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Commissioner Of Income-Tax, Andhra Pradesh-Ii v. Chandulal

Andhra Pradesh High Court

Jul 27, 1984

Judgment

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Structured Summary of the Opinion (Anjaneyulu, J.)

Factual and Procedural Background

For the assessment year 1968-69 the assessee filed a return declaring business income of Rs. 2,321. During investigation the ITO found unrecorded money-lending advances made to five individuals aggregating Rs. 6,900, with a peak outstanding of Rs. 3,200 because of repayments and fresh advances. The ITO also found an unrecorded advance of Rs. 5,000 to Shri Miraz Ali Khan and Rs. 1,000 received as commission from Smt. Jamalunnisa Begum. The ITO included Rs. 9,200 in the assessee's total income (Rs. 8,200 loans + Rs. 1,000 commission). The assessment was confirmed on appeal and became final.

Prior to completion of assessment proceedings, the ITO issued a notice under s. 274 and initiated penalty proceedings under s. 271(1)(c) for concealment of income or furnishing inaccurate particulars. The ITO rejected the assessee's explanation that the Rs. 8,200 advances were out of winnings from card games, and levied penalty of Rs. 9,200. The AAC confirmed the penalty. On second appeal the Tribunal rejected most contentions but accepted the assessee's objection that the penalty notice was invalid because the ITO had not struck out the inappropriate portion (the notice mentioned both concealment and furnishing inaccurate particulars without striking either). Relying on Subramania Iyer v. Union of India (Kerala HC), the Tribunal held the notice vague/ambiguous and quashed the penalty. The Commissioner obtained a reference under s. 256(1) asking whether the Tribunal was justified in quashing the penalty order.

Legal Issues Presented

Whether, on the facts and in the circumstances of the case, the Appellate Tribunal was justified in law in quashing the order of penalty (the question referred under s. 256(1) of the Income-tax Act, 1961).
Whether the notice issued under s. 274 is invalid because the ITO did not strike out the portion relating either to concealment of income or to furnishing inaccurate particulars (i.e., whether non-striking renders the notice void for vagueness/ambiguity).
Whether the Explanation to s. 271(1)(c) is applicable in the facts of this case (particularly given the assessee's explanation that the advances were from winnings from card games) and whether the Tribunal erred in failing to consider that Explanation before quashing the penalty.

Arguments of the Parties

Revenue's Arguments (Respondent)

The penalty proceedings could not be held invalid merely because the ITO failed to strike out inappropriate portions of the s. 274 notice; the notice's purpose is to put the assessee on notice and secure his explanation.
The offence alleged could be both concealment and furnishing inaccurate particulars; the assessee's explanation (that advances were from card-game winnings) in itself amounted to furnishing inaccurate particulars, so there was no requirement to strike out portions of the notice.
The Tribunal erred in cancelling penalty proceedings; moreover, the Revenue urged before the Tribunal (for the first time) that the Explanation to s. 271(1)(c) applied to this case, and if applied the penalty was exigible.
The Revenue relied on a Patna High Court decision (Addl. CIT v. Prasadi Sao Rajendra Prasad) to argue that rejection of an explanation during assessment without further explanation in penalty proceedings may satisfy the Explanation to s. 271(1)(c).
Objections based on limitation and on the absence of sanction to levy penalty for deemed income under s. 69 were not sustainable (penalty was levied within two years as required; s. 69-deemed income is still subject to consequences including penalty).

Assessee's Arguments (Appellant)

The penalty notice was invalid because the ITO did not strike out the inapplicable part(s) — the notice referred both to concealment of income and furnishing inaccurate particulars without specifying which offence was alleged; reliance placed on Subramania Iyer v. Union of India (Kerala HC).
The Tribunal accepted the above and characterised the notice as vague/ambiguous (a “whimsical notice”), and quashed the penalty order on that ground.
Before the Tribunal the assessee also contended that the penalty could not be levied simply by disbelieving the explanation that the advances were from card-game winnings; further grounds before the court included limitation and that there was no sanction for levying penalty in respect of income deemed under s. 69 (both of which the High Court rejected).

