Commissioner of Income Tax, Gujarat II vs Ochhavlal Panalal Kothari

Divan, J.—In this reference made at tahe instance of the revenue, the following question has been referred to us by the Tribunal :

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

The facts giving rise to this reference are that the assessee, the respondent herein, is a registered firm. The relevant assessment year was 1956-

57 and the assessee-firm filed its return voluntarily for the assessment year 1956-57 on March 31, 1958, and the return showed a total income of

Rs. 57,994. On June 30, 1960, the Income Tax Officer passed the assessment order holding the total income of the assessee-firm in the

assessment year 1956-57 to be Rs. 70,369. At the time of passing the assessment order the Income Tax Officer directed that notice u/s 28 for late

submission of return u/s 22(1) should also be issued. In the penalty proceedings, the Income Tax Officer levied a penalty of Rs. 2,000 u/s 28(1)(a)

of the Indian Income Tax Act, 1922 (hereinafter referred to as ""the old Act""). The assessee filed an appeal before the Appellate Assistant

Commissioner against the order of assessment and the Appellate Assistant Commissioner set aside the assessment and in consequence thereof the

order of penalty was also set aside. Thereafter, fresh assessment was made and a sum of Rs. 66,169 was determined as the total income of the

assessee for the assessment year 1956-57; and this assessment order was passed by the Income Tax Officer on June 15, 1963. At the time of

passing this order on June 15, 1963, the Income Tax Officer directed that penalty notice for default u/s 22(1) of the old Act should be issued and

fresh notice u/s 28(3) of the old Act was issued by the Income Tax Officer on July 19, 1964. The Income Tax Officer passed an order on January

30, 1963, levying the penalty of Rs. 11,456 u/s 271(1)(a) of the Income Tax Act, 1961 (hereinafter referred to as ""the new Act""); and this penalty

was levied for default in filing the return in time as contemplated by section 22(1) of the old Act. Against this order of penalty, an appeal was filed

before the Appellate Assistant Commissioner and that officer cancelled the penalty order. He held that the assessment order for the assessment

year 1956-57, having been passed de novo after April 1, 1962, the provisions of section 297(2)(g) would apply and the Income Tax Officer

should have initiated penalty proceedings and the penalty should have been imposed under the new Act. According to the Appellate Assistant

Commissioner since the penalty proceedings had been initiated u/s 28 of the old Act and the penalty was imposed in consequence of the new Act,

the order of penalty was cancelled, as this was not permissible in law. After the Appellate Assistant Commissioner''s order cancelling the order of

penalty was communicated to the Income Tax Officer, the Income Tax Officer once again started the proceedings u/s 271 read with section 274

of the new Act. A notice was issued to the assessee to show cause why the penalty should not be levied and by his order, dated 11th June, 1965,

the Income Tax Officer levied a penalty in the sum of Rs. 12,027 u/s 271(1)(a) of the new Act. This order of penalty was confirmed by the

Appellate Assistant Commissioner in the appeal filed by the assessee. The matter was taken in further appeal to the Tribunal and the Tribunal held

that the order of the Appellate Assistant Commissioner, dated November 16, 1964, setting aside the penalty of Rs. 11,466 had become final and

it was not open to challenge and hence the Tribunal set aside the fresh order of penalty, dated June 11, 1965, in the sum of Rs. 12,027.

Thereafter, at the instance of the department, the question set out hereinabove has been referred to us for our decision.

It is obvious that the assessment order in this particular case was passed on June 15, 1963; and in appeal the total income of the assessee for

the assessment year 1956-57 was held to be Rs. 66,169 and a fresh notice u/s 28(3) of the old Act was issued by the Income Tax Officer.

u/s 297(2)(g) of the new Act, notwithstanding the repeal of the old Act, any proceeding for the imposition of a penalty in respect of any

assessment for the year ending 31st day of March, 1962, may be initiated and any such penalty may be imposed under the new Act. The Tribunal

in its order has observed in paragraph 3 that the main contention on behalf of the assessee was that the Income Tax Officer has no jurisdiction to

levy penalty u/s 271(1)(a) inasmuch as the proceedings for penalty had not been initiated when the Income Tax Officer finalised the assessment;

and the Tribunal observed that in their opinion this submission on behalf of the assessee had no answer. The Tribunal also observed in paragraph 4

that since the order of the Appellate Assistant Commissioner, dated November 16, 1964, had become final in the sense that it was not appealed

against by the department, it was not open to challenge.

