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Commissioner Of Income-Tax v. Linotype And Machinery Ltd.
Summary of Judgment: Income-tax Reference No. 304 of 1982 (Decided July 3, 1989)
Factual and Procedural Background
This reference arises under section 256(1) of the Income-tax Act, 1961 for the assessment year 1976-77. The question referred asked whether the Income-tax Appellate Tribunal was justified in law in holding that the Commissioner of Income-tax was not entitled to exercise his jurisdiction under section 263 of the Act for the failure of the Income-tax Officer ("ITO") to initiate penalty proceedings under section 273(a).
Briefly, the ITO did not initiate any penalty proceedings under section 273(a) when making the assessment. The Commissioner believed that a notice under section 210 had been served calling for advance tax of Rs. 96,372. The assessee had filed an estimate under section 212 on 11 September 1975 showing an estimated income of Rs. 50,000 (tax payable Rs. 36,750) and paid advance tax in three instalments (32,124 on 14-06-1975; 2,313 on 15-09-1975; 2,313 on 19-12-1975). The assessee's return filed on 13 September 1976 declared income of Rs. 93,640 and, on assessment, tax payable worked out to Rs. 69,355.
The Commissioner took the view that the advance tax paid fell well short of the statutory minimum of 75% of the assessed tax and that the ITO had wrongly failed to charge interest under section 215 and to initiate penalty under section 273(a). The Commissioner set aside the ITO's assessment order and directed the ITO to make a fresh assessment in accordance with law.
The assessee appealed to the Income-tax Appellate Tribunal. The Tribunal confirmed the Commissioner's order insofar as the assessment was set aside for non-charging of interest under section 215, but quashed the Commissioner's direction to initiate penalty proceedings under section 273(a).
The question was referred to this Court under section 256(1), and the Court heard the matter and delivered the present judgment.
Legal Issues Presented
- Whether, on the facts and in the circumstances of the case, the Income-tax Appellate Tribunal was justified in law in holding that the Commissioner of Income-tax was not entitled to exercise his jurisdiction under section 263 of the Income-tax Act for the failure of the Income-tax Officer to initiate penalty proceedings under section 273(a) of the Act.
Arguments of the Parties
Commissioner of Income-tax / Revenue
- The Commissioner relied on the proposition that, given the assessee's shortfall in advance tax (compared to the assessed tax), the ITO should have charged interest under section 215 and initiated penalty proceedings under section 273(a). The Commissioner contended that the ITO's failure to do so made the assessment order erroneous and prejudicial to the interests of the Revenue, justifying revision under section 263.
- The Commissioner placed reliance, as noted by the Tribunal, upon a decision of the Madhya Pradesh High Court in Addl. Commissioner of Income-Tax, M.P. v. Indian Pharmaceuticals (1980) 123 ITR 874, which had held that the Commissioner could exercise jurisdiction under section 263 where the ITO failed to initiate penalty proceedings under relevant provisions.
Assessee
- The assessee (and its representatives before the Tribunal) relied on the decision of the Delhi High Court in Addl. Commissioner of Income-Tax, Delhi-I v. J.K. D'Costa (1982) 133 ITR 7, which was cited to support the view that penalty proceedings under provisions such as section 271(1)(a) or section 273(b) (and by analogy section 273(a)) are independent and separate from assessment proceedings.
- The assessee argued that the failure of the ITO to record initiation of penalty proceedings in the assessment order does not make the assessment order erroneous or prejudicial to the interests of the Revenue for purposes of section 263, because initiation and levy of penalty are separate proceedings and the law requires only that penalty proceedings be initiated in the course of assessment proceedings (which might be evidenced by some record anywhere), not necessarily that the assessment order itself include the satisfaction-note.
