D.M. Dharmadhikari, C.J.

1. At the instance of the assessee, out of many questions proposed, only the following questions have been referred under Section 256(1) of the Income Tax Act, 1961 :

"1. Whether, on the facts and in the circumstances of the case, the Tribunal was justified in law in confirming the penalty levied under Section 271(1)(c) of the Act to the extent of Rs. 90,000

2. Whether, on the facts and in the circumstances of the case, the Tribunal was right in law in holding that the ratio laid down by the Gujarat High Court judgment in the case of CIT v. Lakhdhir Lalji : [1972]85ITR77(Guj) , was not applicable even when the Commissioner of Income Tax (Appeals) had telescoped the two additions in question in the quantum appeal

6. Whether, on the facts and in the circumstances of the case, the Tribunal was justified in holding that the explanation offered by the asses-see had a ring of a convenient excuse and not a ring of truth

7. Whether, on the facts and in the circumstances of the case, the Tribunal was correct in law in appreciating the different ratios of the Gujarat High Court judgments in the cases of Vinaychand Harilal : [1979]120ITR752(Guj) and Kantilal Manilal : [1981]130ITR411(Guj)

11. Whether, on the facts and in the circumstances of the ease, the Tribunal had any cogent material before it to arrive at the aforesaid findings and whether the same were not based on surmises and conjectures

12. Whether, on the facts and in the circumstances of the case, the Tribunal was justified in drawing an adverse inference as regards the factum of not contesting the additions effectively in relation to the penalty proceedings especially in view of the ratio of the Supreme Court decisions in the case of Anwar Ali : [1970]76ITR696(SC) and Khoday Eswarsa and Sons : [1972]83ITR369(SC)

13. Whether, on the facts and in the circumstances of the case, the Tribunal was justified in holding that the assessee had furnished inaccurate particulars of the income to the extent of Rs. 90,000 and whether the said finding of the Tribunal is sustainable from the material on record "

2. All the above questions are on the justifiability of imposition of penalty on the assessee under Section 271(1)(c) of the Income Tax Act, 1961, and they being interrelated can be dealt with jointly for giving a common answer.

3. The facts leading to the reference of the above questions are as under :

In his assessment case for the year 1974-75, the assessee had in his revised return showed an income of Rs. 95,641. The Income Tax Officer, however, made additions to the income on two counts :

Rs. 80,000 in respect of unexplained cash credit in the name of one Merchant Brothers.

Rs. 90,000 in respect of certain squared up accounts. [The actual amount of squared up account was Rs. 1,40,000 and the Income Tax Officer accepted the assessees explanation regarding the total amount of Rs. 50,000.]

4. On appeal, the Commissioner of Income Tax (Appeals) held that since the Income Tax Officer had regarded all the loans as actually the assessees undisclosed profit, he directed the Income Tax Officer to work out the cash credits. In respect of all the loans, the Income Tax Officer arrived at a figure of Rs. 1,39,100 instead of Rs. 1,70,000.

5. The Tribunal, however, held that since the Income Tax Officer had not fully investigated the question of loan from Merchant Brothers, there was no justification for adding the amount of that loan, i.e., Rs. 80,000. The addition of Rs. 90,000 as unexplained cash credit was however confirmed.

6. The Income Tax Officer initiated penalty proceedings on the basis of two separate amounts, i.e., a loan from Merchant Brothers and the cash credit of Rs. 90,000. It was held that the assessee was guilty of furnishing inaccurate particulars of his income which meant concealment of his income. Invoking Explanation 1 to Section 271(1)(c) of the Act he imposed a penalty of Rs. 1,39,100.

7. The Commissioner of Income Tax (Appeals) relying upon the decisions of the Gujarat High Court in the cases of CIT v. S. P. Bhatt : [1974]97ITR440(Guj) and CIT v. Vinaychand Harilal : [1979]120ITR752(Guj) and by distinguishing the decision of this High Court in the case of Kantilal Manilal v. CIT : [1981]130ITR411(Guj) , cancelled the entire penalty.