The main contention before us is whether it is necessary for the Income Tax Officer to initiate proceedings for penalty before finalising the

assessment. The question as to the condition precedent for the commencement of penalty proceedings has been considered by the Supreme Court

in D. M. Manasvi v. Commissioner of Income Tax. The Supreme Court examined the provisions of section 271 of the new Act and observed at

page 561 of the report :

The fact that notices were issued subsequent to the making of the assessment orders would not, in our opinion, show that there was no satisfaction

of the Income Tax Officer during the assessment proceedings that the assessee had concealed the particulars of his income or had furnished

incorrect particulars of such income. What is contemplated by clause (1) of section 271 is that the Income Tax Officer or the Appellate Assistant

Commissioner should have been satisfied in the course of proceedings under the Act regarding matters mentioned in the clauses of that sub-

section. It is not, however, essential that notice to the person proceeded against should have also been issued during the course of the assessment

proceedings. Satisfaction in the very nature of things precedes the issue of notice and it would not be correct to equate the satisfaction of the

Income Tax Officer or the Appellate Assistant Commissioner with the actual issue of notice. The issue of notice is a consequence of the satisfaction

of the Income Tax Officer or the Appellate Assistant Commissioner and it would, in our opinion, be sufficient compliance with the provisions of the

statute if the Income Tax Officer or the Appellate Assistant Commissioner is satisfied about the matters referred to in clauses (a) to (c) of sub-

section (1) of section 271 during the course of the proceedings under the Act even though notice to the person proceeded against in pursuance of

that satisfaction is issued subsequently.

At page 562, the following passage from the judgment of Shah J. in Commissioner of Income Tax v. S. V. Angidi Chettiar is quoted and Shah J.

in that passage was dealing with the provisions of section 28 of the old Act :

The power to impose penalty u/s 28 depends upon the satisfaction of the Income Tax Officer in the course of proceedings under the Act; it

cannot be exercised if he is not satisfied about the existence of conditions specified in clause (a), (b) or (c) before the proceedings are concluded.

The proceeding to levy penalty has, however, not to be commenced by the Income Tax Officer before the completion of the assessment

proceedings by the Income Tax Officer. Satisfaction before conclusion of the proceeding under the Act, and not the issue of a notice or initiation of

any step for imposing penalty is a condition for the exercise of the jurisdiction.

The Supreme Court has pointed out at page 563 of the report that it would be the satisfaction of the Income Tax Officer in the course of the

assessment proceedings regarding the concealment of income which would constitute the basis and foundation of the proceedings for levy of

penalty. In the light of this judgment of the Supreme Court and also in the light of the judgment of the Supreme Court in Commissioner of Income

Tax v. S. V. Angidi Chettiar it is obvious that both u/s 28 of the old Act and section 271 of the new Act, what is required is that the satisfaction of

the Income Tax Officer should have been reached in the course of the assessment proceedings. Once the satisfaction is shown to have been

arrived at in the course of assessment proceedings, the notice to show cause why penalty should not be levied and subsequent step in the course of

the penalty proceedings can follow. In view of these two judgments of the Supreme Court, it is obvious that the conclusion of the Tribunal that the

Income Tax Officer had no jurisdiction to levy penalty u/s 271(1)(a) inasmuch as the proceedings for penalty had not been initiated when the

Income Tax Officer finalised the assessment, was erroneous. In the instant case, as we have pointed out, while setting out the narration of facts, at

the time when the Income Tax Officer passed the assessment order on June 15, 1963, he was satisfied that there was default u/s 22(1) of the old

Act and he directed that penalty notice should be issued for that default. This was all that was required to be done; and, therefore, satisfaction

having been reached before the assessment order was passed on June 15, 1963, issuance of the notice and the initiation of penalty proceedings

could be taken up subsequently by the Income Tax Officer.

