1. In this income-tax reference the question referred to us under s. 256(1) of the I.T. Act, 1961, is as follows:
'Whether the Appellate Assistant Commissioner has jurisdiction to decide, in an appeal against an order of the Income-tax Officer under section 221 of the Income-tax Act, 1961, when as assessee is in default in making a payment of tax or when an assessee is not in default in making a payment of tax irrespective of the provisions of section 220(6) of the said Act ?'
2. In the reference we are concerned with the proper interpretation of s. 220(6) read with s. 221 of the I.T. Act, 1961. In order to appreciate the nuances of the arguments the facts may be briefly stated as under:
3. We are concerned with the assessment year 1959-60. The net profit worked out by the assessee-company as per its profit and loss account for the year ended March 31, 1969, was Rs. 41,394. The total income assessed by the ITO was Rs. 7,20,892, and on this footing the net tax payable worked out to Rs. 2,80,214. The ITO made the assessment on March 23, 1964, and served the notice of demand on the assessee-company on March 26, 1964. By the said notice of demand a tax amount of Rs. 2,80,214 was required to be paid by March 31, 1964. However, the assessee-company filed to pay the tax demanded by the said notice by the specified date, namely, March 31, 1964.
4. On October 16, 1964, the ITO issued a notice requiring the assessee-company to show cause why penalty should not be levied against it under s. 221(1) for non-payment of tax. Thereafter, correspondence ensued between the assessee-company and the ITO. In the said correspondence the assessee-company pointed out that it had preferred an appeal from the decision of the ITO, and on November 18, 1964, the assessee-company requested the ITO to stay recovery of tax pending the decision in appeal. It was indicated that in the said appeal major additions made by the ITO were disputed. It was also mentioned that the assessee-company's financial position was unsatisfactory. By his letter dated November 21, 1964, the ITO regretted that he was unable to allow the time for payment of tax till the disposal of the appeal. However, no grounds were given in the said letter to justify such a decision. On December 19, 1964, the ITO levied a penalty of Rs. 10,000. This was purportedly done under s. 221(1) for non-payment of the tax of Rs. 2,80,214. The penal order dated December 19, 1964, passed under s. 221(1) of the I.T. Act, 1961, is found annexed as annex. A to the statement of case.
5. The assessee-company carried the matter in appeal to the AAC, and by his order dated April 30, 1968, the AAC cancelled the penalty of Rs. 10,000 levied by the said ITO. In his order the AAC applied his mind to, and discussed, the issues raised in the appeal by the assessee-company against the original assessment in which the total income was computed by the ITO at Rs. 7,20,892. The assessee-company represented to the AAC that the ITO had not exercised his discretion judicial in refusing the assessee-company request to stay recovery. The assessee-company urged that the issues raised in the appeal against the assessment were substantial. The assessee-company also indicated why the appeal against the assessment still remained undisposed of, and it would appear that the shame could not be taken up because it depends in turn on the earlier year's assessment which had been set aside in appeal and which remained to be reframed. In a short but well-considered decision, the AAC, after setting out the various contentions urged by the assessee-company, observed that the ITO should have exercised his discretion under s. 220(6) of the I.T. Act, 1961, in favour of the appellant before him, The AAC further observed that the request of the assessee-company for stay of the recovery proceedings till the disposal of the appeal against the concerned assessment was not at all unreasonable. In the result, he quashed the levy of penalty in the sum of Rs. 10,000.
