S. Ranganthan, J.:— This is a reference under Section 256(1) of the Income Tax Act 1961 and relates to the assessment and the respondent assessee is Rejender Kumar Somani. The questions of law which have been referred to us for decision are as follows:

(1) Whether, on the facts and in the circumstances of the case, the Tribunal was right in holding that penalty proceedings had not been initiated correctly and thereby cancelling the levy of penalty under section 271(1)(a) of the Act of 1961.

(2) Whether, on the facts and in the circumstances of the case, the Tribunal was right in law in holding that proceedings for the imposition of penalty under Section 273 had not been validly initiated and thus cancelling the penalty levied under Section 273 of the Income-tax Act, 1961.

2. The facts leading to the reference may be briefly stated. For the assessment year 1959-60 the assessee should have filed an estimate under Section 18A of the Indian Income-tax Act, 1922 and paid advance tax but failed to do so. Its return of income under Section 22(1) of the Income-tax Act 1922 was also due to be filed by June, 1959 but was failed only on 5-8-1961. The Income-tax Officer completed the assessment of the assessee on 28-11-1963. At the bottom of the assessment order, after determining the total income at Rs 64,663, the Income Tax Officer observed:

“Penalty proceedings for not filing the return in time and for not paying the tax in advance by not complying the provisions of Section 18-A(3) of the I.T Act, 1922 are to be initiated separately.

3. The Income-tax Officer issued two notices to the assessee under Section 274 of the Income-tax Act 1961 calling upon him to show cause why penalties should not be levied under Section 273 of the Act for failure to pay advance tax and under section 271(1)(a) for the delay in the filing of the return. The assessee contended, inter alia, that the penalty proceedings had not been initiated in the course of assessment proceedings and were therefore invalid. This contention was rejected by the Income Tax Officer who held that penalty proceedings had been commenced on 28-11-1963 itself when the assessing officer had recorded the fact of initiation of penalty in his order under Section 23(3). He proceeded to consider whether there was reasonable cause for the failure on the part of the assessee to pay advance tax and file the return in time and came to the conclusion that the penalties were called for. He, therefore, imposed penalties of Rs 12,705 and Rs 4000 respectively under Section 271(1)(a) and Section 273 by separate orders dated 26-11-1975.

4. On appeal, the Appellate Assistant Commissioner agreed with the Income Tax Officer that the penalty proceedings had been initiated before the completion of the assessment proceedings. However, on the quantum of the penalty he gave some relief. He reduced the penalty under section 271(1)(a) to Rs 9,656 and that under Section 273 to Rs 2,033 only.

5. The assessee was not satisfied with the relief given by the Appellate Assistant Commissioner and preferred appeals to the Appellate Tribunal. Several contentions were raised before the Appellate Tribunal but, having regard to the terms of the questions referred to us, only one of the contentions is material. This contention# was that in the case of both the penalties, the proceedings had not been initiated in the course of assessment proceedings. It was pointed out that the penalty notices has been issued only after the assessment was completed and the demand notice issued and served on the assessee. This argument was accepted by the Tribunal. The Tribunal referred to the decision of the Madras High Court in case of Artisan Press v. Income Tax Appellate Tribunal (1958-33 I.T.R 670) (1). The Tribunal pointed out that in the instant case, the Income Tax Officer, in the assessment order, did not direct the office to issue any notice for penalty. The notices were not even served upon the assessee along with the assessment order and demand notice. The penalty proceedings had therefore not been initiated during the pendency of the assessment proceedings, and hence, in the view of the Tribunal, the levy of penalties had to be set aside. The Tribunal, therefore, allowed the appeals preferred by the assessee. Hence this reference.

6. Under the Indian Income Tax Act 1922 the imposition of penalty was governed by Section 28. Through, the penalty for failure to file an estimate and pay advance Tax was provided for in Section 18-A(9) of the Act, that provision only attracted, proceedings under Section 28. Section 28 did not impose any time limit for the passing of the penalty order. The penalty order could be passed at any time, though there have been some decisions in which orders of penalty passed after an unconscionably or unconscionably long lapse of time have not been upheld. All, that the section required was that Income Tax Officer (amongst others) could proceed to levy a penalty only if he was satisfied in the course of proceedings before him that the assessee had committed certain types of defaults such as: failure without reasonable cause to file a return; failure without sufficient cause to comply with statutory notices and concealing or furnishing of incorrect particulars of income. In other words the Act only required that before the assessment was completed the Income Tax Officer should have arrived at a prima facie conclusion that defaults of the above nature of any of them had been committed by the assessee. It was not necessary further that this conclusion of the Income Tax Officer must have been translated into action by initiation of steps against the assessee in this regard such as, issue of a penalty notice by the officer himself or issue of directions by the Income Tax officer for such issue. This position was explained by the decision of the Supreme Court in the case of CIT v. Argidi Chettiar 1962-44 I.T.R 739 (2) at Page 745 (SC).

