B. Johar Forest Works vs Commissioner of Income Tax

Thakur, J.—This reference u/s 256 of the Income Tax Act, 1961, has been made by the Income Tax Appellate Tribunal, Chandigarh

Bench. The question of law which is referred to this court for consideration and determination is as follows :

Whether, on the facts and in the circumstances of the case, the penalty was exigible ?

The question arose out of the order of the Appellate Tribunal dated December 17, 1970, passed in appeal filed by the assessee against the

order of the Appellate Assistant Commissioner who while maintaining the findings of the Income Tax Officer, Ward ""C"", Jammu, that the assessee

was in default in not having filed a return of its income pursuant to a notice u/s 22(2) of the Indian Income Tax Act, 1922, hereinafter called as the

old Act"", reduced the amount of penalty from Rs. 26,335 to Rs. 16,925. The facts which give rise to the question now before us are as under :

The assessee is a partnership-firm with four partners, namely; (1) Shri-mati Bhupinder Kaur, wife of Shri Surrinder Singh Johar, (2) one married

daughter of S. Surrinder Singh Johar, (3) Amarjit Singh, and (4) Prabjit Singh, the two sons of S. Surrinder Singh Johar. For the assessment year

1959-60, the Income Tax Officer, Ward ""C"", Jammu, issued a notice to the assessee, dated June 10, 1959, u/s 22(2) of the old Act. This notice

has been found by the Tribunal to have been served on one D. B. Thappa, an employee of the assessee. A similar notice, dated May 3, 1960, for

the assessment year 1960-61 was issued by the Income Tax Officer, Ward ""C"", Jammu. This notice the Appellate Assistant Commissioner, found

to have been served on S. Surrinder Singh Johar, the husband of partner No. 1 and the father of partners Nos. 2 to 4, who was the general

manager of the assessee during the relevant period. This notice also was issued u/s 22(2) of the old Act calling upon the assessee to file a return of

its income.

The Tribunal found that after the service of the notice u/s 22(2) for the assessment year 1959-60 on Shri D. B. Thappa, an employee of the

assessee, S. Surrinder Singh Johar, the general manager, applied for extension of time for filing the return till September 17, 1959, which was

allowed by the Income Tax Officer. Despite the extension of time the assessee did not file a return. Thereafter, notice u/s 22(4) of the old Act was

issued on February 22, 1960, but regarding this notice the Tribunal held that the same is not proved to have been served. Another notice under the

aforesaid Section was issued on September 17, 1960, which was served on an employee of the firm and the service was not denied before the

Tribunal.

S. Surrinder Singh Johar died in December, 1961. Notices u/s 22(4) of the old Act were issued on 21st August, 1962, 25th August, 1962, and

18th October, 1962. An application for adjournment was filed before the Income Tax Officer on November 20, 1962, the date fixed for filing the

return by the last notice. But the same was refused with the result that the Income Tax Officer proceeded to assess the income of the assessee ex

parte and passed the assessment order on the same date assessing the income at Rs. 1,01,000. While passing the assessment order ex parte the

Income Tax Officer issued a notice u/s 271 read with Section 274 of the Income Tax Act of 1961, hereinafter called the ""new Act"", to the

assessee calling upon it to show cause why penalty be not imposed on it for having committed a default in not having filed a return of its income

despite notice. Counsel for the assessee appeared before the Income Tax Officer and contended that the penalty was not imposable. As

application u/s 27 of the Income Tax Act of 1961 was also made by the assessee seeking reopening of the assessment proceedings by the Income

Tax Officer which was dismissed. So far as the notice u/s 271 read with Section 274 is concerned the Income Tax Officer after hearing counsel for

the assessee imposed a penalty of Rs. 26,335. The assessee filed two appeals before the Appellate Assistant Commissioner, one against the order

of the Income Tax Officer refusing to reopen the assessment proceedings and the other against his order imposing a penalty of Rs. 26,335. The

Appellate Assistant Commissioner maintained the order of the Income Tax Officer holding that the assessment proceedings could not be reopened

but reduced the amount of assessed income from Rs. 1,01,000 to Rs. 76,024. A corres- ponding reduction was accordingly made in the amount

of penalty as the penalty imposed was determined at 50% of the tax payable. The amount of penalty on such reduction came to Rs. 16,944 as

stated earlier. The assessee felt contented with the order of the Appellate Assistant Commissioner refusing to reopen the assessment proceedings

and did not choose to file an appeal before the Tribunal. The ex parte order of assessment passed by the Income Tax Officer on November 20,

1962, thus became absolute. Two appeals, however, were filed before the Tribunal against the orders of the Income Tax Officer imposing penalty

being Income Tax Appeals Nos. 9538 and 9541 of 1965-66 for the assessment years 1959-60 and 1960-61, respectively. Appeal No. 9541

pertaining to the assessment year 1960-61 was not pressed before the Tribunal and was, therefore, dismissed. Appeal No. 9538 pertaining to

assessment year 1959-60 only was pressed.

