R.K Gulati, J.:— This is a reference under section 256(2), of the Income-tax Act, 1961.
2. The assessee, M/s. Banaras Textorium, Varanasi, is a firm engaged in a business in Banarasi goods. In the assessment year 1972-73, the assessee made a claim for deduction of Rs. 26,439, being an amount of bad debt, out of its total taxable income. This claim was disallowed by the Income-tax Officer and the amount of Rs. 26,439 was added to the income of the assessee. Simultaneously, while completing the assessment order, the Income-tax Officer, being satisfied that the assessee had furnished inaccurate particulars of its income, initiated penalty proceedings under section 271(I)(c) of the Act. As the minimum penalty imposable exceeded a sum of Rs. 25,000, the Income-tax Officer referred the matter for disposal to the Inspecting Assistant Commissioner in terms of section 274(2), as it stood at the relevant time. The Inspecting Assistant Commissioner imposed a penalty in the sum of Rs. 26,500 which was sustained in appeal by the Income-tax Appellate Tribunal. The Income-tax Appellate Tribunal, Allahabad Bench, has referred the following two questions of law for the opinion of this court:
“1. Whether, on the facts and in the circumstances of the case, the Tribunal was right in upholding the imposition of penalty on the basis of the finding arrived by it in the quantum appeal?
2. Whether there was any material before the Tribunal to hold that the assessee was guilty of concealment and of furnishing inaccurate particulars of its income?”
3. Before considering the rival contentions, we may set out in brief, facts concerning the disallowance of the assessee's claim for bad debt. The assessee claimed that it had sold saris worth Rs. 35,861 during the previous year, relevant to the assessment year in question, to one Abdul Ghani, out of which cash sales were Rs. 9,422 and balance sales amounting to Rs. 26,439 were on credit. Abdul Ghani, in turn, sold those goods to two parties, against two post-dated cheques. These cheques were delivered to the assessee for collection which in due course were dishonoured. As the financial position of Abdul Ghani was very bad, the assessee wrote off the amount due from Abdul Ghani and claimed it as a revenue expenditure in its assessment for the year in dispute. On scrutiny of the claim, the Income-tax Officer, inter alia, found that the transactions with Abdul Ghani were fictitious and interpolated in the stock accounts subsequently. For this finding, the Income-tax Officer relied on the following circumstances: (i) the assessee had for the first time sold goods to Abdul Ghani whose bad financial position was very well-known to the assessee, (ii) it was impossible to think that the assessee with its past business experience could ever trust Abdul Ghani for such heavy transactions which were beyond the reach of Abdul Ghani, (iii) the parties to whom Abdul Ghani had sold the goods were strangers to the assessee, and (iv) invariably, in respect of credit sales, invoices were issued and signatures were obtained from the customers in token of goods being supplied to them, bui in the case of Abdul Ghani, the assessee did not issue any sale invoice or challan and did not obtain signatures of Abdul Ghani anywhere. On considerations aforesaid, the Income-tax Officer disallowed the assessee's claim and added the amount representing bad debt to the total taxable income of the assessee. The assessee, being aggrieved, went up in appeal before the Appellate Assistant Commissioner but he confirmed the order of the Income-tax Officer. In second appeal before the Appellate Tribunal also it failed. Thus the disallowance of the bad debt was sustained and confirmed.
4. After the first appeal against the assessment order was dismissed, the Inspecting Assistant Commissioner issued a show-cause notice for imposition of penalty to which the assessee filed a written reply. Apart from reiterating its stand taken in assessment proceedings, the assessee claimed that the transactions in dispute were genuine and were duly recorded in its accounts, inasmuch as profits earned were not only shown in the return, but were also subjected to tax in the year in dispute. To substantiate its stand about the genuineness of the transactions, the assessee referred to the statement of Abdul Ghani and that of the managing partner of the firm, Hazi Mohammed Ikram, which were recorded on oath, during the assessment proceedings. An affidavit of another partner was also filed during the course of penalty proceedings before the Inspecting Assistant Commissioner to the effect that the claim was genuine and there was no mala fides on the part of the assessee in claiming the amount of bad debt in its profit and loss account.
