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Additional Commissioner Of Income-Tax, Madras-1 v. P. Nammalvar Naidu & Sons
Structured Summary of the Court's Opinion (P. Govindan Nair, C.J.)
Factual and Procedural Background
The reference arises from two questions concerning the computation and reduction of penalties for the assessment years 1958–59, 1960–61, 1961–62, 1962–63 and 1963–64 for the same assessee.
The assessee submitted a settlement proposal to the Commissioner of Income-tax (CIT) dated 11 May 1968, which included a request that "in view of the voluntary nature of the disclosure, no penal proceedings may be taken." A negotiated settlement (typed papers at page 33 of the case) contained clause (e) providing for penalty treatment: a penalty of 5% of the tax relatable to the amount capitalised and a further penalty of 10% of the tax attributable to intangible additions set off; and it recorded that the Income-tax Officer (ITO) should initiate penalty proceedings and refer the matter to the Commissioner for orders under section 271(4A).
The assessee failed to pay tax in accordance with agreed instalments. The ITO informed the Inspecting Assistant Commissioner (IAC) that the assessee's request for reduction of penalty should be rejected. The IAC on 12 April 1971 reiterated that the request for reduction should be rejected. The Commissioner, on 15 April 1971, approved the IAC's proposal and stated that imposition of the minimum penalty under section 271(1)(c) for the years 1958–64 was in order. Minimum penalties were thus imposed.
Appeals to the Additional Assistant Commissioner (AAC) failed. On appeal to the Tribunal, the Tribunal found there was no order passed under section 271(4A) but nonetheless allowed the assessee's appeals on the ground that promissory estoppel applied, limiting penalty to the 5% mentioned in clause (e) of the settlement. The present reference asks the High Court to answer two specific questions about whether the Tribunal was justified in computing penalties per clause (e) and, if not, whether the Tribunal erred in reducing the penalties.
Legal Issues Presented
- Whether, on the facts and in the circumstances of the case, the Tribunal was justified in holding that the quantum of the penalty leviable for each of the assessment years 1958–59, 1960–61, 1961–62, 1962–63 and 1963–64 had to be computed on the basis set out in clause (e) of the letter of the Commissioner of Income-tax dated 3rd March, 1969, addressed to the Income-tax Officer?
- If the answer to question No. 1 is in the negative, whether the Tribunal was in error in reducing the penalties as imposed by the Inspecting Assistant Commissioner for each of the assessment years involved?
Arguments of the Parties
Assessee's Arguments
- The assessee (through counsel and its chartered accountant) relied on clause (e) of the settlement dated 3rd March 1969, which, they contended, either amounted to or reflected an order by the Commissioner reducing penalties to 5% (and 10% in part), such that the Tribunal could apply that settlement to limit the penalty.
- Counsel for the assessee also contended that section 271(4A) did not contemplate any specific formal order (relying on a decision of the Jammu & Kashmir High Court in Fairdeal Motors v. CIT), i.e., that no particular formality was required to effect a reduction or waiver under that subsection.
- The assessee relied on the settlement terms and the acts of the Commissioner as providing grounds to restrict penalty liability per the settlement.
Other Parties / Respondent
The opinion does not contain a detailed account of the respondent's (revenue's) legal arguments in the same structured form as the assessee's contentions. The record does show administrative steps taken by revenue officers (ITO/IAC/Commissioner) to impose minimum penalties and to reject the assessee's request for reduction, but the text does not set out a party-by-party, point-by-point argument from the revenue in prosecutable argumentative form.
