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Commissioner Of Income-Tax v. Dodsal Ltd.
Judgment Summary — F.I. Rebello, J.
Factual and Procedural Background
The court admitted two questions concerning the deletion of a penalty imposed under section 158BFA(2) of the Income-tax Act, 1961. The first question asked whether the Income-tax Appellate Tribunal (the Tribunal) was correct in deleting the penalty without appreciating that the assessee had failed to comply with the conditions in the first proviso to section 158BFA(2). The second question asked whether the Tribunal was correct in interpreting the condition in the first proviso as directory rather than mandatory.
The Commissioner of Income-tax (Appeals) (CIT(A)) by order dated October 15, 2003, allowed the assessee's appeal and cancelled the penalty under section 158BFA(2), having considered the assessee's explanation that tax had been paid on the undisclosed income before completion of the assessment and other reasons. On appeal, the Tribunal held the provision to be directory and not mandatory, concluding that the word "may" cannot be read as "shall". The present appeal challenged that legal interpretation. The court reviewed the statutory language of section 158BFA(2), noted that factual findings by CIT(A) and the Tribunal about reasons for delay were not assailed, and ultimately upheld the Tribunal's view that the section is directory. The appeal was disposed of.
Legal Issues Presented
- “Whether, on the facts and in the circumstances of the case and in law, the hon'ble Income-tax Appellate Tribunal is correct in deleting the penalty levied under section 158BFA(2) of the Income-tax Act, 1961, without appreciating the fact that the assessee has failed to comply with the conditions stipulated in the first proviso to section 158BFA(2) of the Income-tax Act, 1961?”
- “Whether, on the facts and in the circumstances of the case and in law, the hon'ble Income-tax Appellate Tribunal is correct in interpreting the condition stipulated in the first proviso to section 158BFA(2) of the Income-tax Act, 1961, as directory and not mandatory ?”
Arguments of the Parties
Revenue's Arguments
- The Revenue submitted that once the Assessing Officer (or the authority) concludes there is a breach of the mandate of section 158BFA(1), the penalty under section 158BFA(2) should be imposed—that is, the provision should be read as mandatory rather than discretionary.
Assessee's Arguments
- The assessee explained that tax on the undisclosed income had been paid before completion of the assessment and provided various reasons in support of deletion of the penalty; these explanations were considered by the CIT(A) and the Tribunal.
Table of Precedents Cited
| Precedent | Rule or Principle Cited For | Application by the Court |
|---|---|---|
| Cit, Bombay v. M/S Gwalior Rayon Silk Manufacturing Co. Ltd., [1992] 196 ITR 149 (SC) | The principle that expressions in a taxing statute are to be understood in a sense harmonious with the object of the statute to effectuate legislative intention; where language is plain and unambiguous it should be followed; tax laws should be interpreted reasonably, in consonance with justice, adopting a purposive approach. | The court relied on this authority to support a purposive and reasonable interpretation of section 158BFA(2), concluding that the statutory language and proviso indicated discretion rather than a mandatory imposition of penalty; this supported upholding the Tribunal's view. |
Court's Reasoning and Analysis
The court examined the language of section 158BFA(2), which provides that the Assessing Officer or the Commissioner (Appeals) "may direct that a person shall pay by way of penalty a sum which shall not be less than the amount of tax leviable but which shall not exceed three times the amount of tax so leviable in respect of the undisclosed income determined by the Assessing Officer under clause (c) of section 158BC." The court observed:
- The use of the word "may" in the opening clause demonstrates that the statute confers discretion on the Assessing Officer (or Commissioner (Appeals)) to direct payment of penalty.
- The proviso to the subsection clarifies that the specified minimum and maximum amounts apply only if the authority decides to impose a penalty; thus, the presence of the quantitative limits does not convert the initial discretion into a mandatory duty.
- The court rejected the Revenue's submission that once a breach of section 158BFA(1) is found the penalty must be imposed; the statutory wording and proviso do not compel that construction.
- The court invoked the established principle (citing the Supreme Court) that taxing statutes should be read in a way harmonious with legislative intent and interpreted reasonably and purposively; applying that principle here supports a directory construction.
- The CIT(A) and the Tribunal had recorded reasons for exercising their discretion in deleting the penalty, and those factual findings were not challenged by the Revenue before the court. Given the unchallenged findings of fact and the textual and purposive analysis, the court upheld the Tribunal's determination that the provision is directory.
