These are petitions for the issue of writs of prohibition forbidding the first respondent, the Income-tax Officer, Second Circle, Madurai, and the Collector of Madurai from proceeding with the collection of penalties levied against the petitioner by the first respondent for the assessment years 1944-45, 1945-46, 1946-47 and 1947-48, the four petitions relating to the four years mentioned above.
The petitioner is a yarn dealer. Part of his business consists of exports to Ceylon. For the assessment year 1944-45 he submitted a return to the Income-tax authorities claiming a loss of Rs. 23,891. In regard to the next year, 1945-46, his return disclosed a net profit of Rs. 25,152. The returns in respect of both the years were taken up for consideration together by the then Income-tax Officer, Madurai, Sri Rathnaswami, who came to the conclusion that the returns of the petitioner should not be accepted and that he had deliberately furnished false particulars regarding his income and after making some additions computed his total income for the year 1944-45 as resulting in a profit of Rs. 3,914. The tax payable on this income was Rs. 183-15-0 for which a demand notice was issued. For the year 1945-46 the Income-tax Officer determined the net assessable income at Rs. 1,28,376. The tax computed on the basis of this figure came to Rs. 67,951-4-0 for which a demand notice was issued under section 29 of the Act. The assessments were completed and these assessment orders were passed on 31st March, 1947. On the previous day, that is on 30th March, 1947, he issued a notice to the petitioner to show cause why a penalty should not be levied for the deliberate concealment of his income and for furnishing false particulars of such income under section 28(1) (c). The assessee took the assessment order in appeal to the Appellate Assistant Commissioner and when that was dismissed, to the Income-tax Appellate Tribunal. This appeal was dismissed on 10th December, 1949. We shall complete the narration of the assessment proceedings for the years 1946-47 and 1947-48 before referring to the penalty proceedings in regard to which notice had been issued relating to the years 1944 to 1946. For the year 1946-47 the assessees return disclosed a net income of Rs. 18,668 while for 1947-48 the assessee returned an income of Rs. 16,623. The assessments in respect of these two years were taken up at the same time by Sri Ram, Income-tax Officer, Madurai, who had succeeded Sri Rathnaswami. This was completed by an order dated 22nd December, 1949. The Income-tax Officer found that there had been suppression of income and adding back the items not disclosed in the accounts, the income for 1946-47 was computed in the figure of Rs. 52,270 and that for the succeeding year 1947-48 at Rs. 43,205 and tax on the above basis was demanded. The petitioner did not file any appeal against the assessment orders relating to these two years but applied to the Commissioner in revision. These revisions were disposed of by an order dated 22nd November, 1950. The result of this order was that in respect of the year 1946-47 the assessee got some relief by the cancellation of an addition of Rs. 7,444 to his income, while the revision in respect of this assessment for 1947-48 was completely dismissed.
We have already referred to the fact that in respect of the years 1944-45 and 1945-46 Sri Rathnaswami, the Income-tax Officer who passed the assessment order on 31st March, 1947, had issued a notice under section 28(1) (c) on 30th March, 1947, calling upon the assessee to show cause why penalty should not be levied. The assessee replied on 16th April, 1947, denying the charge generally and requesting that he might be furnished with particulars of the concealment etc. with which he was charged. This letter however was not attended to immediately. Meanwhile the assessments for 1946-47 and 1947-48, as has been said already, were completed by the Income-tax Officer by an order dated 22nd December, 1949. Four days before this date, i.e., on 18th December, 1949, the Income-tax Officer, Sri K. Ram, who completed the assessments issued notices to the assessee to show cause why penalty should not be levied in respect of the returns regarding these two years. The assessee replied on 22nd December, 1949, denying the charges as usual and asking for details. On 24th December, 1949, the Income-tax Officer replied stating that the assessment order itself was self-explanatory and calling for a reply from the assessee by 1st January, 1950, and this was received on 2nd January, 1950. Meanwhile in respect of the notice issued on 30th March, 1947, in respect of the years 1944-45 and 1945-46 a further communication was sent to the assessee on 6th November, 1951, requiring him to send a detailed reply which was received by the officer and 22nd November, 1951. The penalty proceedings in respect of the four years were then dealt with together and Sri Sowrirajan, who was then the Income-tax Officer, passed an order on 14th February, 1953, whereby he levied a penalty of Rs. 200 for 1944-45, Rs. 60,000 for 1945-46, Rs. 13,000 for 1946-47 and Rs. 12,000 for 1947-48 the variations being due to the difference in the amounts of the tax said to have been evaded by submitting false returns. It is the validity of these levies of penalties in respect of these four years that is challenged as illegal and ultra vires in these four writ petitions. We might premise by saying that it is not alleged that the quantum of the penalty imposed is in excess of that prescribed by section 28.
