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Commissioner Of Income-Tax v. Keshrimal Parasmal
Judgment Summary — S.K. Mal Lodha, J.
Factual and Procedural Background
The Commissioner of Income-tax, Jodhpur ("the CIT") filed an application under section 256(2) of the Income-tax Act, 1961 seeking a direction to the Income-tax Appellate Tribunal (Jaipur Bench) to state a case and refer a question of law to the High Court. The question concerned whether the Tribunal was justified in cancelling the CIT's order under section 263 when the Income-tax Officer (ITO) had allegedly erred and caused prejudice to the Revenue by not initiating penalty proceedings under section 271(1)(c) despite the assessee's confession that a cash credit was a hawala entry.
Facts: For the assessment year 1977-78 the assessee (a registered firm of five partners) had a cash credit of Rs. 10,000 in the name of M/s Bherunath Mohanlal & Co. The assessee surrendered this cash-credit entry to the ITO and admitted it was a hawala/ bogus entry. The ITO, however, did not initiate penalty proceedings under section 271(1)(c).
Proceedings: The CIT initiated revision proceedings under section 263 on grounds that: (1) the ITO erred in not initiating penalty proceedings despite the confession; (2) penalty proceedings should have been initiated during assessment; and (3) the assessment was perfunctory and prejudicial to Revenue. The CIT relied on a precedent (Addl. Commissioner Of Income-Tax, M.P. v. Indian Pharmaceuticals) and set aside the assessment directing the ITO to reframe it de novo. The assessee appealed to the Tribunal.
The Tribunal (order dated November 26, 1982) canceled the CIT's order, holding that the ITO's assessment was not erroneous or prejudicial because of the absence of a recorded initiation of penalty proceedings. The Tribunal followed an earlier Jaipur Bench decision (Paras Fabrics, Pali v. ITO) which favored the assessee. The CIT sought a reference under section 256(1); the Tribunal rejected the reference (order dated August 12, 1983), observing that divergent views existed and, absent a Supreme Court decision, no referable question of law arose. The CIT then filed the present application under section 256(2).
Legal Issues Presented
- Whether, on the facts and in the circumstances of the case, the Tribunal was justified in cancelling the order under section 263 of the Act when the ITO's order was alleged to be erroneous and prejudicial to the interests of the Revenue on account of his failure to initiate penalty proceedings under section 271(1)(c) notwithstanding the assessee's confession that the cash credit was a hawala entry.
- Whether a substantial question of law arises out of the Tribunal's order such that the Tribunal should have referred the question to the High Court under section 256(1) (and consequently whether the High Court should direct a reference under section 256(2)).
Arguments of the Parties
Commissioner of Income-tax (Revenue) — Principal Contentions
- The Tribunal's order of November 26, 1982 followed an earlier Jaipur Bench view (Paras Fabrics) and the Delhi High Court decision in J.K. D'Costa was preferred by the Tribunal, rather than the contrary view in Indian Pharmaceuticals. Therefore, a question of law arises out of the Tribunal's order and should be referred.
- The ITO's failure to initiate penalty proceedings under section 271(1)(c) despite a clear confession amounted to a serious error; the Commissioner relied on the Indian Pharmaceuticals decision to support intervention under section 263 to direct initiation of penalty proceedings and to reframe the assessment.
Assessee — Principal Contentions
- The assessee argued that the surrender of the cash credit was made to "buy peace of mind" and avoid litigation, not because the entry was actually bogus; therefore the ITO was justified in not initiating penalty proceedings under section 271(1)(c).
- The assessee opposed the submission that a referable question of law arose, noting that the Delhi High Court decision in J.K. D'Costa (which the Tribunal followed) had been the subject-matter of a special leave petition by the Department that was dismissed by the Supreme Court on March 2, 1984, meaning the position in J.K. D'Costa was effectively settled.
