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Kerala Oil Mills v. Commissioner Of Income-Tax, Kerala.

Kerala High Court

Feb 10, 1978

Judgment

Subsequent
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Structured Summary of the Court's Opinion

Factual and Procedural Background

The Income-tax Appellate Tribunal, Cochin Bench, referred the following question to the court for opinion: “Whether, on the facts and in the circumstances of the case, the order of the Inspecting Assistant Commissioner of Income-tax under section 271(1)(c) passed on March 31, 1973, was barred by limitation?” The facts relevant to this question, as stated in the opinion, are:

Assessment year involved: 1966–67.
Return filed on 1 December 1966.
Assessment completed by order dated 20 March 1971.
Penalty was imposed by order dated 31 March 1973.
Section 275 of the Income-tax Act, 1961 (which provided the time-limit for completion of penalty proceedings) was amended by the Taxation Laws (Amendment) Act (42 of 1970) with effect from 1 April 1971 to permit penalty proceedings to be completed within two years of the completion of the assessment order.

It was common ground that, but for the 1970 amendment, under the prior text of s.275 the penalty proceedings would have been beyond the earlier time-limit. The Tribunal held that s.275 was a procedural section and that the amended provision governed the penalty proceedings at the time of imposition.

Legal Issues Presented

Whether the order of the Inspecting Assistant Commissioner of Income-tax under section 271(1)(c) dated 31 March 1973 was barred by limitation.
Whether section 275 of the Income-tax Act, 1961, as amended by the Taxation Laws (Amendment) Act (42 of 1970) is procedural in character (a rule of limitation) and therefore applicable to penalty proceedings pending at the time of the amendment.

Arguments of the Parties

Assessee's Arguments

Section 275 should not be regarded as merely procedural because it is inextricably linked with substantive provisions of the Act relating to imposition of penalty; therefore the principle that procedural sections operate retrospectively (to affect pending proceedings) cannot be applied to s.275.
The amendments introduced by the Taxation Laws (Amendment) Act, 1970 (including to sub-s. (4A) of s.271, sub-s. (2) of s.274 and s.275) enlarged the range of the Income-tax Officer's power to take penalty proceedings (e.g., covering cases where concealment exceeds Rs. 25,000 subject to reference to the Inspecting Assistant Commissioner), and s.275 is linked with s.274(2) which gives that power; consequently, s.275 should be treated as affecting substantive rights.
Reliance was placed on the principle stated by a Division Bench in Hajee K. Assainar v. Commissioner Of Income-Tax, Kerala, that where substantive rights and procedure are closely and inextricably linked, procedural changes should not be given retrospective operation unless clearly intended by the legislature.
Counsel for the assessee also relied on the Supreme Court's observations in S.S. Gadgil v. Lal & Co. concerning the character of income-tax proceedings and the character of time-prescriptions under section 34 as fetters on power rather than mere limitation periods.

Revenue's Arguments

The Tribunal's view that s.275 is procedural and embodies a rule of limitation was correct; rules of limitation are rules of procedure and the rules in force at the time when proceedings are taken govern.
Reliance was placed on a line of authorities (including S.C. Prashar v. Vasantsen Dwarkadas, CIT v. Onkarmal Meghraj (HUF), J.P. Jani v. Induprasad Devshanker Bhati and various High Court decisions) supporting the proposition that procedural limitation provisions may be applied in such circumstances and that the amended s.275 applied to the penalty proceedings at the time of imposition.
Counsel for the revenue cited several High Court decisions and a Full Bench (e.g., CIT v. Royal Motor Car Co., Addl. CIT v. Watan Mechanical and Turning Works (Full Bench, AP), CIT v. Bhikari Charan Panda) as supporting the Tribunal and the proposition advanced for the revenue.