Table of Precedents Cited
| Precedent | Rule or Principle Cited For | Application by the Court |
|---|---|---|
| Addl. Commissioner Of Income-Tax, M.P. v. Indian Pharmaceuticals, [1980] 123 ITR 874 (Madhya Pradesh) | Held that where the ITO failed to take notice of facts attracting provisions for penalty and initiate penalty proceedings, the Commissioner was entitled to exercise jurisdiction under section 263. | The Tribunal relied on this decision for the proposition that the Commissioner could invoke section 263; the Court recorded the Tribunal's discussion of this decision but ultimately did not adopt this approach in the present case. |
| Addl. Commissioner Of Income-Tax, Delhi-I v. J.K. D'Costa, [1982] 133 ITR 7 (Delhi) | Established that penalty proceedings (sections 271(1)(a) and 273(b)) are independent and separate from assessment proceedings; failure to record initiation of penalty in the assessment order does not make the assessment order erroneous or prejudicial to Revenue for purposes of section 263. | The Court expressly agreed with and followed the view in J.K. D'Costa, treating it as the correct principle to apply and answering the referred question in the assessee's favour on that basis. |
| Addl. CIT v. Achal Kumar Jain, [1983] 142 ITR 606 (Delhi) | Reiterated the view that penalty proceedings are separate from assessment proceedings and that failure to record satisfaction for penalty in the assessment order does not vitiate the assessment for purposes of section 263. | The Court cited this as one of the Delhi High Court decisions that reiterated the D'Costa view and relied on the line of authority supporting the independence of penalty proceedings. |
| P. C. Puri…Applicant v. The Commissioner Of Income-Tax, New Delhi…, [1985] 151 ITR 584 (Delhi) | Followed the same principle as D'Costa regarding separation of penalty proceedings from assessment proceedings. | Noted by the Court as part of a line of Delhi High Court decisions reiterating the D'Costa view; used to demonstrate consistency of authority. |
| CWT v. A.N. Sarvaria, [1986] 161 ITR 694 (Delhi) | Again reiterated the principle that penalty proceedings are independent of assessment proceedings. | Referred to by the Court as further supporting authority consistent with D'Costa. |
| Commissioner Of Income-Tax v. Keshrimal Parasmal, [1986] 157 ITR 484 (Rajasthan) | Followed the D'Costa reasoning on the independence of penalty proceedings from assessment proceedings. | Cited by the Court as an instance of another High Court following the D'Costa view. |
| Surendra Prasad Singh v. CIT, [1988] 173 ITR 510 (Gauhati) | Followed the Delhi High Court's decision in K. D'Costa on the separation of penalty and assessment proceedings. | Cited by the Court as further High Court authority aligning with the D'Costa principle. |
| Special Leave Petition by Department against J.K. D'Costa decision | Not a reasoned precedent but procedural note that SLP was rejected on 2 March 1984 ([1984] 147 ITR (St.) 1), indicating non-interference by Supreme Court. | The Court noted the rejection of the Department's SLP as a factual point supporting the authority of the D'Costa line of cases. |
Court's Reasoning and Analysis
The Court's analysis proceeded from the legal character of penalty proceedings and the scope of section 263:
- The Court reiterated the principle (as articulated by the Delhi High Court in D'Costa) that penalty proceedings are independent and separate from assessment proceedings. The expression "assessment" in section 263 refers to the particular assessment proceeding before the Commissioner; it does not include separate penalty proceedings unless those penalty proceedings are actually part of the proceedings being considered.
- Recording by the ITO of his satisfaction or direction to issue a notice under section 273 (for defaults under section 273(a)) is not an integral part of the assessment order such that failure to make such a recording would ipso facto render the assessment order erroneous or prejudicial to the interests of the Revenue for purposes of section 263.
- The Commissioner, when dealing with an assessment and considering revising it under section 263, cannot expand the scope of those proceedings to include penalty proceedings which are not before him. In other words, the Commissioner cannot use section 263 to revise an assessment on the ground that the ITO failed to initiate separate penalty proceedings unless the penalty proceedings themselves are properly before him as part of the assessment proceeding being revised.