8. The case of the assessee against imposition of penalty, which was rejected by the Assessing Officer but accepted by the Commissioner of Income Tax (Appeals), has to be stated first before considering the judgment of the Tribunal against the assessee.

9. In the course of assessment proceedings, the assessee was called upon to explain the genuineness of several squared up accounts in which credits ranging from Rs. 500 to Rs. 5,500 appeared and the total of such cash credits amounts to Rs. 90,000. The assessee expressed its inability to furnish any evidence in support of the genuineness of the accounts stating that the funds were procured as temporary loans by the assessees accountant with whom, its relations got strained and for that reason, the assessee could not even furnish the addresses of the parties to enable the Income Tax Officer to go into the genuineness of the loan transactions.

10. From the order of the Assessing Officer imposing penalty, it appears that the above unexplained cash credits were treated as income of the assessee for the relevant previous year by recourse to Section 68 of the Act, which reads as under :

"68. Cash credits--Where any sum is found credited in the books of an assessee maintained for any previous year, and the assessee offers no explanation about the nature and source thereof or the explanation offered by him is not, in the opinion of the Assessing Officer, satisfactory, the sum so credited may be charged to Income Tax as the income of the assessee of that previous year."

11. The Assessing Officer also took recourse to Explanation 1 to Section 271(1)(c) as was in force in the relevant assessment year prior to the introduction of new Explanation 1 below the said Section 271(1)(c) with effect from April 1, 1976. The original Explanation 1 which was in force in the relevant assessment year 1974-75 reads thus :

"Explanation 1.--Where in respect of any facts material to the computation of the total income of any person under this Act,--

(A) such person fails to offer an explanation or offers an explanation which, is found by the Income Tax Officer or the Appellate Commissioner (or the Commissioner (Appeals)) to be false, or

(B) such person offers an explanation which he is not able to substantiate,

then, the amount added or disallowed in computing the total income of such person as a result thereof shall, for the purposes of Clause (c) of this sub-section, be deemed to represent the income in respect of which particulars have been concealed :

Provided that nothing contained in this Explanation shall apply to a case referred to in Clause (B) in respect of any amount added or disallowed as a result of the rejection of any explanation offered by such person, if such explanation is bona fide and all the facts relating to the same and material to the computation of his total income have been disclosed by him."

12. In the state of the provisions as they existed in the relevant assessment year and the inability of the assessee to satisfactorily explain the cash credits to the extent of the squared up amount of Rs. 90,000, the Assessing Officer in imposing penalty of Rs. 1,39,100 gave the following reasons :

"6. While it is true that the penalty proceedings are separate and distinct from the assessment proceedings and the primary onus of establishing mens rea is on the Income Tax Officer before imposition of a penalty under Section 271(1)(c), it is now equally settled law that the material gathered in the course of the assessment proceedings can also be relied upon in the course of the penalty proceedings unless it is rebutted by the assessee. Significantly, the assessee had not at all cared to lead even the primary evidence to show that the cash credits in its book were genuine. Curiously, the cash credits were not ever ledgerised and these were surreptitiously introduced in the cash book and the amounts were withdrawn before the close of the accounting year. Indeed, the basic facts are within the peculiar knowledge of the assessee itself and it cannot shift the primary burden to the Income Tax Officer by keeping mum. In my view, by not furnishing any evidence to substantiate the transaction in its books, the assessee has made a tacit admission of its guilt and, therefore, there is nothing more for me to establish that the assessee was guilty of furnishing inaccurate particulars of his income which has led to the concealment of the real income. 1 am, therefore, satisfied that the assessee is liable to a penalty in terms of the provisions of Section 271(1)(c) in respect of the squared up accounts also.

Incidentally, the case also falls within the mischief of the Explanation to Section 271(1)(c) as it prevailed at the material time, inasmuch as the total income returned by the assessee was far less than 80 per cent, of the total income as finally assessed after giving effect to the order of the learned Commissioner of Income Tax (Appeals), Baroda. It is for the assessee to prove that the failure to return the correct income did not arise from any fraud or any gross or wilful neglect on its part.

