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Additional Commissioner Of Income-Tax, Punjab v. Karnail Singh V. Kaleran
Factual and Procedural Background
In the assessment year 1966–67 the Income-tax Officer received information that the assessee (Shri Karnail Singh) had been found in possession of cash amounting to Rs. 1,72,679 by the police at Ambala Cantt. bus stand on March 1, 1966. The assessee filed a return on August 6, 1966 declaring income of Rs. 163 (interest). Notices were issued under sections 139(2), 142(1), 143(2) and 131 of the Income-tax Act, 1961. After extended examination the Income-tax Officer assessed the assessee on a total income of Rs. 1,77,842 (including Rs. 1,72,679 treated as income from undisclosed source and a Rs. 5,000 bank deposit).
Penalty proceedings under section 271(1)(c) were initiated. Because the minimum penalty exceeded Rs. 1,000 the matter was referred to the Inspecting Assistant Commissioner, who after hearing ordered a penalty of Rs. 50,000. The assessee appealed to the Income-tax Appellate Tribunal which allowed the appeal and deleted the penalty, relying principally on the Supreme Court decision in Commissioner of Income Tax, West Bengal v. Anwar Ali and on the Tribunal's view that the department had not proven that the cash constituted the assessee's income.
The department, dissatisfied with the Tribunal's order deleting the penalty, applied under section 256(1) (later referenced under section 256(2) for a second question) to have a question of law referred to the court. The Tribunal referred the principal question (quoted below) to the court for opinion.
Legal Issues Presented
- Whether, on the facts and in the circumstances of the case, the Tribunal was right in law in holding that no penalty was leviable in this case under section 271(1)(c) read with the Explanation thereto and in deleting the penalty of Rs. 50,000 levied by the Inspecting Assistant Commissioner?
- (A second question referred by the Tribunal and mentioned in the opinion) Whether the Explanation to section 271(1) applies in the circumstances of a case where the Explanation came into force on 1st April 1964 but the alleged fictitious entry was made on 25th February 1964? (The opinion notes this question was conceded by the assessee's counsel to be academic and that the Tribunal did not rely on the Explanation in upholding the assessment.)
Arguments of the Parties
Assessee's Arguments (as presented before the Tribunal)
- The department failed to prove that the cash found in the assessee's possession belonged to him or that it constituted his income.
- The assessee consistently maintained that the money did not belong to him (initially attributing it to a third person and later asserting joint ownership with others); at no point did he assert sole ownership.
- Reliance was placed on the Supreme Court decision in Commissioner of Income Tax, West Bengal v. Anwar Ali, to the effect that rejection of the assessee's explanation does not automatically establish that the amount received constitutes taxable income for penalty purposes.
Revenue's Arguments
- The assessee declared income of only Rs. 163 whereas the finally assessed income (as maintained by the department) was substantially higher (figures in the opinion include assessments of Rs. 1,77,842 and later amounts sustained by the Tribunal up to sums in excess of Rs. 1,37,000), and in view of the Explanation to section 271(1) the burden shifts to the assessee where returned income is less than 80% of assessed income.
- Mr. D.N. Awasthy for the Commissioner contended that the Explanation to section 271(1) (inserted with effect from 1 April 1964) makes the Anwar Ali decision inapplicable to the present facts because that Supreme Court decision did not consider the Explanation; accordingly the Explanation changes the onus and legal effect.