Before the Tribunal it was argued on behalf of the assessee that (1) even if the service of the notice u/s 22(2) be taken as good for purpose of

an assessment, the same service cannot be taken as valid service for the purpose of imposition of penalty, (2) that the delay in the riling of the

return was not the assessee's creation; and (3) that the quantum of the penalty should be determined under the old Act of 1922.

After having considered the case law bearing on the subject the Tribunal came to the finding that the assessee was in default inasmuch as it did

not file a return of its income despite service of the notice u/s 22(2) as the service of notice on D. B. Thappa was not denied by the assessee

before the Tribunal. On the second question the Tribunal found that the mere delay in the issuance of the notice u/s 22(4) by the Income Tax

Officer cannot justify the failure of the assessee to file a return of its income even on receiving a notice u/s 22(2) of the old Act. Regarding the

quantum of penalty the Tribunal held that the amount of penalty was reasonable even according to the old Act. In consequence, the Tribunal

dismissed the appeal filed by the assessee and upheld the order of the Appellate Assistant Commissioner, vide order dated December 17, 1970.

After the passing of the order by the Tribunal dated December 17, 1970, the assessee made an application before it requesting it to frame and

refer to this court three questions mentioned in the statement of the case. The Tribunal, however, framed only one question noted above and

referred the same to this court for determination ; hence, the present reference.

It may be stated at the very outset that Appeal No. 9541 pertaining to the assessment year 1960-61 was not pressed before the Tribunal and,

therefore, the same was dismissed. The exigibility of the penalty, therefore, for default of the assessee to file its return for the assessment year

1960-61 was not the subject-matter of dispute before the Tribunal nor is this court called upon to consider the question of exigibility of penalty in

regard to the assessment year 1960-61. The order of the Income Tax Appellate Tribunal dated December 17, 1970, is confined only to Appeal

No. 9538 and as such the reference to this court u/s 256 of the Income Tax Act is relatable to the question of the exigibility of the penalty

pertaining to the said assessment year only.

We have heard counsel for the parties at length. Mr. Randhawa, counsel for the assessee, argued before us that service of the notice u/s 22(2)

of the old Act on the assessee was not proved. He submitted that the service of the notice u/s 22(2) of the old Act was a condition precedent for

imposition of penalty u/s 271(1)(a) of the Act. He further submitted that D. B. Thappa on whom the service of the notice is found to have been

made was not duly authorised on behalf of the assessee to accept service of the notice. The mere fact, according to him, that S. Surrinder Singh

Johar, who was the general manager of the firm, applied for time for filing of the return on behalf of the assessee did not constitute a valid and a

legal service of the notice u/s 22(2) of the Income Tax Act.

The next contention of Mr. Randhawa was that the Indian Income Tax Act, 1922, was repealed by the Act of 1961. The assessment in the

present case was made on November 20, 1962, a date long after the date of enforcement of the new Act. The proceedings taken under the old

Act, according to him, did not survive after the repeal of the old Act. Fresh notice, therefore, was necessary to be served on the assessee before

initiation of the penalty proceedings u/s 271 read with Section 274. We take up the last contention of Mr. Randhawa first, but feel that the same is

without force. In the present case the proceedings pertain to the assessment year 1959-60. The same could be continued under the new Act

provided the assessment was completed after the first day of April, 1962. Clause (g) of Sub-section (2) of Section 297 of the Income Tax Act of

1961 reads as under :

Any proceeding for the imposition of a penalty in respect of any assessment for the year ending on the 31st day of March, 1962, or any earlier

year, which is completed on or after the 1st day of April, 1962, may be initiated and any such penalty may be imposed under this Act.

