S. Ranganathan, J.
(1) This is a reference under Section 256(1) of the Income Tax Act 1961 and relates to the assessmentyear 1959-60. The applicant is the Commissioner of Income-taxand 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 thecase, the Tribunal was right in holding that penalty proceedings had not been initiated correctly and therebycancelling the levy of penalty under Section 271(1)(a) of the Act of 1961 ?
(2)Whether, on the facts and in the circumstances of thecase, the Tribunal was right in law in holding that proceedings for the imposition of penalty under Section 273 had not been validly initiated and thus cancelling thepenalty levied under Section 273 of the Income-tax Act.1961.
(2) The facts leading to the reference may be briefly stated. Forthe assessment year 1959-60 the assessed should have filed an estimate under Section 18A of the Indian Income-tax Act, 1922 andpaid advance tax but failed to do so. Its return of income under section 22(1) of the Income-tax Act 1922 was also due to be filedby June, 1959 but was failed only on 5-8-1961. The Income-taxOfficer completed the assessment of the assessed on 28-11-1963. Atthe bottom of the assessment order, after determining the total income at Rs. 64,663, the Income Tax Officer observed :
'PENALTYproceedings for not filing the return in time and fornot paying the tax in advance by not complying theprovisions of Section 18A(3) of the I.T. Act, 1922 areto be initiated separately.
(3) The Income-tax Officer issued two notices to the assessedunder Section 274 of the Income-tax Act 1961 calling upon him toshow cause why penalties should not be levied under Section 273 ofthe Act for failure to pay advance tax and under Section 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 thereforee invalid. Thiscontention was rejected by the Income Tax Officer who held thatpenalty proceedings had been commenced on 28-11-1963 itself whenthe assessing officer had recorded the fact of initiation of penalty inhis order under Section 23(3). He proceeded to consider whetherthere was reasonable cause for the failure on the part of the assessedto pay advance tax and file the return in time and came to the conclusion that the penalties were called for. He, thereforee, imposedpenalties of Rs. 12,705 and Rs. 4000 respectively under Section 271(1)(a) and Section 273 by separate orders dated 26-11-1975.
(4) On appeal, the Appellate Assistant Commissioner agreed withthe 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 theenalty under Section 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 theAppellate Assistant Commissioner and preferred appeals to the Appellate Tribunal. Several contentions were raised before theAppellate Tribunal but, having regard to the terms of the questionsreferred to us, only one of the contentions is material. This contentention was that, in the case of both the penalties, the proceedingshad not been initiated in the course of assessment proceedings. It waspointed out that the penalty notices has been issued only after theassessment was completed and the demand notice issued and servedon the assessed. This argument was accepted by the Tribunal. TheTribunal referred to the decision of the Madras High Court in caseof Artisan Press v. Income Tax Appellate Tribunal : 33ITR670(Mad) (1). The Tribunal pointed out that in the instant case, theIncome Tax Officer, in the assessment order, did not direct the officeto issue any notice for penalty. The notices were not even servedUpon the assessed along with the assessment order and demand notice.The penalty proceedings had thereforee not been initiated during thependency of the assessment proceedings, and hence, in the view ofthe Tribunal, the levy of penalties had to be set aside. The Tribunal,therefore, allowed the appeals preferred by the assessed. Hence thisreference.
(6) Under the Indian Income Tax Act 1922 the imposition ofpenalty was governed by Section 28. Though, the penalty for failureto file an estimate and pay advance Tax was provided for in Section 18A(9) of the Act, that provision only attracted, proceedings under section 28. Section 28 did not impose any time limit for the passingof the penalty order. The penalty order could be passed at anytime, though there have been some decisions in which orders ofpenalty passed after an unconscionably or unreasonably long lapseof time have not been upheld. All, that the section required wasthat Income Tax Officer (amongst others) could proceed to levy apenalty only if he was satisfied in the course of proceedings beforehim that the assessed had committed certain types of defaults suchas : failure without reasonable cause to file a return; failure withoutsufficient cause to comply with statutory notices and concealing orfurnishing of incorrect particulars of income. In other words theAct only required that before the assessment was completed the Income Tax Officer should have arrived at a prima facie conclusion thatdefaults of the above nature or any of them had been committed bythe assessed. It was not necessary further that this conclusion of theIncome Tax Officer must have been translated into action by initiation of steps against the assessed in this regard such as, issue of apenalty notice by the officer himself or issue of directions by theIncome Tax Officer for such issue. This position was explained bythe decision of the Supreme Court in the case of Commissioner of Income Tax v. Argidi Chettiar : 44ITR739(SC) (2) at Page 745 (SC).
