Judgement

VAIDIALINGAM, J.: - This appeal, by special leave, by the Commissioner of Income-tax, Madras, is against the Judgment and Order dated October 3, 1966 of the High Court of Mysore, rejecting the appellant s application filed under Section 66 (2) of the Income-tax Act, 1922 (hereinafter to be referred as the Act) for directing the Income-tax Appellate Tribunal, Madras Bench to refer the question of law to the High Court.

2. The question of law, which the appellant wanted to be referred was:

"Whether on the facts and in the circumstances of the case the Appellate Tribunal was right in canceling the penalty of Rupees 35,000/- levied under Section 28 (1) (c) of the Indian Income-tax Act, 1922."

3. The respondent was a firm carrying on business of manufacturing silk, carbon papers, type-writer ribbons, liquor, spirituous drugs and chemicals etc. In respect of the assessment year 1955-56, the respondent has sent a return showing Rupees 51,214/- as taxable income. On looking into the accounts and other records, the Income-tax Officer made several additions to the amount shown in the return and ultimately fixed the total assessable income in the sum of Rupees 3,30,474/-. On appeal, the amount was reduced and the taxable income was fixed in the sum of Rupees 2,09,575/-. In the further appeal by the assessee to the Appellate Tribunal, there was no alteration in this figure. Only two items which were added to the income and which have been accepted by all the authorities require to be noticed. They are:

Pharmaceuticals, section Rs. 77,518.00

Chemicals section Rs. 9,900.00

4. Relating to the Pharmaceuticals section, it is the view of the Income-tax Officer that some of the sale bills produced by the respondent were found to be forged ones and some of the purchasers of tincture were also fictitious persons. There was no evidence produced by the assessee to show that the Kolae powder, which was very essential for the manufacture of tincture had been purchased by it. Hence the Income-tax Officer drew an inference that the respondent had not really manufactured tincture and that on the other hand the firm must have sold all alcohol illicitly.

5. It was on this basis that the Income-tax Officer held that the assessee must be considered to have omitted to show the sum of Rupees 77,588/-. Similarly, regarding Chemical section, the Income-tax Officer found that the respondent has not accounted for a part of sale of Ethyl Acetate and that on verification it was found that there has been a large deficit of rectified spirit. On this basis the Income-tax officer drew an inference that the firm has again secreted a large quantity of rectified spirit under the cloak of manufacture of chemicals. On the ground that certain sales had not been properly accounted for, the sum of Rupees 9,900/- was added to the taxable income of the assessee. It was on the above basis that the two items were included in the total assessable income of the assessee firm.

6. These reasons given by the Income-tax Officer have been, by and large, accepted by the Appellate Assistant Commissioner and the Income-tax Appellate Tribunal. The Income-tax Officer, Special Investigation Circle A, Bangalore issued a notice under Section 28 (1) to the respondent that it has concealed the particulars of its income and deliberately furnished inaccurate particulars in respect of the above amounts added to the total income and that the Income-tax Officer proposed to levy a penalty under Section 28 (1) (c) of the Act. No doubt, in the notice certain other items, which had already been added to the total income were also referred to. But these items have been deleted from the penalty proceedings by the Appellate Assistant Commissioner. Therefore, we are only concerned with the two items, referred to earlier.

7. The assessee sent a reply stating that it has not concealed the particulars of its income nor has it deliberately furnished inaccurate particulars of such income. The explanation offered b