Holding

In penalty proceedings under s.271(1)(c) the revenue bears the burden of proving concealed income and deliberate inaccurate particulars; assessment findings are not conclusive, and the High Court must limit itself to law, with factual determination remitted to the Tribunal.

Issues considered

Whether the burden of proof in penalty proceedings under s.271(1)(c) rests on the revenue.
Whether a finding of undisclosed income in an assessment proceeding is conclusive for penalty purposes.
Whether an ‘intangible’ addition to book profits constitutes real income liable to penalty.
Whether the High Court may decide factual issues in a tax reference or must limit itself to questions of law.
Whether a penalty was leviable against the assessee in the present facts.

Legislation cited

Income Tax Act, 1961s. 260(1), s. 271(1)(c)

Subjects

penaltyincome taxburden of proofconcealed incomequasi‑criminal proceedingassessment vs penaltyintangible additiontax references.271(1)(c)s.260(1)high court jurisdiction

Judgment

618

A ANANTHARAM VEERASINGAIAH & CO.
v.
COMMISSIONER OF INCOME TAX, A.P.
April 15, 1980
8 [N. L. UNTWALIA, R. S. PATHAK AND E. S. VENKATARAMIAH, JJ.]
Income Tax Act, 1961, Section 271(1)(c), scope of Penalty Proceedings irt
quasi judicial and Burden of proof is on Revenue-Secret Profits or undisclosed
income and their actual availability for application by the ass.esSfe-Power of the
High Court in a Tax Reference case, explained.

c The appellant, assessee is an Abkari contractor. It -filed a return of its in-
come for the assessm1e-nt year 1959-60, disclosing a total turnover of
Rs. 10,92,132/- and an income of Rs. 7,704/-. The Income Tax Officer did
not accept the correctness of the return. He found that on 12th December,
l95'i and 16th January, 1958 the excess of expenditure over the disclosed avail-
able cash was Rs. 17,726/- and Rs. 65,066 respectively. He also noticed seve-·
rat deposits, totalling Rs. 28,200, entered in the names of certain Sendhi shop~
D keeP'ers. The Income Tax Officer rejected the account books of the asscssee
and his explanations for the· discrepancies thereof and estimated the assessee's
income on an overall figure of Rs. 5,00,018. In appeal before. the. Appellate
Assistant Commissioner and thereafter before the Income Tax Appellate Tribunal
the assessee succeeded in getting the assessed income reduced to Rs. 1,30,00Ct
in addition to the books profits. Penalty proceedings were taken against the
assessee and the case, was referred to the Inspecting Assistant Commissioner,
E who imposed a penalty of Rs. 75,000 under s. 27l(l)(c) of the Income Tax
Act, 1961. On appeal by the assessee, the Appellate Tribunal held that there
was no positive material to establish that the cash deposits represented con~
cealed inccime. In regard to th·e cash deficits, the' Appellate Tn"bunar noticed
that for the assessment year 1957-58 an addition of Rs. 2,00,000 had been made
to the book profits, and it observed that some part of that amount could have-
been ploughed back into tho business. It held that an amount of Rs. 90,000'
II' representing unledgerised cash credits of that year could be said to have been
introduced in that year. Allowing the appeal, the. Appellate Tribunal set aside
the penalty order made by the Inspecting Assistant Commissioner.

On a reference to the High Court, at the instance of the Commfssioner of
Income Tax, the High Court held that the Appellate Tribunal was not justi~ i
ficd, in holding that no -penalty was 1eviable·. Hence the appeal by special i
G leave. ,'
Directing the Appellate Tribunal to take up the appeal under s:ection 260(1)'
of the Income Tax Act, the Court >--
HELD : An order imp-0sing a penalty is the· result of quasi criminal pro-
ceedings. The burden of proof Ji;es on the Revenue to establish that the dis-
puted amount represents income and that the assessee has consciously conceal-
H ed the particulars of his income or has deliberately furnished inaccurate parti-
culars. It is for the Revenue to prove these ingredients before a penalty caru
be imposed. [622B-C]
VEERASINGAIAH V. C.l.T· 619

Since the burden of proof in a penalty proceeding varies from that invol v-
ed in an assessment proce~dings a finding in an assessment proceeding that a
particular receipt is income cannot automatically be .adopted as a finding to
that effect in the penalty proceeding. In the penalty proceeding the taxing au-
thority is bound to consider the matter afresh on the material before it and,
in the light of th{i burden to prove resting on the Revenue, to ascertain whether
a particular amount is a revenue receipt. No doubt, the fact that the assess-
ment order contained a finding that the disputed amount represents income
constitutes good evidence in the penalty proceeding but the finding in the
assessment proceeding cannot be regarded as conclusive for the purposes of the
penalty proceeding. Before a penalty can be imposed the entirety of the cir-
cumstances must be taken into account and must point to the conclusion that
the disputed amount represents income and that the assessee has consciously
concealed particulars of his income. or deliberately furnished ioaccurate parti-
culars. The mere falsity o.f the explanation given by the asse.ssee is insuffi- c
cient without there being in additiun cogent material Or evidence from which
the n~cessary conclusion attracting a penalty could be drawn. (622C-G]