Table of Precedents Cited

Precedent	Rule or Principle Cited For	Application by the Court
Subramania Iyer v. Union of India, [1974] 97 ITR 228 (Ker)	Authority relied on by the assessee to contend that a penalty notice is invalid if inappropriate portions are not struck off (notice rendered vague/ambiguous).	The Tribunal relied on this decision in quashing the penalty as the notice was held vague. The High Court perused the judgment but did not accept the proposition that mere non-striking off automatically invalidates the notice; it held that prejudice must be shown.
Tripaihi v. State Bank of India, (1984) 1 SCC 43 : AIR 1984 SC 273	Illustration of the flexibility of natural justice principles and that absence of opportunity requires a showing of prejudice.	The High Court referred to this Supreme Court authority to support the view that principles of natural justice are flexible and that mere procedural defects do not invalidate action unless prejudice is shown.
CIT v. Behara, [1976] 105 ITR 193 (Orissa)	Authority indicating it may be open to the Department/Tribunal to consider the applicability of the Explanation to s. 271(1)(c) even if invoked for the first time before the Tribunal.	The Tribunal relied on this decision to apply the Explanation to the facts and hold that penalty was exigible; the High Court cited the decision and accepted that the Tribunal could consider the Explanation, but found the Tribunal had not properly examined its applicability in the factual context.
CIT v. Bumgupalli China Krishnamurthy, [1980] 121 ITR 326 (AP)	Decision of this Court relevant to principles governing levy of penalty and the role of Explanation to s. 271(1)(c) (as cited in the opinion).	The High Court referred to this Court's earlier decision to indicate that the Tribunal should examine the applicability of the Explanation to the assessee's factual explanation (winnings from card games); the High Court found the Tribunal did not do so.
Commissioner Of Income Tax, West Bengal v. Anwar Ali, [1970] 76 ITR 696 (SC)	Part of the Supreme Court authorities cited by the assessee concerning principles governing levy of penalty under s. 271(1)(c).	The High Court noted the assessee relied on these Supreme Court decisions to argue penalty could not be levied merely by disbelief; the court directed the Tribunal to consider these precedents when re-hearing the matter on the Explanation point.
CIT v. Khoday Eswarasa and Sons, [1972] 83 ITR 369 (SC)	Another Supreme Court authority referenced by the assessee on principles applicable to levy of penalty under s. 271(1)(c).	The High Court observed these decisions form part of the legal principles the Tribunal should consider in evaluating the applicability of the Explanation; the Tribunal had not done so.
Commissioner Of Income-Tax, A.P v. Koduri Papa Rao, [1976] 102 ITR 834 (AP)	This Court's authority referred to on the principles applicable to levy of penalty and assessment of explanation.	The High Court referred to the decision as part of the body of authority that the Tribunal should consider when examining whether penalty can be levied despite disbelieving the assessee's explanation.
Addl. Commissioner Of Income-Tax, Bihar v. Prasadi Sao Rajendra Prasad, [1984] 145 ITR 504 (Pat)	Authority relied on by the Revenue to contend that rejection of explanation during assessment and absence of further explanation in penalty proceedings may satisfy the Explanation to s. 271(1)(c).	The High Court noted the Revenue's reliance on this decision but expressly declined to express any opinion on that point and instead directed the Tribunal to re-examine the matter in proper perspective.

Court's Reasoning and Analysis

The court proceeded in two main strands: (A) validity of the notice under s. 274 and (B) whether the Tribunal properly applied or considered the Explanation to s. 271(1)(c).

(A) On validity of the s. 274 notice

The court observed that the s. 274 notice is not a notice prescribed under rules but an administratively devised instrument whose object is to inform the assessee that penalty proceedings have been initiated and to enable the assessee to show cause. So long as that objective is accomplished, mere inapt language or the failure to strike out inapplicable portions does not automatically render the notice invalid.
The court emphasized the importance of whether the assessee was prejudiced by the manner of the notice. Natural justice under s. 274 requires opportunity to be heard, but the rules of natural justice are flexible and do not impose a rigid formula; to sustain a complaint of violation one must show prejudice.
Here the assessee (i) did not indicate any confusion on receipt of the notice, (ii) responded to the notice and gave explanations to the ITO without objecting to the notice's wording, and (iii) did not show that any prejudice occurred because of the notice's phrasing. The court treated the objection raised for the first time on appeal as an afterthought.
The court therefore concluded that non-striking of inappropriate portions did not in itself invalidate the notice; it is only where the notice fails to convey the gist of the offence and prejudice results that invalidity would follow. The court relied on the general principle (and cited Tripaihi) that prejudice must be shown.
Consequently the court upheld the Revenue's plea that the notice was valid and that the penalty order did not suffer a legal infirmity on this ground.

