1. In this reference under section 256(1) of the Income-tax Act, 1961 (hereinafter referred to as the Act), the following questions have been referred to us by the Tribunal :
'(1) Whether, on the facts and in the circumstances of the case, the proceedings for the imposition of penalty were properly commenced in the course of any proceedings under the Act as required by section 271 of the Income-tax Act, 1961, for the assessment years 1959-60 to 1962-63
(2) Whether, on the facts and in the circumstances of the case, there was any material or evidence before the Tribunal to hold that the assessee had deliberately concealed particulars of his income or deliberately furnished inaccurate particulars of such income as required by section 271(1)(c) of the Act for the assessment years 1959-60 to 1962-63 ?'
2. The assessee, who is the applicant before us, is an individual and the relevant assessment years are 1959-60, 1960-61 and 1962-63. So far as the assessment years 1959-60 and 1960-61 were concerned, the assessee was initially assessed under section 23 of the Income-tax Act, 1922. However, the Income-tax Officer subsequently found that the income from the business, which was carried on in the name of M/s. Kohinoor Grain Mills sales Depot, was not included in the returns filed by the assessee; nor had the assessee shown any connection or interest with the said business so far as the assessment year 1959-60 was concerned. For the remaining three years, 1960-61, 1961-62 and 1962-63, the assessee had only disclosed 20% as his share of the profit of the said Messrs. Kohinoor Grain Mills Sales Depot (hereinafter referred to as the alleged firm.) The Income-tax Officer was of the opinion that the alleged firm was not a genuine partnership but was the sole proprietary concern of the assessee and the whole of the income from the alleged firm belonged to the assessee. Therefore, the Income-tax Officer reopened the assessment for the years 1959-60 and 1960-61 and so far as the assessment year 1961-62 was concerned, the assessed the income of the assessee by including the entire income of the alleged firm in the income of the assessee. The reassessment proceedings were carried out under the provisions of the 1961 Act and, for the assessment year 1961-62, the assessment was under section 143 of the Act of 1961. The non-disclosure of the business profits of the alleged firm was considered by the Income-tax Officer to represent deliberate concealment and so he initiated penalty proceedings under section 271 for all the four assessment years. As the minimum penalty leviable under section 271(1)(c) exceeded the sum of Rs. 1,000 in each of these four years, the cases were referred to the Inspection Assistant Commissioner under the provisions of section 274(2) of the 1961 Act. After giving an opportunity to the assessee of being heard and after hearing the assessee, the Inspecting Assistant Commissioner came to the conclusion that the assessee had concealed his income and deliberately furnished inaccurate particulars for all the four assessment years and he, therefore, levied penalties for each of the four assessment years in question. Against the decision of the Inspecting Assistant Commissioner levying penalties for the four years, the assessee appealed to the Tribunal and the Tribunal upheld the order of penalty so far as the question of levying the penalty was concerned but the quantum of penalty was reduced for some of the assessment years. Thereafter, at the instance of the assessee, the above two questions have been referred to us by the Tribunal.
3. It may be pointed out that the alleged partnership firm in the name of M/s. Kohinoor Grain Mills Sales Depot was started on September 6, 1958, and the accounting year closed with the Diwali of that particular Samvat Year, which occurred some time in November, 1958. This alleged partnership firm was a unregistered firm so far as the assessment year 1959-60 was concerned. No application for registration of the firm under the provisions of the Income-tax Act was made for the assessment year 1959-60 but applications for registration were made for the assessment year 1960-61, 1961-62 and 1962-63. The Income-tax officer refused registration under section 26A of the 1922 Act for the assessment years 1960-61 and 1961-62 and under section 185 for the assessment year 1962-63. Against the order refusing registration, there was a appeal and the Appellate Assistant Commissioner confirmed the refusal. There was a second appeal for each of these years to the Tribunal and by a common judgment delivered by the Tribunal on June 14, 1965, all the three appeals were dismissed and the Tribunal confirmed the orders of the Income-tax authorities refusing registration to the firm for all the three assessment years for which registration had been sought. The order passed by the Tribunal while disposing of those three appeals is part of the record of this reference and, while disposing of the four appeals regarding the levy of the penalty, the Tribunal quoted from its order, dated June 14, 1965, regarding registration of the firm. In the group of three appeals, while disposing of the three applications for registration of the firm, the Tribunal held that not only was there no firm in existence as alleged by the partnership deed but that the business belonged to Shri D. M. Manasvi (the assessee before us). The Tribunal in that order of June 14, 1965, appreciated the evidence on the record of the Income-tax Officer in registration proceedings and came to the conclusion that the profits of the alleged firm were disposed of after the assessee became the sole proprietor of the business and, even before the business under the guise of loans to be utilised for his own purpose. There was not doubt left in the mind of the Tribunal that the business was under the control of the assessee and that the other partners were mere nominees and the minors who were admitted to the benefit of the alleged partnership firm were the grand-children of the assessee. The accumulated profits while the business was run in the name of the partnership firm were taken over by the assessee for use according to his own sweet will ad the final disposition of the profits of the alleged firm was made only after the assessee became the sole proprietor of the business. In view of these conclusions which the Tribunal had drawn in its order, dated June 14, 1965, when the Tribunal came to deal with the question of penalties levied by the Assistant Inspecting Commissioner in respect of each of the four years in question, it proceeded on the footing that the assessee had deliberately concealed income in each of the four assessment years in question by adopting this guise of starting a partnership concern, there other partners of which were his own dummies and the minors admitted to the benefit of the partnership were his own grand-children.
