M.C. Jain, J.
1. This reference has been made by the Income-tax Appellate Tribunal, Jaipur Bench, Jaipur, under Section 256(2) of the Income-tax Act, 1961.
2. The facts in brief are that the assessee is a Hindu undivided family carrying on business of kirana. The previous year relevant to the assessment year ended on October 21, 1968. The assessee declared a gross profit of Rs. 17,414 giving a gross profit rate of 2.5 per cent. on the retail sales of kirana goods totalling Rs. 7,34,267. The Income-tax Officer was of the opinion that looking to the nature of the business, the gross profit was very low and he observed that as accounts are not supported by stock tally, the account version cannot be relied upon. He made a lump sum addition of Rs. 12,000 in the trading account, which brought the gross profit rate to 4% as was in the past. The Income-tax Officer at the time of completing the assessment was also of the view that there was concealment of income by the assessee. As such, he initiated penalty proceedings under Section 271(1)(c) of the Income-tax Act, 1961 (for short ' the Act').
3. In response to the notice in penalty proceedings, the assessee submitted that the addition was on account of application of higher rate ofprofit and the assessee had not concealed the particulars of income. TheIncome-tax Officer, by his order dated October 10, 1973, imposed a penaltyof Rs. 15,000. He considered the matter as under :
'But the records show that when the statement of affairs of the asses-see was called for by the learned Appellate Assistant Commissioner, hefound a net accretion of Rs. 13,326 to the wealth of the assessee, againsttrading addition of Rs. 12,000. This was brought to the notice of theassessee, vide letter No. 2103 dated July 3, 1973. The assessee could notgive any explanation with regard to this accretion to his wealth.
In the circumstances as described above, it is amply clear that the assessee fraudulently furnished the particulars of his income which he did by showing smaller rate of profit. The finding of the learned Appellate Assistant Commissioner as to the accretion to wealth remains unchallenged. It is also not the case of the assessee that the accretion was on account of any other income which is not liable for tax. No other source of income excepting the business has been admitted by the assessee. Therefore, any accretion to his wealth has to be necessarily the result of his good profits from the business, which he has not fully disclosed to the Department. '
4. The assessee went in appeal against the order levying penalty and the Appellate Assistant Commissioner of Income-tax, B-Range, Jaipur, by his order dated October 1. 1974 (annexure C), dismissed the appeal. These contentions of the assessee were negatived by the Appellate Assistant Commissioner : that the difference in the income returned and the income assessed is not necessarily the concealed income and that the Income-tax Officer's observation in the order that the assessee could not give any explanation with regard to the accretion to his wealth, is not correct. The Income-tax Officer's letter dated July 3, 1973, was replied by the authorised representative of the assessee, vide letter dated July 13, 1973. It was also contended that the absence of reply to the Income-tax Officer's query, cannot be interpreted as proof of concealment and no penalty can be levied on that basis.
5. The learned Appellate Assistant Commissioner dealt with the matter as under:
'The Income-tax Officer has treated the appellant as a defaulter under Section 271(1)(c) of the Income-tax Act on the ground that at the appeal stage, it was found that the assessee had net accretion of Rs. 13,326 to his wealth. Although the appellant has not drawn regular balance-sheet as such, he had filed at the appeal stage (in Appeals Nos. 160 of 1971-72 and 202 and 227 of 1971-72 dated October 13, 1972), statement of assets and liabilities for the assessment year 1969-70 and also for earlier years. On the basis of these statements, it was found that the appellant had netaccretion to his capital to the extent of Rs. 13,326. It was on the basis of this finding that the trading additions of Rs. 12,000 were confirmed in appeal. It would appear from the above that the penalty levied by the Income-tax Officer is not merely on the basis of trading additions but on the basis of actual accretion to his capital. The appellant's case is thus not within the scope of the decision of the Income-tax Appellate Tribunal, Jaipur Bench, in M/s. Nassiruddin Brothers, Bhilwara, referred to above. Concealment has been established at least to the extent of Rs. 12,000 and, therefore, the Income-tax Officer was justified in levying a penalty under Section 271(1)(c) of the Income-tax Act. The penalty levied by the Income-tax Officer is Rs. 15,000 against the actual concealment of Rs. 12,000. The appellant has not been able to establish in the course of penalty proceedings either before the Income-tax Officer or in the course of the present appeal, that the calculations regarding capital accretions as made in the appeal order referred to above, were incorrect in any way. Since it is established that the concealment of income had occurred in this, mens rea on the part of the appellant is naturally established.'
6. Further appeal was taken by the assessee against the order of the Appellate Assistant Commissioner and the Income-tax Appellate Tribunal, by its order dated November 13, 1975 (annexure D), allowed the appeal and cancelled the order imposing the penalty. The Tribunal after considering the facts of the case and after considering the contentions of the assessee and relying on the decision of the Gujarat High Court in CIT v. Lakhdhir Lalji : [1972]85ITR77(Guj) , considered the case as under :
' The learned Income-tax Officer at the time of initiating penalty proceedings was of the view that there was concealment of income by the assessee and an ad hoc addition of Rs. 12,000 was made in the trading account. At that time, the learned Income-tax Officer never applied his mind that there was capital accretion and as a result of it there was concealment of income to the extent of Rs. 12,000. The Appellate Assistant Commissioner for the first time in quantum appeal also supported the addition in trading account on the ground that there was capital accretion of Rs. 13,326. The learned Appellate Assistant Commissioner, after so holding, was of the view that from this point of view also, the trading addition was fully justified. If the learned Appellate Assistant Commissioner was of the view that there was concealment of income as a result of accretion to the capital, he could have initiated penalty proceedings under Section 271 of the Act. The learned Appellate Assistant Commissioner never initiated penalty proceedings for such capital accretion. Under these circumstances, the learned Income-tax Officer in penalty proceedings cannot impose penalty on the ground that there was capital accretion in the year of account.'
