K.T. THAKORE, A.M. ORDER This appeal which is filed by assessee relates to asst. yr. 1975-76 and is directs against order of CIT (A) upholding levy of penalty of Rs. 1,60,000 as imposed by ITO under provisions of s.271(1)(c) of Act. brief facts leading controversy are set out hereunder: assessee is company which is carrying on business of running hotel Styed Sabar Hotel. Its assessment year is 1975-76 and relevant previous year is S.Y.2030. 2 . assessee was partner alongwith Smt. Indumatiben Dhnasukhlal Sanghvi, Shardaben Rasiklal Shah in firm M/s Ajay Estate Agency, which came into existence on 16th March, 1974. business of firm was to deal in real estates. firm was owning building alongwith land on which restaurant viz. M/s Hotel Sabar was carried on by another firm consisting assessee and S/Shri Ramanlal Premchand Shah, Navnitlal Manilal Shah, Kikaram Khinjibhai Purohit, Smt. Subhadraben Rajnikant Sheth, Smt. Arunaben Rajnikant Shah and Smt Nayanaben Dhirubhai Shah. There were four minors admitted to benefits of partnership of M/s Hotel Sabar. M/s Hotel Sabar came into existence under deed of partnership dt. 14th April, 1974. On 1st April, 1974 remaining partners of M/s Ajay Estate Agency retired from firm of assets of said firm were taken over by assessee at agreed figure of Rs. 16,50,000 Similarly on 22nd April, 1974 remaining partners alongwith minors retired from firm M/s Hotel Sabar and business as well as assets of said firm were taken over by assessee for price stipulated in deed captioned "Deed of Retirement" dt 22nd April, 1974. It may be mentioned that assessee had taken over furniture and fixture, utensils etc. of M/s Hotel Sabar at double amounts of their written down value. 3. In its return of income as well as at time of assessment proceedings, claimed depreciation of Rs. 2,37,852 on assets acquired by it from aforesaid erstwhile firm, on amount paid to retiring partners during course of assessment proceedings, ITO enquired of assessee as to how value of Rs. 16,50,000 has been fixed for land and building as well as price fixed for movable assets acquired from M/s Hotel Sabar. assessee stated before ITO that price of land and building was arrived at on basis of valuer's report, who had valued structure at Rs. 4,62,000 and land at Rs. 10,68,900. As regards movable assets, assessee stated before ITO that same was arrived at after mutual consent with retiring partners. ITO while framing assessment, held that costs at which assessee had shown those assets could not be accepted as assessee was not entitled to claim depreciation on land and there was no basis which assessee had agreed to pay amount to retiring partners at double written down value of movable assets. ITO therefore allowed depreciation. On building which was valued by valuer at Rs. 4,62,000. Similarly, ITO allowed depreciation on movable assets on basis of written down value of erstwhile firm viz. Hotel Sabar. In this way, ITO granted depreciation of Rs. 86,318 as against Rs. 2,37,852 claimed by assessee. ITO initiated proceedings under provisions of s. 271(1)(C) of Act charging assessee for furnishing inaccurate particulars of its income. 4. matter was carried in appeal before CIT (A) who for reasons set out in his order held that ITO was fully justified in restricting claim for depreciation in manner he did. 5 . matter was then carried in appeal before Tribunal and Tribunal also upheld view of authorities below. 6. ITO in meantime called upon assessee to show cause as to why penalty should not be imposed for furnishing inaccurate particulars of its income. assessee's contention in first place was that its total income stood at Rs. 24,497 only and therefore penalty proceedings be dropped. ITO did not consider this explanation as satisfactory and after setting out details which we have set out earlier observed that assessee had revalued its assets in manner indicated below: Value at Original Asset W.D.V which taken price over Furniture 3,07,348 2,11,677 4,23,374 & Fixtures Plant & 1,45,851 96,296 1,92,590 Machinery Utensils 1,22,792 82,426 1,64,852 Dead 6,181 5,563 11,136 stock Decoration 68,755 45,450 92,900 Curtains 62,899 36,777 73,554 Goodwill 1,00,000 According to ITO, assessee had in fact paid double amount of written down value in respect of some of items and paid more than its original cost in respect of other items. assets were acquired by assessee at such exorbitant price that no man of prudence would purchases same at that price. whole exercise was motivated with as ulterior object in order to benefit retiring partners as also with view to claiming higher depreciation. Therefore, it was clear that this was case of collusion by assessee and retiring partners who have tried to further their own interest. ITO therefore held that this was clear case of furnishing inaccurate particulars of income and in this view of matter he imposed penalty of Rs. 1,60,000 with approval of IAC. 7 . Being aggrieved assessee carried matter in appeal before CIT(A) claimed that it had not furnished any inaccurate particulars of its income. In this connection it was submitted in first place that matter of revaluation of assets was within knowledge of ITO and claim for depreciation was based on particulars which were required to be filed alongwith return. depreciation was admissible, according to assessee on basis of actual cost and not on basis of Written Down Value. It was again after