4. At the hearing of the reference before us, Mr. Kaji, on behalf of the assessee, urged the following two points. He firstly contended that both under the provisions of the Act of 1922 and also under the provisions of the Act of 1961, it was necessary that the penalty proceedings must start in the course of and during the pendency of the assessment proceedings; and it was his contention that the penalty proceedings were not properly commenced in the course of the assessment proceedings under the new Act; and his second contention was that, so far as the facts of the instant case were concerned, there was no material or evidence before the Tribunal to hold that the assessee had deliberately concealed particulars of his income or deliberately furnished inaccurate particulars of his income as required by section 271(1)(c) of the Act of 1961.
5. Under section 28 of the 1922 Act, penalty for concealment of income was provided for and the opening words of that section were :
'If the Income-tax Officer, the Appellate Assistant Commissioner, or the Appellate Tribunal, in the course of any proceedings under this Act, is satisfied that any person - ....
(c) has concealed the particulars of his income or deliberately furnished inaccurate particulars of such income, he or it may direct that such person shall pay by way of penalty....'
6. No period of limitation for starting the penalty proceedings was laid down in the Act of 1922.
7. Section 271 of the Act of 1961 provides that, if the Income-tax Officer or the Appellate Assistant Commissioner in the course of any proceedings under the Act is satisfied that any person has concealed the particulars of his income or deliberately furnished inaccurate particulars of such income, the penalty proceedings can be started. Section 275 is material for the purposes of this judgment and is in these terms :
'No order imposing a penalty under this Chapter shall be passed after the expiration of two years from the date of the completion of the proceedings in the course of which the proceedings for the imposition of penalty have been commenced.'
8. The Explanation to section 275 of the Act of 1961 is not material for the purpose of this judgment.
9. The question, therefore, is as to when the proceedings for levying penalty which, according to the Income-tax Officer or the Appellate Assistant Commissioner, falls under section 271, can be commenced by the officer concerned under the provisions of section 271(1)(c). We have referred to the provisions of section 28 of the 1922 Act because the decided cases, which have explained the words 'in the course of any proceedings under the Act', are all with reference to section 28 of the 1922 Act.
10. In Sivagaminatha Moopanar & Sons v. Income-tax Officer, the Madras High Court considered the phrase, 'in the course of any proceedings under the Act', and came to the conclusion that the proceedings for the levy of a penalty must be initiated by an authority when such authority is in season of the assessment or other proceedings in the course of which it is found that the assessee has brought himself within the mischief of section 28; but when once notice has been issued, the jurisdiction of that authority to continue the proceedings is not dependent upon the continuance of the proceedings in the course of which the penalty proceedings came to be initiated; the penalty may be levied notwithstanding that on the date of the actual order of levy, the proceedings in the course of which the concealment took place had terminated. In that decision, the Madras High Court approved the usual practice followed by the income-tax department of initiating proceedings for the levy of penalty; and at page 613 of the report, it has been pointed out :
'The quantum of the penalty is based wholly upon the final assessment figures, for, under the terms of the section, the penalty is not to exceed 'one and a half times the amount of the income-tax and super-tax, if any, which would have been avoided if the income as returned by such person had been accepted as the correct income.' This difference could not obviously be ascertained until the assessment is completed. The usual practice, we understand it to be, is that when an Income-tax Officer finds that an assessee has concealed his income or has deliberately furnished inadequate particulars of it, he estimates the concealed income, adds it to the income returned and levies tax on the entirety of the income as thus determined in his assessment order. At the same time he issues notice to the assessee to show cause why a penalty should not be levied under section 28(1) and (3). But the assessee is not heard and not final conclusion is reached at that stage. The assessment is completed and a demand is made for the tax, of course including that on the concealed income which is added to the income returned. The assessee may take the matter on appeal and it is possible that the income as assessed may undergo variations during this process. Until the final assessment figures as finally determined, the Income-tax Officer pursues the notice already issued. In cases where the addition of the income discovered by the Income-tax Officer is sustained by the appellate authorities, the Income-tax officer resumes the penalty proceedings, hears the assessee and being then in possession of figures to enable him to properly assess the penalty leviable, passes an order in proper cases under section 28(1) after obtaining the approval of the Inspecting Assistant Commissioner. This practice appears to us to be fair to the assessee and not contrary to the language of the enactment.'