7. With regard to the explanation relating to capital accretion, the Tribunal recorded that both the parties were directed to produce the copies of the letter and of the reply but they failed to produce. So, the Tribunal observed that it is left with the material which is available on record and observed that in the absence of the letter dated July 3, 1973, and reply dated July 13, 1973, it would be difficult to come to the conclusion whether before the Income-tax Officer or the Appellate Assistant Commissioner, the assessee gave no explanation regarding the capital accretion. The Tribunal, then, proceeded to consider the questions as under :
' The assessee maintained books of account and on the basis of those books, the assessee disclosed the profits in question. The authorities below nowhere pointed out which of the particular items in the books disclosed by the assessee are false or unreliable. The learned Income-tax Officer made an ad hoc addition of Rs. 12,000. The assessee also took a constant plea that there was no concealment of income by the assessee. Even in the past, such additions were made on the basis of an estimate by applying a higher gross profit rate. We may also point out if in the opinion of the Appellate Assistant Commissioner, there was accretion in the capital, the learned Appellate Assistant Commissioner could have enhanced the addition in accordance with law. But the learned Appellate Assistant Commissioner never enhanced the addition. On the other hand, the learned Appellate Assistant Commissioner only confirmed the trading addition on a different ground.
Looking to the aforesaid facts and circumstances and probabilities of the cases, in our opinion, there were preponderance of probabilities, which go to show that there was no fraud or gross or wilful neglect on the part of the assessee in not returning the assessed income. On the basis of the material on record, it could hardly be said that there was concealment of income by the assessee.'
8. The reference application made by the Commissioner of Income-tax under Section 256(1) was rejected by the Tribunal, vide its order dated April 24, 1976, but this court on application under Section 256(2) framed the following questions of law and directed the Tribunal to send the statement of the case and refer the questions for the opinion of this court:
'1. Whether, on the facts and in the circumstances of the case, the Tribunal was right in holding that the Income-tax Officer, while imposing penalty under Section 271(1)(c) of the Act was not entitled to take into consideration the additional fact noticed by the Appellate Assistant Commissioner in the quantum appeal that there was unexplained net accretion to the assessee's capital amounting to Rs. 13,326 ?
2. Whether the finding of the Tribunal that there was preponderance of probabilities, which go to show that there was no fraud or gross or wilful neglect on the part of the assessee in not returning the correct income stands vitiated as the same is based on no evidence ?
3. Whether, on the facts and in the circumstances of the case, the Tribunal was right in holding that there was no concealment of income on the part of the assessee and in cancelling the penalty imposed under Section 271(1)(c) ?'
9. We have heard Mr. Chand Raj Mehta, learned advocate for the Revenue, and Mr. Rajesh Balia, learned counsel for the assessee.
10. For the proper adjudication of controversies in question and for facility of reference, we may first take notice of the relevant provisions of Section 271 of the Act. The relevant provisions are Section 271(1)(c) and the Explanation appended to Sub-section (1) of Section 271 of the Act:
'271. Failure to furnish returns, comply with notices, concealment of income, etc.--(1) If the Income-tax Officer or the Appellate Assistant Commissioner in the course of any proceedings under this Act, is satisfied that any person--.....
(c) has concealed the particulars of his income or furnished inaccurate particulars of such income, he may direct that such person shall pay by way of penalty,--... 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.'
11. A perusal of the above provision would show that the proceedings under Section 271(1)(c) of the Act can be initiated either by the Income-tax Officer or the Appellate Assistant Commissioner when he is satisfied in the course of any proceedings under the Act that the assessee had concealed the particulars of his income or had furnished inaccurate particulars of such income. It is only on such satisfaction of the Income-tax Officer or the Appellate Assistant Commissioner arrived at in the course of proceedings before them, the provision can be resorted to. The Explanation to subsection (1) of Section 271 of the Act introduces a deeming provision. If thetotal income returned by the assessee is less than 80% of the total income assessed, it shall be deemed that the assessee has concealed the particulars of his income or has furnished inaccurate particulars of such income for the purposes of Clause (c) but the concealment is not so deemed if the assessee proves that the failure to return the correct income did not arise from any fraud or any gross or wilful neglect on his part. If the assessee proves that there was no fraud or any gross or wilful neglect on his part in returning the correct income, then in that situation, no presumption of concealment would arise. Presumption or fiction of concealment would arise only in the situation when he fails to prove that there was no fraud or any gross or any wilful neglect in returning the correct income. How and in what manner the assessee proves and the standard of proof required for the purpose would depend upon the facts and circumstances of each case. Here, we have simply analysed the above provision. We shall be dealing with the law enunciated by the High Courts and the Supreme Court with regard to the aforesaid provision.
12. We now proceed to consider the questions referred to us for our opinion. The first question raises the issue as to whether the Income-tax Officer is entitled to take into consideration the additional fact noticed by the Appellate Assistant Commissioner in connection with the imposition of penalty, when the penalty proceedings were initiated solely on the basis that the gross profit shown was very low and lump sum addition of Rs. 12,000 was made in the trading account, which would bring the gross profit rate to 4% as in the past. It may be stated that the account version was not relied upon by the Income-tax Officer as the account was not supported by stock tally. The gross profit in the past was 4%, and so, on that basis, a lump sum addition was made and gross profit was brought to 4%. The penalty proceedings were thus initiated on the sole basis of low gross profit. In appeal as well, the trading additions were confirmed on the basis of the finding that the assessee had net accretion to his capital to the extent of Rs. 13,326.
13. On behalf of the Revenue, Mr. C. R. Mehta vehemently urged that the additional fact of capital accretion found by the learned Appellate Assistant Commissioner could be legitimately noticed by the Income-tax Officer in order to support the basis of initiation of penalty proceedings. The basis was no doubt addition in the trading account or the determination of the estimated gross profit rate. In order to establish that the assessee had shown very low gross profit, during penalty proceedings, evidence can be collected by the Income-tax Officer that in fact the gross profit shown is low and as such the assessee has concealed the particulars of his income or has furnished inaccurate particulars of income. What theIncome-tax Officer has done in this case is that he had taken support from the fact and the finding arrived at by the Appellate Assistant Commissioner to establish that the assessee had under-rated his profits. When there had been net accretion to the capital of the assessee, it would mean that this was only possible that the capital accretion had taken place on account of higher profits and in this manner, there had been concealment of the particulars of income.