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 875 (MP) | Relied on by the Commissioner to support that an assessment could be set aside and penalty proceedings directed where the ITO failed to initiate penalty despite facts suggesting concealment. | The Commissioner relied on this case to justify interference under section 263; the Tribunal did not follow this view in favor of another line of authority. The High Court recorded that the Revenue had relied on this decision. |
| Addl. Commissioner Of Income-Tax, Delhi-I v. J.K. D'Costa, [1982] 133 ITR 7 (Delhi) | Held that the Commissioner in suo motu revision under section 263 could not set aside an assessment merely because the assessment order did not mention initiation of penalty proceedings, nor direct the ITO to initiate penalty proceedings by remaking the assessment. | The Tribunal followed the view taken in J.K. D'Costa in Paras Fabrics and in the present case. The High Court noted that this view was subsequently the subject of a special leave petition by the Department which the Supreme Court dismissed. |
| Paras Fabrics, Pali v. ITO (Jaipur Bench, order dated September 19, 1982) | Applied the reasoning in J.K. D'Costa to hold in favour of the assessee on a similar point (assessment year 1977-78). | The Tribunal considered its earlier decision in Paras Fabrics and, relying on its detailed reasons, held the ITO's order was not erroneous or prejudicial and therefore canceled the CIT's order under section 263. |
| Commissioner Of Income-Tax, West Bengal-I v. Vegetable Products Ltd., [1973] 88 ITR 192 (SC) | Authority cited for the proposition that differing views of tribunals/high courts cannot be treated as erroneous in the absence of a Supreme Court decision; to show that where conflict exists without a Supreme Court ruling, no referable question may arise. | The Tribunal relied on this Supreme Court authority in refusing to make a reference under section 256(1), observing that divergent views existed and no Supreme Court decision settled the issue at that time. |
| CIT v. J.K. Da Costa — SLP dismissal (S.L.P. (C) Nos. 11391-11392 of 1981), reported in [1984] 147 ITR (St.) 1 | The Supreme Court dismissed the Department's special leave petition against the Delhi High Court decision in J.K. D'Costa, effectively leaving the J.K. D'Costa view intact that the Commissioner cannot set aside an assessment to direct initiation of penalty proceedings where the assessment is silent on initiation of penalty. | The High Court relied on the dismissal of the SLP to conclude that the J.K. D'Costa position had been confirmed by the Supreme Court, rendering the question sought to be referred "academic" and not a substantial question of law arising out of the Tribunal's order. |
Court's Reasoning and Analysis
The Court proceeded in the following steps, based strictly on the material and authorities cited in the opinion:
- The Court identified the specific question the CIT wanted the Tribunal to state and refer: whether the Tribunal was justified in cancelling the CIT's order under section 263 when the ITO allegedly erred by not initiating penalty proceedings under section 271(1)(c) despite the assessee's confession.
- The Court noted the Tribunal had followed an earlier Jaipur Bench decision (Paras Fabrics) which in turn adopted the view in J.K. D'Costa (Delhi). The Tribunal did not adopt the contrary view taken in Indian Pharmaceuticals (MP), which was relied upon by the CIT.
- The Tribunal, when refusing to refer the question under section 256(1), relied on the Supreme Court decision in Vegetable Products Ltd. to the effect that where conflicting views of tribunals or high courts exist in the absence of a Supreme Court ruling, one cannot treat one view as erroneous and thus no referable question of law arises solely on that basis.
- The Court examined the later procedural history of J.K. D'Costa: the Department's special leave petition against the Delhi High Court decision in J.K. D'Costa was dismissed by the Supreme Court on March 2, 1984 (reported in summary form in [1984] 147 ITR (St.) 1). The High Court read that dismissal as confirmation of the J.K. D'Costa position.
- Given that the J.K. D'Costa position was, according to the record, effectively confirmed by the Supreme Court's dismissal of the SLP, the Court concluded that the legal position was settled against the Revenue's contention that the Commissioner could set aside an assessment under section 263 for the sole reason that the assessment order did not record initiation of penalty proceedings and could direct the ITO to initiate such proceedings by reframing the assessment.
- Because the legal position was concluded by the Supreme Court, the question the Commissioner sought to have referred was no longer a substantial question of law arising out of the Tribunal's order but rather an academic question. Therefore, the Tribunal's decision to refuse a reference could not be said to be incorrect.
Holding and Implications
HOLDING: The application under section 256(2) of the Income-tax Act filed by the Commissioner of Income-tax is DISMISSED.
Implications:
- The direct effect is that the Tribunal's refusal to refer the question to the High Court (order dated August 12, 1983) is upheld and the reference application by the Commissioner is dismissed.
- The Court recorded that the relevant legal position (as articulated in J.K. D'Costa) had been effectively confirmed by the Supreme Court's dismissal of the Department's special leave petition, meaning the Commissioner's sought question was academic and not a substantial question of law arising out of the Tribunal's order.
- The parties were directed to bear their own costs in respect of this reference application.
- No novel legal precedent was stated by this High Court judgment; rather, the Court applied existing authority to determine that no referable question arose and dismissed the application.
Note: This summary is strictly confined to the facts, arguments, authorities, reasoning and conclusions as they appear in the provided opinion. No additional facts, inferences, or external materials beyond that opinion have been introduced.
