Commissioner of Income Tax, Gujarat I vs Hiralal Mohanlal Shah

Bhagwati, J.—This reference raises a short but interesting question of law relating to the construction of sections 271(1) and 297(2)(g) of

the Income Tax Act, 1961 (hereinafter referred to as the new Act). The assessee, who is assessed in the status of an individual, returned a total

income of Rs. 8,383 for the assessment year 1960-61, the relevant account year being Samvat Year 2015. The return was admittedly filed by the

assessee before 1st April, 1962, being the date of commencement of the new Act. The Income Tax Officer did not accept the figure of total

income returned by the assessee and determined the total income to be Rs. 33,307 by an assessment order made on 24th November, 1962, after

the commencement of the new Act. The Income Tax Officer was satisfied in the course of the assessment proceeding that the assessee had

concealed particulars of his income or deliberately furnished inaccurate particulars of such income and he, therefore, made a note to the following

effect at the end of the assessment order :

Issue show cause notice for concealing the particulars of income or deliberately furnishing inaccurate particulars of such income.

A notice was then issued by the Income Tax Officer to the assessee u/s 274(1) read with section 271(1)(c) of the new Act calling upon him to

show cause why penalty should not be levied upon him. The assessee filed his reply and on considering the reply the Income Tax Officer was of

the opinion that the minimum penalty liable to be imposed on the assessee was much more than Rs. 1,000 and he, therefore, referred the matter to

the Inspecting Assistant Commissioner u/s 274(2). The Inspecting Assistant Commissioner issued another notice dated 15th February, 1963,

calling upon the assessee to show cause why penalty should not be imposed on him and after considering the objections filed by the assessee, he

imposed a penalty of Rs. 7,500 u/s 271(1)(c) read with section 274(2). The assessee appealed to the Tribunal and two contentions were urged by

him in support of the appeal. One was that section 271(1)(c) under which the penalty was imposed was not at all applicable to the present case

and the other was that on merits the penalty was improperly levied. The Tribunal took the view that, since the assessment proceeding in the course

of which the Income Tax Officer was satisfied that there was concealment on the part of the assessee was admittedly a proceeding under the

Income Tax Act, 1922 (hereinafter referred to as the old Act), and not under the new Act, section 271(1)(c) had no application and the order of

penalty was bad. This view taken by the Tribunal is challenged on the present reference.

Now, the order of penalty was made by the Inspecting Assistant Commissioner u/s 274(2) read with section 271(1)(c) of the new Act and it is,

therefore, clear that unless section 271(1)(c) applies in the present case, the order of penalty cannot be sustained. The order of penalty cannot be

justified u/s 28(1) of the old Act, since under that provision no penalty could be imposed by an Inspecting Assistant Commissioner, and

consequently, the validity of the order of penalty must depend ultimately on the applicability of section 271(1)(c). Could on the facts and

circumstances of the case penalty be imposed on the assessee u/s 271(1)(c) ? The question calls for an examination of the relevant provisions of

the new Act.

The new Act came into force on 1st April, 1962. Prior to the coming into force of the new Act, section 28(1) of the old Act provided for

imposition of penalty and that section, omitting portions immaterial, was in the following terms :

(1) If the Income Tax Officer, the Appellate Assistant Commissioner or the Appellate Tribunal, in the course of any proceedings under this

Act, is satisfied that any person -

(a) has without reasonable cause failed to furnish the return of his total income which he was required to furnish by notice given under sub-section

(1) or sub-section (2) of section 22 or section 34 or has without reasonable cause failed to furnish it within the time allowed and in the manner

required by such notice, or

(b) has without reasonable cause failed to comply with a notice under sub-section (4) of section 22 or sub-section (2) of section 23, or

(c) has concealed the particulars of his income or deliberately furnished inaccurate particulars of such income,

he or it may direct that such person shall pay by way of penalty, in the case referred to in clause (a), in addition to the amount of the Income Tax

and super-tax, if any, payable by him, a sum not exceeding one and a half times that amount, and in the cases referred to in clauses (b) and (c), in

addition to any tax payable by him, a sum not exceeding one and a half times the amount of the Income Tax and super-tax, if any, which would

have been avoided if the income as returned by such person had been accepted as the correct income...