- The Court emphasized the role of the ITO's discretion: the ITO must be satisfied on the facts that penalty should be initiated and imposed. The absence of a recorded satisfaction in the assessment order does not allow a presumption that the assessee did not provide any explanation or that no reasonable cause existed — such absence does not, without more, make the assessment order erroneous or prejudicial.
- Applying these principles to the facts, the Court found that the Tribunal's conclusion was correct: the ITO's failure to record initiation of penalty proceedings in the assessment order did not render the assessment erroneous or prejudicial to the Revenue in the sense required by section 263. The Commissioner therefore could not validly invoke section 263 merely to direct initiation of penalty proceedings under section 273(a).
Holding and Implications
Holding:
The Tribunal was justified; the Commissioner could not invoke section 263 to set aside the assessment on the ground that the ITO had failed to initiate penalty proceedings under section 273(a).
The Court answered the question referred under section 256(1) in the affirmative and specifically indicated that the answer was in favour of the assessee and against the Revenue.
Implications (direct consequences in this case):
- The Tribunal's quashing of the Commissioner's direction to initiate penalty proceedings under section 273(a) is affirmed.
- The Tribunal's confirmation of the setting aside of the assessment insofar as the ITO failed to charge interest under section 215 was left intact by the Court (the Tribunal had confirmed the Commissioner on that point).
- The Court held that the Commissioner's attempt to invoke section 263 on the ground that the assessment was erroneous for not containing a record of satisfaction for penalty was not sustainable; the proper course is for the ITO to exercise his discretionary satisfaction and record it if penalty proceedings are to be initiated.
- There will be no order as to costs. The Court also granted leave to file the paper book.
Broader legal implication as identified in the opinion: the judgment respectfully follows and reaffirms the view in the Delhi High Court line of cases that penalty proceedings are separate from assessment proceedings and that failure to record initiation of penalty in the assessment order does not, by itself, render the assessment erroneous or prejudicial to revenue for purposes of section 263.
Judges: Ajit K. Sengupta, J. (majority opinion) and Bhagabati Prasad Banerjee, J. (concurring).
Income-tax Reference No. 304 of 1982
Decided on July 3, 1989
The Judgment of the Court was delivered by
Ajit K. Sengupta, J.:— In this reference under section 256(1) of the Income-tax Act, 1961, for the assessment year 1976-77, the following question of law has been referred to this court:
“Whether, on the facts and in the circumstances of the case, the Income-tax Appellate Tribunal is justified in law in holding that the Commissioner of Income-tax was not entitled to exercise his jurisdiction under section 263 of the Income-tax Act for failure of the Income-tax Officer to initiate penalty proceedings under section 273(a) of the Income-tax Act?”
2. The facts, shortly stated, are that the Income-tax Officer did not initiate any penalty proceedings under section 273(a) of the Income-tax Act while making the assessment in question. The Commissioner of Income-tax was of the opinion that the notice under section 210 of the Income-tax Act had been served upon the assessee calling for payment of advance tax of Rs. 96,372. The assessee filed an estimate under section 212 on September 11, 1975, showing an estimated income of Rs. 50,000 whereupon the tax payable came to Rs. 36,750. The tax was paid as under:
Rs. 14-06-1975 32,124 15-09-1975 2,313 19-12-1975 2,313
3. The assessee filed its return on September 13, 1976, declaring an income of Rs. 93,640 and, on completion of the assessment, the tax payable worked out to Rs. 69,355. Therefore, according to the Commissioner of Income-tax, it was clear that the advance tax paid by the assessee fell far short of the statutory minimum of 75 per cent, of the assessed tax and the Income-tax Officer had wrongly failed to charge interest under section 215 and initiate penalty proceedings under section 273(a) of the Income-tax Act. He, therefore, set aside the order of the Income-tax Officer and directed him to make a fresh assessment in accordance with law.
