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income-tax Officer Vs. Niranjan Singh Chaddha - Court Judgment

LegalCrystal Citation
CourtIncome Tax Appellate Tribunal ITAT Delhi
Decided On
Judge
Reported in(1984)8ITD835(Delhi)
Appellantincome-tax Officer
RespondentNiranjan Singh Chaddha
Excerpt:
1. the revenue is in appeal against the order of the commissioner (appeals), cancelling the penalty of rs. 18,460, levied under section 271(1)(c) of the income-tax act, 1961 ('the act') for the assessment year 1975-76.2. the ito found, during the course of assessment, that the assessee had not shown income from plying of two trucks, namely, dhg 2180 and pno 4955. therefore, he did not accept the income returned at rs. 24,700. he estimated the income from the plying of these two trucks at rs. 34,300. in effect, he made an assessment at rs. 82,015 by an order passed on 28-9-1978. since there was a wide gulf between the income returned and the income assessed, he initiated the penalty proceedings and caused notice under section 271(1)(c) to be served on the assessee.not being satisfied, the.....
Judgment:
1. The revenue is in appeal against the order of the Commissioner (Appeals), cancelling the penalty of Rs. 18,460, levied under Section 271(1)(c) of the Income-tax Act, 1961 ('the Act') for the assessment year 1975-76.

2. The ITO found, during the course of assessment, that the assessee had not shown income from plying of two trucks, namely, DHG 2180 and PNO 4955. Therefore, he did not accept the income returned at Rs. 24,700. He estimated the income from the plying of these two trucks at Rs. 34,300. In effect, he made an assessment at Rs. 82,015 by an order passed on 28-9-1978. Since there was a wide gulf between the income returned and the income assessed, he initiated the penalty proceedings and caused notice under Section 271(1)(c) to be served on the assessee.

Not being satisfied, the assessee appealed to the Commissioner (Appeals), who reduced the estimate of income derived from the truck plying to Rs. 24,260. The assessee took this matter further in appeal before the Tribunal. The Tribunal brought down the estimate of income derived from these two trucks to Rs. 11,000 only. The ITO, about whom we have already indicated, had initiated penalty proceedings and passed an order imposing penalty of Rs. 18,460. The order was passed on 31-3-1981. According to the ITO, the assessee had not made any reply to several notices issued by him under Section 271 l)(c). Therefore, he held that the assessee had nothing to say in his defence, against the charge that he had concealed a part of his income, which was derived from plying of the aforementioned two trucks. He had detailed in his order several notices which he had caused to be served on the assessee in this respect. Therefore, he found him liable for concealment on the facts and in the circumstances of the case. He derived further support for his finding from Explanation I to Section 271(1)(c), which formed part of the provision prior to the amendment of the Explanation in 1976. According to this Explanation, an assessee was deemed to have concealed the income if the income returned by him fell short of 80 per cent of the assessed income. There is no doubt that 80 per cent of the income finally assessed by the assessing authorities, was more than the income returned. Therefore, in his view, the Explanation also lent support to his finding that the assessee was liable for concealment and he had concealed the income derived from the plying of trucks. Having reached this finding, as we have indicated above, he imposed a penalty of Rs. 18,460 by an order passed on 31-3-1981.

3. The assessee not being satisfied with this levy, appealed before the Commissioner (Appeals) and raised the plea that he was not liable for concealment on the facts and in the circumstances of the case.

According to him, in the voluntary disclosure, made by him on 31-12-1975, he had made the disclosure of the income for the year in issue as well, with its accounting year having ended on 31-3-1975.

Therefore, there was no concealment of income derived from these trucks. He had made the voluntary disclosure particularly in respect of the income from these two trucks. He also pointed out that the plea of the ITO, on which his finding was based, that he had made no replies to the several notices issued by him was not correct. He also rebutted other plea that the aforesaid Explanation, which appeared in Section 271(1)(c) prior to its amendment, was applicable to him. The Commissioner (Appeals), on going through the facts, was moved by the plea of the assessee that it was not correct that the assessee had not made any reply to the notice issued under Section 271(1)(c) or to several opportunity notices made thereafter. In this connection, he referred to two letters in particular, which bad been submitted by the assessee to the ITO. These orders were dated 24-9-1978, 13-2-1981 and 31-3-1981. On going through these letters in the record, the Commissioner (Appeals) was not left in any doubt that the finding of the ITO that the assessee had not furnished any reply to various notices, issued by the ITO, was not correct. He also turned down the second plea of the ITO that the Explanation to Section 271(1)(c) applied and supported the finding of the ITO that the assessee was liable for concealment. He found that the assessment having been completed on 28-9-1978, initiation of penalty proceedings being conterminous with the finalisation of the assessment, was at a time when the aforesaid Explanation did not form part of the Section 271(1)(c). The amendment in the year 1976 had deleted that Explanation.