Commissioner of Income Tax, W&st · Bengal and Anr. v. Anwar Ali
[1970] 76 J.T.R. 696; Commi~ioner of lncome Tax, Madras v. Khoday Eswarsa
and Sons, [1972] 83 I.T.R. 369; applied.
D·
2. Vlhen an 'intangible' addition is made to the book profits during an
assessment proceeding, it is on the basis that the amount represented by that
addition constitutes the undisclosed income of the assessee. That income al-
though commonly described as 'intangible', is as much a part of his real income
as that disclosed by his account books. It has the same concrete. existence. It
could be available to the assessee as the book profits could be. [623A-B]
E
3. Secret profits or undisclosed incon1e of an assessee earned in an earlier
asses.sment year may constitl'lte a fund, even though concealed, from which the
assessee may draw subsequently for meeting expenditure or introducing amounts
in his account books. Any part of that fund need not necessarily be regarded
as the source of unexplained expenditure incurred or of cash credits recorded
during a subsequent assessment year. The mere availability of such a fund
cannot, in all cases, imply that the assessee has not earned further secret profits F'
during the relevant assessn1ent year It is' a matter for consideration by the
taxing authority, in each case, whether the unexplained cash d.eficits and the
cash credits can be reasonably attributed to a pre-existing fund of concealed pro-
fits or they are reasonably exPJained by reference to concealed. income earned in
that very year. In each case the true nature of the cash deficit and the cash cre-
dit must be ascertained from an overall consideration of the particular facts
and circumstances of the caSie. Evidence may exist to Show that reliance can- G·
not be placed completely on the availability of a previously earned undisclosed.
income. A number of circumstances of vital significance may point to the
conclusion that the cash d.eficit or cash credit cannot reasonably be related to
the amount covered by the intangibte: addition but must be regarded as pointing
to the receipt of undisclosed inrome earned during the assessment year under
consideration. It is open to -the Re1'enue to rely on all the circuDtances point-
ing to that conclusion. What those seVeral circurmtanoes can be is difficult to
enumerate and indeed, from the nature of the enquiry, it is alm0st impossible
to do so. However, they must be such as can lead to the firm conclusion that
620 SUPREME COURT REPORTS [1980] 3 S.C.R.

A th: assessee has concealed the particulars of his income or has deliberately fur-
nished inaccurate particulars. [64.JCH, 624AJ

Lagadapn Subha Ramiah v. Commissioner of Income Tax, Madras,
[1956] 30 I.T.R. 593; S. Kuppuswami Mudaliar v. Commissioner of Income Tax,
Madras, [1964] 51 I.T.R. 757; approved.

ti In .an income tax reference, a High Court should co'nfine itself to deciding
the question of law referred to it on facts found by the Appellate Tribunal. It
is the Ap-pelJate Tribunal which has been entrusted with the authority to find
facts. [624D-E]
(
CIVIL APPELLATE JURISDICTION : Civil Appeal No. 2592 of 1972.
·C Appeal by Special Leave from the Judgment and Order dated
9-11-1971 of the Andhra Pradesh High Court in Case Referred No. 4
of 1970. .
S. T. Desai, T. A. Ramachandran, Mrs. !. Ramachandran and
M. N. Tandon for the Appellant.
D S. C. Manchanda, Miss A. Subashini and D. B. Ahuja for the
Respondent.
The Judgment of the Court was delivered by
PATHAK, J. This appeal, by special leave, is directed against a
judgment of the Andhra Pradesh High Court, concerning the scope of
s. 271(1)(c) of the Income Tax Act, 1961.
The assessee is an Abkari contractor. It filed a return of its
income for the assessment year 1959-60, disclosing a total turnover
of Rs. 10,92,132 and an income of Rs. 7,704. The Income Tax
Officer did not accept the correctness of the return. He found tlmt
F on 12th December, 1957 and 16th January 1958 the excess of ex-
penditure over the disclosed available cash as Rs. 17, 720 and
Rs. 650,66 respectively. He also noticed several deposits, total-
ling Rs. 28,200, entered in the names of certain Sendhi shop-keeper;.
The assessee's explanation that the excess "expenditure was met from
amounts deposited with him by some shop-keepers but not entered in
G his books was not accepted. The alternative explanation that expen-
diture incurred earlier had possibly been recorded later was also
rejected. In regard to the cash deposits of Rs. 28,200 the assessee
explained that they represented amounts deposited with it as seeurity.
That explanation was rejected insofar as deposits totalling
Rs. 21,000 were concerned. The Income Tax ,Officer rejected the
account books of the assessee and estimated the assessee's income on
an overall figure of Rs. 5,00,018. In appeal before the Appellate
Assistant Commissioner and thereafter before the Income Tax
VEERASINGAIAR V. C.I.T. (Pathak, J.) 621