In the instant case the ex parte assessment order was passed by the Income Tax Officer on the 20th November, 1962, long after the first day

of April, 1962, the date prescribed by Clause (g) of Sub-section (2) of Section 297. The proceedings initiated under the old Act could, therefore,

be continued even without fresh notice under the new Act. As a matter of fact, the provisions contained in Section 22(2) of the old Act were

substantially altered and an obligation to file a return of income which was more than the taxable, limits was cast on the assessee by Section 139 of

the new Act. The question of issuing a notice u/s 22(2) on or after Novemher 20, 1962, when the assessment order was passed and when Section

22(2) had ceased to exist, could not at all arise. The submission of Mr. Ran-dhawa that the proceeding came to an end with the repeal of the old

Act, therefore, is not at all tenable, and is repelled and it is held that the continuance of the proceedings of assessment and the initiation of the

proceeding of penalty under the new Act was legally valid and without any infirmity.

The next contention of the counsel for the assessee is that there is a finding by the Tribunal that the notice u/s 22(2) in regard to the assessment

year 1959-60 was served neither on any partner of the assessee-firm nor on the general manager of the firm but on one D. B. Thappa. Therefore,

according to him, this could not be treated to be a valid service for purposes of imposition of penalty u/s 271 of the new Act.

Mr. Bhan, standing counsel for the Income Tax department, argued that once the general manager of the assessee-firm had applied for

extension of time for filing of the return the service on the general manager of the firm has to be presumed.

So far as the notices u/s 22(4) are concerned, we think it is not necessary to consider whether or not the same were duly served on the

assessee for it is not a notice u/s 22(4) which is necessary to be served on the assessee for purposes of penalty but one u/s 22(2) of the Act. The

reply to the question referred to us, therefore, will depend on the question whether the service on D. B. Thappa was a legally valid service for

purposes of initiating the imposition of penalty proceedings. We have considered the question and we are of the opinion that the notice in the

present case u/s 22(2) of the Act cannot be said to have been duly served upon the assessee, when, admittedly, there is no finding by the Tribunal

that D. B. Thappa, the employee of the assessee, was authorised to accept such service on behalf of the assessee. It is true that J. S. Johar, the

general manager of the assessee, applied for extension of time for filing the return but this conduct may at best be suggestive of the fact that the

general manager had known about the issuance of such a notice to the assessee. Acquisition of knowledge in regard to the issuance of a notice u/s

22(2) cannot be considered to be equivalent to, or a substitute for, the service of the notice on the assessee. It has to be borne in mind that the

penalty proceedings under the Income Tax Act are of a quasi-criminal nature and the requirement which the statute itself prescribes to be satisfied

must be positively proved to have been satisfied before a penal action against the assessee can be sustained. Section 63 of the old Act, which

prescribed the mode of service of notice on an assessee, reads as under :

(1) A notice or requisition under this Act may be served on the person therein named either by post or, as if it were a summons issued by a court,

under the Code of Civil Procedure, 1908.

(2) Any such notice or requisition may, in the case of a firm or a Hindu undivided family, be addressed to any member of the firm or to the

manager, or any adult male member of the family.....

A perusal of the abovesaid Section would show that a service or requisition must be served in one of the modes mentioned in the Section

before an assessee can be considered to be in default. Admittedly, D. B. Thappa was not the manager of the assessee-firm during the relevant

period. Therefore, the service of the notice on him cannot be considered to be a service of notice on the assessee. The partners of the assessee or

its manager may have known about the issuance of such a notice but that does not suggest that the service had been affected on them. Knowing

about the issuance of the notice otherwise than by its service on the person concerned is one thing and the service of the notice on the person is

another.

We are fortified in this view by a Full Bench judgment of the Rangoon High Court in Commissioner of Income Tax v. Dey Brothers [1935] 3

ITR 213. The facts of that case were that the assessee, who was residing at Calcutta, owned a business at Rangoon styled as Dey Brothers. This

business was carried on by one Mr. Dutta who had been appointed as manager by the assessee. A process issued by the Income Tax Officer in

connection with the assessment of the business was served during the absence of D on M, one of his assistants working in the shop, who signed on

the back of the copies, ""for Dey Brothers"" under a rubber stamp. The question arose whether there was a sufficient service of the notice. Page C.J.

who delivered the judgment for the Full Bench, observed as under (page 215):