Therefore, when the ITO initiated the penalty proceedings, the said Explanation was non-existent. Relying on the decision of the Punjab and Haryana High Court in CIT v. Raman Industries [ 1980] 121 ITR 405 that all procedural provisions are retrospective in nature, he found that the reliance of the ITO on the aforesaid Explanation was misconceived.

Since the ITO had not considered the replies, referred to above, it cannot be said that his finding that the assessee was liable for concealment could be sustained. Accordingly, he cancelled the penalty.

4. The revenue is, therefore, in appeal before us. The revenue has made two pleas to discredit the finding of the Commissioner (Appeals). One of the pleas, advanced by the departmental representative, was based on the Supreme Court's decision in Brij Mohan v. CIT [1979] 120 ITR 1, which laid down that the provision existing on the date of filing of the return shall apply in the case of levying penalty. Therefore, the departmental representative submitted that the finding of the Commissioner (Appeals) was incorrect that the aforesaid Explanation did not apply. Return was filed by the assessee on 3-1-1975, when, undoubtedly, the aforesaid Explanation was a part of the statute and was in effect. His second contention was that if the ITO had made the mistake by not considering the replies tendered by the assessee because he missed them, the Commissioner (Appeals) should have considered the replies and then recorded a finding whether the assessee was liable for penalty or not. Therefore, he made a submission that the matter should be remanded back to the Commissioner (Appeals) for considering the replies tendered by the assessee, which had not been considered by the ITO. The counsel for the assessee rebutted the submissions made by the departmental representative.

5. We have considered the facts of the case and it does not appear that we shall be justified in interfering with the order passed by the Commissioner (Appeals) in this respect. It is true that the legal provision in existence on the date of filing of the return shall apply in respect of the levy of penalty as brought out by their Lordships in Brij Mohan's case (supra) but that applies only to legal provisions which relates to a right or obligation or liability of the parties. In other words, it is the substantive provisions, which have bearing on the rights, liabilities and immunities of the parties as on the date of commission of the offence will apply in preference to a provision brought out in the statute book subsequently. The effect of the judgment of Brij Mohan's case (supra) is in relation to the substantive provisions only and not in relation to the procedural provisions in respect of which nobody gets vested right except where, as indicated in the case of Raman Industries (supra), in the case of those in effect which the proceedings were started. Therefore, reliance of the Commissioner (Appeals) on the case of Raman Industries (supra) to reach a finding that the aforesaid Explanation to Section 271(1)(c) was not a part of the statute when the proceedings for penalty were initiated, was well conceived in law. On the facts and in the circumstances of the case, the ITO cannot possibly derive any support for his finding that the assessee should be deemed to have concealed income because the returned income fell short of 80 per cent of the assessed income. We also do not favour the submission made by the departmental representative regarding the consideration of the letters by the Commissioner (Appeals) which were not considered by the ITO. Although we were inclined to remand the issue back to the Commissioner (Appeals) on the basis of the submissions made by the departmental representative, we have realized only later that the present proceeding relates to imposition of penalty and not to assessment of liability.

Section 271(1)(c) enjoins upon that the ITO 'in the course of any proceedings is satisfied that any person has concealed ...' This in effect means that it is the satisfaction of the ITO acquired during the course of proceedings, which is material and which forms the basis for the proceeding to levy a penalty upon the assessee. In other words, it is the satisfaction of the ITO acquired in the proceedings which is insisted upon as the sine quo non for proceeding for the levy of penalty. We cannot, therefore, hold that the satisfaction of the ITO can be substituted by the satisfaction of the Commissioner (Appeals).

It is true that the Commissioner (Appeals) can interfere with the exercise of discretion made by the ITO. But that does not entitle him to sit in the chair of the ITO and exercise the discretion himself.

