Ganpat Rai Santu Lal vs Commissioner of Income Tax

This is a reference made by the Tribunal, Patna Bench, u/s 256(1) of the income tax Act, 1961 (''the Act'') and a statement of the case has been submitted to this Court for its opinion on two questions which are as follows: 1. Whether, on the facts and in the circumstances of the case, the proceedings for the levy of penalty u/s 273(b) had been validly commenced?

Whether, on the facts and in the circumstances of the case, the confirmation of the amount of penalty imposed notwithstanding the reduction in the income assessed was correct?

The statement of the case as originally submitted to this Court, sets out the following facts: The assessment year concerned is 1963-64 and the matter relates to the levy of penalty in terms of section 273(b)of the Act. The assessee is a firm. It returned an income of Rs. 36,900 for the relevant assessment year. Under the provisions of the Act, it was under an obligation to file its estimate of advance tax payable in terms of section 212(3) of the Act. It did not file such an estimate. The ITO levied penalty of Rs. 1,600 u/s 273(b). A copy of the order passed by the ITO has been marked Annexure ''A'' forming part of the statement of the case.

In appeal before the AAC, it was urged that the order of penalty was a initio void inasmuch as the proceedings for the imposition of penalty were not commenced in the course of the assessment proceedings by the issue of notice u/s 274(1) of the Act before passing the assessment order. The AAC noticed that in the concluding portion of the assessment order for the relevant year, the ITO has stated that:

Assessed as above. Tax on firm. Charge penal interest u/s 215. Charge interest for late filing of return. Start proceedings u/s 273(b).

In the order sheet, relevant for the assessment year in question, the AAC further noticed the following entries:

Assessed u/s 143(3) /182 as per P. file. Issue notice u/s 158. Issue D.N. and Ch. Charge interest u/s 215. Start proceedings u/s 273(6)....

The term ''start proceedings'' as mentioned in the assessment order and in the order sheet, was interpreted on behalf of the assessee as meaning that it was only a direction for starting penalty proceedings after the fact had been recorded that the assessment had been made. According to the assessee, the direction to issue notice for levy of penalty did not amount to commencement of the proceedings for the levy of penalty. The AAC accepted the contention of the assessee and held that the order of the ITO imposing the penalty was ab initio invalid. The order of the AAC has been marked Annexure ''B''.

The revenue, being aggrieved by the order of the AAC appealed to the Tribunal and the assessee filed a cross-objection in that appeal. Both the matters were heard and decided together. The Tribunal held that viewing the orders of the ITO in their proper perspectives, it was obvious that the order of the ITO to initiate penalty proceedings was contemporaneous and simultaneous with the assessment order itself. Relying upon a decision of the Madras High Court in the case of Artisan Press Ltd. Vs. Income Tax Appellate Tribunal and Another, , the Tribunal held that the penalty proceedings were properly commenced during the course of the main assessment proceedings and the departmental appeal was allowed. A copy of the Tribunal''s order has been marked Annexure ''C'' to the statement of the case. It is worthwhile to mention that in the Tribunal''s appellate order an observation was made to the following effect:

The cross-objection filed by the assessee is dismissed as not being pressed.

The assessee then filed an application before the Tribunal stating that it had not withdrawn its cross-objection in the aforesaid appeal and that the observation, as quoted above, made by the Tribunal regarding the cross-objection being not pressed was an error of record. Consequent upon the said application being admitted, the Tribunal heard the assessee on its cross-objection. It was urged that although the default said to have been committed by the assessee was one of non-compliance with the terms of section 212(3), in the notice served u/s 274(1) read with section 273 for levy of penalty for the said default, the default u/s 212(3) had been scored out and what remained in the notice was a default u/s 210(3) of the Act of which the assessee was not guilty. The Tribunal called upon the assessee to produce the original notice as served on it. The assessee was unable to file it. The Tribunal held that as to whether there was any mistake in the original notice served remained unestablished. It, however, discussed the question with regard to its legal effect and held that such effect would be there if such a mistake had in fact occurred. It further held that such a mistake would be a simple error which would not mislead the assessee so as to invalidate the notice and the assessee had in no way been prejudiced in its defence as a result of any such defect. The Tribunal ultimately concluded thus:

In the circumstances we hold that the alleged defect in the notice is not so vital as to invalidate the proceedings or render the imposition of penalty as void.

It was further urged on behalf of the assessee that the ITO imposed a penalty of Rs. 1,600 taking the income assessed at Rs. 1,39,362 but the AAC had, on appeal, reduced the quantum of assessment by Rs. 50,305 and, therefore, the penalty should be proportionately reduced. The Tribunal, however, observed that a reduction in the income assessed does not necessarily and automatically involve a reduction in the penalty imposed and held that taking an overall picture of the facts and circumstances of the case, notwithstanding the reduction in the income assessed, the levy of penalty of Rs. 1,600 was not unreasonable or excessive. The cross-objection of the assessee, thus, terminated in dismissal. A copy of the Tribunal''s subsequent order as aforementioned has been marked Annexure ''C/1'' to the statement of the case.