The question then arises as to under which particular Act, the old Act or the new Act, the proceedings should have been taken. We may point

out that u/s 28 of the old Act, where the provision was made for penalty for failure to furnish the return of his total income after the notice given u/s

22(1) and failure to file it within time could be punished by imposing penalty; but u/s 28, the maximum penalty that could be imposed was laid

down and the maximum was a sum not exceeding one and a half times the amount of the Income Tax payable by him. u/s 271(1)(a), the Income

Tax Officer can levy penalty, in addition to the amount of the tax, if any, payable by him, a sum equal to two per cent. of the tax for every month

during which the default continued, but not exceeding in the aggregate fifty per cent. of the tax.

The main effort of Mr. Shah, on behalf of the assessee, has been to persuade us to hold that the case of the assessee-firm would fall u/s 28 of

the old Act and not u/s 271 of the new Act. We have already referred to section 297(2)(g). Section 297 is the repealing section of the new Act.

Under sub-section 2(f) of section 297, any proceedings for the assessment of penalty in respect of any assessment completed before the first day

of April, 1962, may be initiated and any such penalty may be imposed as if this Act had not been passed; but under clause (g) of sub-section (2) of

section 297, any proceeding for the imposition of a penalty in respect of any assessment for the year ending 31st March, 1962, or any earlier year,

which is completed on or after the first day of April, 1962, may be initiated and any such penalty may be imposed under the new Act. The

contention on behalf of the assessee was that in clause (g) the proceedings for penalty may be initiated under the new Act but once the proceedings

are initiated under the old Act, they must be continued under the old Act. We are unable to accept this contention on behalf of the assessee. In the

instant case, the assessment order, though for assessment year 1956-57, was passed on June 15, 1963 and, therefore once it is shown that

satisfaction of the Income Tax Officer was reached before the assessment order was passed, the rest of the steps are required to be taken under

the new Act by virtue of clause (g), unless the proceedings can be said to have been initiated before repeal. The proceedings could not have been

initiated under the old Act at any time prior to June 15, 1963. It is after the satisfaction of the Income Tax Officer in the course of the assessment

proceedings is reached that the question of issuance of notice and initiation of penalty proceedings can arise; but in the instant case, the order itself

was passed on June 15, 1963, and, thereafter, the proceedings for penalty were started. It is true that when the Income Tax Officer issued the

notice to show cause why penalty should not be imposed after June 15, 1963, i.e., by his notice, dated July 19, 1963, annexure ""F"", he purported

to issue the notice u/s 28(3) of the old Act and ultimately having issued the notice u/s 28(3), when he came to pass the order of penalty, he

imposed the penalty u/s 271(1)(a) of the new Act. In this order, dated November 16, 1964, the Appellate Assistant Commissioner held that the

proceedings for penalty having been initiated u/s 28 of the old Act, the Income Tax Officer could not have imposed penalty u/s 271(1)(a) of the

new Act. He pointed out in his order that the assessment for the assessment year 1956-57, having been made de novo after 1st April, 1962, the

provisions of section 297(2)(g) applied and the Income Tax Officer should have initiated the penalty proceedings and the penalty should have been

imposed under the new Act. The Appellate Assistant Commissioner held that the proceedings having been initiated under the provisions of the old

Act, it was not permissible to pass the penalty order under the provisions of the new Act. It is true that in paragraph 4 of the order, dated

November 16, 1964, the Appellate Assistant Commissioner while dealing with another contention on behalf of the assessee observed :

In fact it is well settled that it is not even necessary to issue a fresh notice u/s 28(3) and penalty proceedings can be continued from the point of

original initiation.

It was contended on behalf of the assessee that the initiation of the penalty proceedings had been done as far back as 1960 when the first

assessment order was passed and it was directed that a notice u/s 28 for late submission of return should be issued. In pursuance of that

satisfaction reached in 1960, on November 6, 1962, an order imposing the penalty of Rs. 2,000 was actually passed by the Income Tax Officer.

Though that order of penalty was set aside by reason of the assessment order itself having been set aside by the Appellate Assistant