Three points have been raised by learned counsel for the petitioner in support of his contention that the penalty proceedings against him are invalid. (1) Section 28 of the Income-tax Act which enables the Income-tax Officer and other Income-tax authorities to levy a penalty in certain circumstances is not within the legislative competence of the Central Legislature under the Government of India Act, 1935. (2) The procedure for the levy of a penalty for concealment of particulars of the income of an assessee which is an alternative to the launching of a prosecution under sections 51 and 52 of the Income-tax Act vests an arbitrary and unguided discretion in the Inspecting Assistant Commissioner to direct either proceedings for levy of a penalty or for the initiation of a prosecution and that the same is therefore violative of article 14 of the Constitution of India and that on this ground section 28(1) (c) ought to be struck down. (3) On a proper construction of section 28 of the Income-tax Act the Income-tax Officer should be satisfied that there has been a deliberate concealment of the income of an assessee during the pendency of the assessment proceedings and as in the present case the assessment proceedings were completed in regard to the first two years by the dismissal of the assessees appeals by the Income-tax Appellate Tribunal on 10th December, 1949, and in respect of the later two years by the disposal of the revision by the Commissioner on 22nd November, 1950, the orders passed subsequent thereto on 14th February, 1953, levying penalties are illegal and not in conformity with the requirements of the section. We shall deal with each of these points in that order.
The first contention regarding the subject of penalty not being within the legislative competence does not merit any detailed consideration. The Indian Income-tax Act of 1922 contained provisions for counteracting evasion and imposing penalties in such cases (vide section 28 as it then stood). But the Income-tax Amending Act of 1939 replaced the earlier provision by the present section and this legislative change having been effected by Central Legislature under the powers vested in it by the Government of India Act, counsel for the assessee naturally canvasses the legislative power to enact the section as it stands now. Entry 54 of the Federal List in Schedule VII of the Government of India Act, 1935, empowers the Central Legislature to enact laws with respect to 'taxes on income' and entry 42 of the same list with respect to 'offences against laws with respect to any of the matters in this list.' The expression 'taxes on income' is of the widest import and would obviously include laws in relation to the taxation of evaded income. Such a law may take the form of an appropriation not merely of the income evaded but even more as the tax or as the reparation for damage caused to the State by such attempted evasion. In this connection it should be borne in mind that we are interpreting the words in an organic instrument designed to endow sovereign legislative bodies with legislative power and the words should not be construed in any narrow or pedantic sense. Apart from this, the power to enact laws to prevent evasion and make it unremunerative to the evader could also be viewed as an incidental or ancillary power necessary to render effective the substantive power conferred by entry 54. Lastly it is legitimate and proper in determining the scope of the power to have regard to what is ordinarily embraced in the topic in the legislative practice both of the State which has conferred the power, viz., the United Kingdom, as well as of the State on whom the power is conferred viz., India. From the earliest times in every State including the United Kingdom as well as India, the law relating to income-tax has always included provisions for circumventing evasion by concealment and for the levy of penalty in such cases as well as for the prosecution of the offender for such concealment. In the light of this it would follow that the content of a law relating to income-tax would comprehend a law designed to prevent evasion of the tax by the levy of suitable penalties. The argument that the penalty which could lawfully be levied under section 28, viz., one and half times the tax evaded, might in certain cases where the average rate of tax exceeds 10 annas in the rupee exceed the income, and is therefore not a proper tax legislation proceeds as a misapprehension, for the quantum of the penalty is one for the Legislature and is wholly irrelevant for determining the constitutional validity of the penalty provision.