On the facts and in the circumstances. I am satisfied that the assessee had committed a default under Section 271(1)(c) as discussed hereinabove. Considering the merits, however, I am imposing a minimum penalty to Rs. 1,39,100 (rupees one lakh thirty nine thousand one hundred only). The maximum penalty leviable is Rs. 2,78,200."

13. As has been stated above, by referring to the decisions of this court in the case of Vinaychand Harilal : [1979]120ITR752(Guj) and while distinguishing the case of Kantilal Manilal : [1981]130ITR411(Guj) , the Commissioner of Income Tax (Appeals) for setting aside the penalty recorded his reasons thus :

"9. I feel that what has been observed by the High Court about the deeming provisions of Section 69A must apply with equal force to the provisions of Section 68. In the present case it is only by invoking the provisions of Section 68 that the addition has been made. In Vinaychand Hari-lals case : [1979]120ITR752(Guj) , the assessee had even accepted that the deposits were the monies of the appellant. The position is that the deposits remained unexplained. The only explanation of the assessee is that the deposits were received through a person who alone knew the addresses of the depositor and since the relations between that person and the appellant are strained the appellant cannot now furnish the details necessary to prove the source of the deposits. Clearly the position is that the assessee admits his inability to furnish the necessary details and because of his inability, the appellant has even suffered tax on that amount treating it as income under Section 68. These facts do not, however, lead to an inference of fraud and gross or wilful neglect on the part of the appellant. Although the onus is on the appellant to prove that there was no fraud, etc., as observed above, it is not necessary for the appellant to produce any positive material to do so. Merely relying on the material which is already on record the appellant can say that his version certainly cannot be rejected as absurd. It is certainly possible that if temporary loans have been obtained through a particular person, and if the relations with that person are strained, the borrower may not be in a position to furnish any particulars of a loan. In such a situation, although the additions may be justified under Section 68, it would not be correct to infer that the difference between the income returned and the income assessed was due to any fraud or gross or wilful neglect on the part of the assessee. I feel that in this case the facts do not indicate even a slight suggestion of fraud such as would be there in other cases involving totalling mistakes or production of doubtful documents or furnishing of incorrect information. Thus, there is a later case in which the Gujarat High Court has upheld the levy of penalty under the Explanation to Section 271(1)(c), i.e., in the case of Kantilal Manilal v. CIT : [1981]130ITR411(Guj) . That was however a case of unexplained cash used in business where there was mistake in totalling in the books and there were reasons which could suggest fraud, gross or wilful neglect.

In the present case, therefore, the facts are similar to the case of Vinaychand Harilal : [1979]120ITR752(Guj) mentioned above. Following the Gujarat High Court on this point, therefore, I feel that the levy of penalty is not justified either under Section 271(1)(c) or under Section 271(1)(c) read with the Explanation."

14. The Tribunal in appeal preferred by the Revenue reversed the order of the Commissioner of Income Tax (Appeals) and upheld the imposition of penalty by recording its reasons thus :

"9. We now consider the merits of the case. The charge is of supplying inaccurate particulars resulting in concealment. The question therefore is as to who has to prove it. Obviously, the answer is that it is for the party who levels that charge. Thus, the Department has to prove it. In the penalty order, the Income Tax Officer has invoked the Explanation to Section 271(1)(c) but at the time of initiation of penalty proceedings he has not mentioned that section at all. In this respect, the argument of the assessees counsel is fully justified. The assessee would then have no notice that the burden of proving had been shifted on him by reason of the said Explanation and even in the penalty order itself the manner in which the Income Tax Officer has invoked that Explanation stating that incidentally the case falls within the mischief of the Explanation to Section 271(1)(c) shows that the Department is not serious about it and is not basing its case on it. We, therefore, go back to the original position regarding the burden of proof stated above.

