Commissioner Of Income Tax, Delhi vs K.L. Bagga
1971 Latest Caselaw 360 Del

JUDGMENT

Hakdayal Hardy, C.J.

(1) This reference under Section 256(1) of the Income-tax Act, 1961 which will hereafter be referred to as the new Act arises out of an order made by the Income-tax Appellate Tribunal, Delhi Bench 'A'. The applicant is the Commissioner of Income-tax while the respondent who will hereafter be referred to as the assessed is Shri K. L. Bagga a dealer in petrol, mobil oil etc.

(2) The assessment year is 1958-59 and the matter concerns the validity or otherwise of the commencement of proceedings for imposition of penalty of Rs. 12,000.00 under Section 271(1)(c) of the Income-tax Act, 1961. The penalty was levied on the ground that the cash credits appearing in certain accounts in the b'JJks of account maintained by the assessed were actually secreted profits of the assessed. The inspecting Assistant Commissioner accordingly imposed a penalty of Rs. 12,000- under Section 271(1)(c) of the new Act on the assesses.

(3) On appeal against the penalty, the Income-tax appellate Tribunal set aside the order of penalty on the ground that the proceedings for the imposition of penalty had not been validly initiated. The relevant facts are that the assessment for the year 1958-59 was completed on 30-3-1963. The Income-tax Officer wrote in that order "issue penalty notice for concealment of income as discussed above. Copy of the assessment order is annexed hereto as other documents." On 1st June., i963, the Income-tax Officer referred the case for imposition of penalty to the Inspecting Assistant Commissioner. He did so in pursuance of the provisions of Section 274(2) of the new Act under which if the 'minimum penalty imposible exceeded the sum of Rs. 1,000.00, the case had to be referred to the Inspecting Assistant Commissioner. On 3rd April, 1964 the Inspecting Assistant Commissioner issued notice to the assessed under S. 274 calling upon him to show cause as to why he should not be penalised for concealing his income. Meanwhile the Inspecting Assistant Commissioner was transferred and his successor issued another notice on 8th September, 1964 again under Section 274. It was only on 24th October 1964 that the Income-tax Officer informed the assessed about the reference of his case for penalty to the Inspecting Assistant Commissioner. Thereafter another notice dated 17-11-1964 was given to the assessed under Section 274.

(4) On these facts the Tribuna] held that even though the Income-tax Officer got the satisfaction that the assessed was liable to penalty under Section 271(1)(c) and he. also gave a direction for issue of a penalty notice during the course of the proceedings for the assessment, the Tribunal was of the view that merely because the. Income-tax Officer felt satisfied and mentioned that fact in the assessment order it cannot take the place of commencement of proceedings for imposition of penalty. According to the Tribunal, the proceedings must commence with the issue of a notice. Unless therefore, the. Income-tax Officer after having got the satisfaction, as is indicated in the assessment order issued notice under Section 274 to the assessed he could not be deemed to have commenced the proceedings for imposition of penalty on the assessed. The Tribunal also held that the notice issued by the Inspecting Assistant Commissioner under Section 274 could not take the place. of 'a notice by the person who got the satisfaction that a cause for penalty had arisen against the assessed. In such a view of the matter. the Tribunal held that the Income-tax Officer did not commence the proceedings for penalty at all and the penalty was levied without such commencement. At the instance of the Commissioner, the following question of law has been referred to this Court :- "WHETHERon the facts and in the circumstances of the case, the proceedings for imposition of penalty under Section 271(1) of the Income-tax act,1961 had been validly commenced against the assessed."

ONbehalf of the Revenue, Shri G. C. Sharma drew our attention to several decisions, one of which is a decision of this Court in Durga Timber Works v. Commissioner of Income-tax (79 Itr 63 ) (1). Question No. 2 in that case related to the commencement of proceedings for the levy of penalty under Section 271(1)(c) of the new Act. On the footing of a decision of Gujarat High Court in D. M. Manasvi v. Commissioner of Income-tax (72 I.T.R. 17) (2) it was said that the combined effect of Section 275 read with Section 271(1) was that the proceedings for the levy of penalty must commence before the completion of the main proceeding which in the instant case meant assessment proceedings. In the judgment which was written by one of us (Hardy J.). it was observed: "The stand taken by the Revenue is that they were in fact so commenced when the Income-tax Officer gave a direction in the assessment order itself that 'a penalty notice should be issued to the assessed for concealment of particulars of its income. The short question therefore is whether such a direction amounts to commencement of penalty proceedings and those proceedings have therefore been commenced in the course of assessment proceedings. The case which seems nearest to the case before us is a decision of Madras High Court in Artisan Press Ltd. v. Income-tax Appellate Tribunal, (33 Itr 670) (3). The decision was no doubt under Section 28 of the Act of 1922, which empowered also the Appellate Tribunal in addition to the Income-tax Officer and the Appellate Assistant Commissioner to initiate action for levy of penalty."

