1. This reference under Section 66(1) of the Indian I.T. Act, 1922, arises out of the income-tax assessment of Ananda Bazar Patrika Private Ltd., the assessee, for the assessment year 1953-54, the relevant previous year being the calendar year 1952.
2. The assessee is engaged in the publication and sale of various newspapers and periodicals. The ITO computed the taxable income as follows : Loss of Rs. 4,951 under the head 'Business' ; income of Rs. 31,335 under the head 'Income from property' and an income of Rs. 1,85,963 under the head 'Other sources'. The last item was arrived at by including a sum of Rs. 1,63,000 from a credit of Rs. 2,50,000 standing in the account of Sarala Bala Sarkar, the grandmother of the managing director of the assessee, which the ITO treated as the assessee's income from undisclosed sources.
3. On appeal, the AAC, on the basis of certain data relating to circulation figures of the publications of the assessee as supplied to the Audit Bureau of Circulation, held that business income of Rs. 6,92,771 had not been accounted for in the books of the assessee. He held further that the saidsum of Rs. 1,63,000 added as income from undisclosed sources was a part of such unaccounted business income. The AAC enhanced the assessment by Rs. 5,29,771. Assessee's further appeal to the Tribunal being dismissed for default, this assessment became final.
4. Penalty proceedings under Section 28 of the Act was initiated by the ITO in respect of the said sum of Rs. 1,63,000 included by him under the head 'Other sources'. In the said proceedings, the assessee contended that after the AAC's order, the said sum of Rs. 1,63,000 could not be treated as income from undisclosed sources and the enhancement by the AAC was not the subject-matter of the penalty proceedings. The penalty proceedings were, therefore, not maintainable. The ITO rejected the contentions of the assessee and passed an order on the 8th August, 1963, levying a penalty of Rs. 2,70,000. He took into consideration the assessment as enhanced by the AAC and proceeded on the basis that the income concealed was Rs. 6,92,771.
5. The assessee appealed to the AAC against the said levy of penalty. Evidence was led to show that the particulars supplied to the Audit Bureau of Circulation were mere estimates and had not even been accepted by the said Bureau. It was contended that having regard to the commission paid on local sales in Calcutta and allowances to agents for unsold copies, enhancement of the business income was not justified. It was further contended that the penalty proceedings, in any event, had to be confined to the cash credit addition. The AAC upheld the penalty imposed but reduced the amount by Rs. 67,500.
6. Both the assessee and the revenue preferred appeals to the Tribunal from the order of the AAC. The Tribunal found that the notice initiating the penalty proceedings was issued with specific reference to the aforesaid sum of Rs. 1,63,000 and held that the AAC was not competent to enhance the business income as was done by him, and, in any event, he acted in excess of jurisdiction in enhancing the total income by Rs. 5,29,771. The Tribunal held that the levy of penalty in respect of the alleged understatement of business income by Rs. 6,92,771 was bad in law and accordingly allowed the appeal of the assessee. The appeal of the revenue was dismissed.
7. The following two questions have been referred :
'(1) Whether, on the facts and in the circumstances of the case, the Tribunal was right in holding that the AAC, who heard the assessment appeal had acted in excess of his jurisdiction in enhancing the total income by Rs. 5,29,771 on the ground that the business income, though not the subject-matter of appeal before him, had been under-assessed to the extent of Rs. 6,92,771 and that for this reason the ITO's order of penalty with respect to such enhancement was bad in law
(2) If the answer to the first question is in the negative, then whether the Tribunal was right in holding that the ITO could not initiate or levy penalty in respect of the enhancement made by the AAC ?'
8. Mr. Pranab Pal, learned counsel for the assessee at the outset drew our attention to the questions which were sought to be raised by the revenue. The said questions were :
'(1) Whether, on the facts and in the circumstances of the case, the Tribunal was right in holding that the leavy of penalty in respect of the under-statement of business income was bad in law
(2) Whether, on the facts and in the circumstances of the case, the Tribunal was right in holding that the ITO was not competent to initiate or levy penalty in respect of the enhancement made by the AAC ?'
9. Mr. Pranab Pal contended that the said questions as proposed by the Commissioner must be held to have been rejected by the Tribunal. The Tribunal has framed and referred to this court entirely new questions which were never asked for or proposed by the Commissioner and the court should refrain from answering the questions.
