Per Shri Pradeep Parikh, Accountant Member - The assessee is in appeal before us against the order of the learned CIT(A) dated 22-1-1990 for assessment year 1985-86. Though apparently there are four grounds, actually there is only one issue and it relates to the levy of penalty of Rs. 70,000 under section 271(1)(c) of the Income-tax Act, 1961 (the Act). Rest of the grounds are mere submissions and/or arguments and are dealt with at the appropriate places in this order.

2. The facts: The assessee M/s Parasmal Parekh, E-37, Shastri Nagar, Jodhpur was a registered firm engaged in contract work relating to Government Departments. It had secured a contract from the Improvement Trust, Jodhpur for the construction of Barkatullah Khan Stadium, Jodhpur. It came into existence in the assessment year 1984-85 under Deed date 30-10-1982 of Partnership. Its partners were S/Shri Parasmal Parekh, Kewalchand Jain and Banwar Ram. The firm is said to have been dissolved with effect from 1-5-1985. For the assessment year 1985-86 in question there were three accountants (Munims) in the said firm, namely, S/Shri Nemichand Sharma, Satya Narain Sharma and Rikhabmal Nahar. Out of these Shri Rikhabmal Nahar, who was said to be the main Munim died two days after the Dewali, 1985. For the assessment year in question, on gross receipts of Rs. 51,56,471, the assessee declared a net profit of Rs.4,93,945 giving a rate of 9.5% as against 10% applied in the preceding assessment year 1984-85. The ITO noticed that as against the total payment/receipts of Rs. 51,56,471, the assessee had claimed Rs. 10,27,621 as wages which came to roughly 1/5th. The labour expenses had been claimed on the basis of muster rolls for the period 14-5-1983 to 28-2-1984. The ITO issued notices under section 143(2)/142(1) requiring the assessee to produce evidence in support of the return filed and to produce the books of account on 16-4-1986. On the said date the books of account were produced before the ITO and taking the view that they were fake, they were impounded under section 131. The books so impounded also included the muster rolls of labourers. The ITO noticed that thumb impressions of some persons were repeated again and again at a number of places. Thereafter, on 18-4-1986 the ITO referred the matter for report of the Finger Print Expert. The report dated 23-7-1986 of the Director, Finger Print Bureau, Calcutta stated that one muster roll pertaining to Barkatullah Khan Stadium dated 14-5-1983 (Sheet Nos. 79,80 & 81) had 58 names in Hindi against which the finger prints marked showed that :—

(i)32 finger prints were identical to each other,

(ii)17 finger prints were identical to each other, and

(iii)9 finger prints were not clear and were smudged and therefore, unfit for comparison.

On 30-9-1986 the ITO examined the assessee firm’s Partners S/Shri Parasmal Parekh and Kewalchand Jain. The statement of the Munim. Shri Satyanarain Sharma was recorded on 9-10-1986 and the second statement of Shri Nemichand Sharma was recorded on 21-10-1986. The second statement of the assessee firm’s partner Sh. Parasmal Parekh was recorded on 17-11-1986 and thereafter the statements of other partner S/Shri Kewalchand Jain and Sanwalram were recorded on 3-12-1986 and 4-12-1986. Earlier the ITO had required the assessee, vide notice dated 9-10-1986 to produce some of the labourers, namely, S/Shri Vyas Satyaraj, Hasari, Baldeo, Naurath, Khetaram, Shivlal, Devilal, Ramlal Vadera and Pema. However, vide its reply dated 15-10-1986 the assessee expressed its inability to produce them on the ground that the execution of the work had been suspended and that the labourers had migrated to the other sites of work, the labourers being casual and migratory. The ITO took the view that only three labourers affixed their thumb impressions against the names of 58. According to him the expenses under the head "Wages" were bogus and inflated. He also found that though the assessee-firm did not own any vehicle, exp