S.V. Manohar, J.

1. This reference application relates to the assessment year 1967-68. In the course of the assessment proceedings for this assessment year, the Income Tax Officer recorded his satisfaction that the assessee had concealed his income. The particulars of such concealed income were held by the Income Tax Officer to be as follows :

amounting in all to Rs. 2,14,510. Since the minimum penalty imposable for such concealed income exceeded Rs. 1,000, the Income Tax Officer the proceedings to the Inspecting Assistant Commissioner under section 274(2) of the Income Tax Act, 1961. The notice which was given by the Income Tax Officer to the assessee under section 274 read with section 271 was as follows :

"Whereas, in the course of proceedings before me for assessment year 1967-68, it appears to me that you have concealed the particulars of your income or deliberately furnished inaccurate particulars of such income and whereas the penalty proceedings have to be referred to the Inspecting Assistant Commissioner of Income Tax according to sub-section (2) of section 274 of the Income Tax Act, 1961, you are hereby informed that the case for levy of penalty under clause (c) of sub-section (1) of section 271 is being referred to by me to the Inspecting Assistant Commissioner of Income Tax, (Central) Range-II, Bombay. Further proceedings in regard to the levy of a penalty will take place before the said Inspecting Assistant Commissioner of Income Tax as provided in sub-section (2) of section 274."
2. The Inspecting Assistant Commissioner also gave to the assessee a notice dated March 17, 1972, under section 274(2) read with section 271 of the Income Tax Act, 1961. This notice also stated as follows :

"Whereas the Income Tax Officer, Section XVI (Cent.) Bombay, has, under sub-section (2) of section 274 of the Income Tax Act, 1961, referred your case to me in connection with the penalty proceedings under clause (c) of sub-section (1) of section 271 and whereas it appears to me that you have concealed the particulars of your income or deliberately furnished inaccurate particulars of such income for the assessment year 1967-68. ..."
3. The assessee appeared before the Inspecting Assistant Commissioner who ultimately, by his order dated August 27, 1974, held that, in the facts and circumstances of the case, the Explanation to section 271(1)(c) was attracted. On this basis, he quantified the penalty at Rs. 65,000.

4. The assessee appealed to the Tribunal against the penalty order of the Inspecting Assistant Commissioner. The Tribunal held that the levy of penalty in respect of the income of the wife was not justified. In the respect of the loan of Rs. 50,000 from Messrs. Madhusadan Gordhandas to the assessee, the Tribunal observed that the credit of Rs. 50,000 was not the exclusive credit in the account of Messrs. Madhusadan Gordhandas. There were credits for larger amounts in the earlier two assessment years. Interest of Rs. 33,000 was paid in respect of these larger credits. The earlier credits were accepted by the Department as genuine. Merely because as raid was conducted on the premises of Messrs. Madhusadan Gordhandas and certain loose sheets were seized in which an entry for a cash receipt was noted in the account of the assessee, it could not be said that the credit of Rs. 50,000 appearing in the books of the assessee was not genuine. The Tribunal said that the assessee had discharged the burden by producing a confirmatory letter in respect of this loan from Messrs. Madhusadan Gordhandas. There was not material on record for imposing penalty. Its also came to a similar conclusion with regard to the interest amount as also jewellery of the value of Rs. 1,20,000. In connection with the jewellery, the assessee had contended that the jewellery was owned by the assessee's friend and his wife and had been borrowed by the assessee and his wife to celebrate the festival of "Paryushan". The Tribunal said that the Department had not established, with the help of any positive evidence, that there was any concealment of income in this connection by the assessee. The Tribunal therefore negatived the contention that the main provision of section 271(1)(c) was attracted.

5. Regarding applicability of the Explanation to section 271(1)(c), the Tribunal held that the Income Tax Officer had not recorded his satisfaction that there was any concealment within the meaning of the Explanation to section 271(1)(c), and hence the Inspecting Assistant Commissioner exceeded his jurisdiction in calling in aid the Explanation to section 271(1)(c). The Tribunal, therefore, set aside the levy of penalty under the Explanation to section 271(1)(c).