10. Mr. B.L. Pal, learned counsel for the revenue, contended on the other hand that this court has power to reframe the questions referred so as to pinpoint the real issue. In support of his contentions Mr. B.L. Pal cited a decision of the Supreme Court in CIT v. Smt. Annsuya Devi : 68ITR750(SC) .
11. Mr. Pranab Pal in reply cited CIT v. Burmah Shell Oil Storage and Distribution Co. of India Ltd. : 115ITR891(Cal) , where it was reiterated by this court that the Tribunal has no power to refer any question of law suo motu.
12. Mr. B.L. Pal finally submitted that he would address on the two distinct parts of the question No. 1. He, however, invited the court to reframe the question No. 2 only to the extent of making it independent of the question No. 1.
13. On the first limb of the question No. 1, Mr. B.L. Pal submitted that the AAC did not enhance the assessment on a new source of income nor in respect of a source riot disclosed in the return and not considered in the original assessment, nor did he travel beyond the subject-matter thereof. One of the assessee's sources of income, viz., from sale of newspapers and periodicals, had already been considered by the ITO.
14. The AAC only came to the conclusion that the said entire credit standing in the name of Sarala Bala Sarkar, a part of which was held by the ITO as income of the assessee from other sources, should be added to the income of the assessee under the head of business income. The addition of Rs. 1,63,000 by the ITO was the subject-matter of the appeal before him and he had to enquire into the correctness and legality of such additionand the source thereof. Under Section 31 of the Act the AAC was empowered to make such further enquiry as he thought fit and also had power to confirm, reduce, enhance or annul the assessment and, therefore, in the instant case, he acted within his jurisdiction. In support of his contentions Mr. B.L. Pal cited CIT v. Rai Bahadur Hardutroy Motilal Chamaria : 66ITR443(SC) , where the following observation was made by the Supreme Court (p. 450):
'The principle that emerges as a result of the authorities of this court is that the Appellate Assistant Commissioner has no jurisdiction, under Section 31(3) of the Act, to assess a source of income which has not been processed by the Income-tax Officer and which is not disclosed either in the returns filed by the assessee or in the assessment order, and, therefore, the Appellate Assistant Commissioner cannot travel beyond the subject-matter of the assessment. In other words, the power of enhancement under Section 31(3) of the Act is restricted to the subject-matter of assessment or the source of income which have been considered expressly or by clear implication by the Income-tax Officer from the point of view of the taxability of the assessee.'
15. On the second limb of the question Mr. B.L. Pal contended that if the enhancement by the AAC was within jurisdiction and proper and valid then there could not be any dispute that the assessee concealed particulars of its income or deliberately furnished inaccurate particulars thereof and the penalty imposed by the ITO could not be bad in law.
16. Mr. Pranab Pal contended on the other hand that the ITO had not questioned the correctness of the business accounts from undisclosed sources of which Rs. 1,63,000 would be assessed as such during the financial year 1952-53. The AAC was, therefore, not competent to enhance the business income except possibly to the extent of Rs. 2,50,000.
17. Mr. Pranab Pal contended further that neither the findings nor the jurisdiction of the Tribunal have been challenged. Except the order of the AAC in the quantum appeal no other evidence was relied on or adduced in the penalty proceedings by the revenue. This evidence having been rejected by the Tribunal there was no other evidence before the Tribunal to sustain the penalty. The finding of the ITO as to the nature of the added sum of Rs. 1,63,000 was, accepted and the finding of the AAC that the same was 'income from business' was rejected by the Tribunal.
18. In support of his contentions Mr. Pranab Pal cited CIT v. Anwar Ali : 76ITR696(SC) and CIT v. Khoday Eswarsa and Sons : 83ITR369(SC) and relied on the following observations of the SupremeCourt in the latter decision (p. 376):
'No doubt the original assessment proceedings for computing the tax may be a good item of evidence in the penalty proceedings but the penaltycannot be levied solely on the basis of the reasons given in the original order of assessment.'
19. Mr. Pranab Pal submitted further that the principles laid down by the Supreme Court in the case of Rai Bahadur Hardutroy Motilal Chamaria : 66ITR443(SC) has no application at all to the facts and circumstances of this case. Here, the business income of the assessee has not at all been processed by the ITO nor did he consider the reports of the Audit Bureau, of Circulation. The appeal related only to income from 'other sources '.
