TaxTMI 
TaxTMI 
1969 (8) TMI 25
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....tatement of the case may be briefly summarised as follows : The assessee is an individual. The assessment years concerned in this reference are 1955-56 to 1962-63. The original assessments for these years were completed on the basis of the returns filed by the assessee. Subsequently, some time in 1963 the Income-tax officer received information that during these years there were substantial deposits in the assessee's account in the Hindustan Commercial Bank Ltd., Netaji Subbas Road Branch, amounting to about Rs. 2,26,000. The Income-tax Officer required the assessee to explain the deposits in his account in the said bank. Thereafter, the assessee made full disclosure of the deposits either in his name or in the names of other persons in this account during those assessment years to the extent of Rs. 3,70,208. What is more, the assessee also admitted that these were his concealed income. The Income-tax Officer took proceedings under section 147 of the Income-tax Act, 1961, for reassessment of the assessee's escaped income for these years. In response to the notices issued, the assessee filed returns giving full details of the deposits in his bank account in respect of those years....
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....o be evaded. The Inspecting Assistant Commissioner gave reasons for his decision in his order under sections 274(2)/271(1)(c) for the assessment year 1955-56 while in his order for the other years he followed his earlier orders and mentioned the amount of penalty determined for those years. From this order of penalty the assessee appealed to the Income-tax Appellate Tribunal. In the original ground filed by the assessee he prayed for mitigation of the amounts of penalty. But with the leave of the Tribunal the assessee urged the additional ground before it, namely, that the penalty proceedings, not having been commenced in the course of the assessment proceedings, the penalty orders passed by the Inspecting Assistant Commissioner were bad in law. The point of that submission is that under section 275 of the Income-tax Act, 1961, penalty proceedings must be commenced before the completion of the assessment proceedings. In this case the assessment proceedings were completed by the passing of the assessment orders on the 31st August, 1964, and as the notices to show cause under section 274(2) were issued by the Inspecting Assistant Commissioner on the 11th March, 1965, the penalty proc....
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....d by the usual wealth of citations of case law. There are certain preliminary points which require disposal at first. One is a matter of the form in which questions have been raised by the Tribunal in this reference and the statement of case. The question is, is it proper that the Tribunal should say while stating the question. " At the instance of the assessee " and " At the instance of the Commissioner of Income-tax ? " This point may be disposed of briefly. Reference to this court is controlled by section 256 of the Income-tax Act, 1961. The governing words in section 256(1) of the Act on this point are, inter alia : " The Appellate Tribunal shall within one hundred and twenty days of the receipt of such application, draw up a statement of the case and refer it to the High Court " In acting under section 256(1) the Tribunal acts at the instance of the assessee or the Commissioner no doubt. The Tribunal cannot act suo motu. Once the Tribunal is moved either by the assessee or the Commissioner in the manner laid down under section 256(1) of the Act, which " require the Appellate Tribunal to refer to the High Court any question of law arising out of such order, and subject....
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....e to the High Court ". No doubt the word used is " may ". But being a statutory procedure, this is the only procedure by which the assessee or the Commissioner may move in order to require the Appellate Tribunal to make the reference to the High Court. There is no other procedure. The procedure being entirely statutory, although the word " may " is used, there is no other available procedure allowed by the statute. The form prescribed is Form No. 37. These forms are prescribed under rule 48 of the Income-tax Rules, 1962, which provides: " An application under sub-section (1) of section 256 requiring the Appellate Tribunal to refer to the High Court any question of law shall be made in Form No. 37. " Paragraph 4 of that form requires the applicant to state the questions of law that arise out of the order of the Appellate Tribunal. Apart from this requirement of an application in the prescribed form, the second condition flows from the limitation of time under section 256(1) of the Act. The first limitation is that such an application in the prescribed form by the assessee or the Commissioner, as the case may be, has to be made " within sixty days of the date upon which he i....
