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Commissioner of Income-tax Vs. A.K. Das - Court Judgment

LegalCrystal Citation
SubjectDirect Taxation
CourtKolkata High Court
Decided On
Case NumberIncome Tax Reference No. 44 of 1967
Judge
Reported in[1970]77ITR31(Cal)
ActsIncome Tax Act, 1961 - Sections 28(1), 143, 143(3), 147, 256, 256(1), 271, 271(1), 274, 274(1), 274(2), 275 and 297(2)
AppellantCommissioner of Income-tax
RespondentA.K. Das
Appellant AdvocateB.L. Pal and ;Ajoy Kr. Mitter, Advs.
Respondent AdvocateK. Roy, Adv.
Cases ReferredCross v. British Oak Insurance Co. Ltd.
Excerpt:
- p.b. mukharji, j.1. the income-tax appellate tribunal has referred two points of law in the following manner, for answer by this court under section 256(1) of the income-tax act, 1961:'(1) at the instance of the commissioner of income-tax--whether, on the facts and in the circumstances of the case and on a proper interpretation of section 271(1)(iii) and section 274(2) of the income-tax act, 1961, the tribunal was right in reducing the penalty imposed on the assessee below the minimum prescribed under section 271(1)(iii) of the said act ? (2) at the instance of the assessee- whether, on the facts and in the circumstances of the case, the tribunal was right in holding that the penalty proceedings were properly initiated and that the penalty orders passed by the inspecting assistant.....
Judgment:

P.B. Mukharji, J.

1. The Income-tax Appellate Tribunal has referred two points of law in the following manner, for answer by this court under Section 256(1) of the Income-tax Act, 1961:

'(1) At the instance of the Commissioner of Income-tax--Whether, on the facts and in the circumstances of the case and on a proper interpretation of Section 271(1)(iii) and Section 274(2) of the Income-tax Act, 1961, the Tribunal was right in reducing the penalty imposed on the assessee below the minimum prescribed under Section 271(1)(iii) of the said Act ?

(2) At the instance of the assessee- Whether, on the facts and in the circumstances of the case, the Tribunal was right in holding that the penalty proceedings were properly initiated and that the penalty orders passed by the Inspecting Assistant Commissioner were valid in law ?'

2. The facts of this reference as appearing in the statement of the case may be briefly summarised as follows : The assessee is an individual. The assessment years concerned in this reference are 1955-56 to 1962-63. The original assessments for these years were completed on the basis of the returns filed by the assessee. Subsequently, some time in 1963 the Income-tax Officer received information that during these years there were substantial deposits in the assessee's account in the Hindustan Commercial Bank Ltd., Netaji Subhas Road Branch, amounting to about Rs. 2,26,000. The Income-tax Officer required the assessee to explain the deposits in his account in the said bank. Thereafter, the assessee made full disclosure of the deposits either in his name or in the names of other persons in this account during those assessment years to the extent of Rs. 3,70,208. What is more, the assessee also admitted that these were his concealed income.

3. The Income-tax Officer took proceedings under Section 147 of the Income-tax Act, 1961, for reassessment of the assessee's escaped income for these years. In response to the notices issued, the assessee filed returns giving full details of the deposits in his bank account in respect of those years. The Income-tax Officer passed orders of assessment under Section 143(3)/147 for the assessment years 1955-56 to 1962-63 on the 31st August, 1964, on the basis of the returns filed by the assessee. From the orders of penalty of the Inspecting Assistant Commissioner it appears that the total escaped income assessed in those reassessment proceedings came to Rs. 4,29,624 and the tax sought to be evaded in respect thereof came to Rs. 3,21,820. The Income-tax Officer in the assessment orders made on the 31st August, 1964, recorded that proceedings under Section 271(1)(c) have already been started separately. From the order-sheet of such assessment proceedings it also appears that on the 31st August, 1964, the Income-tax Officer gave direction for issue of show cause notice under Sections 274/271. There is also an entry in the order-sheet dated 29th August, 1964, to the effect that notice under Sections 274/271 was issued to the assessee and the cases were referred to the Inspecting Assistant Commissioner. It also appears from the statement of the case that a copy of the aforesaid notice dated 29th August, 1964, was served on Shri B. B. Das, the assessee's accountant and authorised representative, who was present in the income-office and the receipt of such notice had been acknowledged by the said Shri B. B. Das by putting his signature on a copy thereof. The intimation regarding the transfer of the case was received at the Inspecting Assistant Commissioner's office on the 29th August, 1964. It also appears that a further notice was issued by the Income-tax Officer under Section 274(1) requiring the assessee to show cause why the penalty should not be imposed and the hearing was fixed on the 22nd September, 1964. The demand notices in respect of the reassessment for the years 1955-56 to 1962-63 were served on the assessee on the 12th September, 1964, while assessment orders for these years were received by the assessee on the 24th September, 1964.

4. The Inspecting Assistant Commissioner came to the finding that the assessee had concealed the particulars of his income at the time of the original assessment and that the penal proceedings were attracted to his case. But in consideration of the co-operation extended by the assessee subsequently in the matter of reassessment proceedings, he restricted the amounts of the penalty to 33 1/3 per cent. of the tax sought to be evaded. The Inspecting Assistant Commissioner gave reasons for his decision in his order under Sections 274(2)/271(1)(c) for the assessment year 1955-56 while in his order for the other years he followed his earlier orders and mentioned the amount of penalty determined for those years. From this order of penalty the assessee appealed to the Income-tax Appellate Tribunal. In the original ground filed by the assessee he prayed for mitigation of the amounts of penalty. But with the leave of the Tribunal the assessee urged the additional ground before it, namely, that the penalty proceedings, not having been commenced in the course of the assessment proceedings, the penalty orders passed by the Inspecting Assistant Commissioner were bad in law. The point of that submission is that under Section 275 of the Income-tax Act, 1961, penalty proceedings must be commenced before the completion of the assessment proceedings. In this case the assessment proceedings were completed by the passing of the assessment orders on the 31st August, 1964, and as the notices to show cause under Section 274(2) were issued by the Inspecting Assistant Commissioner on the 11th March, 1965, the penalty proceedings were void. In addition or rather in the alternative it was also contended by the assessee before the Tribunal that even if the penalty proceedings were held to commence on the issue of the notices by the Income-tax Officer under Section 274(1), as such notices were served on the 2nd September, 1964, the penalty proceedings were still bad in law. The revenue, on the other hand, contended before the Tribunal that the penalty proceedings commenced with the Income-tax Officer's satisfaction and direction to issue a show cause notice to the assessee. Therefore, the revenue contended that such satisfaction was recorded and such direction was given on the 29th August, 1964, and, hence, the penalty proceedings were commenced in time. Following a former decision of another Bench of the Tribunal in I.T.A. No. 11877 of 1964-65 the Tribunal in this case held that the penalty proceedings commenced on a reference being made by the Income-tax Officer to the Inspecting Assistant Commissioner under Section 274(2) and as such reference was made on the 29th August, 1964, and the notice of the transfer was given to the assessee on that date, the penalty proceedings were properly initiated and the penalty orders passed by the Inspecting Assistant Commissioner were valid in law.

5. But the Tribunal accepted the alternative contention of the assessee, namely, that the quantum of the penalties was excessive. The Tribunal repelled the contention of the revenue that the minimum of 20 per cent. of the tax evaded as representing the penalty under Section 271(1)(iii) was not applicable either to the Inspecting Assistant Commissioner acting under Section 274 or to the Tribunal hearing appeals from penalty orders passed by the Inspecting Assistant Commissioner in such proceedings. The Tribunal held that the powers of the Inspecting Assistant Commissioner to impose a penalty were not confined by the provision of Section 271(1)(iii) and there can be no restriction on the powers of the Tribunal in hearing appeals from the orders of penalty imposed by the Inspecting Assistant Commissioner. As a result, the Tribunal reduced the amounts of the penalty much below the 20 per cent. limit.

