JUDGMENT OF THE APPELLATE TRIBUNAL
Under Secton 33 of the Indian Income-tax Act (XI of 1922) the Income-tax Appellate Tribunal, Calcutta Bench, consisting of R. P. Varma (Judicial Member) and P. N. S. Aiyar (Accountant Member,) delivered the following Judgment on January 20 1942.
"This is an appeal against the confirmation by the Appellate Assistant Commissioner of Income-tax, Rajabhmudry, of the penalty imposed by the Income-tax Officer on the appellant under Section 28(1)(b), in respect of the assessment year 1938-39 and directed him to pay a sum of Rs. 1,200 as penalty under Section 28(1)(b) of the Amended Act.
2. The appellant contends that the penalty is not leviable as the amended Act is not applicable in respect of the assessment made on the appellant for the year 1938-39. The penalty was imposed in the following circumstances:-
The Income-tax Officer considered that the appellant did not produce all the account books relating to his business in response to the notice he issued under Section 22(4) and on failure to produce the account books made the assessment under Section 23(4) of the Income-tax Act. The return was filed befor e the April 1, 1939 and the notice under Section 22(4) was issued and complied with as far as the appellant was concerned before April 1, 1939 became law.
The contention of the appellant was that there was no book in his possession which he withheld in response to a notice under Section 22 (4). But this was not accepted by the Income-tax Officer for he considered that the default was committed inasmuch as the appellant did not comply with the notice under Section 22(4). The Income-tax Officer held that the default arose in respect of the notice issued on 4th January 1940 after the amended Act came into force. The appellant further contends before us that the books of account considered to exist did not, if fact, exist and even if the new law be taken to be in force no default was committed by him as the books did not in fact exist.
3. We will first consider whether any default has been committed in non-compliance with the notice under Section 22(4) of the Act.
(a) The proceedings of this case started on the notice to show cause under Section 28 which requires that the Income-tax Officer should be satisfied that the person has without reasonable cause failed to comply with the notice issued to him under sub-section (4) of Section 22 of the Income-tax Act.
4. The Appellate Assistant Commissioner in respect of the assessment of the next suceeding year threw doubt on the existence of the books in the succeeding year although he did not, in so many words, say that he doubted the existence of the books in the year with which we are concerned in connection with the imposition of the penalty. The question is not free from difficulty for it appears to us that inconnection with the imposition of a penalty the existence of the books should be shown in some more tangible material than it may ordinarily be necessary for purposes of an assessment under Section 23(4). If a person shows accounts and denies the existence of the books in proceedings under Section 28 he cannot prove the negative and some positive material is definitely required to show that the books existed and it is not sufficient to entertain any suspicion, however well founded the suspicion may be. To us it appears that this was not a case for imposition of penalty particularly when the income returned by the appellant was not accepted and assessment was made on a very heavy amount under Section 23(4) on the supposition that books existed which the appellant failed to produce. It is possible to conceive a case in which Section 23(4) proceedings may be valid on some material but such materials must lead only to one conclusion of existence of books beyond doubt for imposition of penalty.
5. The question whether any default was committed after the amended Act came into force ?
The appellant was served with a notice requiring him to produce the books of account under the old Act before the amendment came into force. The notice is dated the March 11, 1939, requiring the appellant to comply with its terms on March 20, 1939. If the books of account existed the default was committed by non-compliance on this date and as at that time no penalty was leviable for non-production of the books he had acquired immunity in respect of this default. When the amended Act came into force the Income-tax Officer issued another notice under Section 22(4) dated January 4, 1940, requiring production of books on April 8, 1940. This was with a view to bring the case under the amended Act for the default which the appellant committed before. In the case of Arjun Khemji & Co., it was ruled by the Judicial Commissioner, Nagpur, that the proceedings initiated under any Act would be governed by the same Act and not by the Amendment Act. The question that was decided in that case was that in respect of proceedings started under the provisions of the Income-tax Act VII of 1918, only the Act VII of 1918 and not the subsequent Act XI of 1922 will apply. On the same lines we hold that the Amended Act of 1939 does not apply in the facts and circumstances of this case.
6. We, therefore, accept this appeal and set aside the order of the Income-tax Officer imposing the penalty. The amount of penalty if paid will be refunded to the appellant."
On the application of the Commissioner of Income-tax under Section 66(1) of the Indian Income-tax Act (XI of 1922) the Appellate Tribunal referred the case to the Madras High Court.
(Judgment of the Court was delivered by the Honourable the Chief Justice).
This reference has been made by the Income-tax Appellate Tribunal, Calcutta Bench, under Section 66(1) of the Income-tax Act at the request of the Commissioner of Income-tax, Madras. On the August 15, 1938 the assessees filed a return of their income for the year 1938-39. On the March 11, 1939 the Income-tax Officer served a notice upon them under Sections 22(4) and 23(2) of produce the accounts of their money-lending business for the year 1937-38 and connected documents. The notice was to be complied with by the 20th of that month. The assessees produced for the inspection of the Income-tax Officer certain books of account but when he examined them he considered that the assessees possessed another set of books which they had suppressed. When the notice under Sections 22(4) and 23(2) was served on the assessees Section 28 had not been amended. It was amended with effect from the April 1, 1939. Sub-Section (1)(b) of Section 28 now provides that if the Income-tax Officer, the Appellate Assistant Commissioner or the Appellate Tribunal in the course of proceedings under the Act is satisfied that a person has without reasonable cause failed to comply with a notice under sub-section (4) of Section 22, or sub-section (2) of Section 23, he or it may direct him to pay by way of penalty, in addition to the tax payable by him, a sum not exceeding one and a half times the Income-tax and super-tax, if any, which would have been avoided if the income as returned by the person had been accepted as the correct income.