Now the factual position to start with was that the Income Tax Officer found squared up accounts wherein the peak was the same as the total of this squared up account amounting to Rs. 90,000 keeping the evidence from Merchant Brothers. Naturally, the question arises where these credits come from. It cannot be for the Income Tax Officer to prove that they were profits of the assessee for the simple reason that the Income Tax Officer cannot possibly know about it. It is a fact which is within the knowledge of the assessee and the assessee alone. In this connection, the reliance placed by the learned Departmental Representative on Sections 101 to 106 of the Evidence Act and the quotations from Sarkar on Evidence is justified. The assessee was asked to produce confirmatory letters from the depositors. He claimed to have produced six of these amounting in total to a deposit of Rs. 15,000. The Income Tax Officer has mentioned only two, amounting in total to Rs. 5,000. Therefore, at best, the evidence in this regard led by the assessee is not at all substantial. The assessees explanation that the accountant who had procured these loans could not be produced because their relations were strained has the ring of convenient excuse and not the ring of truth. There is nothing more than the bald statement of the assessee to support. To a straight question put from the Bench to learned counsel as to what prevented the assessee from getting the summons issued to the accountant, the answer was that this would amount to leading additional evidence which was not necessary according to the decision of the case of S. P. Bhatt : [1974]97ITR440(Guj) . This is a brilliant on-the-spot reply but this is a typical lawyers reply and not the reply of an innocent assessee. How would he know the legal position regarding the burden of proof under S. P. Bhatts case : [1974]97ITR440(Guj) . Moreover, we do not agree with the argument that an overall view has to be taken regarding the total deposits explained by the assessee so as to explain the balance. Lack of proof regarding the balance would remain. It is perfectly possible that an assessee may tell part truth and part falsehood. Indeed most situations are of that kind. That brings us to the legal position as stated in the case of Vinaychand : [1979]120ITR752(Guj) . The same High Court in the later decision of Kantilal Manilals case : [1981]130ITR411(Guj) has however distinguished the decisions in the case of S. P. Bhatt : [1974]97ITR440(Guj) and Vinaychand : [1979]120ITR752(Guj) and stated that it was not the positive case of the Revenue, however, in the penalty proceedings in any of these two cases that any particular entries in the books of account were false or that the accounts were deliberately manipulated to conceal income. In the instant case, it is the clear case of the Revenue, which has been accepted by the Tribunal, that there was manipulation of accounts. Manipulation of accounts, as observed earlier, could only be with a view to defrauding the Revenue because no other explanation therefore has been offered by the assessee (at page 419). The sum and substance of this is that where there is fraud, the decision in the case of Vinaychand Harilal : [1979]120ITR752(Guj) , would have no application. Manipulation of accounts is only a way of defrauding. Kantilal Manilals case : [1981]130ITR411(Guj) , was also one of unexplained cash credits. The facts found in this case is that the cash credits existed. The assessee did not disclose these and they were squared up, obviously with the intention that the Income Tax Officer would not notice and would only notice the squared up itself was another kind of manipulation. Therefore, the decision in Vinaychands case : [1979]120ITR752(Guj) , is not applicable but the decision in Kantilals case : [1981]130ITR411(Guj) is applicable here. At the time of the quantum appeal it is seen from the Tribunals order that the assessees counsel did not contest the addition seriously. Although we are to consider this question separately, we cannot help noting the fact that this amount is not a part amount and the assessee with any conviction would at least have contended the addition with some force. The decisions cited by learned counsel in the cases of CIT v. Anwar Ali : [1970]76ITR696(SC) ; CIT v. Kho-day Eswarsa and Sons : [1972]83ITR369(SC) ; CIT v. Anwar Ali : [1967]65ITR95(Cal) and CIT v. L. H. Vora : [1965]56ITR126(Guj) are well known and they ultimately come to this that the Department has to prove its case in penalty proceedings by cogent evidence and mere falsity of explanation given by the assessee is not sufficient. In this case as indicated above the entire conduct of the assessee, i.e., not getting the accountant to appear before the Income Tax Officer the surreptitious manner of getting the accounts passed by squaring them up, is such that it cannot be said that the Department sought to prove the charge merely on the basis of falsity of the explanation given by the assessee."

