SETHURAMAN


In the reference under section 256(2) of the Income-tax Act, 1961, in pursuance of a direction of this court, the following are the questions that were directed to be, and have been, referred

"(1) Whether, on the facts and in the circumstances of the case, the Appellate Tribunal was right in law in cancelling the penalty imposed under the provisions of section 271 (1) (c) for the assessment year 1961-62, when the quantum assessment on the basis of which the penalty came to be imposed by the Department has been set aside by the Appellate Tribunal for being done de novo by the Income-tax Officer in accordance with law ?


(2) Whether the Appellate Tribunal was within its jurisdiction in passing the order cancelling the penalty, having the effect of prohibiting the Income-tax Officer from initiating penalty proceedings, if called for, on the basis of the assessment directed to be made de novo ?" *


The assessee, a private limited company, was carrying on business in mining and export of iron and manganese ore. For the assessment year 1961-62, it filed a return declaring loss. The Income-tax Officer noticed that there were several credit entries in its books in the names of multani bankers. The assessee's explanation was that it had borrowed moneys from the said bankers by executing hundis. There were also entries in the books showing payment of interest of Rs. 81, 040. During the course of the assessment, the assessee contended before the Income-tax Officer that there was a firm called Rambilas Nandlal, the partners of which had a controlling interest in the assessee-company. The said firm had filed a settlement petition to the Central Board of Direct Taxes on May 20, 1965, relating to the assessment years 1955-56 to 1964-65, wherein it had accepted the position that the loans in the various names introduced in the books of the assessee were, in fact, its undisclosed income. The further contention of the assessee was that the interest was really paid to the firm, Rambilas Nandlal, in respect of the said loans. The Income-tax Officer noticed that the said petition for settlement had not been accepted by the Board and taking into account the increase in the maximum of the hundi transactions of the year amounting to Rs. 40, 000, he brought to tax the said sum as income from other sources. He disallowed also the interest claim of Rs. 81, 040. The assessee appealed before the Appellate Assistant Commissioner and succeeded as the latter had accepted a similar claim of the assessee for the assessment year 1961-62. The Department filed an appeal before the Tribunal. The Tribunal set aside the assessment as regards the addition of the amount covered by the credit entries and also the disallowance of the interest incomeThe Inspecting Assistant Commissioner levied penalties in the present case and the question before the Tribunal was whether the penalty of Rs. 27, 226 levied was proper. The Tribunal considered that the firm, Rambilas Nandlal, had taken the stand that the amount represented its own transactions and taking into account the disposal of a similar contention for another year, the penalty had been deleted. Following the same reasoning, the penalty levied in the present case was also cancelled. It is against this cancellation of penalty that the Department has obtained the present reference under section 256(2) of the Act


From the statement of the case, it is clear that the assessment for the relevant year has been set aside. When the assessment itself was set aside, the question of levy of penalty could no longer be a live issue. In order that the penalty proceedings should survive, the assessment proceedings should be alive. As the assessment had been set aside, the penalty proceedings could not have been terminated by the cancellation of penalty. The question as to whether penalty was leviable or not has to be consider

ed in the light of the findings in the assessment to be made as a result of directions given by the Tribunal while setting aside the same. In these circumstances, the Tribunal acted erroneously in cancelling the penalty. In fact, the questions as framed appear to answer themselves and the questions are answered in the negative and in favour of the Department. In the particular circumstances of the case, there will be no order as to costs.