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  • Ramaswami
  • Choudhary, JJ.
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  • Choudhary, JJ.
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Smart Summary

Structured Summary of the Opinion — Ramaswami, J. (with Choudhary, J. concurring)

Factual and Procedural Background

The assessee was a Hindu undivided family (HUF) operating under the name "Sanichar Sah Bhim Sah of Katrasgarh" and was assessed to income-tax for the assessment year 1945–1946.

During the assessment the Income-tax Officer (ITO) found deliberate concealment of income by the HUF, consisting of cash credits and the maintenance of three sets of accounts. In a statement under Section 37 of the Income-tax Act, Bhim Sah (a member of the HUF) admitted maintaining three sets of accounts to conceal income and stated that the "paicha khata in the books originally produced really represented sales that were sought to be concealed."

The Income-tax Officer determined the total income of the assessee for 1945–1946 to be "???" (the exact figure in the provided opinion is not legible), which was reduced on appeal to the Appellate Assistant-Commissioner by Rs. 10,488.

Separately, the ITO initiated proceedings under Section 28(1)(c) of the Act for deliberate concealment and issued a notice under that provision on 23-3-1946. In the course of assessment for 1947–1948 the assessee claimed a partition with effect from 13-2-1946. The ITO investigated and on 18-3-1949 passed an order under Section 25-A holding that the HUF had become separate with effect from 13-2-1946.

Despite the Section 25-A order, the S.28 proceeding continued. On 24-4-1950 the ITO imposed a penalty of Rs. 22,000 on the HUF for concealment in 1945–1946 and directed that the divided members should pay the penalty. The members appealed to the Appellate Assistant Commissioner, who allowed the appeal and cancelled the penalty on the ground that the Income-tax Act did not authorise imposition of penalty on a HUF which had ceased to exist. The ITO appealed to the Appellate Tribunal, which dismissed the appeal and confirmed the Appellate Assistant Commissioner's order.

At the instance of the Income-tax Department the Tribunal stated the following two questions of law to the High Court.

Legal Issues Presented

  1. whether in the facts and circumstances of the case the Income-tax Officer could impose a penalty on 24-4-50 under S. 28(1)(c) of the Act in respect of concealment of income by the Hindu undivided family of Sanichar Sah Bhim Sah whose members had become separated with effect from 14-2-46?
  2. Whether in the facts and circumstances of the case the procedure prescribed by S. 25-A of the Act could be applied to the proceedings taken under S. 28 of the Act in respect of concealment of Income by the Hindu undivided family of Sanichar Sah Bhim Sah whose members had become separated with effect from 14-2-46?

Arguments of the Parties

Income-tax Department (as summarized in the opinion)

  • Mr. Bahadur (for the Income-tax Department) argued that the machinery prescribed by Section 25-A could be applied for recovery of the penalty imposed on the HUF even after the family had become separated. He further contended that Section 25-A should be applied by analogy to proceedings under Section 28 because otherwise the penalty imposed on a HUF could not be recovered.

Assessee / Divided Members (as reflected in the appellate orders)

  • The Appellate Assistant Commissioner allowed the appeal by the divided members and cancelled the penalty on the ground that there was no provision in the Income-tax Act authorising the ITO to impose penalty on a HUF which had ceased to exist.

Table of Precedents Cited

No precedents were cited in the provided opinion.

Court's Reasoning and Analysis

The court's analysis proceeded through statutory interpretation of relevant provisions, focusing primarily on Sections 2, 3, 25-A and 28 of the Income-tax Act and on the temporal existence of the HUF as a legal entity.

