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Mohd. Shafi Khan v. Commissioner Of Wealth-Tax, M.P-I

Madhya Pradesh High Court
Feb 9, 1982
Judgment
Subsequent
References
CaseIQ
Case Information
CITATION CODES
citation codes
CASE NO.

Miscellaneous Civil Case No. 251 of 1979

JUDGES

G.G Sohani

K.N Shukla, JJ.

ACTS

Sub-section (2) of Section 33B of the Indian I.T. Act, 1922,

Section 27(1) of the W.T. Act, 1957 (hereinafter referred

Section 33B(2)(b) of the Indian I.T. Act, 1922,

Sub-sections (11) and (12) of Section 132

Section 14(2) of the Wealth-tax Act,

Section 139(2) of the I.T. Act, 1961,

Sub-section (2) of Section 24,

Section 18(1)(a)

Section 14(2).

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Opinion Summary — Reference under Section 27(1) of the Wealth-tax Act, 1957

Factual and Procedural Background

The Income-tax Appellate Tribunal, Indore Bench, referred two questions of law under Section 27(1) of the Wealth-tax Act, 1957 to this Court.

The assessee is an individual. The assessment years in question are 1969-70 and 1970-71. Returns under Section 14(1) were due on or before 30 June 1969 and 30 June 1970 respectively. Notices under Section 14(2) were issued and served on 9 July 1969 and 2 July 1970, requiring returns within 30 days. The assessee filed returns belatedly on 28 February 1973.

Because the assessee failed to show reasonable cause for delay, the WTO imposed penalties under Section 18(1)(a). On appeal the Appellate Assistant Commissioner (AAC) held penalties were rightly attracted both for default under Section 14(1) and for defaults under notices issued under Section 14(2), and directed recalculation of penalties based on rectified total wealth.

The assessee appealed to the Tribunal. The Tribunal found there was no proper service of the Section 14(2) notices, considered whether penalty could nevertheless be levied for failure to furnish returns under Section 14(1), and concluded that although the case should be remanded to give the assessee another opportunity, Section 18(5) barred imposition of penalty by the WTO on limitation grounds. The Tribunal allowed the appeals and did not remand the cases. Both the assessee and the Department sought reference; the Tribunal formulated two questions now before this Court.

Legal Issues Presented

  1. Whether, on the facts and in the circumstances of the case, the Tribunal was justified in law in holding that even in cases where the Department issues notice under Section 14(2) of the Wealth-tax Act, the default under Section 14(1) still continued and penalty could be levied in respect of the same?
  2. Whether, when the Tribunal was prima facie of the opinion that this was a fit case to be sent back to the WTO for giving another opportunity to the assessee, it was justified in cancelling the penalty instead of asking for a remand report or sending back the case to the WTO?

Arguments of the Parties

Assessee's Arguments

  • As soon as notice under Section 14(2) was issued, the operation of Section 14(1) ended and no penalty could be imposed for default under Section 14(1). (Relied upon Addl. CIT v. Rampratap Shankarlal [1979] 117 ITR 662 (MP)).
  • With respect to limitation, Section 18(5) should apply not only to the initial proceedings but also to proceedings that would follow if the Tribunal remanded the matter to the WTO — thus a remand would not permit imposition of penalty after limitation has expired. Reliance was placed on Addl. CIT v. K.S.G. Panicker, Kerala Produce Exporting Co. [1974] 97 ITR 525 and on observations in Director of Inspection (Income-tax) (Investigation) v. Pooran Mall & Sons [1974] 96 ITR 390.
  • The statute of limitation is a statute of repose; remanding a case should not defeat that repose and thereby nullify the protection intended by Section 18(5).

Department's Arguments

  • The Department urged that the decision relied upon by the assessee (117 ITR 662) needed reconsideration; however, because the Tribunal found notices under Section 14(2) were not served in the present case, this Court did not consider it necessary to address whether the earlier decision required reconsideration.