15. On behalf of the assessee, learned counsel Shri R. K. Patel argued that merely because the assessee had lost in the quantum proceedings, it did not absolve the Revenue from proving in the penal proceedings by cogent evidence that imposition of penalty was justified. Mere rejection of the explanation of the assessee as false may be sufficient for adding the unexplained cash credit to his income but was not sufficient for levying a penalty under Section 271(1)(c) of the Act. Reliance is placed on the decision of the Supreme Court in the case of Sir Shatlilal Sugar and General Mills Ltd. v. CIT : [1987]168ITR705(SC) .

16. On behalf of the assessee, it was further argued that recourse to Section 68 of the Act could have been made to treat unsatisfactorily explained cash credits as income of the assessee to bring them to tax but the same could not constitute a good ground to impose penalty by recourse to Explanation 1 below Section 271(1)(c). It is submitted that the newly substituted Explanation 1 with effect from April 1, 1976, could not be retrospectively made applicable to the case of the assessee for the assessment year 1974-75. It is further argued that the assessees explanation was that the cash credit represented temporary loans arranged and obtained by their accountant who was no longer in service and with whom the assessees relations had become strained. Merely, because the assessee failed to produce evidence of the accountant in the assessment proceedings was no good ground to impose penalty without the Department discharging its burden of proving mala fides or "mens rea" on the part of the assessee by issuing summons to the said accountant for appearance. Reliance is placed on CIT v. Orissa Corporation (P.) ltd. : [1986]159ITR78(SC) and the decision of the Supreme Court in the case of CIT v. N. A. Mokamed Haneef : [1972]83ITR215(SC) .

17. Shri Bharat Naik, learned counsel appearing for the Revenue, supported the order of the Assessing Officer and the Tribunal stating that the dishonest intention of the assessee is write large on the proceedings of the assessment and in the course of imposition of penalty. The assessee failed to satisfactorily explain the cash credits. They were surreptitiously squared up in the account book with a view to conceal the particulars of income. The non-availability of the accountant and strained relations with him was a lame excuse. Presumption of concealment of particulars of income which can be drawn on the basis of the newly added Explanation to Section 271(1)(c) is based on a procedural provision containing a rule of evidence and has retrospective operation. Reliance is placed on the decision of the Supreme Court in which the presumption under Section 113A of the Evidence Act has been held to be retrospective in application to the penal provisions like Section 306 of the Indian Penal Code. It is held that the provision is merely procedural being a rule of evidence in Gurbachan Singh v. Satpal Singh : 1990CriLJ562 .

18. On the state of the above facts and the reasonings adopted on behalf of the Department, the main question on which the answer of all other questions depends is whether addition of cash credits to the income of the assessee by recourse to Section 68 would justify imposition of penalty with the aid of Explanation 1 as it stood in the relevant assessment year or as it exists on the statute book at the time of passing the order of penalty under Section 271(1)(c) of the Act.

19. In the quantum proceedings, the explanation of the assessee in relation to the cash credits was not accepted and was found to be false. The accountant was not produced and the explanation that relations with him are strained was also found to be an unjustifiable excuse. In the assessment, it was also taken into consideration that the assessee had tried to square up the credit entries to conceal the particulars of income. Only two credit entries were explained and regarding the remaining entries, there were no documents or evidence brought on record. The names of the parties from whom the temporary loans were obtained were not furnished.

20. The question before us is whether the abovementioned facts which resulted in addition of the cash credits as income of the assessee in themselves, without any further evidence, are sufficient for imposition of penalty by recourse to Explanation 1 of Section 271(1)(c) as it stood in the relevant assessment year or at the time when the penalty proceedings were initiated and concluded. We do not consider it necessary to go into the question as to whether Explanation 1 below Section 271(l)(c) is a provision of substantive law or procedural law and whether it is prospective or retrospective in operation. The Explanation is to the effect that where in respect of any fact or material for the purposes of his assessment, an assessee offers an explanation which is found by the Assessing Officer or the Deputy Commissioner of Income Tax (Appeals) to be false or where the assessee is unable to substantiate his explanation, then the amount added to his income shall be deemed to represent his concealed income. The newly introduced Explanation 1 considerably reduces, but does not altogether remove the Departments onus to prove concealment in assessments based on unexplained cash credits or unexplained investment and the like, (see Addl. CIT v. Mangalsen Mohanlal : [1982]136ITR905(All) ). There has not been any significant difference by the introduction of the new Explanation 1 in place of the original Explanation 1 with effect from April 1, 1976. The previous Explanation used the expression "deemed to have concealed the particulars of his income or furnished inaccurate particulars of such income for the purposes of Clause (c) of this subsection," while the present Explanation 1 reads : "such income shall be deemed to represent the income in respect of which particulars have been concealed." In effect, this makes explicit what was implicit in the previous Explanation (see CIT v. Rupabani Theatres P. Ltd. : [1981]130ITR747(Cal) ).

