Rastogi, J. - (1.) THIS is a reference under Section 256(2) of the I.T. Act, 1961. It relates to the assessment years 1962-63 and 1963-64, and the question involved is whether the cancellation of penalty under Section 271(1)(c) of the Act was justified.
(2.) THE assessee is a private limited company and at the relevant time was engaged in the business of milling wheat and manufacture of wheat products. For the assessment year 1962-63, the assessment was made on February 19, 1963, on a total loss of Rs. 34,537 which was later on modified to Rs. 45,108. Subsequently, on information received that during the relevant previous year the assessee had allegedly taken hundi loans from persons who were name lenders, the ITO initiated proceedings under Section 147 of the Act. Pursuant to the notice under Section 148, the assessee filed a return showing a loss of Rs. 45,108. THE ITO, however, completed the assessment and determined the total iacome at Rs. 56,722 which included Rs. 95,000 representing the peak credit as income from undisclosed source. For the assessment year 1963-64, the position was the same and the amount added for bogus hundi loans was Rs. 1,00,000. On being satisfied that the assessee had concealed its income, the ITO initiated penalty proceedings under Section 271(1)(c) of the Act for both these years and since the minimum penalty exigible exceeded Rs. 1,000, he referred the case to the IAC. It appears that before the IAC the assessee did not file any explanation whatsoever. The IAC essentially relying upon the material collected during the assessment proceedings and the findings arrived at therein found the assessee guilty of concealing its income or furnishing inaccurate particulars of such income within the meaning of Section 271(1)(c) and imposed penalty in the sums of Rs. 35,360 and Rs. 82,500, respectively, being approximately equal to 100 per cent, of the tax sought to be avoided. The assessee appealed before the Income-tax Appellate Tribunal and coptended that in view of the decisions in CIt v. Anwar Ali [1970] 76 ItR 696 (SC), CIt v. N. A. Mohamed Haneef [1972] 83 ItR 215 (SC) and CIt v. Khoday Eswarsa and Sons [1972] 83 ItR 369 (SC), the imposition of penalty was not justified. The Tribunal took note of the fact that there were two categories of hundi loans, (a) and (b). In respect of loans falling in category (a), though the payment had been made by cheques, since the creditors had confessed that they had indulged in name-lending transactions, the Appellate Tribunal in the appeal against the assessment did not accept the genuineness of those credits. As for the credits falling in category (b) the view taken by the Tribunal in the appeal against the assessment was that when the assessee had furnished evidence in support of those loans in the form of hundis, cheque payments and broker's certificate, it had placed material which prima facie supported the genuineness of the loans. The Tribunal accepted the genuineness of those transactions. In this way, addition of credits falling in category (a) was due to the fact that the explanation offered by the assessee was found to be unreasonable. That being the position the Tribunal in the penalty appeals held that the principle laid down by the Supreme Court in the aforesaid cases was squarely applicable to this case and hence they deleted the penalty and allowed the appeals. Now, at the instance of the Addl. Commissioner and according to the direction issued by this court, the Appellate Tribunal has drawn up a statement of the case on the question indicated above.
(3.) IT was contended before us by the learned counsel for the revenue that the decisions of the Supreme Court in the cases of Anwar Ali [1970] 76 ITR 696, N. A. Mohamed Haneef [1972] 83 ITR 215 and Khoday Eswarsa and Sons [1972] 83 ITR 369 would not apply. Rather the decision in D. M. Manasvi v. CIT [1972] 86 ITR 557 (SC), would apply. He also sought to place reliance on the decisions of the Punjab High Court rendered in Jawahar Woollen Textile Mills v. CIT [1973] 92 ITR 510 and Shiv Narain Khanna v. CIT [1977] 107 ITR 542. The view taken by the Punjab High Court in the later cases is that there is no basis for the assumption that some additional material should always be forthcoming for the levy of penalty in addition to the material on which the assessment was based. The very same material can form the basis for the assessment and penalty, depending on the facts and circumstances of the case. The same view was taken in Jawahar Woollen Textile Mills [1973] 92 ITR 510 (P andamp; H). We have already narrated the facts above and in our opinion the Appellate Tribunal was right in cancelling the penalty. In the instant case during assessment proceedings the assessee had furnished certain explanation in regard to the hundi loans and the Appellate Tribunal did accept that explanation in regard to the loans falling in category (b). As regards the loans falling in category (a) the explanation was not regarded as reasonable. The IAC while imposing the penalty only relied on the material collected during the assessment proceedings and the findings arrived at therein. That material was firstly that the ITO, Bombay, had recorded the statements of some of the creditors who had accepted that they were mere name-lenders and, secondly, that the assessee could not prove the genuineness of loans in assessment proceedings. In our opinion, the statements recorded by the ITO, Bombay, could not be used against the assessee in the assessment proceedings, much less in penalty proceedings, because the assessee was not given an opportunity to cross-examine those persons. As for the second aspect if the assessee failed to prove the genuineness of the loans in assessment proceedings, the addition could be said to be justified but on that ground alone penalty under Section 271(1)(c) could not be imposed. Now the principle laid down in Anwar Alt's case [1970] 76 ITR 696 (SC), is that (Headnote) : " Proceedings under Section 28 of the Indian Income-tax Act, 1922, are penal in character. The gist of the offence under Section 28(1)(c) is that the assessee has concealed the particulars of his income or deliberately furnished inaccurate particulars of such income and the burden is on the department to establish that the receipt of the amount in dispute constitutes income of the assessee. If there is no evidence on the record except the explanation given by the assessee, which explanation has been found to be false, it does not follow that the receipt constitutes his taxable income. It would be perfectly legitimate to say that the mere fact that the explanation of the assessee is false does not necessarily give rise to the inference that the disputed amount represents income. It cannot be said that the finding given in the assessment proceedings for determining or computing the tax is conclusive. However, it is 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 the particulars of his income or had deliberately furnished inaccurate particulars. " ;