Table of Precedents Cited

Precedent	Rule or Principle Cited For	Application by the Court
Beepathuma v. Shankaranarayana, AIR 1965 SC 241	Referenced by the Tribunal in support of the view regarding procedural/limitation character of certain provisions.	The court noted the Tribunal relied on passages from this decision; the opinion records this reliance but does not elaborate further on specific application beyond acknowledging the Tribunal's use.
Hajee K. Assainar v. Commissioner Of Income-Tax, Kerala, [1971] 81 ITR 423 (Division Bench)	Principle that where procedural alteration is closely and inextricably linked with substantive changes, retrospective operation of the procedural change is not permissible unless legislative intent indicates it.	The court distinguished that case on the facts: the Division Bench there considered s.271(1) amendments that formed integral parts of one scheme and could not be separated; the court here held that the provision under consideration (s.275) was fundamentally different and could be viewed as procedural.
S.S. Gadgil v. Lal & Co., [1964] 53 ITR 231 (Supreme Court)	Observations that income-tax proceedings are administrative/statutory machinery, not ordinary civil suits; period prescribed by section 34 was characterized as a fetter upon the power of the Income-tax Officer rather than a period of limitation in the ordinary sense.	The court considered these observations but held the provision before it (s.275) was different; it rejected the assessee's argument that Gadgil's reasoning applied to s.275, noting the context and provisions were not the same.
Commissioners of Inland Revenue v. Sneath, [1932] 17 TC 149 (CA) and Shell Company of Australia Ltd. v. Federal Commissioner of Taxation, [1931] AC 275 (PC)	Authorities cited (via Gadgil) on the nature of tax proceedings as administrative/statutory rather than ordinary litigation.	The court recorded that these authorities were cited in Gadgil; they formed part of the background but the court did not apply them directly to change its conclusion about s.275.
S.C. Prashar v. Vasantsen Dwarkadas, [1963] 49 ITR (SC) 1 (Bombay HC decision discussed by Supreme Court)	Consideration of the effect of amendment to limitation/assessment provisions and whether amended limitations operated where the period had already expired; discussion of retrospective effect.	The court referred to the principles and the split of opinion in the decision, using it as part of the jurisprudential context about retrospective application of limitation-related amendments.
CIT v. Onkarmal Meghraj (HUF), [1974] 93 ITR 233 (Supreme Court)	Summed up the principle that no action can be commenced where the period within which it can be commenced has expired; discussed limited retrospective effect of amendments.	The court cited this decision for the established principle on limitation and retrospective operation of amendments; it used this as part of the reasoning to determine whether s.275 was procedural and could apply.
J.P. Jani, ITO v. Induprasad Devshanker Bhati, [1969] 72 ITR 595	Held that notice under section 148 of the 1961 Act could not be issued where the right to reopen had been barred under the 1922 Act when the new Act came into force; principle about non-application where right was already barred.	The court referred to this decision as being broadly in line with certain authorities (and noted that it followed the principle in Gadgil) while distinguishing the present case's facts and the nature of s.275.
Income Tax Officer, Tuticorin v. T.S. Devinath Nadar & Others, [1968] 68 ITR 252	Discussed operation of newly introduced subsection and timing of completed assessments for the purposes of rectification and subsequent provisions.	The court cited passages from this decision to show differing approaches to whether certain subsections operate in relation to completed assessments and how timing considerations affect retrospective operation; used as contextual support.
CIT v. Royal Motor Car Co., [1977] 107 ITR 753 (Gujarat High Court)	One of several High Court decisions cited by the revenue supporting the revenue's position.	The court listed this decision among authorities cited for the revenue's position; it noted these decisions generally express the principle that procedural sections cannot revive barred causes of action, but the court considered that principle not to apply here.
Addl. CIT v. Watan Mechanical and Turning Works, [1977] 107 ITR 743 (Andhra Pradesh Full Bench)	Full Bench decision supporting the revenue and overruling an earlier Division Bench decision (Mil. CIT v. Rajkamal Hotel and Bar).	The court recorded this Full Bench as one of the authorities cited by revenue that supports the Tribunal's approach; it did not analyze it in detail but recognized its relevance.
CIT v. Bhikari Charan Panda, [1976] 104 ITR 73 (Orissa High Court)	High Court decision cited in support of revenue's position.	The court included this decision among those cited for the revenue's stance; it was not examined in detail in the opinion.
Mil. CIT v. Rajkamal Hotel and Bar, [1977] 107 ITR 737 (Andhra Pradesh Division Bench)	Earlier Division Bench ruling later overruled by the Andhra Pradesh Full Bench (Watan Mechanical).	The court noted the existence of the earlier Division Bench decision and the fact it was overruled by the Full Bench, as part of the catalogue of High Court authority cited by the parties.
Kudilal Govindram Seksaria v. CIT, [1964] 54 ITR 653 (Bombay High Court)	High Court authority touching upon limitation/retrospective operation issues; cited by the revenue.	The court referred to this decision among others that express the general principle limiting retrospective operation of procedural provisions; it did not analyze it in depth but noted its position in the authorities.
Continental Commercial Corporation v. ITO, [1975] 100 ITR 170 (Madras High Court)	Decision relied upon by the assessee; Kanga & Palkhivala (authorities) expressed the view in footnote that this decision was wrong.	The court mentioned the decision as relied upon by the assessee and recorded that Kanga & Palkhivala considered it wrongly decided; the court did not adopt Continental Commercial Corporation as persuasive authority for the assessee.