5. The Inspecting Assistant Commissioner, however, did not accept the assessee's explanation. He essentially relied upon the findings recorded in the assessment proceedings and held that the assessee had concealed its income and had furnished inaccurate particulars thereof within the meaning of section 271(1)(c) of the Act. He imposed a penalty of Rs. 26,500 which was almost 100% of the amount in respect whereof inaccurate particulars were said to have been furnished by the assessee. The assessee unsuccessfully appealed to the Income-tax Appellate Tribunal which confirmed the imposition of the penalty in the following terms:
“I have decided the quantum appeal by my order of date and I have upheld the disallowance of the claim. I have agreed with the revenue authorities that the transactions which the assessee claimed to have “entered into with Abdul Ghani were not genuine. That being the position, it will have to be held that the assessee was guilty of concealment as also of furnishing of inaccurate particulars and penalty is exigible under section 271(1)(c). The penalty amount is almost the minimum leviable and accordingly I confirm the penalty order.”
6. It is in this background that the two questions as quoted earlier have been referred for the opinion of this court.
7. Learned counsel for the assessee urged that penalty proceedings are independent of assessment proceedings and the Income-tax Appellate Tribunal erred in law when it confirmed the penalty solely relying upon its finding recorded on the assessment side. He argued that there was no consideration by the Inspecting Assistant Commissioner or by the Appellate Tribunal in their respective orders regarding the statement of Abdul Ghani and that of the managing partner nor was the affidavit filed in the penalty proceedings taken into account. He contended that it was not disputed even on the assessment side that the profits on the disputed transactions were duly returned by the assessee and assessed in its hands, yet those transactions were held to be fictitious, ignoring relevant evidence which had been brought on record in the penalty proceedings. Our attention was particularly invited to the following observations of the Income-tax Appellate Tribunal in disposing of the appeal on the assessment side:
“It may be that the profit shown by the assessee had been accepted and the sales shown included sales made to Abdul Ghani also. That aspect would not be of appreciable value while considering the point at issue.”
8. It is urged that the claim of the assessee was disallowed, not because no sales were effected to Abdul Ghani, but on account of other circumstances, such as, that sale to Abdul Ghani was an imprudent act of the assessee, for goods were sold to him knowing that his financial position was bad. Learned counsel submitted that sales to Abdul Ghani could not have been disputed as those goods were admittedly sold by Abdul Ghani to others against two post-dated cheques which were issued by the purchasers from Abdul Ghani. It was also pointed out that in respect of each finding in making the disallowance, the assessee had given an explanation which, however, did not find favour with the tax authorities, but, for this reason, no penalty was exigible.
9. We are concerned in this case with section 271(1)(c) of the Income-tax Act, 1961 (for short “the Act”), as it stood after its amendment by section 40 of the Finance Act, 1964 (Act No. 5 of 1964). Before adverting to those provisions, it may be useful to take notice of two well-known decisions of the Supreme Court in CIT v. Anwar Alt, [1970] 76 ITR 696 and in CIT v. Khoday Eswarsa and Sons, [1972] 83 ITR 369. Both these decisions were rendered in construing section 28(1)(c) of the Indian Income-tax Act, 1922, the predecessor section, which was in pari materia with section 271(1)(c) of the Act, before its amendment in 1964.
10. In Anwar All's case, [1970] 76 ITR 696 (SC) at page 701 of the report, it was observed by the Supreme Court:
“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.”
11. The same observations were repeated by the Supreme Court in CIT v. Khoday Eswarsa and Sons, [1972] 83 ITR 369 (SC) which were to the following effect (p. 376):
“Apart from the falsity of the explanation given by the assessee, the department must have before it before levying penalty cogent material or evidence from which it could be inferred that the assessee has consciously concealed the particulars of his income or had deliberately furnished inaccurate particulars in respect of the same and that the disputed amount is a revenue receipt. No doubt the original assessment proceedings for computing the tax may be a good item of evidence in the penalty proceedings but the penalty cannot be levied solely on the basis of the reasons given in the original order of assessment.”