Table of Precedents Cited
| Precedent | Rule or Principle Cited For | Application by the Court |
|---|---|---|
| Commissioner Of Income Tax, West Bengal v. Anwar Ali [1970] 76 I.T.R 696 | The principle that penalty proceedings under the relevant provision are penal in nature and that the department must establish that the receipt of the amount in dispute constitutes income of the assessee; mere rejection of the assessee's explanation is not sufficient to treat the receipt as taxable income for penalty purposes. | The court applied the ratio of Anwar Ali and held it applicable to s.271(1)(c) despite the Explanation to that section, concluding that the Tribunal was right to delete the penalty because the department had not proved the amount was the assessee's income or that concealment/animus was established. |
| Lal Chand Gopal Das v. Commissioner of Income-tax [1963] 48 I.T.R 324 (All.) | Cited in Anwar Ali as part of the line of argument that penalty could be treated as an additional tax (discussion of nature of penalty). | Referenced in discussion of Anwar Ali to explain contrasting views on whether penalty is penal or merely an additional tax; used as background to show Anwar Ali's conclusion that penalty is penal in nature. |
| C.A. Abraham v. Income-tax Officer, Kottayam [1961] 41 I.T.R 425 | Earlier observations that were relied upon in debates as to whether penalty is in substance additional tax; noted the context differences in which such observations were made. | Referred to in the exposition of Anwar Ali's reasoning to show that earlier cases dealt with different contexts and did not decide the penal nature issue definitively for present purposes. |
| Hindustan Steel Ltd. v. State Of Orissa [1970] 25 S.T.C 211 | Authority indicating that orders imposing penalty are quasi-criminal/penal in character (cited as a comparative precedent). | Used in the opinion to support the view that penalty proceedings are penal in nature and thus to inform the allocation of burden of proof in penalty cases. |
| Fattorini (Thomas) (Lancashire) Ltd. v. Inland Revenue Commissioners (English authority) | English authority cited for the proposition that such proceedings are penal in character. | Cited as supportive foreign authority establishing the penal character of penalty proceedings; no further specific application beyond that contextual support. |
| The Commissioner Of Income-Tax, Ahmedabad v. Messrs Gokuldas Harivallabhdas, Nadiad | Cited (via Chagla C.J.'s observation in Anwar Ali) for the proposition that the gist of the offence is concealment of particulars or deliberate furnishing of inaccurate particulars and that the department must establish that the receipt constitutes income. | Referenced through Anwar Ali's treatment; used to support the rule that the department must establish the receipt as income rather than relying solely on rejection of the assessee's explanation. |
| Dawn and Co. v. Commissioner of Income-tax (Kerala High Court) | Consideration of the Explanation to section 271(1): that the Explanation governs allocation of onus between the assessee and the revenue, and does not negate the principle in Anwar Ali that the department must point to circumstances from which deliberate concealment can be inferred. | Quoted and relied upon to show that the Explanation deals with onus and does not dismantle the Anwar Ali principle; used to reject the contention that the Explanation was intended to get over Anwar Ali. |
| Commissioner of Income-tax v. Sankarsons and Company | Explains the object of the Explanation: to create a presumption (rebuttable on a civil standard) that where returned income is less than 80% of assessed income the assessee shall be deemed to have concealed particulars unless he proves otherwise. | Used to clarify that the Explanation shifts the burden of proof in specified circumstances, but does not obviate the requirement that the department must first have material to establish that the amount represents the assessee's income. |
| Gumani Ram Siri Ram v. Commissioner of Income-tax | Illustrates that mere surrender or possession of an amount does not inevitably establish that the amount represents the assessee's income; revenue must find evidence to support that conclusion. | Relied upon by the court to reinforce the necessity for evidence that the amount in possession is the assessee's income; supported the view that s.271(1)(c) requirements were not satisfied in the present case. |
| Commissioner of Income-tax v. S. Teja Singh | Cited for the general proposition that in the case of deeming provisions the court assumes an unreal state of things to be real but the basis for that assumption (e.g., ownership) must be present. | Used to explain limits of applying a deeming provision: ownership must be established as a factual basis before the deeming fiction can apply. |
Court's Reasoning and Analysis
The court proceeded by examining (a) the Tribunal's findings of fact, (b) the text of section 271(1)(c) and its Explanation, and (c) the Supreme Court decision in Anwar Ali together with subsequent authorities interpreting the role of the Explanation.
Key steps of the court's analysis (as stated in the opinion):
- The Tribunal had found, on the facts, that the assessee had consistently maintained that the cash did not belong to him and that the evidence did not establish ownership. The court treated that factual finding as decisive for penalty purposes because section 69A and the deeming provisions presuppose ownership before deeming possession to be income.
- The court reviewed Anwar Ali's core ratio: penalty proceedings are penal in nature and consequently the department must establish positively that the material which suffices for assessment also suffices for penalty — mere rejection of the assessee's explanation does not automatically establish that the receipt is taxable income or that concealment/animus existed.
