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R.M. Ayyathurai Muthuraja (by L. Rs.) Vs. Commissioner of Income-tax - Court Judgment

LegalCrystal Citation
SubjectDirect Taxation
CourtChennai High Court
Decided On
Case NumberTax Case No. 309 of 1966 (Reference No. 74 of 1966)
Judge
Reported in[1973]87ITR449(Mad)
ActsIncome Tax Act, 1961 - Sections 271(1) and 274(2)
AppellantR.M. Ayyathurai Muthuraja (by L. Rs.)
RespondentCommissioner of Income-tax
Appellant AdvocateS.V. Subramaniam, Adv. for ;Subbaraya Aiyar, Sethuraman and Padmanabhan
Respondent AdvocateV. Balasubrahmanyan and ;J. Jayaraman, Advs.
Cases ReferredRam Chandra Sarda v. Income
Excerpt:
.....of income-tax officer for imposition of penalty under section 271 (1) (c) at particular stage of penalty proceedings - it is not necessary for him to initiate penalty proceedings afresh after independent satisfaction as to concealment of income - question answered in affirmative. - - 23,364 by his order, dated march, 30, 1963. as the income-tax officer was satisfied that the assessee had concealed a good portion of his profits in consignment sales, he initiated penalty proceedings and issued a notice under section 274(1) of the income-tax act. section 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 furnished inaccurate..........that the assessee had concealed a good portion of his profits in consignment sales, he initiated penalty proceedings and issued a notice under section 274(1) of the income-tax act. but, later he referred the assessee's case to the inspecting assistant commissioner under section 271(2) for taking action under section 271(1)(c) of the act. after such reference the inspecting assistant commissioner, after calling for the assessee's objection and after giving him an opportunity of hearing, levied a penalty of rs. 5,400 on december 27, 1963, under section 271(1)(c) on the basis that there has been a concealment of income to the extent of rs. 25,000 by the assessee.2. the assessee filed an appeal to the tribunal against that order. before the tribunal he not only questioned the order of.....
Judgment:

Ramanujam, J.

1. The assessee in this case is doing business in commission and consignment sales of plantains. For the assessment year 1960-61, he returned a loss of Rs. 1,736 as an individual. The Income-tax Officer found from the assessee's account that a sum of Rs. 32,466 had been credited during the assessment year in the fictitious name of one P. Shanmugam and a major portion of the same stood debited during the year. Before the Income-tax Officer the assessee had ultimately admitted that P. Shanmugam is a fictitious name and that the credit entry in that account really represented his own transactions in consignment sales of plantains and that the credits represented his profits and the debits his losses in such sales and offered for assessment the closing credit balance of Rs. 6,062 in the name of P. Shanmugam. But the Income-tax Officer while treating the credits as the assessee's profits, however, declined to treat the debits as the losses of the assessee. However, taking a liberal view of the matter, and allowing for probable loss in the consignment sales, the Income-tax Officer estimated the net profit in consignment sales at Rs. 25,000 and, therefore, converted the loss of Rs. 1,736 returned by the assessee into a profit of Rs. 23,364 by his order, dated March, 30, 1963. As the Income-tax Officer was satisfied that the assessee had concealed a good portion of his profits in consignment sales, he initiated penalty proceedings and issued a notice under Section 274(1) of the Income-tax Act. But, later he referred the assessee's case to the Inspecting Assistant Commissioner under Section 271(2) for taking action under Section 271(1)(c) of the Act. After such reference the Inspecting Assistant Commissioner, after calling for the assessee's objection and after giving him an opportunity of hearing, levied a penalty of Rs. 5,400 on December 27, 1963, under Section 271(1)(c) on the basis that there has been a concealment of income to the extent of Rs. 25,000 by the assessee.