Primarily, it must be the exercise of discretion by the ITO himself which should form the basis of a penalty proceeding. Where it is lacking, it cannot be inferred that the Commissioner (Appeals) can exercise that discretion. In this view of the facts, we are not prepared to remit the proceedings back to the Commissioner (Appeals) so that he may consider the replies made by the assessee, which were placed before the ITO but which he failed to consider. It may be that the Commissioner (Appeals) reaches a certain finding but we would not be justified in holding that, that would be based on the satisfaction of the ITO. Since we have held that the provision contained in the aforesaid Explanation was not applicable, we have to consider whether the onus had been discharged by parties concerned. The assessee in reply to the notice issued under Section 271(1)(c) had taken the plea of disclosure of income in the voluntary disclosure made by him which, according to him, was responsible for the income earned from plying of the two trucks not having been shown in the return. Since the provision contained in the aforesaid Explanation did not apply, the onus was on the ITO to prove that the Explanation of the assessee was false and not made in good faith. The ITO having been aware of the plea as appears from his order, could not merely depend upon the finding made in the course of assessment nor upon the fact that returned income fell below 80 per cent assessed income to reach a finding that a part of income was concealed. We repeat that our finding in this respect will not be available to support the penalty order passed by him which depended upon the satisfaction of the ITO primarily or finally and not upon the satisfaction of the appellate authorities.

6. In this view of our finding, we decline to remit the proceedings back to the Commissioner (Appeals) for consideration of the letters.

We, therefore, decline to interfere with the order of the Commissioner (Appeals) cancelling the penalty.

8. I have carefully perused the order recorded by my brother the learned Judicial Member. I regret that it will not be possible for me to agree with the reasoning given and the conclusion arrived at by him.

9. The return of income was filed on 3-10-1975 declaring an income of Rs. 24,600. The assessment was completed on 28-9-1978 when the penalty proceedings under Section 271(1)(c) were initiated. The income as assessed was reduced in appeals and the finally assessed income came to Rs. 43,157. The ITO noted that the assessee had not disclosed income from two trucks Nos. DHG 2180 and PNO 4955. Though the income from these two trucks was estimated by the ITO at Rs. 22,300 and Rs. 18,000, respectively, the estimate was reduced to Rs. 11,000 by the Tribunal.

The ITO observed the difference between the returned and the assessed income and proceeded to hold that the income from these two trucks was concealed. He imposed a penalty of Rs. 18,460. While doing so, he further observed that besides the application of the Explanation to Section 271(1)(c), which was on the statute book up to 1-4-1976, the law for the quantum of penalty would be the law which was there at the time of the filing of the return.

10. When the matter came before the Commissioner (Appeals), it was pleaded before him that the penalty had beed imposed under Explanation to Section 271(1)(c) and this Explanation was there prior to 1-4-1976.

According to the contentions made before the Commissioner (Appeals), proceedings having been initiated on 18-9-1979, this Explanation to Section 27I(1)(c) was not applicable. The Commissioner (Appeals) accepted this plea of the assessee and held that the order of the ITO was void as he had invoked the Explanation to Section 271(1)(c) and that Explanation was not in force at the time of the initiation of the proceedings. In this connection, he made a reference to the order of the Punjab and Haryana High Court in the case of Raman Industries (supra). According to the learned Commissioner 'Appeals), a procedural law had retrospective effect and governed the proceedings pending at the time of its enactment. According to the learned Commissioner (Appeals), the ITO should have proceeded to consider the case of the assessee under Section 271(1)(c) read with the new Explanation I added with effect from 1-4-1976. According to the learned Commissioner (Appeals), this action of the ITO went to the root of the matter and invalidated the proceedings. He further held that the order of the ITO was bad in law as the ITO did not take into consideration the explanation given by the assessee in response to show-cause notice. The order of penalty was, therefore, quashed by him.

11. Now the question of application of Explanation to Section 271(1)(c) which had been introduced in 1964 and was on the statute book up to 1-4-1976 and was substituted by certain other Explanations from that date has been considered by this Bench of the Tribunal in great detail in the case of Modem Textile & Finishing Mills [IT Appeal Nos. 103 and 104 (Asr.) of 1981]. In that case also the Tribunal had considered a similar view expressed by the Commissioner (Appeals) and the Tribunal had not agreed with his analysis of the legal provision. After considering the various case laws, the Tribunal in that case recorded the conclusion as under: 8. We have considered the facts of the case and the reasoning given by the learned Commissioner (Appeals) for cancelling the penalty order passed in this case. The Commissioner (Appeals) has cancelled the orders on the ground that the Income-tax Officer had initiated penalty proceedings with reference to an Explanation to Section 271(1)(c), which was no more in existence on the date of the initiation of such proceedings. In this connection, he referred to the new Explanations which had been added with effect from 1-4-1976.

