under section 274(2) of the Act requiring the assessee to show cause why penalty should not be levied for concealing the income or furnishing inaccurate particulars of such income. In appeal against the assessment, the Appellate Assistant Commissioner accepted the genuineness of credits of Rs. 3,50,000 and upheld the assessment to the extent of Rs. 75,000. This sum of Rs. 75,000 is made up of three cash credits of Rs. 25,000 each in the names of the three persons. In support of the plea that the cash credits were genuine, the assessee produced a confirmatory letter from one creditor. The other two creditors, in sworn statements before the Income-tax Officer admitted having lent the moneys to the assessee. The Income-tax Officer was of the view that the evidence of these three creditors cannot be relied upon, as, in his opinion, they did not have the resources to lend such large sums of money. That explanation, therefore, was disbelieved. In sustaining the assessment of Rs. 75,000, the Appellate Assistant Commissioner upheld the above view of the Income-tax Officer. The assessee did not file an appeal against the order of the Appellate Assistant Commissioner with the result that the assessment of the sum of Rs. 75,000 representing the cash credits in the names of the three creditors became final.
3. The Income-tax Officer referred the matter regarding the levy of penalty under section 271(1)(c) of the Act to the Inspecting Assistant Commissioner, who, according to the law at the relevant time, was the authority empowered to levy penalty. The Inspecting Assistant Commissioner called upon the assessee once again to show cause why penalty should not be levied for concealing the income/furnishing inaccurate particulars of such income. The assessee did not furnish fresh evidence in support of the claim that the three cash credits aggregating to Rs. 75,000 did not represent concealed income, but relied on the evidence already adduced before the Income-tax Officer. The Inspecting Assistant Commissioner took notice of the fact that the evidence adduced by the assessee before the Income-tax Officer consisting of a confirmatory letter from one creditor and sworn depositions from the remaining two creditors was untrustworthy and the creditors have no capacity to lend the amounts in question. The Inspecting Assistant Commissioner, therefore, drew the inference that the monies really belonged to the assessee, but put deliberately in the names of obliging relatives and friends. On these facts, the Inspecting Assistant Commissioner recorded a finding that he was satisfied that the assessee had not discharged the statutory burden cast upon it under the Explanation to section 271(1)(c) of the Act. The Inspecting Assistant Commissioner was of the view that penalty could be levied even without the aid of the Explanation to section 271(1)(c). In the aforesaid circumstances, the Inspecting Assistant Commissioner held that the assessee had concealed the income of Rs. 75,000. Consequently, he levied a penalty of Rs. 20,000 under section 271(1)(c) of the Act.
4. Aggrieved by the order of the Inspecting Assistant Commissioner, the assessee filed an appeal before the Tribunal. The Tribunal allowed the assessee's appeal holding that the assessee discharged the initial burden to prove within the meaning of the Explanation to section 271(1)(c) that the failure to return the correct income did not arise from any fraud or any gross or wilful neglect on its part. The Tribunal held that the evidence adduced by the assessee by the production of confirmatory letter and the sworn statements constituted material to come to the conclusion that the assessee had discharged the initial burden. The Tribunal held that as the Revenue has failed to rebut that evidence, no penalty could be levied by virtue of the Explanation to section 271(1)(c) of the Act. The Tribunal also held that there was much less any case for levying penalty under the main part of section 271(1)(c) of the Act without invoking the aid of the Explanation. In that view, the Tribunal cancelled the penalty levied by the Inspecting Assistant Commissioner. The Commissioner of Income-tax required the Tribunal to refer the case under section 256(1) of the Act. According to the Commissioner's request, the Tribunal referred the following question of law for consideration of this court :
'Whether, on the facts and in the circumstances of the case, the Tribunal was justified in law in holding that the imposition of penalty under section 271(1)(c) and the Explanation to section 271(1)(c) was not justified in law ?'
5. We have already indicated that the reference came up before a Divition Bench and the circumstances under which the matter is referred to us.
6. We may first clear the ground regarding the Revenue's claim that on the facts and circumstances, penalty could be levied even without invoking the aid of the Explanation to section 271(1)(c). Having regard to the principles enunciated by the Supreme Court in CIT v. Anwar Ali : [1970]76ITR696(SC) and CIT v. Khoday Eswarsa & Sons : [1972]83ITR369(SC) , no case is made out for the levy of penalty. By merely disbelieving the explanation of the assessee, the Revenue cannot come to the conclusion that the assessee concealed income or furnished inaccurate particulars of such income. The Supreme Court observed in the aforementioned cases that even the falsity of explanation does not warrant the levy of penalty without the Revenue pointing out evidence indicating that the amount assessed represented income liable to tax under the Income-tax Act. The Tribunal, therefore, is correct in holding that on the well-settled principles, the materials in the present case do not warrant the levy of penalty under section 271(1)(c) of the Act. The only question that remains for consideration is whether the penalty can be levied by invoking the aid of the Explanation to section 271(1)(c) of the Act. It may be pointed out that this Explanation was inserted by the Finance Act of 1964 with effect from 1st April, 1964. It was deleted by the Taxation Laws (Amendment) Act of 1975 with effect 1st April, 1976, by inserting a new scheme of Explanations which are not relevant for our purpose. For the sake of convenient reference, we may extract below the Explanation inserted by the Finance Act of 1964 on which the Revenue relies : (See [1964] 52 ITR 20 ).
