DIPAK KUMAR SEN, J.

( 1 ) THIS reference arises out of the income-tax assessment of Calcutta Credit Corporation, the assessee, in the assessment year 1966-67, the accounting year ending on June 30, 1965. In making the assessment, the Income-tax Officer found Rs. 1,20,000 standing credited in the name of one Shankarlal Dulichand in the books of the assessee. A sum of Rs. 10,846 was also shown as paid by way of interest to the said Shankarlal Dulichand. The Income-tax Officer did not accept the particular item of entry and treated the said sum of Rs. 1,20,000 as the assessee's income from other sources. He also disallowed the assessee's claim of deduction of Rs. 10,846 which was claimed to have been paid to Shankarlal Dulichand by way of interest. The taxable income of the assessee was computed accordingly.

( 2 ) BEING aggrieved, the assessee preferred an appeal before the Appellate Assistant Commissioner. The Appellate Assistant Commissioner found that the creditor, Shankarlal Dulichand, was a registered firm consisting of five partners and that it was an assessee under the Income-tax Act. He also found from the report of the inspector dated July 26, 1969, that the firm had since closed down and its partners were not traceable. He next considered the financial capability of the creditor and scrutinised the last three assessments of the firm. He came to the conclusion that the financial position of the creditor was not bad and it would have been possible for the creditor to have advanced the amount to the assessee from its secreted profits and suppressed funds. He held that the fact that the assessee had not paid any brokerage to the broker who claimed to have negotiated the loan was not of much relevance. He held that the Income-tax Officer was not justified in including the said amount of Rs. 1,20,000 which stood credited in the name of Shankarlal Dulichand in the income of the assessee and directed deletion of the amount.

( 3 ) BEING aggrieved, the Revenue went up in appeal before the Income-tax Appellate Tribunal. The Tribunal found from the facts on record that the confirmatory letter from the creditor suffered from infirmities. The Tribunal also did not accept the oral testimony of the broker in support of the said loan. It was noted that the broker was not carrying on regular business and there was no evidence to show that he had received any brokerage in respect of the particular transaction. The Tribunal also considered the financial position of the creditor and held that it could not be established that the creditor had enough assets to make the loan. The finding of the Appellate Assistant Commissioner that the creditor could have given the loan from its secreted profits and concealed assets was held to be speculative.

( 4 ) THE Tribunal, however, after considering the cash credits covered by the earlier disclosures of the assessee, held that the cash credit shown in the name of Shankarlal Dulichand could be explained from such disclosures and the cash rotation statement except to the extent of Rs. 40,000. The Tribunal reversed the finding of the Appellate Assistant Commissioner and restored the addition to the extent of Rs. 40,000. The claim for deduction of Rs. 10,846 alleged to have been paid by way of interest was also disallowed and the addition of the said amount was restored.

( 5 ) ON the basis of the aforesaid, penalty proceedings were initiated by the Inspecting Assistant Commissioner under Section 274 of the Income-tax Act, 1961, and by an order dated February 25, 1974, a penalty of Rs. 49,566 was imposed on the assessee.

( 6 ) BEING aggrieved, the assessee preferred an appeal against the order of penalty before the Income-tax Appellate Tribunal. The Tribunal found that the assessee's case supported by evidence, viz. , certificate of the creditor, the affidavit and the oral evidence of the finance broker and the income-tax records of the creditor, was accepted by the Appellate Assistant Commissioner who

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