Commissioner Of Income-Tax, Gujarat I v. Lakhdhir Lalji

Divan, J.:— The assessee is a partnership firm and the assessment year is 1963-64, the relevant accounting year being S.Y 2018. The Income-tax Officer passed the final order in assessment proceedings against the assessee on March 31, 1964; and he came to the conclusion that the assessee-firm, which deals in garlic, had not shown 1,383 bags of garlic in the stock register as part of the stock at the end of the year of account. The Income-tax Officer came to the conclusion that these 1,383 bags of garlic were sold out and out by the assessee and the sale proceeds were not disclosed as part of the income of the assessee-firm for the accounting year. Under these circmmstances, he added a sum of Rs. 58,000 as income which had been concealed by the assessee. He assessed the assessee-firm accordingly and he also issued a notice under section 274 for concealment of income. Against this assessment order the assessee appealed to the Appellate Assistant Commissioner. That officer came to the conclusion that there was no sale out and out of 1,383 bags as had been held by the Income-tax Officer but he came to the conclusion that those 1,383 bags were included in the stock, but the assessee had under-valued its stock. The Appellate Assistant Commissioner came to the conclusion that ton the footing of under-valuation of the stock held by the assessee at the end of the accounting year, a sum of Rs. 34,000 should be added and not the sum of Rs. 58,000 as had been done by the Income-tax Officer. Against the decision of the Appellate Assistant Commissioner there was a further appeal to the Tribunal and the Tribunal by its order, dated February 20, 1967, held that there was under-valuation of the stock but on this footing, according to the Tribunal, an amount of Rs. 20,213 should be added to the income as shown in the return and not the sum of Rs. 34,000 nor a sum of Rs. 58,000 as had been done by the Appellate Assistant Commissioner and the Income-tax Officer, respectively.

2. In the meanwhile penalty proceedings for concealment of income were initiated by the Income-tax Officer by the issue of the notice under section 274 and in these proceedings it was found that the penalty which the assessee would be called upon to pay was more than Rs. 1,000, and, therefore, the case was referred by the Income-tax Officer to the Inspecting Assistant Commissioner. By the time the Inspecting Assistant Commissioner disposed of the penalty matter, the Appellate Assistant Commissioner had already disposed of the appeal in assessment proceedings and the Inspecting Assistant Commissioner took a note of the fact that the finding of the Income-tax Officer that there had been a sale out and out of 1,383 bags had been set aside by the Appellate Assistant Commissioner in the assessment proceedings. The Inspecting Assistant Commissioner, however, held that there was a concealment of income by under-valuation of stock and he came to the conclusion that the assessee deliberately concealed this fact from the Income-tax Officer and as such deliberately furnished inaccurate particulars in its return of income. The Inspecting Assistant Commissioner, therefore, held that the provisions of section 271(1)(c) were clearly attracted and that the penalty be levied. He imposed a penalty of Rs. 7,500. Against this order of the Inspecting Assistant Commissioner levying the penalty of Rs. 7,500, there was an appeal to the Income-tax Tribunal and the contention on behalf of the assessee at the time of that appeal was that the Inspecting Assistant Commissioner had no jurisdiction to impose the penalty under section 271(1)(c). It was contended in this connection before the Tribunal that under section 271(1)(c) a penalty for concealment of income could be imposed by the Inspecting Assistant Commissioner only if the Income-tax Officer in the course of any proceedings before him is satisfied that there was concealment of income; but that in a case where a finding in regard to concealment of income was recorded by the Appellate Assistant Commissioner and not by the Income-tax Officer, the jurisdiction to impose penalty, if any, lay with the Appellate Assistant Commissioner and not with the Inspecting Assistant Commissioner. The Tribunal upheld this contention and held that the jurisdiction of the Inspecting Assistant Commissioner in regard to the imposition of penalty was restricted to those items of concealment of income in regard to which the Income-tax Officer was satisfied that there was concealment of income. The Tribunal, therefore, held that the order of the Inspecting Assistant Commissioner imposing penalty for concealment was without jurisdiction and it, therefore, allowed the appeal and set aside the order levying the penalty. Thereafter, at the instance of the revenue, the following question has been referred to this High Court:

“Whether, on the facts and in the circumstance 3 of the case, it was competent in law for the Inspecting Assistant Commissioner of Income-tax to impose penalty under section 271(1)(c) for concealment of income?”

