Satish Chandra, C.J.

1. For the year 1970-71, the Tribunal has referred the following question of law for our opinion :

"Whether, on the facts and in the circumstances of the case, was there any material in support of the finding that penalty was not leviable under Section 271(1)(c) of the Income-tax Act, 1961, in support of the concealed item of income of Rs. 23,500 ?"

2. For the assessment year 1970-71, the assessee which was a partnership firm, returned an income of Rs. 17,480. The ITO did not accept the return and made some additions. The assessee went up in appeal, but failed. The assessee then went up to the Tribunal. Ultimately, the additions of Rs. 23,500 on account of unexplained retirement of certain hundis was upheld by the Tribunal. Other additions were deleted by the Tribunal. During these proceedings, the ITO referred the case to the IAC for drawing up penalty proceedings. The IAC issued the requisite notice and after hearing the assessee imposed a penalty of Rs. 25,840 on the footing that that much amount represented the concealed income. He held that the charge of concealment of income has been proved to the hilt against the assessee. The assessee went up in appeal. The Tribunal heard the appeal of the assessee on the quantum as well as on the penalty side and disposed of them by a common judgment. The Tribunal held that the petitioner's case that he had taken a sum of Rs. 23,638 from certain other parties to enable him to retire the hundis in question was not proved. The Tribunal then addressed itself to the income from undisclosed sources. It observed:

"Anticipating this position, the assessee had taken the alternative plea that the amount utilised for retirement of hundis had come from the funds lying outside the books of account, the same having been built up of the trading account additions made by the Income-tax Officer in the preceding three assessment years. This alternative plea was rejected by the Appellate Assistant Commissioner because he found no co-relation between the additions to trading account made in past years with the funds utilised in the relevant accounting year for retirement of hundis. The only thing common in the transactions is that the trading account additions of past years represent secreted profits not reflected in the books of account and the funds utilised for retirement of hundis also are such as had not been entered in the books of account. The latter may have flown from the former but unless the assessee leads evidence to show how exactly this had happened, there cannot be an invariable presumption in favour of the assessee that one is covered by the other. On the facts of the case, we have to hold that the origin of the amount of Rs. 23,500 (in round figures) which was utilised by the assessee-firm in the retirement of hundis on September 10, 1969, remains unexplained."

On the penalty side, the Tribunal recorded the following finding:

"At paragraph 6.7 above, we have held that the explanation furnished by the assessee about the origin of Rs. 23,636 utlised by the assessee for retiring hundis on September 10, 1969, had not been satisfactorily explained and, therefore, the amount (Rs. 23,500 in round figures) could reasonably be treated as the assessee's income from undisclosed sources. But we have also considered the possibility of the said unrecorded amount having come from the unrecorded additional profits for the three years immediately preceding. In this context, we have to hold that no penalty under Section 271(1)(c) is leviable on a charge of the assessee having concealed its income for the assessment year 1970-71 to the extent of Rs. 23,500. The burden on the revenue which lay in this respect has not been discharged. Accordingly, we cancel the penalty."

3. Learned counsel for the revenue has submitted that, under the circumstances, it is not disputed that the Explanation appended to Section 271(1)(c) was applicable because the returned income was far less than 80%