7. The 1961 Act has changed the above position. A careful perusal of section 275 of this act shows that it has laid down bars of limitation in two respects, one explicity and the other by necessary implication. The explicit limitation is that the order imposing the penalty has to be passed within a particular time. While we are not concerned with that period of limitation here, it is necessary to notice that the period of limitation prescribed starts running from the “end of the Financial year in which the proceedings in the course of which action for imposition of penalty has been initiated, are completed”. Thus, indirectly but by necessary implications, the statute has also provided that the action for imposition of penalty must be initiated in the course of (as far as we are concerned) the assessment proceedings. It is thus not enough that the Income Tax Officer is satisfied in the course of the assessment proceedings that a case for penalty exists, it is further necessary that he should have initiated some action for imposition of penalty in the course of such proceedings. It depends on the facts of each case whether any such action has been initiated before the date of completion of the assessment. If, even before the completion of the assessment, the Income Tax Officer has issued a penalty notice, it is clear that he has taken necessary action for the imposition of penalty. The above condition can also be said to be satisfied where, though a penalty notice has not been issued before that date, it is seen that the officer had given a direction to his office before completing the assessment that such a notice should be issued similarly, in cases governed by Section 274(2) (which has been deleted w.e.f 1-4-1976), action could be considered to have been initiated if the officer had made a reference to the Inspecting Assistant Commissioner under that provision though the Inspecting Assistant Commissioner might apply his mind and issue a further notice to the assessee only long thereafter. But some definite step by way of initiation of penalty proceedings should be taken by the officer before the assessment proceedings come to an end.

8. The above position is quite clear from the terms of the section itself and has also been clarified in a number of decisions which have been collected on page 1225 of Vol. 1 of the 7th Edition of Ranga and Palkivala. It is necessary to set out all these decisions here. In the case of Artisan Press referred to by the Tribunal (1958-33 ITR 670), a penalty had been levied under the 1922 Act by the Income Tax Tribunal which it then had the power to do. On the language of the Section 28, it was necessary for the Tribunal to have been satisfied about the existence of a case for penalty before the proceedings by way of appeal before it had come to an end. It was held that a direction in the order sheet on the date of the hearing of the appeal “a notice is issued under Section 28” was sufficient compliance with the statutory requirement. Again in Manasvi's case 1969 72-ITR (3) (which has been confirmed by Supreme Court on different grounds) it was held that a direction in the assessment order for the issue of a notice for proposed penal under section 271(1) (a) was sufficient. The Delhi High Court in the case of Durga Timber v. I.T.O 1970-79 I.T.R 63(4) has also agreed with the above view.

9. In the present case, unfortunately, it seems to us that the requirements of the statute have not been fulfilled. There is no direction for issue of penalty notice in the assessment order. All that the Income Tax Officer has observed is that penalty proceedings are to be initiated separately these are words indicative not of a initiation of steps for levy of penalty but only of possible future initiation. On behalf of the department, Sri Mukherjee submitted that the words used in the assessment order should not be construed narrowly and that the sentence at the end of the assessment order (extracted earlier) should be treated as sufficient for the purpose. We are unable to accept this submission. As explained above, the language of Section 275 envisages some positive step on the part of the Income Tax Officer being taken before the completion of the assessment. In our opinion, it is not enough for the officer to record that penalty proceedings are to be or will be initiated separately. There should be some other step such as an actual direction to the office to issue a penalty notice (which thereafter needs only ministerial compliance), the actual issue of a penalty notice, a reference to the Inspecting Assistant Commissioner or some other similar action. It is also not without significance that in this case, though the assessment was completed on 28-11-1963, the penalty notices were issued by the Income Tax Officer only as late as 16-12-1963. As rightly pointed out by the Tribunal, in cases where the Income Tax Officer has initiated action during the Assessment proceedings the usual course is for the penalty notices to be issued and served simultaneously with the assessment order and demand notice. In the present case even that was not done. The penalty notices were served upon the assessee only after the service of assessment order and the demand notice. All these circumstances clearly justify the conclusion of the Tribunal that no action had been initiated in the course of the assessment proceedings for the levy of penalty. This conclusion of the Tribunal is one of fact based on the facts and circumstances of the case with which this court will not interfere in a reference.

10. For the above reasons, we have come to the conclusion that the questions referred to us have to be answered in the affirmative and in favour of the assessee. In the circumstance of the case, however, we make no orders to costs.

S.VReference answered in the affirmative