20. Mr. Pranab Pal also cited CIT v. Shapoorji Pallonji Mistry : 44ITR891(SC) , where the Supreme Court laid down that the A AC could not enhance the assessment by bringing to tax an escaped income from a new source not considered by the ITO and also approved of the distinction between 'source of income' and 'head of income' made by the Patna High Court in the case of Jagarnath Therani v. CIT, AIR 1925 Pat 408. Next cited was Union Coal Co. Ltd. v. CIT : 70ITR45(Cal) , where this court laid down that in an appeal against the assessment the AAC should remand the matter to the ITO where the assessee made a new claim for deduction for the first time.
21. Lastly, Mr. Pranab Pal cited CIT v. Gurjargravures Pvt. Ltd. : 84ITR723(Orissa) for the proposition similar to those discussed above laid down by the Gujarat High Court.
22. The second question was refrained by us by consent of the parties as follows :
'Whether the Tribunal was right in holding that the ITO could not initiate or levy penalty in respect of enhancement made by the AAC ?'
23. Mr. Pranab Pal contended in respect of this question that the ITO initiated the penalty proceedings under Section 28 of the Act by reason of the addition of Rs. 1,63,000 as income from other sources. This having been deleted by the AAC in appeal, proceedings for penalty initiated on the above basis could not be continued. Section 28 conferred independent and separate jurisdictions on the authorities specified therein. Satisfaction of one authority in the course of any proceeding before him could lead to initiation of penalty proceedings by Him but not by any other authority. Section 271 of the I.T. Act, 1961, according to Mr. Pranab Pal, did not bring about any material change in the law.
24. Mr. Pranab Pal contended that in the instant case, the ITO initiated penalty proceedings in respect of an item of income under a particular head which was deleted in appeal but levied penalty in respect of another concealed item of income which was enhanced in appeal but under another head. This the ITO had no jurisdiction to do.
25. In support of his above contentions Mr. Pranab Pal cited CIT v. Shadiram Balmukand : 84ITR183(All) , where the ITO included certain amounts in the assessment of the assessee as undisclosed income and initiated proceedings for levy of penalty in respect thereof. In appeal, the AAC also included a sum of Rs. 46,601 as income from undisclosed sources. The ITO imposed a penalty of Rs. 10,000 taking into account the inclusion made by the AAC. The Tribunal set aside the order of penalty as not being severable as between the two assessments. On a reference, the Allahabad High Court held that the language of Sub-section (1) of Section 28 indicated that the authority imposing penalty can do so only upon being satisfied that a person has concealed the particulars of his income or has deliberately furnished inaccurate particulars of it. The ITO was not competent to impose penalty on the basis of the finding in the appeal.
26. Mr. Pranab Pal next cited CIT v. Lakhdhir Lalji : 85ITR77(Guj) . In this case, the ITO added a sum of Rs. 58,000 as concealed income of the assessee and initiated proceedings for levy of penalty. But as the penalty imposable was more than Rs. 1,000, he referred the matter to the IAC. On appeal by the assessee, the AAC reduced the amount of the addition of Rs. 34,000. The IAC levied penalty on the basis of the reduced amount. On appeal from the penalty, the Tribunal held that the order of the IAC was without jurisdiction. On a reference from the order of the Tribunal, the Gujarat High Court upheld the order of the Tribunal and observed, inter alia, as follows (pp. 82, 83):
'......it is clear that the penalty proceedings having been commencedagainst the assessee on a particular footing, viz., of concealment of particulars of income, the final conclusion of levying the penalty was based on a different footing altogether, viz., on the footing of furnishing inaccurate particulars of his income. Under these circumstances, it is clear that it cannot be said that the assessee had been given a reasonable opportunity of being heard before the order imposing the penalty was passed......'
'......the AAC at the time when he heard the appeal in theassessment proceedings and held that there was no suppression of income by suppression of sales but that there was under-valuation of the stock, did not choose to commence penalty proceedings on the ground of furnishing inaccurate particulars of income. It was within the powers of the Appellate Assistant Commissioner to commence such proceedings on the ground that the assessee had furnished inaccurate particulars of the income but that was not done and the ground on which the proceedings were commenced by the Income-tax Officer, viz., that the assessee had concealed the particulars of his income inasmuch as he has suppressed the sales of 1,383 bags of garlic and concealed the income of Rs. 58,000, no longer survived after the finding of the Appellate Assistant Commissioner. In view of this position it was clear that the very basis for the penalty proceedings against the assessee initiated by the Income-tax Officer disappeared when the Appellate Assistant Commissioner held in the assessment proceedings that there was no suppression of income by the assessee. '
27. Mr. Pranab Pal last cited CIT v. Dwarka Prasad Subhash Chandra : 94ITR154(All) . In this case, the ITO initiated proceedings for penalty under Section 271(1) of the I.T. Act, 1961, and referred the matter to the IAC. In the meantime, on appeal by the assessee before the AAC against the assessment, the income assessed by the ITO was enhanced by Rs. 21,560. The IAC made an order levying penalty of Rs. 60,582 taking into consideration not only the findings of the ITO but also the enhancement directed by the AAC. On appeal, the Tribunal reduced it only to the extent of the concealed income discovered by the ITO. On a reference, the Allahabad High Court took the view that the IAC had no jurisdiction to impose penalty on the findings of the AAC.
