Umamaheswari and Co. vs Commissioner of Income Tax

Rama Rao, J.—The question referred at the instance of the assessee is whether on the facts and in the circumstances of the case the penalty of Rs. 15,000 levied by the ITO u/s 271(1)(c) of the income tax Act, 1961 (''the Act'') for the assessment year 1970-71 is valid in law ? At the outset it may be stated that the assessee is absent and not represented and we proceeded to consider the case on merits. Originally the assessment on the assessee''s firm was finalised on 8-10-1970 accepting the return filed on 28-7-1970. Later the assessment was reopened u/s 147(a) of the Act and a return was filed admitting an income of Rs. 32,828. The reassessment was completed on 14-11-1974 on a total income of Rs. 32,830. Regarding the concealed income with reference to the original return the ITO levied penalty of Rs. 15,000 u/s 271(1)(c). On appeal, the AAC confirmed the levy of penalty. On further appeal before the Tribunal the contention is confined to the jurisdiction of the ITO to levy penalty. The contention is that the concealment is with reference to the original return filed on 28-7-1970 and the law prevailing on that date should be applied and, therefore, the ITO should have referred the matter to the IAC u/s 274(2) of the Act. The Tribunal negatived the contention of the assessee and confirmed the levy of penalty.

The only issue for consideration in this reference is whether the ITO is competent to levy penalty or the matter should have been referred to the IAC u/s 274(2). The reassessment proceedings and the levy of penalty are sequel to the concealment of income with reference to the return filed on 28-7-1970. The contention of the assessee is that the law prevailing on 28-7-1970 when the return was filed should be applied and the matter has to be referred to the IAC. The plea of the revenue is that for the purpose of the jurisdiction or the procedural aspect with reference to the levy of penalty the crucial date is the initiation of penal proceedings and not the date of return. It is further stated that the date of filing the return is relevant for the purpose of computing the penalty but this should not be considered as applicable to the forum before which the penalty proceedings should be initiated or levied. At the time when the return was filed the levy of penalty u/s 271(1)(c) is governed by section 274(2). Section 274(2) provides that if minimum penalty leviable exceeds Rs. 1,000 the matter has to be refer red to the IAC who is competent to impose the penalty. By the Taxation Laws (Amendment) Act, 1970, section 274(2) was amended whereby the monetary limit for the purpose of levy of penalty is raised to Rs. 25,000. If the contention of the assessee is accepted that the law prevailing on 28-7-1970 has to be applied the IAC is the competent authority to levy penalty and the ITO has no jurisdiction to levy penalty. Essentially the question that has to be considered is whether the proceedings for levy of penalty are governed by the date of reassessment, i.e., 14-11-1974 or the date of filing the return, i.e., 28-7-1970.

In Brij Mohan Vs. Commissioner of Income Tax , New Delhi, the question is whether the liability to penalty should be considered with reference to the date of concealment or with reference to the law prevailing in the assessment year relevant to the previous year. While considering the divergence of opinion amongst the High Courts the Supreme Court held as follows:

...In our opinion, the assessment of the total income and the computation of tax liability is a proceeding which, for that purpose, is governed by entirely different considerations from a proceeding for penalty imposed for concealment of income. And this is so notwithstanding that the income concealed is the income assessed to tax. In the case of the assessment of income and the determination of the consequent tax liability, the relevant law is the law which rules during the assessment year in respect of which the total income is assessed and the tax liability determined. The rate of tax is determined by the relevant Finance Act. In the case of a penalty, however, we must remember that a penalty is imposed on account of the commission of a wrongful act, and plainly it is the law operating on the date on which the wrongful act, is committed which determines the penalty. Where penalty is imposed for concealment of particulars of income, it is the law ruling on the date when the act of concealment takes place which is relevant. It is wholly immaterial that the income concealed was to be assessed in relation to an assessment year in the past." (p. 4)

In Addl. Commissioner of Income Tax Vs. Dr. Khaja Khutabuddinkhan, the Division Bench of this Court held that the penalty u/s 271(1)(c)(iii) has to be levied in the light of the law existing at the time when the offence for which penalty is levied and as such the date of filing the return in which concealment of income took place would be the relevant date to be taken into account for the purpose of computing the quantum of penalty, but not the date of completion of the assessment or the satisfaction of the ITO as to the concealment of income or levy of penalty. In the course of considering the applicability of law with regard to the levy of quantum of penalty the question regarding the jurisdiction of the IAC to consider the levy of penalty on reference by the ITO is also considered and the Division Bench held as follows:

It is clear so far as the question of the Inspecting Assistant Commissioner''s jurisdiction is concerned, that at the time when the matter came to be referred to him by the income tax Officer and the law as it stood on the date of that reference, he was the only officer who could have heard the matter because the minimum penalty imposable was more than Rs. 1,000. If during the time, when the matter was pending before the Inspecting Assistant Commissioner the law was changed by Act 42 of 1970 with effect from April 1, 1971, and the minimum penalty for purpose of making a reference to the Inspecting Assistant Commissioner come to be raised to Rs. 25,000, it does not mean that the jurisdiction of the Inspecting Assistant Commissioner was taken away. Section 6(d) of the General Clauses Act, 1897, would apply in cases like the present one and the proceedings, in spite of repeal of the relevant part of the old section 275(1), would continue...." (p. 912)