- The court considered the Explanation to section 271(1), which creates a rebuttable presumption (by shifting the onus) where the total income returned is less than 80% of the assessed income. The court observed that the Explanation deals with allocation of onus (who must prove absence of fraud or gross/wilful neglect) and not with establishing the foundational fact that the amount in question is the assessee's income.
- Authorities (Dawn & Co., Sankarsons and Company) were examined to show that the Explanation was intended to resolve difficulties about onus and not to displace Anwar Ali's principle that the department must bring circumstances from which deliberate concealment can be inferred. The court noted that the legislative history did not indicate the Explanation was enacted to overrule Anwar Ali.
- The court emphasized the requirement of ownership under section 69A: the deeming of possession to income depends on the assessee being the owner. Given the Tribunal's factual finding that ownership was not established, the deeming provision could not be applied to justify imposing penalty.
- The court also cited commentary (Kanga & Palkhivala) to observe that the Explanation affects the element of animus (conscious concealment) rather than the evidentiary requirement that the amount be shown to be the assessee's income; in doubtful cases where facts are equally consistent with ownership and non-ownership, penalty is not exigible.
On the basis of the above, the court held that the Tribunal was right in deleting the penalty because the department had not shown affirmatively that the monies constituted the assessee's income or that concealment on the part of the assessee was established to the standard necessary for a penal order.
Holding and Implications
Holding: The question referred was answered in the affirmative in favour of the assessee and against the department; the Tribunal was right in law in holding that no penalty was leviable under section 271(1)(c) read with the Explanation, and the penalty of Rs. 50,000 was not sustainable.
Implications:
- Direct effect on the parties: the Tribunal's deletion of the Rs. 50,000 penalty is upheld; the department's challenge fails. The court made no order as to costs.
- Broader legal implication stated by the court: the Explanation to section 271(1) governs the allocation of onus in specified circumstances (returned income less than 80% of assessed income) but does not eliminate the requirement — grounded in Anwar Ali and other authorities — that the department must positively establish that the amount in question represents the assessee's income and that concealment (animus) existed before imposing a penal order. The opinion does not purport to establish a new precedent beyond applying these principles to the facts of this case.
No other orders (including as to costs) were made by the court in the opinion excerpted above.
1. The Income-tax Appellate Tribunal (Chandigarh Bench) has referred the following question of law for our opinion:
“Whether, on the facts and in the circumstances of the case, the Tribunal was right in law in holding that no penalty was leviable in this case under section 271(1)(c) read with the Explanation thereto and in deleting the penalty of Rs. 50,000 levied by the Inspecting Assistant Commissioner?”
2. In the assessment year 1966–67, the Income-tax Officer received information that the assessee had been found in possession of cash amounting to Rs. 1,72,679 by the police at Ambala Cantt. bus stand on March 1, 1966. A notice was issued to him under section 139(2) of the Income-tax Act, 1961 (hereinafter called “the Act”). The assessee filed his return on August 6, 1966, declaring an income of Rs. 163 from interest. Notices were issued to the assessee under sections 142(1), 143(2) and 131 of the Act. He was examined at considerable length and thereafter the Income-tax Officer assessed him on an income of Rs. 1,77,842. The break up of this income is as follows:
(a) Income from interest as declared—Rs. 163.
(b) Amount recovered by the police in possession of the assessee, the source of which was not satisfactorily explained and which was treated as the assessee's income from undisclosed source—Rs. 1,72,679.