For deciding this issue one has to determine the law which would be applicable for the purpose of imposition of penalty under Section 271(1)(c) of the Income-tax Act at the relevant time. The principles which governed the application of law whether substantive or procedural, retrospectively or prospectively are to be determined differently for the purposes of assessments distinct from the penalty matters. There are various aspects regarding a penalty matter and it will not merely depend on whether a provision is substantive or procedural but also whether right and procedure are dealt with together and we will have to determine the law applicable for different purposes. It is a well-known principle of law that a purely procedural matter is governed by the Jaw which applies when that process is started and when the final order is passed. For example, the question of limitation is purely procedural law. As regards the quantum of penalty, it is now settled law that it must be determined with reference to the law prevailing on the day when the act of concealment was committed, i.e., the date on which the return concealing the income was filed. This matter has been finally settled in Brij Mohan's case referred to above. Here, however, we are concerned with the question of application of Section 271(1)(c) read along with its Explanation as it stood prior to 1-4-1976 and the changes made in it with effect from that date. Though at present, there is no reported decision of any High Court on the questions of application of the Explanations, which have been added with effect from 1-4-1976, we have before us for guidance several decisions on the scope of application of the Explanation to Section 271(1)(c) from 1-4-1964. The Kerala High Court had held in Hajee K. Assainar v. CIT[1971] 81 ITR 423, that the Explanation which was introduced from 1-4-1964 could apply only to the penalties relating to the assessment year 1964-65 onwards. As against this, the Orissa High Court in the case of CIT v. K.C. Behera [1976] 103 ITR 479 expressed the view that the Explanation would be applicable in a case where the initiation of proceedings for the imposition of penalty took place on or after 1-4-1964. This decision of the Orissa High Court has been strongly relied upon by the learned counsel for the assessee. As against these views we have got the decision of more than one High Court, which has taken the view that Explanation to Section 271(1)(c) introduced with effect from 1-4-1964 could be applicable to cases where return of income was filed after 1-4-1964 irrespective of any assessment year. This view was taken by the Gauhati High Court in the case of Rajputana Stores v. IAC [1975] 99 ITR 499. This view was reiterated by that High Court in the case of F.C. Agarwal v. CIT[ 1976] 102 ITR 408 and in the case of CIT v. Gajanand Shyamlal [1978] 111 ITR 816. This question was considered by the Allahabad High Court in the case of CIT v. Data Ram Satpal [1975] 99 ITR 507 where it was held that penalty proceedings are not part of the assessment proceedings and the law which will apply to penalty proceedings will be the law as it stands on the date on which the default is committed. It was further held that if anyone files an incorrect return after 1-4-1964 it is liable to be dealt with according to the amended provisions regardless of the year to which the return relates. The question was again considered in the case of CIT v. Ram Achal Ram Sewak [1977] 106 ITR 144 (All.) where it was held that the Explanation to Section 271(1)(c) was not attracted in that case as the original return was filed before 1-4-1964. Similar view was taken by that High Court in the case of CIT v. S. Devendra Singh [1977] 108 ITR 314 where it was held that the material date with reference to which the law applicable should be determined is the date of the filing of that return.

The matter was again considered in the case of Addl. CIT v. Jiwan Lal Shah [1977] 109 ITR 474 (All.) and the same view as reiterated.

9. The question of application of Explanation to Section 271(1)fc) came up for consideration of the Honourable Calcutta High Court in the case of CIT v. Champalal Jain [1978] 112 ITR 809 and it was held that where a return was filed after the introduction of the Explanation to Section 271(1)(c) that Explanation would be applicable to the penalty proceedings irrespective of the assessment year. The same view was taken in the case of CIT v. Bankim Chandra Dutt [1979] 118 ITR 456 (Cal.).

10. The above discussion would show that in fact there are two different views and the third view expressed by the Kerala High Court in the case of Hajee K. Assainar cannot be considered to be good law in view of the decision of the Supreme Court in the case of Brij Mohan. The view taken by the Orissa High Court in the case of K.C. Behera would support the contention of the assessee that the material date was the date of initiation of penalty proceedings and not the date of the filing of the return. However, the preponderance of the judicial opinion on this question is in favour of the view that the material date is the date of riling of the return. This view also appears to be acceptable for another reason. Though Explanation to Section 271(1)(c) laid down a rule of evidence it also created the concept of deemed concealment in certain circumstances. In the same way, the Explanations which have been added with effect from 1-4-1976 considerably expanded the concept of concealment before that date is now treated as the concealment for the purpose of imposition of penalty under Section 271(1)(c). Where the statute has the effect of expanding a legal concept and the matter relates to penalty such concept would become applicable if the commission of offence takes place after the provisions came into force. Considering the nature of the Explanations which have been added it cannot be held to be purely procedural and they would not be applicable merely on the ground that some proceedings were pending on 1-4-1976.

