Judgment:
R.K. Agrawal, J.
1. The Tribunal, New Delhi, has referred the following questions of law under Section 256(2) of the IT Act, 1961 (hereinafter referred to as 'the Act'), for opinion of this Court :
'1. Whether, on the facts and in the circumstances of the case, the Tribunal was justified in law in holding that a 'reasonable opportunity' was provided to the assessee by the authorities below ?
2. Whether, on the facts and in the circumstances of the case, the Tribunal was correct in law in holding that the onus to explain in regard to the alleged difference lay on the assessee and not on the Department ?
3. Whether, on the facts and in the circumstances of the case, the Tribunal was justified in law in reversing the order of the CIT(A) by which he had cancelled the penalty levied under Section 271(1)(c) of the IT Act, 1961 ?
4. Whether, on the facts and in the circumstances of the case, the Tribunal was justified in law in holding that the penalty of Rs. 37,000 was validly imposed under Section 271(1)(c) of the IT Act, 1961 on the assessee ?
5. Whether the Tribunal was justified and correct in law in not considering that there was a similar brought forward opening balance in 1975-76 as in 1976-77 and thereby ignoring the correct fact, which vitiated the order of the Tribunal and rendered it illegal ?'
2. The reference relates to the asst. yr. 1975-76.
3. Briefly stated, the facts giving rise to the present reference are as follows :
The applicant is an individual. Upto the asst. yr. 1974-75 it did not draw the balance sheet which was drawn for the first time for the asst. yr. 1976-77. While examining the accounts for the asst. yr. 1976-77, the ITO found that there were certain credits in the balance sheet of the applicant in the name of one M/s Jai Gopal Uma Shanker of Ahmedabad. On cross-checking with the said party, the ITO found that the applicant had shown the credit in the name of the said party more by Rs. 39,995. The ITO, therefore, wanted the applicant to show cause as to why the entire amount as aforesaid be not added to its total income for the asst. yr. 1976-77. The applicant, however, submitted before the ITO that the difference to the extent of Rs. 36,956 existed on the opening day of the accounting period corresponding to the asst. yr. 1976-77 and, therefore, the addition in respect of the asst. yr. 1976-77 should be confined to the balance of Rs. 3,040 only. The ITO accepted this contention and, therefore, in the asst. yr. 1976-77, the addition was confined only to Rs. 3,040. The ITO on the basis of the above information, initiated proceeding against the applicant under Section 147(1) read with Section 148 for the asst. yr. 1975-76 and asked it to explain the above discrepancy in the course of the reassessment proceedings. It was explained on behalf of the applicant that in the absence of the books of account for the asst. yr. 1975-76 and earlier years, which had been eaten away by white ants, it was not possible for it to explain how the difference arose and it was suggested that the difference might have been built up probably over the past several years and that, if at all, an addition was made, it should be spread over 4 years. This submission of the applicant was not accepted by the ITO who added the entire amount of Rs. 36,956 to the total income of the applicant for the asst. yr. 1975-76. The assessment was allowed to become final by the applicant. In the course of the assessment proceedings, the ITO had initiated penalty proceeding under Section 271(1)(c) requiring it to explain as to why penalty be not imposed for concealing the income to the extent of Rs. 36,956. On 11th March, 1983, the applicant submitted its reply to the notice under Section 271(1)(c) making out two points as below :
'1. That the assessee had not received the assessment order and that, therefore, it was not possible to know for the assessee as to what additions have been made, and in any case whatever additions had been made would be contested in appeal and, that, therefore, there could be no basis for proceedings Under Section 271(1)(c) of the Act. It was also alleged by the assessee that notice under Section 271(1)(c) had not been served on the assessee at any earlier point of time.
2. That no part of income has been concealed and that the difference, if any, in the accounts of M/s Jai Gopal Uma Shanker, Ahmedabad, cannot be said to be confined in the year in question and the income has got to be established related to this year and any difference in stock-in-trade does not invite the levy of penalty. As such, these proceedings are liable to be cancelled....'
The ITO after considering the above reply imposed the penalty.