(5) The next case referred to by Shri G. C. Sharma is a Bench decision of Andhi-a Pradesh High Court in Navayug Traders Gunnies Firm, Rajahmundry v. Commissioner of Income-tax, A.P. (79 Itr 519) (4). The assessment in that case was completed on June 5, 1962 and in the order of assessment the Income-tax Officer observed :-"Since the firm has deliberately diverted its profits by creating a bogus firm and carried on business in the name of another person, viz. T. Narasimhamurthy, action under Section 28(l)(c) has been taken separately."

 (6) On the same day the Income-tax Officer passed the following order in the order sheet:    "ORDERdictated. Please issue penalty notice."   

 Apenalty notice under Section 28(3) of the Income-tax Act, 1922 was prepared under date June 5, 1962 signed by the Income-tax Officer on June 20 1962 and served on the assessed on July 13, 1962. Mean while the Income-tax Act 1961 had come into force on April 1, 1962 and as the assessment was completed after the coming into force of the 1961-Act, the penalty proceedings had to be taken under the Income-tax Act of 1961 only. A fresh notice was thereupon issued under Section 274 read with S. 271 of the 1961-Act and proceedings were subsequently referred to the Inspecting Assistant Commissioner under Section 274(2) of the Act. It was urged before the Inspecting Assistant Commissioner that the notices dated June 5, 1962 and April 9, 1964, were not validly issued and that there was no notice before the completion of assessment proceedings as required by Section 275 of the Income-tax Act, 1961 and therefore the penalty proceedings were void. The contention was rejected by the Inspecting Assistant Commissioner and a penalty of Rs. 60,000.00 was imposed by him. The order was confirmed by the Income-tax Appellate Tribunal and thereafter the following question of law was referred to the High Court :-    "WHETHERon the facts and in the circumstances of the case, proceedings for imposition of penalty have been commenced validly and within the time limit, if any, prescribed by the Income-tax Act, 1961."  

 IT is true that while answering the question the learned Judges confined themselves to 'Section 275 of the new Act and held that the said section did not prescribe any requirement regarding the commencement of the proceedings for the imposition 'of penalty. The question as to when the penalty proceedings may be said to have commenced and whether the order dated June 10, 1962 in the order sheet, could be said to have set in motion the penalty proceedings, was therefore left un-decided. The case is therefore of no assistance to the argument of the learned counsel.  

 (7) Learned counsel then referred to a decision of Calcutta High Court in Commissioner of Income-fax, West Bengal v. A. K. Dos (77 I.T.R. 31) (5). In the order of assessment which was recorded by the Income-tax Officer on 31-8-1964 it was stated that the proceedings under Section 271(1)(c) for the imposition of penalty had already been started. A notice under Section 271 read with section 274 was issued by the Income-tax Officer to the assessed on 29-8-1964 and on the same day the cases were transferred to the Inspecting Assistant Commissioner as the penalty leviable was more. than Rs. 1000.00. The Inspecting Assistant Commissioner issued notice to the assessed under Section 274(1) on March Ii, 1965. The Inspecting Assistant Commissioner held that penal proceedings were attracted to the case, but in view of the co-operation extended by the assessed, limited the penalty to 33 per cent of the tax sought to be evaded. On appeal to the Tribunal the assessed contended that the penalty proceedings were vitiated as they were commenced only with the Inspecting Assistant Commissioner's notice dated March Ii, 1965 and were not commenced before the completion of the assessment proceedings. The assessed prayed for mitigation of the amounts of penalty. The Appellate Tribunal held that the penalty proceedings were properly initiated by the reference made by the Income-tax Officer to the Inspecting Assistant Commissioner on August 29, 1964, but reduced the penalty much below the 20 per cent limit holding that the powers of the Inspecting Assistant Commissioner were not confined by the provisions of Section 271(1)(iii) and there could be no restrictions on the powers of the Appellate Tribunal in hearing appeals from the orders of penalty imposed by the Inspecting Assistant Commissioner. Question No. 2 which was raised at the instance of the assessed was in these terms :-    "WHETHER,on the facts and in the circumstances of the case, the Tribunal was right in holding that the penalty proceedings were properly initiated and that the penalty orders passed by the Inspecting Assistant Commissioner were valid in law ?"  

 ITwas held that the penalty proceedings commenced on August 29, 1964 when the Income-tax Officer referred the case under Section 274(2) or at any rate, on August. 31, 1964 with the passing of the assessment orders and notice under Section 274(1). The penalty proceedings were therefore properly initiated and the penalty orders passed by the Inspecting Assistant Commissioner were valid in law.  

