The Judgment of the Court was delivered by

Ratnam, J.:— At the instance of the Revenue, under section 256(2) of the Income-tax Act, 1961 (hereinafter referred to as “the Act”), the following question of law has been referred to this court for its opinion:

“Whether, on the facts and in the circumstances of the case, the Appellate Tribunal was justified in holding that the assessee had neither concealed particulars of income nor furnished inaccurate particulars of income and, accordingly, in deleting the penalty of Rs. 27,000 imposed under section 271(1)(c) for the assessment year 1971-72?”

2. The assessee carried on business as a pawn-broker. For the assessment year 1971-72, a return showing a loss of Rs. 770 was filed. In the course of the examination of the accounts of the assessee for completing the assessment, the Income-tax Officer found credits totalling Rs. 27,000 in the names of six persons. Since the assessee did not produce satisfactory or acceptable evidence in support of the genuineness of the credits, the Income-tax Officer completed the assessment on a total income of Rs. 32,460 by adding the amounts represented by the credit entries as income from other sources. Consequent upon the completion of the assessment in the manner aforesaid and in view of the introduction of the Explanation to section 271(1)(c) of the Act by the Finance Act, 1964, penalty proceedings under section 271(1)(c) of the Act were also initiated. The assessee preferred a revision petition before the Commissioner of Income-tax under section 264 of the Act and before Him, the assessee purported to produce three confirmatory letters stated to have been given by the creditors who had advanced amounts to the assessee.

3. The Commissioner of Income-tax directed the Income-tax Officer to examine those letters and delete the cash credits against their names, if the Income-tax Officer was satisfied about the evidence produced before him. However, the Income-tax Officer found the letters to be unsatisfactory and unacceptable and concluded the assessment on that footing. In response to the show-cause notice issued in the penalty proceedings initiated under section 271(1)(c) of the Act by the Inspecting Assistant Commissioner of Income-tax, Salem, the assessee appeared and prayed for a number of adjournments, which were granted, and, finally, he was informed that he should either file a reply or appear before a particular date. The assessee did not appear nor did he send any reply offering his explanation. Thereupon, the Inspecting Assistant Commissioner, on the available materials, concluded that the credit entries were not genuine and the addition made by the Income-tax Officer was well-founded and that the Explanation to section 271(1)(c) of the Act would stand attracted so that the conclusion was inescapable that the assessee had furnished inaccurate particulars and concealed his income. In this view, a penalty of Rs. 27,000 was levied on the assessee. Aggrieved by this, the assessee preferred an appeal to the Tribunal and the Tribunal, relying on the decisions in Commissioner Of Income Tax, West Bengal v. Anwar Ali , [1970] 76 ITR 696 (SC) and CIT v. Khoday Eswarsa and Sons, [1972] 83 ITR 369 (SC), took the view that in penalty proceedings, it is for the Revenue to establish that the assessee is guilty of concealment of income and that, apart from the disbelief of the explanation offered by the assessee in regard to the cash credits, the Department has not brought home the guilt of concealment of income by the assessee and, therefore, no penalty is exigible under section 271(1)(c) of the Act. Referring to the circumstance that the cash credits in question appeared in the books of account maintained by the assessee, the Tribunal stated that it was not the case of the Revenue that the creditors did not exist or that the entries were fictitious and finally, the Tribunal concluded that the assessee had discharged the onus placed on him under the Explanation and as there was no proof to the contrary, the penalty levied ought to be deleted and, in that view, cancelled the penalty, which has given rise to the question referred to earlier.

4. Learned counsel for the Revenue first contended that the Tribunal has wholly and completely misdirected itself in that it had totally lost sight of the applicability of the Explanation and relying upon the decisions reported in Commissioner Of Income Tax, West Bengal v. Anwar Ali , [1970] 76 ITR 696 (SC) and CIT v. Khoday Eswarsa and Sons, [1972] 83 ITR 369 (SC), had proceeded on the footing that it is for the Revenue to establish the assessee's guilt of concealment of income. Learned counsel further submitted that in view of the Explanation, those decisions cannot have any application at all and that the Tribunal had also, without any materials in support thereof, come to the conclusion that the assessee had discharged the onus placed on him under the Explanation. Reliance in support of these contentions was placed on the decisions reported in Addl. CIT v. Lakshmi Industries and Cold Storage Co. Ltd., [1984] 146 ITR 492 (All), CIT v. Nathulal Agarwala and Sons, [1985] 153 ITR 292 (Pat) [FB], Commissioner Of Income-Tax v. Chickanna Silk House, [1987] 163 ITR 145 (Mad), CIT v. Mussadilal Ram Bharose, [1987] 165 ITR 14 (SC) and Chuharmal v. CIT, [1988] 172 ITR 250 (SC). Per contra, learned counsel for the assessee submitted that the Tribunal had considered all the available materials and had come to the conclusion that the levy of penalty on the assessee was not justified and, therefore, there is no justification for disturbing that order as prayed for by the Revenue. Reliance was placed upon the observations in the decision of the Supreme Court reported in CIT v. Mussadilal Ram Bharose, [1987] 165 ITR 14. In reply thereto, learned counsel for the Revenue, relying upon the decision reported in CIT v. S.P Jain, [1973] 87 ITR 370 (SC), pointed out that the conclusion arrived at by the Tribunal to the effect that the assessee had discharged the onus placed on him is not supported by any evidence and is based only on the imagination of the Tribunal and is in the nature of a conjecture or surmise and, therefore, that finding is vitiated.