6. From the above findings, the following question has been referred to us under section 256(1) of the Income Tax Act, 1961 :

"Whether, on the facts and in the circumstances of the case and in law, the Tribunal was justified in holding that the Inspecting Assistant Commissioner was not competent to call in aid the Explanation to section 271(1)(c) and levy penalty when the Income Tax Officer while initiating the proceedings had not done so "
7. In order to answer this question, it is necessary to examine the relevant provisions of section 271 as in force at the relevant time :

"Section 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 - .......

(c) has concealed the particulars of his income or furnished inaccurate particulars of such income.

he may direct that such person shall pay by way of penalty, - .....

(iii) in the cases referred to in clause (c), in addition to any tax payable by him, a sum which shall not be less than twenty percent, but which shall not exceed one and a half times the amount of the tax, if any, which would have been avoided if the income as returned by such person had been accepted as the correct income.

Explanation. - Where the total income returned by any person is less than eight percent of the total income (hereinafter in this Explanation referred to as the correct income) as assessed under section 143 or section 144 or section 147 (reduced by the expenditure incurred bona fide by him for the purpose of making or earning any income included in the total income but which 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 of his part, be deemed to have concealed the particulars of his income or furnished inaccurate particulars of such income for the purposes of clause (c) of this sub-section."

8. Therefore, in order to attract penalty under section 271(1)(c), the Income Tax Officer or the Appellate Assistant Commissioner has to record his satisfaction that the assessee has concealed the particulars of his income or furnished inaccurate particulars or such income. The burden of establishing such concealment or furnishing or inaccurate particulars would be on the Department. If such concealment of furnishing of inaccurate particulars is established by the Department then penalty can be levied as set out under section 271(1)(c)(iii). The Explanation, however, introduces a legal fiction. It sets out that when the total income returned by the assessee is less than 80 percent, of the total income as assessed, such person shall be deemed to have furnished inaccurate particulars of such income or shall be deemed to have furnished inaccurate particulars of such income for the purposes of clause (c) 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. Therefore, by reason of this Explanation in the circumstances set out there, namely when the returned income is less than 80 per cent, of the assessed income, there is a presumption raised under the Explanation that the assessee has concealed his income or has furnished inaccurate particulars of his income. The burden of rebutting this presumption is on the assessee who must establish that his failure to return more than 80 per cent, of the assessed income was not on account of either any fraud or any gross or wilful neglect on this part. The Explanation, therefore, casts, in certain circumstances, a heavy burden on the assessee to establish absence of fraud or gross or wilful neglect on his part.

9. This Explanation cannot in any manner be said to be merely an elucidation of what was already contained in section 271(1)(c), as contended by the Department. Dr. Balasubramaniam contended that this was an Explanation to section 271(1)(c) and, therefore, we must hold that the Explanation merely explains the words used in section 271(1)(c). He submitted that the intention of having the Explanation is to clear up the ambiguity in the section and, therefore, the Explanation to section 271(1)(c) need not be separately referred to in the notice which was issued by the Income Tax Officer as well as by the Inspecting Assistant Commissioner to the assessee in the penalty proceedings. He relied upon a passage at page 50 of Sampath Iyengar's Law of Income Tax, Eighth edition, to the following effect :

"An Explanation is at times appended to a section to explain the meaning of words contained in the section. It becomes a part and parcel of the enactment. The intention of adding an Explanation is to clear up the ambiguity, if any, in the section; it is a subordinate part of the section included for the purpose of arriving at a particular conclusion in the matter of interpreting the statute."
10. These observations, however, are followed by further observations to the effect that :

"There is no general rule, nor can there be any, that an Explanation can, in no case, enlarge the scope of the section to which it is appended...... An Explanation enacting a legal fiction can add to the cases falling within the main provision."
11. We have, therefore, to examine the nature of the Explanation in order to decide whether the Explanation enlarges the scope of section 271(1)(c) or whether it is entailed in section 271(1)(c). A proper reading of the section makes it quite clear that the Explanation makes considerable difference to what was contained in section 271(1)(c). The Explanation creates a legal fiction in certain circumstances to the effect that the assessee shall be deemed to have concealed the particulars of his income or furnished inaccurate particulars of his income in the circumstances set out in the Explanation. But for such a legal fiction, it could never have been said that there was any concealment or furnishing of inaccurate particulars of income simply because the returned income was less than 80 per cent of the assessed income. The Explanation also shifts the burden of proof on the assessee as we have already set out. Therefore, when the Explanation is being resorted to by the Income Tax Officer or by the Inspecting Assistant Commissioner in penalty proceedings, it is essential that the assessee must be informed that penalty proceedings against him are being commenced under the Explanation to section 271(1)(c).

