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Ramlal Kishore Lal v. Commissioner Of Income-Tax, U.P

Allahabad High Court
Mar 10, 1971
Judgment
Subsequent
References
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CASE NO.

Income-tax Reference No. 138 of 1966

JUDGES

R.S Pathak

H.N Seth, JJ.

ACTS

clause (iii) of subsection (1) of section 271,

section 271(1)(c).

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Legal Opinion Summary — Pathak, J.

Factual and Procedural Background

The matter concerns assessment proceedings for the year 1962-63 involving a registered firm (the assessee). While conducting assessment for 1961-62, the Income-tax Officer (ITO) discovered credit entries in the assessee's account with M/s Mirchand Nemichand, Guntur, amounting to Rs. 70,000 and relating to years 1958-59 to 1962-63. The ITO treated Rs. 12,000 as concealed income for 1962-63 and made an assessment, noting that penalty proceedings under section 271(1)(c) would be initiated separately.

The ITO proposed a penalty of Rs. 2,000 but, because this exceeded his jurisdictional limit, he referred the matter to the Inspecting Assistant Commissioner (IAC) under section 274(2). The IAC's office placed a note dated August 3, 1963, suggesting that “No penalty … may be dropped if approved.” On September 25, 1963, the IAC wrote “No penalty” on that note and signed it. On October 3, 1963, the ITO recorded in his order sheet that the penalty had been dropped “vide IAC-P-e. Mo. a-Alld/63-64 dated September 9, 1963,” and informed the assessee in writing that the penalty proceedings under section 271(1)(c) had been dropped.

The Commissioner of Income-tax issued a notice under section 263(1) and, after hearing the assessee, made an order on March 25, 1964, cancelling the ITO's entry dated October 3, 1963, and directing fresh orders. The Commissioner took the view that the ITO's order of October 3, 1963, dropping the penalty was an order that he could revise under section 263(1), and he further held that the IAC's note was not itself an order under section 271.

The assessee appealed to the Income-tax Appellate Tribunal (Tribunal). The Tribunal held that the IAC's writing “no penalty” on September 25, 1963, did not constitute an order because, in the Tribunal's view, formal procedural requirements (fixing a hearing date, an actual hearing, a concluding order, and communication to the assessee) had not been satisfied; consequently the ITO's subsequent entry of October 3, 1963, was likewise not an order under section 263(1). The Tribunal allowed the assessee's appeal.

Two reference questions were then submitted under section 256(1): the assessee referred the first question (whether the IAC passed no order on September 25, 1963) and the Commissioner referred the second (whether no order was passed by the ITO on October 3, 1963, making the Commissioner's revision null and void).

Legal Issues Presented

  1. Whether, on the facts and in the circumstances of the case, the Inspecting Assistant Commissioner passed no orders when he wrote on the office note “no penalty” and signed below it on September 25, 1963?
  2. Whether, on the facts and in the circumstances of the case, no order was passed by the Income-tax Officer by his writing on the order sheet on October 3, 1963, and so the order passed by the Commissioner on March 25, 1964, under section 263(1) was null and void?

Arguments of the Parties

Tribunal's position (as recited in the opinion)

  • The Tribunal held that the IAC's inscription “no penalty” on September 25, 1963, did not constitute an order because formal requirements of a proceeding against the assessee had not been complied with — specifically, there was no evidence of a fixed hearing date, of an actual hearing, of a concluding order following a hearing, or of communication of such an order to the assessee.
  • The Tribunal treated the documents sent by the ITO to the IAC as a request for administrative instructions rather than a statutory reference for exercise of jurisdiction; accordingly, it viewed the ITO's subsequent entry and communication to the assessee as administrative actions and not as an order under section 271 or a statutory order susceptible to revision under section 263(1).

Commissioner of Income-tax's position (as recited in the opinion)

  • The Commissioner contended that the penalty proceedings were dropped by the ITO's order dated October 3, 1963, and that he (the Commissioner) had jurisdiction to revise that order under section 263(1).
  • The Commissioner further took the view that the IAC's office note was not itself an order under section 271 and that the Commissioner was not revising an IAC order but the ITO's order.

Income-tax Officer's position (as recited in the opinion)

  • The ITO, having proposed a penalty exceeding his power, referred the matter to the IAC under section 274(2) to enable the IAC to exercise the statutory power to impose penalty. The ITO's subsequent entry and communication reflected the receipt of the IAC's communication and completion of the administrative record; the ITO did not purport to exercise independent penalty-imposing jurisdiction.