Table of Precedents Cited

Precedent Rule or Principle Cited For Application by the Court
Addl. CIT v. Rampratap Shankarlal [1979] 117 ITR 662 (MP) Authority relied on by the assessee for the proposition that issuance of a notice (in that case under Section 139(2) I.T. Act) affects the operation of the earlier return obligation. The Court found the decision distinguishable on facts and noted it was unnecessary in this case to consider whether that decision required reconsideration, because in the present case the Tribunal found Section 14(2) notices were not served.
CWT v. Suresh Seth [1981] 129 ITR 328 Principle that the law operating on the date on which the wrongful act is committed determines the penalty; a wrongful act does not cease to be wrongful by subsequent events. The Court applied this principle to hold that failure to file the return by the due date (Section 14(1)) constituted a wrongful act attract­ing penalty under Section 18(1)(a) on the date of default, and that issuance of a notice under Section 14(2) thereafter does not extinguish that wrongful act.
Addl. CIT v. K.S.G. Panicker, Kerala Produce Exporting Co. [1974] 97 ITR 525 Authority relied upon by the assessee to support the contention that limitation would apply to proceedings after remand. The Court observed the decision supports the assessee's contention but concluded that the view taken in Panicker differed from earlier precedents and "does not appear to be correct" in light of subsequent authority.
Director of Inspection (Income-tax) (Investigation) v. Pooran Mall & Sons [1974] 96 ITR 390 Observation relied on by the assessee that limitation provisions operate to prevent proceedings after expiry of the period and that a superior tribunal cannot extend limitation by directing inferior tribunal to act after limitation. The Court read those observations as referring to the first or initial assessment by an inferior authority. The Court relied on the fuller context of Pooran Mall to conclude that remand orders (directions to act afresh) are not necessarily subject to the same limitation bar applicable to the initial order.
Vasani & Co. v. CIT [1978] 112 ITR 819 (Gujarat HC) Interpretation that a statutory bar of limitation for imposition of penalty refers prima facie to the initial order to be passed by the competent authority and that appellate or revisional processes should not be frustrated by a literal reading that extends the bar to those processes. The Court expressly agreed with these observations and incorporated the reasoning into its conclusion about the scope of Section 18(5).
CIT v. Kishoresinh Kalyansinh Solanki [1960] 39 ITR 522 (Bombay HC) Bombay High Court view that the period of limitation would not apply when the Commissioner acted pursuant to directions of the Tribunal (i.e., remand/fresh disposal directed by the Tribunal). The Court noted that this Bombay High Court view was later approved by the Supreme Court in CIT v. National Taj Traders and treated it as the correct approach when considering interplay of limitation and remand directions.
CIT v. National Taj Traders [1980] 121 ITR 535 (Supreme Court) Approval of the Bombay High Court view that a direction to dispose of a case afresh can be given to the Commissioner by the Tribunal even if the prescribed period of limitation for the initial order had expired. The Court relied on this Supreme Court approval to conclude that the limitation in Section 18(5) applies to the initial order and is not a bar to appellate authorities remanding the matter for fresh consideration.

Court's Reasoning and Analysis

The Court addressed the two referred questions sequentially and applied statutory interpretation together with precedent analysis.

Question 1 — Whether issuance of a Section 14(2) notice extinguishes the default under Section 14(1) for purposes of Section 18(1)(a) penalty:

  1. The Court identified the wrongful act specified by Section 18(1)(a): failure to furnish the return required under Section 14(1) without reasonable cause.
  2. It observed there is no provision in the Wealth-tax Act that states issuance of a notice under Section 14(2) has the effect of bringing the operation of Section 14(1) to an end.
  3. Relying on the Supreme Court's principle in CWT v. Suresh Seth that the law operating on the date of the wrongful act governs imposition of penalty, the Court held that the failure to file by the due date constituted a wrongful act on that date and that subsequent issuance of Section 14(2) notice does not undo that wrongful act.
  4. Therefore the Tribunal was justified in law in holding that even where the Department issues notices under Section 14(2), the default under Section 14(1) continues to subsist for the purpose of levying penalty under Section 18(1)(a).

