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income-tax Officer and ors. Vs. Burmah Shell Oil Storage and Distributing Co. of India Ltd. - Court Judgment

LegalCrystal Citation
SubjectDirect Taxation
CourtKolkata High Court
Decided On
Case NumberAppeal No. 278 of 1975
Judge
Reported in[1987]163ITR496(Cal)
ActsIncome Tax Act, 1961 - Section 271(1); ;Constitution of India - Article 226
Appellantincome-tax Officer and ors.
RespondentBurmah Shell Oil Storage and Distributing Co. of India Ltd.
Cases Referred(Burma Shell Oil Storage and Distributing Co. of India Ltd. v. Income
Excerpt:
- r.n. pyne, j.1. this appeal is directed against, the judgment and order of a.n. sen j., dated july 3, 1975 (burma shell oil storage and distributing co. of india ltd. v. income-tax officer : [1978]112itr592(cal) allowing the respondent's application made under article 226 of the constitution challenging two notices issued in connection with initiation of penalty proceedings against the respondent. the facts of this case may be briefly stated.2. the respondent which is a company incorporated under the provisions of the english companies acts with liability of its members limited by shares and has its registered office at burmah house, piper sway, swindon in the united kingdom, carries on business, inter alia, at burmah shell house, ballard street, bombay-1, and also at no. 31, binoy badal.....
Judgment:

R.N. Pyne, J.

1. This appeal is directed against, the judgment and order of A.N. Sen J., dated July 3, 1975 (Burma Shell Oil Storage and Distributing Co. of India Ltd. v. Income-tax Officer : [1978]112ITR592(Cal) allowing the respondent's application made under Article 226 of the Constitution challenging two notices issued in connection with initiation of penalty proceedings against the respondent. The facts of this case may be briefly stated.

2. The respondent which is a company incorporated under the provisions of the English Companies Acts with liability of its members limited by shares and has its registered office at Burmah House, Piper Sway, Swindon in the United Kingdom, carries on business, inter alia, at Burmah Shell House, Ballard Street, Bombay-1, and also at No. 31, Binoy Badal Dinesh Bag in the town of Calcutta. The respondent's business consists in the importation and of purchase and storage, sale and distribution of petroleum and allied products. The capital of the respondent has been contributed in pounds sterling and as on December 31, 1966, the authorised capital of the respondent consisted of 25,000,000 divided into 12,500,000 'A' ordinary shares of pound one each and 12,500,000 'B' ordinary shares of pound one each. All the shares of the respondent were issued and fully paid up. The respondent's accounts including profit and loss account were expressed in terms of pound sterling. The respondent was obliged by law to lay before its shareholders at its annual general meeting a profit and loss account expressed in terms of pounds sterling. The financial year of the respondent is from January to December. The respondent company had been assessed to income-tax in India for a number of years. For the assessment year 1967-68, it duly filed its return and the assessment year involved in the proceeding in the court of the first instance and in this appeal is the assessment year 1967-68. On June 5, 1966, the rupee was devalued and as a result of the devaluation of the rupee, the respondent in respect of its trading for the financial year 1966 claimed to have suffered a loss in consequence of the fall in the sterling value of its current assets held in India including oil stocks. It appears that the respondent had further provided in respect of depreciation an amount based on its original actual cost in terms of sterling of its capital asset, which, by reason of the said devaluation, was greater in terms of rupees than it would otherwise have been, and it claimed in its income-tax return for the assessment year 1967-68 depreciation on the enhanced basis on account of the devaluation. The development rebate and terminal or balancing charge in respect of assets discarded or sold on the basis of their original actual cost in sterling were also claimed. Assessment year 1967-68 was the first year in which these questions fell to be considered and the respondent had in its return for the said year claimed deduction for the loss on devaluation and the said greater depreciation on its fixed asset and also the said development rebate.