disallowing claim for depreciation effective income worked out to Rs. 24,497 and therefore levy of penalty of Rs. 1,60,000 was uncalled for. CIT (A) observed that perusal of ITO s order would show that penalty has been imposed for furnishing inaccurate particulars of income. assessee had not filed any forwarding letter accompany return. depreciation was claimed on basis of particulars filed in and said depreciation was claimed on basis of revised valuation of assets. assessee had claimed value of building on which depreciation was claimed at Rs. 16,50,000 assessee has nowhere stated that value of building was inclusive of value of land, on which according to decision in case of CIT vs. Alps Theatres (1967) 65 ITR 377 (SC), no depreciation was admissible. Thus act of assessee to claim depreciation on land when no such depreciation was admissible was act of furnishing inaccurate particulars of income within meaning of s. 271(1)(c) of Act 8 . Relying on order of Tribunal in quantum appeal in WTA No 1271/Ahd/82 decided on 28th Sept., 1983 CIT(A) further observed that there was collusion between assessee and other partners to defraud Revenue. enhancement of valuation of assets affected by assessee before dissolution of firm was for same object. Thereafter relying on various decisions referred to in his order CIT (A) held that this was clear case in which assessee has furnished inaccurate particulars of its income. As regards quantum of penalty CIT (A) held that levy of penalty was justified at Rs. 1,60,000 in view of provisions of Act as they stood for relevant assessment year. In shot CIT (A) declined to interfere with decision of ITO and dismissed appeal. 9 . Being aggrieved assessee has come up in appeal before us. Shri Shah submitted that basis of levy of penalty was act of assessee to furnish inaccurate particulars of its income, in accordance with finding reached by authorities below. assessee has clearly brought out fact about revaluation of assets and liabilities at time of raking over of about revaluation of assets and liabilities at time of raking over of business on retirement of business on retirement of erstwhile partners, in note appended to balance sheet which formed part of Schedule 'D' appended to balance sheet. It was made clear that assessee had revalued assets and said value has been incorporated in accounts of company. Secondly value fixed on revaluation was set in deed of retirement executed on 22nd April, 1974 between assessee and retiring partners. Thus full facts in regard to question was disclosed to ITO at time of hearing. valuation of assets and prices set out in deed of dissolution were incorporated in final accounts of company and no basis of which claim for depreciation was made in return. income as determined by ITO after giving effect to CIT (A)'s order worked out to Rs. 2,4407 which included certain expenses which were disallowed. That apart question whether depreciation was admissible on basis of valuation of assets as revalued was debatable issue and this fact could be supported by decision of their Lordships of Gujarat High Court to issue r. under s. 256(2) of Act. In other words their Lordships have granted question of law in regard to assessee's claim for depreciation which was negatived by Tribunal. In such situation it was difficult to reach firm conclusion that assessee had furnished inaccurate particulars of its income qua depreciation. It was open to taxing authorities, Shri Shah submitted, to substitute written down value for valuation on basis of depreciation as claimed by exercise of power conferred on them. Thus it was open taxing authority not to grant depreciation on basis of revalued assets but on basis of written down value, in accordance with provisions of s. 43(1) r/w Expln. 3 thereof. But exercise of this power by taxing authorities and thereby reducing claim for depreciation would not per se establish charge of furnishing inaccurate particulars of its income within meaning of s. 271(1) of Act. It was also pointed out by Shri Shah that assessee on his own had filed valuation report in which value of land and value of building i.e. super structures were separately recorded and it was on basis of said report that depreciation on value of land was not granted. Shri Shah then submitted that observations contained in order of Tribunal regarding collusive nature of transaction had no material effect so far as tax effect was concerned inasmuch as even after rejecting substantially claim for depreciation there was hardly any income on which tax was payable by assessee. It was therefore, submitted that on facts of case levy of penalty was wholly unjustified. ld. departmental representative on other hand strongly submitted that facts as found by Tribunal in quantum appeal in assessee's own case cited supra spoke for themselves. It was clear case in which assessee has tried to obtain tax benefit by revaluing assets thereby making claim for higher depreciation on one hand and passing on benefit in favour of retiring partners who could claim receipt as non-taxable having received amount on retirement. Another material point which was required to be taken into consideration, Shri Bhattacharya argued, was that in instant case provisions contained in Expln. to s. 271(1)(c) were squarely applicable. return of income was filed on 31st July, 1975 at which point of time Expln. to s. 271(1)(c) was in force. According of their