 (8) Learned counsel for the assessed contended on the other hand that in the Calcutta case penalty proceedings had commenced on August 29, 1964 i.e. two days before the assessment order was passed by the Income-tax Officer. Learned counsel however failed to notice what was said by the High Court that in any event, penalty proceedings had commenced on August 31, 1964 when the assessment orders were passed and thereupon a notice under Section 274(1) was issued by the Inspecting Assistant Commissioner. That notice was issued on March Ii, 1965. The case therefore fully supports the view contended turn by the counsel for the Revenue.  

 (9) The last case to which our attention was invited by the counsel for the Revenue is a decision of Bombay High Court (Nagpur Bench) in Padgilwar Brothers v. Commissioner of Income-tax, Poona (81 Itr 258)(6). In his order of assessment dated February 21, 1963 the Income-tax Officer held that the assessed had concealed income & had exposed himself to penal action indicated by Section 271(1)(c) of the new Act and that a notice under Section 274(1) for concealment of income was being issued separately. On the same day the Income-tax Officer issued a notice to the assessed under S. 274(1) read with Section 271(1)(c) to show cause why penalty should not be imposed. On November 13, 1964 the Income-tax Officer referred the matter to the Inspecting Assistantommissioner because the minimum penalty that was leviable was in excess of Rs. 1000.00. The Inspecting Assistant Commissioner issued notice to the assessed on December 1, 1964 under Section 274(1) and on February 1, 1965 an order imposing a penalty was passed. On a reference to the High Court, after the Tribunal had merely directed the reduction of the amount of penalty, it was contended for the assessed, inter alia, that once the Income-tax Officer found that the amount of penalty leviable would be in excess of Rs. 1000.00 he had no jurisdiction to issue a notice and it should be held that no notice, in law was issued. The notice issued by the Inspecting Assistant Commissioner was also cliamed to be invalid on the ground that when the Inspecting Assistant Commissioner issued the notice there were no proceedings out of which the penalty proceedings could be said to have arisen whereas under Section 271(1) it is only during the course of any proceedings that a notice under section 274(1) ought to be issued. It was held that the notice dated February 21, 1963 issued by the Income-tax Officer and the notice dated December 1, 1964 issued by the Inspecting Assistant Commissioner were not beyond the jurisdiction of those officers. Learned Judges observed :-    "THUSit is clear that in the instant case, there is neither infraction of section 271(1)(c) nor 'of section 274(1) or (2) at all. As we have pointed out above, the Income-tax Officer recorded a finding in the very order of assessment that there has been a concealment of income and also directed issuance of notice. The actual issuance of the notice was also on the same date by the Income-tax Officer in this case. We do not think that the issuance of a notice is prohibited to find out whether there is a case for imposition of penalty and where it is found that the penalty liable to be imposed will be excess of Rs. 1000.00 in the minimum, the requirement that the matter should be referred to the Inspecting Assistant Commissioner restricts the jurisdiction of the Income-tax Officer to issue notice as in the instant case. We also do not think, in view of the pronouncement of the Supreme Court, that the Inspecting Assistant Commissioner lacks the power to issue notice under S. 274(1) which he was bound to do on December 1, 1964, because the proceedings for assessment were already completed before the Income-tax Officer being the proceedings out of which the penalty may arise."  

COUNSELfor the assessed submitted that in the case before the Bombay High Court the Income-tax Officer had not merely recorded a finding in the order of assessment but the actual issuance of the notice was also on the. same date by him. In the instant case, the Income-tax Officer had without issuing such notice, sent the case to the Inspecting Assistant Commissioner. That would however not make any difference. Once the Income-tax Officer had given a finding that there was a case of concealment of income and he was also of the opinion that the penalty which the assessed, was liable to pay exceeded Rs. 1000/'-, he had to send the case to the Inspecting Assistant Commissioner and it is the latter who had to issue a fresh notice to the assessed to show cause why penalty should not be imposed on him. As in the Bombay case the proceedings for assessment had already been completed but the Inspecting Assistant Commissioner did not lack the power to issue a notice for the penalty proceedings actually arose out of the assessment order.