3. In order to appreciate the contentions urged in this connection, it is important to note some of the provisions of the Income-tax Act, 1961 (hereinafter referred to as “the Act”). Under section 271(1), if the Income-tax Officer or the Appellate Assistant Commissioner in the course of any proceedings under this Act is satisfied that any person has concealed the particulars of his income or deliberately furnished inaccurate particulars of such income, he may direct certain penalties to be levied. The procedure for levying of penalty has been laid down in section 274; and sub-section (1) of that section provides that no order imposing a penalty under Chapter XXI (which contains sections 270 to 275) shall be made unless the assessee has been heard or has been given reasonable opportunity of being heard. Under sub-section (2), notwithstanding anything contained in clause (iii) of sub-section (1) of section 271, if in a case falling under clause (c) of that sub-section, the minimum penalty imposable exceeds a sum of Rs. 1,000, the Income-tax Officer shall refer the case to the Inspecting Assistant Commissioner who shall, for the purpose, have all the powers conferred under Chapter XXI for the imposition of penalty; and under sub-section (3), an Appellate Assistant Commissioner, on making an order under this Chapter imposing a penalty, spall forthwith send a copy of the same to the Income-tax Officer. It is important to note that under section 275, no order imposing the penalty under Chapter XXI can be passed after the expiration of two years from the date of the completion of the proceedings in the course of which the proceedings for imposition of penalty have been commenced. The Explanation to section 275 is not material for the purpose of this judgment.

4. It is clear from these provisions of sections 271, 274 and 275 that it is open to the Income-tax Officer or the Appellate Assistant Commissioner in the course of assessment proceedings with which that particular officer is dealing, to direct that a person who has concealed the particulars of his income or furnished inaccurate particulars of his income shall pay the penalty contemplated by Chapter XXI. The satisfaction at the time of taking the decision that penalty proceedings should be directed is a prima facie satisfaction and the prima facie satisfaction must be that the person concerned has concealed the particulars of his income or furnished inaccurate particulars of his income. It is true that once that prima facie satisfaction has been arrived at both the Income-tax Officer and the Appellate Assistant Commissioner derive the jurisdiction under section 271 to commence the penalty proceedings. But, under section 274 the order imposing the penalty can only be passed after the assessee has been given a reasonable opportunity of being heard. As a part of that reasonable opportunity of being heard, the assessee must be told as to what is the particular satisfaction the Income-tax Officer or the Appellate Assistant Commissioner, as the case may be, has arrived at, viz., whether the satisfaction is that the assessee has concealed the particulars of his income or whether the satisfaction is that he has furnished inaccurate particulars of such income. It is possible that the notice under section 271(1)(b) merely may set out the two grounds but such notice will have to be read with reference to the assessment order and by reading the notice for the commencement of penalty proceedings and the assessment order together, it will be possible for the assessee concerned to ascertain as to whether the charge against him is of concealment of the particulars of his income or whether the charge is of furnishing inaccurate particulars of his income. In the instant case, the notice for penalty proceedings was directed to be issued by the Income-tax Officer by including the following sentence in the assessment order:

“Issue notice under section 274 for concealment of income”.

5. This direction for commencement of penalty proceedings was issued on the footing of the conclusion that the Income-tax Officer had arrived at, viz., that the assessee had sold out 1,383 bags of garlic and had thus concealed the income of Rs. 58,000. In the assessment proceedings, the Income-tax Officer added this sum of Rs. 58,000 as concealed income and passed the assessment order accordingly. By the time the Inspecting Assistant Commissioner dealt with the penalty proceedings by virtue of the reference made to him by virtue of section 274(2), the Appellate Assistant Commissioner had already heard the appeal in the assessment proceedings and it was pointed out by the Inspecting Assistant Commissioner in the course of the penalty proceedings that the Appellate Assistant Commissioner had allowed the appeal and in paragraph 4 of the order of the Inspecting Assistant Commissioner it has been pointed out:

“The learned Appellate Assistant Commissioner, however, retained the addition on the ground that there was under-valuation of closing stock and not on the ground of suppressed sales as originally held by the Income-tax Officer.”