Question 2 — Whether the Tribunal was justified in cancelling penalty instead of remanding to the WTO when it considered remand appropriate but limitation might have run:

  1. The Court examined Section 18(5), which prescribes limitation for passing an order imposing a penalty under that section, and noted the statutory text and its explanation provisions.
  2. The Court considered jurisprudence on corresponding limitation provisions in tax law. It agreed with the Gujarat High Court's reading (Vasani & Co.) that the statutory bar prima facie applies to the initial order imposing penalty; a literal reading that extends the bar to appeals, revisions and references would frustrate the appellate scheme enacted by the legislature.
  3. The Court analyzed conflicting High Court views (Kerala in Panicker v. Addl. CIT vs. Bombay in Kishoresinh Solanki) and noted that the Supreme Court in National Taj Traders approved the Bombay High Court position that directions to dispose afresh could be given even where the period of limitation for the initial order had expired.
  4. Reading Pooran Mall in context, the Court concluded the observations relied upon by the assessee were intended to refer to the first or initial assessment/order and do not preclude appellate authorities from remanding matters for fresh disposal.
  5. On this basis the Court held that the bar of limitation in Section 18(5) applies to the initial order by the WTO and is not operative to prevent appellate authorities from remanding a matter for fresh consideration. Consequently, the Tribunal was not justified in cancelling the penalty instead of remanding the case or seeking a remand report from the WTO.

Holding and Implications

Core Holdings:

  • First question: Answered in the affirmative — against the assessee. The Court held that issuance of a notice under Section 14(2) does not terminate or negate the default under Section 14(1) for the purpose of imposing penalty under Section 18(1)(a); the wrongful act is ascertained by reference to the law in force on the date of the default.
  • Second question: Answered in the negative — against the assessee. The Court held the Tribunal was not justified in cancelling the penalty; the limitation bar in Section 18(5) applies to the initial order, and appellate authorities retain the power to remand for fresh disposal even if limitation for the initial order has expired.

Direct Effects and Consequences:

  • For the parties in this case, the legal consequence is that the Tribunal's conclusion that penalty could not be imposed because of limitation was not correct; the Tribunal should have remanded the matter to the WTO for fresh consideration rather than cancelling penalty outright.
  • The first holding affirms that penalties may be levied for failure to file returns under Section 14(1) despite subsequent issuance of Section 14(2) notices, subject to other applicable legal constraints.
  • The Court ordered that parties shall bear their own costs and recorded that the reference is answered accordingly.

No statement in the opinion asserts that a new legal principle is created; the Court's conclusions rest on interpretation of the statute and established precedents.

Show all summary ...

1. By this reference under Section 27(1) of the W.T. Act, 1957 (hereinafter referred to as " the Act"), the Income-tax Appellate Tribunal, Indore Bench, has referred the following questions of law to this court for its opinion :

" (1) Whether, on the facts and in the circumstances of the case, the Tribunal was justified in law in holding that even in cases where the Department issues notice Under Section 14(2) of the Wealth-tax Act, the default Under Section 14(1) still continued and penalty could be levied in respect of the same ?

(2) Whether, when the Tribunal was prima facie of the opinion that this was a fit case to be sent back to the WTO for giving another opportunity to the assessee, it was justified in cancelling the penalty instead of asking for a remand report or sending back the case to the WTO ? "

