G.C.Bharuka, J.

1. The present two tax cases are being disposed of by a common judgment because the answer to the question referred in Tax Case No. 40 of 1978 is intimately dependent on the answer to the question involved and referred in Tax Case No. 39 of 1978. The Income-tax Appellate Tribunal has referred the following questions of law under Sec. 256(1) of the Income-tax Act, 1961 (hereinafter referred to as "the Act") only :

"1. Whether, on the facts and in the circumstances of the case, the Tribunal is justified in law in cancelling the entire assessment under Sec. 147(a) of the Income-tax Act, 1961 for the assessment year 1962-63 ? (referred in Tax Case No. 39 of 1978)

2. Whether, on the facts and in the circumstances of the case, the cancellation of the penalty under Sec. 271(1)(c) of the Income-tax Act, 1961, by the Tribunal was legal ? (referred in Tax Case No. 40 of 1978)."

2. For the assessment year 1962-63 pertaining to the accounting year ending on December 31, 1961, the assessment of the assessee, namely, Agarwalla Brothers, had been completed on May 25, 1964, by determining a loss of Rs. 7,361. During the assessment proceedings as disclosed by the assessee, t