Table of Precedents Cited

No precedents were cited in the provided opinion.

Court's Reasoning and Analysis

The court's analysis proceeds from statutory structure and the factual record of steps taken by the ITO and the IAC:

  1. Statutory reference and jurisdiction: The court examined section 274(2) (quoted in the opinion) which applies where a case falls under clause (c) of section 271(1) and the minimum penalty exceeds Rs. 1,000; in such cases the Income-tax Officer must refer the case to the Inspecting Assistant Commissioner, who has the powers conferred under the Chapter for imposition of penalty. The court treated the ITO's sending of the papers to the IAC as a statutorily mandated reference under this provision, not merely a request for administrative advice.
  2. Characterisation of the IAC's action: The officer's office note of August 3, 1963, stating that “No penalty … may be dropped if approved,” followed by the IAC's handwritten “No penalty” with signature and date (September 25, 1963), occurred after the referral under section 274(2). Given that context, the court concluded the IAC was exercising his jurisdiction under section 274(2) and that his writing “No penalty” constituted an exercise of that statutory power — i.e., an order under section 274(2). The court rejected the Tribunal's insistence on the formal requisites of adversarial proceedings (fixing a hearing date, actual hearing, communication to the assessee) as necessary preconditions to any action by the IAC: those formalities attend proceedings where an order is to be made against the assessee, but where the IAC concludes that no penalty is called for it is appropriate and permissible for him to apply his mind and drop the proceedings without issuing a show-cause notice.
  3. Communication to the ITO: The court noted (following the documentary record) that the IAC's order was communicated to the ITO as required by section 474(2) of the Act (as stated in the opinion). On October 3, 1963, the ITO recorded the receipt of that communication in his order sheet and informed the assessee that the penalty proceedings were dropped. The court analysed the nature of this entry and correspondence by the ITO and held that the ITO, having no jurisdiction to impose or alter penalty beyond his referred limit, did not thereby make an independent statutory order.
  4. Scope of the Commissioner's revisional jurisdiction under section 263(1): Because the ITO's October 3 entry and communication were not statutory orders but administrative records reflecting the IAC's prior order, they were not orders within the meaning of section 263(1) capable of being revised by the Commissioner. The Commissioner had therefore acted without jurisdiction in purporting to revise the ITO's October 3 entry.
  5. Conclusions on the questions: The court concluded that (a) the IAC's writing “No penalty” on September 25, 1963, did constitute an order under section 274(2) (answer to Question 1: negative, because the question asked whether no order was passed), and (b) the ITO's entry of October 3, 1963, was not an order within section 263(1) and so the Commissioner's revision of that “order” was without jurisdiction (answer to Question 2: affirmative, i.e., it could be said that the ITO had not passed an order for purposes of section 263(1)).

Holding and Implications

Holding: Question No. 1: In the negative. The court held that the words “no penalty” written by the Inspecting Assistant Commissioner on September 25, 1963, constituted an order made under section 274(2) of the Act.

Holding: Question No. 2: In the affirmative. The court held that the Income-tax Officer's entry on October 3, 1963, was not an order within the meaning of section 263(1) and therefore the Commissioner had no jurisdiction to take revisional proceedings in respect of that entry.

Implications and direct consequences:

  • The Commissioner’s order dated March 25, 1964, cancelling the ITO's October 3, 1963 entry and directing fresh orders was without jurisdiction insofar as it purported to revise an entry that was not a statutory order within section 263(1).
  • The Inspecting Assistant Commissioner’s decision to drop penalty proceedings by his writing “No penalty” operated as the effective statutory order under section 274(2), and the ITO’s subsequent record-keeping and communication merely recorded that outcome rather than constituting an independent order.
  • No new precedent beyond the decision in this case is stated to have been set by the court; the opinion confines itself to the resolution of the referred questions and declares the parties’ positions accordingly.
  • Costs: The assessee was awarded costs of Rs. 200 (which also represented counsel’s fee).

This summary is strictly limited to the content of the provided opinion and does not add or infer facts or legal propositions beyond those expressly contained in the text.

