Citation Codes

Equivalent Citations

citation codes

Case Number

Case Referred No. 64 of 1970

Judges

Chinnappa Reddy
A.D.V Reddy, JJ.

Acts

provisions of article 20(1) of the Constitution, the Tribunal, applying section 28(1) of the Indian Income-tax Act of 19-22,
provisions of article 20(1) of the Constitution, as the provisions of the Income-tax Act
provisions of the Income-tax Act of 1961. Section 271(1) of the new Act,
provisions of article 20(1) of the Constitution to provisions
provisions of section 271(1)(c) of the Income-tax Act of 1961
SECTION 271 I INCOME TAX ACT 1961
section 28(1)(c) of the Indian Income-tax Act of 1922.
Indian Income-tax Act, 1922. Section 28(1) of that Act
provisions of the Indian Income-tax Act of 1922
provisions of article 20(1) of the Constitution
provisions of the Indian Income-tax Act, 1922,
section 256(1) of the Income-tax Act of 1961
section 271(1)(c) of the Income-tax Act, 1961,
SECTION 271 A INCOME TAX ACT 1961
INCOME TAX ACT 1961
provisions of section 28 of the old Act
section 297(2)(g) of Income-tax Act, 1961,
SECTION 277 INCOME TAX ACT 1961
section 271(1)(c) of Income-tax Act, 1961,
section 28(1) of the old Act,
Finance Act of 1968,
INCOME TAX ACT

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Smart Summary

Judgment Summary — Reference under section 256(1) of the Income-tax Act of 1961

Factual and Procedural Background

The reference arises under section 256(1) of the Income-tax Act of 1961, made by the Appellate Tribunal at the instance of the Commissioner of Income-tax. The question referred concerns the validity of a penalty fixed at Rs. 5,000 where the assessment related to the year 1960-61.

The assessee is a Hindu Undivided Family (HUF) with income from property, a share in the firm M/s. Maduri Rajiahgari Kistaiah, and its own business. For assessment year 1960-61 the assessee returned income of Rs. 54,069 but assessable income was fixed at Rs. 1,59,298 after disallowances (including brokerage, entertainment expenses and an adjustment to gross profits). The assessing officer held that items of expenditure were deliberately inflated and profits suppressed, and initiated penalty proceedings.

Because the minimum penalty leviable exceeded Rs. 1,000, the matter was referred to the Inspecting Assistant Commissioner (IAC). After enquiry the IAC levied a penalty of Rs. 58,000 (penalty order dated March 28, 1967). On appeal, the Tribunal held that some additions/disallowances (gross profit rate and some disallowances) were estimate-based and could not form the basis for penalty; however, with respect to brokerage and vehicle expenses the assessee had not refuted the Income-tax Officer's points and had included some non-genuine items, justifying penalty on that score. The Tribunal considered the assessment year (1960-61) to be governed substantively by the Indian Income-tax Act, 1922, applied section 28(1) of the 1922 Act and restricted the levy of penalty to Rs. 5,000 as meeting the ends of justice. The Tribunal also expressed the view that applying the 1961 Act's minimum penalty would offend article 20(1) of the Constitution. This led to the present reference.

Relevant dates from the opinion: notice for penalty under section 271 was served on May 20, 1965, and the IAC passed the penalty order on March 28, 1967. The court examined the applicability of the 1922 Act (section 28(1)) and the 1961 Act (section 271(1)(c)) as well as transitional provisions (section 297(2)(g) of the 1961 Act as cited in the opinion).

Legal Issues Presented

Whether, on the facts and in the circumstances of the case, since the assessment related to the assessment year 1960-61 governed by the provisions of the Indian Income-tax Act, 1922, the levy of penalty of Rs. 5,000 (which was less than the minimum provided under section 271(1)(c) of the Income-tax Act, 1961) was justified?

Arguments of the Parties

The opinion does not contain a detailed account of the parties' legal arguments.

