1. These two references raise a short question as to the interpretation of the Explanation to section 271(1)(c) of the Income-tax Act, 1961. The assessee is a registered firm which carries on business as a retail dealer in medicinal drugs and preparations. The assessee showed in its return for the assessment year 1964-65 total sales of Rs. 2,88,602 and gross profit of Rs. 16,400 which worked out at approximately five per cent of the total sales and net income of Rs. 14,738. Similarly, for the assessment year 1965-66, the assessee showed in the return submitted by it, total sales of Rs. 3,34,000 and gross profit of Rs. 26,595 which worked out at approximately 7.9 per cent. of the total sales and net income of Rs. 19,434. The Income-tax Officer assessing the assessee to income-tax for the assessment years 1964-65 and 1965-66 found that though the books of account were maintained by the assessee according to the mercantile method of accounting, it was not possible to accept the figure of profit appearing from the books of account because, in the first place, no quantitative stock account was maintained by the assessee, secondly, a majority of the sales were not supported by vouchers and, thirdly, the gross profit disclosed by the books of account was low. The Income-tax Officer accordingly proceeded to make best judgment assessment under section 145(2) by estimating the total sales and applying a rate of 7 1/2 per cent. to the sales to doctors and a rate of 12 1/2 per cent. to the other sales for the purpose of arriving at the gross profit in each assessment year. The result was that for the assessment year 1964-65 a sum of Rs. 20,420 was added to the returned income of Rs. 14,738 making a total assessed income of Rs. 35,158 and similarly for the assessment year 1965-66, the returned income of Rs. 19,434 was augmented to Rs. 38,416, by the addition of a sum of Rs. 18,982. Since the income returned was less than eighty per cent. of the total income assessed in each assessment year, the Income-tax Officer was of the views that the Explanation to section 271(1)(c) was attracted and by reason of that Explanation, the assessee must be deemed to have concealed the particulars of its income so as to be liable for penalty under section 271(1)(c). The Income-tax Officer, accordingly, issued show-cause notices to the assessee and in view of the fact that the minimum penalty imposable exceeded a sum of rupees one thousand, he referred the case for each assessment year to the Inspecting Assistant Commissioner under section 234. The Inspecting Assistant Commissioner issued fresh notices to the assessee calling upon the assessee to show cause why penalty should not be imposed under section 271(1)(c) read with the Explanation. The assessee showed cause but the Inspecting Assistant Commissioner was not satisfied and taking the view that the assessee had not proved that the failure to return the correct income did not arise from any fraud or any gross or willful neglect on its part, he made a separate order for each assessment year imposing a penalty of Rs. 5,000 on the assessee. The assessee preferred appeals against the orders of penalty to the Tribunal. The Tribunal disagreed with the view taken by the Inspecting Assistant Commissioner and observing that :

"The difference between the income returned and the income assessed is mainly due to the fact that the profit has been estimated by the Income-tax Officer for both the years. On the facts of the case no finding of any fraud or any willful neglect on the part of the assessee can be recorded. The revenue authorities noted that the quantitative details were not available. They also noted that all the sales were to vouched. These cannot be sufficient reason to justify the finding of any gross or willful neglect on the part of the assessee. There is no other factor which could justify any finding in regard to fraud by the assessee. We must in the circumstances hold that the assessee cannot be deemed to have concealed the particulars of its income or furnished inaccurate particulars of such income within the meaning of section 271(1)(c)."

allowed the appeals and cancelled the orders of penalty. This view taken by the Tribunal is challenged in the present references at the instance of the revenue.

2. In order to appreciate the question which arises for determination before us, it is necessary to examine the language of section 271(1)(c) with the Explanation and to construe its meaning and effect. section 271(1)(c) provides - and here we are setting out the section as it stood during the relevant assessment years prior to its amendment by Finance Act, 1968 :

"271. (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.... 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, - ...

in the cases referred to in clause (c), in addition to any tax payable by him, 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."

