Explanation to section 271(1)(c) presumption arises when returned income under 80% after disallowed bona fide expenditure; assessee must rebut

Scope of the Explanation concerning penalty for inaccurate income returns: the statutory presumption of concealment arises only where returned income is less than eighty per cent of the assessed income after reducing for bona fide expenditure incurred for earning income but disallowed as deduction; consequence: law deems concealment unless the assessee adduces evidence to show failure to return correct income was not due to fraud, gross or wilful neglect. The burden to rebut this presumption rests on the assessee, and the assessing authority must consider whether disallowed bona fide expenditure affected the eighty per cent comparison before imposing penalty.

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Issues: (i) Whether the Tribunal was right in law in cancelling the penalty imposed under section 271(1)(c) where the returned income was less than eighty per cent of the income assessed after a best judgment assessment under section 144.

Analysis: The Explanation to section 271(1)(c) deems concealment or furnishing of inaccurate particulars where returned income is less than eighty per cent of the income assessed as reduced by bona fide expenditure disallowed as deduction; in such cases the burden is on the assessee to prove that the shortfall did not arise from fraud or gross or wilful neglect. This covers assessments made by estimating turnover and profit rate under section 144. The Tribunal erred in placing the prima facie burden on the department to prove fraud or wilful neglect once accounts were rejected and a best judgment assessment made; instead the Tribunal should have examined whether the assessed income had been reduced by any bona fide expenditure disallowed and whether the assessee discharged the onus to show absence of fraud or gross or wilful neglect.

Conclusion: The Tribunal was not right in law in cancelling the penalty; the Explanation to section 271(1)(c) applies to best judgment assessments and the onus to rebut the presumption lies on the assessee; decision answered in favour of the department.

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