Commissioner, according to Mr. Shah, the penalty proceedings initiated by virtue of the notice issued in 1960 still continued and it is because of

that initiation or alleged initiation that he contends that even after the coming into force of the new Act, the penalty proceedings, at any rate, should

be continued under the provisions of the old Act. He contends that this case would be governed by section 6 of the General Clauses Act, 1897,

and not by section 297(2)(g) of the new Act. In our opinion, it is not possible to accept this contention of Mr. Shah. In the first place, it would not

be correct to say that there was any initiation of penalty proceedings which remained pending under the provisions of the old Act. It was only

because of the satisfaction of the Income Tax Officer arrived at on June 15, 1963, that the proceedings for penalty could be initiated and

appropriate notice could be issued. The error committed by the Income Tax Officer when he issued the notice, annexure ""F"", on July 19, 1963,

was to issue the notice u/s 28(3) of the old Act. Really speaking, in the light of the provisions of section 297(2)(g), he should have issued the notice

u/s 271 read with section 274 and he should have also passed the penalty order under the provisions of the new Act. It is well-settled that if any

officer has power to act under any particular Act, the fact that reference is made to a provision of another Act, does not mean that the exercise of

the power is bad. In the instant case, the Income Tax Officer had the power to initiate proceedings after June 15, 1963, under the provisions of the

new Act and though the reference was made to section 28(3) of the old Act, he had in fact acted under the power conferred upon him by section

271(1)(a) of the new Act read with section 274 and this power he obtained by virtue of section 297(2)(g) of the new Act.

Looking at the matter from another point of view, after the Appellate Assistant Commissioner passed the order on November 16, 1964, the

Income Tax Officer started once again from the point where the error was pointed out to him, viz., of the notice u/s 28 and then he issued the

notice of December 22, 1964, annexure ""I"", u/s 274 read with section 271 of the Act. We emphasize again that the satisfaction of the Income Tax

Officer was reached on June 15, 1963, in the course of the de novo assessment proceedings and it was because of that satisfaction that the notice

could be subsequently issued and, as pointed out by the Supreme Court in D. M. Manasvi''s case, the penalty could be subsequently imposed. All

that the Income Tax Officer did by the issuance of the notice was to indicate the correct section from which he was deriving the power to initiate

penalty proceedings. There was no question of continuance of any old proceedings which had already been initiated.

It was submitted on behalf of the assessee that u/s 297(2)(g) only those proceedings which have been initiated under the new Act can be

continued and penalty can be imposed but if the proceedings are already initiated under the old Act, then the penalty cannot be imposed under the

new Act. We have already dealt with the facts of the case and held that there was no initiation prior to the coming into force of the new Act.

Assuming, however, that our conclusion is not correct, even on a bare construction of the section, it is obvious that clause (g) of section 297(2)

deals with two matters - (1) initiation of proceedings for imposition of penalty, and (2) imposition of penalty itself. The words ""any such penalty

occurring in clause (g) refer to penalty in respect of any assessment for the year ending on 31st March, 1962, or any earlier year provided the

assessment is completed on or after the first day of April, 1962. Therefore, that penalty proceedings can be initiated and also that penalty can be

imposed under the provisions of the new Act, it cannot be said that the words ""any such penalty may be imposed under this Act"" are conjunctive

with the initiation of the proceedings for the imposition of penalty.

Thus, u/s 297(2)(g), the proceedings for the imposition of the penalty can be initiated if other conditions of that clause are satisfied under the

new Act and if the assessment is completed after 1st April, 1962, then the penalty, if any, has to be imposed under the new Act.

At this stage, we may point out that in Jain Brothers v. Union of India, the Supreme Court has pointed out the relevant factors arising u/s

297(2)(g) in conjunction with section 274 of the new Act. At page 116 of the report, it has been pointed out :

It is not possible to say that while applying the penalty provisions contained in the Act of 1961 to cases of persons whose assessments are

completed after 1st April, 1962, any class has been singled out for special treatment. It is obvious that for the imposition of penalty it is not the

assessment year or the date of the filing of the return which is important but it is the satisfaction of the Income Tax authorities that a default has

been committed by the assessee which would attract the provisions relating to penalty. Whatever the stage at which the satisfaction is reached, the

scheme of sections 274(1) and 275 of the Act of 1961, is that the order imposing penalty must be made after the completion of the assessment.

The crucial date, therefore, for purposes of penalty, is the date of such completion.

