Additions were made to my income and confirmed on appeal. The penalty order simply relies on the reasons in the assessment. Is that enough to sustain a concealment penalty?
No. The Supreme Court held that penalty proceedings are penal in character, so the Department must establish that the disputed receipt is the assessee's income, and must have before it, apart from the falsity of the assessee's explanation, cogent material or evidence from which it can be inferred that he consciously concealed particulars or deliberately furnished inaccurate ones. The original assessment order may be good evidence in the penalty proceedings, but penalty cannot be levied solely on the reasons given in it. Where the Tribunal cancels a penalty on findings of fact, no question of law arises and no reference can be directed.
Decided by the Supreme Court (Supreme Court of India - C.A. Vaidialingam and P. Jaganmohan Reddy JJ; judgment by Vaidialingam J) on 1971-09-22, reported as 1972 AIR 132; 1972 SCR (1) 846; (1972) Tax LR 44; Civil Appeal No 648 of 1967. It bears on section 28(1)(c) of the Indian Income-tax Act, 1922, section 66(2) of the Indian Income-tax Act, 1922, section 271(1)(c) of the Income Tax Act 1961, in Penalty and Evidence & Burden of Proof matters.
This is the case a practitioner cites when the penalty order is a copy of the assessment order. It states the requirement of independent application of mind in the plainest terms and shows what its absence looks like: an officer who says the facts have been fully discussed in the assessment and need not be repeated, and an appellate authority who fills the gap with guesswork. It applies Anwar Ali - that the finding in the assessment is not conclusive though it may be good evidence, and that a false explanation does not by itself give rise to the inference that the disputed amount is income. And it is a useful reminder of the appellate reality: because the Tribunal's conclusion on concealment is one of fact, a well-reasoned cancellation is difficult for the Revenue to disturb, just as a well-reasoned confirmation is difficult for the assessee.
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The respondent firm manufactured silk, carbon papers, typewriter ribbons, liquor, spirituous drugs and chemicals. For assessment year 1955-56 it returned income of Rs 51,214. The Income-tax Officer made several additions and fixed the total at Rs 3,30,474; on appeal that was reduced to Rs 2,09,575, and the Tribunal made no further change. Two of the additions matter. In the pharmaceuticals section the officer found some sale bills forged and some purchasers of tincture fictitious, and no evidence that Kolae powder essential for making tincture had been bought, and inferred that the firm had not manufactured tincture at all but had sold the alcohol illicitly, adding Rs 77,518. In the chemicals section he found part of the sale of ethyl acetate unaccounted and a large deficit of rectified spirit, inferred that spirit had been secreted under the cloak of manufacturing chemicals, and added Rs 9,900. A notice under section 28(1) followed and the officer imposed a penalty of Rs 35,000 by order of 15 February 1963, taking in three further items totalling Rs 32,267 for shortages in twisted silk yarn, artificial silk and unaccounted carbon consumption. The Appellate Assistant Commissioner deleted those three items from the penalty proceedings but confirmed the penalty on the two main items, and made no reduction in the amount even though he had reduced the quantum of concealment. The Tribunal, by order of 13 November 1964, set the penalty aside, and on 7 June 1965 refused a reference on the ground that its reasons rested on findings of fact. The Mysore High Court dismissed the Commissioner's application under section 66(2) on 3 October 1966, and he appealed by special leave. The respondent did not appear.
The appeal was dismissed, with no order as to costs as the respondent had not appeared. The High Court was right to refuse to direct a reference, because the Tribunal's conclusions were findings of fact recorded against the Department and no question of law arose from them. The Court rejected the contention that the Tribunal had interfered summarily: it had considered the circumstances in which the additions came to be made, the points pressed for the assessee and the reasoning of the Appellate Assistant Commissioner. On the pharmaceuticals item the Tribunal held the officer's conclusion that no tincture had been manufactured and only alcohol sold to be purely conjecture or surmise; while accepting that there were many doubtful circumstances, it thought it difficult to hold that Excise authorities present on the premises would have permitted the alcohol to be used otherwise, noted that the sale bills carried proper permit numbers issued by those authorities and that the Department had made no enquiry of them, and found no stock discrepancy in Kola Liquidum taken over the whole period. On the chemicals item it held that although the additions in the assessment might be justified, they could not by themselves establish concealment or deliberate furnishing of inaccurate particulars.