2. The assessee filed an appeal to the Tribunal against that order. Before the Tribunal he not only questioned the order of levying penalty on merits, but also questioned the competency of the Inspecting Assistant Commissioner to pass the penalty order in question under Section 271(1)(c) on the ground that Section 274(2) conferred on the Inspecting Assistant Commissioner the power of the Income-tax Officer under Section 271(1)(c) and that, therefore, the Inspecting Assistant Commissioner has also to satisfy himself in the course of the assessment proceedings that the assessee had concealed his income. It was also contended that the Inspecting Assistant Commissioner in this case did not make the assessment against the assessee nor did he satisfy himself in the course of such proceedings that the assessee had concealed income. The Tribunal rejected the said contentions of the assessee observing that the proceedings referred to in Section 271(1)(c) did not mean assessment proceedings only but meant any proceedings under the Act including penalty proceedings, that as such the Inspecting Assistant Commissioner acting under Section 274(2) could satisfy himself in the course of the penalty proceedings that the assessee has concealed income, that if the assessee's contentions where to be accepted, it would mean that the Inspecting Assistant-Commissioner cannot levy penalty in cases referred to him by the Income-tax Officer after completion of the assessment and that such a construction would render Section 274(2) otiose. On the merits the Tribunal held that the assessee by secreting his profits in a fictitious account had deliberately attempted to conceal the income with a view to escape tax liability and that the penalty of Rs. 5,400 levied against the assessee was not excessive.

3. At the instance of the assessee the Tribunal has referred to us the following question:

'Whether, on the facts and in the circumstances of the case, the Inspecting Assistant Commissioner had jurisdiction to pass the order of penalty under Section 271(1)(c) read with Section 274(2) of the Income-tax Act, 1961?'.

4. Before us the question as to whether there was any concealment of income, or whether the penalty was properly levied in the case, or the quantum thereof was not raised by the assessee. The only question raised is as to whether the Inspecting Assistant Commissioner acting under Section 274(2) has to satisfy himself that the assessee has concealed theincome in the course of the assessment proceedings. Section 271(1), so faras it is relevant is set out below:

Section 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 furnished inaccurate particulars of such income,

he may direct that such person shall pay by way of penalty--......... (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.'

5. The above section contemplates the Income-tax Officer or the Appellate Assistant Commissioner being satisfied in the course of any proceedings under the Act that the assessee has concealed- the particulars of income, before initiating proceedings for levy of penalty. As already stated, the Tribunal proceeded on the basis that the words ' any proceedings ' include not only assessment and appellate proceedings but also penalty proceedings. But the learned counsel for the revenue does not want to sustain that reasoning. As a matter of fact he concedes that the view of the Tribunal cannot at all be sustained in view of certain rulings of the Supreme Court taking the view that 'any proceedings' in Section 271(1) will mean only proceedings other than penalty proceedings. We have to, therefore, proceed on the basis that the words ' any proceedings ' occurring in Section 271(1) will not take in penalty proceedings.