3. The respondent's return for the assessment year 1967-68 was duly filed and sent with a covering letter and in the said letter as also in the return, it was specifically pointed out that it was claiming devaluation loss and the said greater depreciation. In the course of the assessment proceedings on the basis of the said return filed by the respondent for the assessment year 1967-68, the Income-tax Officer made several queries and asked for several clarifications all of which were duly furnished by the respondent. A revised return under cover of a letter dated May 20, 1971, was also filed in the course of the said proceedings. In the said revised return, the respondent again made it clear that it had claimed devaluation loss and the said greater depreciation as well as development rebate and terminal charge on the aforesaid basis of devaluation of the rupee. After the filing of the revised return, the respondent at the request of the Income-tax Officer furnished a statement of depreciation and development rebate on the basis that no greater amount was allowable by virtue of devaluation. On the basis of the loss suffered by the respondent on account of devaluation and on the basis of the respondent's claim for greater depreciation as also development rebate, the respondent in the return originally filed had shown a substantial loss of over Rs. 68,00,000 (sixty-eight lakhs). In the course of the assessment proceedings before the Income-tax Officer, the respondent was represented by Shri V. Newatia of M/s. Price Water House Peat & Co. and Shri O.P. Mathur, Taxation Officer of the respondent company. They were heard by the Income-tax Officer and the Income-tax Officer for reasons recorded in his order disallowed the entire claim of the respondent on account of devaluation loss and added back an amount of Rs. 8,19,01,945 to the respondent's income claimed by the respondent by way of deduction on this account. The Income-tax Officer also disallowed a large part of the claim on account of depreciation, terminal allowance and development rebate. On the basis of the view expressed by the Income-tax Officer that the entire claim on account of devaluation loss and the greater part of the claim on account of depreciation, terminal allowance and development rebate were not allowable and on the basis of the said claims being rejected and being added to the income of the respondent and as a necessary consequence of such rejection, the respondent's total income was assessed at Rs. 8,25,26,427. Against the said order of assessment by the Income-tax Officer, an appeal was preferred by the respondent before the Appellate Assistant Commissioner of Income-tax who for reasons recorded in his order dated December 4, 1972, substantially upheld the order of the Income-tax Officer and the Appellate Commissioner on the question of the devaluation loss held that the fall in the sterling value of the Indian assets was a notional or hypothetical loss and it was not a real loss sustained during the year of account. Against the order of the Appellate Assistant Commissioner, the respondent had preferred a further appeal to the Income-tax Appellate Tribunal which was pending at the time of hearing of the writ application.

4. In the course of assessment proceedings, the Income-tax Officer considered it fit to initiate penalty proceedings against the respondent and in the assessment order itself the Income-tax Officer had recorded--'proceedings for levy of penalty under Section 271(1)(c) have been initiated separately. On August 17, 1971, the Income-tax Officer, Central Circle XXIII, Calcutta, issued the following notice bearing No. CCXXIII/5-b/67-68/69 to the Principal Officer of the respondent at Bombay:

'Whereas, in the course of proceedings before me for the assessment year 1967-68, it appears to me that you have concealed the particulars of your income or deliberately furnished inaccurate particulars of such income and whereas penalty proceedings have to be referred to the Inspecting Assistant Commissioner of Income-tax. According to Sub-section (2) of Section 274 of the Income-tax Act, 1961, you are hereby informed that the case for levy of penalty under the section (under Clause (c) of Sub-section (1) of Section 271) is being referred by me to the Inspecting Assistant Commissioner of Income-tax, Range I(c), Calcutta. Further, proceedings in regard to the levy of a penalty will take place before the said Inspecting Assistant Commissioner of Income-tax as provided in Sub-section (2) of Section 274.'

5. The Inspecting Assistant Commissioner issued a notice bearing No. 1426/IAC/ICFP-124/67/68 dated August 18, 1971, under Section 274(2) read with Section 272 of the Income-tax Act, 1961, to the Principal Officer of the company at Bombay and the said notice reads as follows :

'Whereas, the Income-tax Officer, Central Circle XXIII, Calcutta, has under Sub-section (2) of Section 274 of the Income-tax Act, 1961, referred your case to me in connection with the penalty proceedings under Clause (c) of Sub-section (1) of Section 271 and whereas it appears to me that you have concealed the particulars of your income or deliberately furnished inaccurate particulars of such income for the assessment year 1967-68, you are hereby requested to appear before me at 11.30 a.m. on September 20, 1971, and show cause why an order imposing a penalty on you should not be made under Section 271(1)(c) of the said Act. If you do not wish to avail yourself of this opportunity of being heard in person or through authorised representative, you may show cause in writing on or before the said date which will be considered before any such order is made under Section 271(1)(c).'