11. Apart from the above decision of the Punjab and Haryana High Court in the case of CIT v. Bhan Singh Boota Singh [1974] 95 ITR 562 is very clear on the point. In this case, the question for consideration was the application of the Explanation to Section 271(1)(c) in respect of penalty for the assessment year 1963-64 where return of income had been filed on 9-4-1964. Their Lordships clearly held that if the return had been filed before 1-4-1964 the amended law and the Explanations would have no application to it.

However, where the return is filed after coming into force of the new law, those provisions held that the law applicable would be the law, which was in force when the concealment took place. If this was the position regarding the Explanation to Section 271(1)(c) which came with effect from 1-4-1964, similar consideration would apply to the changed law which came into force from 1-4-1976.

The reliance by the assessee on the decision of the Punjab and Haryana Fligh Court in the case of CIT v. Mela Ram Jagdish Raj & Co.

[19811 132 ITR 897 is misconceived as this case related to the question of jurisdiction of the IAC and it was held that it has to be determined according to law in force at the time of the initiation of the proceedings and not on the date of reference to the IAC as we have already discussed above the principles of law regarding the question of jurisdiction would not be applicable to the question of either the quantum of penalty or the concept of concealed income as expanded in the Explanation to the main section of Section 271(1)(c).

12. In view of the above discussion, we hold that the learned Commissioner (Appeals) erred in holding that the penalty orders passed in this case were illegal. The law applicable for this purpose would be the law which was in force on the date of the filing of the returns. Moreover, we agree with the departmental representative that the learned Commissioner (Appeals) should not have cancelled the penalty orders without considering whether the penalties were imposable under the main provisions of Section 271(1 )(c). The mention of Explanation to Section 27l(1)(c) does not mean that the main provisions have not been applied and it is necessary to give a finding whether the penalty was imposable under the main provisions itself. For this reason as well the order of the Commissioner (Appeals) cannot be upheld particularly in view of the fact that in respect of some additions of the same nature in past penalties had been held to be leviable.

12. The above order passed on 6-2-1982 and has been consistently followed by this Bench in several other cases. Only recently this Bench had followed this decision in the case of Partap Steel Rolling Mills (P ) Ltd. [IT Appeal No. 195 (Asr.) of 1981]. While coming to the above conclusion, the Bench had taken into consideration all the case laws including the decision of the Punjab and Haryana High Court in the case of CIT v. Bhan Singh Boota Singh [1974] 95 ITR 562. The Bench had further considered the decision of the Punjab and Haryana High Court in the case of CIT v. Mela Ram Jagdish Raj & Co. [1981] 132 ITR 897, which had followed the decision in the case of Raman Industries (supra). The Tribunal had held that the reliance on the ratio in this case was misconceived as this case related to the question of jurisdiction of the IAC and it was to be determined in accordance with the law in force at the time of the initiation of the proceedings.

13. It may be mentioned that before us the revenue had relied upon the above order of the Tribunal as well as the decision of the Punjab and Haryana High Court in the case of Bhan Singh Boota Singh (supra).

Unfortunately, there is no discussion in the order recorded by the learned Judicial Member which may show the reasons for departing from the view taken by this Bench in the case of Modern Textile & Finishing Mills (supra) and several other cases. On this issue, a question of law has also been referred by us to the Hon'ble High Court. In view of the detailed decision given in the case of Modern Textile & Finishing Mills (supra), I see no reason to depart from that view. I would, therefore, hold that the Commissioner (Appeals) erred in coming to the conclusion that in this case Explanation to Section 271(1)(c), which was on the statute book up to 1-4-1976, was not applicable. I further hold that the Explanation was applicable as the return of income had been filed on 3-10-1975. The Commissioner (Appeals) has considered the whole order invalid only on this ground. In my opinion, there he was in error.

