Court quashes tax penalties, emphasizes CBDT circulars, orders rehearing.

The court quashed the orders related to penalty, interest, and prosecution initiated by the Income-tax Officer, directing reconsideration of the petitioners' case under the "Voluntary Disclosure Scheme". It emphasized the binding nature of circulars issued by the CBDT and the need for principles of natural justice in administrative orders. The court held that the authorities must provide an opportunity for a hearing and pass reasoned orders. The petition was allowed with directions for a reconsideration of the case on its merits, ensuring compliance with the law and principles of natural justice.

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Issues Involved:
1. Quashing of orders and proceedings related to penalty, interest, and prosecution.
2. Reconsideration of relief under the "Voluntary Disclosure Scheme".
3. Binding nature of circulars issued by the Central Board of Direct Taxes (CBDT).
4. Principles of natural justice in administrative orders.

Summary:

1. Quashing of Orders and Proceedings:
The petitioners sought the quashing of orders (annexures T and U) and the proceedings related to penalty, interest, and prosecution initiated by the Income-tax Officer. The petitioners argued that the reassessment and subsequent penalty notices were issued without considering their revised returns filed under the "Voluntary Disclosure Scheme".

2. Reconsideration of Relief under the "Voluntary Disclosure Scheme":
The petitioners filed revised returns for the assessment years 1983-84 and 1984-85, disclosing higher incomes and paying full tax before March 31, 1986. They claimed that this was done before the detection of concealment by the Income-tax Officer. However, their petition for relief under the scheme was dismissed by the Commissioner of Income-tax without a hearing or a reasoned order, which the court found to be against the principles of natural justice.

3. Binding Nature of Circulars Issued by CBDT:
The court emphasized that circulars issued by the CBDT u/s 119 of the Income-tax Act have the force of law and are binding on all subordinate authorities. The court cited various circulars, including Public Circular No. 451, which provided guidelines for the "Voluntary Disclosure Scheme". The court held that these circulars "supplant" the law and must be followed by the authorities.

4. Principles of Natural Justice in Administrative Orders:
The court held that even if the Commissioner of Income-tax was acting on the administrative side, the principles of natural justice required that the petitioners be given an opportunity of hearing and that a reasoned and speaking order be passed. The court found that the cryptic order passed by the Commissioner without affording a hearing was unsustainable in law.

Conclusion:
The court quashed the orders passed by the Commissioner of Income-tax (Appeals) and the Commissioner of Income-tax on the administrative side. The court directed these authorities to reconsider the petitioners' case on merits, in accordance with law, and to provide an opportunity of hearing and pass a reasoned order. The petition was allowed with no order as to costs.

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