Holding

The presumption of concealment under the Explanation to s.271(1)(c) is rebuttable, and where the assessee fails to produce cogent, reliable material to rebut it, the presumption stands and a penalty may be imposed.

Summary

K.R. Sadayappan, a film distributor, purchased a plot of land in his son's name for a total consideration of Rs.1,40,000, but his wealth statement omitted this investment and his return showed only Rs.80,000. The Income Tax Officer treated the unaccounted Rs.18,750 as undisclosed income and imposed a penalty under section 271(1)(c) of the Income Tax Act, invoking the Explanation that a return of less than 80% of assessed income raises a presumption of concealment. The IAC upheld the penalty, but the Tribunal cancelled it, holding that the assessee had not given false particulars and was not wilfully negligent. The Revenue appealed under section 256(2); the High Court said no question of law arose and did not refer the matter. The Supreme Court held that the presumption under the Explanation is rebuttable and, in the absence of cogent evidence to the contrary, stands, making the penalty proper. Consequently, the Court allowed the appeal and directed the Tribunal to refer the question of law to the High Court.

Issues considered

Whether the Appellate Tribunal was correct in cancelling the penalty levied under s.271(1)(c).
Whether the Explanation to s.271(1)(c) creates a rebuttable presumption of concealment that the assessee must discharge with cogent evidence.
Whether the addition of Rs.18,750 represents concealed income of the assessee.

Legislation cited

Finance Act, 1964
Income Tax Act, 1961s. 256(2), s. 271(1)(c), s. 27l(l)(c)

Subjects

Income Taxconcealment of incomerebuttable presumptionpenaltysection 271wealth statementfraudgross neglect

Judgment

COMMISSIONER OF INCOME-TAX, MADRAS A
v.
K.R. SADAYAPPAN

JULY 10, 1990

[SABYASACHI MUKHARJI. CJ AND K.N. SAIKIA, J.] B

Income Tax Act, 1961: s. 271( l)(c)-Explanation (introduced by
Finance Act, 1964)-Deemed concealment of income-Total income
returned less than 80 per cent of the total income assessed-Rebut/able
'y presumption raised against the assessee-Validity of.

Under the Explanation added to s. 27l(l)(c) of the Income Tax
c
Act 1961 by the Finance Act, 1964, the assessee, in a case where the
total income returned was less than 80 per cent of the total income
assessed, was to be deemed to have concealed the particulars of his
income unless he proved that the failure to return the correct income
did not arise from any fraud or gross or wilful neglect on his part. D

In his return of income for the assessment year 1966-67 the
assessee-respondent declared certain loss. The wealth statements called
for did not disclose investment in lands. Later it was found that he had
purchased a plot in his son's name. In the assessment it was stated that
the total consideration was Rs.80,000 out of which Rs.25,000 was the E
payment in respect of the portion purchased for his son. The examina-
~ tion of the material and the document revealed that the total considera-
tion was Rs.1,40,000. The on-money payment made by him on behalfof
his son was Rs.18, 750.

Since the assessee could not adduce evidence to prove the nature F
and source of investment the ITO treated the sum as the undisclosed
income and initiated penalty proceedings under s. 271<l)(c) of the Act
'~ for concealment of income and referred the case to IAC. The IAC
imposed a penalty equal to the income concealed holding that the asses-
see had not discharged the burden cast upon him by the Explanation.
G
In appeal, the Tribunal set aside the penalty on the ground that
the assessee had at no time given any false or different particulars about
this property in his return of income or at any time during the assess-
ment proceedings and, therefore, there could not be any question of his
c:A having filed any incorrect particulars; that since the assessee had not
stated in the assessment proceedings that he had purchased the pro- H

255
256 SUPREME COURT REPORTS [1990] 3 S.C.R.

perty only for Rs.80,000, and during the exannnation and accepted that
A
though there were two agreements but the real consideration was
Rs. l,40,000, it could not be said that he had been wilfully negligent or ~
fraudulent in this regard; that as regards concealment, his explanation
was that there was some cash available for purchase of the plot, and
that no doubt the Income Tax Officer might be justified to say that not
B only this explanation was not conviocing but false the rejection of expla-
nation even on the ground of falsity would not mean that the addition ~
represented the assessee's income and more so of the concealed iocome.
It also refused to refer to the High Court the questions of law preferred y
by the revenue.

