M.K Srinivasa Iyengar, J.:— The Income-tax Appellate Tribunal, Bangalore Bench, has referred the following question under section 256(1) of the Income-tax Act, 196-1 (hereinafter referred to as “the Act”), for the opinion of this court in R.A No. 394(Bang) 1974–75 on its file:

“Whether, on the facts and in the circumstances of the case, the Tribunal is right in law in holding that the provisions of the Explanation to section 271(1)(c) are not applicable to this case?”

2. The Commissioner of Income-tax had sought for referring three questions.

3. But, the Tribunal referred only one question. Subsequently, the Commissioner moved this court in C.P No. 18 of 1976 for directing further questions to be referred to this court. An order was made by this court dated December 1, 1976, in C.P No. 18 of 1976 and, pursuant to that order, the following question has also been referred for the opinion of this court:

“Whether, on the facts and in the circumstances of the case, the Tribunal is right in law in cancelling the penalty of Rs. 5 lakhs levied under section 271(1)(c) of the Income-tax Act, 1961?”

4. As both the references arise out of the same order of the Tribunal, they are disposed of by this common order.

5. An assessment had been made against the assessee (respondent) for the assessment year 1960–61 on December 5, 1961, computing a net loss of Rs. 12,599. Subsequently, proceedings under section 147(a) of the Act were taken on the ground that the assessee had received a sum of Rs. 32,58,500 from Parsons and Whittmore, Canada, which purported to be a loan. The Income-tax Officer thought that, in reality, it was not a loan but a sort of commission paid to the assessee from a foreign collaborator. It was on this ground that reassessment proceedings was started. The assessee maintained that it was a loan and there was no justification to hold that it was any receipt from business. But, the Income-tax Officer did not accept that contention and reassessment was made including that amount as income of the assessee. The appeal to the Appellate Assistant Commissioner of Income-tax and the Tribunal was not fruitful. At the instance of the assessee, the Income-tax Appellate Tribunal referred the question, whether the conclusion that the amount represented income was correct, to this court in I.T.R.C No. 180 of 1975 (Bedi and Co. (P.) Ltd. v. CIT, [1983] 144 ITR 352). That matter was heard on August 4, 1980, and answered in favour of the assessee. This court held that there was no material justifying any inference that the amount represented any income from business and the Tribunal ought to have upheld the apparent state of affairs, namely, that the transaction was a loan transaction.

6. In view of the addition made, the Income-tax Officer was of the opinion that the assessee had concealed its income or furnished inaccurate particulars thereof and, therefore, initiated proceedings for imposition of penalty under section 271(1)(c) of the Act. On the ground that the minimum penalty imposable would exceed Rs. 1,000, he referred the matter to the Inspecting Assistant Commissioner. He, after affording an opportunity to the assessee to show cause why penalty should not be imposed, did not accept the contention of the assessee that the amount did not represent any income and that, therefore, there was no question of concealing any income or furnishing inaccurate particulars thereof, and imposed penalty in a sum of Rs. 5 lakhs. By the time that order came to be made, the appeal of the assessee to the Appellate Assistant Commissioner had been disposed of Apparently, the matter had not yet been disposed of by the Tribunal.

7. The assessee preferred an appeal to the Tribunal against the imposition of penalty. The Tribunal, inter alia, accepted the contention on behalf of the assessee that, in the circumstances of the case, as the assessee was contending that the amount did not represent any income, it could not be said that the assessee has concealed any income or furnished inaccurate particulars thereof. Accordingly, the Tribunal held that the penalty imposed was not justified and cancelled it. In regard to certain other aspects which were argued before the Tribunal, the two members did not wholly agree with each other. They expressed different opinions on some and declined to express a definite opinion in regard to certain matters. It is, in these circumstances, that the above two questions have been referred to this court.

8. The question referred pursuant to the order of this court in C.P No. 18 of 1976 is the main question for consideration. In the light of the decision of this court in I.T.R.C No. 180 of 1975 (Bedi and Co. (P.) Ltd. v. CIT, [1983] 144 ITR 352) relating to the assessment itself, the very basis for the imposition of a penalty would not exist at all. The substance of the finding of the Tribunal in relation to the assessment order is summed up in the order of the Accountant Member relating to the penalty matter, as follows:—

“In other words, there is no positive material in the findings of either of the two members who passed the order in the appeal against the assessment that the impugned amount has been proved to be the income of the assessee. On the other hand, it has been held to be income because the assessee had not been able to prove that the amount really represented a loan.”

9. It is, therefore, clear that the conclusion of the Tribunal that a case for imposition of penalty had not been made out and that, therefore, the penalty imposed was to be cancelled was correct and justified in the circumstances of the case. As stated earlier, in view of the conclusion reached by this court in regard to the assessment, there would exist no basis at all for the imposition of penalty. Accordingly, the question referred in I.T.R.C No. 113(A) of 1980 is answered in the affirmative and in favour of the assessee.

10. In view of the above answer, the question referred in I.T.R.C No. 111 of 1975 becomes academic and it is unnecessary to answer the same. We decline to record any answer in respect thereof.