Lordships of Gujarat High Court in case of CIT vs. Drapco Electric Corporation 1978 CTR (Guj) 181 : (1980) 122 ITR 341 (Guj) said Explanation only enacted rule of evidence and it could be invoked at any stage of penalty proceedings. Therefore, according to ld. departmental representative even if said Explanation was not invoked either by ITO or by CIT(A) same should be invoked in course of present proceedings and question of levy of penalty should be considered in light of said Explanation. Thus according to ld. departmental representative assessee's case fell not only under main provisions of s. 271(1)(c) of Act i.e. furnishing of inaccurate particulars of income but assessee's case was also was hit by Explanation and therefore, burden of proving that assessee had not furnished inaccurate particulars of its income squarely fell on assessee. On fact which did not require repetition, according to ld. departmental representative it was clear that assessee had claimed depreciation on land which was not at all admissible in view of decision in case of Alps Theatres (supra), and thereby made claim which was not tenable in law. In other words by making claim on depreciation on land assessee had clearly furnished inaccurate particulars of its income by making tall claim for depreciation. This default clearly fell within main provisions of s. 271(1)(c) of Act. So far as revaluation of other assets which were made at exorbiting price was motivated with view to obtaining advantage by collusion with retiring partners. It was for assessee under Explanation to show as to why such exorbitant price was paid for items which were otherwise available at much lower price in market and thus there was no justifiable reason to inflate value of other assets. only purpose for doing so was to make excessive claim for depreciation. burden under Explanation was not discharged because inflation in prices of various items as set out in above table were so made with view to defraud Revenue. Thus being fraudulent act assessee's burden could not be said to have been discharged within meaning of said Explanation. Shri Shah in reply submitted that assessee was fully disclosed valuation report filed by it. Therefore, assessee has not withheld any information from Department. 10. We have considered rival submissions. In instant case, assessee is charged with guilt of furnishing inaccurate particulars of its income within meaning of s. 271(1)(c) of Act. inaccurate particulars of income which are said to have been furnished fall into two categories: (a) claim regarding depreciation on land, and (b) claim for excess depreciation on enhanced cost of various items as set out in above table. learned departmental representative has also passed into service Explanation to s. 271(1)(c) of Act and in this connection he has relied on Drapco's case (supra). In view of above decision it is necessary to consider in first place applicability of Explanation to s. 171(1)(c) of Act as it stood for relevant assessment year alongwith main provisions as are relevant for our purposes: "271. (1) If ITO or AAC in course of any proceedings under this Act, is satisfied that any person (c) has concealed particulars of his income or furnished inaccurate particulars of such income, he may direct that such person shall pay by way of penalty,........" "Explanation. Where total income returned by any person is less than eighty per cent of total income (hereinafter in this Explanation referred to as correct income) as assessed under s. 143 or s. 144 or s. 147 (reduced by expenditure incurred bona fide by him for purpose of making or earning any income included in total income but which has been disallowed as deduction), such person shall, unless he proves that failure to return correct income did not arise from any fraud or any gross or wilful neglect on his part, be deemed to have concealed particulars of his income or furnished inaccurate particulars of such income for purpose of cl. (c) of this sub- section." explanation consists of two parts. first part sets out facts which if proved give rise to rebuttable presumption. In case where total income returned by any person is less than 80 per cent of total income as assessed under s. 143 or 144 or 147 (as reduced by expenditure incurred bona fide by him for purpose of making or earning any income included in total income but which has been disallowed as deduction). If these facts are shown to exist presumption would be raised that such person shall be deemed to have concealed particulars of his income or furnish inaccurate particulars of such income for purpose of cl. (c) s. 271(1). Now in instant case, total income as result of order of CIT(A) stood at Rs. 24,407 which included disallowance of Rs. 29,213 comprising of following amounts: (a) Legal charges Rs. 10,000 (b) Bonus Rs. 12,098 (c) Education cess Rs. 4,000 (d) 1/4th Motor car expenses Rs. 3,115 . . Rs. 29,213 Thus correct income for purpose of explanation would work out to l o s e Rs. 4,806. In effect therefore, by claiming excessive depreciation assessee in effect has claimed larger amount by way of depreciation and even if assessee 's claim for such larger depreciation were to be rejected correct income for purpose of Explanation, as stated above would work out to loss for Rs. 4,806. Now explanation casts burden on assessee to show that difference did not arise out of gross or wilful neglect or fraud. scope