In the appeal by the Revenue under s. 256(2) of the Act the High
c Court found that there was no proof to show that the said sum of
Rs.18, 750 represented the income of the relevant year and accordingly
held that no question of law arose.
-16
Allowing the appeal by special leave, the Court,
D
HELD: I. The High Court was in error io not correctly applying
the principles of law laid down by this Court io C.J. T. v. Mussadilal
Ram Bharose, 165 ITR 14 to the facts of the case. The decision, there-
fore, was not sustainable. 1262F J

E 2. I. The presumption that could be raised agaiost the assessee '~
under s. 27I(l)(c) of the Act, as it stood at the relevant time, that he was
guilty of fraud or gross or wilful neglect resulting io concealment of
income was a rebuttable presumption and if there was cogent material
to rebut the evidence that was acceptable, the said presumption would
•
::~

not stand. [261E; 262B)
F
2.2. In the iostant case, the falsity of the explanation given by the
assessee had been accepted by the Tribunal io as much as it had stated ~
that the Income Tax Officer was justified to say that not only the expla-
nation was not convincing but false because there was no cash available
to the assessee for payment of the extra money paid. Therefore, no
G explanation was forwarded as to where from the extra money came. If
that was the position and the presumption was further that the assessee
was guilty of fraud, then the subsequent presumption followed that he
had concealed the iocome. [262B-D I l-
2.3. The presumption thus raised against the assessee that he was
H guilty of fraud or wilful neglect as a result of which he had concealed the
C.l.T. v. K.R. SADAYAPPAN [MUKHARJI, CJ.] 257

income, woola be there. This presumption could have been rebutted ny
A
cogent, reliable and relevant materials. No such attempt was made in
the case. It could not, therefore, be said that the Tribuoal was justified
in rejecting the claim. [262E-F J

[Statement of the case to be forwarded by the Tribunal within

'
four months and the High Court to dispose of the reference as quickly 8
as possible.] [262G]

'°y CIVIL APPELLATE JURISDICTION: Civil Appeal No. 1248
of 1978.

From the Judgment and Order dated 9.3.1977 of the Madras
High Court in T.C. Petition No. 362of 1975. c

""":>- . B.B. Ahuja and Ms. A. Subhashini for the Appellant.

A.T.M. Sampath and P.N. Ramalingam for the Respondent.
D
The Judgment of the Court was delivered by

SABYASACHI MUKHARJI, CJ. This is an appeal by special
leave from the judgment and order of the Madras High Court dated 9th
March, 1977. The appeal involves the assessment of income-tax unaer
the Income Tax Act, 1961 (hereinafter referred to as 'the Act') for the E
assessment year 1966-67. The assessee is an i11dividual who carried on
business in distribution of films for the assessment year 1966-67. The
assessee filed a return of income on 12th July, 1968 declaring "No
loss". Subsequently, the assessee filed a revised return on 4th January,
1969 declaring a net loss of Rs.9,490. The Income Tax Officer called
for wealth statements from the assessee. The wealth statements did F.
not reveal that the assessee had invested any amount in the plot of land
in T. Nagar. However, a raid made in the premises of E.V. Saroja and
K.R. Sadayappan revealed the information that the assessee along
with Smt. P.S.S. Ekammai Achi and A.L.N. Perianna Chettiar had
purchased a plot of land in T. Nagar on 13.4.1965. from Smt. K.V.
Saroja. The plot was purchased in the name of the assessee's son Sri G
Ramakrishnan.

In the assessment, it was stated that the total consideration was
Rs.80,000 out of which Rs.25,000 was the payment in respect of the
portion purchased in the name of Sri Ramakrishnan. The examination
of all the materials including the document revealed that the total H
258 SUPREME COURT REPORTS [1990} 3 S.C.R.

consideration was Rs.1,40,000. The on-money payment made by the
A
assessee on behalf of his son was Rs.18,750 for which the assessee
could not adduce evidence to prove the nature and source of invest-
ment. This sum of Rs.18,750 was treated by the Income Tax Officer as
the undisclosed income of the assessee and he initiated penalty
proceedings under section 27!(1)(c) of the Act for conceahnent of
B income and referred the case to the I.A.C. for disposal as the
minimum penalty leviable exceeded Rs.1,000. The I.A.C. imposed a
penalty of Rs.18, 750 being equal to. the income concealed holding that
the assessee had not discharged the burden cast upon him by the
y
Explanation to section 27l(l)(c) of the Act in not adducing any
evidence that the plot was purchased by the assessee's son out of his
own funds and against the assessee's own statement recorded on
c 9 .10 .1972 that the on-money payment was made by him. The assessee
filed an appeal to the Tribunal and contended that in case of rejection
of assessee's explanation for the source, the addition could not be held·
to be the concealed income of the assessee, and relied on certain
principles laid down by the courts. The Tribunal allowed the appeal. It
D is necessary to refer to relevant portions of the Tribunal's order in
respect of which certain contentions were urged before us. The Tri-
bunal in its order observed, inter alia, as follows:

"We have considered the rival submissions. At first we
were impressed by the argument of the Departmental
E Representative that it is a fit case for the levy of penalty.
However, when we find that the assessee had at no time
given any false or different particulars about this property
in his return of income or at any time during the assessment
proceedings, there cannot be any question of his having
filed any incorrect particulars and more so of the income.
F The Departmental Representative was unable to point out
any occasion when the assessee has stated before the
Income Tax Officer during the assessment proceedings that
he had purchased the property oniy for Rs.80,000. On the
other hand, when he was asked to state the consideration of
the prop~rty during the exainination, he accepted that
G there were two agreements but the real consideration was
Rs.1,40,000. That being so, we are unable to accept that
the assessee had been wilfully negligent or fraudulent in
this regard. Then the question arises as to any concealment
in the addition made by the Department as income from
undisclosed sources. Here, the assessee's case was that he
H had prepared a sort of cash statements to show that there
C.l.T. v. K.R. SADAYAPPAN [MUKHARJI, CJ.] 259

was some cash available for this purpose. The Depart-
A
ment's case was that this was only a cash statement and this
statement sufferred fmm certain defects, viz., the absence
of drawings for personal expenses and even the so-called
surplus followed by utilisation for other expenses. No
doubt, the Income Tax Officer may be justified to say that
not only the explanation is not convincing but false, B
because there was no cash available to the assessee for
payment towards the extra money paid. However, rejec-
{ tion of explanation even on the ground of falsity will not
mean that the addition represented the assessee's income
and more so of the concealed income of the assessee. In
fact, the assessee has not accepted the addition before the
Income Tax Officer though he has not gone on appeal for c
reasons best known to him. Whatever it is, there was no
acceptance that the addition represented the concealed
income. Having regard to all these, we are of the view that
the assessee's case falls within the ratio of the decisions in
C.l. T. v. Anwar Ali, 76 ITR 696 and C.l. T. v. Khoday D
Ramarao & Sons, 83 ITR 369. In view of what we have
expressed above, we find no reasons to sustain the penalty.
Accordingly, we cancel the penalty."

The penalty was set aside. Aggrieved by the said order the
revenue moved the Tribunal under s. 256(1) of the Act to refer the E
following questions of law to the High Court:

" (i) Whether on the facts and in the circumstances of the
case the Appellate Tribunal was right in cancelling the
penalty levied u/s 271(i)(c) in the assessee's case?
F
(ii) Whether having regard to the provisions of Explana-
tion to Section 271(1)(c) the Appellate Tribunal's cancella-
tion of penalty is sustainable in law and on the materials on
record?

-(iii) Whether the Appellate Tribunal's view that the addi- G
tion of Rs.18, 750 did not represent the concealed income
of the assessee is based on valid and relevant consideration
and is reasonable view to take on the facts of this case?"

The Tribunal refused to refer the questions stated hereinbefore.
The respondent moved the High Court u/s 256(2) of the Act. The High H
260 SUPREME COURT REPORTS [1990] 3 S.C.R.

Court was of the opinion that no question of law arose and observed,
A
inter a/ia, as follows:

"It appears that the consideration mentioned in the said
deed was Rs.80,000. Finally, as a result of a search con-
ducted in the premises of R. V. Saroja as well as the asses-
B see himself certain documents were seized, which showed
that the actual consideration was Rs.1,40,000 and not
Rs.80,000. In this regard, it was explained that even if it
was considered that the purchase consideration admitted 'I
by the assessee was not adequate, surplus cash balance and
the additional payment, if any, should be deemed to have
been come out of such surplus fund and not out of any
c undisclosed fund. The Income Tax Officer found himself
unable to accept the said explanation for the reason that
the statements of receipts and payment filed by the asses-
~
see only enabled him to reasonably connect some of the
payments, but the said statement could not serve the
D purpose of a regular cash book disclosing such cash
balance, under the assessee's personal expenses were not
shown in the statement. If these were taken note of, the
surplus, if any, would be wiped off. In the end, he came to
the conclusion that the assessee had not accounted for the
full consideration for the plot purchased by him in the
E name of his son and that the balance of the consideration
should have been met out of income from undisclosed
sources.''

According to the High Court, no question of law arose.