2. The material facts giving rise to this reference briefly are as follows:

The assessee is an individual and the assessment years in question are 1969-70 and 1970-71. The return of wealth for these assessment years were due to be filed on or before 30th June, 1969, and 30th June, 1970, respectively under Section 14(1) of the Act. The WTO also issued notices Under Section 14(2) of the Act to the assessee for these assessment years, which were served on the assessee on 9th July, 1969, and 2nd July, 1970, requiring the assessee to furnish returns within 30 days of the service of the notice. The assessee, however, filed the returns for these assessment years on 28th February, 1973. As there was delay in filing the returns and as the assessee failed to satisfy that there was reasonable cause for" the delay, the WTO imposed penalties Under Section 18(1)(a) of the Act. On appeal, the AAC rejected the contention advanced on behalf of the assessee that there was no proper service of notice issued Under Section 14(2) of the Act. The AAC passed, the following order :

Since there was no reasonable cause, I am of the opinion that penalties Under Section 18(1)(a) are rightly attracted for both the assessment years under appeal for default of not filing the return of wealth within the time prescribed Under Section 14(1) as well as for defaults of not filing the returns of wealth within the time allowed under notices Under Section 14(2). The period of both defaults is incidentally equal and is of 43 months for the assessment year 1969-70 and of 31 months for the assessment year 1970-71. Since by his orders Under Section 35, the WTO has rectified the total wealth of the appellant, I hereby direct the WTO to recalculate the penalties on the basis of wealth-tax payable on the basis of the rectified total wealth, and levy the penalty for the assessment year 1969-70 for a default of 43 months and for the assessment year 1970-71 for a default of 31 months, In the result, the appeals are partly allowed.

3. Aggrieved by the order passed by the AAC, the assessee filed appeals before the Tribunal. The Tribunal held that there was no proper service of notices issued Under Section 14(2) of the Act upon the assessee. The Tribunal then proceeded to consider the question as to whether in the absence of service of notice Under Section 14(2) of the Act, penalty could be levied on account of failure of the assessee to furnish returns, without reasonable cause, as required by Section 14(1) of the Act. It was urged on behalf of the assessee that the WTO had passed the impugned orders imposing penalty on the presumption that notices under Section 14(2) of the Act were served on the assessee and, therefore, the imposition of penalty could not be justified with reference to the default of the assessee to file returns Under Section 14(1) of the Act. Though the AAC had examined this aspect, the Tribunal was of the view that it, was a fit case, which should be sent back to the WTO for giving another opportunity to the assessee to show cause against the imposition of penalty. The Tribunal, however, held that in view of the provisions of Section 18(5) of the Act, the WTO could not impose penalty as the order would be barred by limitation. In these circumstances, the appeals were allowed and the cases were not remanded to the WTO. Aggrieved by that order, the assessee as well as the Department sought a reference and it is at the instance of the assessee that the first question has been referred to this court for its opinion while at the instance of the Department, the second question has been referred to this court for its opinion,

4. Now, as regards the first question, Shri Chaphekar, learned counsel for the assessee, contended that as soon as notices Under Section 14(2) of the Act were issued to the assessee, the operation of Section 14(1) of the Act came to an end and no penalty could be imposed for default Under Section 14(1) of the Act. Reliance was placed upon a decision of this court in Addl. CIT v. Rampratap Shankarlal [1979] 117 ITR 662 (MP). The decision in 117 ITR 662 is, however, distinguishable on facts. On behalf of the Department, it was, however, urged that the decision of this court in 117 ITR 662, needs reconsideration. In that case, it was found that the notice issued Under Section 139(2) of the I.T. Act, 1961, was served on the assessee. In the instant case, the finding of the Tribunal is that notices issued Under Section 14(2) of the Act were not served on the assessee. Hence it is not necessary for us in this case to consider as to whether the decision in 117 ITR 662 needs reconsideration. The only question for consideration in this case is whether after issuance of notice Under Section 14(2) of the Act, the operation of Section 14(1) of the Act came to an end with the result that no action for imposition of penalty can be taken Under Section 18(1)(a) of the Act for default Under Section 14(1) of the Act.

