1. This is an application by the Commissioner of Income-tax under Section 256(2) of the Income-tax Act, 1961 (Act No. XLIII of 1961) (hereinafter referred to as "the Act "), for directing the Appellate Tribunal to state the case and refer the following questions of law to this court for its opinion:

"(i) Whether, on the facts and in the circumstances of the case, the Appellate Tribunal was justified in holding that no penalty can be levied under Section 271(1)(c) of the Income-tax Act, 1961 ?

(ii) Whether, on the basis of material on record and in view of specific opportunity given to the assessee to prove the amount as his income, could an inference of concealment of income be drawn or not ?

(iii) Whether it was necessary for the department to prove by positive evidence the fact of concealment and no inference in that behalf could be drawn on the basis of assessment order and other facts and circumstances ?"

2. The facts relevant for our purpose may shortly be stated as follows :

The assessee is a registered firm carrying on the business of manufacturing and selling bidis. For the assessment year 1960-61, the non-applicant assessee filed a return of its income showing the sales at Rs. 6,28,395.23.

3. The Income-tax Officer scrutinised the books of account of the assessee and rejected them as, in his opinion, true profits could not be determined on their basis. He thereupon estimated the income of the assessee from the manufacture and sale of bidis.

4. It was also noticed by the Income-tax Officer that there were no drawings by any of the partners for personal and household expenses; but the assessee had showed a deduction of Rs. 5,000 in the shop expenses on account of messing expenses and other expenses of the partners. The Income-tax Officer held that it was difficult to believe that the expenses of the partners would be only Rs. 5,000 considering their high standard of living. In his opinion, the personal expenses of the partners were debited in the business expenses of the firm under different heads. He, therefore, after taking into consideration the disallowance under different heads in the earlier years, disallowed a sum of Rs. 56,000 out of the expenses claimed by the assessee. He also disallowed Rs. 10,118, which was claimed as interest paid on certain hundies because, in his opinion, the hundies were bogus.

5. The Income-tax Officer thereafter under Section 271(1)(c) of the Act initiated penalty proceedings against the assessee for claiming--

(i) personal expenses of the partners as business expenses; and

(ii) for claiming interest and commission on bogus hundies.

6. However, as the minimum penalty imposable was above Rs. 1,000, he referred the matter to the Inspecting Assistant Commissioner under Section 274(2) of the Act.

7. The Inspecting Assistant Commissioner held against the assessee on both the counts and in consequence levied on it a penalty of Rs. 1,29,340.

8. The assessee appealed to the Tribunal. Two submissions were advanced--

(i) that against the order of the Income-tax Officer holding the hundies to be bogus the assessee had gone up in appeal to the Appellate Assistant Commissioner who had set aside the order of the Income-tax Officer on the point; that he had held that the hundies were genuine and that the assessee was entitled to claim a deduction of Rs. 10,118 on account of interest paid on them ; and that consequently this claim by the assessee could not be a ground for initiating penalty proceedings against it; and

(ii) that even though the Income-tax Officer was of opinion that it was not possible for him to accept that the expenses of the partners were what was shown by the assessee in its books of account, and that even though on that account he was justified in determining the quantum of the income of the assessee by adding to it Rs. 56,000, by disallowing this amount from the expenses claimed by it, it was not permissible for the Inspecting Assistant Commissioner to impose a penalty on the assessee in the absence of any positive evidence to establish that the assessee had concealed the particulars of its income or had furnished inaccurate particulars of such income.

The Tribunal allowed the appeal and set aside the imposition of the penalty holding, inter alia, that the department had only "assumed by way of inference that the particulars as furnished by the assessee were inaccurate" but had not "by positive evidence proved that the particulars of income as furnished by the assessee were in fact inaccurate ".

9. In Commissioner of Income-tax v. Gokuldas Harivallabhdas, [1958] 34 I.T.R. 98 (Bom.)., it was held that the proceedings for the levy of penalty under the Income-tax Act were in the nature of criminal proceedings and it was for the department to prove the concealment.

10. In C. A. Abraham v. Income-tax Officer, [1961] 41 I.T.R 425 ; [1961] 2 S.C.R. 765 (S.C.)., the Supreme Court had held that a penalty was no more than an additional tax.

11. The application of the aforesaid principle was extended to imposition of a penalty for concealment of income by the Allahabad High Court in Lal Chand Gopal Das v. Commissioner of Income-tax, [1963] 48 I.T.R. 324 (All.).. It was held that there was no essential difference between a tax and a penalty and that the proceedings for the levy of a penalty were not in the nature of criminal proceedings.

12. The aforesaid view of the Allahabad High Court did not find favour in this court, where in agreement with the decision in Commissioner of Income-tax v. Gokuldas Harivallabhdas's case, the proceedings for the levy of penalty were always held to be in the nature of criminal proceedings. See Commissioner of Income-tax v. Punjabhai Shah, [1968] 67 I.T.R. 337 (M.P.)..

13. Hewever, the controversy has now been set at rest by the decision of the Supreme Court in Commissioner of Income-tax v. Anwar Ali, [1970] 76 I.T.R. 696, 700, 701 (S.C.). where, dealing with the question, the Supreme Court said :

"The first point which falls for determination is whether the imposition of penalty is in the nature of a penal provision. The determination of the question of burden of proof will depend largely on the penalty proceedings- being penal in nature or being merely meant for imposition of an additional tax, the liability to pay such tax having been designated as penalty under Section 28 ..... It is true that penalty proceedings under Section 28 are included in the expression 'assessment' and the true nature of penalty has been held to be additional tax. But one of the principal objects in enacting Section 28 is to provide a deterrent against recurrence of default on the part of the assessee. The section is penal in the sense that its consequences are intended to be an effective deterrent which will put a stop to practices which the legislature considers to be against the public interest. .... It appears to have been taken as settled by now in the sales tax law that an order imposing penalty is the result of quasi criminal proceedings ; Hindustan Steel Ltd. v. State Of Orissa†., [1970] 25 S.T.C. 211(S.C.).. In England also it has never been doubted that such proceedings are penal in character : Fattorini (Thomas) (Lancashire) Ltd. v. Inland Revenue Commissioners, [1943] 11 I.T.R. (Suppl.) 50 ; [1942] A.C. 643 ; [1942] 1 All E.R. 619 ; 24 T.C. 328 (H.L.)..

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 Commissioner of Income-tax v. Gokuldas Harivallabhadas 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."

14. The question then arises whether the Tribunal was justified in refusing to make a reference on the ground that whether there was concealment or not was a question of fact.

15. Commissioner of Income-tax v. Kotrika Venkataswamy and Sons, [1971] 79 I.T.R. 499 (S.C.)., dealing with a similar question, the Supreme Court held that if, on the material before it, the Tribunal refused to draw the inference that there was concealment, its finding was purely one of fact on which no reference was permissible.

16. In the instant case also the Tribunal considered the totality of material before it and came to the conclusion that no concealment was proved by the department, to warrant the levy of a penalty on the assessee. This finding was a finding of fact and, under the circumstances, the Tribunal was quite justified in rejecting the application of the Commissioner for a reference under Section 256(2), Income-tax Act.

17. The application is dismissed with costs. Hearing fee Rs. 200.