If we had reached a conclusion favorable to the assessee in his attack on the constitutionally of section 28 as introduced by the Amending Act of 1939 it would have been necessary to canvass a further question as to whether in the circumstances the original section 28 enacted in 1922 when the Legislatures in India were not confined to powers enumerated in lists, is still not in force. But in the view we have expressed above, this need not detain us.
The next point is as regards section 28 offending against the equal protection of laws guaranteed by article 14 of the Constitution. To understand the objection it would be necessary to set out the circumstances under which the authorities might impose penalties under section 28. Under this section, the authorities empowered to impose a penalty are three in number, viz., (1) the Income-tax Officer, (2) the Appellate Assistant Commissioner and (3) the Income-tax Appellate Tribunal. Each of them has the power to levy penalties in the course of proceedings before him or them. The grounds which might give rise to these penalties are enumerated in three clauses (a) , (b) and (c) of sub-section (1). They run thus :
'28 (1). 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 -
(a) has without reasonable cause failed to furnish the return of his total income which he was required to furnish by notice given under sub-section (1) or sub-section (2) of section 22 or section 34 or has without reasonable cause failed to furnish it within the time allowed and in the manner required by such notice, or
(b) has without reasonable cause failed to comply with a notice under sub-section (4) of section 22 or sub-section (2) of section 23, or
(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, in the case referred to in clause (a) , in addition to the amount of the income-tax and super-tax, if any, payable by him, a sum not exceeding one and a half times that amount, and in the cases referred to in clauses (b) and (c) , in addition to any tax payable by him, a sum not exceeding 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.'
There are certain provisos to the section which are not relevant to the present case and therefore might be ignored. Under sub-section (3) no order is to be made levying a penalty unless the assessee has been heard or has been given a reasonable opportunity of being heard. Sub-section (4) enacts that 'no prosecution for a offence against this Act shall be instituted in respect of the same facts on which a penalty has been imposed under this section.' Finally, sub-section (6) imposes a restraint on the Income-tax Officer from levying a penalty under this section without the previous approval of the Inspecting Assistant Commissioner.
Taking now the provisions relating to a prosecution 'for an offence against this Act' referred to in sub-section (4) , these are to be found in Chapter VIII (sections 51, 52 and 53). We are setting out the relevant portions of these provisions below :
'51. If a person fails without reasonable cause or excuse -
(c) to furnish in due time any of the returns mentioned in section 19A, section 20A, section 21, sub-section (2) of section 22, or section 38;
(d) to produce, or cause to be produced, on or before the date mentioned in any notice under sub-section (4) of section 22, such accounts and documents as are referred to in the notice;. he shall, on conviction before a Magistrate, be punishable with fine which may extend to ten rupees for every day during default continues.
52. If a person makes a statement in a verification mentioned in section 19A or section 20A or section 21 or section 22 or sub-section (2) of section 26A, or sub-section (3) of section 30 or sub-section (3) of section 33, which is false, and which he either knows or believes to be false, or does not believe to be true, he shall be punishable, on conviction before a Magistrate, with simple imprisonment which may extend to six months, or with fine which may extend to one thousand rupees, or with both.
53. (1) A person shall not be proceeded against for an offence under section 51 or section 52 except at the instance of the Inspecting Assistant Commissioner.
(2) The Inspecting Assistant Commissioner may either before or after the institution of proceedings compound any such offence.'