4. Feeling aggrieved by the order of the penalty, the applicant challenged the aforesaid order of the ITO and urged before the CIT(A), firstly, that the penalty in question had been imposed on it without affording proper opportunity of being heard and, secondly, that the ITO had not discharged the onus, which lay on him of showing that the entire difference, namely, Rs. 36,956 arose in the accounting period corresponding to the asst. yr. 1975-76. The CIT(A) has accepted both the contentions. He pointed out in his order that the copy of the assessment order had been furnished to the assessee on 11th March, 1983, only and that on that very date the applicant had given the reply to the notice under Section 271(1)(c) and that it could not, therefore, be said that it had a reasonable opportunity for effective hearing. Turning to the merits of the case, the CIT(A) has held that the action of the ITO was based on presumption and that there was no material on record to show that Rs. 36,956 represented the income of the applicant for the asst. yr. 1975-76 and, therefore, the penalty was not imposable with reference to it.
5. The Revenue, feeling aggrieved, preferred an appeal before the Tribunal. The Tribunal on a careful consideration of the case and rival submissions, was unable to accept the finding that the applicant did not have proper opportunity to show cause as to why the penalty be not imposed. It has held that the applicant's reply dt. 11th March, 1983, contained all that it had to say about the difference in the account of M/s Jai Gopal Uma Shanker, Ahmedabad. The Tribunal has further held that the CIT(A) had erred in law in placing the burden of proving the concealment with regard to the income added to the applicant's total income on the ITO. The Explanation to Section 271(1)(c) of the Act was applicable and the applicant had not been able to discharge the onus. The Tribunal, therefore, has upheld the imposition of penalty.
6. We have heard Sri Vikram Gulati, learned counsel for the applicant, and Sri Shambhoo Chopra, learned standing counsel appearing for the Revenue.
7. The learned counsel for the applicant submitted that the books of account had been eaten away by white ants and, therefore, the applicant could not produce the same. According to him, copy of the assessment order was given to the applicant on 11th March, 1983, and on the same date the applicant had submitted a reply. As the applicant was handicapped, he could not submit a full and detailed reply and, therefore, no effective opportunity of hearing was given to it. He, thus, submitted that the omission to disclose the said amount in the return did not arise from any fraud or any gross or wilful neglect on its part and, therefore, the penalty ought to have been set aside. He further submitted that the Explanation to Section 271(1)(c) of the Act, as it was applicable during the assessment year in question, only raised a presumption which is rebuttable. The applicant has given valid explanation and, therefore, it was upon the Department to prove that the applicant had wilfully concealed the particulars of its returned income. In support of his aforesaid submissions, he has relied upon the following decisions :
(i) CIT v. Net Ram Ram Swamp : [1973]88ITR213(All) ;
(ii) Addl. CIT v. Kishan Singh Chand : [1977]106ITR534(All) ;
(iii) CIT v. K.L. Mangal Sain : [1977]107ITR598(All) ;
(iv) CIT v. B.S. Badve and Anr. : [1982]138ITR682(Bom)
(v) Addl. CIT v. Jeewandas Gyanchand : [1983]144ITR881(MP) ;
(vi) CIT v. Punjab Tyres : [1986]162ITR517(MP) ;
(vii) C.M. Shivamallappa v. CIT : [1987]163ITR725(KAR)
8. The learned standing counsel for the Revenue submitted that the applicant had been provided reasonable opportunity of hearing and in fact he had submitted his reply, which has been considered and after disbelieving the same, the penalty has been imposed. According to him, as the returned income was less than 80 per cent of the assessed income, the Explanation was applicable and the applicant had failed to discharge the onus. He has relied upon a decision of the apex Court in the case of Addl. CIT v. Jeevan Lal Shah : [1994]205ITR244(SC) .