Appellate Tribunal, .the assessee succeeded in getting the assessed A-
income reduced to Rs. 1,30,000 in addition to the book profits.
Penalty proceeding were taken against the assessee and the case was
referred to· the Inspecting Assistant Commissioner. The assessee
reiterated the explanation which it had offered in the assessment
proceedings. Predictably, the Inspecting Assistant Commissioner
rejected the explanation and held that the items of cash deficit and B
cash deposits represented concealed income resulting from the
suppressed yield and low selling rates mentioned in the books. He
observed that the assessee had c:oncealed the particulars of his income
and furnished inaccurate of it, and therefore imposed a penalty of
Rs. 75,000 under s.271(1)(c) of the Income Tax Act, 1961. On c
appeai by the assessee, the Appellate Tribunal held that there was
no positive material to establish that the cash deposits represented
concealed income. In regard to the cash deficits, the Appellate
Tribunal noticed that for the assessment year 1957-58 an addition
of Rs. 2,00,000 had been made to the book profits and it observed
that some part of that amount could have been ploughed back into D·
the business. It held that an amount of Rs. 90,000 representing
un!edgerised cash credits of that year cO\Jld be said to have been
introduced in this year. Allowing the appeal, the Appellate Tribunal
set aside the penaty order made by the Inspecting Assistant Conunis-
sioner.
At tbe instance of the Commissioner of Income Tax, the following E
question was referred to the High Court:-
"Whether 011 the facts and in the circumstances of the
case, the Tribunal is justified in holding that no penalty is
leviable ?"
The High Court held that the Appellate Tribunal was not justified p
in holding that no penalty W3.s leviable.
In this appeal, it is nrged by learned counsel for the assessee
that the High Court erred in interfering with a finding of fact, that

t the penalty proceedi'ngs being quasi-criminal the bnrden of proof lay
on the Revenue to establish that a penalty was attracted and that
G.
( the intangible addition of Rs. 2,00,000 represented real income and
the Appelfate Tribunal was right in considering that an amount of
Rs. 90,000 was available to cover. the cash deficits.
Section 271(1) (c) of the Income Tax Act, 1961 provides:-
"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-
( a) * • * •
622 SUPREME COURT REPORTS [1980) 3 S.C.R.
,A (b) • * * *
(c) has concealed the particulars of his income or deli-
berately furnished inaccurate particulars of such
income he may direct that such person shall pay by
way of penalty,
"
B
This is the provision as it stood at the relevant time, It is now
settled law that an order impoing a penalty is the result of quasi-
criminal proceeding and that the burden lies on the Revenue to
establ.ish that the disputed amount represents income and that the
assessee has consciously concealed the particulars of his income or
c has deliberately furnished inaccurate particulars. Commissioner of
Income Tax, West Bengal and Another v. Anwar Ali.(!) It is for the
Revenue to prove those ingredients before a penalty can be imposed.
Since the burden of proof in a penalty proceeding varies from that
involved in an assessment proceeding, a finding in an assessment pro-
ceeding that a particular receipt is income cannot automatically be
D, adopted as a finding to that effect in the penalty proceeding. In the
penalty proceeding the taxing authority is bound to consider the matter
afresh on the material before it and, in the light of the burden to prove
resting on the Revenue, to ascertain whether a particular amount is
a revenue receipt. No doubt, the fact that the assessment order
contains a finding that the disputed amount represents income cons-
E titutes good evidence in the penalty proceeding but the finding in the
assessment proceeding cannot be regarded as conclusive for the
purposes of the penalty proceeding, That is how the law has been
understood by this Court in Anwar Ali (supra), and we believed
'!hat to be the law still. It was also laid down that before a penalty
~an be imposed the entirety of the circumstan.ces must be taken into
F account and must point to the conclusion that the disputed amount
represents income and that the assessee has conciously concealed parti-
culars of his income or deliberately furnished inaccurate particulars.
The mere falsity of the explanation given by the assessee, it was
observed, was insufficient without there being in addition cogent material
of evidence from which the necessary conclusion attracting a penalty
G
could be drawn. These principles were reiterated by this Court in
Commissioner of Income Tax, Madras v. Khoday Eswarsa and
sons, ( 2 )
In the present case, the Appellate Tribunal has relied entirely on
the basic that an intangible addition of Rs. 2,00,000 had been made
•e to the book profits of the assessee for the assessment year 1957-58
(1) (1970) 76 I. T. R. 696,
(2) (1972) 83 I. T. R. 369
VEERASINGAJAH v. C.I.T. (Pathak, J.) 623

