1. This is a reference on a case stated by the Income-tax Appellate Tribunal under s. 256(1) of the I.T. Act 1961. The facts giving rise to this reference are as follows :
The ITO concerned completed the assessment of the respondent for the assessment year 1968-69 on July 31, 1969, on a total income of Rs. 32,820 which included an undisclosed income of Rs. 5,000. In the order of assessment, the ITO noted that penalty proceedings under s. 271(1)(c) of the I.T. Act were initiated. The ITO referred the case to the IAC under s. 274(2) of the I.T. Act on June 28, 1971, as the minimum amount of penalty impossible in the case exceeded the sum of Rs. 1,000. He simultaneously informed the assessee that he had referred the case to the IAC. The IAC issued a notice to the assessee on July 16, 1971, under s. 274(1) read with s. 271 of the I.T. Act to show cause why penalty should not be imposed under s. 271(1)(c), fixing the date of hearing on July 20, 1971. He ultimately imposed a penalty of Rs. 6,000 under that provision. The order was challenged by the assessee before the Tribunal. The assessee raised two main contentions before the Tribunal. The first contention was that as the amended s. 274(2) had come into effect from April 1, 1971, the IAC had no jurisdiction to impose penalty in that case, as admittedly the amount of income in respect of which the particulars were alleged to have been concealed or inaccurate particulars furnished did not exceed Rs. 25,000. He submitted that in view of the amendment of s. 274(2) which came into effect April 1, 1971, and prior to June 28, 1971, when the order of reference to the IAC was made, the said IAC lacked jurisdiction form the very inception and his order was liable to be cancelled on the ground of want of jurisdiction. In the alternative, the assessee contended that if the jurisdiction of the IAC was, for the sake of argument, held to be referable to the original provision in s. 274(2) of the I.T. Act, as it stood before April 1, 1971, his order was still bad as it had not been passed within two years from the date of completion of the proceedings, in the course of which proceedings, the proceedings for imposition of penalty had been commenced. Both these contentions were upheld by the Tribunal. Arising from the said order of the Tribunal, the following two question have been referred to us for our determination :
'(1) Whether, on the facts and in the circumstances of the case, the order of penalty was liable to be canceled on the ground of want of jurisdiction ?
(2) Whether, on the facts and in the circumstances of the case, the order of penalty was liable to be cancelled on thy ground of limitation ?'
2. We propose to deal with question No. 1 first. Before going into the submissions made by the learned counsel of behalf of the respective parties, it would be necessary to take a brief look at the relevant provisions of the I.T. Act. Chapter XXI of the I.T. Act, deals with penalties impossible. Section 271 in that Chapter deals with the power of the ITO or the AAC to impose a penalty for failure to comply with a notice, concealment of income and so on. It is not necessary to set out the provisions of s. 271. Suffice it to say that s. 271(1)(c) read with s. 274 provides that if the ITO or the AAC in the course of any proceedings under that Act is satisfied that any person has concealed the particulars of his income or furnished inaccurate particulars of such income, he may direct that such person shall pay an amount by way of penalty. Sub-section (1) of s. 274 provides that no order imposing penalty under Chapter XXI shall be made, unless the assessee has been heard or has been given a reasonable opportunity of being heard. Before it amendment, which came into effect on April 1, 1971, sub-s. (2) of s. 274 read as follows :
'(2) Notwithstanding anything contained in clause (iii) of sub-section (1) of section 271, if in a case falling under clause (c) that sub-section, the minimum penalty impossible exceeds a sum of rupees one thousand, the Income-tax Officer shall refer the case to the Inspecting Assistant Commissioner who shall, for the purpose, have all the powers conferred under this Chapter for the imposition of penalty.'
3. As per the amendment of this sub-section by the Taxation Laws (Amendment) Act, 1970, which came into effect from April 1, 1971, the words 'the minimum penalty impossible exceeds a sum of rupees one thousand' were substituted by the words 'the amount of income (as determined by the ITO on assessment) in respect of which the particulars have been concealed or inaccurate particulars have been furnished exceeds a sum of twenty-five thousand rupees.'
4. If the provisions of the aforesaid sub-section are analysed, the result is that prior to April 1, 1971, in case the minimum penalty impossible was more that Rs. 1,000, the ITO could not impose such penalty but had to refer the matter to the IAC, who, on such reference, got the jurisdiction to impose such penalty. By the amendment it was provided that only in a case where the income, in respect of which the particulars had been concealed or inaccurate particulars had been furnished, exceeded a sum of Rs. 25,000, the ITO had no jurisdiction to impose the penalty but had to refer the matter to the IAC for the imposition of penalty. Prior to the amendment, the jurisdiction of the ITO was limited to case where the minimum penalty impossible was Rs. 1,000 or less, whereas after the amendment it was limited to cases where the concealed income or income in respect of which inaccurate particulars had been furnished did not exceed a sum Rs. 25,000. One thing is clear that in certain cases it was the ITO who had the jurisdiction to impose penalty, and it was only in other cases where he had no jurisdiction to impose penalty that he was required to refer the matter to the IAC, who on such reference got the jurisdiction to deal with the case and impose penalty.