5. A penalty is imposed on account of the commission of a wrongful act. One of the wrongful acts specified in Section 18(1)(a) of the Act, which attracts penalty, is the failure of the assessee to furnish the return, which he is required to furnish Under Section 14(1) of the Act, without reasonable cause. No provision in the Act was brought to our notice, which lays down that on the issuance of a notice Under Section 14(2) of the Act, the operation of Section 14(1) of the Act comes to an end. Therefore, as soon as there is failure on the part of the assessee to furnish a return, as required by Section 14(1) of the Act, before the 30th day of June, of the relevant assessment year, without reasonable cause, the wrongful act attracting penalty Under Section, 18(1)(a) takes place and as held by the Supreme Court in CWT v. Suresh Seth [I981] 129 ITR 328, it is the law operating on the date, on which the wrongful act is committed, which determines the penalty. The wrongful act so committed does not cease to be a wrongful act by the issuance of a notice under Section 14(2) of the Act. We do not find any provision in the Act, nor was such brought to our notice, as would have the effect of condoning the said wrongful act as soon as notice was issued Under Section 14(2) of the Act. In our opinion, therefore, the Tribunal was justified in law in holding that even in cases where the Department issues notices Under Section 14(2) of the Act, the default Under Section 14(1) of the Act did not come to an end and penalty could be levied in respect of that default. Our answer to the first question is, therefore, in the affirmative and against the assessee.

6. As regards the second question referred to us, Shri Chaphekar, learned counsel for the assessee, contended that the Tribunal was right in holding that the bar of limitation prescribed by Section 18(5) of the Act applied, not only to proceedings which were completed for the first time by the WTO, but also to proceedings which would ensue pursuant to the remand order passed by the Tribunal if the matter was remanded by the Tribunal to the WTO. Reliance was placed upon the decision in Addl. CIT v. K.S.G. Panicker, Kerala Produce Exporting Co. [1974] 97 ITR 525 (Ker). Learned counsel for the assessee also referred to the following observation of the Supreme Court in Director of Inspection of Income-tax (Investigation] v. Pooran Mall & Sons [1974] 96 ITR 390 at p. 397 :

"There is no doubt that there is no equity about limitation. Most of the decisions relied on relate to provisions which laid down a period of limitation for taking one kind of action or other in order to assess to tax the person concerned. Naturally, after the period of limitation has expired, no proceedings can be taken to assess nor could any period of limitation laid down by the Act be extended merely by a superior tribunal directing an inferior tribunal to make an assessment or to take proceedings which result in assessment after the period of limitation is over."

7. Learned counsel for the assessee further contended that the statute of limitation was a statute of repose and this salutary principle, which was recognised by Section 18(5) of the Act, would be set at naught if we were to hold that those provisions would not be attracted to an order passed by the WTO, on remand by the Tribunal.

8. To appreciate the contentions advanced on behalf of the assessee, it would be useful to refer to the relevant provisions of Sub-section (5) of Section 18 of the Act, which read as under :

"(5) No order imposing a penalty under this section shall be passed-

(a) in a case where the assessment to which the proceedings for imposition of penalty relate is the subject-matter of an appeal to the Appellate Assistant Commissioner or Commissioner (Appeals) under Section 23 or an appeal to the Appellate Tribunal under Sub-section (2) of Section 24, after the expiration of a period of-

(i) two years 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, or

(ii) six months from the end of the month, in which the order of the Appellate Assistant Commissioner or Commissioner (Appeals) or, as the case may be, the Appellate Tribunal is received by the Commissioner, whichever period expires later;

(b) in any other case, after the expiration of two years 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.

Explanation.--In computing the period of limitation for the purpose of this section,--

(i) any period during which the immunity granted under Section 22H remained in force ;

(ii) the time taken in giving an opportunity to the assessee to be re-heard under the proviso to Section 39 ; and

(iii) any period during which a proceeding under this section for the levy of penalty is stayed by an order or injunction of any court, shall be excluded."