Table of Precedents Cited

Precedent	Rule or Principle Cited For	Application by the Court
Commissioner of Income Tax, West Bengal v. Anwar Ali [1970] 76 ITR 696 (SC)	Explains that penalty proceedings under section 28 are penal in character (intended as a deterrent) but have been treated as additional tax; places burden on department in penalty proceedings.	Used to show that penalty proceedings are "penal in character" for burden-of-proof purposes, but this does not equate the acts attracting penalty to criminal offences for the purposes of article 20(1).
C.A. Abraham (1961) 41 ITR 425 (SC) (as cited)	Referenced to show earlier observations about penalty being additional tax were made in a different context; the court in that case was not called upon to decide whether penalty proceedings are penal or quasi-penal.	Relied on to caution that observations in that case do not determine the character of penalty proceedings broadly; supports distinction between taxation penalty proceedings and criminal punishment.
P. Ummali Umma v. Inspecting Assistant Commissioner of Income-tax [1967] 64 ITR 669 (Ker)	Holds that penalty proceedings and criminal prosecution are mutually exclusive remedies; under the new Act both remedies are available while under the old Act penalty proceedings could bar prosecution.	Used to reinforce the distinction between penalty proceedings (civil/quasi-civil) and criminal prosecution, supporting the conclusion that article 20(1) (which protects against retrospective increase in punishment for offences) does not apply to tax penalty proceedings.
Spies v. United States (317 US 492)	Distinguishes civil tax penalties (administrative additions to tax) from criminal sanctions (punishments); both may be enforced and invocation of one does not exclude the other.	Invoked to illustrate the established distinction between civil tax penalties and criminal punishment; supports view that penalty under tax law is not penal in the criminal-law sense for article 20(1) purposes.
M.P. Indra & Co. v. Union of India [1967] 64 ITR 664 (Raj)	Held that retrospective application of section 271 (fixing a minimum rate) made applicable by a transitional provision did not infringe article 20(1) where the overall burden was not increased; the applicability of article 20(1) to penalty provisions was not considered.	Referred to for the proposition that retrospective application of a minimum penalty by transitional provisions does not necessarily infringe article 20(1); the court used it in concluding article 20(1) was not attracted in the present case.

Court's Reasoning and Analysis

The court's analysis proceeds in discrete steps, applying the statutory text and constitutional principle as presented in the opinion:

Statutory landscape and initial observation:
- The assessment year was 1960-61 and the Indian Income-tax Act, 1922 was the substantive law in force for that year. Section 28(1) of the 1922 Act permits imposition of a penalty up to one and a half times the tax avoided, but prescribes no minimum penalty.
- Section 271(1)(c) of the Income-tax Act, 1961 (as it stood before the 1968 Finance Act amendment) prescribes a minimum penalty of 20% in cases of concealment of particulars or furnishing inaccurate particulars, and a maximum equal to one and a half times the tax avoided.
- Thus the old Act left discretion to assess an appropriate penalty (including amounts below 20%), while the new Act prescribes a compulsory minimum of 20%.
Transitional provision and its effect:
- Section 297(2)(g) of the 1961 Act (as cited in the opinion) states that any penalty proceeding for assessment years ending on 31 March 1962 or earlier, which is completed on or after 1 April 1962, may be initiated and any such penalty may be imposed under the 1961 Act.
- Because the penalty proceedings in this case were initiated by notice on May 20, 1965 (i.e., after 1 April 1962), prima facie the IAC was correct in invoking the provisions of the 1961 Act to impose penalty.
Tribunal's approach and the constitutional objection:
- The Tribunal applied section 28(1) of the 1922 Act (old Act) and limited penalty to Rs. 5,000, reasoning that the assessment year was governed by the old Act and considering the minimum prescribed by the 1961 Act would offend article 20(1) of the Constitution.
- The court found this approach mistaken because the Tribunal did not properly address the effect of the transitional provision (section 297(2)(g)).
Article 20(1) analysis:
- Article 20(1) reads: no person shall be convicted of any offence except for violation of a law in force at the time of the commission of the act charged as an offence, nor be subjected to a penalty greater than that which might have been inflicted under the law in force at the time of the commission of the offence.
- The court observed article 20(1) has two limbs: conviction for an offence and limitation on punishment for an offence. The Tribunal equated tax-penalty proceedings with criminal offences for the purpose of article 20(1); the court rejected that equivalence.
- The court relied on authorities and reasoning distinguishing tax penalties (even if penal in character for burden-of-proof purposes) from criminal offences attracting conviction and punishment under criminal law. It emphasized that penalty proceedings under the Income-tax Act are of a different nature and are intended to deter evasion or secure compensation to the State (they have a remedial/deterrent character and have been described as additional tax in some contexts).
- Cases cited (Anwar Ali, P. Ummali Umma, Spies v. United States, M.P. Indra & Co.) were used to support the proposition that penalty proceedings cannot be equated with criminal prosecution for the purposes of article 20(1), and that invocation of civil tax penalties does not amount to a conviction for an offence within the meaning of that article.
Conclusion from statutory and constitutional analysis:
- Because the penalty proceedings were initiated after the 1961 Act came into force and the transitional provision permitted imposition under the 1961 Act, and because article 20(1) does not apply to tax penalty proceedings in the manner the Tribunal suggested, the Tribunal was incorrect to restrict the penalty to Rs. 5,000 under section 28(1) of the 1922 Act.
- The court therefore held that the levy of Rs. 5,000 (less than the 20% minimum prescribed by section 271(1)(c) of the 1961 Act) was not justified.