The point that is made on these sections is shortly this. Under both the sections 28 and 51-52 the Inspecting Assistant Commissioner is the pivotal authority. When an Income-tax Officer come across an assessee about whom he is satisfied that he has concealed the particulars of his income or has deliberately furnished inaccurate particulars thereof, he transmits the information to the Inspecting Assistant Commissioner for the purpose of levying a penalty, for under section 28(6) he cannot do this except with the previous approval of this Officer. When the matter is thus before the Inspecting Assistant Commissioner, there are two courses which are open to him. He might in the case of any particular assessee grant the request of the Income-tax Officer and approve his proposal and permit him to levy a penalty on the assessee. In other cases he might make up his mind to prosecute the assessee under section 52. Which course he shall pursue is left to his unfettered discretion. The enactment gives him no guidance and prescribes no standards. It is not indicated how that choice is to be determined or what circumstances he might take into account in arriving at his conclusion. The assessee is left to the mercy of the Inspecting Assistant Commissioner who might pursue one of two alternative courses. It is stated that this would naturally result in some assessees being dealt with under section 28 by the Inspecting Assistant Commissioner according approval to the levy of a penalty and in other cases assessees might be prosecuted though their cases might be identical. On this basis it was argued that section 28 contemplates a law of unequal operation brought about by the statute not enacting any guiding principle to which the Inspecting Assistant Commissioner should adhere.
In this connection reliance was placed on the decision of the Supreme Court in The State of West Bengal w Anwar Ali as also on the decisions of the Supreme Court rendered on the validity of the provisions of the Income-tax Investigation Commission Act, in Suraj Mall Mohta & Co. v. Viswanatha Sastri and Meenakshi Mills v. Viswanatha Sastri. As there was considerable amount of overlapping between the provisions of section 28 under which penalty was leviable, and the penal provisions in section 51 and 52 under which in respect of identical matters an assessee could be prosecuted, and as under section 28(4) of the Act it was provided for the two sets of provisions being somewhat mutually exclusive, we considered the objection prima facie tenable and in consequence issued a notice to the Attorney-General to assist us in the disposal of the matter. The learned Advocate-General appeared in response to this notice on behalf of the Attorney-General and we are obliged to him for the assistance he has given us.
The main argument which was addressed to us by the learned Advocate-General was that in the present case the two provisions contained in sections 51 and 52 on the one hand, and section 28 on the other, were not in their nature mutually exclusive, being directed to secure very different objectives. Sections 51 and 52 had been enacted for vindicating public justice and for the punishment of the offender for the deliberate infraction of the law. It is made clear by the heading of the Chapter VIII in which these provisions appear which is entitled 'Offences and Penalties'. In this connection he invited our attention to the close similarity between the language of section 52 of the Income-tax Act and section 181 of the Indian Penal Code. Section 51 deals with recalcitrant assessees who by their deliberate refusal to co-operate with the assessing officers prevent the completion of the assessment. Section 52 deals with wilfully false statements in their returns and other papers submitted by the assessees. If the Income-tax Act had prescribed that the returns or statements referred to in section 52 of the Income-tax Act should be on oath or affirmation before an officer competent to administer such oath or affirmation there could have been a prosecution without any provision therefor in the Income-tax Act. On the other hand, the object and purpose of section 28 is wholly different. It is enacted for the purpose of rendering evasion unprofitable and of securing to the State compensation for damages caused by attempted evasion. Nor is it correct to regard the ingredients of the misconduct under the two provisions as identical. The falsity of a declaration wilfully made is enough to satisfy the requirements of section 52; whether that declaration results in concealment is not material for the purpose of that section. On the other hand, section 28 (1) (c) is concerned with the effect of the 'inaccurate particulars deliberately furnished', that is, 'concealment' and unless this result was achieved, no penalty can be imposed. Undoubtedly there may be overlapping in some concrete