11. In Vir Bhan Bansi Lal v. Commissioner of Income-tax, the Lahore High Court held that where notice under section 28 of the Act for the imposition of penalty has been issued before the assessment order is made, a penalty under that section may be imposed on a date subsequent to the date of the assessment order and even after the income-tax assessed has been paid by the assessee. At page 623 of the report, the Lahore High Court has pointed out :
'As regards the limit of time when the income-tax authorities are to be satisfied that any concealment has taken place or any particulars have been deliberately furnished inaccurate there appears to be no ambiguity and consequently no dispute. It is common ground that this satisfaction must take place in the course of any proceedings relating to the assessee, whatever the nature of those proceedings may be. The difficulty arises only in the matter of determining the point of time when the direction as contemplated by the word 'payable' as used in the sub-section and urges that by the use of this term the legislature intended to restrict the exercise of the power conferred by this sub-section to the period when the liability of a assessee was determined and before the tax was paid and consequently this power cannot be denied that the interpretation sought to be put upon it by the Commissioner is not impossible. Considering that the former interpretation may lead to absurd results and that the latter is more in consigns with reason, we have no hesitation in adopting the interpretation suggested by the Commissioner. There is no magic in the word 'payable'.... We see no justification for holding that the order should either be contemporaneous or simultaneous with the order of assessment. Neither is it intended to delay the assessment proceedings in order to enable the Income-tax Officer to make up his mind as to the imposition of penalty nor is the order of imposition to be accelerated merely to synchronise it with the assessment order.'
12. Thus, the Lahore High Court's decision mainly turned upon the question whether the penalty order was to be contemporaneous with or simultaneous with the assessment order itself; and the High Court proceeded upon the footing that the proceedings were required to be initiated on the satisfaction of the officer concerned under section 28(1) during the pendency of the main proceedings.
13. In Anant Ram Kanhaiyalal v. Commissioner of Income-tax, the Allahabad High Court pointed out that section 28(3) of the Income-tax Act, 1922, nowhere requires the issue of a notice to show cause against the imposition of a penalty. Such a notice not being prescribed under any provision of law, no question can arise regarding the validity of such a notice or the fresh issue of such a notice. The only basis on which a penalty imposed can be challenged under section 28(3) of that Act is that the assessee was neither heard nor given a reasonable opportunity of being heard. At page 80 of the report, Bhargava J., delivering the judgment of the Division Bench, has pointed out :
'The practice of the income-tax department no doubt is that a printed notice is issued calling upon the assessee to submit his explanation either in writing or in person when the Income-tax Officer proposes to impose a penalty under section 28(1) of the Act. Such a notice not being prescribed under any provision of law, no question can arise about the validity of such a notice...'
14. This decision of the Allahabad High Court is material for the purpose of this judgment as it rightly points out that no such notice has been prescribed under any of the provisions of the Income-tax Act of 1922; nor has the legislature prescribed any such notice under the provisions of the Act of 1961; and the notice to the assessee concerned is issued only for furnishing him an opportunity of being heard before the penalty is levied. It is only for the purpose of furnishing this opportunity of being heard that, as required by the statute, the income-tax department issues a notice on a printed form and that form is not statutorily prescribed.
15. In Guru Prosad Shaw v. Commissioner of Income-tax the Calcutta High Court held that there was nothing in the provisions of section 28 from which it can be said that the notice under sub-section (3) must be given before the conclusion of the assessment and the attention of the Court has not been drawn to any other section of the Act by which such requirement was necessary. According to the Calcutta High Court, the matter was concluded by the wording of sub-section (1) of that section and the Calcutta High Court also pointed out that there was no time-limit prescribed under the Act for the issue of the notice calling upon the assessee to show cause why penalty should not be imposed; and it was emphasized that it was sufficient under the provisions of section 28 that the officer concerned was satisfied during the course of the proceedings and, if he was satisfied during the course of the proceedings, he might issue a notice in the provisions of the Act which made it imperative upon the income-tax authorities to serve a notice for showing cause why penalty should not be imposed during the course of any proceedings under the Act.
