The Commissioner of Income Tax vs Rajinder Kumar Somani

S. Ranganathan, J.

(1) This is a reference u/s 256(1) of the Income Tax Act 1961 and relates to the assessment year 1959-60. The applicant is the Commissioner of income tax and the respondent assessed is Rajender 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 u/s 271(1)(a) of the Act of 1961 ?

(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 u/s 273 had not been validly initiated and thus cancelling the penalty levied u/s 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 u/s 18A of the Indian Income Tax Act, 1922 and paid advance tax but failed to do so. Its return of income u/s 22(1) of the Income Tax Act 1922 was also due to be filed by June, 1959 but was failed only on 5-8-1961. The income tax Officer completed the assessment of the assessed on 28-11-1963. At the bottom of the assessment order, after determining the total income at Rs. 64,663, the Income Tax Officer observed :

" PENALTY proceedings for not filing the return in time and for not paying the tax in advance by not complying the provisions of Section 18A(3) of the I.T. Act, 1922 are to be initiated separately.

(3) The Income Tax Officer issued two notices to the assessed u/s 274 of the Income Tax Act 1961 calling upon him to show cause why penalties should not be levied u/s 273 of the Act for failure to pay advance tax and u/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 Income Tax Officer who held that penalty proceedings had been commenced on 28-11-1963 itself when the assessing officer had recorded the fact of initiation of penalty in his order u/s 23(3). He proceeded to consider whether there was reasonable cause for the failure on the 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. 4000 respectively u/s 271(1)(a) and Section 273 by separate orders dated 26-11-1975.

(4) On appeal, the Appellate Assistant Commissioner agreed with the Income Tax Officer 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 penality u/s 271(1)(a) to Rs. 9,656 and that hinder Section 273 to Rs. 2,033 only.

(5) The assessed was not satisfied with the relief given by the Appellate Assistant Commissioner 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 contestation was that, in the case of both the penalties, the proceedings had not been initiated in the course of assessment proceedings. It was pointed out that the penalty notices has 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 case of Artisan Press Ltd. Vs. Income Tax Appellate Tribunal and Another, . The Tribunal pointed out that in the instant case, the Income Tax Officer, 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 .

(6) Under the Indian Income Tax Act 1922 the imposition of penalty was governed by Section 28. Though, the penalty for failure to file an estimate and pay advance Tax was provided for in Section 18A(9) of the Act, that provision only attracted, proceedings u/s 28. Section 28 did not impose any time limit for the passing of the penalty order. The penalty order could be passed at anytime, 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 wasthat Income Tax Officer (amongst others) could proceed 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 Income Tax Officer should have arrived at a prima facie conclusion that defaults of the above nature or any of them had been committed bythe assessed. It was not necessary further that this conclusion of the Income Tax Officer 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 Income Tax Officer for such issue. This position was explained bythe decision of the Supreme Court in the case of Commissioner of Income Tax, Madras, and Another Vs. S.V. Angidi Chettiar, .

(7) The 1961 Act has changed the above position. A careful pertisal of Section 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 in the course of which action for imposition of penalty has been 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 Income Tax Officer is satisfied in the course of the assessment proceedings that a case for penalty exists, it is further necessary that he should have initiated some action for imposition of penalty in the course of such proceedings''. It depends on the facts of each case whether any such action has been initiated before the date of completion of the assessment. If, even before the completion of the assessment, the Income Tax Officer 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 had given a direction to his office before completing the assessment that such a notice should be issued. Similarly ,in cases governed by Section 274(2) (which has been deleted w.e.f. 1-4-1976), action could be considered to have been initiated if the officer had made a reference to the Inspecting Assistant Commissioner under that provision though the Inspecting Assistant Commissioner might apply his mind and issue a further notice to the assessed only long thereafter. But some definite step byway of initiation of penalty proceedings should be taken by the officerbefore the assessment proceedings come to an end.

(8) The above position is quite clear from the terms of the section itself and has also been clarified in a number of decisions which have been collected on page 1225 of Vol. I of the 7th Edition of Rang and Palkivala. It is necessary to set out all these decisions here. In the case of Artisan Press referred to by the Tribunal Artisan Press Ltd. Vs. Income Tax Appellate Tribunal and Another, , a penalty had been levied under the 1922 Act by the IncomeTax Tribunal which it then had the power to do. On the language of the Section 28, it was necessary for the Tribunal to have been satisfied about the existence of a case for penalty before the proceedings byway 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 u/s 28" was sufficient compliance with the statutory requirement. Again in D.M. Manasvi Vs. Commissioner of Income Tax, Gujarat II, (which has been confirmed by Supreme Court on different grounds)it was held that a direction in the assessment order for the issue of a notice for proposed penal u/s 271(1)(a) was sufficient .The Delhi High Court in the case of Durga Timber Vs. I. T. O. 1970 79 ITR 63 (4) has also agreed with the above view.

(9) In the present case, ''unfortunately, it seems to us that the requirements of the statute have not been fulfilled .There is no direction for issue of penalty notice in the assessment order. All that the Income Tax Officer has observed is that penalty proceedings are to be initiated separately. These 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 the 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 Section 275 envisages some positive step on the part of the Income Tax Officer 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 Inspecting Assistant Commissioner or some other similar action. It is also not without significance that in this case, though the assessment was completed on 28-11-1963,the penalty notices were issued by the Income Tax Officer only as late as 16-12-1963. As rightly pointed out by the Tribunal, in cases where the Income Tax Officer has initiated action during the assessment proceedings the usual course is for the penalty notices to be issued andE served simultaneously with the assessment order and demand notice. In the present case even that was not done. The penalty notices were served upon the assessed only after the service of 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. This 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.

(10) 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 circumstance of the case. however, we make no order as to costs.