VIRKEY CHACKO vs. C.I.T.

VARKEY CHACKO A v. COMMISSIONER OF INCOME TAX AUGUST 24, 1993 B [B.P. JEEVAN REDDY AND S.P. BHARUCHA, JJ.] Income Tax Act, 1961 Section 274(2) Effect of Taxation Laws (Amendment) Act 1971)-(;oncea/ment of incom~Pena/ty-Imposition measur~ C of-Who may impose and in what Jurisdiction of ITO. Sub-section (2) of section 274 of the Income Tax Act, 1961 was amended with effect from 1st April, 1971. Prior to the amendment by the Taxation Law (Amendment) Act, 1970 where in a case falling under clause (iii) of sub-section (1) of Section 276, the minimum penalty imposable D exceeded the sum of Rs. 1,000 the Income Tax Officer was obliged to refer the case .to the Inspecting Assistant Commissioner. By reasun of the amendmeµt the Income-tax Officer was obliged to refer to the Inspecting Assistant tommissioner such cases falling under clause (c) of sub-section E (1) of section 271 where the amount of income, as determined by the ITO i on assessment, in respect of which particulars had been concealed or inaccurate particulars had been furnished exceeded the sum of Rs. 25,000. The appellant-assessee filed his return on 16th April, 1970. On 27th March, 1972, the I.T.O. made the orders of assessment and initiated F penalty proceedings against the assessee on the basis ofa finding recorded in the assessment order that there had been concealment of income in respect of an amount which did not exceed Rs. 25,000. After considering the assessee's objections, the ITO, by his order dated 27th March, 1974, imposed a penalty of Rs.10,000. I G The assessee appealed to the Appellate Assistant Commissioner, who set aside the penalty order on the ground that the ITO did not have the jurisdiction to levy the penalty. The Revenue carried the matter to the Income-tax Appellate Tribunal, which confirmed the order of the Appellate Assistant Commis- H 800 VARKEY v. C.l.T. 801 sioner. It held that the law governing the imposition of penalty for con- A cealment of income was the law that was in force on the date on which the retnrn in which the concealment had been made was filed and that the 1970 amendment had no application to the case because it had not been made expressly retrospective. The Tribunal, however, referred the matter to the High Court under Section 256(2) of the Income Tax Act, 1961. B The High Court relied on this Court's decision in Jain Brothers and Ors. v. Union of India, 77 I.T.R 107 and concluded that the competence or jurisdiction of the authority to initiate the penalty proceedings could be governed only by the law which was in force on the date of initiation of such proceedings, and that a combined reading of section 271(1)(c)(iii) C and section 274(2) provided a clear indication that under the provisions of section 274(2) as they stood prior to the amendment of 1970 the competence of the ITO to exercise the powrr of imposition of penalty against an assessee under section 271(l)(c) was to depend tlpon the findings arrived at by him in the assessment proceedings as to the factum D of concealment and the amonnt of income in respect of which such con- cealment has taken place, and that it was only on arriving at such a finding that the qnestion of initiation of penalty proceedings could arise. The Tribunal was held to be in error and the reference was answered against the assessee and in favour of the Revenue. E The assessee appealed to this Court and submitted relying on this Court's decision in CJ. T. v. Mis Onkar Saran and Sons, [1992] 2 S.C.C. Brij Mohan C.l. T. 514 and v. 120 !TR 1, that the offence of concealment had been committed when the retnrn had been filed, that, therefore, the F unamended provisions of Section 274(2) applied, and consequently the ITO had no authority to impose the penalty. ' ' I The Revenue contested the appeal by submitting that the High Court had answered the reference correctly because the L T.O. has satisfied himself that there had been concealment of income on 27th March, 1972, G when he made the order of assessment, that such satisfaction was a pre-requisite to the initiation of the penalty proceedings which were in- itiated on the same day, and that on that day, under the amended provisions of section 274(2), the ITO had the authority to impose the penalty upon the assessee. H 802 SUPREME COURT REPORTS (1993] SUPP. 1 S.C.R. Dismissing the appeal, this Court A HEJ.D: A penalty for concealment of