On the December 9, 1939 the Income-tax Officer wrote to the assessees stating that a separate set of account books had been kept and that these had not been produced. On the January 4, 1940 he caused to be issued a fresh notice under Section 22(4) and 23(2) requiring the assessees to produce the books of account for the years 1937-38, 1936-37 and 1935-36. The assessees did not comply with this notice. On the January 31, 1940 the Income-tax Officer assessed the assessees for the year 1938-39 on an income of Rs. 16,100. This assessment was under Section 23(4). Two days before this assessment was made the Income-tax Officer served a notice upon the assessees requiring them to show cause why a penalty should not be inflicted under Section 28(1)(b). The respondents appeared before the Income-tax Officer in compliance with this notice and he gave his decision in an order dated the December 21 1940. He held that there had been default in compliance with the notice to produce the books of account and consequently he imposed a penalty of Rs. 1,200 in addition to the amount of tax payable under the order of assessment.
The assessees challenged the correctness of both the orders of the Income-tax Officer in appeals to the Assistant Appellate Commissioner who agreed with the Income-tax Officer. The assessees accepted the decision of the Assistant Appellate Commissioner so far as it concerned the assessment to income-tax under Section 23(4), but they appealed to the Income-tax Appellate Tribunal against the penalty which had been inflicted on them. The Tribunal allowed the appeal on the ground that in connection with the imposition of a penalty for the non-production of books "the existence of the books should be shown in some more tangible material than it may ordinarily be necessary for purposes of an assessment under Section 23(4)." The Tribunal also held that Section 28 could not be applied in a case where the assessment was for a period prior to the April 1, 1939 when the amendment came into force.
The Tribunal has referred three questions to the Court for decision. They read as follows:-
"(1) Whether the proceedings in this case for the imposition of penalty in respect of the assessment for the year 1938-39 are governed by the Income-tax Act as it stood in 1938-39, the year of assessment, or whether they are governed by the Income-tax Act as amended from the April 1, 1939, as proceedings were completed in 1940.
(2) If it is held that the Income-tax Act as amended in 1939 should be applicable the next question will arise : when the default was committed, whether on the March 20, 1939 in answer to the first notice prior to the commencement of the amended Act of 1939 or in January 1940 when there was again a second default to comply with another notice under Section 22(4) for the production of the same books.
(3) If it is held that the Amended Act applied, whether the view of law taken by the Tribunal that the existence of the books should be shown in some more tangible material than the one in the case of an order under Section 23(4) was right in arriving at the conclusion that the case was not a fit one for imposition of penalty."
It is regrettable that the Tribunal did not take greater care in framing these questions. The second and third questions as they stand are not intelligible; but we gather what is meant from the order which the Tribunal passed on the assessees appeal.
The first question is whether Section 28(1)(b) can be applied in respect of the failure to comply with the notice issued on the January 4, 1940. It obviously could not be applied to the earlier notice because when that notice was issued the amendment had not been made. When the second notice was issued the amendment had been made and we consider that the decision was applicable. When the amendment came into force the Income-tax Officer had not made an assessment for the year 1938-39 and he was entitled to make it when he did, namely, on January 31, 1940. It has been suggested that to hold that Section 28(1)(b) applies to the second notice is making the section retrospective, but this is not so. The Income-tax Officer had full power to issue the notice on the January 4, 1940 and failure to comply with it meant liability under Section 28(1)(b). The answer to the first question is that the Income-tax Officer had the right to act under Section 28(1)(b) for failure to comply with the notice issued to the assessee on the January 4, 1940. This answer also covers the second question.
The third question is really whether more evidence is required for the imposition of a penalty under Section 28 than would be required for a "best judgment" assessment under Section 23(3). The two sections have nothing in common and it is not possible to give a direct answer to the question. When the Income-tax Officer makes in assessment under Section 23(4) it must be in the nature of an estimate, because the assessee has failed to place before him material for making an accurate assessment. In Income-tax Commissioner v. Badridas Ramrai Shop, Akola, the Privy Council pointed out how a Income-tax Officer should proceed when assessing under that section. Their Lordships said :
"The Officer it to make an assessment to the best of his judgment against a person who is in default as regards supplying information. He must not act dishonestly or vindictively, or capriciously, because he must exercise judgment in the matter. He must make what he honestly believes to be a fair estimate of the proper figure of assessment and for this purpose he must, their Lordships think, be able to take into consideration local knowledge and repute in regard to the assessees circumstances and his own knowledge of previous returns by and assessments of the assessee, and all other matters which he thinks will assist him in arriving at a fair and proper estimate; and though there must necessarily be guess-work in the matter, it must be honest guess-work. In that sense, too, the assessment must be to some extent arbitrary."
The imposition of a penalty under Section 28 is not a matter of guess-work. Before imposing a penalty in such a case as this the Income-tax Officer must have in his possession such evidence as would convince a reasonably minded man that there exists a second set of books. It is not possible to lay down any hard and fast rule as to what is actually required. Each case must depend upon its own circumstances. We answer the third question in this sense.
The Commissioner is entitled to his costs which we fix at Rs. 250.
Reference answered accordingly.