(B) On the Explanation to s. 271(1)(c) and the Tribunal's treatment

The Tribunal had, for the first time, allowed the Revenue to invoke the Explanation to s. 271(1)(c) and stated, citing the Orissa High Court in Behara, that it had no hesitation to apply the Explanation and hold penalty exigible.
The High Court found that the Tribunal's order did not disclose any examination of whether the Explanation was in fact applicable to the specific facts — particularly the assessee's explanation that the advances were from winnings of card games, which the ITO disbelieved.
The court noted that the Tribunal did not approach the problem from the perspective required by the authorities of this Court and the Supreme Court (cited Anwar Ali, Khoday Eswarasa and others), namely whether penalty can be levied merely by disbelief of the assessee's explanation and whether the Explanation would apply notwithstanding the explanation offered.
The High Court therefore directed that the Tribunal should re-hear the appeal, and examine properly whether the Explanation to s. 271(1)(c) is applicable, bearing in mind the relevant precedents and the specific explanation given by the assessee.

(C) On limitation and s. 69 contentions

The court rejected the assessee's contention that the penalty order was barred by limitation: assessment was on March 30, 1972 and penalty was passed on March 30, 1974, within two years as per pre-1971 law; the court did not need to consider the post-1971 amendments for this case.
The court also rejected the contention that there was no sanction to levy penalty in respect of income deemed under s. 69: once an amount is deemed to be income, consequences including levy of penalty under s. 271(1)(c) are available; the court found difficulty accepting that s. 69 would exclude such sanction.

Holding and Implications

Holding: The High Court held that the s. 274 notice in this case was valid and that the order of penalty did not suffer from legal infirmity on the ground that the ITO failed to strike out inappropriate portions. However, the court declined to finally answer the reference on the merits because the Tribunal had failed to properly examine whether the Explanation to s. 271(1)(c) applied to the facts of this case; accordingly the Tribunal was directed to re-hear the appeal and consider that question in proper perspective.

Implications:

Direct effect on the parties: The Tribunal's quashing of the penalty on the ground of invalid notice was not sustained by the High Court; the Tribunal must re-hear the appeal and determine whether the Explanation to s. 271(1)(c) applies (and thus whether penalty is exigible) after properly considering the assessee's explanation and relevant authorities.
No extensive new precedent was laid down by the court beyond affirming that (i) administrative s. 274 notices are not automatically void for non-striking of inapplicable portions and (ii) prejudice must be shown to invalidate proceedings for breach of natural justice. The court directed re-examination in light of existing authorities.
Costs: The court ordered "No costs."

Disposition recorded in the opinion: The court declined to answer the referred question because of procedural insufficiency in the Tribunal's reasoning and directed the Tribunal to re-hear and determine the applicability of the Explanation to s. 271(1)(c) in accordance with the guidance given.

Show all summary ...

Anjaneyulu, J.:— The Income-tax Appellate Tribunal has referred the following question of law for the opinion of this court under s. 256(1) of the I.T Act, 1961:

“Whether, on the facts and in the circumstances of the case, the Appellate Tribunal is justified in law in quashing the order of penalty?”

2. The matter relates to the income-tax assessment year 1968-69. The assessee filed a return declaring income of Rs. 2,321 from business. During the course of investigation, the ITO found that, in the previous year relevant to the assessment year 1968-69, the assessee advanced loans to five individuals aggregating to Rs. 6,900. These loans were not recorded in the assessee's books of account. The ITO observed that the peak amount of the loans advanced to the five individuals was Rs. 3,200 inasmuch as there were some repayments by the individuals and fresh advances. The ITO also found that a sum of Rs. 5,000 advanced to one Shri Miraz Ali Khan on August 10, 1967, was also not entered in the assessee's books of account. The ITO further found that a sum of Rs. 1,000 received from Smt. Jamal-unnisa Begunl by way of commission was also not accounted in the books. Thus, the ITO found that money-lending loans to the extent of Rs. 8,200 were not entered in the assessee's accounts apart from a sum of Rs. 1,000 received by way of commission from Smt. Jamalunnisa. Begum. The ITO included the sum of Rs. 9,200 in the assessee's total income for the assessment year 1968-69. The assessee carried the matter in appeal, but the assessment was confirmed and the matter became final.

