Penalty cancellation raised an arguable question of law, so the Tribunal had to refer the matter to the High Court.

Penalty proceedings for concealment of income are quasi-judicial, and a mere rejection of the assessee's explanation does not automatically sustain penalty under section 271(1)(c) of the Income-tax Act, 1961. Where the revenue challenges cancellation of penalty on the basis that the relevant facts were within the assessee's special knowledge and a statutory presumption may arise, an arguable question of law can arise. The Tribunal must then state the case and refer that question to the High Court for opinion; the penalty merits were not finally adjudicated.

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Issues: Whether a referable question of law arose from the Tribunal's cancellation of penalty under section 271(1)(c) of the Income-tax Act, 1961, so as to require the Tribunal to state the case to the High Court.

Analysis: The proceedings concerned penalty for concealment of income, and the Court observed that penalty proceedings are quasi-judicial in nature. It noted that while rejection of the assessee's explanation may not by itself justify penalty, the revenue had relied on the absence of entries, the facts being within the assessee's special knowledge, and the possible drawing of a statutory presumption under section 105 of the Indian Evidence Act, 1872. On that basis, the Court held that a question of law did arise for consideration.

Conclusion: The Tribunal was required to refer the question of law to the High Court, and the petitions were allowed.

Final Conclusion: The matter was not decided on the merits of the penalty itself, but the High Court directed a reference because the controversy raised a legally arguable question.

Ratio Decidendi: Where the revenue's challenge to cancellation of penalty raises an arguable question of law founded on the assessee's special knowledge and possible statutory presumption, the Tribunal must state the case for the High Court's opinion.

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