instance but every case that falls within section 52 need not necessarily also be within the scope of section 28 (1) (c). The function and purpose of section 28(4) is to make provision for a statutory concession to the assessee in the overlapping cases. The two remedies or proceedings could have been taken at the same time and it is the case, for instance, in the United States of America. But a concession has been granted to the defaulting or evading assessee by section 28 (4) , the concession being that if a penalty had been levied from an assessee a prosecution on the same facts is not to be launched. Viewed in this light that section 28(4) is in the nature of a concession, there is no question of article 14 being attracted to invalidate section 28. We find ourselves in complete agreement with this argument. In Helvering v. Mitchell the Supreme Court of the United States of America had to deal with the question whether an acquittal on a criminal charge of an assessee of having wilfully attempted to evade the Federal income-tax law could be pleaded in bar to an action for the recovery of penalties for the same evasion. The argument on behalf of the assessee was the plea of double jeopardy on the ground that the penalty demanded was in truth and substance also a criminal penalty intended as a punishment for allegedly fraudulent acts. Brandis, J., repelled this contention and said :
'Congress may impose both a criminal and a civil sanction in respect to the same act or omission. The remedial character of sanctions imposing additions to a tax has been made clear by this Court in passing upon similar legislation. They are provided primarily as a safeguard for the protection of the revenue and to reimburse the Government for the heavy expense of investigation and the loss resulting from the taxpayers fraud .........
The fact that the Revenue Act of 1928 contains two separate and distinct provisions imposing sanctions and that these appear in different parts of the statute, help to make clear the character of that here invoked. The sanction of fine and imprisonment for wilful attempts in any manner to evade or defeat any income-tax introduced into the Act under the heading penalties is obviously a criminal one. The sanction of 50 per centum addition if any part of any deficiency is due to fraud with intent to evade tax, introduced into the Act under the heading Additions to the Tax was clearly intended as a civil one. This sanction, and other additions to the tax are set forth in supplement entitled Interest and additions to the tax.'
In a later decision in Spies v. United States the same question was involved and Helverings case was followed : Jackson, J., said :
'The penalties imposed by Congress to enforce the tax laws embrace both civil and criminal sanctions. The former consist of additions to the tax upon determinations of fact made by an administrative agency and with no burden on the Government to prove its case beyond a reasonable doubt. The latter consist of penal offences enforced by the criminal process in the familiar manner. Invocation of one does not exclude resort to the other.'
If in their nature the two remedies are not mutually exclusive and are concurrent, does the grant of a concession to the assessee in the form of a provision in section 28 (4) alter the situation and make the two provisions mutually exclusive for the purpose of attracting the vice of unequal protection of the laws forbidden by article 14. In our opinion it does not.
There is also one other matter which has to be noted. Though in the case of an Income-tax Officer a prior approval of the Inspecting Assistant Commissioner is necessary before a penalty can be levied, the same requirement has not been laid down in the case of the Appellate Assistant Commissioner and the Income-tax Appellate Tribunal. Indeed from the status of these authorities as compared to the Inspecting Assistant Commissioner the provision could not be otherwise. Neither the Appellate Assistant Commissioner nor the Income-tax Appellate Tribunal have any hand in determining whether an offender should be prosecuted or not (vides 53 of the Income-tax Act). In their cases therefore the situation of one officer or authority being vested with unguided power to initiate one of two mutually exclusive proceedings does not occur. Therefore, when a penalty proceeding is started at the instance of either the Appellate Assistant Commissioner or the Appellate Tribunal the objection now put forward to the validity of section 28 could not obviously be suggested. It would therefore be extremely anomalous to hold that the section violates article 14 when its provisions are sought to be applied by the Income-tax Officer but that it is valid and constitutional when invoked by the higher authorities. On this ground also the argument questioning the validity of section 28 has to be rejected.