The Court compared the two sets of orders. The Income-tax Officer's penalty order, after reciting the assessee's reply to the show cause notice, said in terms that the facts about the unaccounted items had been fully discussed in the assessment orders and need not be repeated, and then disposed of the plea of no concealment very summarily. The Appellate Assistant Commissioner went further into speculation, guessing that because there were many dry areas bordering Mysore the firm would have surreptitiously sold the alcohol supplied to it instead of using it for tincture, and treating the presence of Excise control as of no consequence. Against that, the Tribunal had made a correct and judicial approach and had set aside the penalty after a fair and full consideration of the material circumstances. The Court then applied Anwar Ali. A principal object of the penalty provision is to provide a deterrent against the recurrence of default, and it is penal in the sense that its consequences are intended as an effective deterrent to practices the legislature considers against the public interest. The Department must establish that the receipt in dispute constitutes the assessee's income; if there is no evidence on the record except an explanation found to be false, it does not follow that the receipt is taxable income, and the mere falsity of the explanation does not necessarily give rise to the inference that the disputed amount represents income. The finding in the assessment proceeding, made for determining or computing the tax, is not conclusive, though it may be good evidence. Before penalty can be imposed, the entirety of circumstances must reasonably point to the conclusion that the disputed amount represented income and that the assessee had consciously concealed particulars of his income or deliberately furnished inaccurate particulars. Applying that, since the officer had expressly rested on the assessment reasoning and the Appellate Assistant Commissioner had added only guesswork, the Department had no other material from which such an inference could reasonably be drawn.
The penalty cannot be levied solely on the basis of the reasons given in the original order of assessment.
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Handle my notice → Ask a CA on WhatsAppNo. The Supreme Court held that penalty proceedings are penal in character, so the Department must establish that the disputed receipt is the assessee's income, and must have before it, apart from the falsity of the assessee's explanation, cogent material or evidence from which it can be inferred that he consciously concealed particulars or deliberately furnished inaccurate ones. The original assessment order may be good evidence in the penalty proceedings, but penalty cannot be levied solely on the reasons given in it. Where the Tribunal cancels a penalty on findings of fact, no question of law arises and no reference can be directed. This was decided by the Supreme Court (Supreme Court of India - C.A. Vaidialingam and P. Jaganmohan Reddy JJ; judgment by Vaidialingam J) and bears on section 28(1)(c) of the Indian Income-tax Act, 1922, section 66(2) of the Indian Income-tax Act, 1922, section 271(1)(c) of the Income Tax Act 1961. It is reported as 1972 AIR 132; 1972 SCR (1) 846; (1972) Tax LR 44; Civil Appeal No 648 of 1967. This is the case a practitioner cites when the penalty order is a copy of the assessment order. It states the requirement of independent application of mind in the plainest terms and shows what its absence looks like: an officer who says the facts have been fully discussed in the assessment and need not be repeated, and an appellate authority who fills the gap with guesswork. It applies Anwar Ali - that the finding in the assessment is not conclusive though it may be good evidence, and that a false explanation does not by itself give rise to the inference that the disputed amount is income. And it is a useful reminder of the appellate reality: because the Tribunal's conclusion on concealment is one of fact, a well-reasoned cancellation is difficult for the Revenue to disturb, just as a well-reasoned confirmation is difficult for the assessee. If it applies to you, the first step is this: Read the penalty order against the assessment order. If it adds nothing but a reference back, attack it for want of independent material rather than re-arguing the additions.
