Sabyasachi Mukharji, J. - (1.) This reference arises out of the assessment for the year 1962-63, the relevant previous year in respect of which ended on the 31st March, 1962. The assessee is a private limited company. It carries on business of the manufacture and sale of soap, cocoanut oil, etc. It is also a dealer in bottles, corks, etc. During the relevant assessment year the assessee claimed that it had borrowed Rs. 3,10,000 on hundies from nine different parties of diverse amounts. These parties were Seth Lalchand Ram, Lilaram Girdharam, Biharilal & Co., Arjundas Srichand, Nandlal Pareshrarn, Gopaldas Mohanlal, Lalchand Kishendas, Dendaram Vasudeb and Tirthadas & Sons. The Income-tax Officer went into the sources of these amounts in the course of the assessment. The assessee was required to furnish evidence to prove the genuineness of the aforesaid hundi loans. Summonses under Section 131 of the Income-tax Act, 1961, were issued to the above parties requesting them to produce their books of account and bank pass books, etc., for the relevant accounting period for corroboration and verification of the transactions in question. None of these summonses could be served. The alleged lenders were found to be not traceable at the addresses given by the assessee. In the circumstances, on the 20th January, 1967, the Income-tax Officer informed the assessee that the summons could not be served on these persons and their identity, therefore, remained unverified. The assessee was given another opportunity to establish the identity of these persons and the genuineness of the transactions. The assessee was informed that if these informations were not supplied, an adverse inference would be drawn against the assessee. On the 28th January, 1967, the assessee pursuant to these summonses wrote a letter to the Income-tax Officer in which the assessee, inter alia, stated that it had filed before the Income-tax Officer various letters of the creditors confirming that they had advanced the loans in question. According to the assessee, the assessee had discharged the onus that lay upon them. The Income-tax Officer, however, was unable to accept the assessee's submission. The Income-tax Officer held that the confirmation letters regarding the said transactions did not establish the identity of the parties from whom the alleged loans were taken. The Income-tax Officer, therefore, added Rs. 3,10,000 as the assessee's income from undisclosed sources. The Income-tax Officer also disallowed a sum of Rs. 28,482 claimed as interest on the aforesaid loans.
(2.) The assessee appealed to the Appellate Assistant Commissioner who upheld the order of the Income-tax Officer. It has further to be borne in mind that the assessee had produced the income-tax file Nos. of these persons who were income-tax assessees. The assessee thereafter preferred an appeal before the Tribunal. In the meantime proceedings had been taken for imposition of penalty upon the assessee under Section 271 read with Section 274 of the Income-tax Act, 1961. Before the completion of the assessment on the 20th February, 1967, the Income-tax Officer had issued a notice on the 16th February, 1967, informing the assessee that it appeared to him that the assessee had concealed the particulars of income or had deliberately furnished inaccurate particulars thereof and as such he was referring the question of penalty to the Inspecting Assistant Commissioner under Section 274(2) of the Act. Reference was also made to the Inspecting Assistant Commissioner on that day. But the Inspecting Assistant Commissioner gave the necessary opportunity to the assessee of being heard. Before the Inspecting Assistant Commissioner it was argued that in the facts and circumstances of the case it did not warrant the inclusion of the sum of Rs. 3,10,000 as income and disallowance of interest and that the company's business was carried on with borrowed capital. The hundies had been produced. Some of the borrowings were by cheques. In the premises, it was urged that the borrowings could not be treated as income of the assessee under Section 68 of the Income-tax Act, 1961. The Inspecting Assistant Commissioner, however, referred to some of the statements made by some of the hundi creditors before the respective Income-tax Officers assessing them. He held that the assessee had concealed the particulars of income to the extent of the credits as well as the interests credited in the said account. The Inspecting Assistant Commissioner, therefore, levied a penalty of Rs. 78,468 under Section 271(1)(c) of the Income-tax Act, 1961. The assessee, thereafter, preferred an appeal as mentioned hereinbefore both from the assessment order and from the order imposing penalty. The Tribunal took up the two appeals together and this reference has been made in respect of the order passed by the Tribunal out of the said combined order in respect of the two appeals. The Tribunal upheld the order but allowed the appeal of the assessee so far as the imposition of penalty was concerned.
(3.) In the circumstances above mentioned, three questions have been referred to this court under Section 256(0 of the Income-tax Act, 1961. Two of these questions are at the instance of the assessee and one is at the instance of the Commissioner of Income-tax. The questions referred at the instance of the assessee are as follows : "1. Whether, on the facts and in the circumstances of the case, the assessment order under Section 143(3) is invalid because the penalty proceedings started in the course of the assessment had not been completed along with the assessment ? 2. Whether, on the facts and in the circumstances of the case, the sum of Rs. 3,10,000 could be treated as income under Section 68 of the Income-tax Act, 1961, even though it is not included in the concept of income under Section 2(22)(e)(ii) and Section 2(24) of the Income-tax Act, 1961 ? "And the question at the instance of the Commissioner is as follows : "Whether, on the facts and in the circumstances of the case, penalty could be levied under Section 271(1)(c) of the Income-tax Act, 1961, with reference to the sum of Rs. 3,10,000 and the interest claimed thereon ?";