S.K Mal Lodha, J.:— The Commissioner of Income-tax, Jodhpur (“the CIT”) has filed this application under section 256(2) of the Income-tax Act, 961 (for short “the Act”), for a direction to the Income-tax Appellate [Tribunal, Jaipur Bench, Jaipur (hereinafter referred to as “the Tribunal”), of state the case and refer the following question of law for the opinion of his court:
“Whether, on the facts and in the circumstances of the case, the Tribunal was justified in cancelling the order under section 263 of the Act vhen the order of the ITO was erroneous and prejudicial to the interests of he Revenue on account of his failure to initiate penalty proceedings under section 271(1)(c) notwithstanding a clear confession of concealment of true particulars of income on the part of the assessee by the act of surrendering the cash credit appearing in the name of M/s. Bherunath Mohanlal & Co. is a havala entry?”
2. The assessee-respondent is a registered firm comprising of five partners. During the course of assessment proceedings for the assessment year 1977-78, the Income-tax Officer (ITO) came across a cash credit of Rs. 10,000 in the lame of M/s. Bherunath Mohanlal & Co., Pali, a concern belonging to one shri Mohanlal. The assessee surrendered this entry of cash credit before the Income-tax Officer and confessed to it being a havala entry. The Income-tax Officer, however, did not initiate penalty proceedings under sec tion 271(1)(c) of the Act with reference to the above surrendered amount c Rs. 10,000. The Commissioner of Income-tax initiated proceedings unde section 263 of the Act on the following grounds:
1. That the Income-tax Officer committed a serious error in no initiating penalty proceedings under section 271(1)(c) of the Act not with standing the clear-cut confession on the part of the assessee that the case credit account appearing in the name of M/s. Bherunath Mohanlal & Co. was merely a hawala entry and as such admittedly a bogus one;
2. That the Income-tax Officer failed to appreciate that circumstance existed for initiating penalty proceedings under section 271(1)(c) before completing the assessment;
3. That the assessment was concluded by the Income-tax Officer is a perfunctory manner without proper application of mind causing prejudice to the interests of the Revenue.
3. In response to the show-cause notice issued by the Commissioner of Income-tax, written submissions were made by the authorised representative of the assessee challenging the validity of action under section 26 basically on the ground that the surrender of cash credit was made only in order to buy peace of mind and avoid prolonged litigation and not because the same was bogus. It was further submitted that the Income-tax Office was justified in not initiating penalty proceedings under section 271(1)(c) o the Act. The Commissioner of Income-tax was of the opinion that there were no sound reasons for not initiating penalty proceedings under section 271(1)(c) for which a prima facie case existed and that the penalty proceedings could only have been initiated in the course of the assessmen proceedings and since the Income-tax Officer has not applied his mind to the aspect, he committed an error and the completion of assessment was erroneous which requires interference under section 263 of the Act. In support of the aforesaid finding, the Commissioner of Income-tax placed reliance or Addl. Commissioner Of Income-Tax, M.P v. Indian Pharmaceuticals., [1980] 123 ITR 875 (MP). He also tool into consideration the fact that the assessee's claim for registration is vitiated for the reasons mentioned in para. 5 of his order dated August 19, 1981. The Commissioner, therefore, set aside the assessment made by the Income-tax Officer and directed him to apply his mind to both the points mentioned in his order and to reframe the assessment in accordance with the provisions of law. The purport of the order passed by the Commissioner under section 263 of the Act was to set aside the assessment and to give a direction to the Income-tax Officer for making a de novo assessment. The assessee went in appeal. Before the Tribunal, it was contended on behalf of the assessee that the assessment order passed by the Income-tax Officer was neither erroneous nor prejudicial to the interests of the Revenue and, therefore, the Commissioner of Income-tax has wrongly resorted to the provisions of section 263 of the Act. The Tribunal, in its order dated November 26, 1982, observed as under:
“This issue is already covered by an earlier decision of Jaipur Bench of the Appellate Tribunal, vide its order September 19, 1982, in ITA No. 1068.JP/81 relating to the assessment year 1977-78, in the case of Paras Fabrics, Pali v. ITO, A-Ward, Pali, in favour of the assessee. In view of the detailed reasons given therein, we hold that the order passed by the Income-tax Officer was not erroneous and prejudical to the interests of the Revenue in not recording the initiation of penalty proceedings under section 271(1)(c) in the order passed by him. We, therefore, cancel the order passed by the CIT, under section 263.”