Moreover the question has to be answered whether the Inspecting Assistant Commissioner does on a proper construction of section 28 determine the levy of a penalty For if he does not, the entire argument on behalf of the petitioner breaks down. The learned Advocate-General submitted that the prior approval granted by the Inspecting Assistant Commissioner to the levy of a penalty does not render the penalty one levied by the Inspecting Assistant Commissioner. Even after the approval, the decision to levy the penalty is still statutorily that of the Income-tax Officer and this officer cannot initiate the prosecution under section 53. We see considerable force in this argument also. We have therefore no hesitation in overruling this objection raised to the validity of section 28.
The next point that has been raised for argument is as regards the proper construction of section 28 on the basis that the provision is valid. Under section 28(1) (a) the Income-tax Officer or the other authorities named have to be satisfied that the assessee has concealed the particulars of his income or deliberately furnished inaccurate particulars of such income before he or they may levy the penalty. This satisfaction must be in the course of any proceedings under this section. Under sub-section (3) the assessee should be heard or should be given a reasonable opportunity of being heard before a penalty is imposed. The points made in regard to these provisions are : The penalty proceedings should be 'in the course of any proceeding' under the Act. In the context, therefore, the proceedings referred to in section 28(1) are proceedings other than penalty proceedings, that is, assessment, re-assessment or refund proceedings. As the penalty proceedings must be completed 'in the course of any proceeding under this Act' the latter proceeding must be pending at the time when the penalty is levied. The attack on the penalty proceedings against the petitioner is grounded upon the assessment proceedings having been completed before the penalty was actually levied by the order of the Income-tax Officer, the contention being (a) that there was no 'other proceeding under the Act' pending before the Income-tax Officer on the date when he levied the penalty and (b) that in any event the other proceedings - the assessment proceedings - had finally terminated by the order of the Income-tax Commissioner or the Income-tax Appellate Tribunal in respect of the two sets of assessments.
Before considering this argument and the difficulty introduced by the language of the section one fact has to be borne in mind. 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 no 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 are known, it is in the nature of things not possible for the Income-tax Officer to determine the exact amount of penalty which might be levied on the assessee. He therefore waits until the appeals as regards the assessment are all over. After obtaining these 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. If the construction sought to be put forward on behalf of the assessee were accepted, it might result in the penalty provision being wholly unworkable. The Income-tax Officer has to compute the penalty on the basis of the difference in the tax that would have been payable if the original return had been accepted and that which he has been called on to pay by the additions effected. The latter could be known only when the assessment is completed. If by that date the proceedings before him are held to have come to an end, he would have no jurisdiction to issue a notice to hear the party or to levy the penalty. To get over this difficulty learned counsel for the petitioner suggested that the Income-tax Officer might issue a notice even while he was making the assessment and that he might provisionally determine the tax payable and then hear the parties under section 28(3) and levy the penalty. We are unable to see how this would be in compliance with the requirement that the penalty which he could levy should be based upon the difference between the tax as levied and that which would have been leviable if the return were accepted. The higher figure would not be finally known until the assessment order was issued and the contention is that by that date the Income-tax Officer has lost his jurisdiction to levy the penalty. In our opinion the proceedings for the levy of a penalty must be initiated by an authority when such authority was 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. When once the notice has been issued the jurisdiction of that authority to continue the proceedings is not dependent upon the continuance of other proceedings in the course of which the penalty proceedings came to be initiated. The assessee has to be given notice under sub-section (3) and has to be heard and finally the penalty may be levied, notwithstanding that at the date of the actual order of levy the proceedings in the course of which the concealment etc. took place had terminated. In the present case, all the notices have been issued by the Income-tax Officer when the matter was pending before him. The fact that by the date of the hearing of the assessee under section 28 (3) or of the actual order levying the penalty under section 28 (1) the assessment proceedings had terminated is wholly irrelevant and does not affect the validity of the penalties levied against the assessee.
These writ petitions therefore fail and are dismissed with costs. In view of the nature of question raised which made it necessary for the Advocate-General to appear, we fix the fee payable to counsel at Rs. 350 for all the petitions together.