6. On those facts the questions set out above have been referred to this court for an answer.

7. Long and elaborate arguments have been advanced from the Bar both by the assessee and the revenue, supported by the usual wealth of citations of case law.

8. There are certain preliminary points which require disposal at first. One is a matter of the form in which questions have been raised by the Tribunal in this reference and the statement of case. The question is, is it proper that the Tribunal should say while stating the question, 'At the instance of the assessee' and 'At the instance of the Commissioner of Income-tax?' This point may be disposed of briefly. Reference to this court is controlled by Section 256 of the Income-tax Act, 1961. The governing words in Section 256(1) of the Act on this point are, inter alia :

'The Appellate Tribunal shall within one hundred and twenty days of the receipt of such application, draw up a statement of the case and refer it to the High Court.'

9. In acting under Section 256(1) the Tribunal acts at the instance of the assessee or the Commissioner no doubt. The Tribunal cannot act suo motu. Once the Tribunal is moved either by the assessee or the Commissioner in the manner laid down under Section 256(1) of the Act, which 'require the Appellate Tribunal to refer to the High Court any question of law arising out of such order, and subject to the other provisions contained in this section...', the Tribunal has two courses open : either it shall refer as indicated above or it can refuse to refer in which event Section 256(2) will operate. It appears that when the Tribunal refers a case under Section 256(1). it must have to be satisfied that a question of law fit for reference to the High Court arises. That responsibility and that satisfaction must belong to the Tribunal. Therefore, the question raised in the statement of the case and referred to the High Court for an answer must in essence be the questions of the Tribunal and implies that the Tribunal is satisfied that a question of law has arisen. It is therefore inappropriate in such context when the Tribunal does refer the question of law under Section 256(1) to say that it is doing so at the instance of either the assessee or the revenue or the Commissioner of Income-tax. It is unnecessary to say anything further on this point.

10. But the other preliminary point raises a more important question. That question, in short, is: Can the Tribunal raise a question of law under Section 256(1) of the Income-tax Act, 1961, where there is no application by the aggrieved party as required and within the time thereunder Mr. Pal on behalf of the revenue contends that this practice is illegal but has been growing unnoticed without a formal decision by the courts deciding the exact point of controversy. The point arises directly in this case because the assessee did not make any application to raise question No. 2 asked before the Tribunal. What the assessee did was to state it in reply to the application made by the Commissioner of Income-tax raising question No. 1. The point is: Can it be done ?

11. It is contended by Mr. Pal on behalf of the revenue that this cannot be done and should not be permitted by the court. He emphasizes the expression 'by application in the prescribed form, accompanied where the application is made by the assessee by a fee of Rs. 100' in Section 256(1) of the Act. The relevant portion of Section 256(1) of the Act on this point is, barring the unnecessary details for this purpose, as follows : 'The assessee or the Commissioner may, within 60 days of the date upon which he is served with notice of an order under Section 254, and by such application in the prescribed form require the Appellate Tribunal to refer the same to the High Court'. No doubt the word used is 'may'. But being a statutory procedure, this is the only procedure by which the assessee or the Commissioner may move in order to require the Appellate Tribunal to make the reference to the High Court. There is no other procedure. The procedure being entirely statutory, although the word 'may' is used, there is no other available procedure allowed by the statute. The form prescribed is Form No. 37. These forms are prescribed under Rule 48 of the Income-tax Rules, 1962, which provides :

'An application under Sub-section (1) of Section 256 requiring the Appellate Tribunal to refer to the High Court any question of law shall be made in Form No. 37.'

12. Paragraph 4 of that form requires the applicant to state the questions of law that arise out of the order of the Appellate Tribunal.

13. Apart from this requirement of an application in the prescribed form, the second condition flows from the limitation of time under Section 256(1) of the Act. The first limitation is that such an application in the prescribed form by the assessee or the Commissioner, as the case may be, has to be made 'within sixty days of the date upon which he is served with a notice of an order under Section 254'. The Tribunal, therefore, has to be enabled to do so by the application in the prescribed form within this period of 60 days. If this period of 60 days is allowed to expire, the statute does not provide, except in the proviso which we shall presently mention, to entertain such an application beyond that period. Now, the proviso expressly says :

'Provided that the Appellate Tribunal may, if it is satisfied that the applicant was prevented by 'sufficient cause ' from presenting the application within the period hereinbefore specified, allow it to be presented within a further period not exceeding 30 days.'

14. The proviso means only this that a further period of 30 days in addition to the 60 days mentioned above might be available; but then this is not as a matter of right either to the assessee or to the Commissioner but it depends on the satisfaction of the Appellate Tribunal that the applicant was prevented by sufficient cause from presenting the application within the prescribed period of 60 days. It follows that if there be no application in the prescribed form within the period of limitation mentioned in Section 256(1) read with the proviso, the Appellate Tribunal cannot entertain any other application to make a reference to the High Court or even cannot act suo motu, on its own, to make such a reference. Being matters of revenue, this period of limitation is clearly imposed by statute to close disputes and controversy as soon as possible and within a reasonable time from the order of the Tribunal.

15. From a reading of Section 256, the conclusion is that no question can be raised in a statement of the case by the Tribunal without an application in the prescribed form by the applicant within the prescribed time. It appears that neither of these statutory requirements was satisfied by the assessee to qualify him for raising the second question. The assessee's reply raising such a question is dated as late as the 6th December, 1966, which was about four months after the date of the order of the Tribunal of 5th August, 1966, and the assessee has not either shown that the service upon him was delayed in order to enable him to come within the time prescribed even on the basis of the date of his reply. We are of the opinion that when the applicant does not satisfy the requirements either of : (1) the application in the prescribed form with the fee, and (2) within the limitations expressly invoked, he disqualifies himself from asking for a reference under Section 256(1) of the Act by any other procedure unknown in law or in the statute. We need only say that where there is no application in the prescribed form and within the time imposed under Section 256(1) of the Act, the provision of Section 254(4) of the Income-tax Act comes into force, namely, as stated there :

'Save as provided in Section 256, orders passed by the Appellate Tribunal on appeal shall be final.'

16. At this point we shall notice two authorities of the Supreme Court. One is Commissioner of Income-tax v. Scindia Steam Navigation Co. Ltd., : [1961]42ITR589(SC) The Supreme Court there, at pages 609-10, observed as follows :

'...the question must be one which the Tribunal was bound to refer under Section 66(1) and the applicant must have required the Tribunal to refer it. R(T) is the form prescribed under Rule 22A for an application under Section 66(i), and that shows that the applicant mast set out the questions which he desires the Tribunal to refer and that further, those questions must arise out of the order of the Tribunal. It is, therefore, clear that under Section 66(2), the court cannot direct the Tribunal to refer a question unless it is one which arises out of the order of the Tribunal and was specified by the applicant in his application under Section 66(1). Now, if we are to hold that the court can allow a new question to be raised on the reference, that would in effect give the applicant a right which is denied to him under Section 66(1) and (2) and enlarge the jurisdiction of the court so as to assimilate it to that of an ordinary civil court of appeal.'

17. The Supreme Court in that case was dealing with Section 66 of the old Act. But the principles are found in the observations quoted. The other case is Commissioner of Income-tax v. Arunachalam Chettiar, : [1953]23ITR180(SC) . There also the Supreme Court discussed the principles which should guide references under the Income-tax Act to the High Court. The ratio of that decision also supports the principle quoted above.

18. It is now necessary to examine the arguments put forward on this point by Mr. Roy on behalf of the assessee, contending that the Tribunal has a right to allow cross-objections and regulate its own procedure. His first reliance is on Section 255(5) of the Income-tax Act, 1961, which reads as follows :

'Subject to the provisions of this Act, the Appellate Tribunal shall have power to regulate its own procedure and the procedure of Benches thereof in all matters arising out of the exercise of its powers or of the discharge of its functions, including the places at which the Benches shall hold their sittings.'