On the coming into force of the new Act, the old Act was repealed by section 297(1) of the new Act but certain saving provisions were enacted

in section 297(2). Cases were bound to arise where, at the date of coming into force of the new Act, assessments for the assessment year ending

31st March, 1962, and earlier assessment years might not have been completed : in some cases the returns might have been filed and in some

others, even the returns might have remained to be filed. These assessments being for the assessment year ending 31st March, 1962, and earlier

assessment years, the new Act of its own force would not apply to them and the old Act being repealed would also cease to apply from 1st April,

1962. Some provision was therefore, necessary in regard to these cases and such provision was made in section 297(2), clause (a) and (b) :

(2) Notwithstanding the repeal of the Indian Income Tax Act, 1922 (hereinafter referred to as the repealed Act) -

(a) where a return of income has been filed before the commencement of this Act by any person for any assessment year, proceedings for the

assessment of that person for that year may be taken and continued as if this Act had not been passed;

(b) where a return of income is filed after the commencement of this Act otherwise than in pursuance of a notice u/s 34 of the repealed Act by any

person for the assessment year ending on the 31st day of March, 1962, or any earlier year, the assessment of that person for that year shall be

made in accordance with the procedure specified in this Act;...

In the present case the return was admittedly filed by the assessee prior to 1st April, 1962, and the case was, therefore, governed by section

297(2)(a) and under that section proceedings for the assessment of the assessee could be taken and continued as if the new Act had not been

passed. The scope and ambit of the expression ""assessment"" in section 297(2)(a) came to be considered by the Supreme Court in the recent - yet

unreported - decision in Civil Appeal No. 1421 of 1966 (Kalawati Devi Harlalka v. Commissioner of income tax) and in that case the Supreme

Court, after referring to the decision of the Privy Council in Commissioner of Income Tax, Bombay v. Khemchand Ramdas and its own decisions

in A.N. Lakshman Shenoy v. Income Tax Officer, Ernakulam, C.A. Abraham v. Income Tax Officer, Kottayam and Commissioner of Income Tax

v. Patiala Cement Co. Ltd., held that the word ""assessment"" in section 297(2)(a) was used in a comprehensive sense so as to include the whole

procedure for ascertaining and imposing liability upon the taxpayer. Now, as held in C.A. Abraham v. Income Tax Officer, penalty is imposed as a

part of the machinery for assessment of tax liability and the process of assessment includes taking steps for imposition of penalty. The ""proceedings

for assessment"" within the meaning of section 297(2)(a) could, therefore, plainly include imposition of penalty and if in the course of the assessment

proceeding the Income Tax Officer was satisfied that the assessee had committed any of the defaults enumerated in clauses (a), (b) and (c) of

section 28(1), penalty could be imposed on the assessee under that section by reason of section 297(2)(a). This would appear to be clear on

principle and no authority is necessary in support of it but if any authority were needed with a view to fortifying the conclusion, it may be found in

the decision of the Mysore High Court in S.C. Magavi, Haveri v. Commissioner of Income Tax. If, therefore, the order of penalty had been made

by the Income Tax Officer u/s 28(1)(c), it would have been unassailable by reason of section 297(2)(a) read with section 28(1)(c).

But the order of penalty is made u/s 274(2) read with section 271(1)(c) and it is, therefore, necessary to see whether it could be properly made

u/s 271(1)(c). Section 271(1) is the section in the new Act which provides for imposition of penalty in certain specified circumstances and the

material portion of that section runs as under :

Failure to furnish returns, comply with notices, concealment of income, etc. - (1) If the Income Tax Officer or the Appellate Assistant

Commissioner in the course of any proceedings under this Act, is satisfied that any person -

(a) has without reasonable cause failed to furnish the return of total income which he was required to furnish under sub-section (1) of section 139

or by notice given under sub-section (2) of section 139 or section 148 or has without reasonable cause failed to furnish it within the time allowed

and in the manner required by sub-section (1) of section 139 or by such notice, as the case may be, or

(b) has without reasonable cause failed to comply with a notice under sub-section (1) of section 142 or sub-section (2) of section 143, or

(c) has concealed the particulars of his income or furnished inaccurate particulars of such income,

he may direct that such person shall pay by way of penalty, - .....

