K.C. Mukherjee and Another vs Commissioner of Income Tax

V. Ramaswami, C.J.—In this case the two assessees were equal partners in the firm of K.C. and P.C. Mukherjee of ijua. Assessments were originally made for the years 1945-46, 1946-47 and 1947-48 on the share income return of the two assessees. Later on it transpired that the two assessees had made substantial investments in two private limited companies. Mohalbanj Collieries Limited and Central Kankanee Collieries Limited, the amounts involved being Rs. 25,000/- for the calendar year 1944, Rs. 55,348/-for the calendar year 1945 and Rs. 55,000/- for the calendar year 1946, in each case. After having satisfied himself that income had escaped assessment the Income Tax Officer issued notices u/s 34 on the 8th September, 1949, to both the assessees in respect of the three assessment years. The assessees made returns u/s 34 and declared the following amounts of income each:

Rs.

1945-46 ... 45,325 ... Share income

14,000 ...

Other sources, cash introduced shown as income in the absence of proof.

Total. ...

59,325

1946-47 ... 31,772 ... Share income

23,448

... Other sources

Total. ... 55,220

1947-48 ... 24,581 ... Share Income

55,000 ...

Other sources, cash introduced shown as income in absence of evidence to prove the same.

Total. ... 79,581

The Income Tax Officer levied penalties on the basis of escaped tax as against both the assessees. The assessees preferred appeals to the Appellate Assistant Commissioner, but the appeals were dismissed. The matter was taken by the assessees on further appeals to the Income Tax Appellate Tribunal. It was contended on their behalf that Section 34-proceedings were separate and distinct from the original assessment proceedings, and as there had been no concealment in Section 34-proceedings there could be no legal imposition of penalty u/s 28 of the Income Tax Act. The contention was rejected by the Income Tax Appellate Tribunal and it was held that the penalties were validly imposed upon the two assessees.

u/s 66(1) of the Income Tax Act the Income Tax Appellate Tribunal has submitted the following question of law for the determination of the High Court:

"Whether on a proper construction of Section 34 and Section 28 of the Income Tax Act of 1922, the levy of penalties in Section 34 proceedings is valid?"

The answer to this question depends upon the proper interpretation of Section 28 of the Income-tar Act, which runs as follows:

"28. Penalty for concealment of income or improper distribution of profits. (1) If the Income Tax Officer, the Appellate Assistant Commissioner or the Appellate Tribunal, in the course of any proceedings under this Act, is satisfied that any person--

(a) has without reasonable cause failed to furnish the return of his total income which he was required to furnish by notice given under Sub-section (1) or Sub-section (2) of Section 22 or Section 34 or has without reasonable cause failed to furnish it within the time allowed and in the manner required by such notice or

(b) has without reasonable cause failed to comply with a notice under Sub-section (4) of Section 22 or Sub-section (2) of Section 23, or

(c) has concealed the particulars of his income or deliberately furnished inaccurate particulars of such income,

he or it may direct that such person shall pay by way of penalty, in the case referred to in Clause (a), in addition to the amount of the Income Tax and super-tax, if any payable by him, a sum not exceeding one and a half times that amount, and in the cases, referred to in Clauses (b) and (c), in addition to any tax payable by him, a sum not exceeding one and a half times the amount of the Income Tax and super-tax, if any, which would have been avoided if the income as returned by such person had been accepted as the correct income:

x x x x x"

It was submitted by Mr. Mitra on behalf of the assessees that the proceedings u/s 34 of the Income Tax Act are separate proceedings from the original assessment proceedings. It was pointed out that the proceedings u/s 34 start with the service of notice and, therefore, they are fresh proceedings. It was submitted that the proceedings u/s 34 relate to escaped assessment, that is, assessment which has escaped totally or partially, and such proceedings are separate and distinct from a prior proceeding u/s 23 of the Act.

Mr. Mitra also addressed the argument that if there has been an assessment u/s 23 of the Act and thereafter there is a proceeding u/s 34 because of the escape of any item of income from the assessment, then penalty could be levied only in respect of defaults or other acts committed in the course of that proceeding and not in the course of the original proceeding which ended with the assessment. The contention of the assessees was, therefore, that it was not competent for the Income Tax Officer to levy penalty in the course of proceedings u/s 34 of the Income Tax Act for a default not committed in the course of those proceedings.

