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1. The assessee, at whose instance both the above cases have been referred to this court, is a partner in two firms, Messrs. Nityakalyana Abarna Maligai and C. Innasi Muthu Mudaliar and Sons, Madurai. He also carried on money-lending and jewellery business in his individual capacity under the name and style of "Nityakalyani Stores" at No. 40, Sea Street, Colombo.

2. The premises of Nityakalyana Abarna Maligai, Madurai, was searched by the customs authorities in June, 1958, on suspicion that the assess-see was engaged in currency smuggling activities. Certain papers found in the premises were seized by the said authorities but no action was taken against him by the said authorities thereafter based on those papers. The Income-tax Officer, however, pursued the matter with a view to find out whether the assessee in fact carried on business in currency smuggling. The assessee was examined on January 12, 1959, by the Income-tax Officer in this regard. He denied having engaged himself in currency smuggling activities. However, subsequently, he gave a letter on October 25, 1959, to the Income-tax Officer stating, inter alia, that with a view to purchase peace he was prepared to be assessed on a sum of Rs. 1,000 or Rs. 1,500 on this account for each of the assessment years 1957-58 and 1958-59. This letter of the assessee war construed by the Income-tax Officer as an admission on his part that he was engaged in currency smuggling activities and he estimated the turnover of those activities at Rs. 3,00,000 each year, yielding a profit at 10 per cent. He, therefore, included in the income returned a sum of Rs. 30,000 as undisclosed income from these activities in the assessment for 1958-59.

4. The assessee preferred an appeal to the Appellate Assistant Commissioner against the said inclusion as also the disallowance of loss, and contended : (1) that there was no justification for the assumption of the Income-tax Officer that the assessee was carrying on business in currency smuggling ; (2) that the estimate of the Income-tax Officer of the extent of that business and the alleged profits derived by the assessee was quite arbitrary and excessive ; and (3) that the disallowance of his claim of Rs. 17,630 as trading loss was not justified. However, these contentions were negatived by the Appellate Assistant Commissioner who held that the evidence on record was sufficient to lead to the inference that the assessee must have had currency smuggling activities and that though the estimate of the income from this source at Rs. 30,000 made by the Income-tax Officer was justified, as additions have been made also on the basis of explained cash credits, the addition towards "currency smuggling" should be restricted to Rs. 25,000, The Appellate Assistant Commissioner also upheld the disallowance of the assessee's claim for loss of Rs. 17,630.

3. Whether, on the facts and in the circumstances of the case, the Appellate Tribunal was right in law in holding that the assessee had concealed his income to the extent of Rs. 1,500 representing income from currency smuggling during the assessment year 1958-59 ?"

12. The learned counsel for the assessee contends that the Income-tax Officer is not justified in taking the letter dated October 25, 1959, given by the assessee as containing an admission that he had in fact indulged in currency smuggling activities and that in any event the estimate of the turnover of such business and the extent of the profits therefrom is highly conjectural and arbitrary. It is pointed out by the learned counsel that much imagination is required to sustain the estimate made by the Income-tax Officer in this regard and that the sum of Rs. 1,500 admitted by the assessee as income has not been calculated at the rate of half a per cent. as assumed by the Income-tax Officer in the place of ten per cent. which is considered to be reasonable. But, a perusal of the letter in question shows that the sum of Rs. 1,500 which he undertook to treat as his income from this source is based on the fact that the commission chargeable by persons dealing in such activities is from 1/4% to one per cent. The Income-tax Officer finds that it is quite normal for the persons engaged in such activities to charge 10 per cent. We cannot, therefore, say that the Income-tax Officer is not justified in estimating the income from the currency smuggling activities taking into account the current rate of commission in relation to these activities. The assessee having expressed his willingness for being assessed on a sum of Rs. 1,500 as income from the currency smuggling activities, the Income-tax Officer is entitled either to accept the said figure or make an estimate of such income on some rational basis. In this case, we are not in a position to say that the revenue is not justified in making an estimate and that the addition should be restricted only to the sum of Rs. 1,500 referred to in the letter. The first question in T.C. No. 3 of 1968 is, therefore, answered in the affirmative and against the assessee.

21. For the same reasons item 3 amounting to Rs. 1,229 relating to interest on unexplained credits depends not on any concrete material showing that the assessee has made a false claim for deduction of interest but on the fact that the Income-tax Officer has not accepted the explanation given by the assessee as regard the credits found in the account. Even the item relating to income from currency smuggling, it is seen that the assessment is based only on the assessee's willingness to be assessed on a sum of Rs. 1,500. Though the assessee's willingness was to have a sum of Rs. 1,500 assessed as income from that source with a view to buy peace with the department, the Income-tax Officer proceeded to make an' estimate on the basis of the letter of the assessee dated October 25, 1959. Though we have sustained the estimate made by the Income-tax Officer on the basis of the letter given by the assessee, we cannot take the letter as the basis for the levy of penalty, for the letter nowhere contains an admission on the part of the assessee that he indulged in currency smuggling activities. There is no other material to show that the assessee was involved in currency smuggling activities and derived income which he had suppressed. In the special facts and circumstances of this case, we are clearly of the view that the penalty levied cannot at all be sustained. All the questions referred in T.C. No. 12 of 1968 are, therefore, answered in the negative and is favour of the assessee. The assessee will have his costs in T.C. No. 12 of 1968 alone. Counsel's fee Rs. 250. There will be no order as to costs in the other case.