Section 274 prescribes the procedure to be followed before imposing penalty u/s 271(1) and it says, inter alia :

Procedure. - (1) No order imposing a penalty under this Chapter shall be made unless the assessee has been heard, or has been given a

reasonable opportunity of being heard.

(2) Notwithstanding anything contained in clause (iii) of sub-section (1) of section 271, if in a case falling under clause (c) of that sub-section, the

minimum penalty imposable exceeds a sum of rupees one thousand, the Income Tax Officer shall refer the case to the Inspecting Assistant

Commissioner who shall, for the purpose, have all the powers conferred under this Chapter for the imposition of penalty.

If we look at section 271(1) it is clear that before the Income Tax Officer can initiate any proceedings for imposition of penalty, he must be

satisfied ""in the course of any proceedings under this Act"", that is, in the course of any proceedings under the new Act, that any person has

committed any of the defaults specified in clauses (a), (b) and (c) of the section. The satisfaction of the Income Tax Officer in the course of any

proceedings under the new Act that any of the defaults specified in clauses (a), (b) and (c) has been committed is a condition precedent to the

initiation of proceedings by the Income Tax Officer for imposition of penalty and if the condition precedent is satisfied the Income Tax Officer can,

after giving a reasonable opportunity to the assessee of being heard, make an order imposing penalty on the assessee. Now, in the present case, by

reason of section 297(2)(a), the proceeding for assessment of the assessee was, as pointed out above, a proceeding under the old Act and it was

in the course of that proceeding that the Income Tax Officer was satisfied that the assessee had concealed the particulars of income or deliberately

furnished inaccurate particulars of income. The satisfaction of the Income Tax Officer was, therefore, not arrived in the course of any proceeding

under the new Act and the condition precedent to the power of the Income Tax Officer to initiate proceedings for imposition of penalty was not

satisfied. The Income Tax Officer had, therefore, no power to refer the case to the Inspecting Assistant Commissioner and the Inspecting Assistant

Commissioner was not entitled to impose penalty on the assessee u/s 274(2) read with section 271(1)(c).

But the revenue relied strongly on section 297(2)(g) and contended that by reason of the provision enacted in section 297(2)(g), the Inspecting

Assistant Commissioner, on reference of the case by the Income Tax Officer, was entitled to initiate proceedings for imposition of penalty and to

impose penalty on the assessee u/s 274(2) read with section 271(1)(c). This contention turned primarily on the true interpretation of section 297(2)

(g) but, in order to arrive at its proper construction, it is also necessary to refer to section 297(2)(f). These two clauses of section 297(2) deal with

the subject of imposition of penalty and they provide as follows :

(2) Notwithstanding the repeal of the Indian Income Tax Act, 1922 (hereinafter referred to as the repealed Act).....

(f) any proceeding for the imposition of a penalty in respect of any assessment completed before the 1st day of April, 1962, may be initiated and

any such penalty may be imposed as if this Act had not been passed;

(g) 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;..

The argument of the revenue was that the assessment in the present case was for the assessment year 1960-61 and it was completed on 24th

November, 1962, and, therefore, u/s 297(2)(g) a proceeding for imposition of penalty in respect of such assessment could be initiated and penalty

could be imposed under the new Act. Section 271(1), it was argued, was the only relevant provision of the new Act under which penalty could be

imposed and, therefore, the conclusion was inevitable that the proceeding for imposition of penalty could be initiated and penalty could be imposed

under the relevant clause of section 271(1). So far as section 297(2)(a) was concerned, the revenue sought to escape its applicability by

contending that if section 297(2)(a) stood alone, in a case falling within it, penalty would have been liable to be imposed u/s 28(1) of the old Act

but when Income Tax Officer being satisfied in the course of the assessment proceeding about any of the defaults enumerated in clauses (a), (b)

and (c) of section 28(1), section 297(2)(g) intervened and provided that the proceeding for imposition of such penalty should be initiated and such

penalty should be imposed not u/s 28(1) of the old Act but u/s 271(1) of the new Act. This argument conceded that where, as in a case falling u/s