(7) The 1961 Act has changed the above position. A carefulpertisal of Section 275 of this Act shows that it has laid down barsof limitation in two respects, one explicity and the other by necessaryimplication. The explicit limitation is that the order imposing thepenalty has to be passed within a particular time. While we are notconcerned with that period of limitation here, it is necessary to noticethat the period of limitation prescribed starts running from the 'endof the Financial year in which the proceedings in the course of whichaction for imposition of penalty has been initiated, are completed'.Thus, indirectly but by necessary implications, the statute has alsoprovided that the action for imposition of penalty must be initiated inthe course of (as far as we are concerned) the assessment proceedings.It is thus not enough that the Income Tax Officer is satisfied in thecourse of the assessment proceedings that a case for penalty exists,it is further necessary that he should have initiated some action forimposition of penalty in the course of such proceedings'. It dependson the facts of each case whether any such action has been initiatedbefore the date of completion of the assessment. If, even before thecompletion of the assessment, the Income Tax Officer has issued apenalty notice, it is clear that he has taken necessary action for theimposition of penalty. The above condition can also be said to besatisfied where, though a penalty notice has not been issued before thatdate, it is seen that the officer had given a direction to his officebefore 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 InspectingAssistant Commissioner under that provision though the InspectingAssistant Commissioner might apply his mind and issue a furthernotice 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 sectionitself and has also been clarified in a number of decisions which havebeen collected on page 1225 of Vol. I of the 7th Edition of Rangaand Palkivala. It is necessary to set out all these decisions here. Inthe case of Artisan Press referred to by the Tribunal : 33ITR670(Mad) , a penalty had been levied under the 1922 Act by the IncomeTax Tribunal which it then had the power to do. On the language ofthe Section 28, it was necessary for the Tribunal to have been satisfiedabout the existence of a case for penalty before the proceedings byway of appeal before it had come to an end. It was held that adirection in the order sheet on the date of the hearing of the appeal 'anotice is issued under Section 28' was sufficient compliance with thestatutory requirement. Again in Manasvi's case 1969 72 ITR 17 (3)(which has been confirmed by Supreme Court on different grounds)it was held that a direction in the assessment order for the issue of anotice for proposed penal under section 271(1)(a) was suffcient. The Delhi High Court in the case of Durga Timber v. I. T. O. 1970 79 I.T.R. 63 (4) has also agreed with the above view.
(9) In the present case, 'unfortunately, it seems to us that therequirements of the statute have not been fulfillled. There is no direction for issue of penalty notice in the assessment order. All that theIncome Tax Officer has observed is that penalty proceedings are tobe initiated separately. These are words indicative not of an initiationof steps for levy of penalty but only of possible future initiation. Onbehalf of the department, Sri Mukherjee submitted that the words usedin the assessment order should not be construed narrowly and that thesentence at the end of the assessment order (extracted earlier) shouldbe treated as sufficient for the purpose. We are unable to accept thissubmission. As explained above, the language of Section 275 envisages some positive step on the part of the Income Tax Officer beingtaken before the completion of the assessment. In our opinion, it isnot enough for the officer to record that penalty proceedings are tobe or will be initiated separately. There should be some other stepsuch as an actual direction to the office to issue a penalty notice(which threafter needs only ministerial compliance), the actual issueof a penalty notice, a reference to the Inspecting Assistant Commissioner or some other similar action. It is also not without significancethat in this case, though the assessment was completed on 28-11-1963,the penalty notices were issued by the Income Tax Officer only as lateas 16-12-1963. As rightly pointed out by the Tribunal, in cases wherethe 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 wereserved upon the assessed only after the service of assessment order andthe demand notice. All these circumstances clearly justify the conclusion of the Tribunal that no action had been initiated in the courseof the assessment proceedings for the levy of penalty. This conclusionof the Tribunal is one of fact based on the facts' and circumstances ofthe case with which this court will not interfere in a reference.
(10) For the above reasons, we have come to the conclusion thatthe questions referred to us have to be answered in the affirmative andin favor of the assessed. In the circumstance of the case. however,we make no order as to costs.