1. This is a reference at the instance of 'the Commissioner of Income-tax under S.256 (1) of the Income-tax Act;;and the question of law referred is:

'Whether on the facts and in the circumstances of the case, the Appellate Tribunal was right in holding that the assessee is not guilty of any fraud or gross or wilful negligence in furnishing the return and in cancelling the penalty under S.271 (1) (c) of the Income-tax Act, 1961?"

The assessee is a firm doing business in the manufacture and sale of horn, ivory and rose-wood curios. For the assessment year 1964-65 the relevant previous year being the year ended 3131964 the assessee returned an income of Rs. 44,614 under the head business. The Income-tax Officer held that the gross profit of Rs. 1,50,411 on the admitted turnover of Rs. 5,60,563 was too low as it worked out only at 24.3%. He found several defects in the accounts and rejected the accounts and estimated the gross profit at 30% which resulted in an addition of Rs. 31,814. The Income-tax Officer also found that the expenses claimed in the assessee's Bombay branch was Rs. 32,555 during the relevant year even though the increase in turnover was only rupees one lakh