14. Reliance was placed by Shri Mehta on Rahmat Development & Engineering Corporation v. CIT : [1981]130ITR602(Cal) . In that case, the assessee constructed a building and showed the cost of construction in the accounts. According to the books of the assessee, the amount spent appeared to be Rs. 14,14,410. The departmental valuer estimated the cost as Rs. 23,58,500. The Income-tax Officer added the difference between the two amounts in different years under Section 69 and initiated penalty proceedings. The Inspecting Assistant Commissioner observed that there had been gross and wilful neglect to disclose the correct expenditure and imposed penalty. In the quantum appeal, the Tribunal reduced the estimate of the cost of construction to Rs. 20,57,756 but upheld the order of penalty in its entirety. A contention was raised that the Income-tax Officer had initiated penalty proceedings on the ground that there had been concealment of income but the Inspecting Assistant Commissioner had imposed the penalty on the ground that there had been furnishing of inaccurate particulars of income. It was observed that the expressions used in Section 271(1)(c) are in disjunctive terms and these are two separate offences, the commission of one does not exclude the possibility of the commission of the other. The two charges can and very often do subsist together. It was held that the Inspecting Assistant Commissioner upheld both the charges and the assessee had been given sufficient opportunity to refute both the charges. The facts showed that the inaccurate particulars of investment, which were furnished, was the modus operandi to conceal the true and real income of the assessee. The imposition was, therefore, valid.
15. Mr. Mehta submitted that the accretion to the capital was the modus operandi of the assessee in the present case to conceal the real gross profit and the real income. The capital accretion discovered by the Appellate Assistant Commissioner is a piece of evidence to prove the higher rate of gross profit and higher income received by the assessee.
16. With regard to this authority, Shri R. Balia, learned counsel for the assessee, submitted that the basis of initiation of penalty proceedings was concealment of the real cost of construction, which was maintained in the quantum appeal as well, though the amount was reduced to some extent, so, the basis of initiation of penalty proceedings remained the same.Besides that, the difference between the book and valuer's estimate was treated to be income under Section 69. It was taken to be the deemed income of the assessee, and so, on that basis, it can be said that there was non-disclosure of income and so, the imposition of penalty was held to be valid. Mr. Balia submitted that this authority thus is distinguishable and does not in any way help the Revenue. It is true that in this case, the Income-tax Officer had pressed into service Section 69 of the Act. The effect of Section 69 is that if there is an unexplained investment or unentered investment, then the value of such investment would be deemed to have been earned by the assessee and would be the income of the assessee for the financial year. The moment Section 69 is attracted, it becomes by the fiction of law, the income of the assessee. If it becomes the income of the assessee and if that income is not returned, then there is a non-disclosure of income. Sabyasachi Mukharji J., as he then was, after considering the observations of the Supreme Court in the case of CIT v. Anwar Ali : [1970]76ITR696(SC) , observed that non-disclosure of income might not automatically be considered to be a concealment. When their Lordships considered that aspect, on merits they found that the Tribunal in view of the Explanation was justified in upholding the penalty. It was observed that there was an unexplained investment, its valuation was quantified in the assessment proceedings, the assessee was given an opportunity, the assessee gave the explanation, which was not only found to be unsatisfactory but was also found to be incorrect and false. It is true that this case turned on its own facts.
17. Reliance was further placed by Shri Mehta on Kikabhai Abdulali Rangawala v. CIT [1983] 144 ITR 465. In that case, the Income-tax Officer found that there were certain cash credits in the closed accounts and the assessee was asked to explain them. The assessee admitted that there were some unvouched sales which were not accounted for in the books of account and which were shown as advances from certain parties and the assessee filed revised returns. The Income-tax Officer held that the undisclosed sales should be treated as relating to cement trading account and not the general trading account and made additions to both the trading accounts. In the quantum appeal, the Appellate Assistant Commissioner held that the suppressed sales were in the general trading account. The Inspecting Assistant Commissioner imposed penalty on both the charges of concealment of particulars of income and of furnishing inaccurate particulars of income. The Tribunal, in appeal against the order of the Inspecting Assistant Commissioner, held that there was suppression of sales and income but the Tribunal reduced the amount of penalty for the assessment year 1966-67 but upheld the penalty for the subsequent year. The Bombay High Court held that (headnote):
'The assessee had admitted that there had been suppression of sales. The only explanation which the assessee could give was as to whether these suppressions were made deliberately or as a result of inadvertent errors in its books of account. In respect of this, it made no difference whatsoever as to whether the suppressed sales were alleged to be in the cement trading account or in the general trading account. Both these accounts were covered under the head of income from business or profession. It could not, therefore, be said that the assessee did not have a reasonable opportunity to show cause against the levy of penalty or that the whole basis on which the notices for the levy of penalty were issued was altered by the appellate orders. The Tribunal was justified in law in sustaining the levy of penalty for the assessment years 1966-67 and 1967-68.'
18. As regards this case, Mr. Balia submitted that the basis of of initiation of penalty proceedings was suppression of sales. It was not material whether it was in the cement trading account or in the general trading account. Both the accounts were covered under the head 'Income from business'. There was no change of basis on which the notices for the levy of penalty were issued. He submitted that in the instant case, the basis or the ground of initiation of penalty proceedings is changed. No capital accretion was discovered by the Income-tax Officer and so, the capital accretion could not be made the basis for penalty. We shall be examining this aspect while dealing with the case or with the stance taken by the assessee on question No. 1.
