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Case Number

Income-tax Reference No. 51 of 1967

Advocates

Bhagirath Dass with B. K. Jhingon, Advocates,
D. N. Awasthy with B. S. Gupta, Advocates,

Judges

Mehar Singh, C.J,
Shamsher Bahadur, J.

Acts

SECTION 66 A INCOME TAX ACT 1922
sub-section (3) of section 28

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Smart Summary

Summary of the Opinion (Reference under section 66(1) of the Income-tax Act, 1922)

Factual and Procedural Background

The reference arises from proceedings under section 28 of the Income-tax Act, 1922, concerning a registered firm (Messrs. Sat Prakash Ram Naranjan) assessed for the year 1954-55. The Income-tax Officer (ITO) formed the view that sums standing to the credit of the wives of the partners (total Rs. 47,996) were unaccounted for and treated as concealed income. Pursuant to that view, a penalty of Rs. 10,000 was levied under section 28(1)(c) in an order dated 13 December 1960, with prior approval of the Inspecting Assistant Commissioner.

The procedural chronology relevant to the question is:

17 September 1958: ITO, B-Ward, Jullundur, issued a notice under section 28 to the assessee.
6 November 1958: The assessee replied and requested that penalty proceedings be held over until disposal of the quantum appeal for 1954-55.
About July 1959: Jurisdiction over the assessee was transferred from ITO, B-Ward, to ITO, C-Ward.
2 December 1959: The quantum appeal was disposed of.
13 December 1960: ITO, C-Ward, imposed the penalty without informing the assessee or giving a fresh opportunity to be heard.
8 June 1962: The Appellate Assistant Commissioner allowed the assessee's appeal, holding that the successor ITO (C-Ward) had imposed the penalty without complying with the proviso to section 5(7C) (which provides that the assessee may demand re-opening or re-hearing when jurisdiction is transferred).
On further appeal, the Income-tax Appellate Tribunal (ITAT) reversed the Appellate Assistant Commissioner and restored the ITO's order, finding that the assessee had become aware of the change of jurisdiction and had not demanded an opportunity from the successor ITO.

The High Court was asked to answer the referred question under section 66(1) of the Act concerning whether ITO C-Ward was bound to give the assessee an opportunity of being heard where the assessee was aware of the change of jurisdiction but did not demand such opportunity.

Legal Issues Presented

Whether, on the facts and in the circumstances of the case, the Income-tax Officer, "C" Ward, Jullundur, was bound to give the assessee an opportunity of being heard inasmuch as the assessee was aware of the change of jurisdiction to this Income-tax Officer and did not demand such an opportunity?

Arguments of the Parties

Assessee's Arguments (Mr. Bhagirath Dass)

Even if the factual findings that the assessee knew of the change of jurisdiction and did not ask for an opportunity are accepted, the successor Income-tax Officer (C-Ward) had an independent obligation to afford an opportunity to be heard under subsection (3) of section 28.
The ITO, B-Ward, by agreeing to the assessee's request of 6 November 1958 to hold proceedings in abeyance, should be taken to have acceded to that request; long delay (over two years) without further proceedings indicated that the original officer had effectively held the matter in abeyance.
Sub-section (7C) of section 5 imposes a duty on the successor ITO to ascertain from the assessee whether the proceeding should be continued from the previous stage or whether reopening / re-hearing should be allowed; thus the successor should have taken active steps to inform or re-hear the assessee.
It would be unrealistic to require the assessee to monitor internal developments; the natural justice requirement and practical fairness required the successor ITO to inform the assessee that the penalty matter would be taken up (and afford a hearing).
Relied on the Division Bench decision in Calcutta Tanneries (1944) Ltd. v. Commissioner of Income-tax to support the proposition that a successor officer must give a fresh opportunity to be heard before imposing penalty.

Revenue's Arguments (Mr. Awasthy)

The revenue relied on precedents (A. C. Metal Works v. Commissioner of Income-tax; Shop Siddegowda and Family v. Commissioner of Income; Hulekar and Sons v. Commissioner of Income-tax) where the successor officer proceeded without granting a fresh hearing because the assessee had already submitted written explanations to the predecessor and had not asked for a rehearing under the proviso to section 5(7C).
In those authorities, the courts held that if the assessee had filed written explanations and did not ask to appear or seek re-hearing, the successor officer could legitimately consider the written material and impose penalty without an oral hearing.
In the present case, it was submitted that no explanation had been filed by the assessee before B-Ward and that the penalty proceedings had remained suspended for about two years before the successor imposed penalty without giving the assessee any further opportunity.