Court's Reasoning and Analysis

The court proceeded through the following analytical steps, based on the material and authorities placed before it:

Identification of the legal question: whether the penalty order dated 31 March 1973 was time-barred in view of the timing of the assessment completion (20 March 1971) and a post-assessment amendment to s.275 effective 1 April 1971.
Consideration of the Tribunal's conclusion that s.275 embodied a rule of limitation and was procedural in character, and therefore the amended provision in force at the time of imposition governed the penalty proceedings.
Examination of the assessee's contention that s.275 was inextricably linked with substantive provisions (notably changes effected to s.271(4A), s.274(2) and s.275 by the Taxation Laws (Amendment) Act, 1970) and therefore should not be treated as merely procedural so as to be given retrospective effect to pending proceedings. The assessee relied on Hajee K. Assainar and on S.S. Gadgil.
Distinguishing Hajee K. Assainar: the court observed that the Division Bench there dealt with amendments to s.271(1) that formed part of a single integrated scheme (deleting the word “deliberately” and inserting an Explanation) and it was not possible to give retrospective effect to one part and not the other; the court held that the provision now under consideration (s.275) was fundamentally different in character from the provision considered in Hajee K. Assainar.
Consideration of the title and scheme of s.275: the court noted that the title—“Bar of limitation for imposing penalties”—indicates that the provision embodies a rule of limitation, and the scheme of the related provisions confirms this impression.
Review of S.S. Gadgil: although the court acknowledged the observations in Gadgil about the administrative character of income-tax proceedings and the nature of the period in s.34 as a fetter on power, it found the provision under present consideration (s.275) to be different in context and scheme; therefore the Gadgil observations did not determine the outcome in this case.
Survey of authorities: the court referred to several decisions (including S.C. Prashar, CIT v. Onkarmal Meghraj, J.P. Jani, and various High Court decisions) that deal with limitation and retrospective operation. The court accepted the well-known principle from these authorities that rules of limitation are procedural but also recognized the separate principle that a procedural section cannot be given retrospective operation to revive a cause of action already barred. The court, however, concluded that that latter principle had no application on the facts before it.
Concluding assessment: on the scheme and purpose of sections 271, 274 and 275, and in light of the authorities and considerations above, the court held that s.275 embodies a rule of limitation and is procedural in character. Accordingly, the Tribunal's view was correct that the amended s.275 applied to the penalty proceedings at the time of imposition.

Holding and Implications

HOLDING: The court answered the referred question in the negative — that is, the court held that the order of the Inspecting Assistant Commissioner of Income-tax dated 31 March 1973 was not barred by limitation; the result is stated as being in favour of the revenue and against the assessee.