F Aggrieved thereby, the revenue moved this Court and obtained
leave under Article 136 of the Constitution. The short point is: In the
facts and circumstances of this case and in the light of law as it stood at
the relevant time, has the assessee been able to discharge his onus to
prove the question which arose in view of the Explanation introduced
by the Finance Act, 1964, section 271 of the Act. The said Explanation
G provides as follows:

"Explanation-where the total income returned by any
person is less than 80% of the total income (hereinafter in
this Explanation referred to as the correct income) as asses-
sed u/s 143 or 144 or s. 147 (reduced by the expenditure
H incurred bona fide by him for the purpose of making or
C.l.T. v. K.R. SADAYAPPAN [MUKHARJI, CJ.] 261

earning any income included in the total income but which
A
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 rleemed to have concealed the
particulars of his income or furnished inaccurate particulars
of such income for the purposes of cl. (c) of this sub- B
section."

It was explained by this Court in CIT v. Mussadilal Ram
Bharose, 165 ITR 14 that under the law as it stood prior to the amend-
ment of 1964, the onus was on the revenue to prove that the assessee
had furnished inaccurate particulars or had concealed the income. Mr.
Ahuja, appearing for the revenue, urged before us that difficulties
c
were found in proving the positive element required for concealment
"":>-·.under the law prior to the amendment and this had to be established by
the revenue. He drew our attention to the observation of this Court at
p. 20 of the report where this Court reiterated that the effect of the
Explanation was that where the total income returned by any person D
was less than 30% of the total income assessed, the onus was on such
person to prove that the failure ,to file the correct income did not arise
from any fraud or any gross or wilful neglect on his part and unless he
did so he should be deemed to have concealed the particulars of his
income or furnished inaccurate particulars for the purpose of section
- - 271(1) of the Act. The position, therefore, is that the moment the E
stipulated difference was there, the onus to prove that it was not the
failure of the assessee or fraud of the assessee or neglect of the asses-
see that caused the difference shifted to the assessee, but it has to be
borne in mind that though the onus shifted, the onus that was shifted
was rebuttable. This Court has explained the position at page 22 of the
report as follows: F

"The position, therefore, in law is clear. If the returned
income is less than 80% of the assessed income, the pre-
sumption is raised against the assessee that the assessee is
guilty of fraud or gross or wilful neglect as a result of which
he has concealed the income but this presumption can be G
rebutted. The rebuttal must be on materials relevant and
cogent. It is for the fact-finding body to judge the rele-
vancy and sufficiency of the materials. If such a fact finding
body, bearing the aforesaid principles in mind, comes to
the conclusion that the assessee has discharged the onus, it
becomes a conclusion of fact." H
262 SUPREME COURT REPORTS [1990] 3 S.C.R.

Mr. Ahuja and Mr. Sam path both relied on this decision to
A
contend what was the position in law. Relying on this decision, Mr.~
Sampath appearing for the assessee sought to urge that in the instant
case, the Tribunal had found that there was explanation for the excess
and that was the end of the matter. No question of law arose there-
after, according to him. It is true that the presumption that arose was
B rebuttable presumption that there was concealment of income and if
there was cogent material co rebut the evidence that was acceptable
then presumption would not stand. In the instant case, the falsity of y
the explanation given by the assessee has been accepted by the
Tribunal. The Tribunal stated that in the instant case no doubt the
Income Tax Officer was justified to say that not only the explanation
was not convincing, but false because there was no cash available to
c the assessee for payment of the extra money paid. Therefore, no
explanation was forwarded as to wherefrom the extra money came. If
that was the position and the presumption was further that the assessee ~
was guilty of fraud, then the subsequent presumption followed that the ·
assessee concealed the income and that can be only rebutted by cogent
D and reliable evidence. No such attempt in this case was made. In that
view of the matter, in our opinion, it cannot be said that in this case the
Tribunal was justified in rejecting the claim and penalty may be
imposed. The presumption raised as aforesaid, that is to say that the
assessee was guilty of fraud or wilful neglect as a result of which the
assessee has concealed the income, would be there. This presumption
E could have been rebutted by cogent, reliable and relevant materials. -
There was none, at least neither the tribunal nor the High Court has
indicated any. If that is the position, the High Court, in our opinion,
was in error in not correctly applying the principles laid down by this
Court in C./. T. v. Mussadilo: Ram Bharose, (supra) and the principles
of law applicable in a situation of this type to the facts of this case and,
F therefore, the decision is not sustainable. In the instant case there was
no controversy that the amount was not the income of the year in _..
question.
In the aforesaid view of the matter, we set aside the judgment
and order of the High Court and direct reference on the aforesaid
question of law to the High Court. Let a statement of the case on the
G aforesaid question be forwarded by the Tribunal within four months
from this date, and the High Court dispose of the reference as quickly
·as possible. · ·
The appeal is allowed and is disposed of in those terms. The cost
of this appeal will be the cost in the reference.
H
P.S.S. Appeal allowed.