1966 (9) TMI 7 - HC - Income Tax

Invalidity of Income-tax Act provision penalizing based on assessment completion date; court rules on discriminatory classification.

The court found section 297(2)(g) of the Income-tax Act, 1961, to be invalid as it violated Article 14 of the Constitution by imposing penalties on ... Act of 1922 - Act of 1961 - ITO had no power to issue a penalty notice under s. 274 r/w s. 271 of the Act, 1961 Issues Involved:1. Challenge to the vires of section 297(2)(g) of the Income-tax Act, 1961.2. Applicability of section 271 of the Income-tax Act, 1961, to proceedings initiated under the Income-tax Act, 1922.3. Alleged discrimination under Article 14 of the Constitution.Detailed Analysis:1. Challenge to the vires of section 297(2)(g) of the Income-tax Act, 1961:The petitioners contended that section 297(2)(g) of the Income-tax Act, 1961, is ultra vires the powers of the Central Legislature as it offends the protection and guarantee under Article 14 of the Constitution. They argued that the provision discriminates against assessees who filed their returns before April 1, 1962, but whose assessments were completed after this date, compared to those whose assessments were completed before April 1, 1962. The court found that the classification based on the date of completion of assessment has no rational nexus with the object of the legislation. It held that the mere fact that assessments were completed after April 1, 1962, does not justify different treatment in the matter of imposition of penalties. The court concluded that the classification is arbitrary and violates Article 14, rendering section 297(2)(g) invalid to the extent it permits proceedings for penalty under the new Act for assessees who filed their returns before April 1, 1962.2. Applicability of section 271 of the Income-tax Act, 1961, to proceedings initiated under the Income-tax Act, 1922:The petitioners argued that the Income-tax Officer and the Appellate Assistant Commissioner could not exercise power under section 271 of the 1961 Act as the proceedings were initiated under the 1922 Act. The court agreed, stating that section 271(1) postulates that the proceedings must be under the 1961 Act for the authorities to be satisfied about the contravention by an assessee. Since the proceedings were initiated under the 1922 Act, the authorities could not take action under section 271 of the 1961 Act. The court also dismissed the argument that section 297(2)(g) merely indicates the quantum of penalty under the new Act, stating that the provision should not be read as introducing a fiction.3. Alleged discrimination under Article 14 of the Constitution:The respondents argued that there was no discrimination as the classification made in clauses (f) and (g) of section 297(2) was well-defined, based on whether assessments were completed before or after April 1, 1962. They claimed that this classification was necessary for administrative convenience. However, the court found that the classification had no rational nexus with the object of the legislation. It noted that the date of completion of assessment is a fortuitous circumstance and does not justify different treatment. The court emphasized that the substantial rights of immunity from prosecution and the requirement of approval from a superior officer under the 1922 Act were valuable safeguards that were absent in the 1961 Act. The court concluded that the classification was arbitrary and discriminatory, violating Article 14.Conclusion:The court allowed the petitions, quashing the orders of the income-tax authorities imposing penalties. It held that the authorities could not proceed against the petitioners under section 297(2)(g) read with section 271 of the Income-tax Act, 1961. The petitioners were entitled to their costs.