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....ication in the prescribed form with the fee, and (2) within the limitations expressly invoked, he disqualifies himself from asking for a reference under section 256(1) of the Act by any other procedure unknown in law or in the statute. We need only say that where there is no application in the prescribed form and within the time imposed under section 256(1) of the Act, the provision of section 254(4) of the Income-tax Act comes into force, namely, as stated there : " Save as provided in section 256, orders passed by the Appellate Tribunal on appeal shall be final. " At this point we shall notice two authorities of the Supreme Court. One is Commissioner of Income-tax v. Scindia Steam Navigation Co. Ltd. The Supreme Court there, at pages 609-10, observed as follows : " . . . the question must be one which the Tribunal was bound to refer under section 66(1) and the applicant must have required the Tribunal to refer it. R(T) is the form prescribed under rule 22A for an application under section 66(1), and that shows that the applicant must set out the questions which he desires the Tribunal to refer and that further, those questions must arise out of the order of the Tribunal.....
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....rocedure to follow a procedure which is directly against section 256 and the limitations imposed therein. Almost by the application of the doctrine of expression unius it will appear that the Appellate Tribunal in making the reference to the High Court has no power at all to evolve a procedure for cross-objection as under the Civil Procedure Code. The Tribunal is a statutory institution and has to find its power within the four corners of the statute and its relevant sections. Section 253(4) in dealing with the appeals to the Appellate Tribunal expressly provides for the case of filing a "memorandum of cross-objections ". It expressly gives the party other than the appellant before it the right to file a memorandum of cross-objections verified in the prescribed manner against any part of the order of the Appellate Assistant Commissioner and it expressly provides, " such memorandum shall be disposed of by the Appellate Tribunal as if it were an appeal presented, within the time specified in sub-section (3) ". By sharp and deliberate contrast this provision for cross-objection has not been made in the case of reference to the High Court by the Tribunal under section 256 of the Income....
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.... can dispose of the appeal and not something not included within its scope. In the department's appeal for an increase in the assessable income, the only question for its consideration is whether the increase or part of it should be allowed or not. Whether the amount already assessed was wrongly assessed or not or whether the assessee is liable to be assessed at all or not is a question quite outside the scope of the appeal and any decision on it cannot be said to be an order on the appeal. " Again at page 421 of the report the observation is as follows : " If it prayed that the assessment order be quashed it was not entitled to be heard, whereas if it simply prayed that the department's appeal be dismissed it was entitled to be heard. What the assessee prayed before the Tribunal is essentially a question of fact, which cannot be investigated by this court and on which no finding can be given by it for the first time or given adversely to the finding recorded by the Tribunal. " In Commissioner of Income-tax v. Hazarimal Nagji & Co., a Bench of the Bombay High Court expressed the view affirming the previous view expressed in the case of New India Life Assurance Co. v. Commi....
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....s High Court in hearing a reference which necessarily limits ordinary appellate court's powers under the Civil Procedure Code, which are co-equal with the trial court even in the matter of taking evidence, and (4) it is doubtful how far it is good law after the subsequent decision of the Supreme Court in Commissioner of Income-tax v. Scindia Steam Navigation Co. which we have already discussed. This view of Chagla C.J. creates conflict of decisions in the Indian High Courts. His Lordship's view was followed by the Rajasthan and the Gujarat High Courts and not followed in the Madhya Pradesh and Madras High Courts. In Educational & Civil List Reserve Fund through H. H. Maharana of Udaipur v. Commissioner of Income-tax, the Rajasthan High Court came to the conclusion that it was open to the department also on an application for a reference made by the assessee to ask for a question which according to it arose from the order of the Tribunal to be referred to the High Court. At page 119 of the report the Rajasthan High Court followed the Bombay High Court decision in Girdhardas's case. Similar view was expressed by the Gujarat High Court in Smt. Dhirajben R. Amin v. Commissioner of I....
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....ribed in section 271(1)(iii) of the Income-tax Act, 1961. It proceeds on the assumption that section 271(1)(iii) of the Act applied. What is now being said is that not the whole of section 271 was inapplicable. For that purpose reliance was placed on the authority in Kanpur Industrial Works v. Commissioner of Income-tax already quoted. But, then, there, in that case, the increase of the assessment was the total ambit of the appeal. In fact, there it was held that the point of no assessability at all should not be allowed to be raised as against the whole assessment but confined only to the part of the increase in assessment which was the subject-matter of the appeal before the Tribunal. It was in that case that the word " incongruity " has been used and the incongruity was avoided by suggesting the course that legal assessability was not generally to be the issue and not allowed to be raised but in so far as it affected the increase only in the assessment, it was allowed. To follow such a course in this case would be not only incongruous but completely illogical. If the penalty proceedings were invalid in law altogether, then there can be no question of the penalty being lower than....