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Pathak, J.:— Two questions have been referred by the Income-tax Appellate Tribunal:

“(1) Whether, on the facts and in the circumstances of the case, it could be said that the Inspecting Assistant Commissioner passed no orders when he wrot??? on the office note “no penalty” and signed below it on September 25, 1963?

(2) Whether, on the facts and in the circumstances of the case, it could be said that no order was passed by the Income-tax Officer by his writing on the order sheet on October 3, 1963, and so the order passed by the Commissioner on March 25, 1964, under section 263(1) was null and void?”

2. The questions arise out of proceedings for the assessment year 1962-63. The assessee is a registered firm. While taking assessment proceeding for the year 1961-62 the Income-tax Officer noticed some credit entries in the account of the assessee maintained in the books of M/s. Mirchand Nemi-chand, Guntur, which appear to relate to the years 1958-59 to 1962-63 and totalled Rs. 70,000. Out of this, he treated a sum of Rs. 12,000 as concealed income relating to the assessment year 1962-63 and made an assessment accordingly. In the assessment order he also noted that penalty proceedings under section 271(1)(c) would be initiated separately in this respect. Thereafter, he sent a draft penalty order to the Inspecting Assistant Commissioner with the records of the case and proposed a penalty of Rs. 2,000. It seems that the office of the Inspecting Assistant Commissioner put up a note on August 3, 1963, stating:

“No penalty on account of cash credit added back as income from undisclosed sources is tenable and may be dropped if approved.”

3. Below this office note the Inspecting Assistant Commissioner wrote:

“No penalty”

and signed his name below it on September 25, 1963. Thereafter, on October 3, 1963, the Income-tax Officer made the following entry in the order sheet of his records:

“Penalty dropped vide IAC-P-e. Mo. a-Alld/63-64 dated September 9, 1963.”

4. On the same date the Income-tax Officer wrote to the assessee saying:

“This is to inform you that your penalty proceeding started under section 271(1)(c) for the assessment year 1962-63 has been dropped.”

5. Subsequently, it appears, the Commissioner of Income-tax issued a notice under section 263(1) to the assessee calling upon him to show cause why the Income-tax Officer's order dated October 3, 1963, should not be cancelled. After hearing the assessee, the Commissioner made an order dated March 25, 1964, cancelling that order and directing that fresh orders should be passed in accordance with law. The Commissioner took the view that the penal proceedings were dropped by the order of the Income-tax Officer dated October 3, 1963, and he was competent to revise that order under section 263(1). The note made by the Inspecting Assistant Commissioner, he said, was not an order under section 271 and it could not be said that he was revising it.

6. The assessee appealed to the Income-tax Appellate Tribunal. The Tribunal held that when the Inspecting Assistant Commissioner wrote “no penalty” on September 25, 1963, he did not pass any order. Before he could pass an order, the Tribunal pointed out, he was bound to comply with all the formalities provided in the Act, that is, a date should have been fixed for hearing the assessee, thereafter an actual hearing on the merits, followed by an order concluding the proceeding and the communication of that order to the assessee. The Tribunal pointed out that, as there was no evidence that these formal requirements had been satisfied, no order could be said to have been made by the Inspecting Assistant Commissioner. In the opinion of the Tribunal, what the Income-tax Officer did was merely to seek administrative instructions from the Inspecting Assistant Commissioner and what the Inspecting Assistant Commissioner did was to give certain administrative instructions to the Income-tax Officer. Proceeding from there, the Tribunal observed that if what was done by the Inspecting Assistant Commissioner did not amount to the passing of an order, what was done by the Income-tax Officer subsequently would equally not amount to the passing of an order. The Income-tax Officer, it said, could not be said to have made an order when he recorded the entry in the order sheet on October 3, 1963, that the penalty proceedings had been dropped and communicated that intelligence to the assessee. Upon the view, then, that the Income-tax Officer had made no order under section 263(1) the Tribunal held that the Commissioner had no jurisdiction to take proceedings and, therefore, the order passed by him was null and void and was liable to be set aside. In the result, it allowed the assessee's appeal.

7. Two reference applications were filed under section 256(1) of the Act, one by the Commissioner of Income-tax and the other by the assessee. Of the two questions set out above, the first has been referred at the instance of the assessee and the second at the instance of the Commissioner.