19. In Monoranjan Mukherjee v. CIT : [1981]132ITR712(Cal) , cited by Shri Mehta, the Income-tax Officer discovered suppression of opening stock and of purchases made during the year 1966-67 and added a sum of Rs. 38,464 shown as proceeds realised by sale of goods as the income of the assessee from undisclosed sources. In the quantum appeal, the addition was reduced to Rs. 31,464 which was confirmed by the Tribunal. But the Tribunal held that it should be charged under the head 'Business' and not under 'Other sources' as was done by the Income-tax Officer. The Inspecting Assistant Commissioner imposed penalty. A contention was raised before the Tribunal that non-disclosure of income was considered under the head 'Other sources' by the subordinate tax authorities, whereas it is so treated by the Tribunal under the head 'Business', and so, the basis of the penalty order ceased to exist and the penalty order became unsustainable. This contention was rejected by the Tribunal. It was held by the Calcutta High Court in that case that the assessee had concealed its income and the charge of concealment was upheld by the Tribunal. The basis for the initiation of penalty proceedings had not beenaltered by the subsequent finding of the Tribunal in the quantum appeal. The imposition of penalty was held to be valid. It may be stated that the change of head of Income has not been treated to be change or alteration of the basis or ground of initiation of the penalty proceedings. The ground or basis of initiation of penalty proceedings was the ground of concealment of particulars of income.
20. In CIT v. K.T. Thomas : [1980]123ITR31(Ker) , relied upon by Shri Mehta, the Income-tax Officer found that the gross profit returned was 9.7% less than the earlier year. On an examination of accounts, he found that there was heavy inflation of expenses under different heads, that certain expenses debited had not been really incurred and that there were a number of credits in the capital account of the assessee, which were not satisfactorily explained. So, he rejected the books of account and estimated a gross profit rate of 17.5 per cent, and made an addition of Rs. 1,22,000. On appeal, the Appellate Assistant Commissioner made further enquiries and obtained certain statements from rubber estate owners and others, which strengthened the additions made by the Income-tax Officer and he confirmed the additions. In penalty proceedings, the Inspecting Assistant Commissioner referred to the findings of the Income-tax Officer and to the materials gathered by the Appellate Assistant Commissioner and imposed a penalty of Rs. 2,57,826. There were appeals to the Appellate Tribunal. In the quantum appeal, the Tribunal reduced the additions made to the trading account as well as the cash credit. With regard to the penalty proceedings, the Tribunal held that the addition made to the trading account was merely an estimate of gross profit rate and no penalty could be imposed on such materials. The Tribunal was also of the view that the evidence led before the Appellate Assistant Commissioner could not be used by the Inspecting Assistant Commissioner for the levy of penalty, and bereft of the evidence gathered by the Appellate Assistant Commissioner, there was no material to sustain the levy of a penalty. On a reference, at the instance of the Commissioner, the Kerala High Court held that the penalty was rightly imposed by the Inspecting Assistant Commissioner and it was also held that the Inspecting Assistant Commissioner was justified in looking into the materials before the Income-tax Officer as well as before the Appellate Assistant Commissioner. It was observed that Section 271(1)(c) appears to be quite wide in scope. The Tribunal had based its order on the decision of the Gujarat High Court in CIT v. Lakhdhir Lalji : [1972]85ITR77(Guj) but that case was distinguished. In that case, the Gujarat High Court held that the penalty proceedings had commenced against the assessee on a particular footing, i.e., concealment of income. The Income-tax Officer added a sum of Rs. 58,000 realised by the sale of 1,383 bags of garlic. The final conclusion for levying the penaltywas based on a different footing, i.e., on the footing of furnishing inaccurate particulars of income. The High Court also observed that it could not be said that the assessee has been given a reasonable opportunity of being heard before the order imposing the penalty was passed. The very basis of penalty proceedings had disappeared when the Appellate Assistant Commissioner held that there was no suppression of sales by the assessee. It wouldappear that in Lakhdhir Lalji's case : [1972]85ITR77(Guj) , the very basis on which the penalty proceedings were founded had disappeared and levy of penalty was then based on a different footing for which reasonable opportunity of hearing was not afforded to the assessee. Thus, on the facts of that case, it was held that the Appellate Assistant Commissioner had no jurisdiction to impose penalty for concealment of income and this conclusion of the Tribunal was correct. Mr. Balia submitted that the basis of initiation of penalty proceedings had not changed in the Kerala case (CIT v. Thomas : [1980]123ITR31(Ker) ). We shall see whether the basis has changed in the case in hand.
21. In CIT v. Anwar Ali : [1970]76ITR696(SC) , their Lordships of the Supreme Court have held that the findings given in the assessment proceedings though not conclusive, however, constitute good evidence. Reliance was placed by Mr. Mehta on these observations. That case lays down the law relating to burden of proof in connection with the imposition of penalty under Section 28(1)(c) of the Income-tax Act, 1922 analogous to Section 271(1)(c) of the present Act.