(c) Deposit in bank regarding the source of which there was no satisfactory explanation—Rs. 5,000
3. According to the Income-tax Officer the correct income thus was Rs. 1,77,842 as against Rs. 163 declared by the assessee. The assessee was taxed on this income and ultimately the Tribunal maintained the assessment to the tune of Rs. 1,37,679. The Income-tax Officer also initiated penalty proceedings under section 271(1)(c) of the Act, and as the minimum penalty in the case of the assessee worked at more than Rs. 1,000 the proceedings were referred to the Inspecting Assistant Commissioner of Income-tax. The said Commissioner heard the assessee and ordered a penalty of Rs. 50,000. The assessee filed an appeal against the order of the Inspecting Assistant Commissioner levying a penalty of Rs. 50,000. It was urged before the Appellate Tribunal that, in view of the decision of the Supreme Court in Commissioner Of Income Tax, West Bengal v. Anwar Ali [1970] 76 I.T.R 696 the department could not impose the said penalty. The contention was that the department had failed to prove that the amount recovered from the assessee by the police was his income. The contention of the revenue was that the income that was declared by the assessee was Rs. 163 only whereas his correct income had been finally assessed at Rs. 1,37,679. In view of the Explanation to section 271(1)(c) of the Act, apart from the evidence of concealment, the assessee was to be deemed to have concealed particulars of income or furnished inaccurate particulars of such income for the purposes of section 271(1)(c) of the Act, unless he proved that the failure to return the correct income did not arise from any fraud or any gross or wilful neglect on his part. The Tribunal after hearing the department and the assessee allowed the appeal and deleted the penalty under section 271(1)(c) of the Act. While doing so the Tribunal observed as under:
“So far as penalties and their exigibility is concerned we have held in the quantum appeal that Shri Karnail Singh has not been able to prove that the sum as sustained by us did not belong to him but to others also. Therefore, we have sustained the assessment of the sum of Rs. 1,52,679 minus Rs. 1,50,800 in his hands. Right from the beginning when he was arrested by the police, Shri Karnail Singh has been agitating that the whole sum does not belong to him. To start with, he stated that the amount belonged to Shri John D. Singh and later on he put up the plea that the money belonged jointly to himself, Bakhshish Singh, Puran Singh and Babu Singh. He has been very consistent inasmuch as he has never said at any point of time that the money belonged to him. On the other hand, he has been emphatic in saying that the entire money does not belong to him. What has happened in the instant case is that the revenue has not believed him in his statement that the money belonged (sic) to him. We are of the view that, in such cases, the principle laid down in Anwar Ali's case applies because if the assessee has not been able to prove that the money actually belongs to him, the revenue too has not been able to establish that the money belongs to Shri Karnail Singh. And much less that it is his concealed income. They have been able to rope in the assessee under section 69A, because the assessee has not been able to prove his case. While the assessment of the amount in the absence of evidence furnished by the assessee may be well founded the penalty on the basis of such assessment cannot be, because the material which may be sufficient for assessment may not be sufficient for penalty. The revenue has to prove positively that the material which is sufficient for assessment is also sufficient for penalty. The mere assessment of the amount does not automatically lead to the imposition of penalty. The revenue has assessed the amount under section 69A, because the assessee has not been able to prove that he is not the owner of the said money because the explanation offered by him has not been in the opinion of the Income-tax Officer satisfactory and, therefore, the revenue has deemed the said amount to be his income for the financial year. It is one thing that the assessee has not been able to prove that he is not the owner of the amount but it is another thing that the assessee has been proved to be the owner of the amount. Where the assessee cannot prove his case the assessment may be well founded but in order that the revenue may be competent to impose a penalty they have not only to prove that the assessee has not been able to prove his case but they have also to disprove the assessee's case. The only evidence which the revenue has is the factum of the arrest of Shri Karnail Singh by the police who was found to be in possession of the said sum of Rs. 1,72,679.21. That fact alone does not establish that the assessee is liable to be penalised therefor. It cannot be forgotten that all currency notes are legal tenders, and the possession thereof is not an offence. Therefore, in such doubtful cases, penalty under section 271(1)(c) is not exigible. We, therefore, hold that no penalty is leviable under section 271(1)(c) which we delete.”
4. The department was dissatisfied with the order of the Tribunal and moved an application under section 256(1) of the Act requiring the Tribunal to state the question of law already set out above for the opinion of this court. This application was allowed by the Tribunal and that is how the said question of law has been referred to us for our opinion. Mr. D.N Awasthy's contention is that the Supreme Court decision in Anwar Ali's case, on which the Tribunal based itself in deleting the penalty imposed under section 271(1)(c) of the Act does not apply to the facts of the present case. The burden of his argument is that the Explanation to section 271(1) of the Act makes all the difference and as that Explanation was not considered and did not fall for consideration before the Supreme Court, the said decision is no authority for the proposition for which it has been accepted by the Tribunal. Thus, the short question that we are called upon to determine is whether the Explanation does make the decision of the Supreme Court inapplicable. It is, therefore, essential to set out the relevant provisions of section 271(1) of the Act, which are as under:
“If the Income-tax Officer or the Appellate Assistant Commissioner in the course of any proceedings under this Act, is satisfied that any person—….
