M.R.A. Ansari, C.J. - (1.) THE assessee in this case is a registered firm of the name of Messrs. Fairdeal Motors, Srinagar, deriving income from the sale of trucks, scooters and motor spare parts. For the assessment year 1966-67, for which the relevant accounting year is the year ending December 31, 1965, the assessee filed his return declaring an income of Rs. 94,623. In this return, the assessee had not shown the income derived from the business of the transport of products of Messrs, Indian Oil Co. Ltd. from Pathankot to Srinagar and Sonamarg which was carried on in the name of Messrs. New Bharat Transporters on the plea that the said business belonged to an association of persons and was not a branch of Messrs. Fair-deal Motors. In a letter dated March 14, 1968, addressed to the CIT the assessee agreed, inter alia; that the business carried on in the name of New Bharat Transporters may be treated as a branch of Messrs. Fairdeal Motors. In view of this letter the ITO included a sum of Rs. 62,536 representing the income from the business run in the name of Messrs. New Bharat Transporters in the income of the assessee and completed the assessment on a total income of Rs. 1,79,220. THE ITO simultaneously instituted penalty proceedings against the assessee under Section 271(1)(c) of the I.T. Act, 1961 (hereinafter referred to as "the Act"), for concealment by the assessee of the income from Messrs. New Bharat Transporters. As the penalty leviable against the assessee exceeded a sum of Rs. 1,000, the ITO referred the assessee's case to the IAC under Section 274(2) of the Act for the levy of penalty. In pursuance of this reference and after hearing the assessee, the IAC held that the assessee had concealed his income derived from M/s. New Bharat Transporters and levied a penalty of Rs. 12,632 on the assessee. THE assessee filed an appeal before the Tribunal, Amritsar Bench (hereinafter referred to as "the Tribunal"), against the order of the IAC but the Tribunal confirmed the order of the IAC and dismissed the appeal filed by the assessee. At the instance of the assessee, however, the Tribunal has referred the following three questions to this court under Section 256(1) of the Act: "(1) Whether, on the facts and in the circumstances of the case, the assessee had concealed its income and penalty under Section 271(1)(c) is leviable on it ? (2) Whether, on the facts and in the circumstances of the case, the letter of the CIT (Central), New Delhi, dated March 13, 1968, addressed to the assessee, amounts to an order under Section 271(4A) of the I.T. Act, 1961 ? (3) If the answer to the above question is in the affirmative, whether penalty had to be calculated with reference to the tax attributable to only such 'income' included in the total income of the assessee as arose from the business carried an by M/s. New Bharat Transporters ?"
(2.) BEFORE I proceed to answer the questions, a few more facts have to be stated. During the course of the assessment proceedings, the assessee made some representations to the CIT in respect of its assessment for the assessment year 1966-67. The assessee also appears to have written a letter dated December 23, 1967, to the ITO in this connection. The exact nature of the representations made by the assessee to the CIT cannot be gathered from the statement of the case as submitted or from the annexures thereto. The contents of the letter dated December 23, 1967, also do not form part of the record. But in response to these representations the Commissioner wrote a letter dated March 13, 1968, which is made as annexure 'A' to the statement of the case, and from this letter it would appear that the assessee had made, inter alia, the following proposal to the Commissioner : "The business in the name of New Bharat will be treated as a branch of Fairdeal Motors." After referring to this proposal made by the assessee the CIT in his letter (supra) proceeded to state, inter alia, as follows : "I am prepared to agree to the above proposals if you accept the following conditions: (i) A minimum penalty of 20% will be imposed under Section 271(1)(c) on M/s. Fairdeal Motors in respect of the income of New Bharat TPTS which is now agreed to be a branch of the former for the years 1963-64 to 1967-68." In reply to the above letter of the Commissioner, the assessee wrote a letter dated March 14, 1968, which is made as annexure 'B' to the statement of the case. The relevant portions of this letter are given below : "Inviting a kind reference to your letter No. DD1(9)/CR/67-68, dated 13th March, 1968, I hereby signify my assent to the proposals stated therein. As regards the conditions imposed in para. 2 of your letter aforesaid I accept them provided you will kindly appreciate that my acceptance of these proposals and conditions is actuated by considerations other than purely legal nor it ever be construed by our acceptance that I ever attempted to conceal any income or to introduce any benamidar in my business. But the main consideration has been that I wanted to buy peace of mind even at some cost and sacrifice on my part in view of the political vendetta which has been carried on in the past with regard to my affairs. .........Further it should be clearly understood that the assessments that are made on the basis of the acceptance of these proposals as mutually agreed upon shall never be questioned again in my income-tax proceedings for any assessment year and the decision shall be irrevocable so far as the points covered in these proposals are concerned."
(3.) IT would appear from the assessment order of the ITO which is made annexure 'C' to the statement of the case that it was on the basis of this letter of the assessee dated March 14, 1968, that the ITO included the income derived from New Bharat Transporters in the income of the assessee. No independent investigation appears to have been made by the ITO and there was no reference in the assessment order to any material other than the letter dated March 14, 1968, on the basis of which the ITO had made this addition. From a perusal of the penalty order passed by the IAC, it is obvious that the IAC had based his order on the same letter of the assessee dated March 14, 1968, and that his finding that the assessee had concealed his income from the New Bharat Transporters was not based upon any other material. This is what the IAC has observed in his order : "the assessee accepted the position vide his letter dated 14-3-1968, addressed to the CIT(C), New Delhi. In response to notice under Section 274(2)/271, Bakshi Bashir Ahmad appeared and stated that no penalty could be levied because it had not been accepted that any income had been concealed. The attention of the assessee was drawn to the letter dated 13-3-68, of the CIT(C) in which it had been specifically stated that penalty of 20% will be imposed on Fairdeal Motors for income of New Bharat Transporters. There is no doubt that the assessee had concealed its income or has furnished inaccurate particulars thereof." ;