and it inferred that an amount of Rs. 90,000 was available for being A
put to use in the year with which we are concerned. Now it can hardly
be denied that when an "intangible' additio"n is made to the book
profits during an assessment proceeding, it is on the basis that the
amount represented by that addition constitutes the undisclosed
income of the assessee That income, although commonly described
as "intangible", is as much a part of his real income as that disclosed B
by his account books. It has the same concrete existence. It could
be available to the assessee as the book profits could be. In
Lagadapati Subha Ramiah v. Commissioner of Income-tax, Mad-
ras(!) the Andhra Pradesh High Court adverted to this aspect of
secret profits and their actual availability for application by the
assessee. That view was affirmed by the Madras High Court in
c
S. Kuppuswami Mudliar v. Commissioner of Income-Tax, Madras.( 2 )
There can be no escape from the proposition that the secret
profits or undisclosed income of an assessee earned in an earlier
assessment year may constitute a r~nd, even though concealed, from
which the assessee may draw sufficient for meeting expenditure or D
introducing amounts in his account books. But it is quite another
thing to say that any part of that fund must necessarily be regarded
as the source of unexplained expenditure incurred or of cash credits
regarded during a subsequent assessment year. The mere availa-
bility of such a fund cannot, in all cases, imply that the assessee has
not earned further secret profits during the relevant assessment year. E
Neither law nor human experiences guarantees that an assessee who
has been dishonest in one assessment year is bound to be honest in
a subsequent assessment year. It is a matter for consideration by
the taxing authority in each case whether the unexplained cash deficits
and the cash credits can be reasonably attributed to a pre-existing
fund of concealed profits or they are reasonably explained by reference F
to concealed income earned in that very year. In each case the true
nature of the cash deficit and the cash credit must be ascertained
from an overall consideration of the particular facts and circum-
stances of the case. Evidence may exist to show that reliance cannot
be placed completely on the availability of a pre\<iously earned undis-
G
closed income. A number of circumstances of vital significance may
point to the conclusion that the cash deficit or cash credit cannot
reasonably be related to the amount covered by the intangible addi-
tion but must be regarded as pointing to the receipt of undisclosed
income earned during the assessment year under consideration. It
is open to the Revenue to rely on al! the circumstances pointing to B
(I) [1956] 30 !.T.R. 593.
(2) [1964] 58 I.T.R. 757.
624 SUPREME COURT REPORTS (1980] 3 S.C.R.

A that conclusion. What those several circumstances can be is di:llicult
to enumerate and indeed, from the nature of the enquiry, it is almost
impossible to do so. In the end, they must be such as can lead to
the firm conclusion that the assessee has concealed the particulars
of his income or has deliberately furnished inaccurate particulars. It
is needless to reiterate that in a penalty proceeding the burden remains
B on the Revenue of proving the existing of material leading to that
conclusion.
The Appellate Tribunal erred in law in confining itself to the fact
that an intangible addition had been added to the assessee's book
profits two years before and that a part of that amount remained
c available to the assessee thereafter, the High Court is right in depart-
ing from that limited approach and in insisting on a consideration of
all the relevant facts and circumstances' of the case relied on by the,
Revenue for purpose of determining whether the Revenue has
succeeded in discharging its burden.
But while considering the legal principles involved in the applica-
D tion of s. 271 (1) (c) the High Court, in our opinion, has erred in
entering into the facts of the case and determining in point of fact
that the assessee earned income during the relevant previous year and
that he w~s guilty of 'concealing such income or furnishing inaccurate
particulars of it Having found that the legal basis underlying the
order of the Appellate Tribunal was not sustainable, the High Court
E should have limited itself to answering the question raised by the
reference in the negative, leaving it to the Appellate Tribunal to take
up the appeal again and redetermine 'it in the light of the law laid
down by the High Court. It is the Appellate Tribunal which has
been entrusted with the authority to find facts. A High Conrt is
confined to deciding the question of law referred to it on facts found
F
by the Appellate Tribunal. That is the kind of order we now propose
to make.
Because the findi1ig of the Appellate Tribunal that no penalty
leviable rests on an erroneous legal basis, we endorse the opinion of
the High Court that the question referred must be answered in the
G negative, But as the High Court should not have rendered fi'ndings of
fact, we vacate the finding of fact reached by the High Court, without
expressing any opinion o'n their correctness, leaving it to the Appellate
Tribunal in exercise of its duty under s. 260(1) of the Income Tax
Act to take up the appeal and to redetermine it conformably to this
judgment and in the light of the principle laid down in it.
B The appeal is disposed of accordingly. There is no order as to
costs-
S.R. Case remitted to Tribunal.
MGIPF-289 SCl/80-2500-6-1-81