Commissioner Of Income-Tax, ... vs Rajinder Kumar Somani
1980 Latest Caselaw 204 Del

JUDGMENT

S. Ranganathan J.

1. This is a reference under s. 256(1) of the I.T. Act, 1961, and, relates to the assessment year 1959-60. The applicant is the Commissioner of Income-tax and the respondent-assessed is Rajinder Kumar Somani. The questions of law which have been referred to us for decision are as follows:

"(1) Whether, on the facts and in the circumstances of the case, the Tribunal was right in holding that penalty proceedings had not been initiated correctly and thereby cancelling the levy of penalty under section 271(1)(a) of the Act of 161 ?

(2) Whether, on the facts and in the circumstances of the case, the Tribunal was right in law in holding that proceedings for the imposition of penalty under section 273 had not been validly initiated and thus cancelling the penalty levied under section 273 of the Income-tax Act, 1961 ?"

2. The facts leading to the reference may be briefly stated. For the assessment year 1959-60, the assessed should have filed an estimate under s. 18A of the Indian I.T. Act, 1922, and paid advance tax but failed to do so. His return of income under s. 22(1) of the Indian I.T. Act, 1922, was also due to be filed by June, 1959, but was filed only on August 5, 1961. The ITO completed the assessment of the assessed on November 28, 1963. At the bottom of the assessment order, after determining the total income at Rs. 64,663, the ITO observed "Penalty proceedings for not filing the return in time and for not paying the tax in advance by not complying with provisions of the s. 18A(3) of the Indian I.T. Act, 1922, are to be initiated separately."

3. The ITO issued two notices to the assessed under s. 274 of the I.T. Act, 1961, calling upon him to show cause why penalties should not be levied under s. 273 of the Act for failure to pay advance tax and under s. 273 of the Act for failure to pay advance tax and under s. 271(1)(a) for the delay in the filing of the return. The assessed contended, inter alia, that the penalty proceedings had not been initiated in the course of assessment proceedings and were, therefore, invalid. This contention was rejected by the ITO who held that penalty proceeding had been commenced on November 28,1963 itself when the assessing officer had recorded the fact of initiation of penalty in his order under s. 28(2). He proceeded to consider whether there was reasonable cause for the failure on part of the assessed to pay advance tax and file the return in time and came to the conclusion that the penalties were called for. He, therefore, imposed penalties of Rs. 12,705 and Rs. 4,000, respectively, under s. 271(1)(a) and s. 273 by separate orders dated November 26, 1975.

4. On appeal, the AAC agree with the ITO that the penalty proceedings had been initiated before the completion of the assessment proceedings. However, on the quantum of the penalty he gave some relief. He reduced the penalty under s. 271(1)(a) to Rs. 9,656 and that under s. 273 to Rs. 2,033 only. The assessed was not satisfied with the relief given by the AAC and preferred appeals to the Appellate Tribunal. Several contentions were raised before the Appellate Tribunal, but having regard to the terms of the questions referred to us, only one of the contentions is material. This contention was that, in the case of both the penalties, the proceedings had not been initiated in the course of the assessment proceedings. It was pointed out that the penalty notices had been issued only after the assessment was completed and the demand notice issued and served on the assessed. This argument was accepted by the Tribunal. The Tribunal referred to the decision of the Madras High Court in the case of Artisan Press v. Income-tax Appellate Tribunal [1958] 33 ITR 670. The Tribunal pointed out that in the instant case, the ITO, in the assessment order, did not direct the office to issue any notice for penalty. The notices were not even served upon the assessed along with the assessment order and demand notice. The penalty proceedings, had, therefore, not been initiated during the pendency of the assessment proceedings, and hence, in the view of the Tribunal, the levy of penalties had to be set aside. The Tribunal, therefore, allowed the appeals preferred by the assessed. Hence, this reference.

5. Under the Indian I.T. Act, 1922, the imposition of penalty was governed by s. 28. Though the penalty for failure to file an estimate and pay advance tax was provided for in s. 18A(9) of the Act, that provision only attracted proceedings under s. 28. Section 28 did not impose any time limit for the passing order. The penalty order could be passed at any time, though there have been some decisions in which orders of penalty passed after an unconscionably or unreasonably long lapse of time have not been upheld. All that the section required was that the ITO (amongst others) could proceeds to levy a penalty only if he was satisfied in the course of proceedings before him that the assessed had committed certain types of defaults such as, failure without reasonable cause to file a return; failure without sufficient cause to comply with statutory notices and concealing or furnishing of incorrect particulars of income. In other words, the Act only required that before the assessment was completed the ITO should have arrived at a prima facie conclusion that defaults of the above nature or any of them had been committed by the assessed. It was not necessary further that this conclusion of the ITO must have been translated into action by initiation of steps against the assessed in this regard such as, issue of a penalty notice by the Officer himself or issue of directions by the ITO for such issue. This position was explained by the decision of the Supreme Court in the case of CIT v. S. V. Angidi Chettiar [1962] 44 ITR 739 at page 745.