14. Even if for argument's sake he was of the view that Explanation to Section 27l(1)(c) was not applicable to this case, it was the duty of the Commissioner (Appeals) to give a finding about the charge of concealment of income as the penalty had been imposed under the provisions of Section 271(1)(c) and that provision continued to be the same even at the time of imposition of penalty. The Explanation which was on the statute book was a rule of evidence and gave circumstances under which there was some presumption of concealment. If a particular rule of evidence is not applicable, it would not mean that the whole proceedings are vitiated and the Commissioner (Appeals) should have given a clear finding whether under the law which he considered to be applicable penalty was leviable or not. This the Commissioner (Appeals) has not done.

15. The Commissioner (Appeals) found that certain explanation has been given by the assessee. The two explanations referred to in his order are, in fact and in substance, only one explanation though repeated. As in this case, there was a presumption of concealment in the eyes of law and it was necessary for the Commissioner (Appeals) to consider the substance of those explanations and to hold whether that presumption stood rebutted by the submissions or the materials placed by the assessee. In not considering this aspect of the matter, the Commissioner (Appeals) definitely erred. The scope of the Explanation to Section 271(1)(c) had been considered by the Full Bench of the Punjab and Haryana High Court in the case of Vishwakarma Industries v.CIT[1982] 135 ITR 652. It was held by the Hon'ble High Court that by adding the Explanation the burden of proof had been shifted to the assessee. It was further held that once the Explanation is held to be applicable to the case of the assessee, it straightway raised three legal presumptions, namely: (i) that the amount of the assessed income is the correct income and it is in fact the income of the assessee himself; (ii) that the failure of the assessee to return the correct assessed income was due to fraud; or (iii) that the failure of the assessee to return the correct assessed income was due to gross or wilful neglect on his part.

This was, therefore, held to be a rule of evidence and the presumption should be rebutted by the assessee. The burden of discharging the onus was to be discharged by preponderance of evidence. The High Court did not accept that in spite of the above Explanation the ratio of CIT v.Anwar Ali [1970] 76 ITR 696 (SC) was still applicable. Their Lordships overruled their earlier decision in the case of Addl. CIT v. Kamail Singh V. Kaleran [1974] 94 ITR 505 (Punj. & Har.).

16. In view of the above legal position, it is necessary to give a finding whether the presumptions raised under law have been rebutted by the Explanation given by the assessee. The Commissioner (Appeals) has not considered it necessary to go into this matter. I am of the view that without giving this finding he could not have deleted the penalty under Section 271(1)(c). I, therefore, hold that this is a case where the Explanation to Section 271(1)(c) [as existing on the date of the filing of the return] was applicable and there was a presumption of concealment. I further hold that the matter should go back to the Commissioner (Appeals) for giving a clear finding regarding the rebuttal of such presumption on the basis of material on record and the explanations of the assessee. I would, therefore, allow the departmental appeal for statistical purposes.

1. In an assessment made on 28-9-1978 the ITO included a sum of Rs. 34,300 being the income from two trucks DHG 2180 and PNO 4955, which the assessee had not shown in his return. On the matter going on appeal the income from these two trucks was fixed by the Tribunal at Rs. 11,000. Treating the assessee as having concealed the income from the trucks, the ITO started penalty proceedings and by his order dated 31-3-1981 levied a penalty of Rs. 18,460. On appeal, the Commissioner (Appeals) cancelled the penalty holding the penalty order to be bad in law. Inter alia, he held that the ITO did not follow the procedure for levying penalty laid down in the Act with effect from 1-4-1976 but the procedure 'which was no longer on the statute book as on the date on which the penalty proceedings were initiated and, therefore, imposed a penalty for a wrong reason'. He also held that the ITO had passed the order without taking into account the explanations filed by the assessee. The final decision of the Commissioner (Appeals) is as under: For the aforementioned reasons, I quash the order under Section 271(1)(c) imposing a penalty of Rs. 18,460 on the assessee." 2. Before the Tribunal, the learned Judicial Member confirmed the order of the Commissioner (Appeals). According to him, who went on the basis that the penalty was levied on the basis of the Explanation to Section 271(1)(c), the ITO was not satisfied that the assessee has concealed the income. Any satisfaction which the Commissioner (Appeals) could have on the point could not be substituted for the satisfaction of the ITO. The assessee's explanation for the alleged omission had not been considered by the ITO. He also held that the Commissioner (Appeals)'s finding that the Explanation to Section 271(1)(c) was not a part of the statute when the penalty proceedings were initiated was well conceived in law.