4. The assessee came up in appeal before the Tribunal. After hearing the representatives of the parties, the Tribunal confirmed the order of the Commissioner of Income-tax in so far as the assessment was set aside for non-charging of interest under section 215 of the Income-tax Act. However, so far as the direction to initiate penalty proceedings under section 273(a) was concerned, the Tribunal quashed that part of the order with the following observations:
“Coming to the question of penalty, the Commissioner of Income-tax has relied upon a decision of the Madhya Pradesh High Court in Addl. Commissioner Of Income-Tax, M.P v. Indian Pharmaceuticals., [1980] 123 ITR 874, wherein the Income-tax Officer failed to take notice of facts attracting the provisions of section 271(1)(a) and initiate penalty proceedings thereunder. It was held that the Commissioner was entitled to exercise his jurisdiction under section 263 of the Income-tax Act in such circumstances. On behalf of the assessee reliance was placed on a recent judgment of the Delhi High Court in Addl. Commissioner Of Income-Tax, Delhi-I v. J.K D'Costa., [1982] 133 ITR 7 in which it was observed that proceedings for levy of penalty whether under section 271(1)(a) or section 273(b) are proceedings independent of and separate from the assessment proceedings. There is no identity between the two. Though it is usual for the Income-tax Officer to record in the assessment proceedings that penalty proceedings are initiated, it is more a matter of convenience than that of a legal requirement. All that the law requires is that the penalty proceedings should be initiated in the course of the proceedings for assessment. Failure of the Income-tax Officer to record in the assessment order his satisfaction or the lack of it in the assessment order cannot be said to be erroneous or prejudicial to the interests of the Revenue because the Income-tax Officer failed to record his opinion about the leviability of the penalty. Obviously, two views on the subject are possible.”
5. At the hearing, Dr. Pal, learned counsel, has drawn our attention to the decision of the Delhi High Court in the case of Addl. Commissioner Of Income-Tax, Delhi-I v. J.K D'Costa., [1982] 133 ITR 7.
6. There also a similar question arose and the Commissioner of Income-tax invoked the provisions of section 263 of the Act. The Division Bench of the Delhi High Court held as follows (at p. 11):
“The only question before us is whether the Tribunal was right in revoking the order of the Additional Commissioner in so far as it pertains to the question of penalties under sections 271(1)(a) and 273(b). Here, we find ourselves in complete agreement with the view taken by the Tribunal. It is well-established that proceedings for the levy of penalty whether under section 271(1)(a) or under section 273(b) are proceedings independent of and separate from the assessment proceedings. Though the expression ‘assessment’ is used in the Act with different meanings in different contexts, so far as section 263 is concerned, it refers to a particular proceeding that is being considered by the Commissioner and it is not possible when the Commissioner is dealing with the assessment proceedings and the assessment order to expand the scope of these proceedings and to view the penalty proceedings also as part of the proceedings which are being sought to be revised by the Commissioner. There is no identity between the assessment proceedings and the penalty proceedings; the latter are separate proceedings, that may, in some cases, follow as a consequence of the assessment proceedings. As the Tribunal has pointed out, though it is usual for the Income-tax Officer to record in the assessment order that penalty proceedings are being initiated, this is more a matter of convenience than of legal requirement. All that the law requires, so far as the penalty proceedings are concerned, is that they should be initiated in the course of proceedings for assessment. It is sufficient if there is some record somewhere, even apart from the assessment order itself, that the Income-tax Officer has recorded his satisfaction that the assessee is guilty of concealment or other default for which penalty action is called for. Indeed, in certain cases it is possible for the Income-tax Officer to issue a penalty notice or initiate penalty proceedings even long before the assessment is completed though the actual penalty order cannot be passed until the assessment is finalised. We, therefore, agree with the view taken by the Tribunal that the penalty proceedings do not form part of the assessment proceedings and that the failure of the Income-tax Officer to record in the assessment order his satisfaction or the lack of it in regard to the leviability of penalty cannot be said to be a factor vitiating the assessment order in any respect. An assessment cannot be said to be erroneous or prejudicial to the interests of the Revenue because of the failure of the Income-tax Officer to record his opinion about the leviability of penalty in the case.”