6. The 1961 Act has changed the above position. A careful perusal of s. 275 of this Act shows that it has laid down bars of limitation in two respects, one explicitly and the other by necessary implication. The explicit limitation is that the order imposing the penalty has to be passed within a particular time. While we are not concerned with that period of limitation here, it is necessary to notice that the period of limitation prescribed starts running from the "end of the financial year in which the proceedings initiated are completed." Thus, indirectly, but by necessary implications, the statute has also provided that the action for imposition of penalty must be initiated in the course of (as far as we are concerned) the assessment proceedings. It is thus not enough that the ITO is satisfied in the course of the assessment proceedings that a case of penalty exists, it is further necessary that he should have initiated some action for the imposition of penalty in the course of such proceedings. It depends on the facts of each case whether any such action has been initiate before the date of completion of the assessment. If even before the completion of the assessment, the ITO has issued a penalty notice, it is clear that he has taken necessary action for the imposition of penalty. The above condition can also be said to be satisfied where, though a penalty notice has not been issued before that date, it is seen that the officer given a direction to his officer before completing the assessment that such a notice should be issued. Similarly, in cases governed by s. 274(2) (which has been deleted w.e.f. April 1, 1976), action could be considered to have been initiated if the officer had made a reference to the IAC under that provision though the IAC might apply his mind and issue a further notice to the assessed only long thereafter. But some definite step by way of initiation of penalty proceedings should be taken by the officer before the assessment proceedings come to an end.

7. The above position is quite clear from the term of the section itself and has also been clarified in a number of decision which have been collected on page 1225 of Vol. 1 of the 7th Edn. of Kanga and Palkhivala. (The Law and Practice of Income tax). It is not necessary to set out all these decision here. In the case of Artisan Press [1958] 33 ITR 670 (Mad); referred to by the Tribunal, a penalty had been levied under the 1922 Act by the Income-tax Tribunal which it then had the power to do. On the language of s. 28, it was necessary for the Tribunal to have been satisfied about the existence of a case for penalty before the proceedings by way of appeal before it had come to an end. It was held that a direction in the order sheet on the date of the hearing of the appeal "a notice is issued section 28" was sufficient compliance with the statutory requirement. Again, in Manasvi's case [1969] 72 ITR 17 (Guj) (which has been confirmed by the Supreme Court on different grounds)-see [1972] 86 ITR 557), it was held that a direction in the assessment order for the issue of a notice for proposed penal action under s. 271(1)(a) was sufficient. The Delhi High Court in the case of Durga Timber Works v. CIT [1970] 79 ITR 63 has also agree with the above view.

8. In the present case, unfortunately, it seems to us that the requirements of the statute have been fulfillled. There is no direction for issue of penalty notice in the assessment order. All that the ITO has observed is that penalty proceedings are to be initiate separately. There are words indicative not of an initiation of steps for levy of penalty but only of possible future initiation. On behalf of the department, Sri Mukherjee submitted that words used in the assessment order should not be construed narrowly and that the sentence at the end of the assessment order (extracted earlier) should be treated as sufficient for the purpose. We are unable to accept this submission. As explained above, the language of s. 275 envisages some positive step on the p [art of the ITO being taken before the completion of the assessment. In our opinion, it is not enough for the officer to record that penalty proceedings are to be or will be initiated separately. There should be some other step such as an actual direction to the office to issue a penalty notice (which thereafter needs only ministerial compliance), the actual issue of a penalty notice, a reference to the IAC or some other similar action. It is also not without significance that in this case, though the assessment was completed on November 28,1963, the penalty notices were issued by the ITO only as late as December 16,1963. As lightly pointed out by the Tribunal, in case where the ITO has initiated action during the assessment proceedings, the usual course is for the penalty notice to be issued and serve: simultaneously with the assessment order and the demand notices. In the present case, even that was not done. The penalty notices were served upon the assessed only after the service of the assessment order and the demand notice. All these circumstances clearly justify the conclusion of the Tribunal that no action had been initiated in the course of the assessment proceedings for the levy of penalty. The conclusion of the Tribunal is one of fact based on the facts and circumstances of the case with which this court will not interfere in a reference.

9. For the above reasons, we have come to the conclusion that the questions referred to us have to be answered in the affirmative and in favor of the assessed. In the circumstances of the case, however, we make no order as to costs.