9. Having heard the learned counsel for the parties, we find that in the original assessment proceeding, an addition of Rs. 36,956 has been made by the ITO to the total income of the applicant, which order has become final. The aforesaid addition has been made on the ground that in the balance sheet prepared by the applicant for the asst. yr. 1976-77 in which credit in the name of M/s Jai Gopal Uma Shanker, Ahmedabad, was found more than by Rs. 39,995 and the stand taken by the applicant was that difference to the extent of Rs. 36,956 existed on the opening day of the accounting period corresponding to the asst. yr. 1976-77. Thus, the difference which was there on the opening day of the account year corresponding to the asst. yr. 1976-77, was the excess of closing day of the accounting period corresponding to the assessment year in question, i.e., 1975-76. In reply to the show-cause notice issued under Section 271(1)(c) of the Act, the applicant had submitted its reply which had been reproduced hereinbefore. From a perusal of the aforesaid reply, it appears that the applicant had not claimed for any further opportunity to submit the explanation or reserved the right to give any other or further explanation. Opportunity of hearing does not mean that even if a reply has been filed by the applicant, the ITO should give another opportunity and ask the assessee as to whether he would submit any further reply or not. Once a reply has been submitted without there being any reservation, it is the duty of the assessing authority to proceed and consider the said reply in accordance with law. The principle of natural justice as also giving a reasonable opportunity of hearing is fully complied with in the present case. So far as the question of onus which lay upon the applicant in view of the Explanation to Section 271(1)(c) of the Act is concerned, it was not discharged. The explanation given by the applicant was not supported by any documentary proof. Merely giving an explanation without any further proof would not amount to discharging the onus.
10. It may be mentioned here that by Section 40 of the Finance Act, 1964, the word 'deliberately' occurring in Clause (c) of Section 271(1) of the Act has been omitted and the following Explanation was inserted at the end of Sub-section (1) :
'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 sub-section.'
Prior to the aforesaid amendment made by the Finance Act, 1964, the apex Court in the cases of CIT v. Anwar Ali : [1970]76ITR696(SC) and CIT v. Khoday Eswarsa & Sons : [1972]83ITR369(SC) has held that the burden is on the Department to prove that a particular amount is a revenue receipt. It would be perfectly legitimate to say that the mere fact that the explanation of the assessee is false does not necessarily give rise to the inference that the disputed amount represents income and it cannot be said that the finding in the assessment proceedings for determining or computing the tax is conclusive. It is only a good evidence. Before the penalty can be imposed the entirety of circumstances must reasonable point to the conclusion that the disputed amount represented income and that the assessee had consciously concealed the particulars of his income or had deliberately furnished inaccurate particulars.
11. However, with the incorporation of Explanation to Section 271(1) of the Act, the apex Court has held in the cases of CIT v. Mussadilal Ram Bharose : [1987]165ITR14(SC) ; CIT v. K.R. Sadayappan : [1990]185ITR49(SC) ; Addl. CIT v. Jeevan Lal Shah : [1994]205ITR244(SC) ; and B.A. Balasubramaniam Bros. & Co. v. CIT : [1999]236ITR977(SC) that the view which had been taken earlier in Anwar Ali's case (supra) no longer holds the field and it is for the assessee to discharge the onus as contemplated in the said Explanation.
12. In the case of K.P. Madhusudhanan v. CIT : [2001]251ITR99(SC) , the apex Court has held that the Explanation to Section 271(1)(c) is a part of Section 271. When the AO or the AAC issues a notice under Section 271, he makes the assessee aware that the provisions thereof are to be used against him. These provisions include the Explanation. By virtue of the notice under Section 271, the assessee is put to notice that, if he does not prove, in the circumstances stated in the Explanation, that his failure to return his correct income was not due to fraud or neglect, he shall be deemed to have concealed the particulars of his income or furnished inaccurate particulars thereof, and, consequently, be liable to the penalty under the section. No express invocation of the Explanation to Section 271 in the notice under Section 271 is necessary before the provisions of the Explanation are applied.
13. In the case of Net Ram Ram Swamp (supra), this Court has held that mere failure of an assessee to prove the nature and source of an income would not lead to an inference that he is deliberately concealing the income or has furnished inaccurate particulars thereof. The IT Department's burden to establish that the assessee's case falls under Section 28(1)(c) of the IT Act, 1922, would not be discharged in such a case and penalty cannot be imposed. It may be mentioned here that the aforesaid case related to the imposition of penalty for concealment of income under the Indian IT Act, 1922 in which the Explanation, as inserted in the year 1964, was not there. Thus, no benefit or advantage can be obtained from the aforesaid decision.
14. In the case of B.S. Badve (supra), the Bombay High Court has held that the returns which were filed by the assessee, were merely on the basis of estimates of income and what the ITO did was to raise the estimates of income given by the assessee in respect of the income from the cinema business and from the running of the power looms. There was nothing in the order of the ITO to show that he found the estimates given by the assessee to be fraudulent or that the ITO came to the conclusion that the assessee had made any deliberate false estimate of his income. Moreover, even the additions made by the ITO in the estimates of income made by the assessee are so modest that merely from those additions it cannot be said that the assessee has made any deliberate underestimation of his income and, therefore, the levy of penalty was not valid. In the present case, the applicant had not produced any material or documents to establish that the amount of Rs. 36,956 related to earlier four years as claimed and, therefore, this decision is of no help to the applicant.