6. Therefore, the question is whether the Inspecting Assistant Commissioner to whom the penalty proceedings are referred under Section 247(2) should satisfy himself about the concealment of income in the course of the assessment proceedings. Admittedly, the Inspecting Assistant Commissioner to whom the penalty proceedings are referred is not an assessing or any appellate authority and, therefore, he cannot satisfy himself about the concealment of income in the course of the assessment proceedings. Though the Inspecting Assistant Commissioner has been conferred with' all the powers under Chapter 21 for the imposition of penalty it cannot mean that he has got the powers to assess and to satisfy himself about the concealment of income in the course of the assessment proceedings. Therefore, the power under Section 271(1)(c) to levy a penalty is conferred on the Inspecting Assistant Commissioner and that power cannot be taken away on such a construction being given to Section 271 so as to mean that he himself should be satisfied about the concealment of income in the course of the assessment proceedings. Normally, a case is referred under Section 274(2) to the Inspecting Assistant Commissioner by the Income-tax Officer either after the close of the assessment or when the assessment proceedings are about to be finalised. If the construction contended for by the assessee is to be accepted, the Inspecting Assistant Commissioner cannot exercise the power to impose penalty unless he imposes the levy during the course of the assessment proceedings taken by him. It is true, the contention advanced on behalf of the assessee finds support from the decision in Ram Chandra Sarda v. Income-tax Officer, : [1970]78ITR325(Cal) . In that case the Income-tax Officer had completed the assessment of an assessee for the year 1963-64 on March 31, 1965. On the same day he issued a notice under Section 274 read with Section 271 of the Income-tax Act, 1961, to the effect that as he was satisfied in the course of the assessment proceedings before him that there is a deliberate concealment of income by the assessee and as the minimum penalty imposable exceeded a sum of Rs. 1,000, he is referring the penalty proceedings to the Inspecting Assistant Commissioner in accordance with Section 274(2) of the Income-tax Act. But, it is only on February 24, 1967, nearly two years from the completion of the assessment proceedings, the Inspecting Assistant Commissioner issued a notice under Section 274(2) read with Section 271 requiring the assessee to show cause on or before March 2, 1967, as to why an order imposing penalty should not be made under Section 271(1)(c). The original notice dated March 31, 1965, issued by the Income-tax Officer and the subsequent notice issued by the Inspecting Assistant Commissioner were challeged by the assessee in writ proceedings before the High Court on the ground that, though the Income-tax Officer is the appropriate authority to initiate and complete the penalty proceedings in cases falling under Clauses (a) and (b) of Section 271(1), the legislature has introduced a different scheme for the imposition of penalty in cases falling under Section 271(1)(c) and that in the latter type of cases, if the minimum penalty imposable exceeds a sum of Rs. 1,000, the Income-tax Officer has to refer the cass to the Inspecting Assistant Commissioner who is a higher officer in the'hierarchy by virtue of the provisions of Section 274(2) who has been invested with all the powers conferred under Chapter 21 of the Act and who has to discharge all the functions of the Income-tax Officer for the purpose of imposition of penalty and that the continuation of the penalty proceedings in that case by the Inspecting Assistant Commissioner without himself satisfying as to whether there was concealment of the income in the course of the assessment proceedings was illegal and without jurisdiction. The revenue, however, contended that the satisfying of the Income-tax Officer in the course of the assessment proceedings in that case is sufficient compliance with the requirements even in a case where Section 274(2) applies, and that the penalty proceedings could be continued and an order imposing penalty could be made by the Inspecting Assistant Commissioner on the basis that the penalty proceedings had been validly commenced on the basis of the satisfaction of the Income-tax Officer arrived at in the course of the assessment proceedings. The court, however, held that in a case governed by Section 274(2) of the Act, the Inspecting Assistant Commissioner is to impose the penalty, that his power will also be subject to the condition or limitation on the exercise of that power, that is, the information of a 'satisfaction in the course of proceedings under this Act', and that the satisfaction of the appropriate authority which is a condition precedent for the exercise of the jurisdiction in penalty proceedings, should be in the course of the assessment proceedings. According to the learned judge in that case, the satisfaction referred to in Section 271 is a condition precedent to the exercise of the power thereunder, and it must be arrived at aliunde before the penalty proceedings are commenced, and the function or duty to form the satisfaction and the power to impose a penalty are closely interwoven and interlinked that they should be held to be parts of an integrated process and, therefore, the formation of satisfaction and the imposition of penalty cannot be bifurcated so that the satisfaction can be that of the Income-tax Officer, while the imposition of the penalty would be by the Inspecting Assistant Commissioner. With due respect we are not in a position to agree with the principle enunciated in that case. If the formation of the satisfaction contemplated in Section 271(1) and the imposition of the penalty should be by the same person in cases falling under Section 274(2) as has been held by the learned judge in the case referred to above, it will practically make Section 274(2) ineffective and otiose. It is a well-established canon of statutory construction that, in construing a statutory provision, the court must assume that the legislature had a specific and definite purpose in making a legislative provision. We cannot, therefore assume that Section 274(2) was enacted to be inoperative or ineffective and that it has been introduced in the statute book as a mere surplusage. If the formation of satisfaction referred to in Section 271(1) and the imposition of penalty should be by the same person, there will be no cases in which the Inspecting Assistant Commissioner can exercise his power, for there can be no assessment proceedings before him in the course of which he can satisfy himself as to the concealment of income. In our view the information of satisfaction by the Income-tax Officer in the course of the assessment proceedings is sufficient to form the basis for initiation of penalty proceedings, and once those proceedings are validly initiated, the Inspecting Assistant Commissioner to whom the proceedings are referred to under Section 274(2) could validly continue those proceedings and proceed to decide the question of penalty exercising the power given to the Income-tax Officer or the Appellate Assistant Commissioner referred to in the opening part of Section 271(1). In our view, Section 274(2) itself suggests that the penalty proceedings should have been validly commenced by the Income-tax Officer by the formation of satisfaction in the course of the assessment proceedings, before those proceedings are referred to the Inspecting Assistant Commissioner. The words ' shall refer the case ' in Section 274(2) easily lead to the inference that the case referred to the Inspecting Assistant Commissioner has already been validly initiated by the Income-tax Officer and that the former to whom the case is referred has to dispose of the same from the stage of reference.