I am unable to accept this argument as correct. It is true that once an assessment has been made u/s 23 of the Act or an order is passed by the Income Tax Officer that no assessment can be levied, the proceedings are closed and the proceedings cannot be reopened and the result of the proceedings cannot be altered in any manner except in the manner provided by Sections 33A, 33B. 34 and 35 of the Income Tax Act. It is also manifest that u/s 34 of the Act there is no de novo assessment in the sense that it is open to the assesee also to show that he has been wrongly assessed in respect of matters which are not covered by the notice u/s 34. But that does not mean that for the purpose of Section 28 the two proceedings are separate and distinct.

Essentially the proceeding u/s 34 with regard to the escaped income relates to the same proceeding which is commenced with the publication of the general notice u/s 22(1), In some respects it may lead to supplementary assessment and in other cases it may result in an assessment for the first time. There is however no justification for the argument that proceedings u/s 34 are separate and distinct proceedings from the original assessment proceedings. I, therefore, reject the argument of learned counsel for the assessee on this point and hold that proceedings u/s 34 essentially relate to the same proceeding which is initiated with the publication of the general notice u/s 22(1) of the Act.

My view is that so long as the proceedings u/s 34 relate to the assessment for the same period and for the same assessee as the original assessment, the Income Tax Officer is competent to levy a penalty on any ground open to him u/s 28(1), even though the default relates to the prior proceeding.

Even upon the assumption that a proceeding u/s 34 is a separate proceeding from the original proceeding, there is nothing in the language of Section 28 of the Income Tax Act to suggest that the Income Tax Officer can impose penalty under that section only if the default occurs in the course of the Section 34 proceeding.

The opening clause of Section 28 states that "it the Income Tax Officer, the Appellant Assistant Commissioner or the Appellate Tribunal in the course of any proceedings under this Act, is satisfied that any person..... (c) has concealed the particulars of his income or deliberately furnished inaccurate particulars of such income.... ."

Grammatically speaking, the phrase "in the course of any proceedings" only governs the satisfaction of the Income Tax Officer, the Appellate Assistant Commissioner or the Appellate Tribunal, and not concealment by the assessee of the particulars of income referred to in Sub-section 1(c) of Section 28.

It may be that the satisfaction of the Income Tax Officer occurs in the course of Section 34 proceedings, but the section does not say that the default of the assessee should necessarily occur in the same Section 34 proceedings. The section contemplates that the default of the assessee may have occurred in a prior proceeding u/s 22(1) or Section 22 (2), but still the Income Tax Officer will be competent to impose penalty u/s 28 of the Income Tax Act if he is satisfied in the course of the Section 34 proceedings that a default bad occurred either in that proceeding or in any prior proceeding.

The view that I have expressed is borne out by a decision of the Madras High Court in C. Vs. GOVINDARAJULU IYER v. COMMISSIONER OF Income Tax, MADRAS., , where an assessee had failed to furnish a return of his total income as required by a notice u/s 22(1) of the Inconie-tax Act, but no notice u/s 22(2) was issued by the Department within the year of assessment. It was held by Rajamannar, C.J. that the Income Tax Officer was competent, in the course of the proceedings taken by him u/s 34 of the Act, to levy a penalty u/s 28(1)(a) for failure without reasonable cause to furnish a return pursuant to the notice u/s 22(1).

It was also observed in that case that so long as the proceedings u/s 34 relate to the assessment for the same period as the original assessment, the Income Tax Officer was competent to levy a penalty on any ground open to him u/s 28(1), even though it related to a prior proceeding. Learned Counsel referred to the decision of the Allahabad High Court in Mayaram Durga Prasad v. Commissioner of Income Tax, United Provinces 5 ITC 471. With great respect I think that that decision does not lay down the correct law on the point. On the contrary, I would prefer to follow the decision of the Madras High Court in C. Vs. GOVINDARAJULU IYER v. COMMISSIONER OF Income Tax, MADRAS., , as I have already indicated.

For the reasons expressed I hold that la the circumstances of this case the levy of penalty upon both the assessees u/s 28 of the Income Tax Act is legally valid. I would accordingly answer the question of law referred by the Income Tax Appellate Tribunal to the High Court in favour of the Income Tax Department and against the assessee. The assessee must pay the cost of this reference. Hearing fee Rs. 250/-.

Kanhaiya Singh, J.

I agree.