Now, it is common ground that when the two summonses under consideration were delivered at 32, Mogul Street, the manager, S. M. Dutta, was

not present, and that they were delivered to and taken by J.C. Muzum-dar, one of the assistants working at the shop. There was evidence that

each and every one of the clerks and assistants in the shop used to accept communications addressed to the firm. The question is whether in such

circumstances there was evidence to justify the conclusion that S. M. Dutta was served with the summonses in question. In my opinion there was

not. It is not pretended that S. M. Dutta was present, or had any personal knowledge of the delivery of either of the notices to J. C. Mazumdar, or

that J. C. Mazumdar, or any of the clerks or assistants in the firm were persons authorised to accept service of notices within Order V, Rule 9 and/

or Rule 13. The problem, therefore, has resolved itself to this fine point; whether where a notice under the Income Tax Act is delivered otherwise

than by post to any clerk or servant on the premises where the assessee carries on business, and according to the practice obtaining in the business

the employee is expected to hand over any communication which he has received to the manager, that is evidence upon which the Income Tax

authorities can find as a fact that the manager was served with the summons. I have no doubt that it is not; for if we were to hold that it was, it

would follow that merely because a process server happens to hand over a notice to a durwan or it might be to a chaprasi, that would be evidence

that the person under whom the durwan or the chaprasi was serving had received the notice himself. In my opinion, an inference to that effect could

not be founded upon such evidence. For these reasons, in my opinion, the question propounded should be answered in the negative. The Rs. 100

may be refunded but we make no order as to costs.

From the aforesaid Full Bench authority it would appear that the mere fact that the knowledge of the notice could be imputed to the assessee

or its manager was not considered to be a service according to Section 63 of the Income Tax Act.

Another judgment which can be relied upon by us for the view we propose to take is one by the Madhya Pradesh High Court in Hajarilal

Kishorilal Dhar Vs. Commissioner of Income Tax, . This was also a case of service of notice u/s 22(2) of the old Act. The Tribunal in that case

had found as a fact that the service on the assessee was proved on the material before it. The High Court examined the evidence and found on a

reference to it that the material placed before the Tribunal could not lead to the conclusion that the service had been effected on the assessee.

Justice Bhave, who spoke for the Division Bench, observed as under (page 567):

It is no doubt true that adequacy or sufficiency of evidence is not a matter open for consideration before this court. It is also true that this court is

not entitled to question a finding of fact if it is based on evidence. But this court has certainly jurisdiction to question a finding recorded by the

Tribunal if it is based on no evidence or if it is based on facts which cannot lead to the conclusion arrived at by it.

Support for the view we arc inclined to take in this case is further available from a judgment of the Mysore High Court in C.N. Nataraj Vs.

Fifth Income Tax Officer, City Circle II, Bangalore, . In this case, a notice prescribed u/s 148 of the Act for initiating reassessment proceedings

were issued in the names of the assessees who were minors and not in the names of their guardians and were served on a clerk of the assessees'

father who was neither an agent of the assessees nor authorised to accept notices on their behalf. The court while dealing with the question of

validity of service u/s 63 of the old Act observed as under (page 252):

There is no doubt that a notice prescribed u/s 148 of the Act for initiating reassessment proceedings is not a mere procedural requirement ; the

service of the prescribed notice on the assessee is a condition precedent to the validity of any reassessment made u/s 147. If no notice is issued or

if the notice issued is shown to be invalid, then the proceedings taken by the Income Tax Officer without a notice or in pursuance of an invalid

notice would be illegal and void.

These observations were made by the court relying on the Supreme Court judgment in Y. Narayana Chetty and Another Vs. The Income Tax

Officer, Nellore and Others, , where their Lordships of the Supreme Court observed as under :

The notice prescribed by Section 34 of the Income Tax Act for the purpose of initiating reassessment proceedings is not a mere procedural

requirement; the service of the prescribed notice on the assessee is a condition precedent to the validity of any reassessment made u/s 34. If no

notice is issued or if the notice issued is shown to be invalid then the proceedings taken by the Income Tax Officer without a notice or in pursuance

of an invalid notice would be illegal and void.

Keeping in view the facts found by the Tribunal, the provisions of Section 63 of the old Act and the case law bearing on the subject we are

clearly of the opinion that the service of notice on the assessee u/s 22(2) of the old Act was not legally valid so as to sustain an order of penalty u/s

271(1)(a) of the new Act for committing default in filing the return of income. We, therefore, answer the reference in the negative and hold that, on

the facts and in the circumstances of the case, the penalty was not exigible.

In the circumstances of the case, we leave the parties to bear their own costs.

S.M.F. Ali, C.J.

I agree.