19. On the basis of this provision it is said that the Appellate Tribunal has the power to treat the reply of the assessee in this case as a kind of cross-objection raising the second question under reference. Prima facie, there appears to be a good deal of force in such an argument. On closer scrutiny it appears that the significant words of that sub-section are 'subject to the provisions of this Act' Necessarily, therefore, it must be subject to Section 256(1) of the Act. Equally necessarily, therefore, the power to regulate the procedure cannot override the express provision regarding (1) requirement of an application in the prescribed form, and (2) such application to be within the period of time mentioned there. Thirdly, the Appellate Tribunal cannot be said to have power in the name of regulating its own procedure to follow a procedure which is directly against Section 256 and the limitations imposed therein. Almost by the application of the doctrine of expressio unius it will appear that the Appellate Tribunal in making the reference to the High Court has no power at all to evolve a procedure for cross-objection as under the Civil Procedure Code. The Tribunal is a statutory institution and has to find its powers within the four corners of the statute and its relevant sections. Section 253(4) in dealing with the appeals to the Appellate Tribunal expressly provides for the case of filing a 'memorandum of cross-objections'. It expressly gives the party other than the appellant before it the right to file a memorandum of cross-objections verified in the prescribed manner against any part of the order of the Appellate Assistant Commissioner and it expressly provides, 'such memorandum shall be disposed of by the Appellate Tribunal as if it were an appeal presented, within the time specified in Sub-section (3)'. By sharp and deliberate contrast this provision for cross-objection has not been made in the case of reference to the High Court by the Tribunal under Section 256 of the Income-tax Act, 1961. That is recognised in the decision of the Madras High Court in Commissioner of Income-Tax v. Sundaram & Co. Private Ltd. : [1964]52ITR763(Mad) .

20. It is a mistake to think that the Appellate Tribunal in making a reference to the High Court is either a regular court of appeal with all the powers available in the Civil Procedure Code or that in any other way it has any implied power to permit cross-objections, where it is not provided for in the Income-tax Act, and particularly where it is against the express provisions in the statute regarding limitation and form.

21. To support and illustrate this conclusion it will be necessary to refer to certain provisions in the statute and to certain authorities. Section 255(6) dealing with the procedure of the Appellate Tribunal makes it quite clear that the proceedings before the Appellate Tribunal shall be deemed to be judicial proceedings but within the meaning of Sections 193 and 288 and for the purpose of Section 196, Indian Penal Code, and that the Appellate Tribunal shall be deemed to be a civil court for all the purposes of Section 195 and Chapter XXXV of the Criminal Procedure Code, That provision implies that the Appellate Tribunal is not a regular court of appeal with all the powers of the court under the Civil Procedure Code, We have failed to find any particular section of the Income-tax Act vesting the Appellate Tribunal with all the powers of a civil court under the Civil Procedure Code. A reference to the cases on this point will be necessary.

22. In R.M. Seshadri v. Second Addl. Income-tax Officer : [1954]25ITR400(Mad) a Division Bench of the Madras High Court came to the conclusion that the Income-tax Appellate Tribunal was not a court. (See the observations of the Madras High Court from page 403 to page 406 of that report). The Andhra Pradesh High Court in Bh. Satyanarayanamurthi v. Income-tax Appellate Tribunal : [1958]33ITR123(AP) expressed the same view, where Subba Rao C. J. at page 126 observed as follows:

'In either ordinary parlance or legal sense, the Income-tax Appellate Tribunal cannot be held to be a civil, criminal or revenue court.'

23. The picture on the point gets confused by doctrines derived from analogy and similarity found in many of the law reports. In Kanpur Industrial Works v. Commissioner of Income-tax : [1966]59ITR407(All) the observation was made by M. C. Desai C. J. at page 417 to the following effect:

'By its order an appellate court can dispose of the appeal and not something not included within its scope. In the department's appeal for an increase in the assessable income, the only question for its consideration is whether the increase or part of it should be allowed or not. Whether the amount already assessed was wrongly assessed or not or whether the assessee is liable to be assessed at all or not is a question quite outside the scope of the appeal and any decision on it cannot be said to be an order on the appeal.'

24. Again at page 421 of the report the observation is as follows :

'If it prayed that the assessment order be quashed it was not entitled to be heard, whereas if it simply prayed that the department's appeal be dismissed it was entitled to be heard. What the assessee prayed before the Tribunal is essentially a question of fact, which cannot be investigated by this court and on which no finding can be given by it for the first time or given adversely to the finding recorded by the Tribunal.'

25. In Commissioner of Income-tax v. Hazarimal Nagji & Co. : [1962]46ITR1168(Bom) a Bench of the Bombay High Court expressed the view affirming the previous view expressed in the case of New India Life Assurance Co. v. Commissioner of Income-tax : [1957]31ITR844(Bom) that 'the position of the Appellate Tribunal is the same as a court of appeal under the Civil Procedure Code and its powers are 'identical' with the powers enjoyed by an appellate court under the Code.'

26. Many of the above observations have been applied out of their context and the resulting confusion has been very misleading indeed in some cases. Whatever the position may be, this much is clear to our mind that so far as the Appellate Tribunal's jurisdiction to refer a case to the High Court under Section 256 is concerned, it is strictly limited by the statutory provision and it does not enjoy the powers of a full appellate court under the Civil Procedure Code.

27. The sheet-anchor of Mr. Roy for the assessee on this point has been the decision of the Bombay High Court in Girdhardas & Co. Ltd. v. Commissioner of Income-tax : [1957]31ITR82(Bom) . There, Chagla C.J., delivering the judgment of the Division Bench of the Bombay High Court, made the following observations at page 91 :

'It is obvious that there may be cases where a winning party wouldbe seriously prejudiced if it was precluded from raising a question of lawmerely because it had not made an application for a reference and thereference was asked for at the instance of the losing party. The winningparty can never apply for a reference. But it may happen that if thecourt takes a particular view on the reference asked for by the losing party,certain other questions of law may arise which may have to be decided in the interest of the winning party. Therefore, it would not be proper to shut out a party before the Tribunal from raising a question of law which clearly arises from the order of the Tribunal merely because it so happens that it has not made an application for a reference.'

'In. making the above observations, the Bombay High Court was following one of its previous decisions, unreported, in Commissioner of Income-tax v. Banthia Bank Ltd. (I.T. Ref. No. 20 of 1950--decided on 10-10-50) and mentioned at page 90 of the report in Girdhardas. & Co. Ltd. v. Commissioner of Income-tax.

28. This Bombay decision does not discuss, (1) the then existing Section 66 of the Income-tax Act, (2) the statutory provisions for the application in the prescribed form, and (3) the nature of jurisdiction o5 the Appellate Tribunal in respect of a reference and the character of advisory jurisdiction of this High Court in hearing a reference which necessarily limits ordinary appellate court's powers under the Civil Procedure Code, which are co-equal with the trial court even m the matter of taking evidence, and (4) it is doubtful how far it is good law after the subsequent decision of the Supreme Court in Commissioner of Income-tax v. Scindia Steam Navigation Co. which, we have already discussed.