Implications:

Direct effect: The penalty imposed on 31 March 1973 was upheld as not time-barred because s.275 was treated as a procedural limitation provision applicable at the time of imposition.
Costs: The court directed that there will be no order as to costs.
Precedential scope: The opinion resolves the specific referral by affirming the Tribunal's approach that s.275 is procedural and binds penalty proceedings in similar factual situations. The opinion does not purport to create a broad new principle beyond the application of established rules concerning limitation and retrospective operation; it primarily applies existing principles to the facts at hand.
Administrative step: The court ordered that a copy of the judgment under the seal of the court and signature of the Registrar be communicated to the Income-tax Appellate Tribunal, Cochin Bench, as required by law.

Show all summary ...

The Judgment of the Court was delivered by

Gopalan Nambiyar, C.J:— The following question of law has been referred for our opinion by the Income-tax Appellate Tribunal, Cochin Bench:

“Whether, on the facts and in the circumstances of the case, the order of the Inspecting Assistant Commissioner of Income-tax under section 271(1)(c) passed on March 31, 1973, was barred by limitation?”

2. The question arises with respect to the assessment year 1966–67. The return was filed on December 1, 1966, and the assessment was completed by order dated the 20th March, 1971. Penalty was imposed by order dated March 31, 1973. Section 275 of the I.T Act, 1961, which provided the time-limit within which proceedings for imposition of penalty had to be-completed was amended by the Taxation Laws (Amendment) Act (42 of 1970) with effect from April 1, 1971. The section, after its amendment, permitted penalty proceedings to be completed within two years of the completion of the assessment order, It is beyond dispute that, but for this amendment, under the section as it stood previously, the penalty proceedings would be beyond the time-limit indicated by the earlier section. On these facts the Tribunal held that s. 275 was a procedural section which would govern the penalty proceedings at the time of the imposition.

3. The Tribunal held that s. 275 embodied a rule of limitation; that rules of limitation are rules of procedure and that the rules applicable are the rules which are in force at the time when the proceedings are taken. It relied upon certain passages from Mitra's Limitation Act and on a passage from the decision in Beepathuma v. Shankaranarayana, AIR 1965 SC 241. Counsel for the assessee contended before us that the view of the Tribunal that s. 275 is a procedural section cannot be supported in law, that the section was inextricably linked with certain substantive provisions of the Act relating to the imposition of the penalty and, such being the position, the principle that procedural sections have retrospective operation so as to affect pending proceedings, cannot apply. Counsel drew our attention to the various amendments introduced by the Taxation Laws (Amendment) Act, 1970, to sub-s. (4A) of s. 271, sub-s. (2) of s. 274 and s. 275. In particular, it was stressed that, as a result of these amendments, the range of the power of ITO to take penalty proceedings had itself been enlarged or widened so as to cover even cases where the concealment exceeds a sum of Rs. 25,000 with the qualification that such cases were to be referred to the IAC. The provisions of s. 275 being inextricably linked with s. 274(2) which gave the above power, it was contended that it was wrong to regard s. 275 as dealing only with procedure, and thereby to apply it even to pending proceedings. The principle of the decision of a Division Bench of this court in Hajee K. Assainar v. Commissioner Of Income-Tax, Kerala., [1971] 81 ITR 423 was stressed. There it was observed by this court (p. 428):

“But, where rights and procedure are dealt with (together, the intention of the legislature may well be that the old rights are to be determined by the old procedure and that only the new rights under the substituted section are to be dealt with by the new procedure. If the procedural alteration is closely and inextricably linked with the changes simultaneously introduced in another part of the statute dealing with substantive rights and liabilities, it is not possible to give retrospective operation to the amendment regarding procedure unless the legislature has indicated such an intention either by express words or by necessary implication.”

4. The provision considered in that Act was fundamentally different from the provision that we have to construe here. The Division Bench was there concerned with s. 271(1) of the I.T Act, as amended by the Finance Act, 1964, deleting the words “deliberately” in cl. (c) of s. 271(1), and inserting an Explanation at the end of the said section. These formed integral parts of one scheme, and, in the nature of things, it was impossible to give retrospective effect to the one, and not to the other, or to regard only the one part and not the other, as procedural. This was all that the Division Bench stated.