6. The respondent in its writ application filed in this court challenged the validity of the aforesaid two notices.

7. The respondent's principal grievance was that the conditions which were necessary to be fulfilled for levy of any penalty and for initiating the necessary proceedings for imposition of penalty were totally absent and there was no justification for issuing the said notices and for starting the penalty proceedings against the respondent and for continuing the same. It appears that after thesaid notices had been issued, various letters were exchanged between the respondent and the authorities and in the letters addressed by or on behalf of the respondent, it tried to explain the position and satisfy the authorities that in the facts and circumstances of the case, there was or could be no concealment of income and the respondent had not furnished any inaccurate particulars in the return. After the position was explained to the Inspecting Assistant Commissioner of Income-tax by the letter dated February 25, 1974, addressed by Price Water House Peat & Co. to the Inspecting Assistant Commissioner of Income-tax, the Inspecting Assistant Commissioner on March 2, 1974, addressed the following letter to the respondent with a copy thereof to M/s. Price Water House Peat & Co.

'Since the points raised by me in connection with the above are answered by you in the form of written submission, and for doing so the case has been fixed for further hearing on March 12, 1974. I would request you to please state your views as to why your case should not be considered to be covered by the provisions of the Explanation to Section 271(1)(c) of the Income-tax Act, 1961. In this respect, I would like you to refer in particular to that portion of the Explanation which states ...... that the failure to return the correctincome did not arise from any fraud or any gross or wilful neglect on his part......'

8. This letter of the Inspecting Assistant Commissioner was answered by Price Waterhouse Peat & Co. on behalf of the respondent on March 6, 1974, and along with the said letter, the respondent enclosed the opinion of counsel on the question of the respondent's claim for increased depreciation. In the said letter, it was, inter alia, stated :

'We also take this opportunity to place on record that the question of other disallowances, including devaluation loss other than pertaining to depreciation have been discussed with you and/or recorded in our/the company's earlier letters to you and that you verbally confirmed at our meeting on February 27, 1974, that you were satisfied with the explanation on these matters and that you would drop the penalty proceedings if you were also satisfied with the company's explanation for making the claim for depreciation.

In the circumstances, it seems that the penalty proceedings can be now dropped and that there is no need for further explanations from the company. If you agree, please let the company have your confirmation immediately that you be pleased to drop the penal proceedings under advice to us so that the company is spared further expenses in this matter.'

9. As the authorities concerned did not inform the respondent that the penalty proceedings against the respondent had been dropped, it presented a petition under Article 226 of the Constitution for the issue of appropriate writs for quashing the said two notices and for prohibiting the authorities fromcontinuing the said penalty proceedings against the respondent and also for restraining the authorities from taking any further proceedings in the matter of adjudging or imposition of any penalty against the respondent.

10. The arguments made by both the parties in the court of first instance have been set out in detail in his judgment by A.N. Sen J. The main points taken on behalf of parties may briefly be stated.