Holding and Implications

Holding: The reference is answered in the negative and against the assessee.

Concrete consequences implemented by the court (direct effect on the parties):

The Tribunal's reduction of the penalty to Rs. 5,000 (under section 28(1) of the 1922 Act) was held to be not justified in law.
The Department's position that penalty proceedings initiated after the commencement of the 1961 Act may be governed by the 1961 Act (by virtue of the cited transitional provision) was upheld in principle for the facts of this case.
The court directed that the department recover its costs from the assessee and fixed advocate's fee at Rs. 250.

Broader legal implication (as stated in the opinion):

The court held that article 20(1) of the Constitution does not apply to tax penalty proceedings in the way argued by the Tribunal; tax penalty proceedings, although penal in character for certain purposes, are not criminal convictions attracting the protections of article 20(1) against retrospective increase in punishment.
The opinion therefore supports the application of transitional provisions that bring certain penalty proceedings under the 1961 Act even where the assessed year falls within the period of the earlier Act, provided the statutory transitional conditions are met.

The opinion's final operative directions: reference answered in the negative, costs to the department, advocate's fee Rs. 250.

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Commissioner Of Income-Tax, A.P v. Maduri Rajeswar

A.D.V Reddy, J.:— This reference made under section 256(1) of the Income-tax Act of 1961 by the Appellate Tribunal at the instance of the Commissioner of Income-tax is for the decision on the following question:

“Whether, on the facts and in the circumstances of the case, since the assessment related to the assessment year 1960-61 governed by the provisions of the Indian Income-tax Act, 1922, the levy of penalty of Rs. 5,000 which was less than the minimum provided for under section 271(1)(c) of Income-tax Act, 1961, was justified?”

2. The assessee is a Hindu undivided family having income from property, share from the firm of M/s. Maduri Rajiahgari Kistaiah and from their own business. For the assessment year 1960-61 as against a return of income of Rs. 54,069 the assessable income was fixed at Rs. 1,59,298 as certain amounts were disallowed towards brokerage and entertainment expenses and gross profits disclosed being found to be less. Therefore, holding that the assessee had deliberately inflated these items of expenditure and suppressed the profits, penalty proceedings were started and as the minimum penalty leviable exceeded Rs. 1,000, the case was referred to the Inspecting Assistant Commissioner and he, after enquiry, levied a penalty of Rs. 58,000. On appeal, the Tribunal held that the addition on account of gross profit rate and also some of the disallowances have been made on estimate basis, as the assessing officer was not satisfied with the proof, and this could not form the basis of penalty. But the Tribunal, however, found that with regard to the brokerage as well as vehicle expenses claimed, the points made out by the Income-tax Officer had not been refuted by the assessee and this has been brought about by his own action in including some items of non-genuine nature. Keeping this in view, the Tribunal was of the opinion that a penalty on this score only is leviable and the quantum of penalty levied by the Income-tax Officer was unconscionably high. The Tribunal, however, held that the assessment year under appeal being 1960-61, the provisions of the Indian Income-tax Act of 1922 applied as far as the substantive provisions were concerned and as under the relevant provision no minimum penalty had been prescribed and as the application of the provisions of the Income-tax Act of 1961 would offend the provisions of article 20(1) of the Constitution, the Tribunal, applying section 28(1) of the Indian Income-tax Act of 19-22, which was in existence at the time the alleged “offence” was committed, considered that restricting the levy of penalty to a sum of Rs. 5,000 would meet the ends of justice. Hence this reference.

