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K.C Mukherjee And Another v. Commissioner Of Income-Tax, Bihar And Orissa Opposite Party.
Legal Opinion Summary — Ramaswami, C.J.
Factual and Procedural Background
Two assessees, equal partners in the firm of K.C. and P.C. Mukherjee of Sijua, were originally assessed for the years 1945–1946, 1946–1947 and 1947–1948 on the basis of share income returns. Subsequently it was discovered that both had made substantial investments in two private limited companies (Mohalbani Collieries Limited and Central Kankanee Collieries Limited) involving sums of Rs. 25,000 for calendar year 1944, Rs. 55,348 for calendar year 1945 and Rs. 55,000 for calendar year 1946.
The Income-tax Officer, having concluded that income had escaped assessment, issued notices under Section 34 on 8 September 1949 to both assessees for the three assessment years. The assessees filed returns under Section 34 declaring total incomes (per assessee) of Rs. 59,325 for 1945–1946, Rs. 55,220 for 1946–1947 and Rs. 79,581 for 1947–1948. The Income-tax Officer imposed penalties on the basis of escaped tax.
The assessees appealed to the Appellate Assistant Commissioner and the appeals were dismissed. On further appeal to the Income-tax Appellate Tribunal the assessees contended that proceedings under Section 34 are separate from the original assessment proceedings and, because there was no concealment in the Section 34 proceedings, penalties under Section 28 could not legally be imposed. The Tribunal rejected that contention and held the penalties valid; under Section 66(1) of the Income-tax Act the Tribunal referred the following question of law to the High Court:
“Whether on a proper construction of Section 34 and Section 28 of the Income Tax Act of 1922, the levy of penalties in S.34 proceedings is valid?”
Legal Issues Presented
- Whether, on a proper construction of Section 34 and Section 28 of the Income-tax Act, the levy of penalties in Section 34 proceedings is legally valid.
- Whether proceedings under Section 34 are separate and distinct from the original assessment proceedings (under Section 23 and the process initiated by the general notice under Section 22(1)), and, if they are separate, whether a penalty under Section 28 can be levied only for defaults occurring in the course of the Section 34 proceedings.
Arguments of the Parties
Assessees' Arguments (as presented in the opinion)
- Proceedings under Section 34 are separate and distinct from the original assessment proceedings because they start with the service of a fresh notice; they are therefore fresh proceedings.
- Section 34 proceedings relate to escaped assessment and do not reopen the original assessment; accordingly, penalties under Section 28 could be imposed only in respect of defaults or acts committed in the course of the Section 34 proceedings themselves and not for defaults occurring in the prior (original) proceedings.
- Because there had been no concealment in the Section 34 proceedings, it was submitted that imposition of penalty under Section 28 was not legally sustainable.
Respondent / Income-tax Department
The opinion does not contain a detailed account of the Department's specific arguments. The record shows, however, that the Income-tax Officer imposed penalties, the Appellate Assistant Commissioner dismissed the appeals, and the Tribunal held the penalties valid before referring the legal question to the High Court.
Table of Precedents Cited
| Precedent | Rule or Principle Cited For | Application by the Court |
|---|---|---|
| C.V. Govindrajulu Iyer v. Commissioner of Income-tax, Madras — 1948-16 ITR 391 (AIR 1949 Mad 399) | Holds that where an assessee failed to furnish a return as required by a notice under Section 22(2) and no notice under Section 22(2) was issued within the year, the Income-tax Officer was competent, in the course of proceedings under Section 34, to levy a penalty under Section 28(1)(a) for failure without reasonable cause to furnish a return pursuant to the notice under Section 22(1). | The High Court followed and preferred this decision: it supports the view that penalties under Section 28 may be levied in Section 34 proceedings even if the default relates to a prior proceeding. |
| Mayaram Durga Prasad v. Commissioner of Income-tax, United Provinces — 5 ITC 471 (All) | Referred to by learned counsel (noted in the record) as bearing on the point. | The High Court observed, with respect, that the Mayaram Durga Prasad decision does not lay down the correct law on the issue and therefore preferred the Madras decision instead. |
Court's Reasoning and Analysis
The court's analysis proceeded from statutory interpretation of Section 28 and a textual and contextual reading of Sections 22, 23 and 34.
