The assessee is entitled to an opportunity to prove that the surrender of an amount was not an admission of undisclosed income, and the mere fact of surrender cannot be the sole basis for imposing a penalty.

1. This judgment of ours would dispose of Income-tax References Nos. 42 and 43 of 1971. The facts read as under :

For the assessment years 1959-60 and 1960-61, regular assessments had been made in respect of Messrs. Kishan Lal Shiv Chand Rai. Later on, notices were issued under Sections 143(3)/148 of the Income-tax Act, 1961 (hereinafter referred to as "the Act"), and in the course of the assessment proceedings in pursuance of those notices, the assessee surrendered certain amounts which it had shown as loans of third parties at the time of earlier regular assessments. The Income-tax Officer accepted those surrenders and made orders of reassessment after affording an opportunity to the assessee-firm to prove that the credits on the basis of hundis shown in the names of third parties were genuine credits. At that time, the assessee-firm, instead of proving that fact, gave a statement surrendering those amounts to be treated as its income of the year from undisclosed sources.

2. Thereafter, proceedings for imposition of penalty were initiated against the assessee-firm. In those proceedings, it was pleaded by the assessee that it should be given an opportunity to prove that the credits on the basis of hundis in favour of third parties, which had been surrendered during the course of assessment proceedings, were in fact credits of genuine parties, and it was only for the sake of avoiding botheration that the firm surrendered those credits and agreed to be assessed on the basis of those credits being taken as the income of the firm from undisclosed sources The Inspecting Assistant Commissioner refused to give an opportunity to the assessee-firm to prove their assertion and imposed a penalty of Rs. 18,291 in respect of the assessment year 1959-60 and a penalty of Rs. 22,729 for the assessment year 1960-61. The appeals filed by the assessee were also dismissed and their application for reference of some questions of law arising out of the Tribunals order for opinion to this court, was also rejected. Thereafter, the assessee-firm filed petitions under Section 256(2) of the Act in this court for a direction to the Income-tax Appellate Tribunal for stating the case to this court for opinion along with the questions set out in that application. Those income-tax cases came up for hearing before Mahajan and Tuli JJ. and their Lordships, vide their order dated November 10, 1970, directed the Income-tax Appellate Tribunal to draw up the statement of the case and refer to this court for opinion, the question, " Whether, on the facts and in the circumstances of the case, the order imposing penalty was justified ? " It is in these circumstances that the Appellate Tribunal, Chandigarh Bench, has drawn the statement of the case, and has referred the above mentioned question for our opinion.

3. It was strenuously contended before us by Mr. Sharma that the penalty proceedings are penal in character, that it was for the department to establish that the amounts surrendered constituted their income and that the mere fact that the amounts were surrendered during the course of assessment proceedings would be no ground to impose the penalty on the assessee. It was also contended by the learned counsel that the Inspecting Assistant Commissioner did not give any opportunity to the assessee-firm to prove their assertions, and that penalties were imposed illegally. On the other hand, it was contended by Mr. Awastby, learned counsel for the department, that full opportunity was afforded to the assessee-firm by the Inspecting Assistant Commissioner for proving their case but they failed to utilise that opportunity, that the department successfully discharged the onus initially placed on it for the purpose of imposing the penalty and that the order of the Tribunal, which was passed on a consideration of various circumstances, could not be interfered with by this court.

4. After giving our thoughtful consideration to the entire matter, we are of the view