5. Turning to the provisions here in question, there is some indication— however slight it be—afforded by the title to the section itself as “Bar of limitation for imposing penalties” implying that the provision embodied a rule of limitation and nothing more. The scheme of the provisions only confirms this impression. Counsel for the assessee drew our attention to the decision of the Supreme Court in S.S Gadgil v. Lal & Co., [1964] 53 ITR 231 and in particular to the following observations from that judg ment (p. 238):

“A proceeding for assessment is not a suit for adjudication of a civil dispute. That an income-tax proceeding is in the nature of a judicial proceeding between contesting parties, is a matter which is not capable of even a plausible argument. The income-tax authorities who have power to assess and recover tax are not acting as judges deciding a litigation between the citizen and the State: they are administrative authorities whose proceedings are regulated by statute, but whose function is to estimate the income of the taxpayer and to assess him to tax on the basis of that estimate. Tax legislation necessitates the setting up of machinery to ascertain the taxable income, and to assess tax on the income, but that does not impress the proceeding with the character of an action between the citizen and the State: Commissioners of Inland Revenue v. Sneath, [1932] 17 TC 149, 164 (CA) and Shell Company of Australia Ltd. v. Federal Commissioner of Taxation, [1931] AC 275 (PC).

Again the period prescribed by section 34 for assessment is not a period of limitation. The section in terms imposes a fetter upon the power of the Income-tax Officer to bring to tax escaped income. It prescribes different periods in different classes of cases for enforcement of the right of the State to recover tax.”

6. From these observations, counsel would contend that s. 275 embodied a jurisdictional condition or a fetter on the right or jurisdiction of the officer and not a period of limitation. On a conspectus of the provisions and the scheme of the sections, we cannot accept this argument. The provision construed by the Supreme Court in Gadgil's case, [1964] 53 ITR 231 was different, and the observations are understandable.

7. Our attention was called to a number of decisions which have considered the question. It is enough to refer to a few of them. The position was discussed in S.C Prashar v. Vasantsen Dwarkadas, [1963] 49 ITR (SC) 1. The principle of the decision was summed up and noticed by the Supreme Court in CIT v. Onkarmal Meghraj (HUF), [1974] 93 ITR 233. There it was observed (p. 240):

“It is a well-settled principle that no action can be commenced where the period within which it can be commenced has expired. It is unnecessary to cite authorities in support of this position. Does the fact that the second proviso says that there is no period of limitation make a difference? The first thing to be noticed is that that provision was given retrospective effect only from April 1, 1952, though the Income-tax (Amendment) Act came into effect from May 24, 1953. Where it is intended that the retrospective effect should be without any limit it is usual and proper to provide that the amendment would have effect and would be deemed always to have had effect as if it had been part of the Act from its inception. That that was not done shows that the intention was only to give limited retrospective effect, that is to say, there would be no bar of limitation if it had not expired before April 1, 1952.