In Continental Commercial Corporation Vs. Income Tax Officer and Another, for the assessment year 1970-71 the return was filed on 22-12-1970 and the assessment order was passed on 25-1-1973. As there was an addition of income from the undisclosed sources the penalty proceedings were initiated u/s 271(1)(c ) and the order levying penalty was passed on 9-10-1973. This order was confirmed by the Commissioner. Thereupon the assessee moved a writ petition contending that the ITO did not have any jurisdiction to levy penalty in view of the provisions of section 274(2) prior to the amendment by the Taxation Laws (Amendment) Act. In the context of considering whether the ITO had jurisdiction to levy penalty the Madras High Court held that the date when the offence or infringement takes place will be the relevant date for the purpose of finding out the law that is applicable for initiating or levying the penalty and it is not the law that is prevailing on the date when the proceedings for penalty are initiated or the order is passed. In Addl. Commissioner of Income Tax, Karnataka Vs. M.Y. Chandragi, he returns were filed by the assessee on 27-7-1988 and 24-7-1969 for the assessment years 1968-69 and 1969-70 and the assessments were finalised on that basis. Subsequently the assessments were reopened and the revised returns were filed by the assessee on 4-3-1970. The reassessment orders were passed by the ITO on 24-12-1971. The ITO imposed penalties and on appeal the AAC set aside the order of the ITO on the ground that the authority competent to impose penalty was the authority who was competent to impose penalty as on the date of concealment and it was the IAC who was competent to impose penalty and not the ITO. This is confirmed by the Tribunal. In the context of considering this aspect the Karnataka High Court held as follows:

...The question of determining the quantum of penalty payable by an assessee with reference to the date of concealment has no bearing on the question of competence of the authority to impose penalty. The latter has to be determined with reference to the date when the penalty is imposed. Even on the basis that for the purpose of determining the jurisdiction of the authority to impose penalty the date of initiation of the penalty proceedings as also the date of final order are relevant as far as these cases are concerned, on both these dates the income tax Officer had jurisdiction. We respectfully, disagree with the view expressed by the Madras High Court....(p. 258)

In R. Abdul Azeez Vs. Commissioner of Income Tax, Karnataka-I, the Karnataka High Court again held that the date of concealment does not determine the jurisdiction of the officer. In Commissioner of Income Tax Vs. Varkey Chacko, .) it is held that the principle that the penal liability of a person in respect of an offence committed by him is governed by the law actually in force on the date of the commission of the offence cannot have application in determining which authority is competent to initiate proceedings for the imposition of penalty in respect of the offence under, or infringement of, the Act.

The act of concealment of income constitutes the provocation for levy of penalty. Therefore, the law prevailing on the date of infraction of the provisions should be necessarily applied for visiting the concealment of income by levy of penalty. The analogy of the applicability of law on the date of commission of offence can be pressed into service and the date of concealment or the date of commission of offence are relevant for the purpose of applicability of law regarding quantum and incidents and this is enjoined by article 20 of the Constitution. Insofar as the forum having competence to levy penalty the crucial factor is the date of finalisation of assessment contemporaneous with initiation of penalty. It is only on passing the assessment order and pursuant to the satisfaction and finding of the ITO the concealment is brought to surface culminating in initiation of penal proceedings. The assumption of jurisdiction to levy penalty is founded upon the satisfaction of the officer regarding concealment and this satisfaction is finally arrived at on the date of passing the order. Therefore, the search for the authority to be seized of the competence to levy penalty is only on the date of satisfaction regarding concealment and initiation of penal proceedings and anterior to this date the question of any authority initiating the proceedings does not arise. Insofar as the question of penalty and the material constituting the base for violation and levy of penalty the law as on that day is applicable. On the date of filing the return the concealment is crystallised by non-disclosure of correct particulars and, therefore, the applicability of law on the date of filing the return is relevant. Section 274(2) prior to and subsequent to the amendment furnishes a clue to the interpretation. Before amendment of section 274(2) the competence of the ITO to initiate proceedings rested upon findings regarding concealment and the quantum of penalty leviable. After amendment in 1970 of section 274(2) the jurisdiction to levy penalty by the ITO or reference to the IAC depeneded upon the amount of income in respect of which particulars are concealed exceeds a sum of Rs. 25,000. Therefore, the findings in the assessment and completion of assessment accompanied by initiation of penal proceedings furnish a base for identifying the authority to pursue the proceeding for levy of penalty. This jurisdictional foundation should not be mixed up with the applicability of law existing on the date of concealment of income reflected by the return filed by the assessee. The Madras High Court in Continental Commercial Corpn.''s case (supra) held that the law prevailing on the date of filing the return is applicable for all situations but missed the crucial link between the factum of detection and the authority competent to levy penalty and it is only on the date of assessment order comprising the satisfaction regarding concealment the authority competent to levy penalty has to be traced in accordance with the law prevailing on that date. We are unable to agree with the view expressed by the Madras High Court. In the result, the question is answered in the affirmative and in favour of the revenue.