29. This view of Chagla C. J. creates a conflict of decisions in the Indian High Courts. His Lordship's view was followed by the Rajasthan and the Gujarat High Courts and not followed in the Madhya Pradesh and Madras High Courts. In Educational & Civil List Reserve Fund through H.H. Maharana of Udaipur v. Commissioner of Income-tax the Rajasthan High Court came to the conclusion that it was open to the department also on an application for a reference made by the assessee to ask for a question which according to it arose from the order of the Tribunal to be referred to the High Court. At page 119 of the report the Rajasthan High Court followed the Bombay High Court decision in Girdhardas's case. Similar view was expressed by the Gujarat High Court in Smt. Dhirajben R. Amin v. Commissioner of Income-tax : [1968]70ITR194(Guj) But the opposite view was taken by the Madhya Pradesh High Court in Commissioner of Income-tax v. Dr. Fida Hussain : [1969]71ITR314(MP) where the following observations were made at page 318:

'In regard to the second question we are of opinion that It could not have been referred to this court without an. application duly made by the assessee under Section 66(1) of the Act. We had occasion to consider an identical question in Commissioner of Income-tax v. Jiwaji Rao Sugar Co. Ltd. : [1969]71ITR319(MP) Having regard to this conflict of judicial opinion in the different High Courts in India, Mr. Pal for the revenue naturally insisted that it was essential that the point must be decided on this reference so far as this court is concerned. We have already expressed our conclusion on this point. We hold that section 256 of the Income-tax Act, 1961, lays down the whole procedure how reference has to be made. That procedure, in our view, does not give the Appellate Tribunal any jurisdiction or power to admit cross-objections within the meaning of the Civil Procedure Code to raise a question of law not raised by an application in the prescribed form and not within the time prescribed and make a reference of the same to this court. We hold further that it is a course which can never be taken specially where it is beyond the express limitation stated in Section 256 of the Income-tax Act. Our observations should not be understood as limiting any scope for argument on the question raised on the reference according to the procedure laid down in Section 256 even though that argument is not raised by way of a question. We would like to elaborate on this particular aspect. An argument has been advanced about related and unrelated questions. If a question is duly raised according to the procedure of Section 256 of the Income-tax Act, 1961, then different approaches and aspects of that question certainly will be open to argument in the reference and the question from that point of view may be reframed or appropriately framed. But that is not the same as saying that a wholly unrelated question can be allowed to be raised which was not raised by way of an application in the prescribed form and within the statutory limitation. This is acutely illustrated in the instant reference before us. The first question raised only relates to the power of reduction of the penalty below the statutory limit prescribed in Section 271(1)(iii) of the Income-tax Act, 1961. It proceeds on the assumption that Section 271(1)(iii) of the Act applied. What is now being said is that not the whole of Section 271 was inapplicable. For that purpose reliance was placed on the authority in Kanpur Industrial Works v. Commissioner of Income-tax already quoted. But, then, there, in that case, the increase of the assessment was the total ambit of the appeal. In fact, there it was held that the point of no assessability at all should not be allowed o be raised as against the whole assessment but confined only to the part of the increase in assessment which was the subject-matter of the appeal before the Tribunal. It was in that case that the word 'incongruity' has been used and the incongruity was avoided by suggesting the course, that legal assessability was not generally to be the issue and not allowed to be raised but in so far as it affected the increase only in the assessment, it was allowed. To follow such a course in this case would be not only incongruous but completely illogical. If the penalty proceedings were invalid in law altogether, then there can be no question of the penalty being lower than the minimum statutory limit, for ex hypothesis the penalty did not come under the statute at all. We do not think that such a course is open, any further, to argument after the decision of the Supreme Court in Commissioner of Income-tax v. Scindia Steam Navigation Co. Ltd.

30. Although we are of the opinion that this question should not have been referred in the manner as it is done, we have allowed the assessee to address us on the merits of question No. 2 in order to find out and decide if they are a part and parcel of and are implicit in the first question. Question 2, as quoted above, is:

'...whether, on the facts and in the circumstances of the case, the Tribunal was right in holding that the penalty proceedings were properly initiated and that the penalty orders passed by the Inspecting Assistant Commissioner were valid in law ?'

31. In order to appreciate the merits of this point urged by the assessee, it will be helpful to have the following calendar ;--

1-4-62 : The new Income-tax Act, 1951, came into force.

29-8-64 : I.T.O.'s reference under Section 274(2) of the I.T. Act, 1961, to the InspectingAsstt. Commissioner.

31-8-64 : I.T.O.'s order of assessment and notice under Section 274(1) of the I.T, Act.

2-9-64 : Service of the above notice on the assessee.

22-9-64 : I.T.O.'s hearing of the assessee.

11-3-65 : Inspecting Asstt. Commissioner's notice under sec. 274(1) of the Act to the assessee.

32. We have already described the facts as appearing in the statement of the case. The assessee's point is that the penalty proceedings on those facts started on March 11, 1965, when the Inspecting Assistant Commissioner gave notice under Section 274(1) of the Income-tax Act, 1961. The Tribunal held that the penalty proceedings started from either August 29, 1964, or August 31, 1964. The point of contention, however, must not be missed. It is not that the order imposing the penalty was not within two years. The point of contention is that the penalty proceedings were initiated after the commencement of the assessment proceedings.

33. It will be necessary and helpful to have Section 275 to decide this question. Section 275 reads as follows :

'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.'

34. It is followed by an Explanation with which we are not concerned. What is complained of by the assessee in this case is that the proceedings for the imposition of penalty have been commenced in this case after the completion of assessment proceedings. Therefore, it is contended that the whole penalty proceeding is bad and vitiated.

35. The Tribunal came to the following finding on this issue :

'In this case, assessment proceedings were completed by the passing of the assessment order on 31st August, 1964. ....'

36. Learned counsel for the assessee contended that, though usually penalty proceedings would be commenced by the issue and service of notice under Section 274 of the Income-tax Act by the Income-tax Officer, yet in the case where the penalty proceedings are transferred to the Inspecting Assistant Commissioner under Section 274(2), such proceedings are commenced by the issue and service of the notice by the Inspecting Assistant Commissioner on the assessee to show cause. Having noticed this, the Tribunal proceeds to record the finding in these terms :

'The proceedings are initiated by the Income-tax Officer and transferred to the Inspecting Assistant Commissioner and that the provision for imposition of penalty are attracted must be to the satisfaction of the Income-tax Officer under Section 271(1)(c). This argument overlooks the fact that under Section 274(2) the Inspecting Assistant Commissioner has all the powers conferred under Chapter XXI, which also includes Section 271 for the imposition of penalty. As in this case, the penalty proceedings were referred to the Inspecting Assistant Commissioner on 29th August, 1964, which was before the completion of the assessment proceedings, and the notice of the transfer was given to the assessee on that date, it must be held that the penalty proceedings were properly initiated and the penalty orders passed by the Inspecting Assistant Commissioner are valid in law.'

37. In coming to that conclusion, the Tribunal distinguished a Bombay Tribunal Bench decision on the ground that that was not a case of imposition of the penalty by the Inspecting Assistant Commissioner on transfer but of a penalty imposed by the Income-tax Officer.

38. The answer to this question really turns on the interpretation of the expression ''proceedings for the imposition of penalty have been commenced' appearing in Section 275 of the Income-tax Act, 1961. In other words, what is the commencement of the penalty proceedings When do the penalty proceedings commence Again, in our view, these questions must be answered on the terms of the statute and by strict reference to the relevant sections which govern the procedure for and imposition of the penalty. Analogies we consider to be misleading and inappropriate. Before dealing with the numerous authorities and various analogies placed before us by Mr. Roy, appearing for the assessee, a close look at' the sections relevant for this purpose is the first step. The three sections relevant for this purpose are: Sections 271, 274 and 275 of the Income-tax Act, 1961.

39. Chapter 21 of the Income-tax Act, 1961, deals with 'penalties imposable.' Section 271(1) of the Income-tax Act, 1961, lays down, inter alia, as follows:

'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 o! his income or deliberately furnished inaccurate particulars of such income, he may direct that such person shall pay by way of penalty--.

(iii) .... a sum which shall not be less than 20% 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.' In quoting the above section I have left out the irrelevant or immaterial portions for the purpose of this question. The dominant features are plain from the sections as quoted. They are three in number. In the first place, the Income-tax Officer has to be satisfied. In the second place, such 'satisfaction' of the Income-tax Officer must be 'in the course of any proceedings under this Act'. Thirdly, he may direct that such person shall pay by way of penalty a certain amount. The overall condition is that there has to be a 'concealment'.

