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Phusraj Gangabishan Vs. Commissioner of Income-tax - Court Judgment

LegalCrystal Citation
SubjectDirect Taxation
CourtRajasthan High Court
Decided On
Case NumberD.B. Civil Income-tax Reference No. 47 of 1972
Judge
Reported in[1985]151ITR628(Raj)
ActsIncome Tax Act, 1961 - Sections 271(1)
AppellantPhusraj Gangabishan
RespondentCommissioner of Income-tax
Appellant Advocate M.M. Vyas, Adv.
Respondent Advocate J.P. Joshi, Adv.
Excerpt:
.....have been satisfied that proceedings for imposition of penalty should be initiated, before the penalty proceedings were commenced. 271. (1) if the income-tax officer or the appellate assistant commissioner in the course of any proceedings under this act, is satisfied that any person. the bombay high court in the aforesaid circumstances held that the notices issued by the ito as well as by the iac were proper for initiation of penalty proceedings. so far as the primary condition which is required to be satisfied is concerned, namely, satisfaction that there has been concealment of income or that there has been deliberate furnishing of inaccurate particulars of income according to the provisions of clause (c) of section 271(1), as it then stood, we cannot conceive of any case where..........256(1) of the i.t. act, 1961, as arising out of its order dated september 14, 1971 :'whether the penalty proceedings in the present case were properly initiated ?'2. the facts leading to the making of this reference may be briefly stated : m/s. phusraj gangabishan of nokha, district bikaner (hereinafter called 'the assessee'), is a wholesale dealer in foodgrains. in its return of income relating to the assessment year 1965-66, the assessee fraudulently concealed part of its income and furnished inaccurate particulars of its income. certain fictitious cash credit entries were shown, which were discovered during the course of assessment proceedings to represent the income of the assessee from undisclosed sources. the ito, b-ward, bikaner, who was the assessing authority in relation to.....
Judgment:

Dwarka Prasad, J.

1. The Income-tax Appellate Tribunal, JaipurBench, Jaipur, by its order dated March 29, 1972, has referred the followingquestion of law to this court for its opinion under Section 256(1) of the I.T. Act, 1961, as arising out of its order dated September 14, 1971 :

'Whether the penalty proceedings in the present case were properly initiated ?'

2. The facts leading to the making of this reference may be briefly stated : M/s. Phusraj Gangabishan of Nokha, District Bikaner (hereinafter called 'the assessee'), is a wholesale dealer in foodgrains. In its return of income relating to the assessment year 1965-66, the assessee fraudulently concealed part of its income and furnished inaccurate particulars of its income. Certain fictitious cash credit entries were shown, which were discovered during the course of assessment proceedings to represent the income of the assessee from undisclosed sources. The ITO, B-Ward, Bikaner, who was the assessing authority in relation to the assessee, while passing the order of assessment on April 14, 1967, held that the assessee had concealed part of its income and as such issued a notice to the assessee under Section 271(1)(c) read with Section 274(2) to show cause why penalty should not be imposed upon it. As the minimum penalty imposable upon the assessee, in the circumstances of the case, exceeded a sum of Rs. 1,000, the assessing authority referred the case relating to levy of penalty to the IAC, Bikaner Range, Bikaner, under the provisions of Section 274(2) of the Act. After making an enquiry, the IAC held that the facts of the case proved beyond reasonable doubt that the assessee had income from undisclosed sources in respect of which fictitious cash credit entries were made and by making inflated claims for salary paid to employees and in other manner, the assessee concealed part of its income. As such a penalty of Rs. 15,000 was imposed by him upon the assessee under Section 271(1)(c) of the Act.

3. On appeal to the Income-tax Appellate Tribunal, Jaipur Bench, Jaipur, the Tribunal felt that there could not have been a better case for levy of penalty than the present one. The Tribunal held that the assessee fraudulently tried to introduce Rs. 50,000 in fictitious names by means of cash credit entries and later conceded that the cash credits did not belong to the ladies to whom they were attributed. Other fictitious entries were also found to exist by the Tribunal. Thus, the Tribunal held that the IAC was justified in imposing a penalty as there was deliberate concealment of income by the assessee and inaccurate particulars of its income were furnished. The Tribunal by its order dated September 14, 1971, upheld the penalty imposed by the IAC.

4. Thereafter, the assessee submitted an application under Section 256(1) of the Act before the Income-tax Appellate Tribunal, Jaipur Bench, seeking that a statement of the case be drawn up and three questions may be referred to this court for its opinion as arising out of the order of theTribunal. The Tribunal held that questions Nos. 1 and 3, desired to be referred by the assessee, were questions of fact on the basis of which the Tribunal had arrived at the conclusion that the assessee had concealed its income and had furnished inaccurate particulars of its income. However, as regards the proposed question No. 2, the Tribunal held that it was a question of law and after reframing the question, the same has been referred to this court as quoted above.

