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Issues Involved:
1. Whether penalty was leviable in law under section 28(1)(c) of the Indian Income-tax Act, 1922, for the alleged concealment of income by the assessee-firm. Analysis: Issue 1: Whether penalty was leviable in law under section 28(1)(c) of the Indian Income-tax Act, 1922, for the alleged concealment of income by the assessee-firm. The case pertains to the assessment year 1949-50, with the corresponding previous year being S.Y. 2004. The assessee, a registered partnership firm, had an overdraft from the Mercantile Bank of India. The Income-tax Officer discovered that the overdraft was sanctioned on the hypothecation of stocks worth Rs. 7,68,325, contrary to the assessee's claim of a clean overdraft. Upon investigation, the Income-tax Officer found that the assessee had suppressed stocks worth Rs. 2,46,780. Consequently, he estimated the turnover at Rs. 25 lakhs and added Rs. 2,50,000 as income from undisclosed sources. The Appellate Assistant Commissioner, in his remand, revised the addition to Rs. 47,940, corresponding to 175 bags of cotton and 28 bags of groundnuts. The assessee-firm agreed to this revised addition during settlement negotiations. However, the Income-tax Officer initiated penalty proceedings under section 28(1)(c) for the amount of Rs. 47,940, which was sustained by the Appellate Assistant Commissioner. The Tribunal, however, found that the department failed to establish mens rea, noting that the declaration to the bank might have been made to obtain more overdraft facilities and not necessarily to conceal income. Mr. Joshi, representing the revenue, argued that the assessee's agreement to the addition of Rs. 47,940 indicated an admission of concealed income. He cited the Delhi High Court's decision in Durga Timber Works v. Commissioner of Income-tax, where the court upheld a penalty based on the assessee's admission of concealed income. However, the High Court found this case distinguishable, as the explanation provided by the assessee-firm was partially satisfactory, and the undisclosed stock was limited to the two items worth Rs. 47,940. The Tribunal observed that the penalty proceedings were based on the declaration made to the bank, and there was no conclusive evidence of deliberate concealment. The court referred to the Supreme Court's decision in Commissioner of Income-tax v. Anwar Ali, which established that penalty proceedings could not be justified in the absence of deliberate concealment or contumacious conduct. Additionally, the court cited Commissioner of Income-tax v. N. A. Mohamed Haneef, where the Supreme Court held that penalty could not be imposed without a firm conclusion of deliberate supply of wrong particulars. Applying these principles, the High Court concluded that there was no basis for levying any penalty on the assessee-firm. Conclusion: The High Court answered the question in the negative, ruling against the department, and held that no penalty was leviable in law. The revenue was directed to pay the costs of the reference.
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