12. In connection with the Explanation to section 271(1)(c), the Supreme Court, in the case of CIT v. Mussadilal Ram Bharose [1987]165ITR14(SC) , has said that the Explanation was added in order to obviate the difficulty felt by the Revenue in establishing the positive element required for concealment under the law prior to the amendment. The effect of the Explanation was that, where the total income returned by any person was less than 80 per cent, of the total income assessed, the onus was on such persons to prove that the failure to file the correct income did not arise from any fraud or gross or wilful neglect on his part.

13. Therefore, the Explanation makes a substantial difference to what was originally contained in section 271(1)(c). In our view, it was essential for the Department to have given notice to the assessee of the fact that penalty proceedings were started against the assessee under the Explanation to section 271(1)(c). Instead, the assessee was merely given a notice under section 271(1)(c). In our view, the Tribunal was justified in coming to the conclusion that the Inspecting Assistant commissioner was not competent to have assumed jurisdiction to call in aid the Explanation to section 271(1)(c) for the purposes of levy of penalty against the assessee when the notice to the assessee was only in respect of penalty proceedings under section 271(1)(c).

14. The learned advocate for the assessee had drawn our attention, in this connection, to a decision of the Gujarat High Court in the case of CIT v. Lakhdhir Lalji [1972]85ITR77(Guj) . In the case before the Gujarat High Court, the notice issued by the Income Tax Officer was for levying penalty for concealment of income. In the assessment proceedings, the Appellate Assistant Commissioner held that there was no concealment of income but there was only under valuations. The penalty proceedings were referred to the Inspecting Assistant Commissioner. The Inspecting Assistant Commissioner levied penalty for furnishing inaccurate particulars of income in the light of the findings given by the Appellate Assistant commissioner in the assessment proceedings. The Gujarat High Court held that the penalty proceedings had been commenced against the assessee on a particular footing, namely, concealment of particulars, of income. But the final conclusion for levying the penalty was based on a different footing altogether, namely, on the footing of furnishing inaccurate particulars of income. Under these circumstances, it could not be said that the assessee had been given a reasonable opportunity of being heard before the order imposing the penalty was passed. The very basis for the penalty proceedings against the assessee initiated by the Income Tax Officer had disappeared when the Appellate Assistant Commissioner held that there was no concealment of income by the assessee. Hence, the conclusion by the Tribunal that the Inspecting Assistant Commissioner had no jurisdiction to impose penalty under section 271(1)(c) for concealment of income was correct.

15. We respectfully agree with the conclusion of the Gujarat High Court. In the present case also, the basis for issuing notice for levying penalty was concealment of income or furnishing inaccurate particulars for income under section 271(1)(c). When the Tribunal held that there was no such concealment of income by the assessee, the very basis for issuing the notice disappeared. The Inspecting Assistant Commissioner could not have proceeded to levy the penalty under the Explanation to section 271(1)(c) in the absence of any initiation of penalty proceedings under the Explanation to section 271(1)(c). These are penalty proceedings and the section must be strictly construed. The assessee, in our view, had no opportunity of meeting the case under the Explanation to section 271(1)(c). The levy of penalty under the Explanation, therefore, was not sustainable. The ratio of the decision in the case of CIT v. Lakhdhir Lalji [1972]85ITR77(Guj) , applies to the present case. The assessee has also referred to two judgments of the Kerala and Allahabad High Courts relating to the nature of penalty proceedings. But, in our view, it is not necessary to refer to them since they do not carry the matter any further.

16. In the premises, the question which is referred to us is answered in the affirmative and in favour of the assessee.

17. No order as to costs.