7. In Commissioner of Income-tax v. A.K. Das, : [1970]77ITR31(Cal) a Division Bench of the same Court, however, has taken a different view from Ram Chandra Sarda v. Income-tax Officer, In that case it has been held that, on a proper interpretation of Sections 271, 274 and 275 of the Income-tax Act, 1961, it is the Income-tax Officer who has to initiate the penalty proceedings, that the foundation for the initiation of the penalty proceedings is his satisfaction in the course of the proceedings that there has been a concealment of income and that, unless there has been such initiation of penalty proceedings by the Income-tax Officer or by the Appellate Assistant Commissioner, the Inspecting Assistant Commissioner cannot initiate penalty proceedings. According to the learned judges in that case, even in a case falling under Section 271(1)(c), and where the minimum penalty imposable exceeds Rs. 1,000, the satisfaction that there has been a concealment and the initiation of penalty proceedings should be only by the Income-tax Officer or the Appellate Assistant Commissioner concerned. In Durga Timber Works v. Commissioner of Income-tax, : [1971]79ITR63(Delhi) also the same view was taken. There a Division Bench of the Delhi High Court has expressed the view that the direction given by the Income-tax Officer in the course of his assessment order that the penalty notice should be issued to the assessee for concealment of particulars of income, amounts to a valid initiation of the penalty proceedings and that there is nothing in Section 274(2) which requires that all action for initiating penalty proceedings where the minimum penalty imposable is more than Rs. 1,000 should be taken by the Inspecting Assistant Commissioner before the assessment order is passed by the Income-tax Officer. According to the learned judges, the power conferred on the Inspecting Assistant Commissioner are for the specific purpose of imposition of penalty and those powers can very well be exercised by him when action for initiating penalty proceedings has already been taken by the Income-tax Officer in the course of assessment proceedings and thereafter the case has been referred by him under Section 274(2). In Padgilwar Brothers v. Commissioner of Income-tax, : [1971]81ITR258(Bom) . the Bombay High Court had held that, though the power to impose penalty depends upon the satisfaction of the Income-tax Officer in the course of the proceedings under the Act, if the Income-tax Officer had recorded a finding in the very order of assessment that there has been a concealment of income and had also directed the issue of a notice under Section 274(1), the Inspecting Assistant Commissioner, to whom the case is referred, as the penalty imposable would be in excess of Rs. 1,000, did not lack power to issue a further notice under Section 271(1) after taking seisin of the case as a result of the reference made by the Income-tax Officer. While dealing with the scope of Section 271(1) the learned judges have said that a careful perusal of Section 271(1) would show that the condition precedent for imposition of a penalty under the Act is a satisfaction that a person has concealed the particulars of his income or deliberately furnished inaccurate particulars of such income and that such satisfaction could be reached either by the Income-tax Officer or by the Appellate Assistant Commissioner in the course of the assessment proceeding. They have observed :

' In our opinion, investing the Inspecting Assistant Commissioner, to whom the matter is referred, with all the powers conferred under this Chapter, namely Chapter XXI, for imposition of penalty, is an enabling provision, but it does not mean, and cannot possibly mean, that when a matter is referred to the Inspecting Assistant Commissioner, he has to follow all the steps de novo. Some steps have properly got to be taken by the Income-tax Officer who has been given the power to refer in particular cases the matter of penalty to the Inspecting Assistant Commissioner.'

8. In Commissioner of Income-tax v. Angidi Chettiar, : [1962]44ITR739(SC) the Supreme Court, while considering a corresponding provision in Section 28 of the Income-tax Act, 1922, had stated at page 745 :

'The power to impose penalty under Section 28 depends upon the satisfaction of the Income-tax Officer in the course of proceedings under the Act; it cannot be exercised if he is not satisfied about the existence of conditions specified in Clauses (a), (b) or (c) before the proceedings are concluded. The proceeding to levy penalty has, however, not to be commenced by the Income-tax Officer before the completion of the assessment proceedings by the Income-tax Officer. Satisfaction before conclusion of the proceeding under the Act, and not the issue of a notice or initiation of any step for imposing penalty is a condition for the exercise of the jurisdiction.'