22. Mr. Balia, appearing on behalf of the assessee, on the other hand, with all emphasis submitted that under the scheme of Section 271(1)(c), the Income-tax Officer and the Appellate Assistant Commissioner have mutually exclusive jurisdiction to initiate penalty proceedings on the basis of what they themselves discover. When the Appellate Assistant Commissioner has not chosen to initiate the penalty proceedings on the basis of capital accretion, the Income-tax Officer could not have proceeded to impose penalty on the footing of capital accretion discovered by the Appellate Assistant Commissioner. The penalty order is not sustainable if the finding of the Appellate Assistant Commissioner regarding capital accretion is excluded from consideration. He urged that the Appellate Assistant Commissioner's finding as to the capital accretion is not made use of by way of evidence but is the basis for imposition of penalty. Reliance was placed by him on CIT v. Shadiram Balmukand : [1972]84ITR183(All) . In that case, the undisclosed income was included in the assessment by the Income-tax Officer, which was increased by the Appellate Assistant Commissioner. The Income-tax Officer imposed the penalty taking into account the income discovered by the Appellate Assistant Commissioner as undisclosed income.The Tribunal, in the appeal against the order imposing the penalty, held that the Income-tax Officer did not have the jurisdiction to take into account the amount added by the Appellate Assistant Commissioner and the Tribunal quashed the entire penalty order as the same could not be treated as severable. On a reference, Pathak J., as he then was, speaking for the court, held that the Tribunal validly cancelled the levy of penalty. It was observed in that case as under (at pp. 185 and 186) :
'It seems to us clear that the provision contemplates distinct jurisdictions in the Income-tax Officer, the Appellate Assistant Commissioner and the Appellate Tribunal in relation to the proceedings pending before those respective authorities so far as the imposition of penalty is concerned. It will be apparent from the language employed in the sub-section that the authority imposing the penalty can do so only upon being satisfied that a person has concealed the particulars of his income or deliberately furnished inaccurate particulars of such income, and that satisfaction must be in the course of proceedings under the Act. Those proceedings must be proceedings before that authority, and they must be proceedings necessarily under some provision of the Act other than Section 28. In the instant case, the Appellate Assistant Commissioner found cash credits in the amount of Rs. 46,601 to represent income from undisclosed sources. If a penalty could be imposed in respect of that amount, it lay within the jurisdiction of the Appellate Assistant Commissioner. The amounts were discovered in the course of the appellate proceeding before him. They were discovered by him. It was for him then to impose the penalty if he was satisfied that the assessee had concealed the particulars of his income or had deliberately furnished inaccurate particulars of it. The Income-tax Officer was seized of the assessment proceeding, and it was not during the assessment proceeding that the sum of Rs. 46,601 was discovered. We are satisfied that the Tribunal is right in holding that the penalty order was bad in law.'
23. In CIT v. Dwarka Prasad Subhash Chandra : [1974]94ITR154(All) , the Income-tax Officer discovered that the assessee had not disclosed his true income and he added Rs. 66,457 to the total income returned by the assessee. Penalty proceedings were initiated. The Appellate Assistant Commissioner did not permit withdrawal of the appeal and after notice to the assessee, enhanced the income as assessed by the Income-tax Officer by a further sum of Rs. 21,560. The quantum appeal before the Tribunal was dismissed. The penalty case was referred to the Inspecting Assistant Commissioner under Section 274(2) of the Act. The Inspecting Assistant Commissioner of Income-tax, while examining the penalty, took into consideration not only the income found by the Income-tax Officer to havebeen concealed by the assessee but also the amount of income enhanced by the Appellate Assistant Commissioner. The Tribunal reduced the penalty to Rs. 10,000 confining it to the concealed income discovered by the Income-tax Officer. The Tribunal was of the view that the Inspecting Assistant Commissioner had no jurisdiction to impose a penalty in respect of the concealed income discovered by the Appellate Assistant Commissioner. The question then was, whether in disposing of the case, the Inspecting Assistant Commissioner had the jurisdiction to take into account the total income as enhanced by the Appellate Assistant Commissioner subsequently and to impose a penalty on that basis. It was observed in that case (at pp. 158 and 159):
'The Appellate Assistant Commissioner and the Inspecting Assistant Commissioner are vested with mutually exclusive jurisdiction in the matter of penalties. The Inspecting Assistant Commissioner has jurisdiction to impose penalty in respect of concealed income discovered by the Income-tax Officer in a proceeding before him and the Appellate Assistant Commissioner has jurisdiction to impose penalty in respect of concealed income discovered by him in a proceeding before him.'
24. It may be stated that in both the cases of the Allahabad High Court, the authority imposing the penalty took into consideration the income enhanced by the Appellate Assistant Commissioner. On the analysis and interpretation of Section 271(1), it has been held that the authorities have mutually exclusive jurisdiction in the matter of penalties. The authorities have to satisfy themselves in the course of any proceedings before them that the assessee has concealed the particulars of income or furnished inaccurate particulars of income and when the order of penalty is not severable, then in that situation, the whole order must go. In our opinion, both these cases are distinguishable and have no application to the present case. What these cases lay down is that for any income enhanced by the Appellate Assistant Commissioner, penalty proceedings can be initiated by the Appellate Assistant Commissioner alone and that enhanced income cannot be taken notice of by the Income-tax Officer or the Inspecting Assistant Commissioner for imposition of penalty. These cases do not lay down that in connection with the under-rating of gross profits, if anything is discovered affecting the finding regarding the estimated gross profits, then that material discovered by the Appellate Assistant Commissioner, cannot be taken note of by the Income-tax Officer while imposing penalty.
25. Mr. R. Balia farther relied on a decision of the Calcutta High Court in CIT v. Ananda Bazar Patrika P. Ltd. : [1979]116ITR416(Cal) . This case also lays down the same principle as enunciated in the aboveAllahabad decisions. In this case as well, the Income-tax Officer took into consideration the assessment as enhanced by the Appellate Assistant Commissioner and proceeded on the basis that the income concealed was as found by the Appellate Assistant Commissioner. The Calcutta High Court followed the Allahabad High Court decision as well as the Gujarat High Court decision and observed that it was no longer open to the Income-tax Officer to proceed to impose penalty on the assessee on the basis of the finding of the Appellate Assistant Commissioner and with regard to the Allahabad and Gujarat High Court decisions, it was observed that 'these decisions have held that when the original basis of initiation of the penalty proceeding is altered or modified by the appellate authority, the authority initiating the penalty proceedings has no jurisdiction thereafter to proceed on the basis of the findings of the appellate authority (at p. 424).'
26. Mr. R. Balia placed reliance on the above observations and contended that in the present case, the Income-tax Officer had no jurisdiction to proceed on the basis of the finding of the Appellate Assistant Commissioner. It may be mentioned that these observations have no application to the facts of the present case. We may state that the Appellate Assistant Commissioner, after considering that there was a capital accretion has simply confirmed the trading additions stating that from this point of view also, the trading addition is fully justified. The original basis of initiation of penalty proceedings was not altered or modified by the Income-tax Officer. The Income-tax Officer has simply taken support from the fact of capital accretion found by the Appellate Assistant Commissioner to arrive at the conclusion that the assessee had not fully disclosed the trading profits from his business.