particulars of income or for furnishing inaccurate particulars of income can be imposed only when the assessing authority is satisfied that there bas been such concealment or furnishing of inaccurate particulars. [807-B] B penalty proceeding, therefore, can be initiated only after an assess- A ment order has been made which finds such concealment or furnishing of inaccurate particulars. [807-C] Who at this point of time bas the authority to Impose the penalty is C what is relevant. Whoever this authority may be, he is obliged to impose such penalty as was permissible under the law in that behalf on the date on which the offence of concealment of income was committed, that is to say, on the date of the offending return. [807-C] The two aspects namely, who may impose the penalty and in what D measure must firmly be borne in mind. [807-D] In the instant case, when the ITO reached the satisfaction that the assessee had concealed income and made the assessment order on 27th March, 1972 the amended provisions of section 274(2) were in operation E and they entitled the ITO to impose penalty in cases where the amount of income in respect of which particulars had been concealed were, as here, less that Rs. 25,000. The High Court therefore, answered the question referred to it correctly. [807-E-F] C.I. T. v. Mis Onkar Saran and Sons, [1992] 2 S.C.C. 514 and Brij F Mohan v. C.I.T., 120 ITR 1 referred to. Jain Brothe" and Ors. v. Union of India, 77 I.T.R. 107 and D.M. Manasvi v. C./. T., 86 ITR 557 and C./. T. v. Dhadi Sahu, 199 ITR 610, relied on. G CIVIL APPELLATE JURISDICTION : Civil Appeal No. 1151 of 1982. From the Judgment and Order dated 7.11.1980 of the Kerala High Court in l.T.R. 42/1978. H VARKEY v. C.l.T. [BHARUCHA,J.] 803 M.T. George, M.M. George and R. Sathish for the appellant. A B.B. Ahuja, S. Rajappa and Ms. A. Subhashini for the respondent. The Judgment of the Court was delivered by .. BHARUCHA, J. This is an appeal on a certificate granted by the B High Court of Kerala. The judgment under appeal was delivered on a reference under section 256(2) of the Income-tax Act, 1961. It answered in the negative, that is, against the appellant ( assessee) and favour of the in Revenue (respondent), the following question: "Whether on the facts and in the circumstances of the case, the C Income-tax Appellate Tribunal is right in law in holding that the Income-tax Officer had no jurisdiction to levy the penalty and that he should have referred the case to the Inspecting Assistant Com- missioner for imposition of penalty?" The reference pertained to the Assessment Years 1968-69, the D relevant accounting period having ended on 31st March, 1968. The assessee filed his return on 16th April, 1970. With effect from 1st April, 1971, sub-section (2) of section 274 of the Income-tax Act, 1961, was amended. Prior to the said amendment where, in a case falling under clause (iii) of sub-section (1) of section 276, the minimum penalty int' ··~ posable exceeded the sum of Rs. 1,000, the Income Tax Officer was ob~ to refer the case to the Inspecting Assistant Commissioner. By reason of the said amendment the Income-tax Officer was obliged IC? rd-er to the Inspecting Assistant Commissioner such cases falling under clause (c) of sub-section (1) of section 271 where the amount of income, as determined F by the ITO on assessment, in respect of which particulars had been concealed or inaccurate particulars had been furnished exceeded the sum of Rs. 25,000. On 27th March, 1972, the ITO made the orders of assessment and initiated penalty proceedings against the assessee on the basis of a finding recorded in the assessment order that there had been concealment G of income in respect of an amount which did not exceed Rs. 25,000. After considering the assessee's objections, the ITO, by order dated 26th March, 1974, imposed a penalty of Rs. 10,000. The assessee appealed to the Appellate Assistant Commissioner, who set aside the penalty order on the ground that the ITO did not have H 804 SUPREME COURT REPORTS (1993] SUPP. 1 S.C.R. the jurisdiction to levy the penalty. The Revenue carried the matter to the A Income-tax Appellate Tribunal, which confirmed the order of the AAC. It held that the law governing the imposition of penalty for concealment of income was the law that was in force on the date on whicn the return in which the concealment had been was filed and that the said