11. On behalf of the petitioner in the court of the first instance, i.e., respondent in this appeal, after referring to Section 271 of the Income-tax Act, 1961, it was contended that the conditions laid down in the section, the fulfilment of which only could justify an action for taking penalty proceedings by the parties, were totally absent in the facts and circumstances of the instant case. No case for imposition of penalty had been made out and the requirements of the section for imposition of penalty were not satisfied and the notices issued by the authorities were, therefore, without jurisdiction. In the instant case, there was no concealment of any income and incorrect particulars were not furnished in the returns. Full and frank disclosure of necessary particulars had been made by the respondent in its return and it had not concealed any part of its income and had not furnished inaccurate particulars of the income and there was no question of deliberately furnishing any inaccurate particulars of such income in the returns. The respondent company, after having submitted proper return, stating out correctly all particulars of income claimed certain allowances on the basis of devaluation loss, increased depreciation and development rebate. As the claim was disallowed by the Income-tax Officer, an appeal was filed by the respondent company against the decision of the Income-tax Officer which was upheld by the Appellate Assistant Commissioner. An appeal against the order of the Appellate Assistant Commissioner was pending before the Tribunal. Although in the writ proceeding the court was not undoubtedly concerned with the merits of the said claim of the respondent company for deduction, the said claim of the respondent company could never be considered to be frivolous, fraudulent and mala fide. Such claim of the respondent company had been made and was being pursued under expert legal advice and was clearly based on cogent legal ground and there was no authoritative judicial pronouncement covering the said question raised by the respondent company. Apart from the question of correctness or otherwise of the said reasons which would be decided in appropriate proceedings, the reasons clearly would go to indicate that the respondent company sought to raise certain questions of law on proper and cogent grounds which, however, have not found favour with the Income-tax Officer. The claim of the respondent company for necessary deduction based on legal contentions put forward by it could never amount to concealment of any income of the respondent company and it could never be said that the respondent company had furnished inaccurate particulars of its income byseeking to raise the said legal pleas. It was contended that unless the requirement of Section 271 including the Explanation therein was satisfied, penalty proceedings against any party could not be lawfully and validly initiated as no penalty could be imposed unless the requirement for imposition of penalty was satisfied. In the instant case, there could have been no satisfaction on the part of the Income-tax Officer in the course of assessment proceedings that the respondent company had concealed any part of its income or has furnished any inaccurate particulars of its income in the return. The order of the Income-tax Officer in the assessment proceedings would clearly go to indicate that the company had raised certain questions of law before the Income-tax Officer in support of the contentions for claim in respect of deduction of devaluation loss, increased depreciation and development rebate which was not accepted by the Income-tax Officer. The question whether the Income-tax Officer was right or wrong in rejecting the contentions and whether the claim of the respondent company was indeed immaterial for the writ proceedings as the question of law urged by the respondent company before the Income-tax Officer on the materials which had been fully disclosed and placed before the Income-tax Officer in the course of assessment proceedings could never constitute concealment or furnishing of any inaccurate particulars as contemplated by Section 271 of the Income-tax Act. As the question of law urged by the respondent company before the Income-tax Officer could never amount to any concealment or furnishing of any inaccurate particulars, there could never be any satisfaction on the part of the Income-tax Officer in the course of the assessment proceedings that the respondent company had concealed its income or that it had furnished inaccurate particulars of income. It was further contended that the notices issued by the authorities and the subsequent correspondence between the parties also would go to indicate that the authorities did not know whether, according to the authorities, it was a case of concealment of income or of furnishing of inaccurate particulars within the meaning of Section 271(1)(c) of the Act and the authorities also did not know whether the case came under Section 271(1)(c) of the Act or the case was one covered by the Explanation in the section. Therefore, the basic requirement of the section had not been fulfilled in the facts and circumstances of the instant case and hence there could be no question of any imposition of penalty and there could be no justification for issuing the said notices. It was further argued that the respondent company was a limited company and its balance-sheet was duly audited ; the audited balance-sheet had to be placed before the shareholders ; full and frank disclosure had been made by the respondent company and it had furnished detailed and accurate particulars and all relevant documents and papers had been made available before the Income-tax Officer in the course of the assessment proceedings and all queries and questions were properly answered. The respondent company had raised certain questions of law for claiming deductionof devaluation loss, increased depreciation and development rebate and raising pleas of law could never result in concealment of income or furnishing inaccurate particulars by the respondent company. Therefore, there could be no satisfaction of the condition as to concealment of income or of furnishing any inaccurate particulars of income by the respondent company. The Explanation under Section 271 could have no application in the instant case as the Explanation would only apply on the basis of the deeming provision contained therein ; but the deeming provision would have no application except in case of fraud or gross or wilful neglect. Raising of legal pleas or urging question of law for getting relief to which a person might be entitled to or to which a person might consider himself to be entitled could never constitute fraud or gross or wilful neglect on the part of any such person. In the facts and circumstances of this case, the respondent company had raised the aforesaid contentions of law claiming the said deductions after taking proper advice in the matter and such contentions of the respondent company had yet to be finally adjudicated upon. As raising of the said question of law could never be considered to be an act of fraud or gross or wilful neglect, the Explanation would also have no application. Although the requirements of Section 271 were not satisfied in the instant case, the authorities concerned were still persisting in proceeding with penalty proceedings by applying wrong principles of law. The wrong principles of law which were being sought to be applied by the authorities concerned in persisting with the penalty proceedings wrongfully and illegally were ; (i) legal contentions which did not find favour with the authority; if raised before the authority, would result in concealment of income and furnishing of inaccurate particulars ; (ii) urging of questions of law in support of claim for deduction before the Income-tax Officer would be an act of fraud or of gross or wilful neglect on the part of the assessee if the contentions were not accepted by the Income-tax Officer ; and (iii) mere rejection of a question of law urged before the Income-tax Officer and rejected by the Income-tax Officer might form the basis of satisfaction that the assessee had concealed its income or has furnished inaccurate particulars. By applying the above principles which were all clearly wrong principles of law, the authorities concerned were seeking to assume or exercise jurisdiction in the matter of penalty proceedings.