The respondent firm manufactured silk, carbon papers, typewriter ribbons, liquor, spirituous drugs and chemicals. For assessment year 1955-56 it returned income of Rs 51,214. The Income-tax Officer made several additions and fixed the total at Rs 3,30,474; on appeal that was reduced to Rs 2,09,575, and the Tribunal made no further change. Two of the additions matter. In the pharmaceuticals section the officer found some sale bills forged and some purchasers of tincture fictitious, and no evidence that Kolae powder essential for making tincture had been bought, and inferred that the firm had not manufactured tincture at all but had sold the alcohol illicitly, adding Rs 77,518. In the chemicals section he found part of the sale of ethyl acetate unaccounted and a large deficit of rectified spirit, inferred that spirit had been secreted under the cloak of manufacturing chemicals, and added Rs 9,900. A notice under section 28(1) followed and the officer imposed a penalty of Rs 35,000 by order of 15 February 1963, taking in three further items totalling Rs 32,267 for shortages in twisted silk yarn, artificial silk and unaccounted carbon consumption. The Appellate Assistant Commissioner deleted those three items from the penalty proceedings but confirmed the penalty on the two main items, and made no reduction in the amount even though he had reduced the quantum of concealment. The Tribunal, by order of 13 November 1964, set the penalty aside, and on 7 June 1965 refused a reference on the ground that its reasons rested on findings of fact. The Mysore High Court dismissed the Commissioner's application under section 66(2) on 3 October 1966, and he appealed by special leave. The respondent did not appear. The matter was decided on 1971-09-22 by the Supreme Court (Supreme Court of India - C.A. Vaidialingam and P. Jaganmohan Reddy JJ; judgment by Vaidialingam J). On those facts the Supreme Court held as follows. The appeal was dismissed, with no order as to costs as the respondent had not appeared. The High Court was right to refuse to direct a reference, because the Tribunal's conclusions were findings of fact recorded against the Department and no question of law arose from them. The Court rejected the contention that the Tribunal had interfered summarily: it had considered the circumstances in which the additions came to be made, the points pressed for the assessee and the reasoning of the Appellate Assistant Commissioner. On the pharmaceuticals item the Tribunal held the officer's conclusion that no tincture had been manufactured and only alcohol sold to be purely conjecture or surmise; while accepting that there were many doubtful circumstances, it thought it difficult to hold that Excise authorities present on the premises would have permitted the alcohol to be used otherwise, noted that the sale bills carried proper permit numbers issued by those authorities and that the Department had made no enquiry of them, and found no stock discrepancy in Kola Liquidum taken over the whole period. On the chemicals item it held that although the additions in the assessment might be justified, they could not by themselves establish concealment or deliberate furnishing of inaccurate particulars.
The Court compared the two sets of orders. The Income-tax Officer's penalty order, after reciting the assessee's reply to the show cause notice, said in terms that the facts about the unaccounted items had been fully discussed in the assessment orders and need not be repeated, and then disposed of the plea of no concealment very summarily. The Appellate Assistant Commissioner went further into speculation, guessing that because there were many dry areas bordering Mysore the firm would have surreptitiously sold the alcohol supplied to it instead of using it for tincture, and treating the presence of Excise control as of no consequence. Against that, the Tribunal had made a correct and judicial approach and had set aside the penalty after a fair and full consideration of the material circumstances. The Court then applied Anwar Ali. A principal object of the penalty provision is to provide a deterrent against the recurrence of default, and it is penal in the sense that its consequences are intended as an effective deterrent to practices the legislature considers against the public interest. The Department must establish that the receipt in dispute constitutes the assessee's income; if there is no evidence on the record except an explanation found to be false, it does not follow that the receipt is taxable income, and the mere falsity of the explanation does not necessarily give rise to the inference that the disputed amount represents income. The finding in the assessment proceeding, made for determining or computing the tax, is not conclusive, though it may be good evidence. Before penalty can be imposed, the entirety of circumstances must reasonably point to the conclusion that the disputed amount represented income and that the assessee had consciously concealed particulars of his income or deliberately furnished inaccurate particulars. Applying that, since the officer had expressly rested on the assessment reasoning and the Appellate Assistant Commissioner had added only guesswork, the Department had no other material from which such an inference could reasonably be drawn. In the words reproduced by the source cited on this page: "The penalty cannot be levied solely on the basis of the reasons given in the original order of assessment."