(c) 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….
(iii) 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.
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 (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 subsection….”
5. The contention of Mr. Awasthy is that the Explanation says that “where the total income returned by the assessee is less than 80 per cent. of his assessed income which is the true income such, assessee shall unless he proves that 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 sub-section (1) of section 271 of the Act”. The Tribunal after considering the facts and circumstances of the case has come to the conclusion that “it is one thing that the assessee has not been able to prove that he is not the owner of the amount but it is another thing that the assessee has been proved to be the owner of the amount”. It is a well-settled rule of law that the provisions of section 271 of the Act are penal provisions. See in this connection the decision of the Supreme Court in Anwar Ali's case, particularly the following observations:
“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. One line of argument which has prevailed particularly with the Allahabad High Court in Lal Chand Gopal Das v. Commissioner of Income-tax [1963] 48 I.T.R 324 All.., is that there was no essential difference between tax and penalty because the liability for payment of both was imposed as a part of the machinery of assessment and the penalty was merely an additional tax imposed in certain circumstances on account of the assessee's conduct. The justification of this view was founded on certain observations in C.A Abraham v. Income-tax Officer, Kottayam [1961] 41 I.T.R 425. 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 is significant that in C.A Abraham's case, this court was not called upon to determine whether penalty proceedings were penal or of quasi-penal nature and the observations made with regard to penalty being an additional tax were made in a different context and for a different purpose. 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). In England also it has never been doubted that such proceedings are penal in character. (Fattorini (Thomas) (Lancashire) Ltd. v. Inland Revenue Commissioners).
6. This brings us to the main ratio of the judgment in Anwar Ali's case. The Supreme Court was dealing with section 28(1) of the Indian Income-tax Act, 1922, and while dealing with this provision, which is more or less analogous to section 271(1)(c) of the Act, their Lordships observed as follows;
“The next question is that when proceedings under sec???on 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 The Commissioner Of Income-Tax, Ahmedabad v. Messrs Gokuldas Harivallabhdas, Nadiad*, the gist of the offence under section 28(1)(c) is that the asssssee 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.”
7. It is no doubt true that the Explanation to section 271(1) of the Act does not figure in section 28 of the 1922 Act, and it is on this basis that the contention of the learned counsel for the Commissioner of Income-tax proceeds, namely, that the Explanation has made the whole difference thereby making the observations of the Supreme Court in Anwar Ali's case, inapplicable to the facts of the present case. It will be, at this stage, appropriate to set out both section 28 of the 1922 Act and section 271 of the Act side by side:
Section 28 of 1922 Act Section 271(1) of 1961 Act (1) If the Income-tax Officer, the Appellate Assistant Commissioner or the Appellate Tribunal, in the course of any proceedings under this Act, is satisfied that any person—…. (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—…. (c) has concealed the particulars of his income or deliberately furnished inaccurate particulars of such income, (c) has concealed the particulars of his income or furnished inaccurate particulars of such income,
he or it may direct that such person shall pay by way of penalty, in the case referred to in clause (a), in addition to the amount of the income-tax and super-tax, if any, payable by him, a sum not exceeding one and a half times that amount, and in the cases referred to in clauses (b) and (c), in addition to any tax payable by him, a sum not exceeding one and a half times the amount of the income-tax and super-tax, if any, which would have been avoid-ed if the income as returned by such person had been accepted as the correct income: he may direct that such person shall pay by way of penalty,—…. (iii) 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. Provided that—…. 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 (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.
