D.K. Kapur, J.
1. We have heard the learned counsel for the parties in connection with the present application for reference under s. 256(2) of the I.T. Act, 1961, which relates to the assessment year 1971-72, and the arises, (a) on the substantive assessment of the assessed, and (b) from an order imposing a penalty against the assessed. The facts of the case are that some watches were seized by the Customs authorities and they were being smuggled by a the German National. It was claimed in the proceedings before the Customs officials that the smuggling was done or attempted at the instance of the assessed; the assessed, however, denied this fact and the ownership of the watches was also not claimed by him. In these proceedings, the watches were confiscated and a penalty of Rs. 25,000 was imposed against the assessed which is still under challenged in proceedings under the Customs Act. The ITO had added Rs. 1,10,000 to the assessed income on smuggling business. This was reduced on appeal by the AAC tors. 70,000 as being the value of the unexplained investment in the watches.
2. The Tribunal, on a further appeal, held that even this addition of Rs. 70,000 could not be made as the watches had been confiscated and had not been claimed by the assessed. Amongst other things, it was held as follows:
'It is not the assessed case that this loss is to be adjusted against his income. In fact, it is the case of the Department that the amount invested for the purchases of these watches was the undisclosed income of the assessed. Now, we do not know whether the amount had actually been paid Mr. Sidhwani or was yet to be paid after the selling of these watches or part had already been paid or part had yet to be paid. Mr. Thomas did not say that he received or paid any money. It may be that the amount was yet to be recovered from the sale of these watches was never done.'
3. Thus, the real doubt was expressed by the Tribunal as to whether the amount had been invested by the assessed. This would be a question of fact. However, in the Customs' case, a fine has been imposed against the assessed but, in the criminal proceedings, the assessed has been acquitted. In these circumstances, we have to decide whether a question of law arises out of the order.
4. In the judgment of the Andhra Pradesh High Court, Soni Hinduji Kushalji & Co. v. CIT : 89ITR112(AP) , the assessed had claimed a sum of Rs. 56,978 as a deduction on account of smuggled gold being seized by the Customs officials but the deduction was disallowed as it was held that it did not arise out of any business or trade. We are dealing with a revenue case.
5. If these watches belonged to the assessed and were laying in a shop, there is no doubt that the amount could be added to his income as an unexplained credit. We see little difference why a similar inference cannot be raised if the watches were smuggled by the assessed through the agency of another. The real point is that this question is still undecided.
6. On the above question, the Tribunal's view was that the matter could not be decided till the Customs authorities finally decided the questions of ownership of the watches. However, the appeal was argued on a difference question, namely, that even if Rs. 75,000 was the unexplained credit, the watches had been seized and even a fine had been imposed, so the net amount was a debit and not a credit. Out of this question, we think that a question of law arises.
7. The Commissioner has sought a reference on e following questions in the case of the substantive appellate decisions given by the Income-tax Appellate Tribunal in relation to the assessment proceedings:
'1. Whether, on the facts, and in the circumstance of the case, the Tribunal is legally correct in holding that the addition of Rs. 70,000 as investment in the smuggling activity is not called for
2. Whether, on the facts and in the circumstances of the case, and on the material brought on record, it cannot be held that smuggling activity relating to the watches was not financed by the assessed
3. Whether, the Tribunal went by relevant considerations in holding that the addition of Rs. 70,000 as investment in the smuggling activity is not called for ?'
8. Regarding the penalty questions the Commissioner has sought a reference on the following question:
'Whether, on the facts and in the circumstances of this case, the Tribunal is legally correct in cancelling the penalty of Rs. 1,00,000 levied by e Inspecting Assistant Commissioner under section 271(1)(c) ?'
9. As far as the penalty proceedings are concerned, they will only arise in case the substantive decision is against the assessed, so there can be no objections to the question as framed.
10. However, the questions as framed by the Department are not the ones that arise from the Tribunal order. The first question was decided on the view that if Rs. 70,000 is to be added, then the loss is also to be subtracted as a loss resulting from the seizure and confiscation of the watches. The second questions was left open by the Tribunal, so it does not arise. And the third question was also not dealt with by the Tribunal in the manner proposed in the question. The following questions would represent the real question which arises and which we think should be referred:
'In the facts and circumstances in which the Tribunal had decided the appeal before it, whether the assessed was entitled to any set-off/adjustment on account of the confiscation of the watches ?'
11. We, accordingly, direct the Tribunal to submit a statement of the case regarding the above question. Parties to bear their own costs.