6. The ITO carried the matter in appeal to the Income-tax Appellate Tribunal, and the said Tribunal (Bombay Bench 'D'), by its order dated January 23, 1970, upheld the decision of the AAC. The Tribunal has considered the submissions made on behalf of the revenue in paras. 4 and 5 of its judgment. It was submitted on behalf of the Revenue that it was for the ITO to consider whether the assessee ought or ought not to be treated as being in default under s. 220(6). According to the Department, no appeal was provided from this decision and in an appeal from decision to levy penalty under s. 221 it was not open to the AAC to go into the question whether the ITO had or had not exercised his discretion properly. The Tribunal observed that if such a contention was to be upheld there would be little point in permitting an appeal from the levy of penalty under s. 221. In its view, since an appeal is provided in law from an order imposing penalty under s. 221, it was incumbent on the AAC in such an appeal to consider the question whether the assessee s in default. Whilst considering this question, according to the Tribunal, the AAC was entitled to consider whether the ITO had exercised his discretion under s. 220(6) properly or not. On the latter issue if the ITO had taken an erroneous view of the matter in the opinion of the AAC, then the AAC could review that decision, although technically he would be sitting in appeal only from the levy of penalty made under s. 221.
7. Aggrieved by the said decision of the Income-tax Appellate Tribunal, the Commissioner has sought a reference, and his requests being granted, the matter has come in the High Court.
8. The petition existing under the statutory provisions is beyond dispute. Section 220 indicates when tax is payable and when as assessee would be deemed to be in default. sub-section (6) of s. 220 confers a discretion on the ITO to treat the assessee as not being in default in respect of the amount in dispute in the appeal, if the assessee has preferred an appeal under s. 246 against the assessment made by the ITO. Such discretion may be exercised conditionally or unconditionally. Section 246 of the I.T. Act, 1961, does not provide for any appeal from the decision of the ITO under s. 220(6) either refusing to treat the assessee as not being to default or deciding to treat the assessee as being in default but subject to conditions which the assessee may regard as unduly onerous. It would, however, appear that this is a quasi-judicial function, and such discretion must be exercised by the ITO fairly and reasonably but not arbitrary or capriciously.
9. The question which arises for decision in this reference deals with a situation when the ITO has refused to exercise his discretion conferred on him by s. 220(6) in favour of the assessee-company. By so doing, the effect would be that the assessee would have to be treated as being in default immediately the period of thirty-five days indicated in s. 220(1) is over. Section 221 then comes into the picture and permits a penalty being imposed on such assessee subject to the pecuniary limitations provided under the said section. Section 221 specifically provides that before levying any such penalty the assessee has to be given a reasonable opportunity of being heard. This is in contrast to the absence of any such provision in sub-s. (6) of s. 220. It is in pursuance of the power conferred on him under s. 221 that the ITO in the instant case levied the penalty of Rs. 10,000.
10. Now, when we turn to s. 246, which section indicates the appealable orders, we find that one of such orders is the order imposing penalty under s. 221.
11. According to the Tribunal, if an appeal is provided to the AAC under s. 246 from the penalty levied by the ITO, under s. 221, in such an appeal the AAC will perforce have to decide whether the ITO was right or not in deciding to treat the assessee-company as an assessee in default. If the ITO had exercised the discretion under s. 220(6) and had either conditionally or unconditionally decided to treat the assessee-company as not being in default, no penalty could have been imposed under s. 221. In the instant case it is obvious and clear from the record that the order of penalty, and indeed the power to impose penalty, flowed from the order passed under s. 220(6) declining to exercise the discretion in favour of the assessee-company. If that order could not be reviewed or considered by the AAC, there would be very little purpose served by s. 246 providing an appeal from the penalty imposed under s. 221. The appeal is not and cannot be one retracted only to the quantum of penalty which the ITO has imposed. In the appeal it would be permissible to the assessee-company to question the basis of imposition of penalty, and once this conclusion is reached it would be apparent that the basis could be impugned or could be challenged only by impugning the failure to exercise the discretion conferred on the ITO under s. 220(6).
12. The question whether the assessee-company is or i not in default would indeed appear to be the primary question, and the quantum of penalty, the subsidiary question, which can be decided in the appeal. Were the other view to prevail, namely, that the only question to be decided in such an appeal is the question of quantum of penalty, then, the very purpose of providing the appeal would be substantially rendered nugatory.
13. It would appear to us that the view taken by the Tribunal is proper and correct. Accordingly, we answer the question referred to us by the Tribunal in the affidavit and against the Commissioner. There will, however, be no order as to costs.