Satish Chandra, C.J.

1. THIS reference raises an interesting question in respect of the levy of penalty.

2. THE assessee is a registered firm. It carries on business in shoes. For the assessment 1968-69, the assessee filed a return of income on 31st October, 1968, disclosing an income of Rs. 65,691. The ITO included Rs. 71,834.95 as income from other sources in respect of credit balance existing in the assessee's account books in respect of six other firms. This addition was reduced on appeal. On further appeal, the Tribunal upheld the inclusion in relation to two cash credit items, namely :--

(1) of Rs. 16,350 relating to Sri Ram Lal, leather merchant, Agra,

(2) of Rs. 8,510 of Chimanlal, leather merchant, Agra.

Thus, the inclusion as income from other sources was reduced from Rs. 71,834-95 to Rs. 24,860. The Tribunal also upheld the inclusion of Rs. 8,423 on account of bonus received by the assessee as a result of the devaluation of Indian currency. This receipt was held to be clearly revenue in nature and includible in the total income of the assessee.

3. MEANWHILE, the IAC initiated penalty proceedings, and ultimately levied a penalty of Rs. 57,000, because the amount of income concealed was, in his opinion, Rs. 56,823.

4. THE assessee appealed to the Tribunal against the order imposing penalty.

The Tribunal held that penalty proceedings are criminal in nature. It was hence necessary for the person sought to be penalised to be informed of the exact charge against him. The assessee had never been intimated that he was being charged under the Explanation to Section 271(1)(c) of the I.T. Act, 1961. The revenue was hence not entitled to levy penalty after taking the aid of the Explanation. On the view that the assessee could only be charged for an offence against the substantive provision of Clause (c) of Section 271(1), the Tribunal held that, in the circumstances, the ratio of the Supreme Court decision in CIT v. Anwar Ali [1970] 76 ITR 696 is applicable, and applying the tests laid down in that case, it was apparent that the assessee could not be held guilty of concealing any income.

5. IN the alternative, the Tribunal went on to consider whether the provisions of the Explanation were satisfied. It came to the conclusion that the assessee may be negligent but this negligence cannot be equated with gross negligence or that it was guilty of fraud. Even if the Explanation was applicable, the assessee was not liable to levy of penalty. On these findings, the assessee's appeal was allowed. The penalty order was cancelled.

6. AT the instance of the Commissioner, the Tribunal has referred the following questions of law for our opinion :

"(1) Whether, on the facts and circumstances of the case, the Tribunal was right in cancelling the penalty levied under Section 271(1)(c) of the Act of 1961 ?

(2) Whether, on the facts and circumstances of the case, the Tribunal was right in holding that the Explanation to Section 271(1)(c) of the Act was not applicable to the instant case ?"

The Tribunal has dealt with the case also on the footing that the Explanation was applicable. We may at first deal with this aspect.

7. ULTIMATELY, three items were added as income from undisclosed sources ;

8. IN respect of the first two items, the assessee's case was that the amounts represented purchase of raw materials on credit, which were liquidated by payment subsequently.

The ITO disbelieved this explanation. He held that the purchases were made towards the end of the accounting period ; payments were made long after ; payments were made by bearer cheques and not by account payee cheques, and, lastly, that these firms were not identifiable. The assessee did not produce them. The income-tax inspector could not trace them out. The conclusion was that the parties were fictitious and purchases were made on credit, even though cash was available with the assessee or in the bank account.

9. IN respect of the third item, the ITO repelled the assessee's ple