3. The learned Accountant Member, on the contrary, held that the Commissioner (Appeals) could not have deleted the penalty under Section 271(1)(c). The Explanation to Section 271(1)(c) as existing on the date of filing of the return was applicable in the case and there was a presumption of concealment. Since the Commissioner (Appeals) had not adjudged on the rebuttal of this presumption, according to the learned Accountant Member, the matter was to go back to the Commissioner (Appeals) for 'a clear finding regarding the rebuttal of such presumption on the basis of material on record and the explanations of the assessee'.

4. The two Members, thus, having differed, the points of difference have been referred to me as the Third Member in the following form: 1. Whether, on the facts and in the circumstances of the case, the Explanation inserted by the Finance Act, 1964, which was substituted by other Explanation with effect from 1-4-1976 would be applied to these proceedings which had been initiated by issue of notice under Section 271(1)(c) on 28-9-1978 2. Whether, on the facts and in the circumstances of the case, the order of the Commissioner (Appeals) cancelling the penalty imposed under Section 271(1)(c) was to be upheld or the matter should be restored to the Commissioner (Appeals) for giving his fresh findings ?"' 5. The parties were heard and the facts gone into in detail. The learned counsel for the department pointed out that the penalty was levied both on the substantive provisions of Section 271(1)(c) as well as the Explanation thereto. The Explanation, as understood by the ITO, was relevant in the context of the case and the assessee's explanations for the omission not being available, the ITO correctly levied the penalty. Stressing the points made out in the ITO's order as well as those obtaining in the learned Accountant Member's order, the learned counsel pointed out that the penalty had been correctly levied. Even if the explanations to the show-cause notice filed by the assessee were not treated as having been considered by the ITO, they were definitely considered by the Commissioner (Appeals) and to this extent the assessee's grievance did not exist. The law enforceable before 1-4-1976 was applicable and the penalty levied on that basis was, therefore, according to the learned counsel, to be sustained.

6. For the assessee it was pointed out that as validly explained by the assessee in his replies, there was no factual concealment. In fact none of the authorities pointed out that there was any factual concealment.

Reliance was placed only on the Explanation to Section 271(1)(c) and that too as a rule of evidence and procedural law not only to levy high quantum of penalty on the assessee but also to make him liable to the levy itself. It is pointed out that the assessee's explanations were never considered in the first place. Both, for the purpose of making out a factual case of concealment and for attracting the deeming provisions of the Explanation, the assessee's explanations to the show-cause notice had to be considered. This had not been done by the ITO. The levy of penalty, therefore, was not justified.

7. I have considered the case. A reading of the order of the ITO and also the orders of the other authorities leaves me with no doubt that no allegation of a direct factual concealment of income or furnishing of inaccurate particulars has been made. Resort has been made only to the Explanation to Section 271(1)(c) for the levy of the penalty and the dispute apart from other things relates to the actual provisions of the Explanation which was applicable, to the case. Even so as the facts above mentioned indicate, the Commissioner (Appeals) as well as the two learned members of the Tribunal have noted that the assessee had sent in three replies to the show-cause notice. The ITO had not taken into account any one of these. In fact he had gone on the basis that there was no reply to the show-cause notice leading to the inevitable conclusion that the assessee had no explanation to offer. If this be so, it leads to two direct consequences. In the first place both on the basis of the statute Section 274 of the Act and the principles of natural justice no penalty can be levied unless the assessee has been given an opportunity to present his case. It is true that the show-cause notice has been issued to the assessee. He has also replied to them not once but thrice. The ITO, however, did not take into account any one of these replies. In fact he proceeded on the basis that no reply was received. Both the statutory provisions regarding granting of opportunity and the principles of natural justice require that the opportunity given should be a real opportunity. Not only should the party know what to answer, but he must also be able to furnish the answer, which should be considered before deciding the matter. The widest limits of the principles of natural justice reinforced statutorily in the present case by Section 274 could be gathered from the Supreme Court decision in Smt. Maneka Gandhi v. Union of India AIR 1978 SC 597. In this case the assessee had no opportunity to present his case. As a matter of law, therefore, the levy of penalty is not justified and the penalty order has to be cancelled. An argument was made by the learned counsel for the department that insofar as the Commissioner (Appeals) had the opportunity to look into replies of the assessee, the assessee must be deemed to have been given the requisite opportunity at least at that stage. Whether granting of an opportunity, at the initial stage is necessary or the granting of the same at any subsequent stage would be sufficient has also been considered in Smt.