3. Then there is the Explanation to section 271(1)(c), which reads as follows :

"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 (reducted 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 gorss or wilful neglect on his part, be deemed to have concealed the particulars of his income or furnihsed inaccurate particulars of such income for the purposes of clause (c) of this sub-section."

4. It is clear on a plain grammatical construction of the language used by the legislature that the condition which attracts the applicability of section 271(1)(c) is that the income-tax authority should be satisfied in the course of any proceeding under the Act that any person has concealed the particulars of his income or furnished inaccurate particulars of such income. It may be pointed out that, prior to its amendment by the Finance Act, 1964, section 271(1)(c) required that the assessee should have concealed the particulars of his income or deliberately furnished inaccurate particulars of such income, but the word "deliberately" was omitted from the section by the Finance Act, 1964. What is the effect of this omission does not fall for determination in this case because the assessee is sought to be brought within section 271(1)(c) not on the application of its own terms but by resort to the deeming fiction contained in the Explanation. The Explanation which was not originally there when section 271(1)(c) was enacted but 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 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 within the meaning of section 271(1)(c). It is an Explanation enacted in the context of a highly penal provision and there can, therefore, be no doubt that it must be construed fairly and reasonably. This, of course, does not mean that if a case falls fairly and squarely within the language of the Explanation, we should refuse to give effect to the mandate of the legislature as disclosed in the Explanation. But what is necessary to be borne in mind is that when we are construing the true meaning and effect of the Explanation, we must not forget that it is the Explanation which adds to the rigour of a highly penal provision and we must not, therefore, be over anxious to enlarge the scope and ambit of the Explanation by making an effort to bring every possible case within it, but we should instead construe the Explanation and apply it in a fair and reasonable way with a view to achieving the purposes of the main provision, namely, that an assessee who has concealed the particulars of his income or furnished inaccurate particulars of such income should not escape penalty. 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 subject to a certain reduction which is not material for our purpose. What the condition contemplates is merely a matter of arithmetical calculation. The income-tax authority is required to take the total income returned by the assessee and the total income as assessed by the revenue authorities and if the former is less than eighty per cent. of the latter, the condition for the applicability of the Explanation is satisfied. The Explanation then says that 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). The Explanation raises a legal fiction and the assessee is straightaway brought within the ambit of section 271(1)(c). It is then not necessary for the revenue to show affirmatively by producing the material that the assessee has in fact concealed the particulars of his income or furnished inaccurate particulars of such income. The fact of the total returned income being less than eighty per cent. of the total income assessed is sufficient to bring the assessee within the penal provision enacted in section 271(1)(c). That is achieved by the legal fiction enacted in the Explanation. But, this legal fiction can be displaced if the assessee proves that the failure to return the correct income, that is the total income assessed, did not arise from any fraud or gross or wilful neglect on his part. If the assessee wants to repel the legal fiction and throw the burden of bringing the case within section 271(1)(c) again on the revenue, as it would be in the absence of the Explanation, the assessee has to show - and tis burden is upon him - that his failure to return the correct income did not arise from any fraud or gross or wilful neglect on his part. Now, this burden is not of the same nature as the burden 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 on 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. The only question to which the income-tax authority has to address itself is, whether on the material on record in the penalty proceedings, can it 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. If the answer to the question is in the affirmative, the legal fiction enacted in the Explanation cannot arise and the revenue must fail in its attempt to impose penalty on the assessee. If the material on record in the penalty proceedings fairly and reasonably leads to the inference that there was no fraud or gross or wilful neglect on the part of the assessee in not returning the total assessed income, it would almost be impossible for the revenue to contend that the assessee has concealed the particulars of his income or furnished inaccurate particulars of such income so as to attract the applicability of section 271(1)(c) on its own terms independently of the Explanation. But that is not a matter on which we wish to express any final opinion because, in the present case, the attempt to levy penalty on the assessee is founded only on the Explanation and it is the applicability of the Explanation alone which requires to be considered by us in the present references.