16. In Venkatadri Iyer & Sons. v. Commissioner of Income-tax, the Kerala High Court followed the decision of the Calcutta High Court in Guru Prosad Shaw's case.
17. In Artisan Press Ltd. v. Income-tax Appellate Tribunal, the Madras High Court referred to its earlier decision in Sivagaminatha's case and held that 'to initiate' means 'to originate' or 'to take the first step'. In that case it was held that the direction given by the Appellate Tribunal while disposing of the appeal under section 33(4) of the Act of 1922 to issue notice under section 28 contained in the notes on the record was initiation of penalty proceedings and, therefore, the terms of section 28(1) were satisfied and the order of the Tribunal was within its jurisdiction. In that case, the Appellate Tribunal, in the proceedings in appeal before it, discovered that the assessee company had concealed its income and furnished inaccurate particulars thereof in its return and the Tribunal had recorded a note to that effect in the order while disposing of the appeal. This note was recorded on October 7, 1955, and on the same date directions for the issue of the notice under section 28, as evidenced by the notes on record, were given. The order disposing of the appeal was served only on October 13 and in the meanwhile the notice under section 28 was issued and served on October 10, 1955; and it was held that the direction to the office to issue a notice on October 7, was the first step taken in connection with the penalty proceedings.
18. In Chennuru Venkataramanaiah Chetty & Bros. v. Income-tax Officer, the Andhra Pradesh High Court held that the notice under section 28 of the Income-tax Act, 1922, for the imposition of penalty, which was issued to the petitioner on March 21, 1952, the date on which the assessment proceedings were completed, was a proper notice. The Andhra Pradesh High Court in that case held that the restriction imposed on the income-tax authorities under section 28 was only with regard to their satisfaction within the time when proceedings are pending before them as to the concealment of income or the non-furnishing of the return; that was the only limitation imposed thereunder; and it was held that the Income-tax Officer had jurisdiction to issue the notice under section 28(1) of the Act.
19. These decided cases, all under section 28(1) of the 1922 Act, clearly go to show that the satisfaction of the officer concerned under section 28 of the Act was required to be reached during the course of the proceedings in the course of which the concealment of the particulars of income or deliberate furnishing of inaccurate particulars of such income came to the notice of the officer concerned; and the view of the Madras High Court that such proceedings must be initiated while the officer concerned was in seisin of the main proceedings seems to be the view which is most favourable to the assessee.
20. Unlike the Act of 1922, the Act of 1961 provides in section 275 that an order imposing penalty must be passed within two years from the date of the completion of the main proceedings, i.e., the proceedings in the course of which the proceedings for the imposition of penalty have been commenced. Though section 275 does not directly lay down that the penalty proceedings must be commenced before the completion of the main proceedings in the course of which the satisfaction of the officer concerned was reached under section 271(1) by necessary implication, it does indicate that the order imposing the penalty must be passed within two years from the date of the completion of the main proceedings and by using the words 'in the course of which the proceedings for the imposition of penalty have been commenced', the legislature does indicate that the proceedings for the levy of penalty must have been commenced before the completion of the main proceedings, i.e., the proceedings in the course of which the satisfaction of the officer concerned was reached. Since this is the view which is more favourable to the assessee, and since some support for the view in favour of the assessee can be derived from the language of section 275, though there is no direct provision to that effect, we will proceed, in view of the fact that this is a penal provision, by adopting the view which is favourable to the assessee.
21. The question then arises as to whether, in the instant case, the penalty proceedings were commenced by the Income-tax Officer concerned during the pendency of the main proceedings. In each of the assessment orders for the four assessment years 1959-60, 1960-61, 1961-62 and 1962-63, the Income-tax Officer concerned has mentioned as follows :
'Issue notice under section 275 for the proposed penal action under section 271(1)(c) in respect of concealment or furnishing inaccurate particulars of income from M/s. Kohinoor Grain Mills Sales Depot.'
