Ajit K.Sengupta, J. - (1.) This reference under Section 256(2) of the Income-tax Act, 1961, relates to the assessment year 1964-65.
(2.) The following question of law has been referred to this court: "Whether, on the facts and in the circumstances of the case, relating to the cash credits standing in the names of Sarbashree Kanhaiyalal Agarwalla, Haripada Kedia and Surajmal Ganeshram and the interest paid to these three parties and on a correct interpretation of the Explanation to Section 271(1)(c) of the Income-tax Act, 1961, the Tribunal was justified in holding that no penalty could be imposed under Section 271(1)(c) of the Income-tax Act, 1961, and in that view, cancelling the order of penalty made by the Inspecting Assistant Commissioner under the said section ?"
(3.) The facts leading to this reference are that the assessee, as a registered firm, in its return of income for the assessment year 1964-65 had shown a total income of Rs. 69,359. The Income-tax Officer framed the assessment on a total income of Rs. 2,15,170. In doing so, the Income-tax Officer treated the cash credits amounting to Rs. 1,10,000 standing in the names of Shri Kanhaiyalal Agarwalla, Hari Prasad Kedia and Surajmal Ganeshram as the assessee's income from undisclosed sources on the ground that he was "doubtful about the genuineness of the loans" advanced by these parties for the reasons stated in his order. It may be noted that these parties had stated in response to the notices issued under Section 131 of the 1961 Act, that they had advanced the loans to the assessee. Further, the Income-tax Officer disallowed the assessee's claim for deduction of Rs. 16,083 being the interest paid on the aforesaid loans as well as loans taken from Rajkumar Jain and Co. and Patni Trading Co. (P.) Ltd., in the earlier years. Simultaneously, he initiated penalty proceedings under Section 271(1)(c) of the 1961 Act and referred the matter to the Inspecting Assistant Commissioner as the minimum penalty imposable under that section exceeded Rs. 1,000. Thereafter, the Inspecting Assistant Commissioner, vide his order dated February 17, 1971, imposed a penalty of Rs. 26,000 under that section.;