3. Before the completion of the assessment proceedings, the ITO initiated proceedings for the levy of penalty for concealment of income or for furnishing inaccurate particulars of such income under s. 271(1)(c) of the I.T Act, 1961. The-assessee explained that the money-lending advances of Rs. 8,200 referred to above were made from out of the assessee's winnings in card games. It does not appear that any specific explanation was offered in respect of the sum of Rs. 1,000 received from Smt. Jamalunnisa Begum by way of commission. The ITO declined to accept the assessee's explanation that the money-lending advances of Rs. 8,200 were made from out of the assessee's winnings from card games. Accordingly, the ITO levied Rs. 9,200 under s. 271(1)(c) which is equivalent to the amount of income considered to have been concealed by the assessee.

4. The assessee appealed against the levy of penalty to the AAC who confirmed the order of the ITO levying the penalty and dismissed the appeal.

5. The assessee carried the matter in second appeal to the Income-tax Appellate Tribunal and raised a number of contentions both legal and factual. The Tribunal declined to accept most of the contentions raised by the assessee, but finally accepted one contention and that was regarding the validity of the penalty notice issued. The assessee urged before the Tribunal that the penalty notice issued by the ITO was invalid inasmuch as the ITO did not strike out inappropriate portions of the notice. The notice required the assessee to show cause why penalty should not be levied for concealment of income and also for furnishing inaccurate particulars of such income. In the notice issued by the ITO, both the items mentioned above, were kept without either of them being struck off. The assessee urged before the Tribunal that the penalty in this case was levied for alleged concealment of income and on account of the ITO not striking out the portion relating to furnishing of inaccurate particulars of the income, the notice issued by the ITO was rendered invalid and, consequently, the order of penalty is invalid in law. Reliance was placed by the assessee on the decision of the Kerala High Court in Subramania Iyer v. Union of India, [1974] 97 ITR 228 (Ker). The Tribunal found that the decision of the Kerala High Court supported the contention urged by the assessee. The Tribunal eventually held that the penalty notice issued by the ITO suffered from a serious infirmity of vagueness and ambiguity. The Tribunal characterised the notice issued by the ITO as a “whimsical notice”, following the principle laid down by the Kerala High Court. In that view of the matter, the Tribunal held the penalty proceedings to be invalid and quashed the penalty order passed by the ITO. The Commissioner then applied for and obtained the present reference for the opinion of this court.

6. The learned standing counsel, Sri M.S.N Murthy, contended that the penalty proceedings in the present case could not be considered to be invalid by reason of the fact that the ITO failed to strike out the inappropriate portions. According to the learned counsel, penalty was levied in the present case not only for concealment of income but also for furnishing inaccurate particulars of such income. The learned counsel contended that the explanation that the money-lending advances were made from out of the winnings from card games amounted to furnishing of inaccurate particulars of the assessee's income and, consequently, there is no necessity to strike out any portion of the notice issued under s. 274 by the ITO. The learned standing counsel, therefore, urged that the Tribunal erred in cancelling the penalty proceedings as invalid.

7. The learned counsel for the assessee, Sri Jagannatha Raju, supported the order of the Tribunal cancelling the order of penalty and placed reliance on the judgment of the Kerala High Court referred to above.

8. We are unable to subscribe to the view that by reason of the ITO not striking out inappropriate portions of the notice issued under s. 274, the notice issued was rendered invalid. In the first place, it has to be borne in mind that the notice issued under s. 274 is not prescribed under the rules. It is a notice administratively devised for the purpose of putting the assessee in the knowledge of the fact that the ITO initiated proceedings for levy of penalty in order to enable him to show cause why penalty should not be levied. So long as the object of putting the assessee in the awareness and knowledge of the initiation of the penalty proceedings is accomplished by the issuance of a notice, the question of invalidity does not arise on account of either inappropriate language in the notice or on account of any inappropriate portions of the notice not being struck off. There was no offence to any of the rules prescribed inasmuch as the notice is given to secure the assessee's explanation to fulfil the requirement of natural justice.