9. Dealing with a similar provision occurring in section 275 of, i.t. act, it was observed by the Gujarat High Court in Vasani & Co. v. CIT [1978] 112 ITR 819, at p. 822, as follows :

" On a plain reading of this provision where the Legislature had laid down a bar of limitation for imposition of penalty, it is obvious that the term ' no order imposing a penalty under Chapter XXI' would refer prima facie to the initial order or the first order, which would have to, be passed by the competent authority. When the legislature has enacted the provisions providing for appeal or revision where the appellate, or revisional authority could interfere with the original imposition of penalty, the very scheme enacted by the legislature for such appeal or revision would be frustrated, if the provision in section 275 is literally read so that all these appeals, revision and even, reference proceedings to this court and even an appeal to the Supreme Court would be governed by this period of two years' limitation,"

10. We respectfully agree with the aforesaid observations.

11. The decision, in [1974] 97 ITR 525 (Addl. CIT v. K.S.G. Panicker, Kerala Produce Exporting Co.) no doubt supports the contention advanced on behalf of the assessee. The Kerala High Court in. [1974] 97 ITR 525, differed from the view taken by the Bombay High Court in CIT v. Kishoresinh Kalyansinh Solanki. [I960] 39 ITR 522, that the period of two years mentioned in Section 33B(2)(b) of the Indian I.T. Act, 1922, would not apply when the Commissioner acted pursuant to the directions of the Tribunal. However, the view taken by the Bombay High Court in [1960] 39 ITR 522, has been approved by the Supreme Court in CIT v. National Taj Traders [1980] 121 ITR 535. The question that arose for consideration in that case was whether a direction to dispose of the case afresh could be given to the Commissioner by the Appellate Tribunal when the prescribed period of limitation under Sub-section (2) of Section 33B of the Indian I.T. Act, 1922, had expired. Dealing with this question, the Supreme Court observed that the view taken by the Bombay High Court in [1960] 39 ITR 522, was the correct view. In these circumstances, the view of the Kerala High Court in [1974] 97 ITR 525 (Addl. CIT v. K.S.G. Panicker, Kerala Produce Exporting Co.), differing from the view taken in [1960] 39 ITR 522, does not appear to be correct.

12. The observations in [1974] 96 ITR 390 (Pooran Mall & Sons' case) reliance on which was placed on behalf of the assessee, have to be read in the context of the argument advanced on behalf of the assessee that after the period of limitation has expired, no proceedings could be taken to assess, which would result in an assessment after the period of limitation was over. These observations must be read as referring to the first or initial assessment by an inferior Tribunal on directions by a superior Tribunal. This has been made clear in the earlier part of the judgment, where the Supreme Court has observed as follows (p. 394):

" Even if the period of time fixed under Section 132(5) is held to be mandatory that was satisfied when the first order was made. Thereafter, if any direction is given under Section 132(12) or by a court in writ proceedings, as in this case, we do not think that an order made in pursuance of such a direction would be subject to the limitations prescribed under Section 132(5). Once the order has been made within ninety days, the aggrieved person has got the right to approach the notified authority under Section 132(11) within thirty-days and that authority can direct the Income-tax Officer to pass a fresh order. We cannot accept the contention on behalf of the respondents that even such a fresh order should be passed within ninety days. It would make the Sub-sections (11) and (12) of Section 132 ridiculous and useless."

13. In view of the aforesaid decision, it must be held that the bar of limitation specified in Section 18(5) of the Act would apply to the first or initial order to be passed by the WTO. When the order passed by the WTO is pending for consideration before the appellate authorities and: those authorities, it was not disputed before us, have the power to remand the matter for deciding it afresh, the bar of limitation Under Section 18(5) would not be operative. In our view, therefore, the Tribunal was not justified in cancelling the penalty instead of asking for a remand report or sending the the case back to the WTO. Our answer to the second question: is, therefore, in the negative and against the assessee.

14. In the circumstances of the case, parties shall bear their own costs.

15. Reference answered accordingly.

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