  1. Definitions and legal personality:
    • The court noted that the expression "person" in S. 28(1)(c) includes a Hindu undivided family because S. 2(9) defines 'person' to include a HUF.
    • Similarly, the expression "assessee" in S. 28(3) refers to a HUF by virtue of the definition in S. 2(2).
    • Section 3 treats a HUF as a separate legal entity for the purpose of imposing a charge of income-tax; therefore under the Act a HUF is a separate legal unit distinct from its members. This conceptual background is noted as underpinning S. 25-A as well.
  2. Procedural prerequisite to imposing penalty:
    • Section 28(3) requires that no order imposing penalty under sub-s. (1) shall be made unless the assessee has been heard or given a reasonable opportunity of being heard. The court emphasised this peremptory procedural condition for imposing penalties under S. 28.
    • Because the statute treats a HUF as a separate legal entity, that entity must be heard (or given opportunity) before an order is made against it.
  3. Temporal existence of the HUF and application to the facts:
    • The ITO's order under S. 25-A accepted that partition occurred and the family was separate with effect from 13-2-1946 (the S.25-A order was dated 18-3-1949).
    • The notice under S. 28(1)(c) was issued on 23-3-1946 and the final penalty order was passed on 24-4-1950; the court observed that the HUF did not exist on the date the ITO started the S.28 proceeding and also did not exist on the date the penalty was imposed.
    • Given that the specific legal entity (the HUF) was non-existent at the relevant times, the court held that the proceeding under S.28(1)(c) and the penalty order were legally invalid because the peremptory condition (that the assessee/HUF be heard) could not be satisfied for a non-existent entity and because the order purported to act upon an entity that no longer existed under the Act.
  4. On whether S. 25-A machinery applies to penalties under S. 28:
    • Section 25-A, read as a whole, refers to assessments made under S. 23 where partition has been claimed at the time of assessment and prescribes how income should be assessed and how members or groups of members shall be liable for a share of the tax.
    • The court analysed S. 25-A(1) and (2) and concluded it is tied to assessment (i.e., "where at the time of making an assessment under S. 23") and to liability for a share of tax; S.25-A(2) makes explicit reference to "tax" and to members being liable for a share of the tax, and does not refer to liability for a share of any penalty imposed on the joint family.
    • The court emphasised that the legislature draws a clear distinction between "tax" and "penalty" elsewhere in the Act (citing the separate recovery provisions: Ss. 45 and 46 for tax and S. 47 for penalty) and therefore it is not permissible to read "tax" in S.25-A as including "penalty" without express legislative language to that effect.
    • The Department's submission that S.25-A should be applied by analogy to S.28 proceedings because without such application the penalty could not be recovered was rejected. The court held that filling such a gap would amount to legislation, which is not the court's function; any remedial measure for such a statutory gap must be provided by the legislature through amending legislation.
  5. Conclusion of analysis:
    • Both referenced questions were answered against the Income-tax Department: the S.28 proceeding and the penalty order were invalid as they were directed to a non-existent HUF, and S.25-A's machinery does not extend to imposing or distributing penalties under S.28 after disruption of the HUF.

Holding and Implications

Holding: The High Court answered both questions in favour of the assessee and against the Income-tax Department. Concretely:

  • The proceeding initiated by the Income-tax Officer under Section 28(1)(c) and the final order imposing a penalty on 24-4-1950 were held to be legally invalid because the Hindu undivided family was non-existent on the dates the proceedings were commenced and the penalty imposed.
  • The machinery prescribed by Section 25-A of the Income-tax Act cannot be applied to proceedings under Section 28 for imposing or recovering penalty after a Hindu undivided family has been disrupted; Section 25-A governs assessment and allocation of tax, not liability for penalties.

Implications:

  • Direct effect on the parties: The court ruled in favour of the assessee (the divided members), set aside the validity of the S.28 penalty proceedings and the penalty order, and directed that the Income-tax Department pay the costs of the reference. The hearing fee of Rs. 250 was noted.
  • Broader legal consequences: The court emphasised statutory limits — it refused to extend S.25-A by analogy to cover penalties and warned against judicial law-making to fill a statutory gap; any legislative remedy must come from Parliament. The opinion did not purport to create or declare a new rule beyond the statutory interpretation and application to the facts; it resolved the stated legal questions on those grounds.

Order: Answers accordingly; the Income-tax Department must pay the costs of the reference. Hearing fee Rs. 250. (Choudhary, J. concurred.)

This summary is strictly confined to and derived from the text of the provided opinion. No information beyond the opinion has been added or inferred.

Show full summary ...

    Commr. Of Income-Tax, B. & O. v. Sanichar Sah Bhim Sah Opposite Party.

    Ramaswami, J.:— In this case the assessee is a Hindu undivided family under the name of Sanichar Sah Bhim Sah of Katrasgarh which was assessed to income-tax for the assessment year 1945-1946. In the course of the assessment proceeding the Income-tax Officer found that the Hindu undivided family had deliberately concealed its income. The assessee had concealed its income in the shape of cash credits and the assessee had further maintained three sets of accounts for the purpose of concealing its income. In a statement made under Section 37 of the Income-tax Act, Bhim Sah, a member of the undivided family, conceded that three sets of accounts were maintained in order to conceal the income. Bhim Sah further admitted that the “paicha khata in the books originally produced really represented sales that were sought to be concealed”.