27. Reliance has further been placed by Mr. R. Balia on a decision of the Madhya Pradesh High Court in Addl. CIT v. Nihalchand Badrilal : [1982]135ITR519(MP) . In that case, the assessee filed a return on June 30, 1965, disclosing a loss of Rs. 18,000. He filed a revised return disclosing an income of Rs. 84,282, which was further revised to Rs. 74,282. He was, however, assessed on a total income of Rs. 98,100. Penalty proceedings were initiated by the Income-tax Officer and he referred the matter to the Inspecting Assistant Commissioner. The Inspecting Assistant Commissioner came to the conclusion that no penalty could be imposed on the assessee on the charge of concealment or of furnishing inaccurate particulars of its income, so far as the addition of Rs. 11,000 was concerned. However, he found him guilty of concealment and imposed a penalty of Rs. 19,500. The penalty proceedings were initiated by the Income-tax Officer because he added the cash credit amounting to Rs. 11,000 to the income of the assessee as income from undisclosed sources. The Tribunal held that theInspecting Assistant Commissioner having found that no penalty could be imposed on this addition, had no jurisdiction to enlarge the scope of the penalty proceedings by referring to the original return disclosing loss. Op-the facts of that case, the Madhya Pradesh High Court observed that the Inspecting Assistant Commissioner had no jurisdiction to impose a penalty on a ground different from that on which the Income-tax Officer had started the penalty proceedings nor can he take into account any further concealment discovered by himself. It may be stated that the cash credit basis taken into account by the Income-tax Officer was excluded from consideration by the Inspecting Assistant Commissioner, and so, it was observed that the Inspecting Assistant Commissioner had no jurisdiction to impose a penalty on a different ground.
28. In the present case, the basis or the ground or the footing for imposition of penalty is not changed. The basis was concealment of income by showing low rate of gross profit and the fact of capital accretion was pressed into service to support the finding that there has been concealment of income by showing a low rate of gross profit. The Income-tax Officer clearly stated that any accretion to the wealth has to be necessarily the result of good profits from the business which the assessee has not fully disclosed to the Department. Thus, the basis or the ground is not in any way altered and only evidence has been collected to support the finding that the real profits have been concealed.
29. In the light of the above discussion, we are of the opinion that in the present case, the Income-tax Officer was entitled to take into consideration the additional fact noticed by the Appellate Assistant Commissioner in the quantum appeal that there was 'unexplained' net accretion to the assessee's capital amounting to Rs. 13,326. However, the Income-tax Officer could take this into consideration, only after notice thereof to the assessee and after affording reasonable opportunity of being heard without which such an additional fact could not be taken notice of. The Tribunal was, therefore, not right in holding that the Income-tax Officer was not entitled to take into consideration the additional fact of unexplained capital accretion noticed by the Appellate Assistant Commissioner in the quantum appeal. We, therefore, decide question No. 1 in the negative, in favour of the Revenue and against the assessee.
30. Now, we take up questions Nos. 2 and 3. These questions to some extent overlap, and so, it would be proper that they may be considered together. Question No. 2 relates to the finding of the Tribunal on the question as to whether there was any fraud or gross or wilful neglect on the part of the assessee in not returning the correct income. The question framed shows that the finding arrived at by the Tribunal is based on noevidence, and so, the finding is vitiated. This consideration will also fall for determination of these questions as to whether the Tribunal was right in proceeding to decide the matter without taking on record the explana-tion submitted by the assessee by its letter dated July 13, 1973, in reply to the letter of the Income-tax Officer dated July 3, 1973. Before entering into the consideration of the arguments on these questions, it would be proper to consider the case law relating to the burden of proof arising from the Explanation and how the matter has been examined and viewed in them.
31. Reference may be made to Anwar Ali's case : [1970]76ITR696(SC) . In that case, it has been observed as under (at pages 700 and 701):
'The next question is that when proceedings under Section 28 are penal in character what would be the nature of the burden upon the Department for establishing that the assessee is liable to payment of penalty. As has been rightly observed by Chagla C. J. in CTT v. Gokuldas Harivallabhdas : [1958]34ITR98(Bom) , the gist of the offence under Section 28(1)(c) is that the assessee has concealed the particulars of his income or deliberately furnished inaccurate particulars of such income and, therefore, the Department must establish that the receipt of the amount in dispute constitutes income of the assessee. If there is no evidence on the record except the explanation given by the assessee, which explanation has been found to be false, it does not follow that the receipt constitutes his taxable income.
Another point is whether a finding given in the assessment proceedings that a particular receipt is income after rejecting the explanation given by the assessee as false would, prima facie, be sufficient for establishing, in proceedings under Section 28, that the disputed amount was the assessee's income. It must be remembered that the proceedings under Section 28 are of a penal nature and 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. It cannot be said that the finding given in the assessment proceedings for determining or computing the tax is conclusive. However, it is good evidence. Before penalty can be imposed, the entirety of circumstances must reasonably 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.'
32. From the above observations, it would appear that the proceedings are of penal nature. Even when the explanation is found to be false, itdoes not follow that the receipt constitutes the taxable income of theassessee. The Department has to prove that the particular amount is arevenue receipt.
33. Reference may be made to a Full Bench decision of the Andhra Pradesh High Court in CIT v. H. Abdul Bakshi & Bros. : [1986]160ITR94(AP) . In the matter of burden of proof, taking into consideration the explanation, it was observed in this case as under (headnote):
'Once the income returned is less than 80% of the assessed income, the Explanation to Section 271(1)(c) of the Income-tax Act, 1961, 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.
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 the 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 presumption stands rebutted and the burden shifts to the Revenue to establish that the assessee concealed income. The assessee can be said to have discharged the initial burden by a 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.
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. 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 the limited effect of discharging the initial burden.'
34. On the material on record, it was found that the penalty was not sustainable and it was not found that the assessee failed to prove that the failure to return the correct income arose from any fraud or gross or wilful neglect on his part.