of expression concealment, fraud and wilful neglect was considered by their Lordships of Gujarat High Court in Drapco's case (supra) at page 359- 360 is stated as follows: "As regards alternative arguments, as we have seen earlier, concealment for purposes of s. 271(1)(c) must be conscious concealment. Conscious concealment would mean concealment which is not accidental or unintentional but concealment with guilty mind to evade tax. It would thus appear that for purposes of bringing case within said sub-section, state of mind of assessee becomes relevant. Explanation, in so far as it is relevant, provides that unless assessee proves that failure to return correct income did not arise from any fraud or any gross or wilful neglect on his part, he should be deemed to have concealed particulars of his income. question is whether absence of circumstances which assessee is required to prove in order to escape from clutches of s. 271(1)(c) introduces proof of factors which are not inherently relevant in proof of conscious concealment. Now, case of fraud would obviously be case of conscious concealment. So also would be case of wilful neglect, because neglect of that type would result from deliberate action part of assessee resulting in escapement or avoidance of tax and conscious concealment might ordinarily be inferred in such case. As observed by Patna High Court in CIT vs. Patna Timber Works (1977) 106 ITR 452 at 460 (Pat), expression "wilful neglect" imports neglect of kind, where it is mixed with neglect, conscious, wilful o r deliberate act of assessee. Gross neglect which is different from mere negligence and springs from utter want of care and diligence can not, in our opinion, be put in different class. When person acts with reckless disregard of consequences, he could not be said to have acted honestly. Every assessee is bound to comply with provisions of law and to know consequences of non-compliance. law presumes this knowledge whether it is present to mind of negligent person or not. If by negligence assessee brings about situation where there is avoidance or evasion of tax, it could be legitimately inferred that he is guilty of conscious concealment. This would be so because if assessee failed to give accurate particulars as to his income even with this assessee failed to give accurate particulars as to his income even with this knowledge which law presumes he has, he can hardly be held to be honest blunderer or stupid man. Such person can legitimately be found to be acting dishonestly. argument based on definition of 'good faith' in s. 3(22) of General Clauses Act cannot assist assessee. In Municipality of Bhiwandi and Nizampur vs. Kailash Sizing Works AIR 1975 SC 529, Supreme Court was concerned with s. 167 of Bombay District Municipal Act which confers protection on Municipality in respect of anything in good faith done or intended to be done. definition of expression "done in good faith" as given in General Clauses Act was referred to and it was pointed out that, accordingly, it would mean anything done honestly, whether done negligently or not. It was observed that authority could not be said to be acting honestly where it has suspicion that there is something wrong and does not make further enquiries. Being aware of possible harm to others and acting in spite thereof is acting with reckless disregard of consequences. It is worse than negligence, for negligent action is that, consequences of which, law, presumes to be present in mind of negligent person, whether actually it was there or not. This legal presumption is drawn through well-known hypothetical reasonable man. Supreme Court, in terms, observed (p. 531): "Reckless disregard of consequences and mala fides stand equal, where actual state of mind of actor is relevant. This is so in eye of law, even if there might be variations in degree of moral reproach deserved by recklessness any mala fides." It was further pointed out that General Clauses Act helps only in so far as it lays down that negligence does not necessarily mean mala-fides. Sometimes more than negligence is necessary. But Act says "honestly" and so, for interpretation of that word, legal meaning explained above became relevant. ratio of this decision is that for purposes of judging whether anything was done in good faith, what is to be seen is whether authority or individual, being aware of possible harm to others, acts inspite thereof in reckless disregard of consequences. If it is so, it would be case so far as actual state of mind of actor is relevant, of mala fides. It would thus appear that even for purposes of definition of expression "done in good faith" as given in s. 3(22) of General Clauses Act, any action taken by person being aware of possible harm to others in total or reckless disregard of consequences can be treated as not honest. It is this very test which we have applied. If assessee, by his gross neglect, brings about avoidance, evasion of tax thereby causing loss to public revenue, he could not be said to have acted in good faith. conclusion can be legitimately reached in that case that gross neglect is equal to lacking in bona fides. It is pertinent to note in this behalf that s. 52 of Indian Penal Code defines "good faith" as under: "Nothing is said to be done or believed in 'good faith' which is done or believed without due care and attention. Therefore, for purpose of criminal liability, anything