5. The main contention urged on behalf of the revenue was that the Tribunal had misconceived the legal position and erroneously cast on the revenue the burden of showing that there was fraud or gross or wilful neglect on the part of the assessee in not returning the total assessed income. The revenue urged that the burden of showing that there was no fraud or gross or wilful neglect on the failure to return the total income assessed was on the assessee and it was not for the revenue to establish affirmatively that there was such fraud or gross or wilful neglect on the part of the assessee. This error in regard to the burden of proof, contended the revenue, vitiated the order of the Tribunal because, if the Tribunal had approached the case correctly and examined whether the assessee had discharged the burden of proof which lay upon it, the Tribunal would have come to the conclusion that the burden was not discharged and it was not possible to say that there was no fraud or gross or wilful neglect on the part of the assessee. Now, on a superficial reading of the order of the Tribunal, this contention of the revenue might seem to derive some support but, reading the order of the Tribunal as a whole, we do not think it would be right to attribute any remissness to the Tribunal on the question of burden of proof. It is clear from the order that the Tribunal was fully conscious of the terms of the Explanation and it was aware that the legal fiction enacted in the Explanation could be displaced only if there was no fraud or gross or wilful neglect on the part of the assessee. That is why the Tribunal addressed itself to the question whether or not there was fraud or gross or wilful neglect on the part of the assessee. The Tribunal could come to either of two conclusions on this question : there was fraud or gross or wilful neglect on the part of the assessee or there was not. It is only if the Tribunal came to the conclusion that there was no fraud or gross or wilful neglect on the part of the assessee that the Tribunal could negative the applicability of the legal fiction enacted in the Explanation. That is what the Tribunal proceeded to consider and when the Tribunal observed that

"on the facts of the case no finding of any fraud or any wilful neglect on the part of the assessee can be recorded"

, what the Tribunal meant was that there was no fraud or gross or wilful neglect on the part of the assessee. We are, therefore, of the view that the charge made by the revenue against the Tribunal that it misconceived the correct position in regard to burden of proof cannot be sustained. We must, however, observe that it would have been better if the Tribunal had phrased its order properly so as to leave no scope for doubt that what it was holding was that the assessee had discharged the burden of showing that there was no fraud or gross or wilful neglect on its part in failing to return the total income assessed. The wording of the order, as it stands, does give rise to scope for misunderstanding. We hope and trust that the Tribunal will in future use language which is plain and unambiguous and disclose clearly that what it is considering is the question whether the assessee has discharged the burden of proof which lies upon him.

6. So far as the facts of the present case are concerned, there is no doubt that the finding reached by the Tribunal that there was no fraud or gross or wilful neglect on the part of the assessee is correct in law. Here it is significant to note that the difference between the returned income and the total assessed income was entirely due to the fact that the Income-tax Officer estimated the profits supposed to have been earned by the assessee. The Income-tax Officer found it difficult to accept the figure of profit appearing from the books of account maintained by the assessee because no quantitative stock account was maintained, a majority of sales were not supported by vouchers and the gross profit disclosed in the books of account appeared to him to be low. It was not the case of the Income-tax Officer that any particular entries in the books of account were false or any particular items of purchase or sale were omitted to be entered in the books of account. It was only because the figures of profit appearing in the books of account. It was only because the figures of profit appearing in the books of account could not be verified by him on account of lack of maintenance of proper verificatory records that the Income-tax Officer estimated the sales and applied a percentage of 7 1/2 per cent. to sales to doctors and a rate of 12 1/2 per cent. to the other sales. It is quite possible that if proper verificatory records had been maintained by the assessee, the income returned might have been accepted as the correct income by the Income-tax Officer. These records might have shown that the accounts maintained by the assessee were correct and reflected the correct income. It is difficult to see how in these circumstances where assessment of total income is made on the basis of estimate it can be said that the failure to return the total assessed income was on account of fraud or gross or wilful neglect on the part of the assessee and, if that be so, it must follow by necessary implication that the failure to return the total assessed income was not on account of any fraud or gross or wilful neglect on the part of the assessee. The burden which lies upon the assessee must be taken in such a case to be discharged so as to repel the applicability of the legal fiction enacted in the Explanation.

