Penalty proceedings must begin during assessment, but no section 271 penalty lies for a year governed by the earlier tax regime.

Penalty proceedings under section 271 of the Income-tax Act, 1961 must be initiated while the assessment or reassessment proceedings are still pending, and a notice direction recorded in the assessment order was sufficient to show timely commencement. However, for assessment year 1961-62, the return had been filed before the 1961 Act came into force and the assessment proceeded under the 1922 Act, so the statutory basis for penalty under section 271 was not satisfied and the penalty order could not stand for that year. The authorities also had sufficient material, including earlier findings on the true nature of the business, to support concealment and inaccurate particulars.

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Issues: (i) Whether penalty proceedings under section 271 of the Income-tax Act, 1961 were validly commenced in the course of the assessment or reassessment proceedings; (ii) whether the penalty order for the assessment year 1961-62 was invalid because the return had been filed before the commencement of the Income-tax Act, 1961 and the assessment was under the Income-tax Act, 1922; (iii) whether there was material before the authorities to sustain the finding of concealment of income or furnishing of inaccurate particulars.

Issue (i): Whether penalty proceedings under section 271 of the Income-tax Act, 1961 were validly commenced in the course of the assessment or reassessment proceedings.

Analysis: The expression used in the penalty provision and the limitation provision was treated as requiring the authority to reach satisfaction and take the first step in the penalty process while the main proceedings were still pending. Section 275 of the Income-tax Act, 1961 was read as indicating that the penalty proceedings should commence before completion of the main proceedings. On the facts, the assessment orders themselves recorded directions to issue notice for proposed penalty action, showing that the penalty proceedings were initiated during the pendency of the assessment or reassessment matters.

Conclusion: The penalty proceedings were validly commenced in time, and this issue was answered in favour of the Revenue, except to the extent stated for the assessment year 1961-62.

Issue (ii): Whether the penalty order for the assessment year 1961-62 was invalid because the return had been filed before the commencement of the Income-tax Act, 1961 and the assessment was under the Income-tax Act, 1922.

Analysis: For the assessment year 1961-62, the return had been filed before 1 April 1962 and the assessment was made under the Income-tax Act, 1922. The case was held to fall within the ratio governing proceedings continued under the old Act, so that the condition precedent for invoking section 271 of the Income-tax Act, 1961 was not satisfied for that year.

Conclusion: The penalty order for assessment year 1961-62 was invalid and this issue was answered in favour of the Assessee.

Issue (iii): Whether there was material before the authorities to sustain the finding of concealment of income or furnishing of inaccurate particulars.

Analysis: The finding of concealment was not based merely on an unsatisfactory explanation. The authorities relied on earlier findings, including those recorded in registration proceedings, which showed that the partnership was a device and that the business was the assessee's proprietary concern. Those materials were held sufficient to support the inference of deliberate concealment and inaccurate particulars.

Conclusion: Sufficient material existed to uphold the finding of concealment, and this issue was answered in favour of the Revenue.

Final Conclusion: The reference was disposed of by upholding the levy of penalty in principle, while striking it down for assessment year 1961-62 alone because that year fell under the earlier statutory regime.

Ratio Decidendi: For penalty under section 271 of the Income-tax Act, 1961, the authority must reach satisfaction and commence the proceedings during the pendency of the relevant assessment or reassessment proceedings, and a penalty under the 1961 Act cannot be sustained for a year governed by the earlier 1922 Act regime where the statutory conditions for invoking the newer provision are not met.

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