15. In the case of Jeewandas Gyanchand (supra), the Madhya Pradesh High Court has held that where the assessment was made after rejecting the books of account of the assessee and no particular item in the books was found to be false, nor it had been shown that any specific item of income had not been entered in the books, the assessee has succeeded in rebutting the presumption arising under the Explanation to Section 271(1)(c) of the Act. The Madhya Pradesh High Court has held that the presumption is rebuttable which is not present in the case in hand.
16. In the case of Punjab Tyres (supra), the Madhya Pradesh High Court has held that even in cases of agreed addition to the total income on account of unexplained investments, the Department had to prove by independent evidence in addition to the evidence already brought on record from various sources during the assessment proceedings that that amount represented the concealed income of the assessee earned during the relevant accounting year and where the assessee had agreed to the addition to purchase peace with the Department and the Department was unable to adduce evidence showing that the assessee had consciously concealed the particulars of his income in regard to the unexplained investments, any admission made by the assessee surrendering a particular amount as his income would not by itself justify the imposition of penalty. In the case of C.M. Shivamallappa (supra), the Karnataka High Court has held that as the assessee himself voluntarily disclosed the receipts which became the basis for the reopening of the assessments, there was no concealment of income and the levy of penalty was not valid. The Madhya Pradesh High Court and the Karnataka High Court have not considered the effect of Explanation added by the Finance Act of 1964.
17. In the case of Kishan Singh Chand (supra), this Court has held that the Explanation to Section 271(1)(c) of the Act does not apply to all the cases of suspected concealment but applies only where the income returned is less than 80 per cent of the income assessed minus the expenses incurred bona fide and disallowed by the ITO as a deduction. In the aforesaid case, there was no finding that this requirement was satisfied. In fact, the IAC did not rely upon the Explanation and, as such, he did not record a finding that the income returned was less than 80 per cent of the assessed income, attracting the Explanation nor has the Tribunal done so and once the Explanation is out of the way, the case would be governed by the law laid down by the apex Court in the case of Anwar Ali (supra). The penalty proceedings under Section 271(1)(c) of the Act are penal in nature and the burden is on the Department to establish that the assessee has been guilty of concealment, etc. Such a finding has to be recorded on positive material and cannot be inferred from the fallacy of the assessee's explanation. The aforesaid decision is of no help to the applicant as in the present case we find that the Explanation is attracted and further in view of the decision of the apex Court, in the case of K.P. Madhusudhanan (supra), where the returned income is less than 80 per cent of the assessed income, the Explanation is applicable, whether or not it has been specifically invoked by the assessing authority in the notice or the order.
18. In the case of K.L. Mangal Sain (supra), this Court has held that where the assessee had not maintained the books of account regularly and were rejected and the correct income was estimated by applying a flat rate, it cannot be held that the assessee was guilty of fraud or gross or wilful neglect. In the aforesaid case, the Tribunal had accepted the explanation given by the assessee and had applied the Explanation to Section 271(1)(c) of the Act from a correct view point. In the present case, we find that the applicant had not been able to discharge the burden/onus that lay on it under the Explanation to Section 271(1)(c) of the Act.
19. It may be mentioned here that the stand taken by the applicant for not producing the books of account of the earlier accounting periods on the plea that it had been eaten away by white ants, will not absolve its liability to prove that the failure to return the correct income did not arise from any fraud or any gross wilful neglect on its part.
20. A Division Bench of this Court in the case of Haji Lal Mohd. Bin Works v. CIT : [1982]134ITR718(All) has held that where an assessee does not produce the books of account and other documents on the plea that it had been destroyed in fire or riot, the Department is free to draw an adverse inference. Respectfully following the aforesaid decisions, we are of the considered opinion that in the present case as the applicant had not produced the books of account to establish that the amount of Rs. 36,956 related to the earlier years, the onus which lay upon it has not been discharged.
21. In view of the foregoing discussions, we answer all the questions referred to us in the affirmative, i.e., in favour of the Revenue and against the assessee. There shall be no order as to costs.