Table of Precedents Cited
| Precedent | Rule or Principle Cited For | Application by the Court |
|---|---|---|
| Fairdeal Motors v. CIT, (1975) 101 ITR 687 (Jammu & Kashmir High Court) | Held (as noted by counsel for assessee) that s.271(4A) does not contemplate a specific formal order in any particular form. | The court rejected the approach in this decision and held, with respect, that the Fairdeal Motors view was incorrect because the statutory language (with proviso and sub-s. (4B)) and the need to advert to conditions require a formal order under s.271(4A). |
| Union of India v. Anglo-Afghan Agencies, AIR 1968 SC 718 | Enunciation by the Supreme Court of the principle of promissory estoppel as applied to government/administrative representations. | The court cited this authority as establishing the rule of promissory estoppel, but held that the principle cannot be used to override or get around statutory compulsion ("there can be no estoppel against a statute"). |
| Century Spg. & Mfg. Co. v. Ulhasnagar Municipal Council, (1970) 1 SCC 582; AIR 1971 SC 1021 | Reiterated the Supreme Court's formulation of promissory estoppel. | Used to support the proposition that promissory estoppel exists in principle but cannot be invoked to nullify statutory provisions. |
| Assistant Custodian of Evacuee Property v. Brij Kishore Agarwala, (1975) 1 SCC 21; AIR 1974 SC 2325 | Held that principles of estoppel cannot be employed to override statutory provisions. | Relied upon to show that settlements or representations cannot be used to displace mandatory statutory provisions (supporting the court's view that estoppel cannot be pressed against the statute). |
| Excise Commissioner v. Ram Kumar, (1976) 3 SCC 540; AIR 1976 SC 2237 | Affirmed that estoppel-based principles do not apply to defeat express statutory provisions. | Applied to reinforce the conclusion that the settlement cannot be used to avoid or limit penalties mandated by statute. |
| Howell v. Falmouth Boat Construction Co. Ltd., [1951] AC 837 (House of Lords) | Illustrated at common-law level the principle that estoppel cannot be used against a statute. | Referred to as a supporting authority (from the House of Lords) for the same general proposition that estoppel cannot displace statutory obligations. |
Court's Reasoning and Analysis
The court proceeded on the factual finding accepted from the Tribunal that no formal order under section 271(4A) had in fact been passed. It considered whether the settlement's clause (e) could be treated as amounting to a formal order or otherwise as binding such that penalty could be reduced in accordance with the settlement terms.
On the interpretation of section 271(4A), the court analyzed the statutory text and context. Although sub-s. (4A) uses the terms "reduce" or "waive" and does not itself contain detailed formalities, the court observed that the proviso to sub-s. (4A) and sub-s. (4B) explicitly refer to "an order under sub-s. (4A)". From this textual interplay the court concluded that the statute contemplates a formal order: an authority (whether ITO or IAC, depending on quantum) vested with power to waive or reduce must express a considered decision in a formal, speaking order that advertises the statutory conditions and the reasons why reduction or waiver is granted.
The court emphasized the necessity of a "speaking order" because the power to reduce or waive minimum penalty is a statutory power whose exercise must show that the relevant conditions were examined and applied. Additionally, such orders are subject to appellate review, reinforcing the need for a clear formal record demonstrating that the statutory criteria were considered.
The court then addressed the Tribunal's reliance on promissory estoppel. It accepted the settled principle from the Supreme Court (Union of India v. Anglo-Afghan Agencies and Century Spg. & Mfg. Co.) that promissory estoppel may operate against government representations in appropriate circumstances, but reaffirmed the corollary that "there can be no estoppel against a statute." The court cited further Supreme Court decisions (Brij Kishore Agarwala and Ram Kumar) and an English authority (Howell) to support its view that the principle of estoppel cannot be invoked to nullify or avoid mandatory statutory provisions such as clause (iii) of section 271(1)(c).
Applying these legal principles to the facts, the court held that using the settlement to displace the statutory minimum penalty imposed by section 271(1)(c)(iii) would amount to pleading estoppel against the statute. Because no formal order under section 271(4A) had been passed, and because the statutory scheme requires such an order for any reduction/waiver, the Tribunal was not justified in reducing penalties to the rates stated in clause (e) of the settlement by invoking promissory estoppel.
The court also observed, as a matter of administrative practice, that it had been represented to them that formal orders under s.271(4A) were not customarily passed, and invited Commissioners to rectify that omission in other cases; however, the court made clear this administrative observation did not affect its statutory interpretation.
Holding and Implications
Holding: The court answered the first referred question in the negative and the second question in the affirmative. In precise terms:
- Answer to Question 1: The Tribunal was not justified in holding that the quantum of penalty for the assessment years in question should be computed on the basis set out in clause (e) of the CIT's letter of 3rd March 1969.
- Answer to Question 2: The Tribunal erred in reducing the penalties as it did; the reduction based on promissory estoppel was incorrect in the absence of a formal order under section 271(4A).
Consequences and practical effects:
- The Tribunal's decision to reduce penalties to the rates in clause (e) is disapproved; the statutory minimum penalties under section 271(1)(c) remain applicable unless and until a proper order under section 271(4A) is validly passed.
- The parties were directed to bear their respective costs.
- The court noted the administrative implication that Commissioners should, where appropriate, pass formal orders under section 271(4A) to regularize any past informal settlements that purported to affect statutory penalties; the court urged early rectification but made no order beyond the present reference.