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....sition of penalty have been commenced. " It is followed by an Explanation with which we are not concerned. What is complained of by the assessee in this case is that the proceedings for the imposition of penalty have been commenced in this case after the completion of assessment proceedings. Therefore, it is contended that the whole penalty proceeding is bad and vitiated. The Tribunal came to the following finding on this issue : " In this case, assessment proceedings were completed by the passing of the assessment order on 31st August, 1964 . . . . . . Learned counsel for the assessee contended that, though usually penalty proceedings would be commenced by the issue and service of notice under section 274 of the Income-tax Act by the Income-tax Officer, yet in the case where the penalty proceedings are transferred to the Inspecting Assistant Commissioner under section 274(2), such proceedings are commenced by the issue and service of the notice by the Inspecting Assistant Commissioner on the assessee to show cause. Having noticed this, the Tribunal proceeds to record the finding in these terms : " The proceedings are initiated by the Income-tax Officer and transferr....
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....rson shall pay by way of penalty--...... (iii) ... a sum which shall not be less than 20% but which shall not exceed one and a half times the amount of the tax, if any, which would have been avoided if the income as returned by such person had been accepted as the correct income. " In quoting the above section I have left out the irrelevant or immaterial portions for the purpose of this question. The dominant features are plain from the sections as quoted. They are three in number. In the first place, the Income-tax Officer has to be satisfied. In the second place, such " satisfaction " of the Income-tax Officer must be " in the course of any proceedings under this Act ". Thirdly, he may direct that such person shall pay by way of penalty a certain amount. The overall condition is that there has to be a " concealment ". Certain results follow from a provision of this nature. The first is that the authority, prima facie, belongs to the Income-tax Officer. It is before him that the first foundations of penalty are laid. That foundation is his " satisfaction " in the course of assessment proceedings that there has been concealment. He is therefore the fons et origo of this pe....
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.... It only prevails in the limited case mentioned under section 271(1)(c) and (iii) and for the particular case where the penalty imposable exceeds the sum of Rs. 1,000 and that only so far as the Income-tax Officer is concerned and not the Appellate Assistant Commissioner as mentioned in section 271(1). That is the scope and ambit of limitation of the non-obstante expression under section 274(2) of, the Income-tax Act, 1961. The conclusion follows that all cases of penalty and penalty proceedings have their source originally with the Income-tax Officer. The operation of section 274(2) of the Act comes into play when the minimum penalty imposable exceeds Rs. 1,000. This can only mean that the Income-tax Officer has to find initially that the minimum penalty imposable exceeds Rs. 1,000 because none else can make this initial finding under the scheme of the Income-tax Act. That means a judicial consideration by the Income-tax Officer when the minimum penalty imposable in a particular case exceeds the sum of Rs. 1,000. This is the second feature of section 274(2) of the Act. Thirdly, the significant expression in section 274(2) of the Act is : " The Income-tax Officer shall refer the....
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....of 1961 does not require the Income-tax Officer to obtain such sanction in any case. It confirms the conclusion that we are reaching that the Income-tax Officer is the institutional authority where the penalty proceedings are commenced. All that the present Act does is that, if the case falls within section 271(1) concerning a case of concealment read with sub-clause (c) thereof and where the minimum penalty imposable exceeds Rs. 1,000, he is bound to refer the case to the Inspecting Assistant Commissioner who is then empowered to impose a penalty in that case. It has to be emphasized in this context that the Income-tax Officer's jurisdiction to impose a penalty in any case falling outside section 271(1)(c) is not in any way affected or qualified by section 274(2) of the new Income-tax Act of 1961. The words " for the purpose " under section 274(2) of the Income-tax Act, 1961, can only mean for the purpose of imposing the penalty and not for commencing the penalty proceeding but for concluding it. It will be necessary now to come to the next section, section 275. This has already been quoted. Mr. Roy for the assessee argues that this section contemplates two different proceeding....
