Rajendra Nath Mittal, J.

1. The Income-tax Appellate Tribunal, Chandigarh Bench, at the request of the Commissioner of Income-tax, Patiala, referred the following question of law for decision of this court under Section 256(1) of the I.T. Act, 1961 (hereinafter referred to as "the Act"):

"Whether, on the facts and circumstances of the case, the Tribunal was right in law in holding that the Inspecting Assistant Commissioner of Income-tax was not legally competent to pass the penalty order ?"

2. Briefly the facts which have given rise to this reference are as follows :

3. The assessee is a registered firm and manufactures and sells tool bits. For the accounting year ending March 31, 1965, relevant to the assessment year 1965-66, the assessee filed a return of income on September 30, 1965, wherein it showed its income as Rs. 10,365. While making the assessment the ITO noticed that the assessee had purchased goods worth Rs. 96,648 for which bills were not produced by it. He also categorised 26 separate cash credits, the peak of which on February 8, 1965, came to Rs. 60,882. The assessee, when asked to explain the source of the credits, did not furnish any explanation, but said