Sabyasachi Mukharji, J. - (1.) This reference relates to the assessment years 1970-71 and 1971-72. This reference arises out of certain orders for the imposition of penalty for those two assessment years. In the pro ceedings for assessment to tax for those years, the assessee did not dis close the interest receivable from Speciality Papers Ltd, and M/s. Bags & Cartons for which the ITO started penalty proceedings and as the minimum penalty leviable exceeded Rs. 1,000, he referred the cases to the IAC under Section 274(2) of the I.T. Act, 1961. When the IAC took up the penalty proceedings, he held that the assessee had concealed the particulars of the income. He further held that till December 31, 1967, interest income was shown on accrual basis though it was not received and the loans were advanced as early as 1963 in the case of Speciality Papers Ltd. and in 1966 in the case of M/s. Bags & Cartons. He also mentioned that there was no indication that the assessee had changed the method of accounting in respect of these two items alone. The IAC held that the assessee must have concealed the particulars of income for the follow ing reasons: "Though the assessee might have reversed the entries of interest accrued from 1968-69 onwards, on 31st December, 1971, yet the fact remains that as late as 28th September, 1973, the Speciality Papers Ltd. in their letter to the assessee confirmed that, apart from the principal loan, a sum of Rs. 8,56,066 by way of accrued interest up to 31st March, 1973, was due to them. In this letter, Speciality Papers Ltd. further stated that if they commit any default in the payment of any instalment of the principal loan, the assessee shall have the right to recover the interest and enforce his right under the second mortgage as mentioned in the letter. This would clearly show that the assessee had a right to recover the interest under the second mortgage in case there was a default in the payment of instalments by Speciality Papers Ltd, Similarly, regarding the other amount, some instalments commencing from 1st August, 1972, for the repayment of the principal amount were agreed to and it was provided that in the event of default of any instalment, the assessee shall have the right to recover the entire interest also. The assessee was asked to state as to why the debit and credit entries in respect of interest were at all passed in the books if it was considered that this would not be recoverable and even the principal amount would be recoverable with difficulty. It was stated by the aulhorised representative that they did not want to give up their claim for interest and in case a necessity arose they could file a suit for recovery. As it is, the claim for this interest admits of revival if the instalments are not paid and the assessee could recover the same as the debtor parties are existing in good financial condition. Having considered the entire circumstances, I feel satisfied that the assessee has been guilty of default such as is contemplated u/s. 271(1)(c) of the I.T. Act, 1961. I, therefore, do hereby direct that the assessee shall pay by way of penalty and in addition to any taxes payable by him, a sum of Rs. 64,200."
(2.) As would be apparent from the aforesaid, the IAC had referred to the letter dated 31st March, 1973. It may not be inappropriate to refer to that letter which appears in the supplementary paper book in the instant reference. The said letter dated 28th September, 1973, from the Speciality Papers Ltd., inter alia, stated as under ; "We refer to the second mortgage dated 30th March, 1969, executed by us in your favour as and by way of security for repayment of the loan of Rs. 11,65,000 and the correspondence which has passed between us and your solicitors, M/s. Crawford Bayley & Co, in connection therewith. We also refer to our letter of 3rd February, 1971, agreeing to make payments of the loan by certain instalments in fulfilment of which you had agreed to waive the interest and also commission as therein mentioned, the said agreement of 3rd February, 1971, was and continued to be subsisting; according to you it was no longer binding on you on account of defaults in the instalment payments; the matter of the payment of the outstanding amount under the said mortgage was discussed between us and an agreement has been arrived at as follows : We confirm that there is due and owing by us to you a sum of Rs. 8,15,000 as balance of the principal amount of the loan, a sum of Rs. 8,56,066 by way of accrued interest up to 31st March, 1973, making together the sum of Rs. 17,15,478.11. We further confirm that we are liable to pay you interest from 1st April, 1973, on the outstanding amount of the loan for the time being at the bank overdraft rate which may be in force from time to time as also commission amounting to Rs. 44,412.11 as above, if we make defaults as stated hereafter. We will, in the first instance, pay to you the sum of Rs. 8,15,000, being the balance amount outstanding on account of the principal amount of the loan, and a sum of Rs. 3,32,423, being interest on the outstanding amount of the loan, up to 31st December, 1967, making together the sum of Rs. 11,47,423 by the instalments as follows :"
(3.) Thereafter, certain instalments were mentioned with which we are not concerned. In the appeals relating to the quantum of tax payable for those years, the Tribunal had held that the interest income should have been shown in the return of income and the right to receive the amounts accrued to the assessee during the years under reference. The assessee thereafter from the order of the IAC went to the Tribunal on the question of penalty and contended that no penalty should be levied on the facts and circumstances of the case. The Tribunal, after considering the rival contentions, observed as follows : "6. On enquiry it appears that the principal amounts realisable from Speciality Papers Ltd. were being realised by the assessee in instalments and that no evidence has been produced by the assessee that it had forgone the claims regarding interest. It may be that interest had not been received as yet, but that does not mean that the assessee's right to receive interest had ceased to exist for ever. The decision of the Tribunal for the assessment year 1969-70 relates to assessment by holding that provisions of section 147(b) of the Act are not applicable. The observations of the Tribunal in deciding the issue not being germane for the applicability of the provisions of section 147(b) cannot be a guiding factor for holding that the interest was not to be received and that the assessee had no right to receive the amounts. If that was so the assessee could have produced some evidence in the penalty proceedings which are independent proceedings that the assessee will not get the interest and that there was an agreement not to charge interest by the assessee while getting back the principal from the parties concerned.";