297(2)(a), the assessment proceeding is under the old Act, the defaults entailing penalty would ordinarily be defaults enumerated in clauses (a), (b)

and (c) of section 28(1) of the old Act, but the penalty for such defaults, it was said, was not liable to be imposed u/s 28(1) of the old Act but was

liable to be imposed u/s 271(1) of the new Act. This argument, though at first blush attractive, is in our opinion not well-founded and our reasons

for saying so are as follows :

We may point out at the outset that the penalty provided u/s 271(1) is in some ways more rigorous and harsh than that provided u/s 28(1) of

the old Act. Section 271(1) provides that in certain cases, if any penalty is imposed, it should not be less than a certain minimum prescribed in the

section whereas no such minimum penalty was prescribed u/s 28(1). No prosecution could be instituted u/s 28(1) in respect of the same facts on

which a penalty was imposed but under the new Act not only can a penalty be imposed but a prosecution can also be launched upon the same

facts. Now, the effect of accepting the argument of the revenue would be that, in respect of defaults committed under the old Act, the more

rigorous and harsh penalty provided under the new Act would be liable to be imposed even where the defaults might have been committed prior to

the commencement of the new Act. This would indeed be a startling proposition and unless there are clear words used by the legislature

compelling us to reach such a conclusion, we would be reluctant to place a construction on section 297(2)(g) which leads to such a result. Section

297(2)(g) is punitive in effect and must, therefore, be strictly construed. The coverage of the section must be confined to that which is clear and

explicit. If the section is of doubtful and ambiguous meaning, we should not attempt to extract out of that ambiguity, a new and added obligation

not formerly cast upon the assessee. With these preliminary observations we will now turn to examine the true meaning and content of section

297(2)(g).

If we look at sections 297(2)(f) and 297(2)(g) together, it is clear that what the legislature has intended to provide is that the imposition of

penalty in respect of an assessment completed before 1st April, 1962, should be governed by the old Act while imposition of penalty in respect of

an assessment for the year ending 31st March, 1962, or any earlier year completed on or after 1st April, 1962, should be governed by the new

Act. When and under what circumstances should penalty be liable to be imposed in respect of an assessment completed before 1st April, 1962,

should be determined by reference to the provisions of the old Act and when and under what circumstances penalty should be liable to be imposed

in respect of an assessment for the year ending on 31st March, 1962, or any earlier year completed on or after 1st April, 1962, should be

determined by reference to the provisions of the new Act. Section 297(2)(f) and 297(2)(g) do not enact a provision for imposition of penalty but

merely lay down that in a case covered by section 297(2)(f), the old Act shall apply in relation to imposition of penalty, while in a case falling within

section 297(2)(g) imposition of penalty shall be governed by the new Act. If in a case covered by section 297(2)(g) one wants to find out whether

any penalty is liable to be imposed, one must turn to the old Act while in a case falling within section 297(2)(g), one must turn to the new Act. But,

in either case, whether covered by section 297(2)(f) or section 297(2)(g), the case must fall within the relevant provision imposing penalty under

the old Act or the new Act, as the case may be, before any penalty can be imposed under such provision. A proceeding for imposition of penalty

can, therefore, be initiated and penalty can be imposed on the assessee under the new Act only if the conditions for the applicability of section

271(1) are satisfied. Just as section 297(2)(f) does not dispense with the fulfilment of the conditions requisite for the applicability of section 28(1),

section 297(2)(g) does not dispense with the fulfilment of the conditions requisite for the applicability of section 271(1). If the conditions attracting

the applicability of section 271(1) are not satisfied in a case falling within section 297(2)(g), no proceeding for imposition of penalty can be initiated

and penalty imposed u/s 271(1).