40. Certain results follow from a provision of this nature. The first is that the authority, prima facie, belongs to the Income-tax Officer, It is before him that the first foundations of penalty are laid. That foundation is his 'satisfaction' in the course of assessment proceedings that there has been concealment. He is therefore the fons et origo of this penalty proceeding. Unless he initiates or the Appellate Assistant Commissioner initiates, the Inspecting Assistant Commissioner cannot initiate. In the natural context that is what should be when one remembers that after all the assessment proceedings are being held by the Income-tax Officer or the Appellate Assistant Commissioner who are the persons likely at all to know whether there has been a concealment and not the Inspecting Assistant Commissioner who, not dealing with the regular assessment proceedings, would have little or no knowledge of concealment. It is significant to emphasise also that Section 271 of the Income-tax Act does not breathe a word about Inspecting Assistant Commissioner.

41. The next stage is reached in Section 274 which is described as the 'procedure'. Section 274 reads as follows:

'(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 Rs. 1,000, 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.'

42. Section 274(1) makes it clear that ''no order imposing a penalty can be made unless the assessee has been heard or given a reasonable opportunity of being heard'. Its plain meaning is that no order of penalty can be imposed upon the assessee without his being heard or given a reasonable opportunity of being heard. It does not mean that no proceeding can be taken against him without those two conditions of 'hearing' or 'reasonable opportunity of being heard', nor does it posit or stipulate for a notice when the penalty proceeding is commenced. Sub-section (2) of Section 274 is significant in many ways. In the first place, it is the proverbial non-obstante clause beginning with the words ' 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 language of this 'notwithstanding' clause on a proper interpretation can only mean this that the entire provision of Section 271(1) is not wiped out. It only prevails in the limited case mentioned under Section 271(1) (c) and (iii) and for the particular case where the penalty imposable exceeds the sum of Rs. 1,000 and that only so far as the Income-tax Officer is concerned and not the Appellate Assistant Commissioner as mentioned in Section 271(1). That is the scope and ambit of limitation of the non-obstante expression under Section 274(2) of the Income-tax Act, 1961. The conclusion follows that all cases of penalty and penalty proceedings have their source originally with the Income-tax Officer.

43. The operation of Section 274(2) of the Act comes into play when the minimum penalty imposable exceeds Rs. 1,000. This can only mean that the Income-tax Officer has to find initially that the minimum penalty imposable exceeds Rs. 1,000 because none else can make this initial finding under the scheme of the Income-tax Act. That means a judicial consideration by the Income-tax Officer when the minimum penalty imposable in a particular case exceeds the sum of Rs. 1,000. This is the second feature of Section 274(2) of the Act. Thirdly, the significant expression in Section 274(2) of the Act is : 'The Income-tax Officer shall refer the case to the Inspecting Assistant Commissioner.' The words 'refer the case' plainly indicate that the case is with the Income-tax Officer and he is referring that case to the Inspecting Assistant Commissioner. It follows again, therefore, that it is the Income-tax Officer before whom 'the case' originates and he is referring that case to the Inspecting Assistant Commissioner. In other words, the penalty proceedings in this context commence before the Income-tax Officer. Fourthly, when the Income-tax Officer has referred 'the case' to the Inspecting Assistant Commissioner, the power and the function of the Inspecting Assistant Commissioner are controlled by the expression that follows, viz., 'who shall for the purpose have all the powers conferred under this Chapter for the imposition of penalty'. That means that after the Income-tax Officer refers the case to the Inspecting Assistant Commissioner, he has all the powers under Chapter 21 given to the Income-tax Officer and the Appellate Assistant Commissioner under Section 271 of the Act. It is necessarily so because in that particular case where the minimum penalty imposable exceeds Rs. 1,000, the case is transferred by the Income-tax Officer to the Inspecting Assistant Commissioner and who, in order to discharge his functions, must, a fortiori, be clothed with the powers given under the statute under Section 271 of the Act or else he could not function. From this, it follows that what the Inspecting Assistant Commissioner does is to take over the pending case before the Income-tax Officer with regard to the penalty proceedings on the ground that the minimum penalty imposable exceeds Rs. 1,000. In that view of the matter, Section 274(2) read with Section 271 of the Income-tax Act, 1961, does not suggest that the Inspecting Assistant Commissioner is the institutional authority where penalty proceedings are or can be commenced. The Inspecting Assistant Commissioner in this view is really a transferee authority whose jurisdiction is dependent on the condition that the Income-tax Officer must make the reference of the case where the minimum penalty imposable exceeds Rs. 1,000. Under Section 28 of the old Income-tax Act of 1922, the Income-tax Officer had no power to impose any penalty without any previous approval of the Inspecting Assistant Commissioner and it is significant that the new Income-tax Act of 1961 does not require the Income-tax Officer to obtain such sanction in any case. It confirms the conclusion that we are reaching that the Income-tax Officer is the institutional authority- where the penalty proceedings are commenced. All that the present Act does is that, if the case falls within Section 271(1) concerning a case of concealment read with Sub-clause (c) thereof and where the minimum penalty imposable exceeds Rs. 1,000, he is bound to refer the case to the Inspecting Assistant Commissioner who is then empowered to impose a penalty in that case. It has to be emphasized in this context that the Income-tax Officer's jurisdiction to impose a penalty in any case falling outside Section 271(1)(c) is not in any way affected or qualified by Section 274(2) of the new Income-tax Act of 1961. The words 'for the purpose' under Section 274(2) of the Income-tax Act, 1961, can only mean for the purpose of imposing the penalty and not for commencing the penalty proceeding but for concluding it,

44. It will be necessary now to come to the next section, Section 275. This has already been quoted. Mr. Roy for the assessee argues that this section contemplates two different proceedings which he describes as : (1) the assessment proceedings and (2) the penalty proceedings. His argument suggests that they are two independent and entirely different proceedings. No water-tight distinction of this nature appears possible in the scheme of the Act. It will be unnecessary to discuss the old controversy whether penalty is an additional tax or not which culminated in the two Supreme Court decisions in C.A. Abraham v. Income-tax Officer, Kottayam, : [1961]41ITR425(SC) and Commissioner of Income-tax v. Bhikaji Dadabhai & Co. : [1961]42ITR123(SC) Mr. Roy for the assessee contends that the transfer of the case by the Income-tax Officer to the Inspecting Assistant Commissioner is in the nature of an administrative or departmental act and only after that transfer the penalty proceeding before the Inspecting Assistant Commissioner starts. Therefore, his submission is that the commencement of the proceedings really starts with the Inspecting Assistant Commissioner, on the basis of this distinction between penalty proceedings and the assessment proceedings. The opening words of Section 274(1) of the Act are clear enough to say that the requirement that the assessee shall be heard or be given a reasonable opportunity of being heard is a requirement before an order imposing a penalty under Chapter 21 of the Income-tax Act, 1961, is made. The order imposing the penalty requires that condition to be satisfied but there is no such limitation for initiating or commencing penalty proceedings with the notice. This is an important difference because under other sections like Sections 22 and 34 of the old Income-tax Act with corresponding provisions in the new Act require such notices as statutory conditions and, therefore, commencement of proceedings under those sections is bound to be different from commencement of proceedings under Section 271 read with Sections 274 and 275 of the Income-tax Act of 1961. When we come to the discussion of the relevant authorities on that subject we shall deal with the point in further detail. Modern statutes have many provisions for penalty proceedings and specially in the case of dismissal of public servants. Such penalty proceedings assume and also are required to satisfy particular statutory conditions of giving two notices, such as, a preliminary notice why the public servant should not be discharged or dismissed and a second notice why a particular penalty should not be imposed upon him. These considerations, however, are clearly inapplicable to penalty proceedings under Chapter 21 of the Income-tax Act, 1961.