7. The Delhi High Court in Addl. CIT v. Achal Kumar Jain, [1983] 142 ITR 606; P. C. Puri…Applicant v. The Commissioner Of Income-Tax, New Delhi…, [1985] 151 ITR 584 (Delhi) and CWT v. A.N Sarvaria, [1986] 161 ITR 694 (Delhi), have reiterated the same view. The Rajasthan High Court in Commissioner Of Income-Tax v. Keshrimal Parasmal, [1986] 157 ITR 484, and the Gauhati High Court in Surendra Prasad Singh v. CIT, [1988] 173 ITR 510, following the decision of the Delhi High Court in K. D'Costa, [1982] 133 ITR 7, also took the same view. It may be mentioned that on March 2, 1984, the special leave petition filed by the Department against the judgment of the Delhi High Court in J.K D'Costa, [1982] 133 ITR 7 was rejected (see [1984] 147 ITR (St.) 1).
8. Penalty proceedings do not form part of assessment proceedings. Recording by the Income-tax Officer of satisfaction or direction to issue a notice under section 273 of the Income-tax Act, 1961, for default committed under section 273(a) for failure to file an estimate of advance tax and pay the tax is not an integral part of the assessment order so that failure to do so would render it ipso facto erroneous or prejudicial to the interests of the Revenue. In the context of section 263, the expression “assessment” refers to the particular “proceeding” which is to be considered. The Commissioner, in dealing with assessment proceedings and the assessment order, cannot expand his powers to deal with penalty proceedings when they are not before him.
9. In our view, the Tribunal in this case has come to a correct conclusion. In the assessment order, the Income-tax Officer did not record that the penalty proceedings had been initiated. He may initiate penalty proceedings by recording a direction to that effect in the order sheet, but no penalty can be imposed as a matter of course. The Income-tax Officer must be satisfied as to whether the facts warrant initiation of penalty proceedings and, if so, whether any penalty should be imposed. He has a discretion as to whether penalty should be imposed or not. He may levy penalty after being satisfied that the case attracts the provisions for penalty. For failure of the Income-tax Officer to record in the assessment order his satisfaction or the lack of it, the assessment order cannot be said to be erroneous or prejudicial to the interests of the Revenue. The Income-tax Officer must record his opinion about the leviability of the penalty on the facts of the case. The Income-tax Officer has to be satisfied that the assessee had furnished a statement of advance tax payable by him which he knew or had reason to believe to be untrue.
10. The Commissioner of Income-tax held that the Income-tax Officer should have taken action under section 273(a) because the assessee failed to file a revised estimate under section 212(2) and pay tax accordingly. The Commissioner of Income-tax also held that the assessee did not file any explanation for failure to file a proper revised estimate as envisaged under section 212(2). Nor did the assessee file any explanation to the satisfaction of the Income-tax Officer that the assessee had reasonable cause which prevented it from filing the revised estimate and thus warranting waiver of penalty under section 273(a). It was for the Income-tax Officer to find out whether there was any reasonable cause preventing the assessee from filing the revised estimate under section 212(2). It cannot be presumed in the absence of any recording by the Income-tax Officer that the assessee did not furnish any explanation to the satisfaction of the Income-tax Officer. In our view, on the facts of this case, it must be held that the Commissioner of Income-tax cannot invoke his power under section 263 on the ground that the order passed by the Income-tax Officer is erroneous, in so far as it is prejudicial to the interests of the Revenue.
11. We, therefore, respectfully agreeing with the view taken by the Delhi High Court in J.K D'Costa, [1982] 133 ITR 7, answer the question referred to us in the affirmative and in favour of the assessee and against the Revenue.
12. There will be no order as to costs. Leave is given to file the paper book.
Bhagabati Prasad Banerjee, J.:— I agree.
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