We will now refer to some of the decisions which were relied upon. In S.C Prashar v. Vasantsen Dwarkadas, [1956] 29 ITR 857 the effect of the amendment made to section 34 were considered by the Bombay High Court. A Bench of the High Court consisting of Chagla C.J and] Tendolkar J. held that where the period mentioned in the substantive part of section 34 had expired before the amendment in 1953, i.e, before 1st April, 1952, no action can be taken under that section. The court also took the view that the second proviso to section 34(3) offended article 14 of the Constitution in so far as it affected third parties. That question has now been set at rest by the decision of this court in Income Tax Officer, A Ward, Sitapur v. Murlidhar Bhagwan Das pas, [1964] 52 ITR 335 as already noticed. In this court, out of the five judges who heard the appeal in Prashar v. Vasantsen Dwarkadas, [1963] 49 ITR (SC) 1, two of the judges, Das J. and Kapur J., held that section 31 of the Income-tax (Amendment) Act, 1953, did not operate as regards assessment years for which assessment or reassessment was barred before April 1, 1952, in accordance with section 34 before it was amended in 1948. Hidayatullah J. and Raghubar Dayal J. took the contrary view. Sarkar J. expressed no opinion on the point. In J.P Jani, ITO v. Induprasad Devshanker Bhati, [1969] 72 ITR 595, this court held that the Income-tax Officer cannot issue a notice under section 148 of the Income-tax Act, 1961, in order to reopen the assess ment of an assessee in a case where the right to reopen the assessment was barred under the 1922 Act at the date when the new Act came into force. It was held that section 297(2)(d)(ii) of the 1961 Act was applicable only to those cases where the right of the Income-tax Officer to, reopen an assess ment was not barred under the repealed Act. This decision is broadly in line with the opinion of Das and Kapur JJ. in Prashar's case, [1963] 49 ITR (SC) 1. The decision of this court relied upon by the appellant, in Income Tax Officer, Tuticorin v. T.S Devinath Nadar & Others, [1968] 68 ITR 252, 260, which was a case under section 35(5), which was introduced into the Income-tax Act by the 1953 amendment at the same time as the amendment to section 34 does not really affect this position. This court observed:

‘As we have already said, sub-section (5) becomes operative as soon as it is found on the assessment or reassessment of the firm or on any reduction or enhancement made in the income of the firm that the share of the partners in the profit or loss of the firm had not been included in the assessment of the partner or if included was not correct.; The completion of the assessment of the partner as an individual need hot happen after April 1, 1952. The completed assessment of the partner is the subject-matter of rectification and this may have preceded the above-mentioned date. Such completion does not control the operation of the sub-section. In the result we find ourselves unable to concur in the decision or the reasoning in Atmala Nagaraj's case, [1962] 46 ITR 609 (SC)’.”

8. Counsel for the revenue invited our attention to the decisions in CIT v. Royal Motor Car Co., [1977] 107 ITR 753 (Guj), Addl. CIT v. Watan Mechanical and Turning Works, [1977] 107 ITR 743 (AP) [FB] and CIT v. Bhikari Charan Panda, [1976] 104 ITR 73 (Orissa). Of these, a Full Bench decision of the Andhra Pradesh High Court overrules an earlier Division Bench ruling of that court in Mil. CIT v. Rajkamal Hotel and Bar, [1977] 107 ITR 737. The principle of the decisions cited by counsel for the revenue supports the stand taken by him and by the Tribunal. Counsel for the revenue also invited our attention to the Supreme Court decision in J.P Jani, ITO v. Induprasad Devshanker Bhatt, [1969] 72 ITR 595 at 600 following the principle of the decision of the Supreme Court in S.S Gadgil's case, [1964] 53 ITR 231. Our attention was also called to the decision of the Bombay High Court in Kudilal Govindram Seksaria v. CIT, [1964] 54 ITR 653 at pages 659, 660, 661 and 663. We are not examining these decisions in detail. They only give expression to the well-known principle that even a procedural section cannot be given retrospective operation so as to revive a cause of action that had already become barred. That principle has no application here.

9. In addition to the decisions noticed above, our attention was drawn to the passage in Kanga and Palkhivala on Income-tax, Vol. 1, 7th edition, at pages 83, 84, 1206 and 1207. In foot-note 6 at p. 1207 the learned author submits that the decision of the Madras High Court in Continental Commercial Corporation v. ITO, [1975] 100 ITR 170 (one of the decisions relied on for the assessee) was wrong.

10. In the light of the principle of the decisions noticed supra and on the scheme and purpose of ss. 271, 274 and 275, we are of the view that s. 275 of the Act embodies a rule of limitation and is procedural in character. The Tribunal was right in the view that it took. We answer the question referred in the negative, i.e, in favour of the revenue and against the assessee. There will be no order as to costs.

11. A copy of this judgment under the seal of the court and the signature of the Registrar will be communicated to the Income-tax Appellate Tribunal, Cochin Bench, as required by law.