1. The assessee is a HUF engaged in the manufacture and sale of art silk cloth. For the assessment year 1963-64, the assessee filed a return showing a loss of Rs. 6,317. During the course of examination of accounts, the ITO found certain credits in the name of Multani bankers and the assessee was asked to prove the genuineness of the credits. The assessee put in a petition stating that the total sales admitted of Rs. 2,52,433 included export sales in two invoices to the extent of Rs. 1,42,800 on July 25, 1962, and the exports were made actually by one J. K. K. Natarajan Chettiar and that the assessee was only a name-lender. After deducting the export sales, he showed actual sales during the year ended April 12, 1963, as Rs. 1,09,633 and filed a revised return on that basis on September 29, 1965, admitting a total income of Rs. 9,683. Natarajan Chettiar gave a statement admitting that he would have obliged the assessee with cash and goods for the export of cloth to the extent of Rs. 1,42,800 and including all other expenses amounting to Rs. 1,50,000. The ITO found that the peak credit as per the account amounted to a sum of Rs. 2,15,000. The assessee's explanation with reference to these several credit purchases to the extent of Rs. 1,50,000 represented value of goods exported actually by J. K. K. Natarajan Chettiar in the name of the assessee and just to accommodate the exporter the assessee had to show as if there has been manufacturing of cloth by purchasing art silk yarn and paying wages and in that regard the sum of Rs. 1,50,000 had to be necessarily brought into the account in the names of fictitious creditors. Since this part of the statement is corroborated by the statement of Natarajan Chettiar, the ITO accepted this contention. With reference to the balance of Rs. 65,000, the assessee's explanation was that Natarajan Chettiar, the ITO accepted this contention. With reference to the balance of Rs. 65,000. But the transaction did not fructify and, therefore, it had to show as if there were cash sales. But this part of the statement was not accepted by the ITO. Accordingly, the ITO, in the view that a sum of Rs. 59,205, after deducting the interest on credits relatable to the figure of Rs. 65,000 was the unexplained income of the assessee, brought it to tax under the head 'Other Sources'.
2. The assessee preferred an appeal before the AAC. The referred to the letter written by J. K. K. Natarajan Chettiar on March 25, 1968, to the ITO, wherein he had admitted that they had promised to arrange of further exports in the name of the assessee. But they did not do so and stated that since the ITO has already accepted the explanation with regard to Rs. 1,50,000 and as the income from the service rendered by the assessee had already been considered under 'business', it was but fair that the remaining sum of Rs. 65,000 of the gross peak was also eliminated. In that view, he ordered the deletion of Rs. 59,205. Against this decision of the AAC, the ITO preferred an appeal to the Tribunal.
3. The IAC had also initiated proceedings under s. 271(1)(c) of the I. T. Act on the ground that the assessee originally submitted a return showing a loss of Rs. 6,555, or later filed a revised return showing an income of Rs. 9,445 during the course of the assessment proceedings and that the income had been concealed. In that view, he levied a penalty of Rs. 10,146. This was on the basis that the tax sought to be evaded was Rs. 50,729.
4. The assessee preferred an appeal to the Tribunal against this order of the IAC. The assessee had also filed another appeal before the Tribunal against the order of the AAC contesting the fixation of the business income at Rs. 25,323. All these appeals were heard by the Tribunal and by the separate orders dated November 30, 1972, dismissed the appeal of the department relating to the deletion of Rs. 59,205 and re-determined the income of the assessee in the quantum appeal at Rs. 14,000. In view of the relief granted in this quantum appeal, the Tribunal, though it held that the assessee was liable to pay penalty, reduced the penalty to a sum of Rs. 1,000. The department having failed in its application filed under s. 256(1) of the Act to get a question of law referred sought reference of four questions in this court in T. C. P. Nos. 28 and 27 of 1975, and in pursuance of the order therein, the Tribunal has referred the following questions :
T. C. No. 790 of 1976 :
'(i) Whether, on the facts and in the circumstances of the case, the Appellate Tribunal was right in deleting the entire addition of Rs. 59,205 made under the head 'Other sources' on account of unexplained peak hundi credits, for the assessment year 1963-64
(ii) Whether, on the facts and in the circumstances of the case, the assessee had explained the credits satisfactorily and discharged the onus of proof that lay upon him under the provisions of section 68 of the Income-tax Act, 1961
(iii) Whether the finding of the Appellate Tribunal is a reasonable view to take on the facts and in the circumstances of the case ?'
T. C. No. 791 of 1976 : 'Whether, on the facts and in the circumstances of the case, the Appellate Tribunal was right in reducing the penalty imposed under section 271(1)(c) for the assessment year 1963-64, to Rs. 1,000 ?'
5. The learned counsel for the revenue contended that there was only an explanation of the assessee relating to Rs. 59,205 and there was no material in support of that explanation and, as such, the tribunal was in error in deleting the same. We are unable to agree with this contention. The explanation of the assessee was that there was a promise by J. K. K. Natarajan Chettiar that he would arrange for further exports in the name of the assessee and since he was not going to be the actual exporter, it had to make certain bogus entries as on the previous occasion. It was found that with reference to Rs. 1,50,000 the procedure adopted was to create certain bogus entries of credit in the names of some Multani bankers and then make corresponding entries of manufacture and export. In the second occasion, though it had made the credit entries and also entries as if it had purchased art silk yarn, manufactured silk cloth and they were ready for export, the said J. K. K. Natarajan Chettiar could not put through a transaction of export and, therefore, it had to enter certain bogus cash sales entries. Thus, all the entries, according to the assessee, viz., credit entries in the names of Multani bankers as well as the cash sales, were bogus entries. This statement was in a way supported by the letter of J. K. K. Natarajan Chettiar that he did promise for further export in the name of the assessee, but they could not do so. In the circumstances, we are unable to agree with the learned counsel that it is a bare assertion of the assessee not supported by any other evidence. For one thing, the explanation of the assessee was in the nature of a statement of fact and that statement was supported by the evidence of J. K. K Natarajan Chettiar. In the circumstances, we cannot say that this is a case where the assessee could be said to have not satisfactorily explained the credits or discharged the onus of proof under s. 68 of the I. T. Act. We are also of the view that on the statement of the assessee, in fact, s. 68 of the Act could not be invoked at all, because no amount has come to the possession of the assessee, which was used for the purpose of the business, so that the entry relating to the credit as also the entry relating to sales were bogus and, therefore, s. 68 of the Act could not be invoked. Further, even assuming that any other view is possible, since the AAC and the Tribunal had taken one view which cannot be stated to be unreasonable, in the circumstances, we cannot say that the deletion of the sum of Rs. 59,205 was contrary to law. We, accordingly, answer the three questions in T. C. No. 790 of 1976 in the affirmative and against the revenue.
6. In view of the answer to the above three questions, it necessarily follows that we have to answer the question referred to us in T. C. No. 791 of 1976 also in the affirmative. This was in the view that if we once accepted the view that the deletion of Rs. 59,205 was justified, there being no reference against the order of the Tribunal in the quantum appeal, the penalty will have to be levied on the basis that the income from the business determined was only Rs. 14,000. Since the sum of Rs. 1,000 fixed by the Tribunal is above the minimum prescribed, we have to hold that the Tribunal had the power to reduce the penalty and fix it at Rs. 1,000. We, accordingly, answer the reference in T. C. No. 791 of 1976 also in the affirmative and against the revenue. The assessee will be entitled to its costs. Counsel's fee Rs. 500. One set.