(10) Counsel for the assessed referred us to a decision of a Single Judge of Calcutta High Court in Ram Chandra Sarda v. Income-tax Officer, "B" Ward, District 1(1) & others (78 Itr 325) (7) where a contrary view appears to have been taken. According to the learned Judge, the satisfaction which is a condition precedent for the exercise, of power under Section 271 of the new Act must be arrived at aliunde before the penalty proceedings are commenced. In a case where the penalty imposable exceeds Rs. 1000.00 the Income-tax Officer has to defer the passing of the final order of assessment until the case has been referred to the Inspecting Assistant Commissioner under Section 274(2) of the Act and his tentative satisfaction as to whether the penalty proceedings should be commenced or not, is arrived at. The learned Judge referred to a decision of the Supreme Court in Commissioner of Income-tax v. S. v. Angidi Chelliar (44 Itr 739) (8) where Section 28 of the Income-tax Act, 1922 came up for consideration before the Supreme Court. At page 745 of the report it was observed :- "THEpower to impose penalty under Section 28 depends upon the satisfaction of the Income-tax Officer in the course of proce,edings under the Act; it cannot be exercised if he is not satisfied about the existence of conditions specified in clauses (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 proceedings under the Act, and not issue of a notice or initiation of any step for imposing penalty is a condition for the exercise of the jurisdiction."

IT is true that the provisions of Section 271 are in, pari matena with thei provisions of Section 28 of the Act of 1922 but there is nothing in the passage extracted above which shows that a direction for initiating penalty proceedings cannot be taken by the Income-tax Officer in the assessment order itself. There is no doubt that the proceedings to levy penalty has not to be commenced by the Income-tax Officer before the completion of the assessment proceedings by him, but that does not mean that no such direction can be given by him in the assessment order itself. What is material is the satisfaction of the Income-tax Officer and that satisfaction has to be arrived at in the course of proceedings under the Act. Once that satisfaction is arrived at a direction for initiating proceedings can be given by him in the assessment order.

(11) There is another answer to the view that found favor with the learned Single Judge, of Calcutta High Court. It is the assessment order that quantifies the taxable income of the assessed and this cannot be done till the Income-tax Officer finally arrives at the result. So long as there is no quantification it is not possible for the Income-tax Officer lo ascertain as to whether the assessed had concealed particulars of his income or has furnished inaccurate particulars of his income. There can be therefore no real satisfaction of the Income-tax Officer that the case attracts penalty. If the Income-tax Officer has to hold the proceedings in abeyance as the learned Judge would desire him to do and not pass the order of assessment until the case has been referred to the. Inspecting Assistant Commissioner under Section 274(2) of the Act, the Income-tax Office cannot record a finding. On the other hand, he would leave, the whole question to the Inspecting Assistant Commissioner and it will be the satisfaction of the Inspecting Assistant Commissioner that will have to be arrived at. This may apply not only to a case where the penalty imposable exceeds Rs. 1000.- but also to a case where the penalty amount may be below that figure. In any event, the assessment proceedings will have to be held in abeyance.. This does not seem to us to be a correct approach to the problem. In the case of penalty proceedings where the penalty imposable is less than Rs. 1000.00 the. case has not to be referred to the Inspecting Assistant Commissioner, but in the other case the Income-tax Officer has to refer the case to the Inspecting Assistant Commissioner. In either event he has to record a satisfaction that the case attracts penalty. It is for the quantifications of penalty that a reference has to be made to the Inspecting Assistant Commissioner under Section 274(2) of the new Act and once a reference has been made. to the Inspecting Assistant Commissioner in a case where the penalty imposable exceeds Rs. 1000.00, the. latter has all the powers for imposition of penalty.

(12) Mr. Bajaj lastly submitted that there have to be two notices to the assessed before proceedings for penalty are initiated against him. The first notice has to be given by the Income-tax Officer and after the assessed had filed a reply and has been heard and the Income-tax Officer has come to the conclusion that the penalty leviable exceeds Rs. 1000.00 then the case has to be sent to the Inspecting Assistant Commissioner. In the present case, no such notice was actually issued by the Income-tax Officer to the assessed. We do not think it is necessary for the Income-tax Officer to issue a notice to the. assessed before the case. is sent to the Inspecting Assistant Commissioner. While giving a finding in the assessment order, the Income-tax Officer is in the know of the provisions of the Act. He. knows the extent of income concealed by the assessed. He also knows the amount of penalty that has to be, levied on the assessed. He may therefore straight-away send the case to the Inspecting Assistant Commissioner without issuing a separate notice himself. In the instant case, the penalty levied on the assessed being Rs. 12,000.00, the question does not arise for consideration at all.

(13) The result is that the question is answered in favor of Revenue. The. assessed will also pay the costs of these proceedings. Counsel's fee Rs. 200/'-.

(14) Shri Kirpa Ram Bajaj further contended that he wanted to raise a few other points regarding the merits of the case; but since the order of imposition of penalty was quashed by the Tribunal, the other points were not considered. It will be open to the assessed to raise those points when the case goes back before the Tribunal.