5. The argument of the learned counsel for the ass.essee is two-fold. Firstly, it was submitted by him that the penalty proceedings in a case where the minimum penalty imposable exceeded Rs. 1,000 should have been initiated by the IAC and the second submission was that the ITO should have been satisfied that proceedings for imposition of penalty should be initiated, before the penalty proceedings were commenced.

6. The relevant provisions of Section 271(1)(c), applicable at the material time, were as follows:

'271. (1) If the Income-tax Officer or the Appellate Assistant Commissioner 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.' [The word 'deliberately' was omitted by F.A. 1964]

The penalty that could be imposed for infraction of Section 271(1)(c) is given in Clause (iii), as it then stood, and that was in the following terms : '(iii) in the cases referred to in Clause (c), in addition to any tax payable by him, a sum which shall not be less than twenty per cent. but which shall not exceed one and a half times the amount of the tax, if any, which would have been avoided if the income as returned by such person had been accepted as the correct income.'

7. If the minimum penalty imposable under Clause (iii) of Sub-section (1) of Section 271 exceeded a sum of Rs. 1,000, the ITO was required to refer the case to the IAC, on whom the powers regarding imposition of penalty were conferred by Section 274 of the Act, which was as under at the relevant time:

'274. (1) No order imposing a penalty under this Chapter shall be made unless the assessee has been heard, or has been given a reasonable opportunity of being heard.

(2) Notwithstanding anything contained in Clause (iii) of Sub-section (1) of Section 271, if in a case falling under Clause (c) of that sub-section, the minimum penalty imposable 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) An Appellate Assistant Commissioner on making an order under this Chapter imposing a penalty, shall forthwith send a copy of the same to the Income-tax Officer.'

8. In Durga Timber Works v. C1T : [1971]79ITR63(Delhi) their Lordsphips of the Delhi High Court did not accept a similar contention advanced before them that all actions for initiating penalty proceedings in a case, where the penalty imposable under Section 271(1)(c)(iii) exceeded a sum of Rs. 1,000 should be taken by the IAC. It was held in the aforesaid case that the mere fact that, under Sub-section (2) of Section 274, the ITO is required to refer the case to the IAC, it does not follow that the ITO's own powers have been completely taken away. Of course, he is required to refer the case to the IAC, where the minimum penalty imposable would exceed a sum of Rs. 1,000. The learned judges held that the powers conferred upon the IAC under Section 274(2) were for the specific purpose of imposition of penalty and those powers could be exercised by him when action for initiating penalty proceedings had already been taken by the ITO in the course of assessment proceedings and, thereafter, the case was referred by him to the IAC. Their Lordships held that it would be sufficient compliance with the provisions of Section 274 if the ITO recorded in the course of the assessment order that notice for penalty proceedings be issued to the assessee and all further action thereafter is taken by the IAC.

9. The same view was taken by the Bombay High Court in Padgilwar Brothers v. CIT : [1971]81ITR258(Bom) . In that case, the ITO, in his order of assessment, held that the assessee had concealed its income and had rendered itself liable for imposition of penalty under Section 271(1)(c) of the Act and stated that notice under Section 274(1) for concealment of income was being issued separately. The ITO, on the same day, issued a notice to the assessee under Section 274(1) read with Section 271(1)(c) to show cause why penalty should not be imposed. Subsequently, the ITO referred the matter to the IAC, because the minimum penalty imposable exceeded Rs. 1,000. Thereafter, the IAC issued a notice under Section 274(1) and passed an order imposing penalty. The Bombay High Court in the aforesaid circumstances held that the notices issued by the ITO as well as by the IAC were proper for initiation of penalty proceedings. The learned judges observed as under in the aforesaid case : see : [1971]81ITR258(Bom)

