1971 (11) TMI 49 - HC - Income Tax

High Court upholds penalty under Income-tax Act for non-genuine expenses, clarifies penalty not criminal.

The High Court of Andhra Pradesh considered a penalty levy under the Income-tax Act of 1961 for an assessment year governed by the Indian Income-tax Act ... Income Tax Act Issues:Levy of penalty under the Income-tax Act of 1961 for an assessment year governed by the Indian Income-tax Act of 1922. Interpretation of penalty provisions in the context of minimum and maximum penalties. Application of article 20(1) of the Constitution to penalty proceedings under the Income-tax Act.Analysis:The High Court of Andhra Pradesh considered a reference under section 256(1) of the Income-tax Act of 1961 regarding the levy of a penalty of Rs. 5,000 for an assessment year 1960-61 governed by the Indian Income-tax Act of 1922. The case involved an assessee, a Hindu undivided family, with income from various sources. The penalty was imposed due to disallowed expenses and suppressed profits. The Tribunal found that certain disallowances were based on estimates and could not form the basis for a penalty. However, specific items like brokerage and vehicle expenses were deemed non-genuine, justifying a penalty. The Tribunal applied section 28(1) of the Indian Income-tax Act of 1922, limiting the penalty to Rs. 5,000 due to the absence of a minimum penalty provision in the old Act.The Court analyzed the penalty provisions of both Acts. Section 28(1) of the old Act allowed for penalties without a prescribed minimum, while section 271(1)(c) of the new Act mandated a minimum penalty of 20%. The Court noted that penalty proceedings initiated after April 1, 1962, were governed by the new Act. The Tribunal's decision to impose a penalty under the old Act was deemed incorrect, given the applicability of the new Act to the proceedings. The Court also addressed the argument that mandatory minimum penalties under the new Act violated article 20(1) of the Constitution.Article 20(1) prohibits penalties greater than those under the law at the time of the offense. The Court clarified that penalty proceedings under the Income-tax Act are not akin to criminal offenses but serve as a deterrent against tax evasion. The Court cited precedents emphasizing the distinction between penalties and criminal sanctions. It concluded that article 20(1) did not apply to penalty proceedings under the Income-tax Act. Referring to previous judgments, the Court held that the levy of a penalty below the minimum prescribed under the new Act was not justified.In conclusion, the Court answered the reference against the assessee, upholding the penalty of Rs. 5,000. The decision highlighted the distinction between penalties and criminal offenses under the Income-tax Act and clarified the application of article 20(1) to penalty provisions. The department was awarded costs, including advocate's fees.