    2. Finally the Income-tax Officer determined the total income of the assessee for the assessment year 1945-1946 to be ??? reduced on appeal to the Appellate Assistant-Commissioner by Rs. 10,488. Meanwhile the Income-tax Officer started a proceeding under S. 28(1)(c) of the Act against the undivided Hindu family for deliberate concealment of its income. The notice under S. 28(1)(c), was issued by the Income-tax Officer on 23-3-1946. In the course of assessment for the assessment year 1947-1948 the assessee claimed that a partition had taken place among the members of the Hindu undivided family with effect from 13-2-1946. The Income-tax Officer investigated the claim and found that there was actual disruption of the Hindu undivided family and the brothers. Bhim Sah and Arjun Sah had become separate. On 18-3-1949, the Income-tax Officer passed an order under S. 25-A of the Act holding that the Hindu undivided family had become separate with effect, from the 13-2-1946. Meanwhile the proceeding taken under S. 28(1) of the Act continued and on 24-4-1950, the Income-tax Officer passed an order imposing a penalty of Rs. 22,000 upon the Hindu undivided, family for concealment of its income for the assessment year 1945-1946. The Income-tax Officer further ordered that the divided members of the family should pay the penalty imposed. An appeal was taken by the members of the family against the order of the Income-tax Officer to the Appellate Assistant Commissioner. The appeal was allowed and the Appellate Assistant Commissioner cancelled the penalty imposed by the Income-tax Officer on the ground that there was no provision in the Income-tax Act authorising the Income-tax Officer to impose penalty on a Hindu undivided family which had ceased to exist. The Income-tax Officer appealed to the Appellate Tribunal against the order of the Appellate Assistant Commissioner. The appeal was dismissed by the Tribunal and the order passed by the Appellate Assistant Commissioner was confirmed.

    3. At the instance of the Income-tax Department the Tribunal has stated a case on the following questions of law:

    “(1) whether in the facts and circumstances of the case the Income-tax Officer could impose a penalty on 24-4-50 under S. 28(1)(c) of the Act in respect of concealment of income by the Hindu undivided family of Sanichar Sah Bhim Sah whose members had become separated with effect from 14-2-46? and (2) Whether in the facts and circumstances of the case the procedure prescribed by S. 25-A of the Act could be applied to the proceedings taken under S. 28 of the Act in respect of concealment of Income by the Hindu undivided family of Sanichar Sah Bhim Sah whose members had become separated with effect from 14-2-46”?

    4. Section 28(1)(c) of the Act states:

    “If the Income-tax Officer is satisfied that any person….(c) has concealed the particulars of his income or deliberately furnished inaccurate particulars of such income, he may direct that such person shall pay by way of penalty………in addition to any tax payable by him, a sum not exceeding one and a half times the amount ??? would have been avoided if the income as returned by such person had been accepted as the correct income”.

    5. The expression ‘person’ which occurs in S. 28(1)(c), includes a Hindu undivided family for S. 2(9) of the Act defines a ‘person’ to include a Hindu undivided family and local authority. Section 28(3) is also important.

    6. Section 28(3) is in the following terms:

    “No order shall be made under sub-s. (1) or sub-S. (2), unless the assessee or partner, as the case may be, has been heard, or has been given a reasonable opportunity of being heard”.

    7. The expression ‘assessee’ in S. 28(3), also refers to a Hindu undivided family in view of the definition given in S. 2(2) of the Act. It is therefore clear that S. 28, authorises the Income-tax authorities to impose penalty on a Hindu undivided family. But the power of the Income-tax authorities to impose the penalty is subject to the peremptory condition that notice must be given to the Hindu undivided family to show cause. In other words, the penalty cannot be imposed by the Income-tax authorities unless the Hindu undivided family is heard or is given a reasonable opportunity of being heard before the final order is passed. It is also important to remember in this connection that a Hindu undivided family is a separate legal unit under the scheme of the Income-tax Act.

    8. As I have already stated, S. 2(9) defines a ‘person’ to include a Hindu undivided family. Section 3 treats a Hindu undivided family as a separate legal entity for the purpose of imposing a charge of income-tax. That is also the underlying basis of S. 25-A of the Act. In the context of the Income-tax Act therefore a Hindu undivided family is a separate legal entity and is distinct from the members constituting a Hindu undivided family. In the present case the order of the Income-tax Officer under S. 25-A, clearly shows that the Income-tax Officer accepted the claim that the family was separate from 10-2-1946. The notice under S. 28(1)(c) of the Act was issued by the Income-tax Officer on 23-3-1946, against the divided members of the Hindu undivided family. The final order under S. 28 was passed by the Income-tax Officer on 24-4-1950, and the divided members of the family were directed to pay the penalty.