8. The Income-tax Officer was of the view that penalty proceedings should be taken under section 271(1)(c). He proposed to levy a penalty of Rs. 2,000. As the amount of the penalty exceeded the limit up to which he had jurisdiction, he referred the case to the Inspecting Assistant Commissioner for the purpose of imposing penalty. When he made this reference, he acted with??? the terms of section 274(2), which provides:

“(2) Notwithstanding anything contained in clause (iii) of subsection (1) of section 271, if in a case falling under clause (c) of that sub-section, the minimum penalty imposable exceeds a sum of rupees one thousand, 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”.

9. The Tribunal has observed that the Income-tax Officer, when sending the papers to the Inspecting Assistant Commissioner, was seeking administrative instructions. We do not see how that inference is possible upon the facts of the case. There could be no question of seeking administrative instructions because the Income-tax Officer had no jurisdiction at all to impose a penalty exceeding Rs. 1,000 in a case falling under section 271(1)(c). What the Income-tax Officer did was to refer the case to the Inspecting Assistant Commissioner, who alone had jurisdiction to levy the penalty proposed. It appears to be the practice in the office of the Inspecting Assistant Commissioner to put up a note on such a reference, suggesting whether it was a case for penalty. When the papers with the note were put up before the Inspecting Assistant Commissioner, he wrote “no penalty” and appended his signature and the date thereto. When regard is had to the circumstance that the case was referred to him by the Income-tax Officer for the exercise of his jurisdiction under section 274(2), no other conclusion is possible but that what was done by the Inspecting Assistant Commissioner was to make an order under section 274(2). He considered the matter as not calling for the imposition of a penalty, and accordingly made that order. The Tribunal has been impressed by what it considers to be the formal requisites of a proceeding before an order can be made. It points to the necessity of a date being fixed for hearing the assessee, an actual hearing, concluded by an order and communication of that order. We think it is open to the Inspecting Assistant Commissioner, and indeed desirable, that when a reference is made to him by the Income-tax Officer he should apply his mind to the question whether or not it is a case for penalty before notice is issued to the assessee requiring him to show cause against the imposition of a penalty. Where the Inspecting Assistant Commissioner comes to the opinion that no penalty is called for, he will drop the proceeding rendering it wholly unnecessary to issue notice to the assessee to appear in the matter. The formal requirements contemplated by the Tribunal are those which attend a proceeding in which it is proposed to pass jan order against the assessee. It is then that the assessee has a right to be heard, and proceedings for hearing him must be taken.

10. We hold that the words “no penalty” written by the Inspecting Assistant Commissioner on September 25, 1963, constituted an order made under section 274(2) of the Act. The view taken by the Tribunal to the contrary is erroneous. We, therefore, answer the first question in the negative.

11. The order dated September 25, 1963, was communicated by the Inspecting Assistant Commissioner to the Income-tax Officer as was required by section 474(2) of the Act. On October 3, 1963, therefore, the Income-tax Officer made an entry in the order sheet noting that the penalty proceeding had been dropped, and he referred in that behalf to the communication received from the Inspecting Assistant Commissioner. When he made that entry, the Income-tax Officer cannot be considered to have made an order. Indeed, he had no jurisdiction to do so. The imposition of the penalty rested entirely within the jurisdiction of the Inspecting Assistant Commissioner, and when he made the order which he did, there was nothing more to be done. The Income-tax Officer could not by a subsequent order limit or extend the order made by the Inspecting Assistant Commissioner. When he made the entry of October 3, 1963, it was merely for the purpose of completing the record before him. Thereafter, he wrote to the assessee informing him that the penalty proceeding had been dropped. When he did so it was not because the statute compelled him to do so but because it was only right that the assessee should know what had happened in the proceeding, especially as after the proceeding had been initiated under section 271(1)(c) the assessee was on no occasion privy to the proceeding before the Inspecting Assistant Commissioner. We are clear in our mind that the entry made by the Income-tax Officer in the order sheet on October 3, 1963, cannot be construed as an order made by him. It was not an order within the meaning of section 263(1) of the Act and, therefore, the Commissioner had no jurisdiction to take proceedings under that provision. So far as this order is concerned, we are of opinion that the Tribunal was right in the view which it took. Accordingly, we answer the second question in the affirmative.

12. In the result, the questions are answered as follows:

Question No. 1: In the negative.

Question No. 2: In the affirmative.

13. The assessee is entitled to its costs, which we assess at Rs. 200. Counsel's fee is assessed in the same figure.

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