3. The assessment year was 1960-61. The Act then in force was the Indian Income-tax Act, 1922. Section 28(1) of that Act reads as follows:

“If the Income-tax Officer, the Appellate Assistant Commissioner or the Appellate Tribunal, in the course of any proceedings under this Act, is satisfied that any person,—……

he or it may direct that such person shall pay by way of penalty, in the case referred to in clause (a), in addition to the amount of the income-tax and super-tax, if any, payable by him, a sum not exceeding one and a half times that amount and in the cases referred to in clauses (b) and (c) in addition to any tax payable by him, a sum not exceeding one and a half times the amount of the income-tax, and super tax, if any, which would have been avoided if the income as returned by such person had been accepted as the correct income.”

4. This provision while fixing the maximum has not prescribed any minimum penalty that has to be levied. The Tribunal would have been correct, if the assessment had been completed before the new Act of 1961 came into force in levying a penalty of Rs. 5,000. But, in this case, the assessment was completed after the Income-tax Act of 1961 had come into force and a notice for the levy of penalty under section 271 of the Income-tax Act of 1961 for concealment of income and furnishing inaccurate particulars was issued to the assessee on May 20, 1965. The order imposing the penalty was passed by the Inspecting Assistant Commissioner on March 28, 1967, imposing a penalty under the provisions of the Income-tax Act of 1961. Section 271(1) of the new Act, as it stood before the amendment by the Finance Act of 1968, read as follows:

“If the Income-tax Officer or the Appellate Assistant Commissioner, in the course of any proceedings under this Act, is satisfied that any person,— ……

he may direct that such person shall pay by way of penalty,—……

(iii) in the cases referred to in clause (c), in addition to any tax payable by him, a sum which shall not be less than twenty per cent. but which shall not exceed one and a half times the amount of the tax, if any, which would have been avoided if the income as returned by such person had been accepted as the correct income.”

5. This shows that though the maximum fixed is the same, as under section 28(1) of the old Act, a minimum of 20 per cent. has been fixed in the new Act and no discretion is left to the assessing officer to levy any penalty less than the minimum, whatever the circumstances be, while under the old Act, there is no minimum and the assessing officer could levy any amount b???fitting the circumstances of the case.

6. However, under section 297(2)(g) of Income-tax Act, 1961, “any proceeding for the imposition of a penalty in respect of any assessment for the year ending on the 31st March of 1962, or any earlier year, which is completed on or after the 1st day of April, 1962, may be initiated and any such penalty may be imposed under this Act”. As the penalty proceedings in this case were initiated by a notice served on the assessee on May 20, 1965, those proceedings are governed by the provisions of the new Act and prima facie the Inspecting Assistant Commissioner was right in imposing the penalty under the provisions of the new Act.

7. The Tribunal, however, have chosen to impose the penalty under the provisions of section 28 of the old Act on the mistaken ground that for the assessment year 1960-61, there is no minimum penalty prescribed, thereby ignoring or not considering the effect of the provisions of section 297(2)(g) of the Act of 1961. They had also chosen to say that the compulsory levy of a minimum penalty would offend the provisions of article 20(1) of the Constitution, as the provisions of the Income-tax Act in existence at the time the “offence” was committed only would be applicable to the case and in that view did not choose to levy the penalty as per the provisions of section 271(1)(c) of the Income-tax Act of 1961 whereunder the minimum is prescribed and chose to levy a penalty under section 28(1)(c) of the Indian Income-tax Act of 1922. It is, therefore, to be seen how far the provisions of article 20(1) of the Constitution are attracted in the circumstances of the case.

8. Article 20(1) reads as follows:

“No person shall be convicted of any offence except for violation of a???aw in force at the time of the commission of the act charged as an offence, nor be subjected to a penalty greater than that which might have been inflicted under the law in force at the time of the commission of the offence.”

9. The above article, it may be seen, has two limbs, the first dealing with conviction for any offence and the second dealing with penalty to be imposed on the commission of the offence. What is now contended is that a case of penalty imposed under the Income-tax Act attracts the second limb of the above article and no penalty, greater than that which might have been inflicted under the law then in force at the time the act attracting penalty was committed can be imposed. The fallacy lies in equating the acts attracting the penalty under the Income-tax Act to an offence. In Commissioner Of Income Tax, West Bengal v. Anwar Ali [1970] 76 ITR 696 (SC) the question that came up for consideration related to the burden of proof in the case of penalty proceedings and in that connection their Lordships of the Supreme Court stated as follows (page 700):

“It is true that penalty proceedings under section 28 are included in the expression ‘assessment’ and the true nature of penalty has been held to be additional tax. But one of the principal objects in enacting section 28 is to provide a deterrent against recurrence of default on the part of the assessee. The section is penal in the sense that its consequences are intended to be an effective deterrent which will put a stop to practices which the legislature considers to be against the public interest. It is significant that in C.A Abraham's case [1961] 41 ITR 425 (SC) this court was not called upon to determine whether penalty proceedings were penal or of quasi-penal nature and the observations made with regard to penalty being an additional tax were made in a different context and for a different purpose.”

