Commissioner of Income Tax vs Chandulal

Anjaneyulu, J.—The Tribunal referred the following question of law for the opinion of this Court u/s 256(1) of the income tax Act, 1961 (''the Act'') : "Whether, on the facts and in the circumstances of the case, the Appellate Tribunal is justified in law in quashing the order of penalty?"

The matter relates to the income tax assessment year 1968-69. The assessee filed a return declaring income of Rs. 2,321 from business. During the course of investigation, the ITO found that, in the previous year relevant to the assessment year 1968-69, the assessee advanced loans to five individuals aggregating to Rs. 6,900. These loans were not recorded in the assessee''s books of account. The ITO observed that the peak amount of the loans advanced to the five individuals was Rs. 3,200, inasmuch as there were some repayments by the individuals and fresh advances. The ITO also found that a sum of Rs. 5,000 advanced to one Shri Miraz Ali Khan on 10-8-1967, was also not entered in the assessee''s books of account. The ITO further found that a sum of Rs. 1,000 received from Smt. Jamalunnisa Begum by way of commission was also not accounted in the books. Thus, the ITO found that money-lending loans to the extent of Rs. 8,200 were not entered in the assessee''s accounts apart from a sum of Rs. 1,000 received by way of commission from Smt. Jamalunnisa Begum. The ITO included the sum of Rs. 9,200 in the assessee''s total income for the assessment year 1968-69. The assessee carried the matter in appeal, but the assessment was confirmed and the matter became final. 2. Before the completion of assessment proceedings, the ITO initiated proceedings for the levy of penalty for concealment of income or for furnishing inaccurate particulars of such income u/s 271(1)(c) of the Act. The assessee explained that the money- lending advances of Rs. 8,200, referred to above, were made from out of the assessee''s winnings in card games. It does not appear that any specific explanation was offered in respect of the sum of Rs. 1,000 received from Smt. Jamalunnisa Begum by way of commission. The ITO declined to accept the assessee''s explanation that the money-lending advances of Rs. 8,200 were made from out of the assessee''s winnings from card games. Accordingly, the ITO levied Rs. 9,200 u/s 271(1)(c), which is equivalent to the amount of income considered to have been concealed by the assessee.

The assessee appealed against the levy of penalty to the AAC, who confirmed the order of the ITO levying the penalty and dismissed the appeal.

The assessee carried the matter in second appeal to the Tribunal and raised a number of contentions, both legal and factual. The Tribunal declined to accept most of the contentions raised by the assessee, but finally accepted one contention and that was regarding the validity of the penalty notice issued. The assessee urged before the Tribunal that the penalty notice issued by the ITO was invalid inasmuch as the ITO did not strike out inappropriate portions of the notice. The notice required the assessee to show cause why penalty should not be levied for concealment of income and for also furnishing inaccurate particulars of such income. In the notice issued by the ITO, both the items, mentioned above, were kept without either of them being struck off. The assessee urged before the Tribunal that the penalty in this case was levied for alleged concealment of income and on account of the ITO not striking out the portion relating to furnishing of inaccurate particulars of the income, the notice issued by the ITO was rendered invalid and, consequently, the order of penalty is invalid in law. Reliance was placed by the assessee on the decision of the Kerala High Court in N.N. Subramania Iyer Vs. Union of India (UOI) and Another, . The Tribunal found that the decision of the Kerala High Court supported the contention urged by the assessee. The Tribunal eventually held that the penalty notice issued by the ITO suffered from a serious infirmity of vagueness and ambiguity. The Tribunal characterised the notice issued by the ITO as a ''whimsical notice'', following the principle laid down by the Kerala High Court. In that view of the matter, the Tribunal held the penalty proceedings to be invalid and quashed the penalty order passed by the ITO. The Commissioner then applied for and obtained the present reference for the opinion of this Court.

The learned standing counsel, Shri M.S.N. Murthy, contended that the penalty proceedings, in the present case, could not be considered to be invalid by reason of the fact that the ITO failed to strike out the inappropriate portions. According to the learned counsel, penalty was levied in the present case not only for conceal ment of income, but also for furnishing inaccurate particulars of such income. The learned counsel contended that the explanation that the money-lending advances were made from out of the winnings of card games, amounted to furnishing of inaccurate particulars of the assessee''s income and, consequently, there is no necessity to strike out any portion of the notice issued u/s 274 of the Act. The learned standing counsel, therefore, urged that the Tribunal erred in cancelling the penalty proceedings as invalid.

The learned counsel for the assessee, Shri Jagannadha Raju, supported the order of the Tribunal cancelling the order of penalty and placed reliance on the judgment of the Kerala High Court, referred to above.