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....be imposed upon him. These considerations, however, are clearly inapplicable to penalty proceedings under Chapter 21 of the Income-tax Act, 1961. The reason why the Income-tax Act, 1961, in section 274(1) requires that no order of penalty shall be made without hearing the assessee or giving him a reasonable opportunity, and the reason for dispensing with any such requirement or comparable notice at the initial stage of the penalty proceeding under section 271 of the Act are plain and can be sensibly and rationally justified. The justification lies in this fact that section 271(1) of the Income-tax Act, 1961, begins with this requirement that this satisfaction of the Income-tax Officer must arise " in the course of any proceeding under this Act " ; that means that the Income-tax Officer who is dealing with the assessment proceedings under the scheme of the Income-tax Act which are not ex parte but on notice and opportunities given to the assessee mentioned in that Act. It is only in such course of assessment proceedings that the Income-tax Officer is satisfied that a concealment has occurred under section 271(1)(c). Therefore, the initial notice about the commencement is dispense....
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....consideration for transfer of capital asset " under section 52 of the Act. The analysis of the powers and jurisdiction of the Inspecting Assistant Commissioner under the Income-tax Act, 1961, shows that he has not any power to commence the penalty proceedings as in this case. He is an institutional authority with very strictly enumerated powers. Section 2(27) of the Income-tax Act, 1961, says that the Inspecting Assistant Commissioner means a person appointed to be such under section 117(1) of the Act. He is more or less--to use a kind of non-technical language--a kind of a supervisor, superintendent, although we would not call him a watch-dog. On the interpretation and construction of section 271, section 274 and section 275 we have come to the conclusion that the penalty proceedings commence and are initiated before the Income-tax Officer or, as the case may be, with the Appellate Assistant Commissioner under the statute and not with the Inspecting Assistant Commissioner. It will be now necessary to examine the various authorities on which Mr. Roy for the assessee relied and also examine the analogies he tried to draw with regard to the concept and procedure for penalty fro....
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....f appeal against acquittal and section 29 of the Arms Act where proceedings of that Act were construed to mean legal proceedings in court. We are not prepared to apply the analogy of section 29 of the Arms Act to sections 271, 274 and 275 of the Income-tax Act, 1961, which we consider are entirely different. The third case on which Mr. Roy relied, is Abdul Gani v. David Jacob Cohen, which only decided the point that taking out of a summons or notice of motion under the practice of the court was not making of an application. We do not think that that case has any application to the points before us. But the next group of authorities on which Mr. Roy for the assessee relied relates to the Income-tax Act and is nearer the field. These decisions, however, are not on penalty proceedings under the Income-tax Act but under other sections of the Income-tax Act. All these authorities are on sections 22 and 34 of the old Income-tax Act of 1922. We shall briefly notice these authorities now. Mr. Roy opens this branch of citation with the case in D. P. Wadia & Sons v. Commissioner of Income-tax. In particular, he relies on the observations of Desai J. at pages 762 and 763. This case supp....
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....the old Income-tax Act of 1922 used the expression " commencement of the proceedings. " To continue with the authorities cited by Mr. Roy some more references have to be examined. The decision in Harakchand Makanji & Co. v. Commissioner of Income-tax, was a case under section 34 again of the old Income-tax Act of 1922. There Chagla C.J., at page 122, observed : " Therefore once a public notice is given under sub-section (1) the assessment proceedings have commenced and there is no obligation upon the Income-tax Officer to serve an assessee individually as well. " The other case cited by Mr. Roy is Y. Narayana Chetty v. Income-tax Officer, Nellore of the Supreme Court. Mr. Roy relied on the observations of Gajendragadkar J., at page 392, where it was observed that notice prescribed under section 34 could not be regarded as a mere procedural requirement and that the service of the requisite notice on the assessee was a condition precedent to the validity of any reassessment made under section 34. It was held by the Supreme Court in that case that the notice prescribed by section 34 of the Income-tax Act for the purpose of initiation of reassessment proceedings was not merely....