    9. It is clear in these circumstances that the Hindu undivided family was not existing on the date the Income-tax Officer started the proceeding under S. 28(1)(c), and also on the date the Income-tax Officer imposed the penalty. In my opinion the proceeding initiated by the Income-tax Officer under S. 28(1)(c) of the Act is legally invalid since the Hindu undivided family was non-existent on that date. It follows that the order of the Income-tax Officer imposing the penalty on 24-4-1950, is also legally invalid.

    10. The second question is whether the machinery prescribed by S. 25-A of the Act could be applied to the proceedings taken under S. 28 of the Act for imposing penalty on the Hindu undivided family of Sanichar Sah Bhim Sah whose ??? with effect from 14-2-1946. The argument put forward by Mr. Bahadur on behalf of the Income-tax Department was that the machinery prescribed by S. 25-A could be applied for recovery of the penalty imposed on the Hindu undivided family-even after they had become separated. In my opinion the argument is unsound.

    11. Section 25-A(1) states:

    “Where at the time of making an assessment, under S. 23, it is claimed by or on behalf of any member of a Hindu family hitherto assessed as undivided that a partition has taken place, among the members of such family, the Income-tax Officer shall make such inquiry thereinto as he may think fit, and, if he is satisfied that the joint family property has been, partitioned among the various members or groups of members in definite portions he shall, record an order to that effect.”

    12. Section 25-A(2) is in the following terms:

    “Where such an order has been passed, or where any person has succeeded to a business, profession or vocation formerly carried on by a Hindu undivided family whose joint family property has been partitioned on or after the last day on which it carried on such business, profession or vocation, the Income-tax Officer shall make an assessment of the total income received by or on behalf of the joint family as such, as if no partition had taken place, and each member or group of members shall, in addition to any income-tax for which he or it may be separately liable and notwithstanding anything contained in Sub-s. (1) of S. 14, be liable for a share of the tax on the income-so assessed according to the portion of the joint family property allotted to him or it; and the Income-tax Officer shall make assessments accordingly on the various members and groups of members in accordance with the provisions of S. 23.”

    13. It is manifest that S. 25-A refers to assessment, of a Hindu undivided family which had become separated in the course of the assessment year. The section does not, in my opinion, lay down the machinery for the imposition of penalty on a Hindu undivided family which had become disrupted. This is clear from the opening words of S. 25-A(1): “Where at the time of making an assessment under S. 23”. This view is also borne out by the language of S. 25-A(2) which states that “the member or group of members” shall be liable for a share of the tax on the income assessed. Section 25-A(2) does not say that the member or group of members shall be liable to pay a share of the penalty imposed upon a Hindu undivided family. It cannot be argued and it was not argued on behalf of the Income-tax Department that the expression ‘tax’ in S. 25-A includes penalty also, for the legislature has made a sharp distinction between tax and penalty in enacting the various provisions of the Income tax Act.

    14. For instance, Ss. 45 and 46 refer to the time and manner of recovery of tax from the assessee and S. 47 deals with the recovery of penalty. For these reasons I am of opinion that the machinery prescribed by S. 25-A cannot be applied to the proceedings taken under S. 28 of the Act for imposing penalty on a Hindu undivided family after it had disrupted and after the Income-tax Officer had made an order under S. 25-A. On behalf of the Income-tax Department Mr. Eahadur made the submission that S. 25-A should be applied by analogy to the proceedings taken under S. 28 because the penalty imposed on a Hindu undivided family cannot be otherwise recovered. It is clear that, there is a gap in the provisions of the Act; but it is not the function of the Court to fill up gap. The function of the Court is to interpret and not to legislate and the Court cannot fill up the gap under the guise of interpretation. That would be legislation and not adjudication. If there is a gap, it is for the legislature to provide the remedy by enacting suitable amending legislation. For the reasons I have expressed I hold that both the questions referred to the High Court must be answered against the Income-tax Department and in favour of the assessee. The Income-tax Department must pay the cost of the reference. Hearing fee Rs. 250.

    Choudhary, J.:— I agree.

    D.H.Z

    15. Answers accordingly.

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    Commr. Of Income-Tax, B. & O. v. Sanichar Sah Bhim Sah Opposite Party.
    (Nov 4, 1954)