We are unable to subscribe to the view that by reason of the ITO not striking out inappropriate portions of the notice issued u/s 274, the notice issued was rendered invalid. In the first place, it has to be borne in mind that the notice issued u/s 274 is not prescribed under the rules. It is a notice administratively devised for the purpose of put ting the assessee in the knowledge of the fact that the ITO initiated proceedings for levy of penalty, in order to enable him to show cause why penalty should not be levied. So long as the object of putting the assessee in the aware ness and knowledge of the initiation of the penalty proceedings is accomplished by the issuance of a notice, the question of invalidity does not arise on account of either appropriate language in the notice or on account of any inappropriate portions of the notice not being struck off. There was no offence to any of the rules prescribed inasmuch as the notice is given to secure the assessee''s explanation to fulfil the requirement of natural justice. It is not in dispute that the assessee did not entertain any doubt in his mind when he received the notice issued by the ITO u/s 274. If the assessee was under a mistaken view about the real intent and effect of the notice issued, he could have asked the ITO to clarify whether the penalty proceedings were initiated for concealment of income or for furnishing inaccurate particulars of such income. In the present case, it is not denied that in the explanation given to the ITO in response to the notice issued u/s 274, the assessee did not raise any objection on the ground that the notice did not convey the nature of offence committed by him. No objection was also taken regarding the validity of the notice on that ground. It is, therefore, clear that the assessee was not under any misapprehension about the offence alleged against him. There was proper understanding and indeed in the explanation filed, the assessee dealt with the reasons for contending that no penalty could be levied u/s 271(1)(c). It was not shown to us that any prejudice was caused to the assessee on account of the assessee not being put in the knowledge of the nature of offence committed by him. The contention regarding the validity of the notice was urged only during the course of the appeal before the Tribunal and it seems to us that the explanation was only an afterthought. The assessee certainly understood the offence alleged against him and showed cause to the ITO by pointing out the circumstances and urged that no penalty could be levied. This apart, we also agree with the learned counsel for the revenue that the provisions of section 274 would apply not only to concealment of income but also for furnishing inaccurate particulars of such income, and where the offence is two-fold, there is no need on the part of the ITO to strike off any inappropriate portions. In the present case, the offence alleged against the assessee is that there is concealment of income and furnishing of inaccurate particulars of such income. It is not, therefore, necessary for the ITO to strike out any portion of the notice issued to him.

The principle of natural justice contained in section 274, which requires that an assessee shall be heard before levying penalty u/s 271, is to ensure that the basic require ment of fair play in action is fulfilled. The rules of natural justice are flexible and cannot be put on any rigid formula. In order to sustain a complaint of violation of principles of natural justice on the ground of absence of opportunity, it has to be established that prejudice has been caused to the party concerned by the procedure followed. We have already mentioned above that the assessee has not shown that any such prejudice has been caused to him. Attention may be invited in this connection to the decision of the Supreme Court in K.C. Tripathi v. State Bank of India AIR 1984 SC 273. We have perused the judgment of the Kerala High Court in N.N. Subramania Iyer''s case (supra), on which the assessee has relied. With great respect, we are unable to agree that the mere non- striking of the inappropriate portions in a notice renders the notice automatically invalid, unless in a further enquiry in the matter it is shown that by reason of the notice not properly conveying the gist of offence to the assessee, prejudice is caused to him. We cannot accept as a general proposition of law that in every case, a notice is rendered invalid just because inappropriate portions in the notice are not struck off.

For the aforesaid reasons, we uphold the revenue''s plea that the notice issued u/s 274, in the present case, is perfectly valid and the order of penalty did not suffer from any legal infirmity.

The learned counsel for the assessee then contended that before the Tribunal, the asses see contended that the explanation that the money-lending advances were made out of the assessee''s winnings from card games was merely disbelieved and no penalty could be levied by merely disbelieving the explanation offered by the assessee. Our attention has been invited to the following Ground No. 5, urged in the grounds of appeal before the Tribunal:

"The assessee offered certain explanation. The explanation was rejected by the income tax Officer and penalty was levied. The Appellate Assistant Commissioner sustained it in spite of bringing to his notice the Supreme Court decision on the point."