Maneka Gandhi's case (supra). Applying the principles laid down therein it cannot be held that the assessee had an opportunity. This argument of the departmental representative, therefore, cannot be upheld.8. Even as a matter of fact while the issue of a show-cause notice would start proceedings, the ITO cannot come to any factual conclusion about the concealment unless he had seen the assessee's explanations.

The assessee may have a valid reason for not indicating any particular income in his return or furnishing any particular type of particulars.

Unless the ITO looks into it, even as a matter of fact, he cannot come to a conclusion about concealment. By holding erroneously that the assessee has not cared to reply to the show-cause notice and by not looking into the replies, the ITO, thus, has made an unjustified presumption that the assessee had no explanation to offer. Both as a matter of law and fact, therefore, the levy of penalty is not justified and if the penalty is levied, it has to be cancelled. These defects go to the root of the matter. To question as to whether there was concealment or not under the provisions of the section itself or the Explanation thereto, would be subsequent enquiries. Insofar as the very basis, legal as well as factual, for the levy of penalty does not exist in the present case, in my opinion, the subsequent issues do not arise for consideration at all. In this view of the matter, in my view, the first question referred to me would be purely academic and a decision in the abstract. It is only after the basic requirements of the levy are justified, can one think of the Explanation to Section 271(1)(c), if at all it be relevant. Being abstract not relevant to the issue on hand, I am, therefore, not answering question 1 referred to me.

9. The second point of difference referred has itself two parts: (i) whether the Commissioner (Appeals) was correct in cancelling the penalty imposed under Section 271(1)(c), and (ii) whether the matter should be restored to the Commissioner (Appeals) for giving fresh findings. As far as the first question is concerned, in view of the basic failure of the ITO to give an opportunity to the assessee before levying the penalty, the penalty has to be cancelled and I have to hold that the Commissioner (Appeals) was correct in cancelling the penalty.

On this point, therefore, I would agree with the learned Judicial Member though not for the reasons stated by him.

10. The second point is whether the matter should be restored to the Commissioner (Appeals) for giving his fresh findings. Whereas the learned Judicial Member has agreed with the Commissioner (Appeals), the learned Accountant Member has suggested that the matter must go back to the Commissioner (Appeals) for considering the question of rebuttal with regard to Section 271(1)(c), Explanation. Insofar as I have not answered question 1 referred to me, the application of Section 271(1)(c) Explanation being academic, I cannot agree with the learned Accountant Member that the matter should go back to the Commissioner (Appeals) for giving any fresh findings on the question of 'rebuttal of presumption' with regard to Explanation to Section 271(1)(c). There, however, remains an important point as to the levy of the penalty itself. Decisions in Guduthur Bros. v. ITO [1960] 40 ITR 298 (SC) and CIT v. National Taj Traders [1980] 121 ITR 535 (SC) indicate that in certain circumstances, even though there is a failure of the authorities to follow mandatory requirements, the appellate authorities can remit the matter back to the original authorities for the purpose of pursuing the matter from the stage where invalidity sets in. On account of the manner in which the matter has been dealt with by the original Bench of the Tribunal this question has not been considered by the Bench. The learned counsel for the assessee has pointed out that insofar as the mandatory requirements of law have not been complied with, the order of the ITO requires to be cancelled. According to the learned counsel an appellate authority can deal with a penalty order only by enhancing the penalty, reducing the penalty or altogether cancelling it. In the present case, the last action should be taken.

There was no scope for remitting the matter back to the ITO to proceed from the stage in which an invalidity set in. It is also pointed out that at any rate the time limit for levying the penalty having passed by remitting the matter back to the ITO, the period of limitation cannot be extended. For the department, the learned counsel has pointed out that the ITO's order had merged with that of the Commissioner (Appeals). Reference is made to the decision in Kashmir Vastralaya v.CIT [1978] 112 ITR 630 (Pat.). The ratio of Supreme Court decision in the case of Guduthur Bros, (supra), therefore, clearly supports his case that the matter should be remitted to the ITO for proceeding from the stage from which, according to him, not an invalidity but a mere irregularity set in.

11. As would be clear the points of difference referred to me for decision set out above do not involve the consideration of the question whether in view of the initial irregularity which goes to the root of the levy of penalty, the penalty being cancelled, the matter should be remitted back to the ITO for further proceedings. I have as a Third Member no juridiction to decide this question. In view of my decision as above, the matter may, if permissible, be agitated before the original Bench which heard the appeal, to which this will now go back for decision according to law.


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