5. Earlier, it has been seen how in the return for the relevant assessment year filed by the assessee he had shown a loss and how the assessment had been completed on a total income of Rs. 32,460 and that was also maintained by the Income-tax Officer even after consideration of the materials made available to him by the assessee in support of the cash credits. Under the Explanation inserted by the Finance Act, 1964, with effect from April 1, 1964, in section 271(1)(c) of the Act, 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. Considering the income returned by the assessee and that determined by the Income-tax Officer in the course of the assessment proceedings, it is at once obvious that the total income returned by the assessee in this case is far less than eighty per cent, of the total income as assessed. Therefore, the requirement of the first part of the Explanation is fully satisfied in this case. That would suffice to attract the latter part of the Explanation in order to deem that the assessee had concealed the particulars of income or furnished inaccurate particulars of such income, unless the assessee proves that the failure to return the correct income did not arise from any fraud or gross or wilful neglect on his part. Thus, on the application of the Explanation to the assessee, what emerges is that the income of the assessee as assessed is the correct income and in fact is that of the assessee himself and the failure on the part of the assessee to return the correct assessed income was due to fraud or gross or wilful neglect on his part. No doubt, this could be rebutted by the assessee by establishing that the failure to return the correct income was not owing to fraud or gross or wilful neglect on his part. In this case, it has already been seen that in the course of the penalty proceedings, the assessee had no explanation whatever to offer. Apart from merely praying for some adjournments which were granted, the assessee had not made any attempt to establish that the failure to return the correct income did not arise from any fraud or gross or wilful neglect on his part. Prima facie, therefore, the assessee had not attempted to dislodge the presumptions arising as a result of the application of the Explanation on the facts of this case. In other words, the presumption raised under the Explanation had remained totally unrebutted and in such an event, there was absolutely no justification whatever for the deletion of the penalty levied on the assessee by the Tribunal. The Tribunal, presumably with a view to take the case out of the Explanation, has referred to Commissioner Of Income Tax, West Bengal v. Anwar Ali , [1970] 76 ITR 696 (SC) and CIT v. Khoday Eswarsa and Sons, [1972] 83 ITR 369 (SC), to the effect that it is for the Revenue to establish the assessee's guilt of concealment of income. In doing so, the Tribunal, in our view, totally misdirected itself in the matter of applying the appropriate provision of law applicable on the facts of this case. A reference to the judgment in Commissioner Of Income Tax, West Bengal v. Anwar Ali , [1970] 76 ITR 696 (SC), shows that the court was concerned for the assessment year 1947-48 with reference to the unamended provision of section 28(1)(c) of the Indian Income-tax Act, 1922, and the decision was to the effect that the imposition of penalty is in the nature of a penal provision and, further, while dealing with the ancillary question of the nature of the burden upon the Department for establishing that the assessee is liable for payment of penalty under section 28(1)(c) of the Indian Income-tax Act, 1922, the fact that the explanation of the assessee was false would not necessarily give rise to the inference that the disputed amounts represented his income and he was ipso facto liable to penalty. There was thus no question whatever of the interpretation of section 271(1)(c) of the Act and the change brought in by the insertion of the Explanation. The word “deliberately” has been omitted by reason of the amendments in section 271(1)(c) of the Act by the Finance Act, 1964, and the Explanation was inserted and, therefore, the reasoning of the decision in Commissioner Of Income Tax, West Bengal v. Anwar Ali , [1970] 76 ITR 696 (SC), which had construed the earlier and totally differ-enc provision of section 28(1)(c) of the Indian Income-tax Act, 1922, cannot at all be held to be applicable. Similarly, the decision in CIT v. Khoday Eswarsa and Sons, [1972] 83 ITR 369 (SC), also was concerned with the interpretation of section 28(1)(c) of the Indian Income-tax Act, 1922, with reference to the assessment year 1955-56 and had nothing to do with the interpretation of section 271(1)(c) of the Act as well as the Explanation introduced by the Finance Act, 1964. We may, in passing, point out that that decision did recognise that the original assessment proceedings for computing the tax may be a good item of evidence in the penalty proceedings, but that the penalty cannot be levied solely on the basis of the reasons given in the original order of assessment. The latter part of this observation of the Supreme Court is understandable, for, as the provisions then stood, the burden was on the Department to establish that a particular amount was a revenue receipt. We thus find that the two decisions relied on by the Tribunal have no application at all to the present case. We, therefore, hold that the Tribunal totally misdirected itself in proceeding to consider the case in the light of the decisions in Commissioner Of Income Tax, West Bengal v. Anwar Ali , [1970] 76 ITR 696 (SC) and CIT v. Khoday Eswarsa and Sons, [1972] 83 ITR 369 (SC) which did not at all deal with section 271(1)(c) of the Act as well as the Explanation added by the Finance Act, 1964. The observation of the Tribunal that the Department has not brought home the guilt of concealment of income by the assessee cannot, therefore, be stated to reflect a correct approach in the light of the provisions of section 271(1)(c) of the Act read with the Explanation in considering the question of levy of penalty.