8. The purpose of the Explanation seems to differentiate between two types of assessees: those who have reported correct income up to eighty per cent. and those who have not. In the case of one the onus of proving lies on the department and in the case of the other on the assessee. In other words, if an assessee has correctly disclosed his income up to 80 per cent. or more, the onus is on the department to prove that his failure to correctly return the remaining 20 per cent. or less, as the case may be, arose from any fraud or any gross or wilful neglect on the part of the assessee whereas in the case of an assessee who has not correctly returned his income and it is below 80 per cent. and not up to 80 per cent. the onus is on him to prove that the failure to correctly return the income arose not on account of any fraud or gross or wilful neglect on his part and if he fails to prove this it will be deemed that he has concealed the particulars of his income or furnished inaccurate particulars of such income for purpose of clause (c) of this sub-section. This provision was considered by the Kerala High Court in Dawn and Co. v. Commissioner of Income-tax and this is what their Lordships observed:
“Counsel for the department contended that Anwar Ali's case was concerned with section 28(1)(c) of the Indian Income-tax Act, 1922, corresponding to section 271(1)(c) of the Income-tax Act, 1961, and it has no application to section 271(1)(a) of the Act. It was also argued that on account of the Explanation to section 271(1) of the Income-tax Act, 1961, the statute itself gives rise to a presumption of mens rea or knowledge of the wrongful act against the assessee even for purposes of section 271(1)(c) in cases covered by the Explanation and that is an indication to show that the very omission to file the return will give rise to a presumption of conscious violation of section 139(2) by the assessee. It was also pointed out that if the burden is cast on the department to prove want of reasonable cause for failure of the assessee to furnish the return of total income, in effect it will be placing an onus on the department which it will be impossible for them to discharge. According to counsel for the department, a reasonable interpretation of the provision will be to hold that the duty is on the assessee to explain his default and convince the department that it was occasioned by reasonable cause. It is not necessary for us to examine the merits of these contentions, however interesting and plausible they may be, in view of the categorical statement of law by the Supreme Court. At the same time we do not interpret Anwar Ali's case or the case of Hindustan Steel Ltd. to mean that even in cases where an assessee does not offer any explanation to a notice to show cause against the imposition of penalty for default in filing the return in time under section 139(2), it is not open to the Income-tax Officer to infer dishonest disregard of law on the part of the assessee for the imposition of the penalty. The principle of the decision of the Supreme Court is only to the effect that by the mere rejection of the explanation of the assessee to the show-cause notice it does not automatically follow that the necessary ingredient of section 271(1)(a) of the Income-tax Act, 1961, has been made out. It is the duty of the department to point out circumstances from which an inference that the assessee acted deliberately in violation of law can be drawn.”
9. These observations prove that the Explanation was merely appended to section 271(1) for the purpose of onus, that is, in what circumstances the onus will be on the assessee and in what circumstances the onus will be on the department, and that it was not inserted to detract or get over the decision of the Supreme Court. When Mr. Awasthy was asked as to what were the objects and reasons for the Explanation to section 271(1) of the Act and whether it was added in order to get over the decision of the Supreme Court, the learned counsel was unable to say so. It is well-known that whenever the legislature amends an Act or introduces a new provision to get over any judicial decision a mention of this is made in the Statement of Objects and Reasons. As observed in Dawn's case:
“The principle of the decision of the Supreme Court is only to the effect that by the mere rejection of the explanation of the assessee to the show-cause notice it does not automatically follow that the necessary ingredient of section 271(1)(a) of the Income-tax Act, 1961, has been made out. It is the duty of the department to point out circumstances from which an inference that the assessee acted deliberately in violation of law can be drawn.”
10. In the instant case what can be gathered is that the department merely rejected the explanation of the assessee and did nothing more. No further facts were brought to the notice of the Tribunal to bring the case within the ambit of section 271(1)(c) of the Act. In Commissioner of Income-tax v. Sankarsons and Company while dealing with the object of the Explanation, the learned judges observed as follows:
“The object of the Explanation was to get over the difficulty created by the decisions which placed the burden of proving concealment of the particulars of income on the revenue. Now, the Explanation places the burden of proving that the failure to return the correct income did not arise from any fraud or gross or wilful neglect upon the assessee. The purpose of the Explanation is to create a presumption that where the total income returned is less than 80 per cent. of the total income as assessed, the assessee has concealed the income or furnished inaccurate particulars of such income. This presumption can be displaced by the assessee by proving that failure to return the correct income did not arise from any fraud or gross or wilful negligence. The quantum of proof necessary would be that required in a civil case, namely, preponderance of probability. In the light of the Explanation the question for consideration is whether in this case the assessee has discharged the burden thrown upon it. The Appellate Tribunal has referred to the explanation given by the assessee and said that the conclusion in the assessment order regarding the defective nature of the account and suppression of stock is based on mere suspicion and conjecture. It also found that the Income-tax Officer's statement that the figures of opening and closing accounts shown in the trading account are highly suspicious and that in a business of this type the stock available with the assessee should have been much more in view of the turnover shown in the books, are mere surmises. The Tribunal was also of opinion that the finding of the Income-tax Officer that in a business of this type it can never happen that there would be no closing stock was also a mere conjecture. These and other circumstances mentioned in the order of the Appellate Tribunal read in the light of the explanation given by the assessee led the Tribunal to the conclusion that the assessee has proved that there was no fraud or gross or wilful negligence on its part in the failure to return the correct income.”