1. The court rejected the assessees' primary contention that Section 34 proceedings are separate and distinct from the original assessment proceedings for the purposes of imposing penalties. The judge observed that although a completed Section 23 assessment closes those proceedings (subject to the statutory mechanisms for reopening provided by Sections 33A, 33B, 34 and 35), that does not make Section 34 proceedings entirely separate in character. Section 34 proceedings, which arise in relation to escaped income, essentially relate to the same proceeding that is commenced with the publication of the general notice under Section 22(1); they may in some cases lead to supplementary assessments or to first-time assessments, but they are not distinct for the purpose of excluding prior defaults from consideration.
2. The court then turned to the language of Section 28. The opening clause of Section 28 provides that if the Income-tax Officer, Appellate Assistant Commissioner or the Appellate Tribunal, "in the course of any proceedings under this Act, is satisfied that any person ... has concealed the particulars of his income or deliberately furnished inaccurate particulars," a penalty may be directed. Grammatically and logically, the phrase "in the course of any proceedings" modifies when the satisfaction of the officer must occur (i.e., the officer's satisfaction must arise in the course of some proceedings); it does not restrict the temporal occurrence of the default itself to the very proceedings in which the satisfaction arises.
3. Consequently, even if the officer's satisfaction is reached during Section 34 proceedings, the default in respect of which the officer is satisfied may have occurred in an earlier proceeding (for example, the original assessment begun under Section 22(1) and concluded under Section 23). Section 28, on its proper construction, therefore permits the officer to impose a penalty in Section 34 proceedings on the basis of a concealment or inaccurate particulars that occurred in prior proceedings, so long as the officer's satisfaction as to that concealment occurs in the course of proceedings under the Act (including Section 34 proceedings).
4. The court found corroboration for this interpretation in authority: it relied upon the Madras High Court decision in C.V. Govindrajulu Iyer (1948-16 ITR 391 : AIR 1949 Mad 399), which held that the officer was competent in Section 34 proceedings to levy penalty under Section 28(1)(a) for failure to furnish a return pursuant to a notice under Section 22(1), even though the operative default related to earlier steps in the assessment process. The court expressly preferred the Madras decision over the decision relied upon from Allahabad (Mayaram Durga Prasad), which it considered not to lay down the correct law on the point.
Holding and Implications
Holding: The High Court held that the levy of penalty upon both assessees under Section 28 of the Income-tax Act in the circumstances of this case is legally valid. The referred question of law was answered in favour of the Income-tax Department and against the assessees.
Implications:
- The direct effect is that the penalties imposed by the Income-tax Officer (and upheld on appeal) were legally sustainable and remain payable by the assessees.
- The assessees were ordered to pay the costs of the reference; a hearing fee of Rs. 250 was awarded.
- The court relied on and adopted the reasoning of the Madras High Court decision cited; it expressly rejected the contrary view in the Allahabad decision as not laying down the correct law. The opinion does not purport to state that it is establishing any novel legal principle beyond its application of Section 28 to the facts before it; it disposes of the referred question in favour of the department in these proceedings.
Disposition recorded in the opinion: "Answer for department." (Kanhaiya Singh, J. agreed.)