22. And necessarily the amount which was held to have been concealed for each of the four years was different but the directions for issuing a notice for the proposed penal action was identical in each of the four years. It is, therefore, clear that the decision to commence the peal action on the part of the Income-tax Officer concerned was taken before the main reassessment proceedings for the two years, and the assessment proceedings for the last two years were completed by passing the assessment order in question. It was in the course of these reassessment proceedings for the first two years and the assessment proceedings for the last two years that the Income-tax Officer came to the conclusion that there was concealment of income and furnishing of inaccurate particulars regarding the income derived by the assessee from M/s. Kohinoor Grain Mills sales Depot; and having reached that satisfaction as contemplated by section 271(1), proceedings under clause (c) of section 271(1) were commenced by passing the appropriate orders in that behalf. It is thereafter that the proceedings were initiated and ultimately penalty was levied in pursuance of the notices issued under section 274 of the Act of 1961. As the Madras High Court has pointed out in Artisan Press Ltd.'s case, to initiate proceedings means to commence proceedings of this kind or to take the first step in the penalty proceedings and the first step was taken by the Income-tax Officer in each of these four orders by placing on record his direction that penal action should be started under section 271(1)(c) against the assessee for concealment of income or furnishing inaccurate particulars about his income from M/s. Kohinoor Grain Mills sales Depot. Under these circumstances, it is clear that the proceedings were properly commenced during the pendency of the main assessment proceedings or reassessment proceedings and the requirements of the statute as set out in section 271 read with section 275 of the Act of 1961 were satisfied in the instant case.
23. Regarding the penalty proceedings for assessment year 1961-62, Mr. Kaji drew our attention to the fact that the return in this case was filed by the assessee on November 21, 1961, i.e., before 1st April, 1962, when the Income-tax Act of 1961, came into force. In Commissioner of Income-tax v. Hiralal Mohanlal Shah, this High Court interpreted the provisions of sections 297(2)(g) and 271(1) of the 1961 Act. In that particular case, the assessee filed his return for the assessment year 1960-61 before 1st April 1962. The Income-tax Officer did not accept the figure of total income and passed the assessment order in November 1962, under the Act of 1922. He, therefore, initiated the proceedings for the imposition of penalty under section 271(1)(c) of the Act of 1961, and passed an order imposing penalty under section 271(1)(c) read with section 297(2) of the Act of 1961; and it was held by this court that by reason of section 297(2)(a), the proceedings for assessment were proceeding that the Income-tax Officer was satisfied that the assessee had concealed particulars of his income. The condition precedent for the exercise of power under section 271(1) was not satisfied and so the order of penalty was not valid. In the instant case also as the return was filed by the assessee for the assessment year 1961-62 before April 1, 1962 the assessment proceedings were in respect of an assessment year prior to April 1, 1962; and as shown by the order, which is on the record of this reference, the assessee was assessed for the year 1961-62 under section 23(3) of the Act of 1922. Under these circumstances, it is clear that the case directly falls within the ratio of the decision of this High Court in Hiralal's case, order levying penalty for the assessment year 1961-62 was invalid and to that extent the reference in connection with the assessment year 1961-62 must be answered in favour of the assessee.
24. As regards the second contention regarding the materials before the authority levying the penalty, Mr. Kaji relied upon the decision of this High Court in Commissioner of Income-tax v. L. H. Vora and contended that in the penalty proceedings there were no materials other than the materials which were disclosed in the assessment proceedings which would justify the levy of penalty. Now, in L. H. Vora's case what has been laid down is that the mere unsatisfactory nature or falsity of the explanation given by the assessee is not sufficient for coming to the conclusion that the receipt in question was income and that there had been concealment of income. This High Court in that case held that the decision of the Bombay High Court in Commissioner of Income-tax v. Gokuldas Harivallabhdas was still good law and that the Supreme Court had not reversed or disapproved of the principle laid down in that case when it decided the case of C. A. Abraham v. Income-tax Officer, Kottayam, or in any other later ruling of the supreme Court; and, in terms, it was held by this court that it was not correct that the decision in Gokuldas's case was no longer good law. In the instant case what has been done by the Tribunal and by the Inspecting Assistant Commissioner is that the earlier decision of the Tribunal in registration proceedings has been relied upon for coming to the conclusion that there was a deliberate disguise created by the assessee for the purpose of concealing his income. This is not a case of unsatisfactory nature or falsity of the explanation given by the assessee but a case where a device or a deliberate disguise was created by the assessee for the purpose of concealing the income and then failing to furnish particulars of his income derived from Messrs. Kohinoor Grain Mills sales Depot. Under these circumstances, the decision in L. H. Vora's case cannot help the assessee; and there were sufficient materials on the record of the case for the authorities levying the penalty to come to the conclusion that there was concealment of income or furnishing of false particulars by the assessee. Under these circumstances, the second contention urged by Mr. Kaji on behalf of the assessee must fail.
25. We, therefore, answer the questions referred to us as follows :
Question. Answer :1. In the affirmative,but as observedabove, the penalty proceedingsfor assessment year 1961-62were invalid.2. In the affirmative.
26. The assessee will pay the costs of this reference to the Commissioner.