which is done or believed without due care and attention, can not be said to have been done or believed in good faith. In quasi-judicial proceedings like penalty proceedings under IT Act, it is this under definition which would in any case be more relevant in judging state of mind of person for purpose of arriving at conclusion whether or not there is conscious concealment. If this definition is borne in mind, it would be apparent that cases of gross neglect, which would necessarily involve want of due care and attention, would prove guilty state of mind." (Underlined italisized in print supplied) close reading of above observations would show that gross or wilful neglect or fraud must result in avoidance or evasion of tax and thereby cause loss to public revenue. On facts stated above by reducing claim for depreciation in instant case there is no loss to revenue inasmuch as effective income for purpose of Explanation is determined at loss. Thus there is no tax liability involved as result of claim put forth by assessee. In such situation burden placed on assessee could be said to have been discharged and therefore, we hold that Explanation has no application to facts of case. Now coming to rejection of claim for depreciation as pointed out earlier it falls into two parts firstly claim for depreciation on land. assessee had shown value of building with land at Rs. 16,50,000 while value of super structure was shown at Rs. 4,62,000 and that of land at Rs. 10,68,900 by his valuer. above valuation was based on valuer's report filed by assessee before ITO. Now depreciation as rightly pointed out by ITO is admissible only on building and not on land in view of decision of Supreme Court in case of Alps Theatres (supra). In our view when clatm is made by assessee and it is not found tenable in law it is open to taxing authorities to reject same. But it would not per se establish guilt of furnishing inaccurate particulars of income within meaning of s. 271(1)(c) of Act. In instant case, assessee had furnished break up of amount shown under head building and break up was based on valuer's report as observed by ITO. In our opinion therefore, claim for depreciation on land which is not tenable in law was rightly rejected. But at same time it can not be said that assessee had furnished inaccurate particulars of income with view to getting unfair advantage because as pointed out earlier there was no tax effect involved as result of making wrong or erroneous claim for depreciation. It may not be out of place to mention that particulars required to be submitted in return of income in respect of depreciation allowance inter alia requires that in respect of building assessee is required to indicate whether building is taken on lease or owned by assessee. There is no mention that value of building and land should be separately shown, in depreciation statement. Now coming to second aspect question relating to claim for depreciation on revaluation of movable assets it is noticed that assessee has revalued assets in accordance with agreement reached at time of retirement of partners and on basis of revaluation of assets surplus amount have been paid to retiring partners. Therefore, actual cost of assets acquired by assessee was revalued price of movable assets. Now s. 43(1) defines expression "actual cost" which means actual cost of assets to assessee. However Explanation (3) empowers ITO to substitute said actual cost by amount which he may determine having regard to all circumstances of case, with approval of IAC, if ITO is satisfied that main purpose of transfer of assets acquired by assessee was reduction of liability to income-tax by claiming depreciation with reference to enhanced cost, while assessee is required to show in return actual cost of asset acquired for purpose of depreciation it is open to ITO in case where Explanation (3) to s. 43(1) applies to substitute amount which in his opinion reasonable in lieu of actual cost. This power is exercisable by ITO. No obligation is cast on assessee to show any amount other than actual cost for purpose of claiming depreciation while filing return of income. In fact form of return of income requires following particulars which should be given in statement attached with return in respect of depreciation allowance and investment allowance namely: (ii) Written down value of existing assets Actual cost of assets acquired during previous year. Thus what assessee was required to furnish along with return is particulars of actual cost of assets acquired during previous year and nothing more. It is open to ITO as pointed out earlier to invoke Explanation (3) as aforesaid and substitute value which he considered as reasonable in lieu of actual cost. exercise of this power would result in reduction of claim for depreciation and nothing more. Thus when assessee has claimed depreciation on basis of actual cost it could not be said to have furnished inaccurate particulars of income within meaning of s. 271(1)(C) of Act (main part). 11. On facts of case therefore that neither under Explanation nor under main provision assessee could be said to have furnished inaccurate particulars of income within meaning of s. 271(1)(c) of Act. We, therefore, hold that levy of penalty in light of above facts was not at all justified. We accordingly quash orders of authorities below and allowed this appeal. *** HOTEL SABAR PVT. LTD. v. INCOME TAX OFFICER