45. The reason why the Income-tax Act, 1961, in Section 274(1) requiresthat no order of penalty shall be made without hearing the assessee orgiving him a reasonable opportunity, and the reason for dispensing with any such requirement or comparable notice at the initial stage of the penalty proceeding under Section 271 of the Act are plain and can he sensibly and rationally justified. The justification lies in this fact that Section 271(1) of the Income-tax Act, 1961, begins with this requirement that this satisfaction of the Income-tax Officer must arise 'in the course of any proceeding under this Act' ; that means that the Income-tax Officer who is dealing with the assessment proceedings under the scheme of the Income-tax Act which are not ex parte but on notice and opportunities given to the assessee mentioned in that Act. It is only in such course of assessment proceedings that the Income-tax Officer is satisfied that a concealment has occurred under Section 271(1)(c). Therefore, the initial notice about the commencement is dispensed with because the notice is already there as the assessee is appearing before the Income-tax Officer in connection with the assessment proceedings. Therefore, the argument that the assessment proceedings and the penalty proceedings are two separate independent proceedings cannot really be sustained. One flows from the other. There cannot be a penalty proceeding which does not spring from the assessment proceeding. They are in that sense inseparably connected. It is not open to the Income-tax Officer or the Appellate Assistant-Commissioner under Chapter 21 of the Act to take penalty steps against the assessee which does not arise out of the assessment proceedings. In that sense it is not an unrestrained or unqualified power of penalty. In that sense it is not possible to separate the two proceedings completely and describe the penalty proceedings in that sense as independent of the assessment proceeding. I understand the Division Bench decision in Commissioner of Income-tax v. Anwar Ali, only in that context. Were it necessary to express any difference with the view expressed in Commissioner of Income-tax v. Anwar Ali, we would have certainly referred it to a Fuller Bench but it is not necessary to do so in the instant reference before us, for we are only considering here the commencement of the penalty proceedings and whether in that context the commencement has the soil of origin in the assessment proceedings.

46. The conclusion is also enforced by an analysis and scrutiny of the powers, functions and jurisdiction of the Inspecting Assistant Commissioner under the Income-tax Act, 1961. A broad analysis of the Act shows six specific powers or functions or jurisdiction of the Inspecting Assistant Commissioner. In the first place, he acts under the direction of the Commissioner under Section 123 of the Act. In the second place, he has the power to call for information under Section 133. In the third place, he has the power to inspect the register of companies under Section 134. Fourthly, he has the power to give permission for levy of super-tax on undistributed income of certain companies under Section 104 of the Act. Fifthly, he has the power to impose a penalty under Section 274(2) of the Act in cases of concealment and referred to by the Income-tax Officer. Sixthly, he has the power to accord 'previous approval in connection with the under-statement of the consideration for transfer of capital asset' under Section 52 of the Act. This analysis of the powers and jurisdiction of the Inspecting Assistant Commissioner under the Income-tax Act, 1961, shows that he has not any power to commence the penalty proceedings as in this case. He is an institutional authority with very strictly enumerated powers. Section 2(27) of the Income-tax Act, 1961, says that the Inspecting Assistant Commissioner means a person appointed to be such under Section 117(1) of the Act. He is more or less--to use a kind of non-technical language--a kind of a supervisor, superintendent, although we would not call him a watch-dog.

47. On the interpretation and construction of Section 271, Section 274 and Section 275 we have come to the conclusion that the penalty proceedings commence and are initiated before the Income-tax Officer of, as the case may be, with the Appellate Assistant Commissioner under the statute and not with the Inspecting Assistant Commissioner.

48. It will be now necessary to examine the various authorities on which Mr. Roy for the assessee relied and also examine the analogies he tried to draw with regard to the concept and procedure for penalty from other branches of law.

49. In the first place, he submits that penalty is quasi-criminal. The reason for his submission is that he wanted to draw upon the criminal law and Criminal Procedure Code for elucidating the expression 'commencement of the proceedings' with a view to apply them to this particular Income-tax Act of 1961. For this purpose, he relied on the observations of D. Basu J. in Commissioner of Income-tax v. Anwar Ali : [1967]65ITR95(Cal) . Penalty in this context should always be construed within the terms and language of the particular statute. Penalties in modern law are always statutory. Therefore, the statute creating the penalty is the first and the last consideration in this respect. Analogies are often misleading, because these statutes are not in pari materia. The popular and literary notion about penalty and the concepts associated with it have to subordinate themselves to the actual words and terms used in the statute creating the penalty and laying down the procedure for its imposition. It will be trite to say that penalty is penal. It is confusing to say that penalty is criminal or quasi-criminal. Penalty is statutory just as much as legal misconduct is not necessarily the popular misconduct.

50. Secondly, Mr. Roy for the assessee has drawn analogies from the Sales Tax Act, the Arms Act and the Ticca Tenancy Act. In support of his submission on these analogies, he has referred to three cases. The first case is Hossein Kasam Duda (India) Ltd. v. State of Madhya Pradesh, : 1983(13)ELT1277(SC) . This is a decision construing Section 22(1), proviso, of the C.P. and Berar Sales Tax Act and was concerned with the problem whether the amendment of that proviso by Act 17 of 1949 applied to proceedings commenced before the amendment. It has nothing to do with the point for decision in this instant reference before us. Neither its adumbration of the law nor discussion of facts has any relevance or application to the points for decision in the present reference before us. The observations of that report at page 225 about 'lis' have no application in the present context for the simple reason that here the penalty proceedings under Chapter 21 of the Income-tax Act, 1961, spring from the assessment proceedings before the Income-tax Officer.

51. The second case on which Mr. Roy relied is Emperor v. Gulam Nabi, A.I.R. 1928 Pat. 146 which was concerned with Section 417 of the Criminal Procedure Code on the point of appeal against acquittal and Section 29 of the Arms Act where proceedings of that Act were construed to mean legal proceedings in court. We are not prepared to apply the analogy of Section 29 of the Arms Act to Sections 271, 274 and 275 of the Income-tax Act, 1961, which we consider are entirely different.

52. The third case on which Mr. Roy relied, is Abdul Gani v. David Jacob Cohen, [1953] 57 C.W.N. 313 which only decided the point that taking out of a summons or notice of motion under the practice of the court was not making of an application. We do not think that that case has any application to the points before us.

53. But the next group of authorities on which Mr. Roy for the assessee relied relates to the Income-tax Act and is nearer the field. These decisions, however, are not on penalty proceedings under the Income-tax Act but under other sections of the Income-tax Act. All these authorities are on Sections 22 and 34 of the old Income-tax Act of 1922. We shall briefly notice these authorities now. Mr. Roy opens this branch of citation with the case in D.P. Wadia & Sons v. Commissioner of Income-tax : [1963]50ITR761(Bom) . In particular, he relies on the observations of Desai J. at pages 762 and 763. This case supplied Mr. Roy with the 'open the arena' expression. That expression was used in that authority. Mr. Roy, therefore, suggests that all the proceedings before the Income-tax Officer under Section 271, until he refers the case to the Inspecting Assistant Commissioner under Section 274(2) of the Act, are all only steps to 'open the arena'. The phrase is attractive and liable to seduce. But, on the particular sections of the Income-tax Act, in this case, like Sections 271, 274 and 275, the attraction loses its force and glamour. This decision of D. P. Wadia v. Commissioner of Income-tax, was given on Section 22(2) and the notice was under the old Act. The ratio of that decision was that the issue of a public notice under Section 22(1) did not mark the start of assessment proceeding against an individual assesses and the public notice only opened the arena as it were for the proceedings to commence and was anterior to the commencement of assessment proceedings against any individual assessee. The controversy about public notice and individual notice for assessment proceeding has been the subject-matter of many judicial decisions but that is not the point here before us. Whether proceedings are commenced by public notice or by individual notice is not the point calling for an answer on this reference. We do not think that it is possible to argue on the relevant sections operating on penalty proceedings to suggest that proceedings only start under notice under Section 274(1) road with Section 274(2). We do not wish to repeat the reasons which we have already given.

