Commissioner of Income Tax vs Hind Mercantile Corporation (In Liquidation)

Sethuraman, J.—In the reference u/s 256(2) of the Income Tax Act, 1961, in pursuance of a direction of this court, the following are the

questions that were directed to be, and have been, referred:

(1) Whether, on the facts and in the circumstances of the case, the Appellate Tribunal was right in law in cancelling the penalty imposed under the

provisions of section 271(1)(c) for the assessment year 1961-62, when the quantum assessment on the basis of which the penalty came to be

imposed by the Department has been set aside by the Appellate Tribunal for being done de novo by the Income Tax Officer in accordance with

law ?

(2) Whether the Appellate Tribunal was within its jurisdiction in passing the order cancelling the penalty, having the effect of prohibiting the Income

Tax Officer from initiating penalty proceedings, if called for, on the basis of the assessment directed to be made de novo ?

The assessee, a private limited company, was carrying on business in mining and export of iron and manganese ore. For the assessment year

1961-62, it filed a return declaring loss. The Income Tax Officer noticed that there were several credit entries in its books in the names of multani

bankers. The assessee''s explanation was that it had borrowed moneys from the said bankers by executing hundis. There were also entries in the

books showing payment of interest of Rs. 81,040. During the course of the assessment, the assessee contended before the Income Tax Officer

that there was a firm called Rambilas Nandlal, the partners of which had a controlling interest in the assessee-company. The said firm had filed a

settlement petition to the Central Board of Direct Taxes on May 20, 1965, relating to the assessment years 1955-56 to 1964-65, wherein it had

accepted the position that the loans in the various names introduced in the books of the assessee were, in fact, its undisclosed income. The further

contention of the assessee was that the interest was really paid to the firm, Rambilas Nandlal, in respect of the said loans. The Income Tax Officer

noticed that the said petition for settlement had not been accepted by the Board and taking into account the increase in the maximum of the hundi

transactions of the year amounting to Rs. 40,000, he brought to tax the said sums as income from other sources. He disallowed also the interest

claim of Rs. 81,040. The assessee appealed before the Appellate Assistant Commissioner and succeeded as the latter had accepted a similar claim

of the assessee for the assessment year 1961-62. The Department filed an appeal before the Tribunal. The Tribunal set aside the assessment as

regards the addition of the amount covered by the credit entries and also the disallowance of the interest income.

The Inspecting Assistant Commissioner levied penalties in the present case and the question before the Tribunal was whether the penalty of Rs.

27,226 levied was proper. The Tribunal considered that the firm, Rambilas Nandlal, had taken the start that the amount represented its own

transactions and taking into account the disposal of a similar contention for another year, the penalty had been deleted, following the same

reasoning the penalty levied in the present cases was also cancelled. It is against this cancellation of penalty that the Department has obtained the

present reference u/s 256(2) of the Act.

From the statement of the case, it is clear that the assessment for the relevant year has been set aside. When the assessment itself was set aside,

the question of levy of penalty could no longer be a live issue. In order that the penalty proceedings should survive. The assessment proceedings

should be alive, as the assessment had been set aside, the penalty proceedings could not have been terminated by the cancellation of penalty. The

question as to whether penalty was leviable or not has to be considered in the light of the findings in the assessment to be made as a result of

directions given by the Tribunal while setting aside the same. In these circumstances, the Tribunal acted erroneously in cancelling the penalty, in

fact, the questions as framed appear to answer themselves and the question are answered in the negative and in favour of the Department. In the

particular circumstances of the case, there will be no order as to costs.