35. Mr. R. Balia further referred to a decision of the Punjab & Haryana High Court in CIT v. Metal Products of India . In this case, it was observed that strict rules of evidence are not applicable to income-tax proceedings and the word 'evidence' has to be understood in the generic sense and not in the arrested sense so as to be either oral or documentary evidence or both. In that case, the income returned was less than the income assessed. The difference arose due to rejection of books of account and addition of estimated income. The assessee asserted that he had not concealed his income. The Tribunal took into account the assessee's assertion and production of books of account. The High Court held that cancellation of penalty was justified.
36. Reliance was further placed by Mr. Balia on CIT v. Devandas Perwmal & Co. : [1983]140ITR943(Bom) . It was observed that the Explanation introduced an artificial rule of evidence by creating a fiction regarding the concealment and the burden was placed on the assessee to prove that the failure to return the correct income did not arise from any fraud or gross or wilful neglect on his part. In that case, net profits were estimated at higher figure. A penalty was levied. The assessee had maintained books of account in such manner as was practicable. There was no suppression of sales or inflation of purchases. It was found that from mere estimates of profit, it does not follow that there was failure to return the correct income due to fraud or gross or wilful neglect. On facts, it was found that the presumption raised by the Explanation stood rebutted,
37. In CIT v. Drapco Electric Corporation : [1980]122ITR341(Guj) , it was observed that the Explanation enacts a rule of evidence and the Explanation raises only a rebuttable presumption. It provides that unless the assessee proves that the failure to return the correct income did not arise from any fraud or any gross or wilful neglect on his part, he would be deemed to have concealed the particulars of income. It was observed in that case that the penal default was conscious concealment and all that the Explanation does is to enact a rule of evidence whereunder the presumption as to the conscious concealment can be rebutted by evidence led by the assessee.
38. In CIT v. Khoday Eswarsa and Sons : [1972]83ITR369(SC) , their Lordships of the Supreme Court referred to the decision in Anwar Ali's case : [1970]76ITR696(SC) and observed that the conclusions drawn by the AppellateTribunal were all findings of fact recorded against the Department and on those findings, no question of law arose for reference.
39. Mr. Balia further referred to a decision of the Patna High Court in CIT v. Patna Timber Works : [1977]106ITR452(Patna) . The principle of burden of proof was considered in this case. It was observed that for proving absence of fraud or gross or wilful neglect ordinarily and generally, there cannot be any direct evidence to prove such a fact. The assesses merely has to place materials of the primary facts or the circumstances, which in all reasonable probability would show that he was nut guilty of any fraud or gross or wilful neglect. In that case, the gross profit was shown as 13 per cent. The Income -tax Officer estimated the gross profit at 25 per cent. The Income-tax Officer did not reject the accounts as being incorrect or incomplete and he did not find that it was possible for the assessee in the nature of its business to maintain a day to day manufacturing account or a stock account nor did he find any defect in the accounts maintained by the assessee. It was also observed that, on the facts of the case, the denial of the assessee at the time of argument before the Inspecting Assistant Commissioner was sufficient and it was necessary for the Department to place further materials to show that over and above the materials in the assessment order, there were facts and circumstances on which the failure of the assessee to return the correct income could be attributed to its act of fraud or gross or wilful neglect.
40. Reliance was further placed by Mr. Balia on the decision of the Allahabad High Court in Addl. CIT v. Horilal Kunj Beharilal [1977] 106 ITR 720. In that case, the books of account were rejected and the Income-tax Officer made additions to the income by increasing the rate of profit. There was no evidence that profit was added in the income of the assessee. The assessee was not found guilty of concealment and it was held that the finding recorded by the Tribunal is a finding of fact calling for no interference.
41. Reference has also been made to CIT v. S. P. Bhatt : [1974]97ITR440(Guj) . P. N. Bhagwati C.J., as he then was, observed as under (head-note) :
'The condition which attracts the applicability of Section 271(1)(c) of the Act is that the income-tax authority should be satisfied in the course of any proceeding under the Act that any person had concealed the particulars of his income or furnished inaccurate particulars of such income. The Explanation to that provision, which was introduced by the Finance Act, 1964, provides that where the total income returned is less than eighty per cent. of the total income assessed, the assessee shall, unless he proves that the failure to return the correct income did not arise from anyfraud 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 within the meaning of Section 271(1)(c). The Explanation creates a legal fiction if the condition of its applicability is satisfied. The condition is an objective condition, namely, that the total income returned by the assessee should be less than eighty per cent. of the total income assessed, and the assessee is straightaway brought within the penal provision in Section 271(1)(c). But this legal fiction can be displaced if the assessee proves--and this burden is upon him--that the failure to return the correct income did not arise from any fraud or gross or wilful neglect on his part. This burden is not of the same nature which rests on the prosecution in a criminal case where the prosecution has to establish the guilt of the accused beyond reasonable doubt nor is it of the same nature as the burden which lies upon the revenue in establishing that the assessee has concealed the particulars of his income or furnished inaccurate particulars of such income. It is a burden akin to that in a civil case where the determination is made upon preponderance of probabilities. It is also not necessary that any positive material should be produced by the assessee in order to discharge this burden which rests upon him. The assessee may claim to have discharged the burden by relying on the material which is on record in the penalty proceedings, irrespective of whether it is produced by him or by the Revenue. If it can be said on a preponderance of probabilities that the failure to return the total assessed income has not arisen on account of any fraud or any gross or wilful neglect on the part of the assessee, the legal fiction enacted in the Explanation cannot arise and the Revenue must fail in its attempt to impose penalty upon the assessee.'
42. In that case, the Tribunal reached the finding that there was no fraud or gross or wilful neglect on the part of the assessee. The Income-tax Officer did not accept the figure of profit as no quantitative stock account was maintained, a majority of sales was not supported by vouchers and the gross profit disclosed in the books of account appeared to be low. The Income-tax Officer did not find any entries to be false or omission of any items of purchases or sales. It was further observed that there is nothing in the law which says that the books of account shall be maintained by an assessee on pain of penalty and failure to maintain books of account cannot be said to constitute neglect. There was no obligation on the assessee to maintain any verificatory records. In the absence thereof, the Income-tax Officer did not accept the figure of profit. But from that, it does not follow that the accounts maintained by the assessee were false and incorrect or that the income returned by the assessee was not correct ncome. It must follow by necessary implication that the failure to returnthe total assessed income was not on account of any fraud or gross or wilful neglect on the part of the assessee.
