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Om Prakash Agarwal v. Income Tax Officer Opp. Party
Factual and Procedural Background
The petitioner was assessed to income-tax for the assessment year 1963-1964 and served with a notice of demand for Rs. 6,858.88. He filed an appeal against the assessment order. While the appeal was pending and the tax remained unpaid, the Income-tax Officer issued a notice on November 18, 1965 calling on the petitioner to show cause why a penalty should not be imposed under section 221(1) of the Income-tax Act, 1961, and required appearance or written communication by November 24, 1965. On November 23, 1965 the petitioner submitted an application titled “Request for stay of disputed tax till decision in appeal,” asking that he be treated as not being in default during the pendency of the appeal and explaining financial difficulty and alleged error in the assessment. On December 31, 1965 the Income-tax Officer imposed a penalty of Rs. 500 under section 221 for non-payment of the assessed tax. The petitioner sought quashing of that penalty order and mandamus directing the Income-tax Officer to decide the November 23, 1965 application and to treat him as not being in default.
Legal Issues Presented
- Whether, before imposing a penalty under section 221(1), the Income-tax Officer must determine whether the assessee is in default or deemed to be in default, including consideration of any application under section 220(6) to be treated as not in default while an appeal under section 246 is pending.
- Whether the proviso to section 221(1) requiring that the assessee be given a reasonable opportunity of being heard must be complied with before a penalty can be levied.
Arguments of the Parties
Petitioner's Arguments
- The petitioner had lodged an appeal against the assessment and filed an application on November 23, 1965 requesting that he be treated as not being in default under section 220(6) while the appeal was pending.
- The Income-tax Officer was bound to consider and dispose of that application before concluding that the petitioner was in default and before considering the question of imposing any penalty under section 221(1).
- The petitioner sought quashing of the penalty order and mandamus to require the Income-tax Officer to decide the November 23, 1965 application in accordance with law and to treat him as not being in default if appropriate.
Table of Precedents Cited
| Precedent | Rule or Principle Cited For | Application by the Court |
|---|---|---|
| Esthuri Aswathaiah v. Income-tax Officer. (1959) 37 ITR 518 : (AIR 1959 Mys 44) | Support for the proposition that the Income-tax Officer must consider relevant questions (including applications under the Act) before imposing penalty; authority reinforcing the court's view on procedural requirement prior to penalty. | The court stated it was "fortified in the view" it was taking by this decision and relied on it to support the conclusion that the Income-tax Officer ought to have considered the petitioner's application before imposing the penalty. |
Court's Reasoning and Analysis
The court examined the statutory framework governing demand, default and penalty:
- Section 220(1) requires payment of the amount specified in a notice of demand within thirty-five days of service.
- Section 220(3) permits the Income-tax Officer to extend time for payment or allow payment by installments.
- Section 220(4) deems an assessee to be in default if the amount is not paid within the time limited under subsection (1) or any extension under (3).
- Section 220(6) authorizes the Income-tax Officer, where an appeal under section 246 has been presented, to treat the assessee as not being in default in respect of the amount in dispute for so long as the appeal remains undisposed of, in his discretion and subject to conditions he may impose.
- Section 221(1) makes an assessee in default liable to a penalty and contains a proviso that "before levying any such penalty the assessee shall be given a reasonable opportunity of being heard."
From these provisions the court concluded that before imposing a penalty under section 221(1) the Income-tax Officer must: (a) determine whether the assessee is in default or is deemed to be in default; (b) give the reasonable opportunity of being heard required by the proviso to section 221(1); and (c) consider whether, despite a deemed default under section 220(4), the assessee ought to be treated as not being in default under section 220(6) because an appeal under section 246 is pending and on the particular circumstances of the case.
The court observed that the assessee may produce material showing payment, showing that the officer's records are incorrect, explaining extenuating circumstances, or otherwise showing why only a minimal penalty (if any) should be imposed. All these matters must be considered before arriving at the decision to levy a penalty and as to its amount.
Applying these principles to the case, the court found that the Income-tax Officer did not dispose of the petitioner's November 23, 1965 application requesting to be treated as not being in default before making the penalty order on December 31, 1965. That omission meant the officer had not completed the necessary determinations required by the statute and by the proviso to section 221(1), and therefore vitiated the penalty order.
Holding and Implications
Holding: The petition is allowed and the court issued a writ of certiorari quashing the penalty order dated December 31, 1965. The court directed the Income-tax Officer to consider the application dated November 23, 1965 and thereafter to dispose of the penalty proceedings. The petitioner was awarded his costs.
Core Ruling: The penalty order dated December 31, 1965 is quashed because the Income-tax Officer failed to consider the petitioner's application under section 220(6) and did not afford the procedural opportunity required before levying a penalty under section 221(1).
Implications: The direct effect is that the specific penalty order against the petitioner is set aside and the Income-tax Officer must reconsider the petitioner's application and the penalty question in accordance with law. The opinion does not purport to lay down any broader novel principle beyond the application of the cited statutory provisions and the reliance on the Mysore High Court authority referenced; no wider new precedent is articulated in the opinion itself.
