Penalty for concealment not sustained where rejected books and estimated income did not prove fraud or gross neglect.

Penalty under section 271(1)(c) of the Income-tax Act was considered in light of the Explanation placing the burden on the assessee where returned income fell below the prescribed percentage of correct income. The assessee had to show that the shortfall was not due to fraud or gross or wilful neglect. On the facts, the books were not regularly maintained and were rejected, leading to income being estimated at a flat rate; however, that circumstance alone did not establish the statutory concealment or culpable neglect required for penalty. The cancellation of penalty was therefore justified and upheld in favour of the assessee.

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Issues: Whether the penalty under section 271(1)(c) of the Income-tax Act, 1961 was rightly cancelled on the facts found, having regard to the Explanation placing the burden on the assessee where returned income was below the prescribed percentage of correct income.

Analysis: The Explanation required the assessee to show that the shortfall in returned income did not arise from fraud or gross or wilful neglect. The Tribunal proceeded on the correct footing that the burden lay on the assessee. The only established fact was that the books were not regularly maintained and were rejected, leading to estimation of income by a flat rate. Rejection of account books and estimation of income, by themselves, did not establish fraud or gross or wilful neglect necessary for penalty.

Conclusion: The Explanation was correctly applied and the cancellation of the penalty was justified; the answer was in favour of the assessee and against the department.

Final Conclusion: The reference was answered against the department, and the penalty cancellation was upheld.

Ratio Decidendi: Rejection of books of account and estimation of income do not, without more, prove fraud or gross or wilful neglect for penalty under section 271(1)(c) of the Income-tax Act, 1961, where the statutory burden under the Explanation is properly applied.

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