V. Ramaswami, C.J:— In this case the two assessees were equal partners in the firm of K.C and P.C Mukherjee of Sijua. Assessments were originally made for the years 1945–1946, 1946–1947 and 1947–1948 on the share income return of the two assessees. Later on it transpired that the two assessees had made substantial investments in two private limited companies, Mohalbani Collieries Limited and Central Kankanee Collieries Limited, the amounts involved being Rs. 25,000/- for the calendar year 1944, Rs. 55,348/- for the calendar year 1945 and Rs. 55,000/- for the calendar year 1946, in each case. After having satisfied himself that income had escaped assessment the Income-tax Officer issued notices under S. 34 on the 8th September, 1949, to both the assessees in respect of the three assessment years. The assessees made returns under S. 34 and declared the following amounts of income each:
Rs. 1945-1946 … 45,325 … Share income 14,000 … Other sources, cash introduced shown as income in the absence of proof. Total. 59,325 1946-1947 … 31,772 … Share Income 23,448 … Other source Total. 55,220 1947-1948 … 24,581 … Share Income 55,000 … Other sources, cash introduced shown as income in absence of evidence to prove the same. Total. 79,581
2. The Income-tax Officer levied penalties on the basis of escaped tax as against both the assessees. The assessees preferred appeals to the Appellate Assistant Commissioner, but the appeals were dismissed. The matter was taken by the assessees on further appeals to the Income-tax Appellate Tribunal. It was contended on their behalf that S. 34-proceedings were separate and distinct from the original assessment proceedings, and as there had been no concealment in S. 34-proceedings there could be no legal imposition of penalty under Section 28 of the Income-tax Act. The contention was rejected by the Income-tax Appellate Tribunal and it was held that the penalties were validly imposed upon the two assessees. Under Section 66(1) of the Income-tax Act the Income-tax Appellate Tribunal has submitted this following question of law for the determination of the High Court:
“Whether on a proper construction of Section 34 and Section 28 of the Income Tax Act of 1922, the levy of penalties in S. 34 proceedings is valid?”
3. The answer to this question depends upon the proper interpretation of Section 28 of the Income-tax Act, which runs as follows:
“28. Penalty for concealment of income or improper distribution of profits. (1) If the Income-tax Officer, the Appellate Assistant Commissioner or the Appellate Tribunal, in the course of any proceedings under this Act, is satisfied that any person—
(a) has without reasonable cause failed to furnish the return of his total income which he was required to furnish by notice given under sub-sec. (1) or sub-sec. (2) of S. 22 or S. 34 or has without reasonable cause failed to furnish it within the time allowed and in the manner required by such notice, or
(b) has without reasonable cause failed to comply with a notice under sub-sec. (4) of S. 22 or sub-sec. (2) of S. 23, or
(c) has concealed the particulars of his income or deliberately furnished inaccurate particulars of such income,
he or it may direct that such person shall pay by way of penalty, in the case referred to in clause (a), in addition to the amount of the income-tax and supertax, if any payable by him, a sum not exceeding one and a half times that amount, and in the cases, referred to in clauses (b) and (c), in addition to any tax payable by him, a sum not exceeding one and a half times the amount of the income-tax and supertax, if any, which would have been avoided if the income as returned by such person had been accepted as the correct income:
4. It was submitted by Mr. Mitra on behalf of the assessees that the proceedings under Section 34 of the Income-tax Act are separate proceedings from the original assessment proceedings. It was pointed out that the proceedings under S. 34 start with the service of notice and, therefore, they are fresh proceedings. It was submitted that the proceedings under S. 34 relate to escaped assessment, that is, assessment which has escaped totally or partially, and such proceedings are separate and distinct from a prior proceeding under S. 23 of the Act.
5. Mr. Mitra also addressed the argument that if there has been an assessment under S. 23 of the Act and thereafter there is a proceeding under S. 34 because of the escape of any item of income from the assessment, then penalty could be levied only in respect of defaults or other acts committed in the course of that proceeding and not in the course of the original proceeding which ended with the assessment. The contention of the assessees was, therefore, that it was not competent for the Income-tax Officer to levy penalty in the course of proceedings under Section 34 of the Income-tax Act for a default not committed in the course of those proceedings.
6. I am unable to accept this argument as correct. It is true that once an assessment has been made under S. 23 of the Act or an order is passed by the Income-tax Officer that no assessment can be levied, the proceedings are closed, and the proceedings cannot be reopened and the result of the proceedings cannot be altered in any manner except in the manner provided by Sections 33A, 33B, 34 and 35 of the Income-tax Act. It is also manifest that under S. 34 of the Act there is no de novo assessment in the sense that it is open to the assesee also to show that he has been wrongly assessed in respect of matters which are not covered by the notice under S. 34. But that does not mean that for the purpose of S. 23 the two proceedings are separate and distinct.