We cannot accept the contention of the revenue that the liability to penalty is in such a case incurred u/s 28(1) by reason of section 297(2)(a)

and it is only the initiation of proceeding for imposition of penalty and the ultimate imposition of penalty which have to be done u/s 271(1) by virtue

of section 297(2)(g). It is no doubt true that for a default which is declared to be penal by one statute, a subsequent statute may provide with

retrospective effect a different kind of penalty than that provided by the former statute. But we do not think that such is the effect of the provision

enacted in section 297(2)(g). If the legislature wanted to declare that even in respect of defaults committed under clauses (a), (b) and (c) of section

28(1), penalty shall be levied according to the measure provided in section 271(1), we have no doubt that the legislature would have said so in

clear and explicit terms and not left its intention to be gathered from language of doubtful implication. The legislature could have easily provided that

if any defaults enumerated in clauses (a), (b) and (c) of section 28(1) are committed by the assessee, such defaults shall be deemed to be defaults

under the corresponding clauses (a), (b) and (c) of section 271(1) and proceeding for the imposition of penalty for such defaults may be initiated

and such penalty may be imposed under the relevant clause of section 271(1). But, quite apart from this consideration, it is difficult to see how it

can be said that in enacting section 297(2)(g), the legislature was providing the measure of penalty set out in sedation 271(1) for defaults

committed under clauses (a), (b) and (c) of section 28(1). This argument could have had some plausibility if the conditions on the fulfilment of

which penalty was liable to be imposed u/s 28(1) were the same as the conditions inviting the imposition of penalty u/s 271(1). But we find that the

conditions attracting the applicability of the penalty u/s 28(1) are different from those attracting the imposition of penalty u/s 271(1). The penalty u/s

28(1) is liable to be imposed if the Income Tax Officer is satisfied about any of the default specified in clauses (a), (b) and (c) in the course of any

proceeding under the old Act whereas the penalty u/s 271(1) is attracted only if the Income Tax Officer is a satisfied about any of the defaults

specified in clauses (a), (b) and (c) of that section in the course of any proceeding under the new Act. The defaults specified in clauses (a) and (b)

of section 28(1) are defaults in complying with the provisions of the old Act while the defaults enumerated in clauses (a) and (b) of section 271(1)

are defaults in complying with the provisions of the new Act. It is no doubt true that the acts required to be done under the provisions of the old

Act referred to in clauses (a) and (b) of section 28(1) are of the same nature as acts required to be done under the sections of the new Act

referred to in clauses (a) and (b) of section 271(1) but that does not mean that the defaults under clauses (a) and (b) of section 28(1) are the

defaults for which penalty is provided u/s 271(1). To use the language of the criminal law, we cannot say that penalty u/s 271(1) is provided for the

offence"" committed u/s 28(1). If section 271(1) had provided a different kind of penalty for the ""offence"" committed u/s 28(1), it might perhaps

have been possible to read section 297(2)(g) as providing that for the offence u/s 28(1), proceeding for imposition of penalty may be taken and

penalty may be imposed u/s 271(1). But that is not the position here and we cannot, therefore, take the view that u/s 297(2)(g), though the liability

to penalty is incurred u/s 28(1) in the course of the assessment proceeding under the old Act, proceeding for imposition of penalty can be initiated

and the penalty can be imposed u/s 271(1). Section 297(2)(g) can be invoked only where it is found that in a case falling within that section the

conditions attracting the imposition of penalty u/s 271(1) are satisfied and penalty can be properly and legitimately imposed under that section.

The revenue urged that, if this construction were accepted, section 297(2)(g) would be rendered superfluous and otiose and there would be no

case which would fall within that section. This argument can be of little avail in the construction of a section which is punitive in effect, but even on

merits we do not think it is well-founded. Even on the view we have taken, cases falling within section 297(2)(b) and section 297(2)(a)(d)(ii)

would be covered by section 297(2)(g). It may also be noted and indeed it was not disputed on behalf of the revenue that sections 297(2)(f) and

297(2)(g) are not exhaustive of the cases of imposition of penalty and, therefore, it would not be right to place a strained construction on section

297(2)(g) for the purpose of expanding its scope and ambit. We must, therefore, reach the conclusion that the revenue cannot avail of section

297(2)(g) for the purpose of invoking the applicability of section 271(1) and the order of penalty made by the Inspecting Assistant Commissioner

u/s 274(2) read with section 271(1) must be held to be without jurisdiction.

Our answer to the question referred to us is, therefore, in the negative. The Commissioner will pay the costs of the reference to the assessee.

Question answered in the negative.