9. It is not in dispute that the assessee did not entertain any doubt in his mind when he received the notice issued by the ITO under s. 274. If the assessee was under a mistaken view about the real intent and effect of the notice issued, he could have asked the ITO to clarify whether the penalty proceedings were initiated for concealment of income or for furnishing inaccurate particulars of such income. In the present case, it is not denied that in the explanation given to the ITO in response to the notice issued under s. 274, the assessee did not raise any objection on the ground that the notice did not convey the nature of offence committed by him. No objection was also taken regarding the validity of the notice on that ground. It is, therefore, clear that the assessee was not under any misapprehension about the offence alleged against him. There was proper understanding and indeed, in the explanation filed, the assessee dealt with the reasons for contending that no penalty could be levied under s. 271(1)(c). It was not shown to us that any prejudice was caused to the assessee on account of the assessee not being put in the knowledge of the nature of offence committed by him., The contention regarding the validity of the notice was urged only during the course of the appeal before the Tribunal and it seems to us that the explanation was only an after-thought. The assessee certainly understood the offence alleged against him and showed cause to the ITO by pointing out the circumstances and urged that no penalty could be levied. This apart, we also agree with the learned counsel for the Revenue that the provisions of s. 274 would apply not only to concealment of income but also for furnishing inaccurate particulars of such income and where the offence is two-fold, there is no need on the part of the ITO to strike off any inappropriate portions. In the present case, the offence alleged against the assessee is that there is concealment of income and furnishing of inaccurate particulars of such income. It is not, therefore, necessary for the ITO to strike out any portion of the notice issued to him.

10. The principle of natural justice contained in s. 274 which requires that an assessee shall be heard before levying penalty under s. 271 is to ensure that the basic requirement of fair play in action is fulfilled. The rules of natural justice are flexible and cannot be put on any rigid formula. In-order to sustain a complaint of violation of principles of natural justice on the ground of absence of opportunity, it has to be established that prejudice has been caused to the party concerned by the procedure followed. We have already mentioned above that the assessee has not shown that any such prejudice has been caused to him. Attention may be invited in this connection to the decision of the Supreme Court in Tripaihi v. State Bank of India, (1984) 1 SCC 43 : AIR 1984 SC 273. We have perused the judgment of the Kerala High Court in Subramania Iyer v. Union of India, [1974] 97 ITR 228, on which the assessee has relied. With great respect, we are unable to agree that the mere non-striking off of the inappropriate portions in a notice renders the notice automatically invalid unless in a further enquiry in the matter it is shown that by reason of the notice not properly conveying the gist of the offence to the assessee, prejudice is caused to him. We cannot accept as a general proposition of law that in every case a notice is rendered invalid just because inappropriate portions in the notice are not struck off.

11. For the aforesaid reasons, we uphold the Revenue's plea that the notice issued under s. 274 of the I.T Act, in the present case, is perfectly valid and the order of penalty did not suffer from any legal infirmity.

12. The learned counsel for the assessee then contended that before the Tribunal the assessee contended that the explanation that the money-lending advances were made out of the assessee's winnings from card games was merely disbelieved and no penalty could be levied by merely disbelieving the explanation offered by the assessee.

13. Our attention has been invited to the following ground No. 5 urged in the grounds of appeal before the Tribunal:

“The assessee offered certain explanation. The explanation was rejected by the Income-tax Officer and penalty was levied. The Appellate Assistant Commissioner sustained it in spite of bringing to his notice the Supreme Court decision on the point.”

14. The learned counsel for the Revenue draws our attention to the order of the Tribunal where the Tribunal has considered the question. While the ITO levied the penalty under s. 271(1)(c), which was upheld by the AAC, the ground urged by the Revenue before the Tribunal was that the decisions of the Supreme Court governing the levy of penalty under the impugned provisions of s. 271(1)(c) will have no application in a case to which the provisions of the Explanation to s. 271(1)(c) are applicable. For the first time, the Revenue urged before the Tribunal that this is a case to which the Explanation could be applied and the penalty levied by the ITO sustained. We find from the Tribunal's order that the assessee took an objection to the Department being allowed to invoke the Explanation to s. 271(1)(c) for the first time before the Tribunal. The Tribunal referred to the judgment of the Orissa High Court in CIT v. Behara, [1976] 105 ITR 193, and held that it was open to the Revenue to require the Tribunal to consider the question of applying the Explanation to s. 271(1)(c) for the first time. After referring to the Orissa High Court's-judgment, the Tribunal came to the conclusion in the following terms:

“In the light of this judgment in [1976] 105 ITR 193, I have no hesitation to apply the Explanation to the facts of the present case and hold that, if so applied, penalty is clearly exigible.”

