Transitional tax penalty rules: defaults in saved repealed-act proceedings cannot attract penalty under the new Income-tax Act.

Where reassessment proceedings had already commenced under section 34 of the Indian Income-tax Act, 1922, the savings and transitional scheme in section 297 of the Income-tax Act, 1961 required those proceedings to continue as if the 1961 Act had not been passed, so penalty for defaults in those proceedings could not be levied under section 271 of the 1961 Act; any penalty, if otherwise permissible, had to arise under the repealed Act. On the discretion point, section 271(1)(a) did not permit the Tribunal to refuse penalty merely as a matter of choice where a default existed without reasonable cause; no penalty could be declined only if there was no default or reasonable cause was shown.

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Issues: (i) Whether, where reassessment proceedings had been commenced by notice under section 34 of the Indian Income-tax Act, 1922 before the commencement of the Income-tax Act, 1961, penalty could be imposed under section 271 of the 1961 Act for defaults committed under the repealed Act; (ii) Whether the Tribunal had discretion under section 271(1)(a) to hold that no penalty at all could be levied.

Issue (i): Whether, where reassessment proceedings had been commenced by notice under section 34 of the Indian Income-tax Act, 1922 before the commencement of the Income-tax Act, 1961, penalty could be imposed under section 271 of the 1961 Act for defaults committed under the repealed Act.

Analysis: The savings and transitional scheme in section 297 of the 1961 Act governed the matter. Proceedings commenced pursuant to a notice under section 34 of the repealed Act were to be continued and disposed of as if the 1961 Act had not been passed. The defaults in question arose from non-compliance with notices issued under the repealed Act, and section 271 of the 1961 Act authorised penalty only for non-compliance with the statutory requirements of that Act. Clause (g) of section 297(2) was treated as applying to cases where fresh proceedings were initiated under the new Act in the absence of any pending section 34 proceeding under the old Act, and not to proceedings already protected by clause (d)(i).

Conclusion: Penalty could not be imposed under section 271 of the Income-tax Act, 1961; any such penalty, if otherwise permissible, lay only under section 28 of the Indian Income-tax Act, 1922. The issue was decided in favour of the assessee.

Issue (ii): Whether the Tribunal had discretion under section 271(1)(a) to hold that no penalty at all could be levied.

Analysis: Penalty under section 271(1)(a) or section 271(1)(b) was contingent on a statutory default without reasonable cause. Where there was no default, or where reasonable cause existed, no penalty could be levied. Conversely, where the statutory default existed without reasonable cause, the Tribunal could not decline to levy any penalty on the ground of discretion alone.

Conclusion: The Tribunal had no discretion to say that no penalty could be levied where there was a default without reasonable cause; it could do so only where there was no default or reasonable cause existed. The issue was answered against the assessee on this point, though it did not alter the overall result.

Final Conclusion: The penalty imposed under the 1961 Act was unsustainable in proceedings that had to be continued under the repealed Act, and the reference was answered accordingly, with no order as to costs.

Ratio Decidendi: Where proceedings begun under a notice issued under the repealed Income-tax Act are preserved by the transitional provision, penalty for defaults committed in those proceedings must be imposed, if at all, only under the repealed Act and not under the penalty provision of the new Act unless the new Act itself expressly governs the class of proceeding.

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