12. The aforesaid statement of law was equally applied in a case arising under section 271(1)(c) before its amendment in 1964 in the case of Anantharam Veerasinghaiah and Co. v. CIT, [1980] 123 ITR 457 (SC).
13. If the matter had stood there, in view of the aforesaid pronouncement of the Supreme Court, we quite see the force and plausibility of the submissions made before us by learned counsel for the assessee. However, as noted earlier, section 271(1) was amended by the Act No. 5 of 1964. By this amendment in clause (c), the word “deliberately” was omitted and the following Explanation was inserted at the end of subsection (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.”
14. As a result of the aforesaid amendment, two radical changes were brought about. With the omission of the word “deliberately”, it was no longer necessary to establish that the act of concealment or furnishing of inaccurate particulars of such income was deli-berate on the part of the assessee. The effect of the newly added Explanation is that for the purposes of levying penalty, two clear-cut, divisions have been made, based on variation between the assessed income and returned income. The dividing line is the objective test whether the returned income is less than 80% of the assessed income or not, reduced by the expenditure incurred bona fide for the purposes of making or earning any income included in the total income, but which had been disallowed as a deduction. Cases where the returned income is more than 80 per cent, of the assessed income have been left out of the purview of the Explanation and they continue to be governed by the law as it existed prior to amendment in 1964. However, cases where the returned income is less than 80 per cent, of the assessed income would fall in the second category and are caught within the mischief of the Explanation. The burden of proof, in such cases, under the amended law, is shifted from the Revenue to the taxpayer. In such cases, as a result of fiction, the assessee shall 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) unless he proves that the failure to return the correct income was not on account of fraud or any gross or wilful neglect on his part. Once the Explanation is held to be applicable, as pointed out by a Full Bench decision of the Punjab and Haryana High Court in Vishwakarma Industries v. Commissioner Of Income-Tax, Amritsar-I., [1985] 135 ITR 652, three legal presumptions immediately arise, viz., (i) the amount of the assessed income is the correct income and it is, in fact, the income of the assessee himself, (ii) that the failure of the assessee to return the correct income was due to fraud, and (iii) or that the failure of the assessee to return the correct income assessed was due to gross or wilful neglect on his part. The presumptions raised by the Explanation are not conclusive presumptions. These are only rebuttable presumptions. If an assessee comes within the mischief of the Explanation, in order to get out of it, he must prove that the failure to return the correct income was not due to any of the factors, namely, fraud or gross or wilful neglect on his part. 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, had concealed his income or particulars thereof. In other words, if 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 had concealed his income. In a recent decision in Commissioner Of Income Tax v. Messrs Mussadilal Ram Bharose., [1987] 165 ITR 14, the Supreme Court explained the scope and true import of the amended provisions as under (p. 20):
“Under the law, as it stood prior to the amendment of 1964, the onus was on the Revenue to prove that the assessee had furnished inaccurate particulars or had concealed the income. Difficulties were found in proving the positive element required for concealment under the law prior to the amendment and this had to be established by the Revenue. To obviate that difficulty, the Explanation was added. The effect of the Explanation was that where the total income returned by any person was less than 80% of the total income assessed, the onus was on such person to prove that the failure to file the correct income did not arise from any fraud or any gross or wilful neglect on his part and unless he did so, he should be deemed to have concealed the particulars of his income or furnished inaccurate particulars, for the purpose of section 271(1). The position is that the moment the stipulated difference was there, the onus to prove that it was not the failure of the assessee or fraud of the assessee or neglect of the assessee that caused the difference shifted to the assessee but it has to be borne in mind that though the onus shifted, the onus that was shifted was rebuttable. If in an appropriate case, the Tribunal or the fact-finding body was satisfied by the evidence on the record and inference drawn from the record that the assessee was not guilty of fraud or any gross or wilful neglect and if the Revenue had not adduced any further evidence, then, in such a case, the assessee cannot come within the mischief of the section and suffer the imposition of penalty.”