It was decided by the Supreme Court on 1971-09-22 and is reported as 1972 AIR 132; 1972 SCR (1) 846; (1972) Tax LR 44; Civil Appeal No 648 of 1967. Binding on every court and authority in India. A Supreme Court decision binds every assessing officer, every Commissioner (Appeals), every bench of the Income Tax Appellate Tribunal and every High Court in India. An officer who declines to follow it is acting contrary to law, and that refusal is itself a ground of appeal. On section 28(1)(c) of the Indian Income-tax Act, 1922, section 66(2) of the Indian Income-tax Act, 1922, section 271(1)(c), the practical question is whether the facts of your own notice match the facts of this case closely enough for the same rule to apply.
It helps the taxpayer. The appeal was dismissed, with no order as to costs as the respondent had not appeared. The High Court was right to refuse to direct a reference, because the Tribunal's conclusions were findings of fact recorded against the Department and no question of law arose from them. The Court rejected the contention that the Tribunal had interfered summarily: it had considered the circumstances in which the additions came to be made, the points pressed for the assessee and the reasoning of the Appellate Assistant Commissioner. On the pharmaceuticals item the Tribunal held the officer's conclusion that no tincture had been manufactured and only alcohol sold to be purely conjecture or surmise; while accepting that there were many doubtful circumstances, it thought it difficult to hold that Excise authorities present on the premises would have permitted the alcohol to be used otherwise, noted that the sale bills carried proper permit numbers issued by those authorities and that the Department had made no enquiry of them, and found no stock discrepancy in Kola Liquidum taken over the whole period. On the chemicals item it held that although the additions in the assessment might be justified, they could not by themselves establish concealment or deliberate furnishing of inaccurate particulars. It arises in Penalty and Evidence & Burden of Proof matters, on section 28(1)(c) of the Indian Income-tax Act, 1922, section 66(2) of the Indian Income-tax Act, 1922, section 271(1)(c) of the Income Tax Act 1961, and was decided by Supreme Court of India - C.A. Vaidialingam and P. Jaganmohan Reddy JJ; judgment by Vaidialingam J. Before relying on it, read the source linked on this page and check whether it has since been distinguished, overruled or overtaken by an amendment to the Income Tax Act. In practice the steps that follow from it are these. Press the point that suspicion, however strong, is not evidence - here the Tribunal accepted there were doubtful circumstances and still held concealment unproved. Point to what the Department did not do. The Tribunal relied on the absence of any enquiry from the Excise authorities whose permit numbers appeared on the sale bills, and on the presence of those authorities on the premises. Do not treat this case as stating the current burden of proof. The statutory scheme for concealment penalties was changed after it, and the applicable Explanation for your year must be applied.
Searched for later treatment; none was found. That is not the same as a source affirming it. The judgment is widely cited but rarely applied. In CIT v Harkaran Das Ved Pal (Delhi High Court, 12 November 2008) it appears only among the authorities the assessee's counsel placed reliance on at para 12, and the Bench decided the penalty question on Sir Shadilal Sugar and on the construction of section 158BFA(2) without adopting it. In CIT v T.K. Manicka Gounder (Madras High Court, 24 January 1989) the Bench distinguished it, holding that it 'was concerned with the interpretation of section 28(1)(c)... and had nothing to do with the interpretation of section 271(1)(c)', and that the Tribunal had referred to it in order to take the case out of the Explanation. In ITO v M/s Sainath Enterprises (Pune Tribunal, 30 November 2016) it appears only in the reproduced order of the Commissioner (Appeals) and in the assessee's submissions, the Tribunal deciding on Reliance Petroproducts. Nothing overruling or doubting the judgment is recorded either. The burden rule it takes from Anwar Ali must in any event be read with the Explanation to section 271(1)(c) of the 1961 Act, which this entry does not examine. No source could be cited for that finding. Checking whether an authority still stands matters as much as knowing what it held: a decision may be overruled on one point and survive on another, or the provision it interprets may have been amended since. Read the source and the editor's note on this page before relying on it in a reply to an Assessing Officer or in an appeal.
