ARIJIT PASAYAT, C.J.

At the instance of the Revenue, the following questions have been referred under s. 256(1) of the IT Act, 1961, (in short "the Act"), by the Tribunal, Cochin Bench (in short "the Tribunal").

"1. Whether, on the facts and in the circumstances of the case, the Tribunal is right in law and fact, in deleting the penalty levied under s. 271(1)(c) of the IT Act ?

2. Whether, on the facts and in the circumstances of the case, the Tribunal is right in law and fact, in holding that this is an agreed assessment on the basis of which penalty is not leviable ?

3. Whether, on the facts and in the circumstances of the case, the Tribunal is right in law and fact, in holding that penalty cannot be levied as the AO in the proposal under s. 271(1)(c) had not referred to Expln. 1(B) to s. 271(1)(c) ?"

The factual position, as borne out from the statement of case, is as follows : For the asst. yr. 1986-87, the assessee, a partnership firm, filed its return of income on 22nd April, 1987, admitting a total income of Rs. 6, 76, 890. The AO completed the assessment determining total income at Rs. 7, 90, 170 including Rs. 93, 000 as income under the head "Other sources". The assessee, in the course of its business, received rice mostly from suppliers from Andhra Pradesh, who sent the goods either directly or by raising hundis. When hundis were raised, the assessee honoured them by making payment through local banks. When goods were sent directly, payments were made either by demand draft or by telegraphic transfers through local banks. During the course of assessment proceedings, the Assessing Officer noticed that some of the demand drafts purchased and telegraphic transfers made by the assessee were not entered in its cash book on the dates on which they were purchased or made, as the case may be. The payments were found to have been accounted by the assessee's suppliers on the respective dates. The assessee purchased a demand draft of Rs. 50, 000 on 27th January, 1986, from the State Bank of India, Calicut, in favour of Sree Jayalaxmi Enterprises, Byravapatanam, Andhra Pradesh. A copy of the assessee's account furnished by Sree Jayalaxmi Enterprises confirmed this payment. But, in the assessee's accounts, this amount was entered only on 4th February, 1986, when there was sufficient cash balance. Similarly, the assessee transferred a sum of Rs. 1 lakh by telegraphic transfer through Andhra Bank, Calicut, on 24th March, 1986, to Madavenkataratanam and others, Bhimavaram, Andhra Pradesh. This transaction was found entered only on 24th April, 1986, when the assessee had sufficient cash balance. When these discrepancies were pointed out to the assessee, it submitted a letter on 28th August, 1989, stating that as sufficient cash balance was not available on the dates of transactions, it had obtained hand loans from a few friends and as it was confident of repaying such loans within a short time, no entries were made in the books of account for such loans. It was stated that being unable to furnish evidence for such loans, it offered the amount as additional income. Taking into account deficiency in cash balance, the assessee agreed for an addition of Rs. 93, 000 to cover such deficiency. The assessment was finalised, as indicated above, treating Rs. 93, 000 as "unexplained investment". Penalty proceedings were initiated under s. 271(1)(c) of the Act. The AO noticed that when the assessee had purchased a demand draft of Rs. 50, 000 on 27th January, 1986, it had a cash balance of only Rs. 26, 876. The transaction was entered on 4th February, 1986, when the assessee had sufficient cash balance. In the books of account between 27th January, 1986, and 4th February, 1986, the lowest cash balance of Rs. 10, 568 was on 30th January, 1986. On that basis, deficiency of cash balance was worked out at Rs. 39, 432. So far as telegraphic transfer of Rs. 1 lakh on 24th March, 1986, is concerned, the cash balance on the date was Rs. 67, 967. T