'Explanation. - Where the total income returned by any person is less than eighty per cent. of the total income (hereinafter in this Explanation referred to as the correct income) as assessed under section 143 or section 144 or section 147 (reduced by the expenditure incurred bona fide by him for the purpose of making or earning any income included in the total income but which has been disallowed as a deduction), such person shall, unless he proves that the failure to return the correct income did not arise from any fraud or any gross or wilful neglect on his part, be deemed to have concealed the particulars of his income or furnished inaccurate particulars of such income for the purposes of clause(c) of this subsection.'
7. It is not necessary for us to deal with the real effect of the Explanation in detail, as that was the subject-matter of consideration in a number of cases by several High Courts. In Addl. CIT v. B. China Krishnamurthy : [1980]121ITR326(AP) , this court had dealt with the scope of the Explanation in sufficient detail. Once the income returned is less than 80 per cent. of the assessed income, the Explanation becomes applicable. Then two presumptions will follow : They are :
(a) The amount of the assessed income is the correct income and it is in fact the income of the assessee;
(b) Failure of the assessee to return the correct assessed income was due to fraud or gross or wilful neglect on the assessee's part.
8. From the factum of presumptions spelt out, the Explanation becomes a rule of evidence. Presumptions raised by the Explanation are not conclusive presumptions, but are rebuttable. The initial burden of discharging the onus of rebuttal is on the assessee. Once that initial burden is discharged, the assessee would be out of the mischief of the Explanation until and unless the Revenue is able to establish afresh that the assessee in fact concealed the particulars of income or furnished inaccurate particulars thereof. It, therefore, follows that when an assessee on whom the initial burden is placed fails to discharge the same, his case would fail and he would straightaway come within the mischief of the Explanation. If, however, the assessee discharges the initial burden, the presumptions stand rebutted and the burden shifts to the Revenue to establish that the assessee has concealed income. The assessee can be said to have discharged the initial burden by preponderance of probabilities and evidence. Such a burden can be discharged by the material already existing on the record or by the assessee choosing to adduce fresh evidence during the course of the penalty proceedings. If the assessee does not choose to adduce fresh evidence or produce fresh materials, it is still open to him to show and prove that on the existing material itself the presumption raised by the Explanation would stand rebutted. Broadly, these are the basic principles governing the applicability of the Explanation to section 271(1)(c) of the Act. Learned standing counsel for the Revenue, Sri M. Suryanarayana Murthy, does not dispute the correctness of the above basic principles. All that he points out is that in the present case the assessee did not adduce any fresh evidence or produce any fresh materials to rebut the presumption raised by the Explanation. It is pointed out that the assessee relied on the evidence already on record during the course of the assessment proceedings and that evidence was found untrustworthy Learned counsel, therefore, contends that the assessee in this case failed to discharge the initial burden and the presumptions under the Explanation stand unrebutted. It is, therefore, claimed that the Revenue was justified in coming to the conclusion that the assessee failed to prove that the failure to return the correct income did not arise from any fraud or gross or wilful neglect on the part of the assessee. It is urged that it must, therefore, be deemed that the assessee concealed the particulars of income or furnished inaccurate particulars of such income for the purpose of section 271(1)(c) of the Act.
9. We are unable to agree with the submissions of the learned standing counsel for the Revenue. In the first place, we may point out that the authority empowered to levy penalty must derive satisfaction that the evidence adduced by the assessee was such that within the terms of the Explanation to section 271(1)(c), it cannot be said that the assessee has discharged the initial burden. We have perused the order of the Inspecting Assistant Commissioner who levied the penalty in the present case. The Inspecting Assistant Commissioner refers to the confirmatory letter from one of the creditors and the sworn statements of the other two creditors. He further referred to the fact that in the assessment proceedings that evidence was rejected, as the capacity of the creditors to lend money was in doubt. From these facts, the Inspecting Assistant Commissioner records a finding that the monies really belonged to the assessee and the assessee had not discharged the statutory burden under the Explanation.