Two features of the procedural setting shape what this judgment can be cited for. It arises under the Indian Income-tax Act, 1922: the penalty provision is s.28(1)(c) of that Act, and the matter reached the Supreme Court from a refusal by the High Court to direct a reference under s.66(2). So the Court was not deciding the penalty on the merits. It was deciding whether any question of law arose out of the Tribunal's order at all, and it held that none did, because the Tribunal's conclusions were findings of fact recorded against the Department. That is why the propositions the judgment is cited for are stated the way they are. Penalty proceedings are penal in character; the Department must establish that the disputed receipt is the assessee's income; and, apart from the falsity of the assessee's explanation, there must be cogent material or evidence from which it can be inferred that the assessee consciously concealed particulars or deliberately furnished inaccurate ones. The original assessment order is good evidence in the penalty proceedings, but the penalty cannot rest on the reasons given in the assessment alone. The Court rejected the suggestion that the Tribunal had interfered summarily, pointing to the circumstances in which the additions were made, the points pressed for the assessee and the reasoning of the Appellate Assistant Commissioner. The two items are worth keeping apart. On the pharmaceuticals item the Tribunal held the officer's conclusion that no tincture had been manufactured and only alcohol sold to be conjecture or surmise, accepted that there were doubtful circumstances but thought it difficult to hold that Excise authorities present on the premises would have permitted the alcohol to be diverted, noted that the sale bills carried proper permit numbers and that the Department had made no enquiry of those authorities, and found no stock discrepancy in Kola Liquidum over the whole period. On the chemicals item it held that although the additions in the assessment might be justified, they could not by themselves establish concealment or the deliberate furnishing of inaccurate particulars. It is the second item that carries the general proposition; the first turns on its own evidence. One caution before the judgment is carried into a current penalty matter. The burden rule it applies comes from Anwar Ali and was stated for s.28(1)(c) of the 1922 Act. Under s.271(1)(c) of the 1961 Act the Explanation has to be read with it, and the Explanation shifts the onus in the cases it covers. Check the text of the Explanation as it stood for the year you are dealing with before relying on the burden as this judgment states it. This is an appeal against the refusal of a reference, so the Court decided only that no question of law arose; it did not itself decide whether the firm had concealed anything, and the additions to income stood, having become final. The judgment does not explain why the Appellate Assistant Commissioner, having deleted three of the five items from the penalty proceedings, left the penalty amount of Rs 35,000 untouched, although it notes the point. The harvested text carries the additions to the pharmaceuticals section as Rs 77,518 in one place and Rs 77,588 in another, and the source page's citation list is short, so the ITR reference for this judgment is not recorded here. The batch line refers to section 271(1)(c) of the 1961 Act; the provision actually construed is section 28(1)(c) of the 1922 Act. This library shows the verification state of every entry openly. This entry has not yet been read in full by a chartered accountant. The summary reflects the sources listed on this page. Read the source before you rely on it in a reply to an Assessing Officer or in an appeal before the Commissioner (Appeals) or the Income Tax Appellate Tribunal.
The appeal was dismissed, with no order as to costs as the respondent had not appeared. The High Court was right to refuse to direct a reference, because the Tribunal's conclusions were findings of fact recorded against the Department and no question of law arose from them. The Court rejected the contention that the Tribunal had interfered summarily: it had considered the circumstances in which the additions came to be made, the points pressed for the assessee and the reasoning of the Appellate Assistant Commissioner. On the pharmaceuticals item the Tribunal held the officer's conclusion that no tincture had been manufactured and only alcohol sold to be purely conjecture or surmise; while accepting that there were many doubtful circumstances, it thought it difficult to hold that Excise authorities present on the premises would have permitted the alcohol to be used otherwise, noted that the sale bills carried proper permit numbers issued by those authorities and that the Department had made no enquiry of them, and found no stock discrepancy in Kola Liquidum taken over the whole period. On the chemicals item it held that although the additions in the assessment might be justified, they could not by themselves establish concealment or deliberate furnishing of inaccurate particulars.
TaxSphere, “CIT v Khoday Eswarsa & Sons”, https://taxnotice.vittsphere.com/caselaw/case/cit-v-khoday-eswarsa-penalty-needs-more-than-the-assessment-order/ (validity last checked 2026-08-29)
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