Brishketu Saran Sinha, J.:— On the direction of this court, the Income Tax Appellate Tribunal, Patna Bench (Tribunal) has Stated a case with regard to the following question of law:—
“Whether the order of the Tribunal setting aside the imposition of penalty of Rs. 10,000/- upon the assessee is in accordance with the law provided in Section 271(1)(c) of the Income-tax Act, 1961 as it stood amended at the relevant time with effect from the 1st April, 1964?”
2. The assessee is a registered firm and the assessment year is 1966-1967. For the Return of the aforesaid period the Income Tax Officer made an estimated addition of Rs. 20,000/- in the mustard oil account, Rs. 7,200/- in the Arhat account and Rs. 9,000/- under Section 68 of the Income Tax Act respectively. The assessee had shown Rs. 9,000/- as deposit of Rs. 1,500/- each from the six partners. In the absence of necessary and conclusive evidence regarding the nature of these deposits, the same were added as income of the assessee. In rejecting the assessee's case of deposit, the Income Tax Officer took certain circumstances into consideration. In appeal before the Appellate Assistant Commissioner of Income Tax; the assessee disputed the aforesaid additions. The additions of Rs. 20,000/- and Rs. 7,200/- were maintained by the Appellate Assistant Commissioner. With regard to Rs. 9,000/-, the unexplained deposit, the case of the assessee was that Rs. 1,500/- was introduced by each of the six partners from their past savings and that was in keeping with their status and such introduction could not be ruled out. In the alternative, it was argued that if the explanation about the deposits was not accepted, the assessee be given the advantage of telescoping of this amount in view of the substantial, addition made in the trading accounts. As there was an addition of Rs. 27,200/- in the trade accounts for the deficiency of profit, the Appellate Assistant Commissioner, deleted the addition of Rs. 9,000/- and gave the assessee “the benefit of telescoping”
3. A notice was thereafter issued to the assessee under Section 274(2) read with Section 271 of the Income Tax Act, 1961, in which apart from other grounds it was urged that introduction of Rs. 9,000/- in the cash credit by the partners could not be ruled out. It was further urged that Section 271(1)(c), being penal in nature, the onus was on the Revenue to prove beyond doubt that the additional sum of Rs. 9,000/- introduced as cash credit was the concealed income of the firm and that by adopting the test of probabilities, the case of the assessee should have been accepted. The Inspecting Assistant Commissioner of Income Tax, by his order dated the 5th of August, 1969, held that as before the Appellate Assistant Commissioner the assessee requested for the benefit of telescoping the clear inference was that the assessee had admitted that it had made substantial profit in the mustard oil account which was not disclosed. Hence, it was concluded that the assessee had falsified its accounts and what it had kept out of its trading accounts had been re-introduced in the books in the shape of deposits in the name of the six partners. The Inspecting Assistant Commissioner, therefore, held that the assessee had all along endeavoured to conceal its income by giving false explanation. Therefore, the assessee had not discharged the onus cast upon it to show that it was not due to any fraud or gross or wilful neglect on its part. The provisions of Section 271(1)(c) of the Income Tax Act was evidently attracted and a penalty of Rs. 10,000/- was imposed.
4. Aggrieved by the aforesaid order the assessee went up before the Tribunal which, by its order dated 29th June, 1978, held that although the explanation of the assessee with regard to the Introduction of Rs. 9,000/- was rejected, the benefit of telescoping had been allowed. But by mere falsity of explanation it Could not be inferred that the assessee had concealed the amount or furnished inaccurate particulars. By rejecting the explanation the amount could be added in the assessment but the penalty could not be sustained in the absence of proof that the assessee had concealed the amount which was in the nature of income. In coming to this conclusion the Tribunal relied on the case of (1) Commr. Of Income Tax, Kerala v. H.A Mohamed Haneef (83 I.T.R 215). The Penalty, therefore, was held to be improper and was deleted and it was ordered that if the penalty had been collected it should be refunded.