21. The provisions of Section 68 permitting the Assessing Officer to treat unexplained cash credit as income are enabling provisions for making certain additions, where there is failure by the assessee to give an explanation or where the explanation is not to the satisfaction of the Assessing Officer. However, the addition made on this count would not automatically justify imposition of penalty under Section 271(1)(c) by recourse only to Explanation 1 below Section 271(1)(c).

22. In order to justify the levy of penalty, two factors must co-exist, (i) there must be some material or circumstances leading to the reasonable conclusion that the amount does represent the assessees income. It is not enough for the purpose of penalty that the amount has been assessed as income and (ii) the circumstances must show that there was animus, i.e., conscious concealment or act of furnishing of inaccurate particulars on the part of the assessee. The Explanation has no bearing on factor No. 1 but it has a bearing only on factor No. 2. The Explanation does not make the assessment order conclusive evidence that the amount assessed was in fact the income of the assessee. No penalty can be imposed if the facts and circumstances are equally consistent with the hypothesis that the amount does not represent concealed income as with the hypothesis that it does. If the assessee gives an explanation which is unproved but not disproved, i.e., it is not accepted but circumstances do not lead to the reasonable and positive inference that the assessees case is false, the Explanation cannot help the Department because there will be no material to show that the amount in question was the income of the assessee.

23. Alternatively treating the Explanation as dealing with both the ingredients (i) and (ii) above, where the circumstances do not lead to the reasonable and positive inference that the assessees explanation is false, the assessee must be held to have proved that there was no mens rea or guilty mind on his part. Even in this view of the matter, the Explanation alone cannot justify levy of penalty. Absence of proof acceptable to the Department cannot be equated with fraud or wilful default. As we find no material difference between the original Explanation 1 and Explanation 1 as substituted, in our opinion, it has to be so construed as to harmonise it with the basic principles of justice and fairness as in the case of the original Explanation. We are guided by the commentaries of the learned authors Kanga and Palkhiwala, Law and Practice of Income Tax, volume 1, pages 1637, 1639 and 1640.

24. In the instant case, the cash credits were not satisfactorily explained by evidence and documents. The parties who had advanced the alleged temporary loans were neither disclosed with their particulars nor any supporting documents were on record. Only two entries were explained. The accountant who had arranged the loan was not produced stating that he had left the service and relations with him are strained. On this state of accounts and evidence in the quantum proceedings, the Department was justified in treating the cash credits as income of the assessee but merely on that basis by recourse to Explanation 1, penalty under Section 271(1)(c) could not have been imposed without the Department making any other effort to come to a conclusion that the cash credits could in no circumstances could have been amounts received as temporary loans from various parties. The assessee in the quantum proceedings failed to produce the accountant but the Department also in penalty proceedings made no effort to summon him. Applying the test (ii) discussed above, therefore it was a case where there was no circumstance to lead to a reasonable and positive inference that the assessees case--that the cash credits were arranged as temporary loans, was false. The facts and circumstances are equally consistent with the hypothesis that it could have been sundry loans in small amounts obtained from different parties. In our opinion, therefore even taking recourse to Explanation 1, the same circumstances or state of evidence on which the cash credits were treated as income, could not by themselves justify imposition of penalty without anything more on record produced by the assessee or the Department.

25. In the conclusion, all the questions posed, which are interrelated to the main question of imposition of penalty under Section 271(1)(c) of the Act, are answered in favour of the assessce and against the Revenue. The reference is accordingly answered and be informed to the Tribunal. In the circumstances, the parties shall bear their own costs.