6. We may now make a brief reference to the decisions cited at the Bar. In Addl. CIT v. Lakshmi Industries and Cold Storage Co. Ltd., [1984] 146 ITR 492 (All), it has been laid down that the Explanation to section 271(1)(c) of the Act had brought about a material change in the law relating to the imposition of penalty for concealment of income and in a case where the total income returned by the assessee is less than eighty per cent, of the total income assessed, as 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, a presumption arises that the assessee concealed the particulars of his income or furnished inaccurate particulars of such income for the purpose of clause (c) of that sub-section and that the assessee can rebut this presumption by proving that the failure to return the correct income did not arise from any fraud or any gross or wilful neglect on his part and the degree of proof necessary under this Explanation is that required in a civil suit, viz., preponderance of probability and the principles enunciated in Commissioner Of Income Tax, West Bengal v. Anwar Ali , [1970] 76 ITR 696 (SC) and CIT v. Khoday Eswarsa and Sons, [1972] 83 ITR 369 (SC) are no longer applicable, as, under the Explanation, when the total income returned is less than eighty per cent, of the total income assessed, a presumption is raised regarding concealment and that should be discharged by the assessee by leading evidence, though the onus placed on the assessee is of a negative nature and the ultimate decision has to be based on the preponderance of probabilities, after considering the materials placed on record. In CIT v. Nathulal Agarwala and Sons, [1985] 153 ITR 292, a Full Bench of the Patna High Court held that the Explanation raises a rebuttable presumption and the presumption could be discharged by the assessee by evidence and it may not be necessary to lead fresh evidence and it would be permissible for the assessee to show and prove that on the existing materials, the presumption raised by the Explanation stood rebutted. It has also been further pointed out that the statute visualises the assessment proceedings and penalty proceedings as distinct and independent, at least in so far as the applicability of the Explanation is concerned and the assessment proceedings necessarily must precede the subsequent penalty proceedings, if any, and until the assessment proceedings take the final shape of determination of assessable income, the provisions of the Explanation cannot come into play and only when that is fulfilled, the case squarely falls within the ambit of the Explanation and, therefore, the distinction between assessment and penalty proceedings must be kept distinct and independent of each other. Viewed in the light of the principles laid down in this decision, on the facts of this case, it is at once apparent that though, in the course of the assessment proceedings, the assessee attempted to offer some explanation which was eventually not accepted, there was absolutely no explanation in the course of the penalty proceedings and if the two proceedings are kept distinct and separate, it follows that the assessee did not even make any attempt to discharge the burden laid on him in view of the Explanation referred to already. Again, in Commissioner Of Income-Tax v. Chickanna Silk House, [1987] 163 ITR 145, referring to the Explanation, a Division Bench of this court, to which one of us was a party, had pointed out that a presumption is raised that the assessee had concealed particulars of his income or furnished inaccurate particulars of such income and such a presumption would be rebutted only in the event of the assessee establishing that the failure to return the correct income as assessed did not arise from any fraud or gross or wilful neglect on its part and if the assessee maintains accounts which are false or incorrect and on the basis of such false or incorrect accounts, it returns an income which is not found to be the correct income, it would clearly be a case of wilful neglect. On the facts of this case also, the entries in the books of account showing cash credits have not been established by the assessee as not arising from any fraud or any gross or wilful neglect on his part. This decision also fully supports the stand taken by the Revenue in this case. In CIT v. Mussadilal Ram Bha-rose, [1987] 165 ITR 14 (SC), the Explanation to section 271(1)(c) of the Act came to be considered and the Supreme Court pointed out that the effect of the Explanation was that where the total income returned by any person was less than eighty per cent, 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)(c) of the Act and that 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 was shifted, the onus that was shifted was rebuttable. While so holding, the Supreme Court approved of the decision of the Full Bench of the Punjab and Haryana High Court in Vishwa-karma Industries v. CIT, [1982] 135 ITR 652, holding that the application of the Explanation raises three legal presumptions, viz., (i) that 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 assessed income was due to fraud; or (iii) that the failure of the assessee to return the correct assessed income was due to gross or wilful neglect on his part, and further stated that the presumption is a rebuttable one and if the fact-finding body, on relevant and cogent materials, comes to the conclusion that in spite of the presumption the assessee was not guilty, such conclusion does not raise any question of law. In this connection, it has to be pointed out that in this case, there is absolutely no explanation whatever offered by the assessee in the course of the penalty proceedings. There was no other material also on the basis of which it can be held that the assessee had discharged the presumption arising under the Explanation that he is guilty of concealment and that such concealment arose due to gross or wilful neglect on his part. This decision also supports the interpretation to be put upon the Explanation to section 271(1)(c) of the Act in the manner contended for by the Revenue. Again, the Supreme Court in Chuharmal v. CIT, [1988] 172 ITR 250 (SC), held that where the assessee had shown a total income of Rs. 3,113 and the value of the wrist watches seized by the raiding party in a sum of Rs. 87,455 was added to the assessed income of the asessee, the Explanation applied, as the income returned was less than eighty per cent, of the assessed income and the Revenue had discharged the onus of proving concealment of income. In view of the decisions referred to already, it follows that the assessee will have to thereafter discharge the onus by placing such materials to establish that the failure to return the correct income did not arise from any fraud or gross or wilful neglect on his part. Thus, on a consideration of the interpretation put upon the Explanation to section 271(1)(c) of the Act, it is at once clear that to the facts of this case, the Explanation is attracted and there is no material placed by the assessee either before the Inspecting Assistant Commissioner of Income-tax or even before the Tribunal in the course of the penalty proceedings to show that there was no fraud or gross or wilful neglect on his part. Even considering the proceedings in the course of the assessment, that cannot, in any manner, assist the assessee, for, the assessment record, as it stood, did not proceed to accept that the so-called creditors of the assessee had advanced amounts to him. Looked at from any point of view, on the facts of this case, there is no material at all placed by the assessee to rebut the presumption arising as a result of the application of the Explanation to him.