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....this Act " are always with notice to the assessee. The other case to which reference was made by Mr. Roy is S. S. Gadgil v. Lal & Co., a decision of the Supreme Court, and the observations are at pages 237-239. It will be unnecessary to discuss that case again in detail because that was also under section 34 of the old Income-tax Act of 1922 and the foregoing remarks apply also to distinguish that form the instant case before us. We need only refer to another aspect of the decision appearing from the judgment of Shah J. that the " income-tax authorities who have power to assessee and recover taxes are not acting as judges deciding a litigation between the citizen and the State ; they are administrative authorities whose proceedings are regulated by the statute, but whose function is to estimate the income of the taxpayer and to assess him to tax on the basis of that estimate. " We can conclude our analysis of these authorities by referring to the decision of the Supreme Court on which Mr. Pal for the revenue relied and which is nearest to the point. That is the decision of the Supreme Court in Commissioner of Income-tax v. S. V. Angidi Chettiar. This decision was rendered on ....
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....which is the date when the Income-tax Officer referred the case under section 274(2) of the Income-tax Act, 1961, or, at any rate, on August 31, 1964, with the passing of the assessment orders and notice under section 274(1) of the Income-tax Act, 1961. In this case, the Tribunal at page 18 of the paper book records the finding : " In this case such satisfaction was recorded and such direction was given on August 31, 1964, as recorded in the assessment orders themselves the order sheet show that on August 31, 1964, the Income-tax Officer directed the issue of notice under section 271/274. Therefore, the penalty proceedings commenced on that date. " The facts are not challenged. But here a point was raised by Mr. Roy for the assessee by trying to suggest that the Income-tax Officer gave a notice on August 29, 1964, under section 274(2) of the Income-tax Act, 1961, and again the Income-tax Officer gave a notice on September 2, 1964, asking the assessee to show cause why an order imposing a penalty should not be passed under section 271. Therefore, he suggests that the second notice of September 2, 1964, is illegal because by that time the Income-tax Officer had become functus o....
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....e to a wrong decision in law on the above point. Section 274(2) of the Income-tax Act, 1961, has already been set out and its interpretation given elsewhere in this judgment. The jurisdiction of the Inspecting Assistant Commissioner under section 274(2) arises on the three conditions mentioned, namely, (1) it must be a case of concealment under section 271(1)(c), (2) the minimum penalty imposable exceeds a sum of Rs. 1,000, and (3) that the Income-tax Officer shall refer his case to the Inspecting Assistant Commissioner. When these three conditions are satisfied it is only then that the Inspecting Assistant Commissioner acquires the jurisdiction. But that jurisdiction is expressly qualified by the language of section 274(2) saying " who shall for the purpose have all the powers conferred under this Chapter for the imposition of penalty ". There has been in the Tribunal's order a confusion between the statutory limits of penalty and the powers of the officers. As we read section 271 and section 274 the limit is on the quantum of penalty, not on the power of the officer dealing with it except in the case that, so far as the Income-tax Officer is concerned, if the penalty imposable ex....
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....on which seems to us to be inconsistent with the principles of the Act. The further consideration on this point is that penalties are not the normal features. They arise only in certain cases, such as in the case of concealment. The penalty should always be strictly construed. Courts should be reluctant to construe a power of penalty without any limitation unless the words are clear or create an inescapable compelling implication. We are, therefore, not inclined to hold that the Tribunal and the Inspecting Assistant Commissioner have unfettered powers to impose whatever penalty they consider necessary. Penalties are strictly creatures of statute. No doubt under section 253(1)(b) an assessee may appeal to the Appellate Tribunal against an order passed by the Inspecting Assistant Commissioner under section 274(2). Equally no doubt, section 254(1) of the Act gives the Appellate Tribunal the power to " pass such orders thereon as it thinks fit ". The expression " such orders as it thinks fit " cannot mean an order against the statutory mandate imposing limits of penalty under section 271(1)(iii) of the Act of 1961. The words " as it thinks fit " in section 254(1) of the Income-tax Act,....