Table of Precedents Cited

Precedent	Rule or Principle Cited For	Application by the Court (as described in the opinion)
Calcutta Tanneries (1944) Ltd. v. Commissioner of Income-tax (Division Bench, Calcutta High Court)	Where penalty proceedings were initiated by one ITO and, after a long interval, a successor officer imposed penalty without giving the assessee an opportunity to be heard, the proviso to section 5(7C) does not oust the requirement of a fresh opportunity under section 28(3); the successor must give a further opportunity to be heard.	The assessee relied on this decision to support the contention that ITO C-Ward was bound to give an opportunity before imposing penalty; the court treated this authority as establishing that the successor officer had no authority to impose penalty without giving a fresh hearing.
A. C. Metal Works v. Commissioner of Income-tax (Division Bench, Rajasthan High Court)	Where an assessee had submitted a written explanation to the first officer, did not appear or seek to adduce evidence, and did not demand rehearing under the proviso to section 5(7C), the succeeding officer could continue proceedings and impose penalty after considering the written representation without giving a fresh opportunity of being heard.	The revenue relied on this authority to argue that a successor could proceed without a fresh oral hearing when a written explanation had already been furnished and no re-hearing had been sought; the opinion notes that in the instant case no written explanation had been filed, which distinguished the facts.
Shop Siddegowda and Family v. Commissioner of Income (Division Bench, Mysore High Court)	Similar principle: where a written representation had been furnished to the earlier officer and the assessee did not seek a fresh opportunity, the successor could proceed considering the written representation.	The revenue cited this case as supporting the proposition that a successor need not give a fresh hearing when a written representation exists and no re-hearing had been requested; the opinion treats it as consonant with the Rajasthan decision.
Hulekar and Sons v. Commissioner of Income-tax (Division Bench, Mysore High Court)	Again, where a written representation was submitted to the predecessor officer and the assessee did not seek a fresh hearing, the successor was permitted to continue proceedings without granting a further opportunity.	Cited by the revenue in support of the view that successor officers could rely on prior written explanations; the opinion notes the similarity of principle but distinguishes on the facts (no written explanation here).

Court's Reasoning and Analysis

The court framed the question as hinging on the construction of sub-section (3) of section 28 (which mandates that "No order shall be made under sub-section (1) or sub-section (2) unless the assessee ... has been heard, or has been given a reasonable opportunity of being heard") and considered it in the context of the proviso to section 5(7C) (which permits a successor officer to continue proceedings from the stage left by the predecessor, subject to the assessee's right to demand reopening or re-hearing).

The court considered the parties' competing authorities. The revenue's authorities establish a principle: where a written representation has been made to the predecessor and the assessee does not seek a rehearing, the successor may consider that written representation and proceed without granting a fresh oral hearing. The Calcutta Tanneries decision, however, holds that a successor officer must give a further opportunity to be heard before imposing penalty where a long interval has elapsed and the assessee was not re-heard by the successor.

Applying the statutes and the precedents to the facts before it, the court observed these material points (as stated in the opinion):

In the present case the proceedings had been held in abeyance at the request of the assessee; no written explanation had been filed before B-Ward to the same effect as in the precedents relied on by the revenue.
The successor ITO (C-Ward) imposed penalty more than a year after the disposal of the quantum appeal and did so without informing the assessee or calling the assessee to be heard.
It was unrealistic and unfair to expect the assessee to monitor internal departmental actions of the successor officer when the assessee had been informed that proceedings were being held in abeyance by the predecessor.
The practical requirement of natural justice in the circumstances was that the successor officer should have informed the assessee that the penalty matter would be taken up and afforded an opportunity to be heard.

On the basis of the statutory language (section 28(3)), the proviso to section 5(7C), and the authorities considered, the court concluded that the successor officer was bound to give an opportunity of being heard before imposing the penalty in the circumstances of this case.

Holding and Implications

Holding: The reference is answered in favour of the assessee; the Income-tax Officer, C-Ward, was bound to give the assessee an opportunity of being heard before imposing the penalty.

Implications:

Direct effect on the parties: the High Court resolved the reference in favour of the assessee on the specific question referred; the opinion notes that, in the circumstances, there would be no order as to costs.
Broader implications: the court's conclusion rests on the construction of section 28(3) and the proviso to section 5(7C), and on the factual distinction from authorities where written explanations had been furnished to the predecessor. The opinion does not purport to lay down any general new principle beyond its application to the facts before the court.