7. We may now refer to the submission of learned counsel for the asses-see and the reliance placed on CIT v. Mussadilal Ram Bharose, [1987] 165 ITR 14 (SC) in support of that fact that the Tribunal was satisfied that there was no gross or wilful neglect or fraud on the part of the assessee and such a conclusion being one of fact, does not merit interference. A careful perusal of the order of the Tribunal shows that apart from totally misdirecting itself with reference to the appropriate provision of law applicable, viz., the Explanation to section 271(1)(c) of the Act, the Tribunal has also assumed that the assessee had offered an explanation to show that he is not guilty of fraud or gross or wilful neglect. The Tribunal, after referring to the quantum of proof necessary to discharge the burden, observed that that would be as required in civil cases. But the Tribunal failed to note that there was no material at all placed by the assessee to discharge the burden. In other words, the burden had remained undischarged. But the Tribunal has recorded a conclusion that the assessee had discharged the onus placed on him and there is no proof to the contrary. It is in this context that the ratio of the decision in CIT v. S.P Jain, [1973] 87 ITR 370 (SC) is relevant. There; the Supreme Court has pointed out that the High Court and the Supreme Court have always the jurisdiction to interfere with the findings of the Appellate Tribunal if it appears that either the Tribunal has misunderstood the statutory language, because the proper construction of the statutory language is a matter of law, or it has arrived at a finding based on no evidence or where the finding is inconsistent with the evidence or contradictory of it, or it has acted on material partly relevant and partly irrelevant or where the Tribunal draws upon its own imagination and imports facts and circumstances not apparent from the record or bases its conclusions on mere conjectures or surmises or where no person judicially acting and properly instructed as to the relevant law could have come to the determination reached and that in all such cases, the findings arrived at are vitiated. On the facts of these cases, it is seen that the Tribunal has not only misdirected itself in law, but also has arrived at a finding that the assessee had discharged the burden on no evidence, and had drawn upon its imagination in arriving at such a conclusion and such a conclusion so arrived at merely proceeded upon conjectures and surmises. In view of the aforesaid enunciation of the principles relating to the scope of interference with the findings of the Tribunal, the decision in CIT v. Mussadilal Ram Bharose, [1987] 165 ITR 14 (SC) cannot, in our view, be applied. On a due consideration of the facts and circumstances of this case, we hold that the Appellate Tribunal was not justified at all in holding that the assessee had neither concealed particulars of income nor furnished inaccurate particulars of income and in deleting the penalty of Rs. 27,000 imposed under section 271(1)(c) of the Act in respect of the assessment year 1971-72. We answer the question referred to us in favour of the Revenue. The Revenue will be entitled to the costs of this reference. Counsel's fee Rs. 500.