10. The above observations had been made for holding that the proceedings for levying the penalty are penal in character and, therefore, the burden in establishing the acts attracting the penalty will be on the department and it is for the department to establish that the receipt of the amounts in dispute constitute income of the assessee and the concealment thereof, there fore, attracted the penalty provisions. From those observations it cannot be said that the acts that attracted the penalty are in the nature of offences. The framers of the Income-tax Act have chosen to make a difference between the two—while section 271 of the Income-tax Act, 1961, relates to penalty proceedings, section 277 of the Income-tax Act, 1961, prescribes what are offences under the Act and what punishment has to be imposed for the said offence. Therefore, penalty proceedings cannot be equated to criminal proceedings attracting punishment. Even in the case cited above, it has been pointed out that penalty proceedings are included in the expression “assessment” and the true nature of penalty has been held to be additional tax and not punishment. The objects of the two provisions appear to be different: The one entailing the prosecution and punishment is to vindicate public justice by punishing the offender, whereas the object of penalty proceedings is to render evasion unprofitable and to secure to the State the compensation for damages or attempted evasions. As pointed out in P. Ummali Umma v. Inspecting Assistant Commissioner of Income-tax [1967] 64 ITR 669 (Ker), they are mutually exclusive remedies and under the new Act both the proceedings are available, though under the old Act penalty proceedings would have been a bar to the launching of a prosecution. This does not make a difference to the distinction drawn.

11. In Spies v. United States (317 US 492), Jackson J. brought out the distinction in the following terms:

“The penalties imposed by Congress to enforce the tax laws embrace both civil and criminal sanctions. The former consist of additions to the tax upon determinations of fact made by an administrative agency and with no burden on the Government to prove its case beyond a reasonable doubt. The latter consist of penal offences enforced by the criminal process in the familiar manner. Invocation of one does not exclude resort to the other.”

12. Therefore, the contention that the proceedings entailing a penalty under the Income-tax Act are to be equated to the prosecution attracting the punishments cannot be accepted, as no conviction for any offence is involved in the imposing of a penalty. From a reading of the provisions of article 20(1) of the Constitution it is evident that the first limb and the sec???nd limb are interlinked and have to be read together, that while the first limb refers to a conviction for an offence, the second limb refers to the punishment that has to be inflicted with regard to an offence. Penalty is, on the other hand, levied for an act or omission of the assessee, not because it is an offence but because it is an attempt at evasion in the payment of the tax. Therefore, article 20(1) of the Constitution is not attracted.

13. In M.P Indra & Co. v. Union of India [1967] 64 ITR 664 (Raj) it was held that though under the provisions of section 271 of the Income-tax Act of 1961 fixing the minimum rate of penalty, made applicable retrospectively by section 279(2)(g) of the said Act, the minimum penalty payable may be higher than under section 28 of the Act of 1922, as the maximum penalty is the s???me in both the cases and the overall burden of penalty has not been increased, the provisions of article 20(1) of the Constitution are not infringed. The applicability of the provisions of article 20(1) of the Constitution to provisions imposing penalty has not been considered. For the reasons set out supra, we find that article 20(1) of the Constitution is not applicable to the proceedings imposing penalty under the Income-tax Act. Therefore, the levy of penalty of Rs. 5,000 in this case which is less than the minimum provided under section 271(1)(c) of the Income-tax Act, 1961, is not justified.

14. We, therefore, answer the reference in the negative and against the assessee. The department will get its costs from the assessee. Advocate's fee Rs. 250.

Commissioner Of Income-Tax, A.P v. Maduri Rajeswar

Judgment Summary — Reference under section 256(1) of the Income-tax Act of 1961

Factual and Procedural Background

Legal Issues Presented

Arguments of the Parties

Table of Precedents Cited

Court's Reasoning and Analysis

Holding and Implications

Commissioner Of Income-Tax, A.P v. Maduri Rajeswar

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