5. In support of this case the Senior Standing Counsel for Revenue has urged that the Tribunal erred in relying upon the case reported in 83 I.T.R 215 in as much as that was a case under Section 28 of the Income Tax Act, 1922 and not under Section 271(1)(c) of the Income Tax Act, 1961. It was urged that the word “deliberately” having been deleted from Section 271(1)(c), that case would have no application to the facts of this case.
6. In (2) The Commissioner Of Income-Tax, Ahmedabad v. Messrs Gokuldas Harivallabhdas, Nadiad* (34 I.T.R 98) Chagla, C.J, delivering the judgment on behalf of a Bench of the Bombay High Court, held that proceedings under Section 28(1)(c) of the Income Tax Act, 1922 was in the nature of penal proceedings and it was not possible to infer from the falsity of the assessee's explanation that the receipt necessarily constituted an income of the assessee. It was further observed that it was necessary for the Department to prove that it was income which he had concealed or in respect of which he had deliberately furnished inaccurate particulars. This view was followed by our High Court in a number of cases but in some cases the Madras and Allahabad High Courts took a different view. In the case of (3) Commissioner of Income Tax v. Anwar Ali (65 I.T.R 95) the Supreme Court laid down the law holding the Patna and the Bombay views to be the correct views. In doing so they followed the earlier decision of the Supreme Court in the case of (4) Hindustan Steel Limited v. State of Orissa (83 I.T.R 26) in which the Supreme Court was called upon to interpret the provisions relating to penalty proceeding under the Orissa Sales Tax Act, Anwar Ali's case has thereafter been followed in three other decisions of the Supreme Court including the case reported in 83 I.T.R 215. In the case of (5) Commissioner of Income Tax v. Khoday Newarea and Sons (83 I.T.R 369) the Supreme Court observed:—
“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.”
7. It was further laid down that penalty could not be levied solely on the basis of the reasons given in the original order of assessment.
8. In the case of (6) Commissioner of Income Tax, Bihar v. Patna Timber Works (106 I.T.R 452) a Bench of this Court in considering the law as engrafted in Section 271(1)(c) of the Income Tax Act, 1961, considered as to what was the effect of the deletion of the word “deliberately”, occurring in the second portion of clause (c). This deletion was the result of the Finance Act of 1964 when an explanation was also added to it. Untwalia, C.J (as he then was) held that if a case is not covered by the explanation, the burden to prove facts to attract the Imposition of penalty under Section 271(1)(c) is still on the Department which has to prove that the particulars furnished were inaccurate to the knowledge of the assessee at the time of return or must be deemed to be inaccurate to his knowledge in the eye of law because the act was done with wilful or gross neglect.
9. It seems, therefore, that under Section 271(1)(c) before penalty can be Imposed, the Revenue must establish that the return furnished was inaccurate to the knowledge of the assessee or was the result of wilful or gross neglect on its part. Mere negligence in furnishing the particulars which are found to be inaccurate will not be enough and the neglect must be either wilful or at least gross, that is to say the act or omission was patently wrong in the eye of law and if the assessee had taken care and exercised diligence, he would not have committed the set or omission.