12. On behalf of the respondent in the court of the first instance, that is, the appellant in the instant appeal, it was contended that at the stage when only notices were given and in a proceeding in court under Article 226 challenging the said notices as was done in the instant case, the court should not interfere with the penalty proceedings initiated against the respondent company. Unlike the case of reopening of an assessment under Section 147 of the Act, no condition precedent need be satisfied for the assumption of jurisdiction for initiating penalty proceedings against any assessee. The jurisdiction to initiate penalty proceedings was vested under the Act in the authorities who werecompetent to impose a penalty only if the requirement of Section 271 was satisfied. In the course of penalty proceedings, it would be for the authorities concerned to decide whether the requirements of Section 271 had been satisfied or not and if the authorities concerned were satisfied on a consideration of the relevant materials placed before the authorities concerned in the course of the penalty proceedings, that the requirement of Section 271 had been satisfied, the authorities concerned would proceed to impose penalty, as the authority concerned was lawfully empowered to do so. If, however, the authority concerned was of the opinion on a consideration of the relevant materials that the requirements of Section 271 had not been satisfied, it could not exercise the power of imposing any penalty against the assessee. It was further submitted that the statute did not require any notice to be given to the assessee for initiating penalty proceeding and the notice that has been given to the company was not a statutory notice, but it had been given in compliance with the provisions contained in Section 274 to give the assessee necessary opportunity of showing cause as to why penalty should not be imposed on it. Since such notice was not a statutory notice, it could not be challenged and the validity thereof could not be questioned in a writ proceeding- It was further submitted that, in the instant case, the Explanation contained in Section 271 was clearly attracted and in view thereof, it became the duty of the respondent company to satisfy the appropriate authority in the course of the penalty proceeding that there had been no fraud, gross or wilful neglect on the part of the assessee and the onus of proving the same clearly rested on the assessee. The facts and circumstances of this case would go to show that there might be gross or wilful neglect on the part of the respondent company in making the claim for deduction of devaluation loss, for increased depreciation and development rebate as the said claims had been made in clear disregard of the provisions contained in the Act. Therefore, in the facts and circumstances of this case, it could not be said that the respondent company had raised pure legal contentions and the authorities concerned had initiated penalty proceedings only on the ground that the legal contentions raised by the respondent company had not been accepted. Referring to Section 32 of the Act, it was submitted that the provisions contained in the said section would clearly go to indicate that the claim for increased depreciation had been made in utter disregard of the provisions contained in the said section.

13. It was further submitted that as the Explanation to Section 271 was clearly attracted in the instant case, the question whether there was any fraud or gross or wilful neglect would have to be decided in the penalty proceeding itself before the appropriate authority and it would be for the respondent company to satisfy the authority concerned, that there was no fraud or gross or wilful neglect on its part. The appropriate authority was perfectly competent and had jurisdiction to decide the said question. It was also argued that as the Act provided a complete machinery for redress of the grievance of the respondentcompany, if there be any, in the matter of imposition of penalty on the respondent company, such jurisdiction of this court should not be allowed to be invoked and the court should not exercise its power under Article 226 of the Constitution. Reliance was placed on the case of Gita Devi Aggarwal v. CIT : [1970]76ITR496(SC) . It was also submitted that as the income returned by the respondent company was less than the statutory percentage of the assessed income and the Explanation in the said section was attracted in consequence thereof, the respondent company became liable to penalty, inasmuch as the respondent company was deemed to have concealed its income or furnished inaccurate particulars by virtue of the provisions contained in the Explanation unless it furnished evidence to prove its bona fides in the matter. The respondent company was required to furnish evidence of its bona fides to prove that there had been no fraud or gross or wilful neglect on its part before the appropriate authority in the penalty proceedings itself and as the appropriate authority was the proper forum where such evidence had to be furnished, it could not be said that the appropriate authority lacked jurisdiction or was acting in excess of its jurisdiction in penalty proceedings against the respondent company. The act does not require any statutory notice to be given for initiating penalty proceedings against an assessee. The requirement of the statute is to hear the assessee and give the assessee reasonable opportunity of being heard before an order of imposition of penalty is passed. The notice is usually given to show cause why penalty should not be imposed by the appropriate authority, if the authority concerned is satisfied that a fit case for exercise of power for imposition of penalty on the basis of the provision contained in Section 271 of the Act has arisen and the notice is issued for the purpose of hearing the case or giving the assessee a reasonable opportunity of being heard before passing an order of imposition of penalty in compliance with the requirements of Section 274 of the Act.