'What Section 274(1) requires is that no order imposing penalty under this Chapter shall be made unless the assessee has been heard or has been given a reasonable opportunity of being heard. In other words, this is a salutary rule accepting the principle of natural justice that no penal consequences should follow or a penalty be imposed unless adequate opportunity has been given to the person who is to be penalised of being heardor having his say. So far as the primary condition which is required to be satisfied is concerned, namely, satisfaction that there has been concealment of income or that there has been deliberate furnishing of inaccurate particulars of income according to the provisions of Clause (c) of Section 271(1), as it then stood, we cannot conceive of any case where such satisfaction will be reached without hearing the persons or the assessee normally. In the proceedings which are commenced under the Act, there is no provision for proceeding against a person without issuing a notice. By and large, when an enquiry is being made into the income earned by an assessee for the purpose of bringing it to tax, or where there has been a case of concealment of income, it will be after a notice, but that is not the notice referred to in Section 274(1) of the Act. The satisfaction that is to be reached by the Income-tax Officer or the Appellate Assistant Commissioner regarding the concealment of income or other infraction enumerated in Section 271(1) will obviously be in the course of proceedings pending before the Income-tax Officer. We, therefore, do not see any reason why the subsequent notice required to be given under Section 274(1) to the assessee, who is found to have concealed income to show cause why penalty should not be imposed, cannot issue after the completion of the proceedings in which a satisfaction is reached by the Income-tax Officer that the case of concealment of income has been established.'

10. A discordant note was struck by their Lordships of the Calcutta High Court in Ram Chandra Sarda v. ITO : [1970]78ITR325(Cal) wherein it was held that the function or duty to form the satisfaction and the power to impose a penalty are so closely interwoven and interlinked that they should be held to be parts of an integrated process. Their Lordships held that the formation of the satisfaction and the imposition of the penalty could not be bifurcated so that the satisfaction could be that of the ITO, whereas the imposition of the penalty would be by the IAC. Their Lordships held that in a case which was referred to the IAC under Section 274(2) of the Act, the duality of function and power must necessarily vest in the same person, namely, the IAC. Thus, it was held that initiation of penalty proceedings under Section 271(1)(c) by the ITO was improper as the ITO was incompetent to initiate penalty proceedings where the minimum penalty imposable was Rs. 1,000.

11. However, the matter has now been set at rest by the decision of their Lordships of the Supreme Court in Manasvi v. CIT : [1972]86ITR557(SC) wherein it was held that Section 271(1) contemplates that the ITO should have been satisfied in the course of assessment proceedings regarding matters mentioned in the various clauses of that sub-section. It was also held that the proceedings for imposition of penalty under Section 271(1) havenecessarily to be initiated by the ITO or by the AAC. The fact that the ITO has to refer the case to the IAC if the minimum penalty imposable exceeded Rs. 1,000 in a case falling under Section 271(1)(c) does not show that the proceedings in such a case cannot be initiated by the ITO because the satisfaction of the ITO in the course of assessment proceedings regarding the concealment of income constitutes the basis or foundation for the proceedings for levy of penalty. Their Lordships observed as under in the aforesaid case (p. 562):

'The proceedings for the imposition of penalty in terms of Sub-section (1) of Section 271 have necessarily to be initiated either by the Income-tax Officer or by the Appellate Assistant Commissioner. The fact that the Income-tax Officer has to refer the case to the Inspecting Assistant Commissioner if the minimum imposable penalty exceeds the sum of rupees one thousand in a case falling tinder Clause (c) of Sub-section (1) Section 271 would not show that the proceedings in such a case cannot be initiated by the Income-tax Officer. The Income-tax Officer in such an event can refer the case to the Inspecting Assistant Commissioner after initiating the proceedings. It would, indeed, be the satisfaction of the Income-tax Officer in the course of the assessment proceedings regarding the concealment of income which would constitute the basis and foundation of the proceedings for levy of penalty.'

12. Thus, it has been clearly held by their Lordships of the Supreme Court that the ITO can refer the case to the IAC after initiating the penalty proceedings under Section 271(1)(c) of the Act. It was also laid down that the satisfaction of the ITO regarding the concealment of income or giving of inaccurate particulars is a pre-requisite for initiation of penalty proceedings under Section 271(1)(c) as such satisfaction is the very basis or foundation for initiation of proceedings for the imposition of penalty under the aforesaid Clause (c) of Section 271(1).

13. In the present case, the ITO during the course of assessment proceedings felt satisfied that there was concealment of income and that inaccurate particulars were furnished by the assessee. After arriving at the aforesaid satisfaction, while passing the assessment order on April 14, 1967, the ITO directed that notice under Section 271(1)(c) read with Section 274 be issued to the assessee. He, thereafter, referred the proceedings to the IAC who also issued a notice to the assessee under Section 274(1) to show cause why penalty should not be imposed upon him. Thus, in our view, the proceedings were properly initiated by the ITO and then referred to the IAC because the minimum penalty imposable would have exceeded Rs. 1,000.

14. We, therefore, hold that the penalty proceedings were properly initiated in the present case. The question referred by the Income-tax AppellateTribunal, Jaipur Bench, Jaipur, is answered in the affirmative and in favour of the Department and against the assessee.


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