11. This court had an occasion to consider the provisions of section 271 of the Act in Gumani Ram Siri Ram v. Commissioner of Income-tax and observed as under:
“So far as the Tribunal is concerned it assumed that the amount of Rs. 12,000 represents the income of the assessee and proceeded on that basis. It will be apparent from the two orders already referred to that from the only circumstance that the amount of Rs. 12,000 was surrendered by the assessee an inference has been drawn that the amount represents the income of the assessee. In our opinion, this conclusion is not inevitable. There may be hundred reasons for the assessee to surrender this amount irrespective of the fact whether it was his income or not and it was incumbent, in view of the observations of the Supreme Court in Anwar Ali's case, for the Income-tax Officer to find on evidence that the amount of Rs. 12,000 represented the income of the assessee. Therefore, we are clearly of the view that the requirements of section 271(1)(c) have not been satisfied so as to bring the case of the assessee within the same.”
12. The only criticism that has been levelled against this decision by Mr. Awasthy is that the Explanation to section 271(1) was not relied upon or considered. It may be mentioned that question No. 2 that the Tribunal was asked to refer for the opinion of this court under section 256(2) of the Act was in the following terms;
“Whether, on the facts and in the circumstances of the case, the Explanation to section 271(1) will apply particularly when the said Explanation came into force with effect from 1st April, 1964, while the alleged fictitious entry was made on 25th February, 1964?”
13. In this question there was a specific reference made to the Explanation to section 271(1) of the Act. In fact in the reference application under section 256(2) of the Act, the counsel for the assessee did not press for the reference of the said question and conceded that the second question was only of an academic nature particularly when the Tribunal did not rely on the Explanation in support of the order upholding the levy of penalty by the Appellate Assistant Commissioner. But the fact of the matter is that when this court reversed the decision of the Tribunal no attempt was made by the counsel for the department to justify the decision of the Tribunal on the basis of the Explanation to section 271(1) of the Act. Section 271(1) of the Act provides that there has to be concealment of particulars of the assessee's income or inaccurate particulars of such income as supplied by the assessee. Income is the common factor in both cases and the Explanation also is worded in that manner. It is taken for granted both in this provision and in the Explanation that what is concealed are the particulars or what is inaccurately furnished again are the particulars. Of course, the particulars have necessary relation to income. The question will arise whether those particulars relate to income or something other than income. It cannot be assumed in every case that whatever amount is possessed in the form of cash is necessarily income. A thief may have in his pocket money stolen from somebody, and that cannot be said to be income and if this illustration is kept in view the decision of the Supreme Court in Anwar Ali's case shows that it had nothing to do with the Explanation and it would have proceeded on the same lines irrespective of the Explanation. Therefore, we are unable to accept the contention of Mr. Awasthy that the Explanation would have made any difference to the ratio in Anwar Ali's case so far as the interpretation of section 28 of the 1922 Act is concerned if it had been part of it. In our opinion the ratio of that decision holds good also with regard to section 271(1)(c). It is evident that the requirement of section 271(1)(c) so far as the concealment of the particulars is concerned is a common factor in Anwar Ali's case as well as in the present case. At this stage it will be useful to refer to section 69A of the Act, which is in the following terms:
“Where in any financial year the assessee is found to be the owner of any money, bullion, jewellery or other valuable article and such money, bullion, jewellery or valuable article is not recorded in the books of account, if any, maintained by him for any source of income, and the assessee offers no explanation about the nature and source of acquisition of the money, bullion, jewellery or other valuable article, or the explanation offered by him is not, in the opinion of the Income-tax Officer, satisfactory, the money and the value of the bullion, jewellery or other valuable article may be deemed to be the income of the assessee for such financial year.”