28. Mr. B.L. Pal, however, contended that though the ITO originally-initiated the penalty proceeding in respect of the said sum of Rs. 1,63,000 as concealed income of the assessee from 'Other sources' yet he was competent to take into account in the proceedings for penalty the subsequent decision of the AAC. In support of this contention Mr. B.L. Pal cited several decisions :
(a) Addl. CIT v. Gurjargravures P. Ltd. : 111ITR1(SC) . The judgment of the High Court in this case has already been cited by Mr. Pranab Pal. Here, the question before the Supreme Court was whether in the absence of any claim for exemption under Section 84 of the I.T. Act, 1961, in the assessment proceedings before the ITO the same could be raised before the AAC in appeal against the assessment. The Supreme Court held that merely because an item of income was noticed by the ITO but not examined by him from the point of view of taxability, it cannot be said that the same have not been considered by him at all and similarly, if the ITO had examined part of the profits from the point of view of taxability it cannot be said that he had not considered the question of its non-taxability and, therefore, the AAC had jurisdiction to consider the question of exemption from tax in respect of any portion of such income under Section 84 of the I.T. Act, 1961.
(b) Narrondas Manordass v. CIT : 31ITR909(Bom) . Here a sum of Rs. 4,00,000 was not included in assessing the income of the assessee on account of a mistake in interpreting the law by the ITO concerned. The assessee preferred an appeal against the assessment on other points. In appeal, the AAC set aside the entire assessment and remanded the same to the ITO for a fresh assessment with a direction to go into the question of taxability of the said amount of Rs. 4,00,000. This order of the AAC was challenged by the assessee in appeal before the Tribunal on the ground that the same was illegal and without jurisdiction. The Tribunaldid not accept the contentions of the assessee. A reference from this order of the Tribunal was initiated before the Bombay High Court. The High Court held that the powers of the AAC under the I.T. Act were much wider than the powers of a court of appeal under the Code of Civil Procedure. The competency of the AAC was not restricted to the complaints of the assessee but covered the entire assessment and it is open to the AAC to correct the ITO on all matters including matters not raised by the assessee in the appeal. The AAC had the power to revise the whole assessment. The High Court upheld the contentions of the revenue.
29. In our opinion the above decisions cited on behalf of the revenue do not advance their case any further. They have little application to the facts before us. In the instant case, we are not concerned with an appeal from assessment but the power and jurisdiction of the ITO in penalty proceedings. The Allahabad High Court in the cases of Shadiram Balmukand : 84ITR183(All) and Dwarka Prasad Subhas Chandra : 94ITR154(All) and the Gujarat High Court in the case of Lakkdhir Lalji : 85ITR77(Guj) have held that when the original basis of initiation of the penalty proceeding is altered or modified by the appellate authority, the authority initiating the penalty proceedings has no jurisdiction thereafter to proceed on the basis of the findings of the appellate authority. These cases have neither been distinguished by Mr. B.L. Pal nor has he cited any authority to the contrary. We respectfully follow the said decisions. The AAC in the case before us admittedly modified the original assessment and held that the said sum of Rs. 1,63,000 was not concealed income of the assessee from 'Other sources' as held by the ITO but was concealed 'Business income' and also enhanced the business income of the assessee on other evidence. Therefore, it was no longer open to the ITO to proceed to impose penalty on the assessee on the basis of the said findings of the AAC.
30. For the, reasons given above the contentions of the assessee succeed. We answer the questions as follows:
31. We decline to answer the question No. 1 as, in our view, the revenue never sought to raise this question in its reference application and this question was raised suo motu by the Tribunal. We answer question No. 2 in the affirmative and in favour of the assessee. There will be no order as to costs.