The Judgment of the Court was delivered by

Balasubrahmanyan, J.:— This is a case of penalty under s. 271(1)(c) of the I.T Act, as it stood after amendment by the Finance Act, 1968, but before its further amendment by the T.L (Amend.) Act, 1975. The IAC who levied the penalty in the first instance recorded a finding that the amount of income in respect of which the assessee had concealed particulars of his income was Rs. 55,830. The IAC accordingly levied minimum penalty at the same figure, namely, Rs. 55,830. On appeal, the Tribunal sustained the penalty to the extent of Rs. 35,500 made up of the following two figures:

Rs. Concealment of particulars of income under the head Business; 14,000 Income from Other sources 21,500 Total 35,500

2. On the first item, the Tribunal's finding was as under:

“As far as the business income is concerned, the Income-tax Officer had to resort to an estimate, because there were several omissions. An analysis has been given of the deficiency in stock between January 20, 1967, and March 31, 1967. The period was only, of two months and the deficiency which was not explained was quite large. Apart from the deficiency in frosted glass, where there may have been some breakages, there is a clear deficiency in plywood sheets by as much as 44 sheets. In the absence of any explanation, the only inference is that there were sales outside the books. In these circumstances, an estimate of the turnover was warranted and consequently the Income-tax Officer had to estimate the profit also. There is nothing to show that the estimates were in any way excessive. We, therefore, hold that in respect of the amount of Rs. 14,000 penalty will be exigible”

3. On the second item, the Tribunal's finding was as follows:

“As far as the credits of Rs. 27,500 are concerned, they were in three instances in the names of persons, who have died, and who were close relations of the assessee. It should have been possible for the assessee to let in some manner of evidence to establish the creditworthiness of such close relations. Where the assessee has not tendered any evidence at all regarding the creditworthiness of such relations beyond ascertaining that they had funds, it has to be considered that there was no explanation for such credits. As far as the credit in the name of Susheela is concerned, here again the assessee had not let in any evidence and being a close friend, the position stands on a similar footing. Regarding the daughter, the assessee had adduced a confirmation letter before the Inspecting Assistant Commissioner and this has not been proved false. Out of the amount of Rs. 27,500, we, therefore, hold that penalty will be exigible only in respect of an amount of Rs. 21,500 because, in the absence of any evidence at all, we have to hold that the assessee has not discharged the onus of showing that the failure to return such amounts as part of the income was not due to gross or wilful negligence.”

4. Against this order of the Tribunal the assessee demanded and got a reference to this court on the following questions of law:

“1. Whether, on the facts and in the circumstances of the case, the provisions of section 271(1)(c) stood attracted to justify any penalty?

2. Whether, on the facts and in the circumstances of the case, a penalty of Rs. 14,000 would be exigible in respect of the addition to the gross profit in the assessment?

3. Whether, on the facts and in the circumstances of the case, the Appellate Tribunal was right in law in upholding the penalty of Rs. 21,500 in respect of the addition of a like amount under other sources as unproved credits?”

5. Section 271(1) of the Act makes appropriate provision for levying penalties on assessees in different eventualities. One is for non-filing of returns or delayed filing of returns without reasonable cause. The other is for non-compliance with the statutory notices for production of accounts and documents and with the summons for inquiry. The last one is for concealment of income. Each of these penalty provisions has two distinct limbs. One limb deals with the conditions precedent for initiating penalty action and assumption of jurisdiction of the authority concerned. We can find this limb separately enacted in each of the cls. (a), (b) and (c) of s. 271(1). The other limb of the penalty provision is the substantial provision which deals with the actual imposition of the liability for penalty and the quantification thereof. This limb is found enacted, respectively, in cls. (i), (ii) and (iii) of s. 271(1). Clause (c) of s. 271(1) lays down the conditions precedent for the ITO or other concerned authority assuming jurisdiction to initiate penalty proceedings for concealment of income. Clause (iii) lays down the basis on which penalty for concealment is to be levied and quantified. It is common ground that to the present case the appropriate provision to apply is s. 271(1)(iii) as it stood amended by the Finance Act, 1968, with effect from April 1, 1968. Under s. 271(1)(c), the authority competent to initiate penalty action for concealment is the ITO. For starting the penalty proceedings under s. 271(1)(c), he must be satisfied that a person has concealed particulars of his income or furnished inaccurate particulars of such income. In an Explanation to this section, which was added in 1964, it was provided that, as a matter of rebuttable presumption, the assessee shall be deemed to have concealed particulars of his income if the total income returned by the assessee is less than eighty per cent, of the total income assessed by the officer. As for the penalty to be levied for concealment of income, the relevant provision is to be found in s. 271(1)(iii). At the material time, this provision read as follows:

“in the cases referred to in clause (c), in addition to any tax payable by him, a sum which shall not be less than, but which shall not exceed twice, the amount of the income in respect of which the particulars have been concealed or inaccurate particulars have been furnished.”

6. There is no mistaking the meaning of the language of s. 271(1)(iii) as found in the text. Under this clause, there is both a minimum and a maximum penalty. The minimum penalty is equal to the income in respect of which particulars have been concealed. The maximum is double the income in respect of which particulars have been concealed. It will be seen that in both cases the validity of the penalty depends on its being relatable to the income in respect of which particulars have been concealed. This means that if particulars have been concealed in respect of one rupee of income, the minimum imposition will have to be one rupee by way of penalty. This is the implication of this clause. If in respect of one rupee particulars have not been concealed, then penalty cannot be levied on that rupee, either at a minimum of one rupee or at the maximum of two rupees or any amount in between.

7. The reason why this penalty provision is so worded is not far to seek. The yoke of income-tax itself is already a heavy burden, especially on the higher income brackets, and a too high penalty would break the necks of most taxpayers. Besides, the measure of penalty is not on the tax effect, but on the income aspect, which would tend to make the penalty burden greater still. Because of these considerations, Parliament obviously took care to lay down that penalty, as an equivalent of income, cannot be levied unless the income in such and such an amount can be held to have been concealed. This is why we have stated that for each rupee concealed there can be a minimum penalty of one rupee and a maximum penalty of two rupees, whereas for each rupee not concealed, there cannot be any penalty at all. This clearly is the meaning and intendment of s. 271(1)(iii) of the Act.

8. It is from the point of view of this understanding of s. 271(1)(iii) that the Tribunal's decision in this case bears examination. As we had earlier mentioned, the Tribunal's order sustaining the penalty to the extent of Rs. 35,500 is in two parts; penalty of Rs. 14,000 and penalty of Rs. 21,500. The quantification of penalty of Rs. 14,000 is towards the estimated addition of Rs. 14,000 to the income returned under the head “Business”. We have earlier extracted the reasonings of the Tribunal on this part of the case. All that the Tribunal says and could say, on this aspect, in their order is that there was quite a justification for the ITO to make an estimate of the turnover, and an estimate of the gross profit. The justification, according to the Tribunal, was the detection of deficiency in stock between January 20, 1967, and March 31, 1967. The Tribunal had not given any particulars as to the value of the stock discrepancy during that period. Precise figures in this regard are not found even in the assessment order. For the purposes of framing an estimate, it is enough that some defect or other is found in the accounts. But, as we read the penalty provision in s. 271(1)(iii), there must be a clear evidence to show that an amount of Rs. 14,000 had been concealed by the assessee, that is to say, each and every single rupee comprising that sum. If it is a mere estimate of some figure or other, even for the purpose of assessment of income, we fail to see how it can be said that it represents the amount of income in respect of which particulars have been concealed within the mischief of the language of s. 271(1)(iii). The utmost that can be said in this case is that actual concealment of particulars can only be gathered, if at all, with reference to the deficiency in stock between January 20, 1967, and March 31, 1967. But even this is not very clearly discernible from the record. As we said, there is nothing to show how much was the value of the deficient stock, either in the order of the Tribunal or in that of the IAC, much less any deficiency in stock such as might be thought to represent any concealed income. We do not, therefore, accept the conclusion of the Tribunal that particulars of income have been concealed by the assessee in respect of any part of Rs. 14,000 so as to justify the imposition on the assessee of a minimum penalty in that amount.