Direct effect on the parties: The answers favor the revenue and against the assessee; the Tribunal's allowance of the reduction was set aside and the statutory minimum penalties are upheld unless validly reduced by a formal order under s.271(4A).
The court directed that a copy of this judgment under the court's seal and the Registrar's signature be sent to the Tribunal.
P. Govindan Nair, C.J:— Two questions have been referred to this court for our opinion relating to the assessment years 1958–59, 1960–61, 1961–62, 1962–63 and 1963–64, pertaining to the same assessee. The questions read as follows:
“(1) Whether, on the facts and in the circumstances of the case, the Tribunal was justified in holding that the quantum of the penalty leviable for each of the assessment years 1958–59, 1960–61, 1961–62, 1962–63 and 1963–64, had to be computed on the basis set out in clause (e) of the letter of the Commissioner of Income-tax dated 3rd March, 1969, addressed to the Income-tax Officer?
2. If the answer to question No. 1 is in the negative, whether the Tribunal was in error in reducing the penalties as imposed by the Inspecting Assistant Commissioner for each of the assessment years involved?”
2. The relevant facts that have to be stated for the purpose of answering these questions can be summarised thus. The assessee made a proposal to the CIT on May 11, 1968, for a settlement. In para. 7 of that proposal there is the following statement:
“It is requested that, in view of the voluntary nature of the disclosure, no penal proceedings may be taken.”
3. The matter was discussed with the chartered accountant representing the assessee and one of the partners of the firm, which is the assessee, and a settlement was reached, the terms of which are seen from the typed set of papers at page 33 of the case. Clause (e) of the settlement in relation to the penalty with which we are concerned reads as follows:
“(e) Penalty: A penalty of 5% of the tax rdatable to the amount capitalised and a further penalty of 10% of the tax attributable to the intangible additions set off are called for. The Income-tax Officer is requested to initiate penalty proceedings and then refer the matter to the Commissioner for orders under section 271(4A).”
4. It appears that the assessee did not pay the tax in accordance with the instalments agreed upon by him and which has been recorded by the Commissioner. The ITO, therefore, wrote to the IAC pointing out the circumstances and stated that the assessee's request for reduction of the penalty was only to be rejected. The IAC thereupon, on April 12, 1971, wrote to the Commissioner stating:
“I see no reason for modifying my earlier recommendation that the assessee's request for reduction of the penalty must need be rejected.”
5. The Commissioner promptly replied on April 15, 1971, in these terms:
“The Inspecting Assistant Commissioner's proposal to impose the minimum penalty under section 271(1)(c) for the assessment years 1958–59 to 1963–64 is in order and is approved.”
6. Thereupon, minimum penalties were imposed for all the assessment years already mentioned on the assessee. The appeals before the AAC failed. The matter thereafter went up to the Tribunal. In the appeals taken by the assessee, the Tribunal came to the conclusion that there was no order under s. 271(4A) of the I.T Act, 1961 (for short “the Act”). Nevertheless it allowed the appeals on the basis that the principle of promissory estoppel would apply and that penalty only to the extent of 5% mentioned in cl. (e) of the settlement, to which we have already adverted, can be imposed on the assessee. On the basis of the finding entered by the Tribunal, we must proceed in this case on the basis that there has been no order under s. 271(4A) of the Act. Counsel invited our attention to cl. (e) of the settlement and contended that what is stated therein amounts to an order, as if the matter is open for consideration in this reference. Anyway, without deciding the question whether this report is open for consideration or not, we shall deal with the contention of the counsel for the assessee. He is supported in the submission that the Commissioner contemplated a reduction of the penalty from 20% to 5% in certain cases and 10% in other cases as is seen from cl. (e) of the settlement which we have extracted above. But the same paragraph also indicated that the Commissioner wanted to pass an order under s. 271(4A) of the Act. Regarding that aspect he had stated that the penalty proceedings must be initiated by the ITO and that the ITO should refer the matter to the Commissioner in order that the Commissioner may pass an order under s. 271(4A). In the face of these categorical statements in cl. (e) of the settlement, it appears to us to be impossible to say that we can spell out an order which had never been passed.
