Commissioner of Income Tax vs K.R. Chinnikrishna Chetty

Ratnam, J.—In this reference u/s 256(2) of the Income Tax Act, 1961 (hereinafter referred to as ""the Act""), at the instance of the Revenue,

the following question of law has been referred to us:

Whether, on the facts and in the circumstances of the case, the Appellate Tribunal was justified in considering the case on merits when it has set

aside the assessment appeal for ascertaining the correct facts regarding the addition on which penalty was levied ?

The assessee is an individual and a partner in the firm of Chinnikrishna Chetty. Besides his share income from business, he derived income from

properties as well as from other sources. In respect of the assessment year 1965-66, he returned an income of Rs. 42,396 and the Income Tax

Officer completed the assessment determining the total income of the assessee at Rs. 64,960. In so doing, the Income Tax Officer added a sum of

Rs. 31,193 as income of the assessee from undisclosed sources. The amount so added represented the difference between the peak credit of the

assessee in his personal accounted with the firm of Rs. 1,11,193 as on October 15, 1964, as against the admitted figure of Rs. 80,000. The

assessee attempted to explain the difference by stating that one R. Parandamiah, who had been advances a loan of Rs. 40,000 in March, 1964,

had returned four sums of Rs. 10,000 each on June 4, 1964, July 4, 1964, August 5, 1964 and September 10, 1964. This explanation offered by

the assessee was not accept by the Income Tax Officer and he added a sum of Rs. 31,193 as the income of the assessee from undisclosed

sources. Initiating penalty proceedings against the assessee, the Income Tax Officer referred the matter to the Inspecting Assistant Commissioner

of Income Tax u/s 274(2) of the Act. After issuing a notice to the assessee and hearing his representative on several occasions, the Inspecting

Assistant Commissioner was of the view that the assessee had not made available satisfactory evidence in support of the loan of Rs. 40,000 and its

return by R. Parandamiah and held that the explanation offered by the assessee was unacceptable and a penalty of Rs. 11,290 was imposed on the

assessee. The assessment order was the subject-matter of an appeal before the Tribunal in I.T.A. No. 1097 (Mds)/1970-71 and on June 25,

1973, the Tribunal directed the Appellate Assistant Commissioner to consider thi affidavit filed by the assessee from R. Parandamiah and to

dispose of the appeal afresh. Against the order imposing penalty, the assessee preferred an appeal in I.T.A. No. 2159 (Mds)/1971-72 and the

Tribunal proceeded to consider the levy of penalty on merits. Before the Tribunal, it was contended on behalf of the assessee that R Parandamiah

had submitted an affidavit sworn to on April 18, 1970, before the Inspecting Assistant Commissioner along with the reply submitted in answer to

the show-cause notice issued by the Inspecting Assistant Commissioner and that the Inspecting Assistant Commissioner had erroneously

proceeded on the footing that no evidence was produced in support of the assessee''s case. The assessee also contended before the Tribunal that

the affidavit of R. Parandamiah to the effect that the assessee had been repaid a sum of Rs. 40,000 by him should be accepted and that even apart

from the explanation offered by the assessee, there was no other material on record to show that the income had been concealed by the assessee.

The Revenue maintained that the assessee did not produce any evidence before the Inspecting Assistant Commissioner in support of the repayment

of Rs. 40,000 by R. Parandamiah and that if the affidavit of R.Parandamiah should be taken note of the matter must be remitted to the Inspecting

Assistant Commissioner for further enquiry. The Tribunal noticed that the appeal preferred by the assessee against the order of assessment has

been disposed of on June 25, 1973, directing the Appellate Assistant Commissioner to consider the affidavit filed by the assessee and dispose of

the appeal afresh, but took the view that the explanation offered by the assessee stood uncontroverted and that it was unnecessary to remit the

matter to the Inspecting Assistant Commissioner. In that view, the Tribunal held that the assessee is not guilty of concealment of income either u/s

27(1)(c) of the Act or under the Explanation thereto and cancelled the penalty.

Learned counsel for the Revenue contended that when the assessment for the relevant year had been set aside and the matter had been remitted

to the Appellate Assistant Commissioner for considering the affidavit filed by the assessee''s from R. Parandamiah and dispose of the appeal

afresh, it was not open to the Tribunal to go into the merits of the case for levying penalty, reliance in this connection was also placed upon the

decision in CIT v. Hind Mercantile Corporation (In liquidation) (Tax Case No. 335 of 1977, dated September 22, 1981) - since reported in

Commissioner of Income Tax Vs. Hind Mercantile Corporation (In Liquidation), . On the other hand, learned counsel for the assessee submitted

that it was open to the Tribunal to independently consider the merits of the case regarding the levy of penalty. Even though the order of assessment

had been set aside and the matter remitted to the Appellate Assistant Commissioner.

Inasmuch as the order of assessment passed against the assessee had been set aside by the Tribunal by its order in I.T.A. No. 1097

(Mds)/1970-71 dated June 25, 1973, which has also been noticed in paragraph 6 of its order, the question of levy of penalty cannot be

considered to be available for adjudication by the Tribunal. When, even according to the Tribunal, the order of assessment had been set aside and

the matter had been remitted to the Appellate Assistant Commissioner to consider the affidavit of R. Parandamiah, it follows that the issue relating

to the levy of penalty cannot have any independent existence. In order to consider the question whether the levy of penalty is justified or not, the

assessment should be in existence. Since the assessment order had been set arise and the matter remitted, the question of levy of penalty can be

considered only in the light of the assessment to be made on the assessee pursuant to the directions given by the Tribunal while setting aside the

assessment order. As the Tribunal was fully aware of the circumstance that it had set aside the assessment order in an appeal preferred by the

assessee, it follows that the question of levy of penalty remained to be considered on the basis of the assessment to be made pursuant to the

directions given by the Tribunal after setting aside the assessment already made and remitting the matter to the Appellate Assistant Commissioner.

In other words, when the assessment pursuant to the directions of the Tribunal remained to be completed, there is no question of either levy of

penalty or cancellation of penalty already levied. On the facts and circumstances of this case. The Tribunal, undoubtedly, acted erroneously in

proceeding to cancel the penalty. We are supported in this view of court by the decision in Commissioner of Income Tax Vs. Hind Mercantile

Corporation (In Liquidation), . In that case also, as in this case, the Income Tax Officer passed an order of assessment and on further appeal, the

Tribunal had set aside the assessment. However, the Inspecting Assistant Commissioner initiated proceedings for levy of penalty and also levied a

penalty of Rs. 27,226 and the question before the Tribunal was whether the levy of penalty was proper. The Tribunal cancelled the penalty, as, for

another year, the levy of penalty had been cancelled on the ground that the additions did not represent the undisclosed income of the assessee. In

considering the propriety of the Cancellation of the penalty imposed u/s 271(1)(c) of the Act, the Division Bench pointed out that when the

assessment itself had been set aside. The consideration of the question of levy of penalty may survive, the assessment proceedings should be alive

and when once the assessment had been set aside, the penalty proceedings could not have been terminated by cancellation of the penalty levied,

as, whether penalty was leviable or not to be considered in the light of the findings given in the fresh assessment order to be made as a result of the

directions given by the Tribunal while setting aside the same. The ratio of this decision would squarely apply to this case also. We are. Therefore

not disposed to accept the contention of learned counsel for the assessee that despite the setting aside of the order of assessment, it was open to

the Tribunal to examine the question of the levy of penalty on merits. We, therefore, answer the question referred to us in the negative and in favour

of the Revenue. The Revenue will be entitled to the costs of this reference. Counsel''s fee Rs. 500.