9. As for the other part of the penalty amounting to Rs. 21,500, the Tribunal have regarded that amount as representing income only because the assessee had not offered any explanation about the nature and source of the cash credits in question. This means that there was no actual evidence on record that the credits represented income; the Tribunal merely working on a presumption which is relevant to the assessment process all right, but not to the penalty process. The Tribunal, however, relied on the Explanation to s. 271(1)(c) to hold that even for Rs. 21,500 penalty is exigible because the burden is on the assessee to show that his return of income of an amount less by twenty per cent, and more of the assessed income was not due to any fraud or any gross or wilful negligence. In our view, the Explanation can hardly be pressed into service for the purpose of s. 271(1)(iii) which enjoins that only with respect to income, the particulars of which are concealed, minimum and maximum penalties or anything in between can be levied. The Explanation, in terms, is restricted to s. 271(1)(c). This means that for assuming jurisdiction to initiate penalty action, and to issue the show-cause notice to the assessee, the Explanation can be sought in aid. But, beyond that, when it comes to a question of actually imposing the penalty, the authority concerned must be in a position to hold that the penalty is being levied with reference to “an amount of income in respect of which particulars have been concealed”. Merely by relying on the Explanation to s. 271(1)(c) or by reference to s. 68 of the Act, in which unexplained cash credits can be presumed to be income for purposes of assessment of tax, a penalty cannot be sustained under s. 271(1)(iii).

10. At the hearing, some earlier reported cases were referred to by both sides. We do not, however, think that in any of the earlier cases the questions have been presented in such a fashion as in the present one. We may, however, refer to one decision in Mansukhlal and Brothers v. CIT, [1969] 73 ITR 546(SC). Our purpose in referring to this decision, however, is to highlight the basis of the penalty provision before and after the amendment made by the Finance Act, 1968, in s. 271(1)(iii) of the I.T Act, 1961. In interpreting s. 28(1)(c) of the Act of 1922, which was more or less on the same terms as s. 271(1)(c) and (iii) of the I.T Act, 1961, before its amendment by the Finance Act, 1968, the Supreme Court held that once income was found to be concealed, penalty was not restricted to the tax evaded by reason of the concealment, but has to be quantified on the difference between the income returned and the income assessed. In that case the returned income was Rs. 45,904 and the assessed income was Rs. 1,62,135. The concealment of income actually found, however, was only Rs. 24,000. Nevertheless, the Supreme Court sustained the penalty at 1½ times the tax on the difference between Rs. 45,904 and Rs. 1,62,135, which amounted to Rs. 62,000.

11. The phraseology of s. 28(1)(c) of the Act of 1922 was maintained in s. 271(1)(c) of the Act of 1961 also, till it was amended by the Finance Act, 1968. The clause as it existed before the amendment was that penalty leviable was of “a sum which shall not be less than twenty per cent, but which shall not exceed one and a half times the amount of the tax, if any, which would have been avoided if the income as returned by such person had been accepted as the correct income”. Under this clause-which was in pari materia with s. 28(1)(c) of the Act of 1922, the statute did not impose or lay down a correlation between the tax on concealed income and the penalty for concealment. Let the tax on concealed income be even so little, yet the penalty can be levied on one and a half times the difference between the tax on the assessed income and the tax on the returned income even though much of the add-backs in the assessment are not for understatement of income. Under s. 271(1)(iii), as it stood amended by the Finance Act, 1968, two important changes came about. In the first place, the basis of quantification of penalty was not the tax or a multiple of the tax avoided, but the concealed income itself. Besides, under the provision as amended in 1968, every rupee of penalty must be justified on every rupee of concealment and on no other basis. In this manner, it must be held to have been enacted not as a mere quantification provision, but as constituting the very crux of the penal liability.

12. The Tribunal as well as the IAC have not understood the requirement of this provision and have proceeded to levy penalty on amounts which are not stated to be amounts of income actually concealed. In the result, questions Nos. 2 and 3 are answered in favour of the assessee. In view of this answer of ours, we would phrase our answer to the first question thus: While the provisions of s. 271(1)(c) were attracted up to a point, on the facts and in the circumstances of the case, the penalty levied or sustained by the Tribunal cannot be justified merely on the facts which justify the initiation of proceedings under s. 271(1)(c). The justification for actual imposition of penalty must be found under s. 271(1)(iii) of the Act which we have held does not apply to the present case as our answers to the two other questions would establish.

13. Since the assessee has substantially succeeded in this reference, the Department will pay the assessee's costs. Counsel's fee Rs. 500.