14. The learned judge of the first instance accepting the contention made on behalf of the respondent company by his judgment and order dated July 3, 1975, allowed the application of the respondent company. The learned judge in his judgment in great detail has dealt with the contentions of the parties urged before him and has also given his reasons in detail for allowing the application of the respondent company. The reasonings of the learned judge of the court of the first instance as stated in the judgment may be briefly stated.

15. According to the learned judge, the court may interfere in penalty proceedings provided it is satisfied that the facts and circumstances of the case require and justify the interference by the court in the interest of justice. Whether a case for interference has been made out or not would depend upon the facts and circumstances of the case. The learned judge was of the view that the existence of a remedy under the Act and whether a fit case for penalty had been made out or not, which would be determined by the appropriate authority, could not constitute a bar to the exercise of jurisdiction in aproceeding under Article 226. If, upon consideration of the facts and circumstances of the case, the court is of the opinion that a case for interference has been made out, it will do so. If, on the contrary, no case is made out, the court would not interfere. The impugned notices proceed on the footing that a case for imposition of penalty under Section 271(1)(c) of the Act has arisen and there is no reference to the Explanation of the said section. The respondent company disclosed all the facts and raised various legal contentions which the Income-tax Officer did not accept and a final decision on such contentions was being awaited. It, therefore, could not be said that there was concealment of material facts or non-disclosure of material facts. Whether the legal contentions raised by the respondent company were ultimately upheld or turned down, it could not be said that such contentions were frivolous, dishonest or mala fide.