9. If, as pointed out by the Supreme Court, the penalty proceedings have to be commenced only after the completion of the assessment proceedings on the basis of the satisfaction arrived at by the Income-tax Officer earlier during the assessment proceedings, there is no possibility of the Inspecting Assistant Commissioner acting under Section 274(2), satisfying himself as to the existence of the conditions specified in Clause (c) of Section 271(1) in the assessment proceedings. The position appears to be that once the Income-tax Officer initiates penalty proceedings after satisfying himself as to the existence of the conditions specified in Section 271(1)(c) he refers the matter to the Inspecting Assistant Commissioner it he finds that the penalty leviable exceeds Rs. 1,000, and after such reference the Inspecting Assistant Commissioner continues the penalty proceedings there is no necessity nor is it possible for him to form an opinion as to whether there was concealment of income during the assessment proceedings. In Sivagaminatha Moopanar & Sons v. Income-tax Officer, : [1955]28ITR601(Mad) this court has expressed that the proceedings for the levy of penalty must be initiated by an authority when such authority is in seisin 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 the authority to continue the proceedings is not dependdent upon the continuance of the proceedings in the course of which the penalty proceedings came to be initiated and that the penalty could be levied notwithstanding that, on the date of the actual order of levy, the proceedings in the course of which the concealment was detected had been completed or stood terminated. In Jain Brothers v. Union of India, : [1970]77ITR107(SC) . the Supreme Court was of the view that it is the satisfaction of the Income-tax Officer which attracts the provisions relating to penalty and that whatever the stage at which the satisfaction is reached, the scheme of Sections 274(1) and 275 is that the order imposing penalty must be made after the completion of the assessment. As per this decision, levy of penalty could be made only after the assessment is completed, and if that is the true position, the Inspecting Assistant Commissioner, to whom penalty proceedings which have been validly initiated by the Income-tax Officer are referred, cannot be expected to form the satisfaction at the stage of the assessment proceedings which should have been completed by the Income-tax Officer even at the stage of the initiation of the penalty proceedings.

10. On a due consideration of the scope and effect of the provisions for Sections 271(1) and 274(2) and the relative decisions dealing with their true scope, we are of the view that the Inspecting Assistant Commissioner is substituted in the place of the Income-tax Officer for the imposition of penalty under Section 271(1)(c) at a particular stage of the penalty proceedings and, therefore, it is not necessary for him to initiate the penalty proceedings afresh after an independent satisfaction as to the concealment of income. The true position appears to be this. In the first place, the Income-tax Officer has to be satisfied in the course of the assessment or other proceedings that there has been a concealment of income by an assessee. Then he initiates proceedings and passes an order himself levying a penalty if the penalty leviable is less than Rs. 1,000, but if the penalty leviable exceeds Rs. 1,000, he refers the matter to the Inspecting Assistant Commissioner who has been empowered to act as an Income-tax Officer for the purpose of the levy of penalty. It, therefore, appears to be that it is the Income-tax Officer or the Appellate Assistant Commissioner who initiates the penalty proceedings on the basis of a satisfaction come to by him in the course of assessment or other proceedings under the Act that the assessee has concealed his income, and it is only on this foundation laid by the Income-tax Officer, the Inspecting Assistant Commissioner proceeds to act, and he being a person unconnected with the regular assessment proceedings cannot and could not initiate proceedings under Section 271(1)(c). The mere fact that the Inspecting Assistant Commissioner is clothed with the power to levy penalty under Section 271 by virtue of Section 274(2), he cannot be said to have been empowered to deal with assessment proceedings and to initiate penalty proceedings on his independent satisfaction that the assessee has concealed his income in the course of the assessment proceedings. With respect, we are not inclined to accept the view adopted by Basu J. in Ram Chandra Sarda v. Income-tax Officer. Though no exception could be taken to the general observations of the learned judge that, where the powers and duties are inter-connected, it is not possible to separate one from the other in such a way that powers may be delegated while duties are retained and vice versa, and that normally the delegation of powers takes with it the duties, the conclusion that the Inspecting Assistant Commissioner to whom the penalty proceedings are referred by the Income-tax Officer after they had been duly initiated in accordance with Section 271(1)(c) should again initiate afresh penalty proceedings after satisfying himself in the assessment proceedings that there has been a concealment of income cannot be accepted as laying down the correct position in law. We are, therefore, of the view that in this case the order levying penalty passed by the Inspecting Assistant Commissioner under Section 271(1)(c) read with Section 274(2) cannot be said to be invalid. The question is, therefore, answered in the affirmative and against the assessee. The Revenue will have its costs. Counsel's fee Rs. 250.


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