10. It is clear that the Inspecting Assistant Commissioner did not apply his mind to the evidence on record. He did not deal with the contents of the confirmatory letter and much less the contents of the sworn statements. He did not endeavour to find out why this evidence adduced by the assessee during the course of the assessment proceedings did not have the effect of the assessee discharging the initial burden that lay upon it rebutting the presumptions raised by the Explanation to section 271(1)(c). The Inspecting Assistant Commissioner merely referred to the findings in the assessment proceedings and stated that on the basis of those findings he was satisfied that the assessee has not discharged the initial burden that lay upon it. It seems to us that the Inspecting Assistant Commissioner did not himself apply his mind and merely recorded his satisfaction regarding the applicability of the Explanation based on the findings reached in the assessment proceedings. It should be remembered that penalty proceedings are entirely distinct from assessment proceedings and howsoever relevant and good the findings in the assessment proceedings may be, they are not conclusive so far as the penalty proceedings are concerned. In our opinion, the Inspecting Assistant Commissioner came to an abrupt conclusion on law totally disregarding the facts. Unfortunately, the record before us does not contain the letter of confirmation given by one creditor and the sworn statements of the other two creditors supporting the assessee's plea that loans were taken from the three creditors. Neither the Income-tax Officer's assessment order nor the order of the Appellate Assistant Commissioner is placed before us. We are, therefore, unable to appreciate the facts based on which the conclusion was reached by the Inspecting Assistant Commissioner that the assessee failed to discharge the burden that initially lay on it for rebutting the presumptions under the Explanation. Merely because the evidence was disbelieved in the assessment proceedings, it cannot be said that the assessee failed to discharge the initial burden of explaining the sources or origin of cash credits having the limited effect of discharging the initial burden. The aforementioned letter of confirmation and the sworn statements of creditors relating to the factum of lending the amounts constitute prima facie evidence having the effect of discharging the initial burden. The Inspecting Assistant Commissioner did not point out any circumstance in his order which supports the plea that in spite of the above evidence, the assessee failed to prove that the failure to return the correct income did not arise from any fraud or gross or wilful neglect on his part. We are satisfied that the Revenue has failed to make out a case that penalty could be levied by invoking the Explanation to section 271(1)(c) in the present case. This is enough to dispose of the reference made by the Tribunal.
11. We are still left with the purpose for which the reference was made by the Division Bench. While referring the matter to the Full Bench, the Division Bench observed that the decision in the case of Addl. CIT v. B. China Krishnamurthy : [1980]121ITR326(AP) , requires reconsideration. There is no indication in the reference as to what part of the judgment required reconsideration. However, learned standing counsel for the Revenue invited our attention to the observations of this court in the aforesaid judgment that even after the omission of the word 'deliberately' by the Finance Act of 1964, the legal position that is applicable to penalty proceedings, as enunciated by the Supreme Court in Anwar Anwar Ali's case : [1970]76ITR696(SC) and Khoday Eswarsa's case : [1972]83ITR369(SC) , is not materially altered. According to the standing counsel, the aforesaid view of this court requires reconsideration, as the two decisions of the Supreme Court above referred, were rendered according to the law in existence prior to the Finance Act of 1964 which brought about a change in the law. It is submitted that as long as the word 'deliberately' existed in clause (c) of section 271(1), a conscious mental clement y as required to he established and the burden of proving thereof was on the Department. The removal of that word brought about a reversal of the rule relating to the burden of proof and, consequently, the requirement of a designed mental limit was no longer required. It is this part of the judgment of this court in China Krishna Krishnamurthy's case : [1980]121ITR326(AP) , that required reconsideration, according to the learned standing counsel. Learned standing counsel relied on two Full Bench decisions, one of the Punjab and Haryana High Court in Vishwakarma Industries v. CIT and another of the Patna High Court in CIT v. Nathulal Agarwala & Sons : [1985]153ITR292(Patna) . Learned standing counsel also referred to the decision of the Supreme Court in Addl CIT v. Swastik Mineral Corporation : [1979]118ITR583(SC) , where the Supreme Court observed that the Tribunal overlooked the amendments made by the Finance Act of 1964 and those amendments ought to have been considered by the Tribunal. All the same, the Supreme Court did not think it fit to examine the matter taking an overall view of the facts and circumstances of the case.
12. As against the above submissions, learned counsel for the assessee, Sri A. V. S. Ramakrishnayya, relied on a number of judgments which, according to him, support the view taken by this court in China krishnamurthy's case : [1980]121ITR326(AP) . We do not think it necessary to examine the correctness or otherwise of this proposition, as we have independently examined the applicability of the Explanation to section 271(1)(c) of the Act and come to the conclusion that the penalty is not exigible. The examination of the question whether the deletion of the word 'deliberately' in clause (c) of section 271(1) of the Act has brought about any change in the application of the principles governing the levy of penalty will not have any consequence or effect on our decision regarding the applicability of the Explanation to section 271(1)(c). Our finding that penalty cannot be levied by invoking the aid of the Explanation to section 271(1)(c) by necessary implication rules out the applicability of the main clause (c) section 271(1). It would, therefore, be a matter of academic interest to examine the real effect of the deletion of the word 'deliberately' in clause (c) of section 271(1) by the Finance Act of 1964. We wish to add that the circumstance that we consider it unnecessary to examine this principle should not be construed as approval or otherwise of the view taken by the Division Bench in China Krishnamurthy's case : [1980]121ITR326(AP) ,
13. In the result, we answer the question referred to us by the Tribunal in the affirmative, that is to say, in favour of the assessee and against the Revenue. There shall be no order as to costs.