16. By raising the legal contentions in the facts and circumstances of this case, it could not be said that the respondent company had concealed its income or furnished wrong particulars of income. The facts and circumstances of the case would clearly indicate and establish that there had been no concealment of particulars of income by the respondent company and the respondent company had not furnished any inaccurate particulars of income. The contentions raised by the respondent company do not in any way indicate that there had been any concealment of the particulars of income of the respondent company or that it had furnished any inaccurate particulars of income. The facts and circumstances of this case would clearly go to show that the Income-tax Officer proceeded on the basis that the respondent company had concealed particulars of its income or had furnished wrong particulars of income only on the ground of rejection of the contentions raised by the respondent company. The rejection of legal contentions raised before the Income-tax Officer could not be said to constitute material which could lead to the satisfaction of the authorities concerned, that the respondent company had concealed its income or had furnished inaccurate particulars of its income. Satisfaction of the Income-tax Officer is a basic requirement for exercise of power for imposition of penalty and a condition precedent to the exercise of the power for imposition of penalty under Section 271 of the Act though it is not a condition precedent to the assumption of the jurisdiction for initiating penalty proceedings. Satisfaction of the Income-tax Officer is subjective but there must be material to show that such satisfaction is justified. Sufficiency or adequacy of the materials may or may not be considered by the court, but the court must, in any event, be satisfied that the materials do exist. In the instant case, there does not exist any material which could lead to the satisfaction of the Income-tax Officer that the respondent company has concealed particulars of its income or has furnished inaccurate particulars of income and, therefore, the power conferred upon the authority for imposition of penalty could never be exercised. As, in the instantcase, no material exists which could lead to the satisfaction of the Income-tax Officer that there had been any concealment of income by the respondent company or that it has furnished inaccurate particulars of income, no penalty could be imposed on the basis of the provisions of Section 271(1)(c) of the Act and the authority concerned must be held to be incompetent in the facts and circumstances of this case to exercise power for imposition of penalty on the basis of the provisions contained in the said section. The Explanation to Section 271(1)(c) was referred to for the first time in the letter of the Inspecting Assistant Commissioner dated March 2, 1974, during the pendency of the penalty proceedings, but the facts and circumstances of this case would clearly go to show that the satisfaction of the Income-tax Officer was on the basis of Section 271(1)(c) and not on the basis of the Explanation contained in the said section. The deeming provision in the Explanation does not arise in the facts and circumstances of this case when the assessee has raised legal contentions which, according to the assessee, are sound and which are still being pursued by the assessee. A legal contention raised by the assessee cannot generally constitute an act of fraud, gross or wilful negligence as the legal contentions raised by the assessee cannot be considered to be frivolous, vexatious, dishonest or mala fide. Raising of the said contentions can never constitute an act of fraud or gross or wilful negligence on the part of the assessee. The legal contention raised by the assessee cannot generally constitute an act of fraud or gross or wilful negligence. Different considerations may arise if the contentions put forward by the assessee are found to be frivolous, vexatious, dishonest or male fide. Various legal contentions raised by the assessee await final adjudication and even if the contentions raised by the assessee are not sound, that is of no consequence in the facts and circumstances of this case. Even if the same conditions are ultimately rejected, it cannot be said that by raising the same, the assessee has committed an act of fraud or gross or wilful negligence. Legal contentions bona fide raised, whether they are ultimately accepted or rejected by the appropriate authority, will not be generally an act of fraud or gross or wilful negligence. As in the facts and circumstances of this case, there is no fraud or gross or wilful negligence on the part of the assessee-company, the provisions of Section 271(1)(c) cannot be attracted. Considerations which are necessary to be fulfilled before exercising the power of imposition of penalty under Section 271 of the Act do not exist in the facts and circumstances of this case and in the absence of the said considerations, the authority concerned is not competent to exercise the power for imposition of penalty. The statutory authority is continuing and proceeding with the penalty proceedings on the basis of an erroneous assumption of law. The facts and circumstances of this case clearly indicate that the authorities concerned have assumed that by raising the legal contentions which were urged on behalf of the respondent company in the assessment proceedings and which were rejected by the Income-taxOfficer, the respondent company has concealed particulars of income and has furnished inaccurate particulars of its income. The authority concerned also appears to proceed on the further assumption that by virtue of the provisions contained in the Explanation, the respondent company must be deemed to have concealed particulars of income or to have furnished inaccurate particulars of income and the failure on the part of the respondent company was due to fraud, gross or wilful negligence. Both the assumptions on the part of the authorities concerned were clearly erroneous and in the facts and circumstances of this case, the authority concerned, by continuing the penalty proceedings on the aforesaid erroneous assumption, was acting improperly and was committing an error of law although the authority concerned might ultimately impose penalty on the respondent company after fully considering the submission of the respondent company and after having heard it. Those considerations could not, in the facts and circumstances of the case, have the effect of depriving the court's jurisdiction and the power it has under Article 226 of the Constitution, The facts and circumstances of this case clearly indicate that the continuance of the penalty proceedings is clearly unjustified and is causing unnecessary harassment to the respondent company. In the facts and circumstances of this case, the authority concerned does not have any jurisdiction to exercise the power for imposition of penalty on the respondent company as the conditions for imposition of penalty stipulated in Section 271 of the Act are non-existent. The notices may be statutory notices but it is on the basis of the said notices that the penalty proceedings against the respondent company have been initiated and are being continued. Therefore, it is a fit case where the court should interfere in this proceeding.

17. Before us, on behalf of the parties, mainly the same arguments which were advanced before the court of the first instance were advanced. On behalf of the appellant, it was contended that unlike Section 147 of the Act, the impugned notices are not notices conferring jurisdiction on the authority in initiating the penalty proceedings. Such notices are not a condition precedent for invoking jurisdiction for initiating penalty proceedings. The impugned notices were given to the assessee informing him of the initiation of penalty proceeding and an opportunity to defend such proceedings. According to the appellant, in the facts and circumstances of this case, as there was concealment of income or furnishing of inaccurate particulars of income, penalty proceedings were initiated and by the said impugned notices, the respondent company was given an opportunity to defend the case. Further, in the facts and circumstances of this case, since the income returned by the assessee fell short of the statutory limit, Explanation in the section is applicable and it is for the assessee to prove before the authority concerned that there was no act of fraud or gross or wilful negligence on its part. All the above will be considered by the concerned authority in the penalty proceedings which it is competent to do under the Act. As the concerned authority has jurisdiction to initiate penalty proceedings and such proceedings have been lawfully initiated, the court should not interfere with such proceedings at this stage when only notices have been given.