15. From the above, it is clear that the intention of the Legislature in making the amendments to section 271(1)(c) and in inserting the Explanation thereto was to bring about a change in the existing law. Thus, the ratio of Anwar Ai's case, [1970] 76 ITR 696 (SC) is no longer available in cases falling within the mischief of the Explanation. In the scheme of the Act, the proceedings for imposition of penalty though emanating from proceedings of assessment are essentially independent and a separate aspect of the proceedings which closely follow the assessment proceedings. It is more so, when considered in relation to the newly added Explanation. In this context, we may with respect refer to the observations of the Full Bench in Vishwakarma Industries' case, [1982] 135 ITR 652. (P & H), where it is observed (p. 662):
“It seems plain that the statute visualised the assessment proceedings and penalty proceedings as wholly distinct and independent of each other, at least so far as the applicability of the Explanation is concerned. The assessment proceedings necessarily precede and herein indeed is the very foundation of the subsequent penalty proceedings, if any. In true essence, until the assessment proceedings in the shape of the final determination of the assessed income are completed, the provisions of the Explanation could hardly come into play… It is only when this correct income has been determined, that, by comparing it with the returned income of the assessee, the test of the same being less than eighty per cent, of the former can be applied… Therefore, the assessment proceedings and the penalty proceedings must be kept sharply distinct and independent from each other.”
16. It is settled law that the findings given in assessment proceedings are certainly relevant and have probative value, but such findings are material alone and may not justify the imposition of penalty in a given case, because the considerations that arise in penalty proceedings are different from those in assessment proceedings. The regular assessment order is not the final word in penalty proceedings upon the pleas which can be taken at the penalty stage 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 adjudging as to whether the assessee is guilty of concealment or of furnishing of inaccurate particulars thereof, the matter has to be examined afresh and is not to be guided solely by the findings given on the quantum side. The assessee may adduce fresh evidence in penalty proceedings to establish by material and relevant facts which may go to affect his liability or the quantum of penalty. He cannot be debarred from taking appropriate pleas simply on the ground that such a plea was not taken in regular assessment proceedings or the material brought on the record has already been disbelieved in the assessment proceedings. Even where he does not choose to adduce evidence or produce such material, he may still rely upon the existing material itself, to prove that on the existing material itself, the presumption raised by the Explanation would stand rebutted and he was not guilty of any concealment or furnishing of inaccurate particulars, or there was no fraud or any gross or wilful neglect on his part to return the correct income as envisaged under the Explanation. The fact that the evidence was not accepted on the quantum side would not constitute res judicata in the way of the assessee in requiring the tax authorities to examine the matter afresh for the purposes of penalty proceedings.
17. Keeping the aforesaid principle in view, we now proceed to consider the questions referred to us. The assessee's principal grievance before us is that the Income-tax Appellate Tribunal failed to apply its independent mind while confirming the order of penalty. Its case is that the conditions which were necessary for levy of any penalty were totally absent and there was no justification for the Tribunal to sustain the penalty. It is clear from the extract that we have made from the order of the Tribunal that the Tribunal has completely misconducted itself and has not entered the finding of fact that is necessary to determine whether the assessee has rightly been subjected to penalty under section 271(1)(c) of the Act. It is also clear from the Tribunal's order that it has confirmed the imposition of penalty on a solitary ground that since it had upheld the finding on the quantum side, namely, that the transactions with Abdul Ghani were not genuine, and, therefore, the penalty was liable to be sustained. In doing so, the Tribunal has acted as a matter of course, taking the penalty as an automatic affair. The approach adopted by the Tribunal is not correct. The nature of penalty proceedings is quasi-criminal. The rejection of the assessee's explanation on the assessment side by itself is not sufficient to confirm the penalty, for considerations of the appeal in penalty proceedings are different from those on which an addition may be sustained on the assessment side. We have already analysed in detail the nature of the penalty proceedings and need not repeat them again. The penalty in the instant case has been imposed without the aid of the Explanation, although the difference between the returned income and assessed income was more than twenty per cent. The returned income was a low figure, whereas, the income finally assessed, as sustained after appeal, was Rs. 23,555. On consideration of the order of the Inspecting Assistant Commissioner who passed the penalty order, it is clear that he never relied upon the Explanation. He, on the other hand, relied upon the substantive provisions of section 271(1)(c) under which penalty is attracted only if the assessee had concealed a particular income. The order of the Income-tax Appellate Tribunal also does not show that the provisions of the Explanation were taken into consideration. In our opinion, excluding the provisions of the Explanation from consideration, it may be difficult to sustain the penalty. However, it is not necessary for us to dwell on this any further in this regard in view of another contention raised on behalf of the Revenue.