The Supreme Court further pointed out that both sections 271(1) and 297(2)(g) have to be read together and in harmony and so read the only

conclusion possible is that for the imposition of a penalty in respect of any assessment for the year ending 31st March, 1962, or any earlier year

which is completed after first day of April, 1962, the proceedings have to be initiated and the penalty imposed in accordance with the provisions of

section 271. Thus the assessee would be liable to a penalty as provided by section 271(1) of the new Act for the default mentioned in section

28(1) of the old Act if his case falls within the terms of section 297(2)(g). According to the decision of the Supreme Court in Third Income Tax

Officer, Mangalaore v. M. Damodar Bhat, in a case falling within section 297(2)(j), in a proceeding for recovery of tax and penalty imposed under

the Act of 1922, it is not required that all the sections of the new Act relating to recovery or collection should be literally applied, but only such of

the sections will apply as are appropriate in the particular case and subject, if necessary, to suitable modifications. In other words, the procedure of

the new Act will apply to cases contemplated by section 297(2)(j) of the new Act mutatis mutandis. Similarly, the provision of section 271 of the

Act of 1961 will apply mutatis mutandis to proceedings relating to penalty initiated in accordance with section 297(2)(g) of that Act. In our

opinion, therefore, this contention based on the interpretation of section 297(2)(g) also cannot help the assessee in the instant case.

Mr. Shah also relied on a decision of the Rajasthan High Court in Income Tax Reference No. 17 of 1966, decided by a Division Bench of that

court consisting of Bhandari C. J. and Modi J. on August 29, 1966. In that particular case, the assessee was a proprietor of an automobile stores

and he was assessed for the assessment year 1961-62. During the course of the assessment proceedings it was found that the assessee had not

submitted an estimate of the advance tax payable by him and had also not paid the same for the assessment year 1961-62. The Income Tax

Officer issued a notice under the Indian Income Tax Act, 1922, requiring the assessee to show cause why penalty should not be imposed on him,

and, thereafter, he imposed the penalty of Rs. 1,500 on the assessee describing it as a penalty u/s 273(b) of the new Act for the assessee''s default

u/s 18A(3) of the old Act; and the question that was referred to the Rajasthan High Court was :

Whether, on the facts and in the circumstances of the case, the Income Tax Officer was competent to initiate penalty proceedings for the second

time and impose a penalty in pursuance thereof?

In between, it may be pointed out, the assessee had filed an appeal before the Appellate Assistant Commissioner who had cancelled the order

imposing the penalty and thereafter fresh notice was issued by the Income Tax Officer to the assessee u/s 273(b) of the new Act and the penalty of

Rs. 1,000 was subsequently imposed and the question that was really agitated before the Rajasthan High Court was ""whether the Income Tax

Officer was competent to initiate penalty proceedings for the second time."" After setting out the earlier order of the Appellate Assistant

Commissioner, the Division Bench of the Rajasthan High Court observed :

On a careful reading of this order, we find that the Appellate Assistant Commissioner was of the view that no penalty u/s 273(b) of the Income

Tax Act of 1961 could be imposed for the assessee''s default u/s 18A(3) of the old Act. This view may be erroneous in law and the error could

have been corrected in an appeal filed by the department before the Tribunal, but it cannot be said that without getting the order of the Appellate

Assistant Commissioner, dated January 24, 1963, cancelled, it was open to the Income Tax Officer to initiate new proceedings for imposing

penalty on the assessee.

Thus it is obvious that what weighed with the Rajasthan High Court was the fact that against the earlier order of the Appellate Assistant

Commissioner cancelling the order of penalty of Rs. 1,500, there was no further appeal by the department and instead of going in appeal, the

Income Tax Officer chose to issue a fresh notice, and it was held that the matter was concluded by reason of the fact that there had been no

appeal against the order of the Appellate Assistant Commissioner. In our opinion, this decision of the Rajasthan High Court in no way helps the

assessee in the instant case in view of the facts of the case before us and in the light of the reasoning which we have set out above.

Under these circumstances, we answer the question referred to us in the affirmative. The assessee will pay the costs of this reference to the

Commissioner. Before concluding our judgment, we may, however, draw the attention of the Income Tax department that the case of the assessee

is indeed a very hard one. Initially a penalty of Rs. 2,000 under the provisions of section 28 was imposed and that was considered to be an

appropriate amount of penalty. By reason of other events that order of penalty came to be set aside and because of the change in law the

provisions of the new Act have been made applicable and today because of the provisions of the new Act, particularly regarding the minimum, a

penalty of Rs. 12,000 has been imposed on the assessee-firm. In our opinion, the department should consider the case of the assessee

sympathetically, if and when any application for sympathetic consideration is made to it.

Question answered in the affirmative.