18. On behalf of the respondent company, it was mainly submitted that all necessary particulars relevant for the assessment were disclosed before the Income-tax Officer. All necessary and relevant papers and other documents including the balance-sheet and profit and loss account were placed before the assessing authority. In view of the devaluation of the rupee, devaluation loss and depreciation as also development rebate at an enhanced rate were claimed by the assessee-company, but the same were disallowed by the Income-tax Officer and his decision was upheld by the Appellate Assistant Commissioner. The said questions are pending for determination in the appeal before the Tribunal. It was further submitted that in support of the above claim, various legal contentions were raised before the assessing authority but the same were rejected by him. The legal questions are pending for decision before the Tribunal in the appeal. In the facts and circumstances of this case, non-acceptance of the legal contentions raised by the assessee-company cannot be said to amount to concealment of particulars of income or furnishing of inaccurate particulars of income. There was no material before the authority concerned which could be said to form the basis of the satisfaction on the part of the authority concerned that there has been concealment of particulars of income or furnishing of inaccurate particulars of income so as to initiate penalty proceedings against the assessee-company. In the facts and circumstances of this case, it cannot be said that the Explanation to Section 271(1)(c) is attracted. Further, in the two impugned notices, there is no mention of the said Explanation. It was also submitted that as there was no material to support the satisfaction of the Income-tax Officer that there was concealment of income or furnishing of inaccurate particulars of income, the initiation of the penalty proceedings was bad and the court in exercise of its discretion under Article 226 of the Constitution should quash the penalty proceedings.

19. We have considered the arguments advanced by both the parties. The learned judge of the court of the first instance in his judgment has set out in detail the arguments of the parties advanced before him. His Lordship after considering the contentions of the respective parties for reasons recorded in detail in the judgment allowed the application of the respondent herein. We respectfully agree with the reasonings of the learned judge of the court of the first instance. As will appear from the judgment, the learned judge has dealt in great detail with the contentions of the parties and has given his reason in great detail and since we fully agree with and accept the reasons given by the learned judge of the court of the first instance for avoiding prolixity and repetition, we refrain from giving our reasons in detail. We, however, say that in theinstant case, the respondent company has disclosed all the necessary materials, papers and documents before the assessing authority and raised various legal contentions in support of its claim for devaluation loss and development rebate and depreciation at an enhanced rate. The claims and contentions of the respondent were rejected by the Income-tax Officer which were upheld by the Appellate Assistant Commissioner. The determination of the above questions is now pending before the Tribunal in the appeal before it. Therefore, in the facts and circumstances of this case, when the respondent company had disclosed all the necessary papers and documents and raised legal contentions and when such contentions were not accepted, it cannot be said that there were materials before the authority concerned upon which he could base his satisfaction that there was concealment of income or furnishing of inaccurate particulars of income by the assessee. As, in the facts and circumstances of this case, the materials necessary for the formation of the required satisfaction of the authority concerned are absent, the conditions precedent for invoking penalty proceeding are also absent. It is true that giving of the notice is not a jurisdictional factor but when, in the facts and circumstances of this case, the materials to support the required satisfaction which is a condition precedent for exercise of the jurisdiction and power of initiating penalty proceedings are also absent, the court should in exercise of its power and discretion under Article 226 of the Constitution interfere for the sake of justice. In the facts and circumstances of this case, we are satisfied and also agree with the learned judge of the first instance that the authority concerned does not have any jurisdiction to exercise the power to initiate proceedings for the imposition of any penalty on the respondent company. The conditions for imposition of such penalty stipulated in Section 271 for initiation of penalty proceedings, in the facts and circumstances of this case, are non-existent. We also agree with the learned judge of the court of the first instance that the notices may not be statutory notices but it is on the basis of the said notices that the penalty proceedings against the respondent company have been initiated and are being continued. In the above circumstances, in our view, it has been rightly held by the learned judge of the court of the first instance that the court in the exercise, of its discretion under Article 226 of the Constitution should interfere. The appeal is, therefore, dismissed. There will, however, be no order as to costs.

Sambhu Chandra Ghose, C.J.

20. I agree.


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