14. It will be apparent that an assessee has to be an owner before anything in his possession can be deemed to be his income. It cannot be said in the case of stolen property that the thief is the owner thereof. Therefore, it is evident that section 69-A was enacted to make certain properties as income by the deeming provision but then facts must be found to bring a case within that deeming provision. In other words, in the face of the Tribunal's clear finding that it cannot be assumed that the assessee in the present case was the owner of the money, the deeming provision cannot be made to apply in his case. It is no doubt true that in the case of a deeming provision the court has to assume an unreal state of things to be real: See Commissioner of Income-tax v. S. Teja Singh. But then the basis for that assumption must exist and the basis is ownership of what you possess. In the face of the clear findings of the Tribunal on a question of fact that the assessee was not the owner of the money in his pocket and there being no proof thereof no fault can be found with the conclusion of the Tribunal that the provisions of section 271(1)(c) of the Act are not applicable. This view finds support from the following passage in Kanga and Palkhivala on Income-tax, sixth edition, page 1037:
“The Explanation which was inserted in 1964 enacts that where the total income returned is less than 80 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 been guilty of concealment or furnishing inaccurate particulars. This Explanation has to be construed fairly and reasonably in the context,—the context being that of a highly penal provision. The question arises as to the effect of the Explanation in cases where there is a cash credit in the assessee's books or the assessee is found to be in possession of money or other asset, and the explanation given by the assessee is not accepted by the department with the result that the amount is assessed as income under section 68, 69, 69A or 69B, or where the assessment is made on the basis of an estimate of income. There are two ways of approaching this question, both of which converge on the same conclusion:
(a) As is established by the cases cited above, in order to justify the levy of a penalty two factors must co-exist:
(i) there must be some materials or circumstances leading to the reasonable conclusion that the amount does represent the assessee's income, it being not enough for the purposes of penalty that the amount has been assessed as income; and
(ii) the circumstances must show that there was animus, i.e, conscious concealment or conscious furnishing of inaccurate particulars on the part of the assessee.
The Explanation has no bearing on (i), but it has a bearing only on (ii). The Explanation does not make the assessment order conclusive evidence that the amount assessed was in fact the income of the assessee. No penalty can be imposed if the facts and circumstances are equally consistent with the hypothesis that the amount does not represent concealed income as with the hypothesis that it does. For example, if an assessee gives an explanation which is unproved, but not disproved, i.e, it is not accepted but the circumstances do not lead to the reasonable and positive inference that the assessee's case is false, the Explanation cannot help the department because there would be no material to show that the amount in question was the income of the assessee. On the other hand, where the income returned is less than 80 per cent. of the income assessed and the amount assessed is proved by the department to represent the income of the assessee, the Explanation puts the burden squarely on the assessee to show that there was no fraud or gross or wilful neglect on his part in furnishing his return of income.
(b) Alternatively, even treating the Explanation as dealing with both the ingredients (i) and (ii) set out above, where the circumstances do not lead to the reasonable and positive inference that the assessee's explanation is false, the assessee must be held to have proved that there was no fraud or gross or wilful neglect on his part. Even in this view of the matter the Explanation cannot justify the levy of a penalty. Absence of proof acceptable to the department cannot be equated with fraud or wilful neglect. A fortiori, no penalty can be levied in cases of mere inadvertence or innocent mistake.
The opposite construction of the Explanation would lead to the wholly unacceptable result that if a cash credit represents a borrowing or an asset represents inheritance, but there is no satisfactory proof in support of either, the assessee dare not offer such an explanation for fear that if his case does not carry conviction he would not only be assessed to tax but the whole asset would be taken away from him by way of penalty.”
15. For the reasons recorded above we answer the question referred to us in the affirmative, that is, in favour of the assessee and against the department. In the circumstances of the case, we make no order as to costs.
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