54. The authority of this decision also is now in dubio because it is contrary to the observations made by the Supreme Court in Commissioner of Income-tax v. Ranchhoddus Karsondas, : [1959]36ITR569(SC)

55. The next case on which Mr. Roy relied is Dr. Onkar Dutt Sharma v. Commissioner of Income-tax : [1967]65ITR359(All) and the observations made at pages 362-63. That case decided that initiation of proceedings under Section 34 of the Income-tax Act commenced only with the issue of notice under the section and did not commence when the Income-tax Officer applied for sanction of the Commissioner to issue such notice. It is essential to recall and emphasise that the provisions contained in Section 34 of the old Income-tax Act 1922, are very different from Sections 271, 274 and 275 of the Income-tax Act, 1961.

56. Neither Section 22 nor Section 34 of the old Income-tax Act of 1922 used the expression 'commencement of the proceedings'.

57. To continue with the authorities cited by Mr. Roy some more references have to be examined. The decision in Harakchand Makanji & Co. v. Commissioner of Income-tax : [1948]16ITR119(Bom) was a case under Section 34 again of the old Income-tax Act of 1922. There Chagla C.J., at page 122, observed :

'Therefore once a public notice is given under Sub-section (1) the assessment proceedings have commenced and there is no obligation upon the Income-tax Officer to serve an assessee individually as well.'

58. The other case cited by Mr. Roy is Y. Narayana Chetty v. Income-tax Officer, Nellore, [1959] 35 I T.R. 388 of the Supreme Court. Mr. Roy relied on the observations of Gajendragadkar J., at page 392, where it was observed that notice prescribed under Section 34 could not be regarded as a mere procedural requirement and that the service of the requisite notice on the assessee was a condition precedent to the validity of any reassessment made under Section 34. It was held by the Supreme Court in that case that the notice prescribed by Section 34 of the Income-tax Act for the purpose of initiation of reassessment proceedings was not merely a procedural requirement but was a condition precedent going to the very validity of the reassessment proceedings and if no such notice was issued or was invalid then the entire proceedings by the Income-tax Officer were illegal and void. These last two decisions in Harakchand Makanji & Co. v. Commissioner of Income-tax and v. Narayana Chetty v. Income-tax Officer, Nellore, were followed with approval by the Supreme Court subsequently in Commissioner of Income-tax v. Ranchhoddas Karsondas.

59. The next case cited is a decision of the Supreme Court in S. Narayanappa v. Commissioner of Income-tax : [1967]63ITR219(SC) . That again was a case on Section 34 of the old Income-tax Act of 1922. There the Supreme Court had expressed the view that the words 'reason to believe' under Section 34 did not mean purely a subjective satisfaction but that the belief must be in good faith and cannot be a mere pretence and it was open to the court to examine whether the reasons for the belief had a rational connection or a relevant bearing to the formation of the belief and were not extraneous or irrelevant. The Supreme Court also expressed the view that proceedings for assessment or reassessment under Section 34(1)(a) started with the issue of a notice and it was only after the service of the notice that the assessee, whose income was sought to be assessed or reassessed, became a party to those proceedings. The relevant observations of Ramaswami J., who delivered the judgment, may be seen at pages 222-223. The opinion was expressed that the earlier stage of the proceedings for recording the reasons of the Income-tax Officer for obtaining the sanction of the Commissioner are administrative in character and not quasi-judicial. It was this part of the judgment which was used by Mr. Roy for the assessee in his argument to submit that the part or role played by the Income-tax Officer under Section 271 of the Income-tax Act, 1961, until the case was referred by him to the Inspecting Assistant Commissioner, was administrative in character and not quasi-judicial. Now, we have already said that Section 34 in structure and purpose is entirely different from Sections 271, 274 and 275 of the Income-tax Act, 1961. The word in Section 271 is not 'reason to believe' as in old Section 34. The word in Section 271 is 'satisfaction'. The further controlling expressions' in the course of any proceedings under this Act' are always with notice to the assessee.

60. The other case to which reference was made by Mr. Roy is S.S. Gadgil v. Lal & Co. : [1964]53ITR231(SC) a decision of the Supreme Court, and the observations are at pages 237-239. It will be unnecessary to discuss that case again in detail because that was also under Section 34 of the old Income-tax Act of 1922 and the foregoing remarks apply also to distinguish that from the instant case before us. We need only refer to another aspect of the decision appearing from the judgment of Shah J. that the 'income-tax authorities who have power to assess and recover taxes are not acting as judges deciding a litigation between the citizen and the State ; they arc administrative authorities whose proceedings are regulated by the statute, but whose function is to estimate the income of the taxpayer and to assess him to tax on the basis of that estimate.'

61. We can conclude our analysis of these authorities by referring to the decision of the Supreme Court on which Mr. Pal for the revenue relied and which is nearest to the point. That is the decision of the Supreme Court in Commissioner of Income-tax v. S.V. Angidi Chettiar, : [1962]44ITR739(SC) . This decision was rendered on the somewhat comparable Section 28 of the old Income-tax Act of 1922. Shah J., delivering the judgment of the Supreme Court in that case, made the following observations at page 745 of the report:

'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 proceeding by the Income-tax Officer. Satisfaction before conclusion of the proceedings 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.'

62. From the above authority, it follows that 'satisfaction' of the Income-tax Officer is the first step. As we have already indicated, Section 271 of the Income-tax Act, 1961, does not rest only with the 'satisfaction' but proceeds further to say that the Income-tax Officer 'on being satisfied may direct that such a person must pay by way of penalty'. On that ground, we are satisfied that the initiation of penalty proceedings commences with the Income-tax Officer.

63. It will be unnecessary to discuss in detail an English decision cited at the Bar, viz.. Turner v. Jacaranda Clubs Ltd., [1953] 2 All E.R. 548 construing the expression 'action commenced' where the action was commenced in the county court but transferred to the High Court under the County Courts Act in England. It cannot be over-emphasised that analogies in this respect in construing taxing statutes on particular procedure are as misleading and should generally be avoided. We can do no better than quote the observation of the Pareq J. in Cross v. British Oak Insurance Co. Ltd., [1938] 1 All E.R. 383 where interpreting the words 'commencement of proceedings' under the British Road Traffic Act, 1938, the learned judge at page 386 observed as follows :

'I do not think that great assistance is to be obtained from earlier cases dealing with other sections of other Acts of Parliament.'

64. We, therefore, hold that the Tribunal was right in coming to the conclusion that the penalty proceedings in this case and in the facts and circumstances stated above commenced on August 29, 1964, which is the date when the Income-tax Officer referred the case under Section 274(2) of the Income-tax Act, 1961, or, at any rate, on August 31, 1964, with the passing of the assessment orders and notice under Section 274(1) of the Income-tax Act, 1961. In this case, the Tribunal at page 18 of the paper book records the finding :

'In this case such satisfaction was recorded and such direction was given on August 31, 1964, as recorded in the assessment orders themselves; the order sheet shows that on August 31, 1964, the Income-tax Officer directed the issue of notice under Section 271/ 274 . Therefore, the penalty proceedings commenced on that date.'

65. The facts are not challenged. But here a point was raised by Mr. Roy for the assessee by trying to suggest that the Income-tax Officer gave a notice on August 29, 1964, under Section 274(2) of the Income-tax Act, 1961, and again the Income-tax Officer gave a notice on September 2, 1964, asking the assessee to show cause why an order imposing a penally should not be passed under Section 271. Therefore, he suggests that the second notice of September 2, 1964, is illegal because by that time the Income-tax Officer had become functus officio, having made the reference on August 29, 1964, to the Inspecting Assistant Commissioner. We do not think that Mr. Roy is entitled to raise these questions of fact if he is disputing the dates of notices. But we have failed to see how even then there is any question of illegality and how it helps the assessee's argument on the point of commencement of proceedings.