18. Learned counsel for the Revenue contended that the present case was governed by the Explanation which is part of section 271(1)(c) and, we may, for ourselves, take into consideration the provisions of the said Explanation in answering the question referred to us. Learned counsel for the assessee, on the other hand, objected to this course being adopted by us. He contended that in such circumstances, the case is bound to assume a different complexion. His contention is that such a question was never raised before the Appellate Tribunal and, therefore, we are precluded from taking notice of such a contention.
19. So far as the first part of the submission made on behalf of the Revenue is concerned, we agree with it. The Explanation does not confer any discretion on the concerned authority to invoke it or not. It automatically applies to cases where the income is less than eighty per cent, of the assessed income. The consequences follow as a matter of law. We are not impressed by the stand taken on behalf of the assessee that the Revenue is not entitled to fall back on the Explanation since this question was not canvassed before the Tribunal when it decided the penalty appeal. The question that came up for consideration before the Tribunal was in regard to the assessee's liability for penalty under section 271(1)(c) of the Act, on the footing that it had concealed its true income. The ambit of the dispute was wide enough to include the consideration of the. Explanation with its effect, on the assessee's case. In view of this matter, in our opinion, the Revenue is entitled to raise the plea that the case should be examined with reference to the provisions contained in the Explanation.
20. There is, however, some difficulty in accepting the other part of the Revenue's contention that this court should examine the application of the Explanation for the first time in these proceedings. Whether the gap between the returned and assessed income was on account of fraud or any gross or wilful neglect on the part of the assessee is essentially a matter depending on the facts of each case. Findings on these matters are normally findings of fact. Thus, in every case, an inquiry whether the assessee's conduct in filing his return in the way he did, rules out fraud or gross negligence must necessarily be determined by the tax authorities themselves including the Income-tax Appellate Tribunal. Where no endeavour is made by the authorities concerned to find out why the evidence adduced by the assessee during the course of assessment proceedings or the evidence led during the penalty proceedings have the effect of the assessee discharging the initial burden that lay upon it (rebutting the presumption raised by the Explanation to section 271(1)(c)), ordinarily, as in the instant case, it will be difficult to hold that the case has been decided in the right perspective. That apart, even if we were persuaded to record the necessary findings as regards fraud, gross or wilful neglect and as to the initial discharge of the burden of the assessee, we find that it is not possible to do so for material evidence is not on record. The paper book of the case does not contain a copy of the written explanation given by the assessee in the penalty proceedings, or copies of the statement of Abdul Ghani and that of its managing partner, or copy of the affidavit filed before the tax authorities. In these circumstances, it is not possible for us to record any finding.
21. In our opinion, the Tribunal was bound in law to examine the applicability of the Explanation to the case and non-consideration thereof has resulted in miscarriage of justice. The findings of the Tribunal, therefore, are defective in law, based on wrong approach and principles governing the present case. In our considered opinion, the question of penalty requires fresh consideration. The matter, therefore, must be remanded to the Tribunal for addressing itself to the question whether the penalty can and should be imposed or not.
22. For what we have stated above, we decline to answer the questions. We return the reference unanswered with a direction that the Tribunal will hear the appeal giving rise to this reference afresh and will decide it in accordance with law, keeping in view the observations made in this order. A copy of this order shall be forwarded to the Income-tax Appellate Tribunal, as required under section 260 of the Income-tax Act.
23. In the circumstances, the parties are left to bear their own costs.