43. Some more decisions were cited, viz., Addl. CIT v. Chatur Singh Taragi : [1978]111ITR849(All) , Addl. CIT v. Thahrayamal Balchand , Addl. CIT v. Gem Palace , CIT v. Narang & Co. : [1975]98ITR462(Delhi) , CIT v. Prafulla Kumar Mallik : [1976]104ITR648(Orissa) and CIT v. M. S. T. V. Neethimohan & Company : [1977]107ITR585(Mad) .
44. Relying on the case law, Mr. Balia submitted that the Appellate Tribunal has based its decision on the facts and circumstances appearing on the record of the case. The Tribunal considered that the authorities below have not particularised any entries or items in the books of account to be false and unreliable. This circumstance has also gone into consideration of the Tribunal that the Appellate Assistant Commissioner himself has not proceeded to treat the alleged accretion as an income of the assessee and the penalty proceedings were not initiated by him. The Appellate Assistant Commissioner simply confirmed the trading addition on the ground of alleged accretion in the capital. This factor was also taken note of by the Tribunal that the stand of the assessee is emphatic denial of concealment which appears to have weighed with the Tribunal. On consideration of all these circumstances, the Tribunal found that there was preponderance of probability in favour of the assessee and it cannot be said that the failure to return the correct income was due to any fraud or gross or wilful neglect on the part of the assessee, Mr. Balia vehemently submitted that by no stretch of imagination, it can be said that the finding arrived at by the Tribunal was based on no evidence. A different finding could have been reached but that is no reason for interfering with the finding of the Tribunal. The finding cannot be said to be perverse or based on no evidence and the finding being a finding of fact, he urged that no question of law, therefore, arises. Mr. Balia also pointed out that the assessee did submit his explanation but the explanation was not on record, and even the letter of the Income-tax Officer is not on record. In the absence of the copy of the letter of the Income-tax Officer, it is also not known what was asked for by the Income-tax Officer. In the absence of the letter of the Income-tax Officer and its reply, the Tribunal was right in proceeding to decide the matter on the basis of the material on record. The Tribunal could have asked the parties as to what was asked for and what reply was given and thereby reconstructed the record but it was open to the Tribunal to proceed in their absence when the copies thereof were not produced by the parties despite opportunity having been given to them.
45. Mr. Mehta, appearing for the Revenue, submitted that the Income-tax Officer clearly observed that the assessee could not give any explanationwith regard to the accretion to the wealth. Similarly, the Appellate Assistant Commissioner also stated that the appellant has not been able to establish that the calculation regarding the accretion made in the appellate order was incorrect in any way. The Tribunal completely ignored what was recorded by the Income-tax Officer and the Appellate Assistant Commissioner in the penalty proceedings. He submitted that there was no material or evidence adduced by the assessee to show that there had been no capital accretion. The finding of the Tribunal that there was no fraud or gross or wilful neglect on the part of the assessee is vitiated as not based on evidence and the assessee has failed to rebut the presumption. Reference was made by Mr. Mehta to Sree Meenakshi Mills Ltd. v. CIT : [1957]31ITR28(SC) , CIT v. Biju Patnaik : [1986]160ITR674(SC) and Vimal-chand Bhimsen v. CIT : [1986]159ITR941(MP) .
46. In Sree Meenakshi Mitts Ltd.'s case : [1957]31ITR28(SC) , the law has been propounded as to when the finding would raise a pure question of law or a mixed question of law and fact or a question of fact, but open to attack being erroneous in law when there is no evidence to support it or if it is perverse. It has also been laid down that when the finding is one of lact inferred from the other basic facts, it will not alter its character as one of fact.
47. In Esthuri Aswathiah v. CIT [1967] 66 ITR 478, their Lordships observed that conclusive proof of the claim is not predicated ; the Tribunal may act upon probabilities and presumptions, may supply gaps in the evidence which may not, on account of delay or the nature of the transactions or for other reasons, be supplied from independent sources. But the Tribunal cannot make arbitrary decisions ; it cannot found its judgment on conjectures, surmises or speculation. Between the claims of the public revenue and of the taxpayers, the Tribunal must maintain a judicial balance. In that case, the order of the Tribunal was not sustained as it recorded no reasons in support of the estimates of unaccounted income. The decision of the High Court was affirmed. The High Court, on a reference, held that the judgment of the Tribunal was based on no reasoning and was, on that account, speculative.
48. Having given our anxious consideration to the rival contentions advanced before us and to the law cited by both the sides, we are of the view that the Tribunal proceeded to take into account various circumstances referred to above and had reached the finding after considering those circumstances. It cannot be said that the finding reached by the Tribunal was based on no evidence. All material facts and circumstances positive and negative, constitute evidence and on consideration of the positive and negative circumstances, the finding can be arrived at afterweighing the probabilities. Such a finding, in our opinion, cannot be said to be a finding which is vitiated on any count, i.e., such a finding cannot be said to be perverse or based on no evidence. It in true that this course was also open to the Tribunal and the Tribunal should have asked the assessee to submit his explanation with respect to capital accretion considered by the authorities below, but failure to do so by the Tribunal would not in any way affect the jurisdiction of the Tribunal to proceed to decide the appeal on the basis of the material on record. The finding of the Tribunal, therefore, cannot be said to be based on no evidence and the finding that there has been no concealment of income is a finding of fact and it does not raise any question of law and the Tribunal was right in cancelling the penalty imposed on the assessee. Our answer to question No. 2 is in the negative, in favour of the assessee and against the Revenue and our answer to question No. 3 is in the affirmative, in favour of the assessee and against the Revenue.
49. Copy of the order shall be sent under the seal of this court and the signature of the Registrar to the Appellate Tribunal.