66. For the reasons and on the authorities stated above we hold that the penalty proceedings were properly initiated and that the penalty orders passed by the Inspecting Assistant Commissioner were valid in law, We, therefore, answer the second question in the affirmative.

67. We shall now deal with the first question raised in the statement of the case. This relates to the reduction of penalty. Mr. Pal for the revenue contends that the following conclusion of the Tribunal is wrong in, law :

'Section 271(1)(iii) provides a minimum of 20 per cent. of the tax sought to be evaded in case of imposition of a penalty by the Income-tax Officer or the Appellate Assistant Commissioner. The minimum prescribed above is not applicable to the Inspecting Assistant Commissioner acting under Section 274 or the Tribunal hearing appeals from the penalty orders passed by the Inspecting Assistant Commissioner in such proceedings. Section 274(2) provides that notwithstanding anything contained in Section 271(1)(iii), if in a case falling under Clause (c) of that sub-section, the minimum penalty imposable exceeds a sum of Rs. 1,000, the Income-tax Officer has to refer the case to the Inspecting Assistant Commissioner who was to have all the powers conferred under that Chapter. It would appear from a simple reading of that sub-section that the powers of the Inspecting Assistant Commissioner to impose a penalty are not confined by the provisions of Clause (iii) of Sub-section (1) of Section 271. If that be so, the powers of the Tribunal in hearing the appeals from penalties imposed by the Inspecting Assistant Commissioner under Section 274(2) would also not be restricted to the amount prescribed in Section 271(1)(iii). In our opinion in this case the penalties imposed are excessive. While therefore sustaining the orders of penalty, we reduce the amounts as follows .....' On a careful consideration of the law and the interpretation of the relevant sections we have come to the conclusion that the Tribunal came to a wrong decision in law on the above point. Section 274(2) of the Income-tax Act, 1961, has already been set out and its interpretation given elsewhere in this judgment. The jurisdiction of the Inspecting Assistant Commissioner under Section 274(2) arises on the three conditions mentioned, namely, (1) it must be a case of concealment under Section 271(1)(iii) the minimum penalty imposable exceeds a sum of Rs. 1,000, and (3) that the Income-tax Officer shall refer his case to the Inspecting Assistant Commissioner. When these three conditions are satisfied it is only then that the Inspecting Assistant Commissioner acquires the jurisdiction. But that jurisdiction is expressly qualified by the language of Section 274(2) saying 'who shall for the purpose have all the powers conferred under this Chapter for the imposition of penalty'. There has been in the Tribunal's order a confusion between the statutory limits of penalty and the powers of the officers. As we read Section 271 and Section 274 the limit is on the quantum of penalty, not on the power of the officer dealing with it except in the case that, so far as the Income-tax Officer is concerned, if the penalty imposable exceeds Rs. 1,000, it goes to the Inspecting Assistant Commissioner. That does not mean that the Inspecting Assistant Commissioner has a free hand in the matter and can disregard the minimum or maximum limits of penalty clearly stated and prescribed in Section 271(1)(iii). The maximum and the minimum limits in Clause (iii) of Section 271(1) of the Income-tax Act are attached to the penalty and whoever imposes the penalty has to observe those statutory limits. It is wrong, in our view, to interpret Section 271 and Section 275 of the Income-tax Act, 1961, in such a way as to confine the statutory limits mentioned in Clause (iii) of Section 271(1) of the Income-tax Act, 1961, only to the Income-tax Officer or the Appellate Assistant Commissioner but when the Inspecting Assistant Commissioner or the Tribunal deals with the matters, these last two authorities or institutions can act without limit and beyond the limits specified by the statute. This conclusion is further reinforced by the interpretation of the clear words in Section 274 which definitely limits the power of the Inspecting Assistant Commissioner by saying that he has all the powers but only 'for the purpose'. That is for the purpose of Section 271(1)(iii) and no more. It is also enforced by the words 'all the powers'. All these powers mean those powers which are mentioned under Section 271 and no more powers. It does not confer unlimited powers to disregard statutory limits of maximum and minimum penalties prescribed and laid down in mandatory language in Clause (iii) of Section 271(1) of the Income-tax Act, 1961. The scope of the non obstante clause beginning with the word 'Notwithstanding' has already been indicated by us to say that it does not wipe out the whole of Section 271 of the Act to such an extent, that it also wipes out the statutory limits in Clause (iii) of Section 271(1) of the Act, but only to the extent it conflicts with Section 271, namely, the Income-tax Officer cannot deal with it where the penalty imposable is over Rs. 1,000.

68. To accept the argument of Mr. Roy for the assessee would also mean another odd conclusion and that is while the Appellate Assistant Commissioner under Section 271(1) of the Act would be bound by the minimum and maximum statutory limits of the penalty, the -Inspecting Assistant Commissioner will be free to disregard such statutory limits, a conclusion which seems to us to be inconsistent with the principles of the Act. The further consideration on this point is that penalties are not the normal features. They arise only in certain cases, such as in the case of concealment. The penalty should always be strictly construed. Courts should be reluctant to construe a power of penalty without any limitation unless the words are clear or create an inescapable compelling implication. We are, therefore, not inclined to hold that the Tribunal and the Inspecting Assistant Commissioner have unfettered powers to impose whatever penalty they consider necessary. Penalties are strictly creatures of statute. No doubt under Section 253(1)(b) an assessee may appeal to the Appellate Tribunal against an order passed by the Inspecting Assistant Commissioner under Section 274(2). Equally no doubt, Section 254(1) of the Act gives the Appellate Tribunal the power to 'pass such orders thereon as it thinks fit'. The expression 'such orders as it thinks fit' cannot mean an order against the statutory mandate imposing limits of penalty under Section 271(1)(iii) of the Act of 1961. The words 'as it thinks fit' in Section 254(1) of the Income-tax Act, 1961, even then will have to observe the prohibitions of the Income-tax Act, and do not mean that the Tribunal can think 'fit' to disregard the clear mandates of the statute. The Tribunal as much as any other authority has to carry out the dictates of the statute. If the statute says, and as we interpret that it does so, that the limitation is on the penalty and not on the officer or the institution, then whoever administers the penalty, whether it is the Inspecting Assistant Commissioner or the Tribunal, must have to observe the maximum and minimum limits of penalty imposed under Clause (iii) of Section 271(1) of the Income-tax Act, 1961.

69. Lastly, Mr. Roy for the assessee raised the new contention before us that except for the assessment of 1962-63, the penalty imposed in respect of the years l'955-56 to 1961-62 can be imposed in this case only in terms of Section 28(1)(c) of the old Income-tax Act, 1922, for that was the Act which was in operation in those years. His next step in the argument was that as the old Income-tax Act, 1922, did not provide for the lower limit, therefore, the Tribunal was within its legal competence to lower the penalty below the minimum limit imposed by the Income-tax Act of 1961, which came subsequently.

70. This argument was ingenious and resourceful. But the point is that this was not argued before the Tribunal when the whole question of penalty was argued before it to say that not only was the penalty illegal but that the old Act applied and the new Act did not. This is not merely a technical point of not arguing or raising the question any time before but it also involves the practical difficulty on the ground that necessary facts have to be found with regard to the exact time and dates of the assessments of those previous years. The answer, however, to this contention is provided by Section 297(2)(g) of the Income-tax Act, 1961, which provides that 'any proceeding for the imposition of a penalty in respect of any assessment for the year ending on 31st day of March, 1962, or any earlier year, which as completed on or after the 1st day of April, 1962, may be initiated and any such penalty may be imposed under this Act'. We are, therefore, unable to accept this argument of Mr. Roy.

71. For these reasons, we hold that the Tribunal was wrong in reducing the penalty imposed on the assessee below the minimum prescribed under Section 271(1)(iii) of the Income-tax Act, 1961. We answer question No. 1 in the negative in favour of the revenue. Question No. 2 is answered in the affirmative and in favour of the revenue.

72. Each party will bear his own costs.

Sabyasachi Mukharji, J.

I agree.


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