Judge agreement: MEHAR SINGH C.J. delivered the opinion and a separate concurred line records "I agree." (indicating concurrence by the other member identified in the text).

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Satparkash-Ram Narain, . v. The Commissioner Of Income-Tax, Punjab, Jammu And Kashmir And Himachal Pradesh At Patiala, .

- The language of the question which has been referred to us by the Income-tax Appellate Tribunal under sub-section (1) of section 66 of the Income-tax Act, 1922 (hereinafter called the Act), is somewhat inartistic but the meaning and tenor of it has not been in dispute. The question, which is in a compendious form, is to this effect :

"Whether, on the facts and in the circumstances of the case, the Income-tax Officer, "C" Ward, Jullundur, was not bound to give the assessee an opportunity of being heard inasmuch as the assessee was aware of the change of jurisdiction to this Income-tax officer and did not demand such an opportunity ?"

The confusing aspect of this question would be apparent after the facts giving rise to it have been briefly recapitulated.

The assessee is the registered firm of Messrs. Sat Prakash Ram Naranjan of Nawandshehr, and was assessed for the year 1954-55, the relevant accounting period being the year ending with 12th of April, 1954. Being of the view that a sum of Rs. 47,996 standing in the cash credit accounts of the wives of the partners of the firm (Rs. 11,980-3-10 in each case) had not been accounted for, it was added in the total income of the assessee-firm. Regarding it as concealed income, the Income-tax Officer took action under section 28(1)(c) of the Act and levied a penalty of Rs. 10,000 with the prior approval of the Inspecting Assistant Commissioner, Jammu Range, Jammu, in his order of 13th of December, 1960. Sub-section (1) of section 28 of the Act says that :

"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....

(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..."

It is to be noted that sub-section (3) of section 28 says that :

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

It is on the construction of sub-section (3) of section 28 that the decision of this reference must turn.

The assessee appealed from the order of the Income-tax Officer to the Appellate Assistant Commissioner. It may be mentioned at this stage that originally the Income-tax Officer, B-Ward, Jullundur, had jurisdiction over this matter and it was he who actually issued a notice under section 28 to the assessee on 17th of September, 1958. The assessee, in reply, sent a letter to the Income-tax Officer, B-Ward, on 6th of November, 1958, inter alia, making a request that the matter of levy of penalty should be held over till the disposal of the quantum appeal for the year 1954-55. The matter presumably was allowed to remain in abeyance for a long time. Some time in July, 1959, the jurisdiction over the assessee-firm seems to have been transferred to the Income-tax Officer, C-Ward. The appeal, whose decision the Income-tax Officer, B-Ward, had been requested to await, was disposed of on 2nd of December, 1959. Without any information to the assessee, the Income-tax Officer, C-Ward, more than one year later, on 13th of December, 1960, imposed a penalty of Rs. 10,000 on the assessee. The Appellate Assistant Commissioner decided the appeal of the assessee in his favour on 8th of June, 1962, holing that the Income-tax Officer, C-Ward, to whom the jurisdiction over the assessee had been transferred, had imposed the penalty without complying with the provisions of section 5 (7C) of the Act under which :

"Whenever in respect of any proceeding under this Act an Income-tax authorities ceases to exercise jurisdiction and is succeeded by another who has and exercises jurisdiction, the Income-tax authority so succeeding may continue the proceeding from the stage at which the proceeding was left by his predecessor :

Provided that the assessee concerned may demanded that before the proceeding is so continued the previous proceeding or any part thereof be re-opened or that before any order for assessment is passed against him he be re-heard :...."

A further appeal by the revenue before the Income-tax Appellate Tribunal resulted in a reversal of positions and the order of the Income-tax Officer was restored. The Appellate Tribunal was of the view that the assessee had come to know of the change of jurisdiction and had made no request to the Income-tax Officer, C-Ward, to allow him an opportunity of being heard. It is these last two findings of fact which have been incorporated in the question under reference and on which the answer to the main question has been made dependent.