10. It will now be relevant to consider the facts of the present case. The assessee had shown cash deposit of Rs. 9,000/- by the six partners which had been rejected by the Income Tax Officer. In appeal, the assessee did not give up its case that the cash credit had been introduced by its partners but had alternatively urged that if its stand was not accepted it should be given the benefit of telescoping this amount in the enhanced profit of Rs. 27,200/-. This had been done. In this state can it be said, as has been held by the Inspecting Assistant Commissioner, that the assessee admitted that it had falsified its accounts and had re-introduced its earnings in the mustard oil and agency accounts in the shape of deposits in the name of its six partners. The order of the Inspecting Assistant Commissioner does not refer to any material which would, show that the assessee had admitted in so many words that some of its earnings in the mustard oil and, agency account had been falsely re-introduced in the shape of deposits in the name of its six partners. The Inspecting Assistant Commissioner has held that the explanation given by the assesses with regard to this cash credit was not acceptable and was false. But, as pointed out earlier, merely from the falsity of the explanation it cannot be inferred that there was a case of concealment on the part of the assessee without any conscious act on its part. To sustain penalty, It has further to be shown by the Revenue that the act was patenlty wrong in the eye of law and was the result of wilful or gross neglect. By asking for the benefit of telescoping the assessee was not admitting having furnished false accounts but was merely trying to buy peace. In the case of (7) Commissioner of Income Tax (Central), Calcutta v. Ashoka Marketing Limited (103 I.T.R 543) the Tribunal had held that to avoid protracted appeal proceedings, a compromise was entered between the assessee company and D.J.C Limited whereby a certain sum would be assessed in assessee's hand and omitted from the assessment of D.J.C Limited, the latter undertaking, to meet the tax liability in respect of such inclusion, the balance of benefit being retained by the company; such an arrangement was possible because, D.J.C Limited was one of the companies of Sahu Jain Group. It was held by the Supreme Court that the agreement with D.J.C was a fact appearing from the order of the Tribunal and that was sufficient because whether or not an assessee has concealed Its Income is a question to be decided on the facts of a case and the decision in the present case was based on the argument with D.J.C which the Tribunal accepted as true.
11. In the case of (8) M. Ramaswami Asari v. Commissioner of Income Tax, Madras, (96 I.T.R 546) it was held that the mere fact that the assessee had given up his claim in relation to an Item at the appellate stage will not show that there was in fact concealment of this item and, therefore, levy of penalty in respect of that item was not justified. Similarly, in the case of (9) Commissioner of Income Tax, U.P v. Net Ram Ram Swarup (88 I.T.R 213) it was held that merely because the assessee agree to the inclusion of certain amount as its income and that the offer had been made because the assessee was unable to prove its case for want of proper evidence could not be a ground for Imposing penalty. The same view has been expressed in the case of (10) Commissioner of Income Tax, Andhra Pradesh v. C.V.C Mining Company, Gudur (102 I.T.R 830)
12. From the discussions above, it follows that penalty could not be Imposed on the assessee merely because it had asked for telescoping of Rs. 9,000/- in its enhanced profit and because its explanation with regard to that sum was not found to be true. I am therefore, of the view that the Tribunal was correct in holding that the imposition of the penalty was not justified inasmuch as the Revenue had not discharged its onus by showing that the failure to return the correct income was the result of any fraud or gross or wilful neglect on the part of the assessee.
13. Submission on behalf of the Revenue that the effect of telescoping of the income was that the assessee accepted that it had concealed its income cannot be accepted. In support of this submission reliance was placed upon the case of (11) Durga Timber Works v. Commissioner Of Income-Tax. (79 I.T.R 63). In that case when the assessee was asked to adduce evidence to establish cash credits and explain the source of investment of Rs. 14,100/- it admitted that the amount could be treated as its concealed income and included in its total income for that year. In view of that admission was held that in such circumstances it would amount to laying an impossible burden of proof on the Department and making the provision for imposition of penalty under Section 271(1)(c) wholly unworkable if, even after the assessee had admitted that the omission could be treated as concealed income, the Department had still to prove by independent evidence that the assessee had concealed its income. That case is distinguishable on its own fact because in the case before me there is nothing to show that the assessee had admitted that it had concealed its income.
14. In the result, the answer is that setting aside the imposition of penalty of Rs. 10,000/- upon the assessee is in accordance with law provided under Section 271(1)(c) of the Income Tax Act, 1961, as it stood amended at the relevant time with effect from the 1st of April, 1964. Therefore the reference is answered in the affirmative. The parties will bear their own costs.
15. S. Sarwar Ali, A.C.J I agree.
Reference answered accordingly.