4. An application under section 256(1) of the Act was filed by the Commissioner before the Tribunal to refer the aforesaid question to this court for its opinion. The Tribunal, by its order dated August 12, 1983, rejected the reference application holding that the issue involved in the assessee's case was similar to the one which was involved in Paras Fabrics, Pali's case and in that case, the assessee had relied on Addl. Commissioner Of Income-Tax, Delhi-I v. J.K D'Costa., [1982] 133 ITR 7 (Delhi), whereas the Revenue had relied on Indian Pharmaceniicals' case, [1980] 123 ITR 875 (MP) and that the Tribunal in Paras Fabrics, Pali's case had adopted the view that was favourable to the assessee which was reported in J. K.D Costa's case. Relying on Commissioner Of Income-Tax, West Bengal-I v. Vegetable Products Ltd., [1973] 88 ITR 192 (SC), the Tribunal, in its order dated August 12, 1983, observed as follows:
“It may be that in the ultimate analysis, one of the two views may be held to be erroneous, which has to be considered only when the decision of the Supreme Court is available, but so long as a decision of the Supreme Court is not there on the issue, it cannot be said that one order is erroneous against the other. In such circumstances, we do not consider that any referable question of law arises out of the order of the Tribunal. It may not be out of place to mention here that the Revenue has not made any reference application against the order of the Tribunal in the case of Paras Fabrics Pali, relied upon by the Tribunal in accepting the assessee's appeal in the case of the present assessee.”
5. The Tribunal, therefore, rejected the reference application. Hence, this application under section 256(2) of the Act.
6. We have heard Mr. J.L Daga, learned counsel for the Revenue, and Mr. R. Mehta, learned counsel for the assessee.
7. It was contended by Mr. J.L Daga, learned counsel for the Revenue, that the question of law which has been stated in para. 5 of the reference application does arise out of the order of the Tribunal dated November 26, 1982, as the Tribunal itself has followed its earlier decision rendered in Paras Fabrics, Pali's case relating to the assessment year 1977-78. The Tribunal preferred the view taken in J.K.D Costa's case, [1982] 133 ITR 7 and did not follow the contrary view taken in Indian Pharmaceuticals' case, [1980] 123 ITR 875 (MP).
8. On the other hand, Mr. R. Balia, learned counsel appearing for the assessee, has stoutly opposed the submission and urged that no referable question of law arises out of the order of the Tribunal dated November 26, 1982, for the special leave petition by the Department against the judgment in J.K D'Costa's case, [1982] 133 ITR 7 was dismissed by the Supreme Court in CIT v. J.K Da Costa (S.L.P (Civil) Nos. 11391-11392 of 1981) decided on March 2, 1984. In [1984] 147 ITR (St.) 1, it is stated as under:
“Revision: Commissioner in revision in assessment order whether can direct initiation of penalty proceedings:
2-3-1984: Their Lordships P.N Bhagwati and A.N Sen, JJ. dismissed, as not being a fit case in which the question arising in the special leave petition should be decided, a special leave petition by the Department against the judgment dated 27-4-1981 of the Delhi High Court in I.T.R No. 82 of 1974, reported in [1982] 133 ITR 7, whereby the High Court, on a reference, held that the Commissioner in a suo motu revision under s. 263 of the I.T Act, 1961, of an assessment proceeding, was not entitled to set aside the assessment order on the ground that there was no mention of initiation of penalty proceedings in the assessment order, and to direct the ITO to make fresh assessment and to initiate penalty proceedings:CIT v. J.K Da Costa: S.L.P (Civil) Nos. 11391-11392 of 1981.”
9. Thus, the position boils down to this that the view taken in J.K D'Costa's case, [1982] 133 ITR 7 has been confirmed by the Supreme Court and according to this case, the Commissioner of Income-tax is not entitled to set aside the assessment order passed by the Income-tax Officer on the ground that there was no mention of initiation of penalty proceedings in the assessment order and the Commissioner of Income-tax in the proceedings under section 263 of the Act cannot direct the Income-tax Officer to make fresh assessment to initiate penalty proceedings. As the position stands concluded and settled by the Supreme Court, the question which is now sought to be referred by the Commissioner of Income-tax cannot be said to be a substantial question of law arising out of the Tribunal's order. It is only a question of academic nature.
10. In this view of the matter, it cannot be said that the decision of the Tribunal rejecting the reference application by its order dated August 12, 1983, is incorrect.
11. For the reasons aforesaid, no referable question of law arises out of the order November 26, 1982, of the Tribunal. The reference application under section 256(2) of the Act filed by the Commissioner of Income-tax is, therefore, dismissed.
12. The parties are left to bear their own costs of this reference application.
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