7. The question would then arise whether there should be an order at all under s. 271(4A) of the Act. Counsel for the assessee contended that the section does not contemplate or envisage any specific order. Our attention was drawn to the decision of the Jammu and Kashmir High Court in Fairdeal Motors v. CIT, [1975] 101 ITR 687. This decision, no doubt sup ports the assessee, for, the section does not contemplate any order in any particular form. With great respect, we are unable to agree with this decision. A reading of s. 271(4A) leaves no doubt in our mind that there must be an order. The proviso to sub-s. (4A) as well as sub-s. (4B) in clear terms refer to an order under sub-s. (4A) though the sub-section starts by using the words “reduce” or waive the amount of minimum penalty imposable on a person under cl. (i) of subs. (1) and “reduce” or waive the amount of minimum penalty imposable on a person under cl. (iii) of sub-s. (1) and does not in sub-s. (4A) refer to any order. When the sub-section is read with the wording of the proviso and the wording of sub-s. (4B) there can be no doubt whatever that there should be an order under sub-s. (4A). Apart from trying to spell out the need for an order by referring to the proviso and sub-s. (4B) we would like to add that when power is given to the Com missioner, as has been done by sub-s. (4A), to waive or reduce provided certain conditions are satisfied, there must be advertence to those conditions and expression of opinion as to whether those conditions have been satisfied, and a formal expression in the form of an order that there has been waiver or reduction and to what extent, is necessary. This can only be done by means of an order. Every statutory authority conferred with power to do certain things must act in accordance with the statute. Since these orders are subject to scrutiny by higher authorities either in appeal or in refer ences, the order must be a speaking order and must indicate on the face of it that the mind had been applied to the factors which must be taken into account before orders are passed and there must be a clear formal expres sion that certain things had been done as envisaged by the sub-section. We are, therefore, of the opinion that there must be a formal order. The rigour and the compulsion of s. 271(1)(c)(iii) cannot be reduced or removed without an order. The section is in these terms:
“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.”
8. In fact, as we see it, the authority who is entitled to pass the order, whether it be the ITO or the IAC, depending upon the quantum of penalty to be imposed, would be obliged to act in accordance with the section because of the statutory obligation cast on the authorities. He will have no jurisdiction to act otherwise. The above obligation would cease to exist only if an order had been passed under s. 271(4A).
9. We are informed by counsel that it has never been the practice to pass any formal order under s. 271(4A) and that this statement of the law would affect a number of other assessees who have got the benefit of the settlement and in whose favour no formal orders had been passed. We trust the Commissioner or Commissioners will take note of this judgment and take very early steps to rectify this omission and pass orders. This aspect, however, should not delay us and affect us in interpreting the section as we understand it. We have no alternative but to read the section as we see it and give it the meaning which is in consonance with the words used in the section and interpreting the section in the light of established principles.
10. The rule of promissory estoppel, which has been envisaged by the Supreme Court first in the decision reported in Union of India v. Anglo-Afghan Agencies, AIR 1968 SC 718, and reiterated in Century Spg. & Mfg. Co. v. Ulhasnagar Municipal Council, (1970) 1 SCC 582 : AIR 1971 SC 1021, will not apply to a situation where there is a statutory compulsion. In other words, an estoppel cannot be pressed into service against the terms of a statute; “there can be no estoppel against a statute” is the general expression that is used. Counsel for the assessee did not contend before us that this proposition is not applicable or should be whittled down. What he contended was that he is not pleading estoppel against any statute in this case. As we see it, the settlement relied on is sought to be used for the purpose of taking away the provisions of cl. (iii) of s. 271(1)(c). This amounts to pleading an estoppel against a statute. The Supreme Court has ruled in the decision reported in Assistant Custodian of Evacuee Property v. Brij Kishore Agarwala, (1975) 1 SCC 21 : AIR 1974 SC 2325, and in Excise Commissioner v. Ram Kumar, (1976) 3 SCC 540 : AIR 1976 SC 2237, that the principle enunciated in the earlier decisions, to which we referred, are not applicable for the purpose of getting over the provisions of a statute. That is the view taken by the House of Lords too in Howell v. Falmouth Boat Construction Co. Ltd., [1951] AC 837. The principle is too well known and so does not need any further illustration by quoting from the judgment of the Supreme Court or from the judgment of the House of Lords. In the light of the above, we have to answer the first question that has been referred to us in the negative. The Tribunal was not justified in holding that the penalty levied which was based on the minimum penalty which should be imposed by the statute for the years 1958–59, 1960–61, 1961–62, 1962–63 and 1963–64 should be reduced to what is stated in cl. (e) of the letter of the CIT dated 3rd March, 1969. We, therefore, answer the first question in favour of the revenue and against the assessee. We answer the second question in the affirmative; the Tribunal has erred. We direct the parties to bear their respective costs.
11. A copy of this judgment under the seal of this court and the signature of the Registrar will be sent to the Tribunal.
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