Mr. Bhagirath Dass, learned counsel for the assessee, has complained that the question has been so formulated that he is now debarred from questioning the two findings or to ask for a fresh reference. It is, however, submitted by him that, even taking these findings which he is not now in a position to challenge as correct, the assessee having come under the jurisdiction of the Income-tax Officer, C-Ward, an independent obligation devolved on this authority to afford an opportunity to the assessee. It is submitted by the learned counsel that the Income-tax Officer, B-Ward, on the assessees request embodied in the letter of 6th of November, 1958, must be taken to have acceded to it as no further proceedings had been taken in pursuance of the notice under section 28 of the Act for a period of more than two years. Although the quantum appeal had been disposed of on 2nd of December, 1959, no further action was taken by the Income-tax Officer, C-Ward, till he passed the order imposing penalty on 13th December, 1960. It is submitted by the counsel that sub-section (7c) of section 5 of the Act also imposed a duty on the Income-tax Officer, C-Ward, to ascertain from the assessee whether or not to continue the proceedings from the stage at which they had been left by the Income-tax Officer, B-Ward. The opportunity contemplated by sub-section (3) of section 28 having been given by the issue of notice by the Income-tax Officer, B-Ward, it followed as a matter of consequence, as contended for on behalf of the department, that the assessee had to keep himself informed about the progress of penalty proceedings from day-to-day. This appears to be somewhat unrealistic approach and it seems to us that the easiest course for the Income-tax Officer, C-Ward, and one which was in conformity with the requirements of natural justice would have been to inform the assessee that the quantum appeal having been disposed of the question of penalty would be taken on an appointed date. How could the assessee be expected to have knowledge of what was happening in the department of the Income-tax Officer, C-Ward, when all that was made known to him was that on his own request the further proceedings had been held in abeyance by the Income-tax Officer, B-Ward ? A decision of the Division Bench of the Calcutta High Court in Calcutta Tanneries (1944) Ltd. v. Commissioner of Income-tax has been relied upon by Mr. Bhagirath Dass. In the judgment of Chief Justice Lahiri, with whom Bachawat J. (as Mr. Justice Bachawat then was) concurred, it was held that where one Income-tax Officer had initiated penalty proceedings was concluded on September 29, 1951, and a long time thereafter a successor officer passed an order on January 14, 1954, imposing a penalty, without giving an opportunity to the assessee to be heard, the provisions of section 5(7C) of the Act applied and, though the assessee had failed to exercise his right under the first part of the proviso to section 5(7C) to have the proceedings reopened, it did not lose its right of being heard under section 28(3) before the officer who had been invested with jurisdiction to continue the penalty proceedings. The successor officer, in the view of Chief Justice Lahiri, had no authority to pass an order penalty without giving the assessee further opportunity of advancing arguments before him. According to this ruling, it is clear that the Income-tax Officer, C-Ward, was bound to give an opportunity to the assessee before passing an order of penalty.

On behalf of the department, Mr. Awasthy has cited a Division Bench judgment of the Rajasthan High Court in A. C. Metal Works v. Commissioner of Income-tax. In that case, though one Income-tax Officer had issued notice under section 28(3) of the Act and the assessee had submitted his explanation in writing, the assessee did not choose to appear before the Income-tax Officer or ask for an opportunity to adduce evidence or addressed arguments, nor did he demand rehearing under the proviso to sub-section (7c) of section 5 when the officer had been transferred. It was held that the succeeding officer had authority to continue the penalty proceedings and impose penalty on the assessee after considering the written representation already filed by him without giving a fresh opportunity of being heard. In the instant case, no explanation had been filed by the assessee and the proceedings before the Income-tax Officer, B-Ward, had remained in a state of suspended animation for a period of two years, when the successor imposed the penalty without giving any opportunity to the assessee and hearing what the assessee may have to say.

Mr. Awasthy places reliance also on the Division Bench authority of the Mysore High Court of Hedge and Ahmed Ali Khan JJ. in Shop Siddegowda and Family v. Commissioner of Income. In that case, one Income-tax Officer issued a notice under section 28(3) to the assessee calling upon him to appear and show cause why penalty should not be levied and the assessee submitted his explanation in writing, but did not choose to appear or ask for an opportunity to adduce evidence or address arguments; it was held that the successor officer had authority, like the Rajasthan case, contains the distinguishing feature that the assessee had given an explanation which alone came to be considered by the successor authority.

Precisely, the same considerations prevailed in another Division Bench authority of the Mysore High Court in Hulekar and Sons v. Commissioner of Income-tax. There again, a written representation had been given to one Income-tax Officer and the successor proceeded with the penalty proceedings as the assessee did not seek a fresh opportunity of being heard.

In our opinion, the answer to the reference, therefore, must be made in favour of the assessee. In the circumstances, there would be no order as to costs.

MEHAR SINGH C.J. - I agree.

Satparkash-Ram Narai... v. The Commissioner Of ...