Penalty jurisdiction under the Income-tax Act requires proceedings under that Act; transitional provisions do not create substantive power.

Penalty under section 271 of the Income-tax Act, 1961 could be initiated only in proceedings under that Act and only where the specified defaults were found. Because the assessment and related notices were issued under the repealed Indian Income-tax Act, 1922, the statutory preconditions for section 271 were absent and the penalty notices could not be sustained. Section 297(2)(g) was only a transitional provision and did not create an independent substantive power to impose penalty or cure the lack of jurisdiction. The commentary notes that article 14 was not finally decided, as the matter was disposed of on the first ground.

---

---

Issues: (i) Whether penalty proceedings could validly be initiated under section 271 of the Income-tax Act, 1961, when the assessment and all relevant notices were issued under the repealed Indian Income-tax Act, 1922; (ii) Whether section 297(2)(g) of the Income-tax Act, 1961 could justify the notices and the proposed penalty proceedings.

Issue (i): Whether penalty proceedings could validly be initiated under section 271 of the Income-tax Act, 1961, when the assessment and all relevant notices were issued under the repealed Indian Income-tax Act, 1922

Analysis: Section 271 authorises penalty only when, in the course of proceedings under the Income-tax Act, 1961, the specified defaults in clauses (a), (b), or (c) are found. The assessment in the case was completed under the repealed Act and the notices connected with that assessment were also issued under that Act. The statutory conditions precedent for invoking section 271 were therefore absent.

Conclusion: The penalty notices could not be sustained under section 271 of the Income-tax Act, 1961, and this issue was decided in favour of the assessee.

Issue (ii): Whether section 297(2)(g) of the Income-tax Act, 1961 could justify the notices and the proposed penalty proceedings

Analysis: Section 297(2)(g) was treated as a transitional provision indicating the law applicable to penalty proceedings, but it did not create an independent substantive power to impose penalty. Since section 271 itself was not attracted on the facts, the transitional clause could not cure the absence of jurisdiction. The challenge under article 14 was not required to be finally decided in view of the disposal on the first ground.

Conclusion: Section 297(2)(g) afforded no assistance to the revenue, and the penalty notices remained invalid.

Final Conclusion: The notices proposing penalty were quashed, and the respondents were restrained from acting upon them, leaving the revenue free to proceed only in accordance with law.

Ratio Decidendi: Penalty under section 271 of the Income-tax Act, 1961 can be initiated only in proceedings under that Act and only when the statutory defaults specified therein are found; a transitional provision governing applicability of the new Act does not by itself confer substantive jurisdiction to impose penalty where those conditions are absent.

---