5. The submission of Mr. Joshi was that in the present case the ITO passed the order of assessment of July 31, 1969, and on that day he recorded that penalty proceedings were initiated, which meant that he considered the matter and came to the conclusion that the case one which attracted penalty. It was submitted by him that it was the satisfaction of the ITO regarding the concealment of income which constituted the basis and foundation of the proceedings for the levy of penalty. It was at that point of time that the question of jurisdiction had to be determined and that the subsequent issue of a notice to the assessee, or making a reference to the IAC, were merely ministerial acts which did not affect the question of jurisdiction. It was urged by him that this satisfaction in the present case was recorded by the ITO on July 31, 1969, and, hence, the question of jurisdiction had to be considered in accordance with the provisions of sub-s.(2) of s. 274 as it stood prior to the amendment which came into effect on April 1, 1971. As against this, the submission of Mr. Patil is that the making of an order of reference to the IAC could never be regarded as a mere ministerial act. The making of such reference involved a conscious decision by the ITO that he did not have the jurisdiction to impose a penalty, because it was only on that conclusion that a reference could have been made to the IAC.
6. We now propose to consider the two cases, one of which was relied upon by Mr. Joshi and the other by Mr. Patil. Mr. Joshi placed reliance on the decision of a Division Bench of the Punjab and Haryana High Court in CIT v. Mela Ram Jagdish Raj & Co. . In that case it was held that it is the satisfaction of the ITO in the course of assessment proceedings regarding the concealment of income which constitutes the basis and foundation of proceedings for the levy of penalty. The issue of a notice or making a reference under s. 274(2) of the I.T. Act by the ITO to the IAC are ministerial acts. The moment the ITO passes an order for initiating penalty proceedings, the proceedings stand initiated by the ITO, and the question would immediately arise as to who has the jurisdiction to pass an order for levying the penalty. It is at that point of time that the question of jurisdiction has to be determined keeping in view the prevailing provisions of law. In this decision, the Division Bench has placed reliance on the decision of the Supreme Court in D. M. Manasvi v. CIT : 86ITR557(SC) , to the effect that s. 271(1) of the I.T. Act contemplates that the ITO should have been satisfied in the course of the assessment proceedings regarding the concealment of income, and that satisfaction constitutes the basis for the levy of penalty. It has, however, with respect, nowhere been held by the Supreme Court in that case that the making of a reference by the ITO to the IAC can be regarded as a ministerial act. In fact, with respect, we fail to see how the making of such a reference could ever be regarded as a mere ministerial act. Before making a reference under s. 274(2), as it stood prior to the aforesaid amendment, the ITO had to consider the matter and to take a decision that the minimum penalty impossible exceeded a sum of Rs. 1,000 and, after the amendment, before making a reference, the ITO had to satisfy himself that the amount of income in respect of which particulars had been concealed or inaccurate particulars had been furnished exceeded a sum of Rs. 25,000. We fail to see how in arriving at such a satisfaction after considering the matter, the ITO could be said to be performing a mere ministerial act. Moreover, as pointed out by a Division Bench of the Delhi High Court in the case of CIT v. Kundan Lal reported in : 144ITR547(Delhi) , the ITO may issue a penalty notice thinking that the several additions made by him attract penalty, but the assessee's reply to the show-cause notice may convince him that only some and not all the additions warrant the penalty, If after consideration of the assessee's reply he comes to the conclusion that the concealed income is less than Rs. 25,000, he cannot refer the case to the IAC although when he sent the initial notice he might have thought of making such reference. The making of a reference, therefore, cannot, in our view, with respect, be regarded as a mere ministerial act. We are considerably supported in our view by the aforesaid decision of the Delhi High Court, with which we are in respectful agreement. If the making of a reference is not a ministerial act but an act to be done after conscious determination of a certain question, the question of jurisdiction has to be considered at that stage. At the time when the ITO is considering the making of an order for reference, he has to decide whether to make the order for reference. He has to consider whether in law it is he who can impose penalty, or the matter has to be referred to the IAC for the imposition of the penalty, In the present case, at the time when the order of reference was made, viz., June 28, 1971, it was the ITO who had the jurisdiction to levy the penalty, as admittedly the amount of income in respect of which particulars were alleged to have been concealed did not exceed Rs. 25,000. The reference made to the IAC was, therefore, bad in law. The jurisdiction of the IAC in this regard is founded on a valid order of reference under s. 274. As in the present case, the order of making reference was itself invalid, the IAC had no jurisdiction to proceed with the matter of levying penalty.
7. In view of what we have said earlier, question No. 1 must be answered in the affirmative.
8. As far as question No. 2 is concerned, it is based on an alternative submission of the assessee, and that alternative submission is based on the premise that the question of jurisdiction had to be considered under s. 274(2) as it stood prior to April 1971. In view of what we have held earlier, that question does not arise at all and, hence, we decline to answer that question.
9. The Commissioner to pay to the assessee the costs of the reference.