15. Apart from this abrupt conclusion, the order does not disclose that the Tribunal had occasion to consider whether the Explanation to s. 271(1)(c) is applicable at all. Reference may be made to the decision of this court in AMI. CIT v. Bumgupalli China Krishnamurthy, [1980] 121 ITR 326 (AP). The assessee explained that the money-lending advances were made from out of his winnings from card games. According to the assessee, the winnings from card games were not income liable to be taxed. By disbelieving this explanation, the ITO held that the sum of Rs. 8,200 (advances) was income liable to be taxed under the I.T Act. It is clear from the order of the Tribunal that the applicability of the Explanation to s. 271(1) was not examined at all from the point of view of the explanation given by the assessee. There is no finding that even if the explanation given by the assessee is unacceptable, still penalty can be levied by invoking the Explanation to s. 271(1). The assessee's grievance is that the principles enunciated by the Supreme Court in a number of decisions in Commissioner Of Income Tax, West Bengal v. Anwar Ali , [1970] 76 ITR 696 (SC), CIT v. Khoday Eswarasa and Sons, [1972] 83 ITR 369 (SC) and also by this court in Commissioner Of Income-Tax, A.P v. Koduri Papa Rao., [1976] 102 ITR 834 (AP) are applicable. The Tribunal did not examine the matter from the above point of view and came to an abrupt conclusion that the Explanation to s. 271(1) is applicable.

16. The learned counsel for the Revenue relies on the decision of the Patna High Court in Addl. Commissioner Of Income-Tax, Bihar v. Prasadi Sao Rajendra Prasad., [1984] 145 ITR 504 (Pat). According to the learned counsel, the Patna High Court has taken the view that if the explanation offered during the course of the assessment enquiry is unacceptable and no further explanation is forthcoming during the course of the penalty proceedings, that would constitute sufficient compliance with the requirements of the Explanation to s. 271(1). We express no opinion on this point as we are requiring the Tribunal to examine this matter, since it failed to do so in the order already passed, bearing in mind the judgments of this court as well as of other High Courts on the point. We, accordingly, direct the Tribunal to consider this question in proper perspective and determine the question whether the Explanation to s. 271(1)(c) is applicable while passing an order conformably to the judgment of this court under s. 260(1) of the Act.

17. The learned counsel for the assessee endeavoured to support the order of the Tribunal on certain grounds negatived by the Tribunal. The learned counsel stated that the order of penalty, in the present case, was barred by limitation. The learned counsel also contended that there is no sanction for the levy of penalty for concealment of income deemed under s. 69 of the I.T Act, 1961. We are not impressed with either of these contentions. As far as the limitation is concerned, we find that the assessment order was made on March 30, 1972, and the order of penalty was passed on March 30, 1974. The order was thus passed within two years from the date of the assessment order as per the provisions of law prior to the Taxation Laws (Amendment) Act, 1970, which came into effect from April 1, 1971. It is not necessary to consider the effect of the amended provisions because even under the unamended provisions, it is clear that the penalty was levied before the expiry of two years from the date of the assessment order. As regards the second contention regarding the deemed income, s. 69 enumerates the circumstances in which an amount can be deemed to be the assessee's income. Once the amount is deemed as income, all the necessary consequences by treating the said amount as income for purposes of law would necessarily follow. We find it difficult to accept the learned counsel's contention that the sanction to levy penalty under s. 271(1)(c) in respect of concealment of income or in respect of furnishing inaccurate particulars of such income, does not take in its sweep income deemed to be so under any of the provisions of the Act. We, therefore, reject these two contentions of the assessee.

18. We decline to answer the question referred to us as the Tribunal failed to deal properly with the question regarding the applicability of the Explanation to s. 271(1). The Tribunal shall re-hear the appeal in accordance with the directions given by us in para. 13 supra.

19. The reference is answered accordingly. No costs.