Holding and Implications
Holding: The court upheld the Income-tax Appellate Tribunal's view that section 158BFA(2) of the Income-tax Act, 1961, is directory and not mandatory, and accordingly disposed of the appeal.
Implications:
- The practical effect is that the deletion of the penalty by the CIT(A) and the Tribunal stands in this case.
- The court emphasized that the statutory wording and the recorded exercise of discretion supported the outcome; no broader novel precedent was announced beyond applying established principles of interpretation of taxing statutes as cited. The opinion does not discuss wider implications beyond the direct effect on the parties.
F.I Rebello, J.:— Admit on the following two questions:
“(a) Whether, on the facts and in the circumstances of the case and in law, the hon'ble Income-tax Appellate Tribunal is correct in delet-ing the penalty levied under section 158BFA(2) of the Income-tax Act, 1961, without appreciating the fact that the assessee has failed to comply with the conditions stipulated in the first proviso to section 158BFA(2) of the Income-tax Act, 1961?
(b) Whether, on the facts and in the circumstances of the case and in law, the hon'ble Income-tax Appellate Tribunal is correct in inter-preting the condition stipulated in the first proviso to section 158BFA(2) of the Income-tax Act, 1961, as directory and not mandatory ?”
2. The Commissioner of Income-tax (Appeals) by his order dated October 15, 2003, allowed the appeal preferred by the assessee and cancelled the penalty under section 158BFA(2) of the Income-tax Act. While considering the deletion of penalty, the Commissioner of Income-tax (Appeals) considered the explanation given by the assessee that tax had been paid on the undisclosed income before the completion of the assessment. Various other reasons have also been rendered.
3. In the appeal before the Income-tax Appellate Tribunal, the learned Tribunal in paragraph 3.4 after considering the terminology of the section was pleased to hold that the power conferred is directory and not mandatory and that the word “may” cannot be read as “shall”.
4. The learned Tribunal also has considered the reasons as to why the penalty should not be invoked.
5. In the present appeal, the findings of fact by the Income-tax Appellate Tribunal and the Commissioner of Income-tax (Appeals) regarding reasons for delay in paying tax have not been assailed. The only question raised before us is whether the said provision is directory or mandatory. We have perused the relevant provision which read as under:
“158BFA.(2) The Assessing Officer or the Commissioner (Appeals), in the course of any proceedings under this Chapter, may direct that a person shall pay by way of penalty a sum which shall not be less than the amount of tax leviable but which shall not exceed three times the amount of tax so leviable in respect of the undisclosed income deter-mined by the Assessing Officer under clause (c) of section 158BC.”
6. The language used under section 158BFA(2) is “may direct the person shall pay by way of penalty a sum which shall not be less than the amount of tax leviable but which shall not exceed three times the amount of tax so leviable in respect of the undisclosed income determined by the Assessing Officer under clause (c) of section 158BC.”
7. The terminology of the said section makes it clear that there is a discretion in the Assessing Officer to direct payment of penalty. The proviso supports this interpretation. Only if the authority decides to impose penalty then, it will not be less than the tax leviable but shall not exceed three times the tax so leviable. It is, therefore, not possible to accept the submission on behalf of the Revenue that once the Assessing Officer comes to the conclusion that there is a breach of the mandate of section 158BFA(1), then the penalty should be imposed. Merely because the expression used is shall not be less than the amount of tax leviable or not exceeding three times the tax, does not result in reading the first part of the section as mandatory. The proviso to the sub section makes it clear that there is discretion conferred on the Commissioner (Appeals) for the rea-sons which are set out therein. Whilst considering the taxing statute, the Supreme Court has held that it is settled law that the expressions used in a taxing statute would ordinarily be understood in the sense in which it is harmonious with the object of the statute to effectuate the legislative inten-tion. It is equally settled law that, if the language is plain and unambi-guous, one can look fairly at the language used and interpret it to give effect to the legislative intention. Tax laws, nevertheless, have to be inter-preted reasonably and in consonance with justice adopting a purposive approach. See Cit, Bombay v. M/S Gwalior Rayon Silk Manufacturing Co. Ltd., [1992] 196 ITR 149 (SC). In the instant case, both the Commissioner of Income-tax (Appeals) and the Income-tax Appellate Tribunal have recorded reasons for exercise of their discretion. Before us, the Revenue has not challenged the said finding of fact as to the exercise of discretionary power. We, therefore, uphold the view taken by Income-tax Appellate Tribunal that the section is directory and not mandatory.
8. In the light of that, the question as framed would not arise. Conse-quently, appeal disposed of.
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