The learned counsel for the revenue draws our attention to the order of the Tribunal, where the Tribunal has considered the question. While the ITO levied the penalty u/s 271(1)(c), which was upheld by the AAC, the ground urged by the revenue before the Tribunal was that the decisions of the Supreme Court governing the levy of penalty under the impugned provisions of section 271(1)(c), will have no application in a case, to which the provisions of the Explanation to section 271(1)(c) are applicable. For the first time, the revenue urged before the Tribunal that this is a case to which the Explanation could be applied and the penalty levied by the ITO sustained. We find from the Tribunal''s order that the assessee took an objection to the department being allowed to invoke the Explanation to section 271(1)(c) for the first time before the Tribunal. The Tribunal referred to the judgment of the Orissa High Court in Commissioner of Income Tax Vs. K.C. Behera and Others, and held that it was open to the revenue to require the Tribunal to consider the question of applying the Explanation to section 271(1)(c) for the first time. After referring to the Orissa High Court''s judgment, the Tribunal came to the conclusion in the following terms:

"In the light of this judgment- Commissioner of Income Tax Vs. K.C. Behera and Others, I have no hesitation to apply the explanation to the facts of the present case and hold that if so applied, penalty is clearly exigible."

Apart from this abrupt conclusion, the order does not disclose that the Tribunal has occasion to consider whether the Explanation to section 271(1)(c) is applicable at all. Reference may be made to the decision of this Court in Additional Commissioner of Income Tax Vs. Burugupalli China Krishnamurthy (decd.) and Others, The assessee explained that the money-lending advances were made out of his winnings from card games. According to the assessee, the winnings from the card games were not income liable to be taxed. By disbelieving this explanation, the ITO held that the sum of Rs. 8,200 as advance was income liable to be taxed under the Act. It is clear from the order of the Tribunal that the applicability of the Explanation to section 271(1)(c) was not examined at all from the point of view of the explanation given by the assessee. There is no finding that even if the explanation given by the assessee is unacceptable, still penalty can be levied by invoking the Explanation to section 271(1)(c). The assessee''s grievance is that the principles enunciated by the Supreme Court in a number of decisions in Commissioner of Income Tax, West Bengal I, and Another Vs. Anwar Ali, , The Commissioner of Income Tax Madras Vs. Khoday Eswarsa and Sons, and also by this Court in Commissioner of Income Tax Vs. Koduri Papa Rao, are applicable. The Tribunal did not examine the matter from the above point of view and came to an abrupt conclusion that the Explanation to section 271(1)(c) is applicable.

The learned counsel for the revenue relies on the decision of the Patna High Court in Addl. Commissioner of Income Tax Vs. Prasadi Sao Rajendra Prasad, . According to the learned counsel, the Patna High Court has taken the view that if the explanation offered during the course of the assessment enquiry is unacceptable and no further explanation is forthcoming during the course of the penalty proceedings, that would constitute sufficient compliance with the requirements of the Explanation to section 271(1)(c) We express no opinion on this point as we are requiring the Tribunal to examine this matter, since it failed to do so in the order already passed, bearing in mind the judgments of this Court as well as other High Courts on the point. We, accordingly, direct the Tribunal to consider this question in proper perspective and determine the question whether the Explanation to section 271(1)(c) is applicable, while passing an order conformably to the judgment of this Court u/s 260(1) of the Act.

The learned counsel for the assessee endeavoured to support the order of the Tribunal on certain grounds negatived by the Tribunal. The learned counsel stated that the order of penalty, in the present case, was barred by limitation. The learned counsel also contended that there is no sanction for the levy of penalty for concealment of income deemed u/s 69 of the Act. We are not impressed with either of these contentions. As far as the limitation is concerned, we find that the assessment order was made on 30-3-1972 and the order of penalty was passed on 30-3-1974. The order was, thus, passed within two years from the date of the assessment order, as per provisions of law prior to the Taxation Laws (Amendment) Act, 1970, which came into effect from 1-4-1971. It is not necessary to consider the effect of the amended provisions because even under the unamended provisions, it is clear that the penalty was levied before the expiry of two years from the date of the assessment order. As regards the second contention regarding the deemed income, section 69 enumerates the circumstances in which an amount can be deemed to be the assessee''s income. Once the amount is deemed as income, all the necessary consequences, by treating the said amount as income for purposes of law, would necessarily follow. We find it difficult to accept the learned counsel''s contention that the sanction to levy penalty u/s 271(1)(c) in respect of concealment of income or in respect of furnishing inaccurate particulars of such income, does not take in its sweep income deemed to be so under any of the provisions of the Act. We, therefore, reject these two contentions of the assessee.

We decline to answer the question referred to us, as the Tribunal failed to deal properly with the question regarding the application of the Explanation to section 271(1)(c). The Tribunal shall rehear the appeal in accordance with the directions given by us in para 13 supra. The reference is answered, accordingly. No costs.