7. Essentially the proceeding under S. 34 with regard to the escaped income relates to the same proceeding which is commenced with the publication of the general notice under S. 22(1). In some respects it may lead to supplementary assessment and in other cases it may result in an assessment for the first time. There is however no justification for the argument that proceedings under S. 34 are separate and distinct proceedings from the original assessment proceedings. I, therefore, reject the argument of learned counsel for the assessee on this point and hold that proceedings under S. 34 essentially relate to the same proceeding which is initiated with the publication of the general notice under S. 22(1) of the Act.
8. My view is that so long as the proceedings under S. 34 relate to the assessment for the same period and for the same assessee as the original assessment, the Income-tax Officer is competent to levy a penalty on any ground open to him under S. 28(1), even though the default relates to the prior proceeding.
9. Even upon the assumption that a proceeding under S. 34 is a separate proceeding from the original proceeding, there is nothing in the language of Section 28 of the Income-tax Act to suggest that the Income-tax Officer can impose penalty under that section only if the default occurs in the course of the section 34 proceeding.
10. The opening clause of S. 28 states that “it the Income-tax Officer, the Appellant Assistant Commissioner or the Appellate Tribunal in the course of any proceedings under this Act, is satisfied that any person….. (c) has concealed the particulars of his income or deliberately furnished inaccurate particulars of such income…..”
11. Grammatically speaking, the phrase “in the course of any proceedings” only governs the satisfaction of the Income-tax Officer, the Appellate Assistant Commissioner or the Appellate Tribunal, and not concealment by the assessee of the particulars of income referred to in sub-s. 1(c) of S. 28.
12. It may be that the satisfaction of the Income-tax Officer occurs in the course of S. 34 proceedings, but the section does not say that the default of the assessee should necessarily occur in the same S. 34 proceedings. The section contemplates that the default of the assessee may have occurred in a prior proceeding under S. 22(1) or S. 22(2), but still the Income-tax Officer will be competent to impose penalty under Section 28 of the Income-tax Act if he is satisfied in the course of the section 34 proceedings that a default had occurred either in that proceeding or in any prior proceeding.
13. The view that I have expressed is borne out by a decision of the Madras High Court in C.V Govindrajulu Iver v. Commissioner of Income-tax Madras, 1948-16 ITR 391 : (AIR 1949 Mad 399), where an assessee had failed to furnish a return of his total income as required by a notice under Section 22(2) of the Income-tax Act, but no notice under S. 22(2) was issued by the Department within the year of assessment. It was held by Rajamannar, C.J that the Income-tax Officer was competent, in the course of the proceedings taken by him under S. 34 of the Act, to levy a penalty under section 28(1)(a) for failure without reasonable cause to ??? a return pursuant to the notice under S. 22(1).
14. It was also observed in that case that so long as the proceedings under S. 34 relate to the assessment for the same period as the original assessment, the Income-tax Officer was competent to levy a penalty on any ground open to him under S. 28(1), even though it related to a prior proceeding. Learned Counsel referred to the decision of the Allahabad High Court in Mayaram Durga Prasad v. Commissioner of Income-tax, United Provinces, 5 ITC 471 (All). With great respect I think that decision does not lay down the correct law on the point. On the contrary, I would prefer to follow the decision of the Madras High Court in 1948-16 ITR 391 : (AIR 1949 Mad 399), as I have already indicated.
15. For the reasons expressed I hold that in the circumstances of this case the levy of penalty upon both the assessees under Section 28 of the Income-tax Act is legally valid. I would accordingly answer the question of law referred my the Income-tax Appellate Tribunal to the High Court in favour of the Income-tax Department and against the assesses. The assessee must pay the cost of this reference. Hearing fee Rs. 250/-.
16. Kanhaiya Singh, J.— I agree.
V.S.B
17. Answer for department.
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