1. The petitioner was assessed to income-tax for the assessment year 1963-1964. A notice of demand was served upon him requiring him to pay income-tax in the sum of Rs. 6,858.88. The petitioner filed an appeal against the assessment order. During the pendency of the appeal, as the petitioner had not paid the tax assessed against him, a notice was issued by the Income-Tax Officer on November 18, 1965 calling upon him to show cause why a penalty should not be levied under section 221(1) of the Income-tax Act, 1961. The notice required the petitioner to appear personally or through an authorised representative on November 24, 1965 or to send a written communication so as to reach the Income-tax Officer on or before that date. On November 23, 1965 the petitioner submitted an application to the Income-tax Officer. The subject of the application was stated as “Request for stay of disputed tax till decision in appeal.” and it was mentioned that an appeal was pending before the Appellate Assistant Commissioner of Income-tax wherein the petitioner expected full relief, that the assessment order was erroneous and that the financial position of the petitioner was not then very sound and he was not in a position to liquidate the demand. Upon these allegations, the petitioner prayed that the Income-tax Officer would treat the petitioner as not being in default during the pendency of the appeal. On December 31, 1965, the Income-tax Officer made an order under section 221 imposing a penalty of Rs. 500 upon the petitioner for not having paid the entire amount of the assessed tax within the time allowed in that behalf. The petitioner prays for the quashing of the penalty order and for mandamus directing the Income-tax Officer to decide the application dated November 23, 1965 in accordance with law and further to treat the petitioner as not being in default. The petitioner contends that the Income-tax Officer was bound to consider and dispose of the application dated November 23, 1965 and to determine whether the petitioner should be treated as not being in default. It was only if that determination ended in a finding against the petitioner that the Income-tax Officer could consider the question of imposing a penalty under section 221(1). The contention is well founded.
2. Section 220(1) requires that the amount specified as payable in a notice of demand must be paid within thirty five days of service of the notice at the place and to the person mentioned in the notice. Section 220(3) empowers the Income-tax Officer to extend the time for payment or allow payment by installments. Section 220(4) provides:
“If the amount is not paid within the time limited under sub-section (1) or extended under sub-section (3), as the case may be, at the place and to the person mentioned in the said notice the assessee shall be deemed to be in default.”
Then follows section 220(6):
“Where an assessee has presented an appeal under section 246, the Income-tax Officer may, in his discretion, and subject to such conditions as he may think fit to impose in the circumstances of the case, treat the assessee an not being in default in respect of the amount in dispute in the appeal, even though the time for payment has expired, as long as such appeal remains undisposed of.”
3. The provision for imposing a penalty upon an assessee in default is enacted in section 221, sub-section (1) of which reads:
“When an assessee is in default or is deemed to be in default in making a payment of tax, he shall, in addition to the amount of the arrears and the amount of interest payable under sub-section (2) of section 220, be liable to pay by way of penalty, an amount which, in the case of a continuing default, may be increased from time to time, so however, that the total amount of penalty does not exceed the amount of tax in arrears:
Provided that before levying any such penalty the assessee shall be given a reasonable opportunity of being heard.”
4. Now, it seems to me that before the Income-tax Officer can impose a penalty under section 221 he must determine whether the assessee is in default or is deemed to be in default in making payment of tax. He is required by the proviso to Sec. 221(1) to give a reasonable opportunity to the assessee of being heard before levying any such penalty. The assessee may show that he is not in default because he has paid the amount specified in the notice of demand and in this connection may establish that the records upon which the Income-tax Officer relies for coming to the prima facie conclusion that the assessee is in default are incorrect. The assessee may also show that even though he is in default there are extenuating circumstances explaining why he was unable to pay the amount. The assessee may further be in a position to place material before the Income-tax Officer to show that although a penalty is attracted there is a case for imposing a minimum sum as penalty.
5. The Income-tax Officer will consider all these factors and thereafter determine whether a penalty should be imposed and if so in what sum While determining the question whether the assessee is in default or is deemed to be in default, the Income-tax Officer must consider not only whether the amount specified in the notice of demand has been paid within the time limited but also whether the assessee has presented an appeal and the circumstances of the case are such that the assessee should be treated as not being in default. This is so particularly when the assessee has presented an application under Section 220(6) for being treated as not being in default. Whether the assessee should be treated as not going in default is a matter to be considered by the Income-tax Officer before he can decide upon the imposition of a penalty. That consideration directly affects the issue whether the assessee is in default. It is true that he is in default if he has not paid the amount within the time limited. That is so by section 220(4). But that question has to be determined and it is necessary for the Income-tax Officer to arrive at a finding to that effect. He cannot arrive at that finding before giving the opportunity of being heard to the assessee which is contemplated by the proviso to section 221(1). And even after coming to the finding that the assessee is to be deemed to be in default by reason of section 220(4) he must yet arrive at a further finding whether the assessee is to be treated as not being in default notwithstanding the default contemplated by section 220(4). Both these steps are necessary before the Income-tax Officer can come to the decision that the assessee is in default and a penalty should be imposed upon him. I am fortified in the view that I am taking by the decision of the Mysore High Court in Esthuri Aswathaiah v. Income-tax Officer. (1959) 37 ITR 518 : (AIR 1959 Mys 44).
6. In the instant case, the Income-tax Officer did not dispose of the application of November 23, 1965 before making the order of penalty on December 31, 1965. He was bound to do so and his omission vitiates the penalty order.
7. The petition is allowed. A writ in the nature of certiorari shall issue quashing the order dated December 31, 1965. The Income-tax Officer is directed to consider the application dated November 23, 1965 and then to dispose of the penalty proceedings. The petitioner is entitled to his costs.
AGJ/D.V.C
8. Petition allowed.
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