6. In paragraphs 9 and 10 of his order, the Inspecting Assistant Commissioner has observed:

“9. From these admitted facts, it was clear before the Income-tax Officer that the assessee had concealed particulars of income either by suppressing the sales or by furnishing the inaccurate particulars of the closing stock. As such, he was satisfied that action under section 271(1)(c) was called for and proceedings were validly initiated.

10. From the above facts, it is also evident that the knowledge that the value of the closing stock was wrongly put was with the assessee and he deliberately concealed this fact from the Income-tax Officer and as such deliberately furnished inaccurate particulars in his return of income submitted to the department.”

7. Thus the Inspecting Assistant Commissioner has clearly proceeded on the footing that the assessee had furnished inaccurate particulars of his income as distinguished from concealment of the particulars of the income. The notice issued by the Income-tax Officer on the strength of which the proceedings which ultimately were disposed of by the Inspecting Assistant Commissioner were commenced, started on the footing that there was concealment of income by suppression of sales of 1,383 bags of garlic out and out. The conclusion of the Inspecting Assistant Commissioner was that there was furnishing of inaccurate particulars of his income by the assessee inasmuch as the stock at the closing of the year was under-valued. Thus though the charge was in regard to concealment of particulars of the income, the ultimate conclusion was based on the footing of furnishing inaccurate particulars of his income by the assessee. Thus, it is clear that the penalty proceedings having been commenced against the assessee on a particular footing, viz., of concealment of particulars of income, the final conclusion of levying the penalty was based on a different footing altogether, viz., on the footing of furnishing inaccurate particulars of his income. Under these circumstances, it is clear that it cannot be said that the assessee had been given a reasonable opportunity of being heard before the order imposing the penalty was passed.

8. Moreover, under the scheme of section 271, the penalty proceedings under the Act may be initiated either by the Income-tax Officer or by the Appellate Assistant Commissioner. The Appellate Assistant Commissioner has to make an order imposing the penalty and under section 274(3) when he imposes a penalty under the provisions of Chapter XXI, he has to send a copy of his order to the Income-tax Officer. As the Income-tax Tribunal in the appeal against the order of the Inspecting Assistant Commissioner has pointed out, the Appellate Assistant Commissioner at the time when he heard the appeal in the assessment proceedings and held that there was no suppression of income by suppression of sales but that there was undervaluation of the stock, did not choose to commence penalty proceedings on the ground of furnishing inaccurate particulars of income. It was within the powers of the Appellate Assistant Commissioner to commence such proceedings on the ground that the assessee had furnished inaccurate particulars of the income but that was not done and the ground on which the proceedings were commenced by the Income-tax Officer, viz., that the assessee had concealed the particulars of his income inasmuch as he has suppressed the sales of 1,383 bags of garlic and concealed the income of Rs. 58,000, no longer survived after the finding of the Appellate Assistant Commissioner. In view of this position it was clear that the very basis for the penalty proceedings against the assessee initiated by the Income-tax Officer disappeared when the Appellate Assistant Commissioner held in the assessment proceedings that there was no suppression of income by the assessee. It is clear from the provisions of section 274 that the jurisdiction of the Inspecting Assistant Commissioner in penalty proceedings is to the same extent as that of the Income-tax Officer except that cases involving minimum penalty of more than Rs. 1,000 have to be referred to the Inspecting Assistant Commissioner but that officer does not get any higher jurisdiction than that of the Income-tax Officer concerned. The conclusion reached by the Tribunal, therefore, in the appeal against the order of the Inspecting Assistant Commissioner that, in the circumstances of this case, the Inspecting Assistant Commissioner had no jurisdiction to impose a penalty under section 271(1)(c) for concealment of income was correct.

9. We, therefore, answer the question referred to us in the negative. The Commissioner will pay the costs of this reference to the assessee.