On these facts the two questions of law as aforementioned were referred to this Court for its opinion.

When this case came to be heard by a Bench of this Court, it was found that the statement of the case did not contain all the relevant facts relating to the second question which was sought to be answered, namely, as to "whether on the facts and in the circumstances of the case, the confirmation of the amount of penalty imposed notwithstanding the reduction in the income assessed was correct". This Court, accordingly, issued a direction to the Tribunal to file a supplementary statement of the case setting out all the relevant facts with regard to the second question. Accordingly, a supplementary statement of the case has been filed. The facts stated therein are relevant to be noticed in connection with the second question referred to this Court.

The assessee is a firm and it returned an income of Rs. 36,900 for the assessment year 1963-64. The ITO computed the total income of the assessee at Rs. 1,39,362. The assessee went up in appeal before the AAC and the AAC by his order, dated 31-7-1967, allowed a relief of Rs. 50,305. The assessee further came up to the Tribunal and the Tribunal by its appellate order, set aside the order and remanded the case to the AAC with some directions. The AAC, by his second order, dated 25-2-1972, further allowed a relief of Rs. 49,181. Thus, the final income of the assessee stood at Rs. 39,876 as against the return submitted to the tune of Rs. 36,900 by the assessee. The tax payable on the income assessed by the ITO for the purpose of section 273 amounted to Rs. 7,902 whereas the tax on the final income of Rs. 39,876, as finally assessed, amounted to Rs. 749. After allowing deduction u/s 273(b)(ii) read with section 217(1) and section 215(1) of the Act, the tax on the income amounted to Rs. 5,927 and Rs. 562. This is the supplementary statement of the case as drawn up and submitted to this Court by the Tribunal.

On the aforesaid facts and in the circumstances of the case, there can be no manner of doubt that the proceedings for the levy of penalty u/s 273(b) had been validly commenced against the assessee as the notice had been issued by the ITO contemporaneously to the assessment proceedings. This question, therefore, must be answered in favour of the revenue and against the assessee.

That then leads us to the second question. The facts are so patent that there can be two opinions that the question must be answered in favour of the assessee and against the revenue. The income on which tax was assessed by the ITO was to the tune of Rs. 1,39,362 and it was on the basis of the tax computed for that income that the penalty u/s 273(b)(ii) was imposed to the tune of Rs. 1,600. Ultimately, however, on the admitted facts, the total taxable income of the assessee was assessed at Rs. 39,876 only after the Tribunal''s order in the assessment appeal. Therefore, the difference in the income returned and the income finally assessed was only to the tune of about Rs. 3,000 tax on which has been, as submitted by the Tribunal, computed at Rs. 5,927 and Rs. 562 only for the purpose of section 273(b). The provisions of section 273(b)(ii) are very clear. They read thus:

If the income tax Officer, in the course of any proceedings in connection with the regular assessment for the assessment year commencing on the 1st day of April, 1970, or any subsequent assessment year, is satisfied that any assessee-

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(b) has without reasonable cause failed to furnish an estimate of the advance tax payable by him in accordance with the provisions of sub-section (3) of section 212, or

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he may direct that such person shall, in addition to the amount of tax, if any, payable by him, pay by way of penalty a sum-

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(ii) which, in the case referred to clause (b), shall not be less than ten per cent but shall not exceed one and a half times of seventy-five per cent of the assessed tax as defined in sub-section (5) of section 215; and

The language of this statutory provision is unambiguous and unequivocal. The proportion in which the penalty may be imposed has been fixed by clause (ii) of clause (b) of section 273. The final assessed tax in this case, according to the Tribunal, has been very much reduced than what was originally assessed by the ITO. The final assessed tax, therefore, must form the basis for coming to a conclusion as to what should be the penalty imposable in the proportion as mentioned in clause (ii) of clause (b) of section 273. The Tribunal was, therefore, incorrect in law in holding that notwithstanding the reduction in the assessment of tax, the amount of penalty of Rs. 1,600, as imposed by the ITO, was not unreasonable. As a matter of fact, it was absolutely without jurisdiction since the statute has fixed a maximum limit to which an amount of penalty may be imposed. The Tribunal shall, accordingly, readjust the quantum of penalty in accordance with the provisions of section 273(b)(ii), taking into account the final tax as assessed against the assessee. The second question, thus, is answered in favour of the assessee and against the revenue. Since both the parties have succeeded on one of the points each, there shall be no order as to costs.