7. The revenue relied very strongly on the fact that in the past years also, the Income-tax Officer had declined to accept the books of account of the assessee as reflecting the correct income in the absence of proper verificatory records and made additions in the income returned by it and yet the assessee persisted in not maintaining proper verificatory records and continued to keep the accounts on the same basis as in the past year. This, according to the revenue, constituted gross or wilful neglect on the part of the assessee and it was on account of such gross or wilful neglect that the assessee failed to return the total income assessed and the case, therefore, fell fairly and squarely within the language of the Explanation. This argument, plausible though it may seem, is, in our opinion, wholly fallacious. It proceeds on the assumption that if accounts had been properly maintained by the assessee, they would have disclosed the total income as assessed and in that event there would have been no failure on the part of the assessee to return the total assessed income. This assumption is not well-founded. It is clear law that neglect postulates breach of duty to take care and there is clearly no duty on the assessee to maintain books of account, he runs the risk of best judgment assessment and in a best judgment assessment, it is quite possible that the total income assessed by the Income-tax Officer may be more than the income earned by the assessee. But, apart from this risk of enhanced assessment which the assessee account shall be maintained by an assessee on pain of penalty. Since there is no duty laid by the income-tax law on the assessee to maintain books of account, failure to maintain books of account cannot be said to constitute neglect. But this does not mean that the assessee can escape liability if he maintains false or incorrect accounts. If the assessee maintains books of account, he is under an obligation to see that the accounts shown in the books of account are correct. There would clearly be neglect on the part of the assessee if he maintains accounts which are false or incorrect and on the basis of such false or incorrect accounts he returns income which is not found to be the correct income. But, here, in the present case, there is nothing to show that the accounts maintained by the assessee were false or incorrect. The Income-tax Officer did not find that any particular entries in the books of account were not genuine or any particular items of purchase or sale were omitted to be entered in the books of accounts. The only grievance of the Income-tax Officer was that in the absence of proper verificatory records, it was not possible to verify the figures of profit appearing in the books of account and hence he was not in a position to accept the income returned by the assessee. There was no obligation on the assessee to maintain any verificatory records so that lack of maintenance of such records could be regarded as neglect on the part of the assessee. The assessee could tell the Income-tax Officer that the accounts maintained by it were correct and they reflected the correct profit. The Income-tax Officer might very well say that, in the absence of proper verificatory records, he would not accept the figures of profit appearing in the books of account and make best judgment assessment by making an estimate but from that it does not follow that the accounts maintained by the assessee were false or incorrect or that the income returned by the assessee was not the correct income. Moreover, as pointed out above, it is quite possible that if proper verificatory records had been maintained, they would have shown that the accounts maintained by the assessee were correct and the income returned was the correct income. Failure to return the total assessed income could not, therefore, be said to be due to non-maintenance of proper verificatory records by the assessee.

8. We are, therefore, of the view that in a case like the present, where assessment is made on the basis of an estimate and there is nothing on record to show that any particular entries in the books of account are false or incorrect or any particular items of purchase or sale are omitted to be entered in the books of account, the assessee must be held to have discharged the onus which rests upon him to show that the failure to return the total income assessed was not on account of any fraud or gross or wilful neglect on his part. This view is clearly supported by the decision of a Division Bench of the Kerala High Court in Commissioner of Income-tax v. Sankarsons & Company. We must, in the circumstances, hold that the Tribunal was right in coming to the conclusion that there was no fraud or gross or wilful neglect on the part of the assessee in failing to return the total assessed income and the legal fiction enacted in the Explanation was not attracted and the assessee was accordingly not liable to penalty under section 271(1)(c).

9. We, therefore, answer the question referred to us in each of the references in the affirmative. The Commissioner will pay the costs of each reference to the assessee.