amendment B had no application to the case because it had no been made expressly retrospective. Arising out of the order of the T~ibunal, the question quoted above was referred to the High Court. The High Court noted that the question to be considered was whether the proceedings for imposition of penalty taken in the case were governed by the provisions of section 274(2) as they C stood prior to the said amendment or whether it was the sub-section as amended that would apply. It concluded that the competence or jurisdic- tion of the authority to initiate the penalty proceedings could be governed only by the law which was in force on the date of initiation of such proceedings. A combined reading of section 27(1)(c)(iii) and section D 274(2) provided a clear indication that under the provisions of section 274(2) as they stood prior to the amendment of 1970 the competence of the ITO to exercise the power of imposition of penalty against an assessee under section 271(1)(c) was to depend upon the findings arrived at by him in the assessment proceedings as to the factum of concealment and the E amount of income in respect of which such concealment had taken place. It was only on arriving at such a finding that the question of initiation of penalty proceedings could arise. In this connection, the High Court / referred to the judgment of this Court in Jain Brothers and ors. v. Union of India, 77 l.T.R. 107. Accordingly, the Tribunal was held to be in error and the question referred to the High Court was answered in the negative, that F is, against the assessee and in favour of Revenue. ! 'Section 271(1)( c) confers upon the assessing authority the power to direct an assessec to pay a penalty where he is satisfied that the assessee has concealed the particulars of his income or has furnished inaccurate G particulars of his income. Section 274(2), before it was amended by the Taxation Law (Amendment) Act, 1970, with effect from 1st April, 1971, read thus: I "Notwithstanding anything contained in clause (iii) of sub-section 1) of section 271, if in a case falling under clause ( c) of that H ( VARKEY v. C.l.T.[BHARUCHA,J.] sub-section, the minimum penalty imposable exceeds a sum of A rupees one thousand, the Income-tax Officer shall refer the case to the Inspecting Assistant Commissioner who shall, for the pur- pose, have all the powers conferred under this Chapter for the imposition of penalty''. B After the said amendment, it read thus: "Notwithstanding anything contained in clause (iii) of sub-section (1) of section 271, if in case falling under clause ( c) of that sub-section, the amount of income (as determined by the Income- tax Officer on assessment) in respect of which the particulars have C been concealed or inaccurate particulars have been furnished exceeds a sum of twenty-five thousand rupees the Income-tax Officers shall refer the case to the Inspecting Assistant Commis- sioner who shall, for the purpose, have all the powers conferred under this Chapter for the imposition of penalty." D Learned· counsel for the assessee submitted that the offence of concealment had heen committed when the return has been filed; that, therefore, the unamended provisions of section 274(2) applied and the ITO had to authority to impose the penalty. He relied upon the judgment of this Court in C.I.T. v. M/s. Onkar Saran and Sons, [1992] 2 S.C.C. 514. E Emphasis was laid upon the statement in the judgment that, after the T., decision of this Court in Brij Mohan v. C.I. 120 !TR 1, there could be no doubt that the law applicable to penalty proceedings under section 271(1)(a) or (c) was the law that was in force on the date on which the offending return had been filed. I F The issue in the cases of Onkar Saran and Brij Mohan related to the quantum of penalty that could be demanded, and it was in that context that the statement that was emphasised was made. In Brij Mohan 's case it was expressly stated that a penalty was imposed on account of the commission of a wrongful act and "it is the law operating on the date on which the G wrongful act is committed which determines the penalty.'' • Learned counsel for the Revenue drew our attention, first, to this Court's judgment in Jain Brothers (ibid). It was there held, inter alia, that it was the satisfaction of the income-tax authorities that a default had been committed by the assessee which atcracted the provisions relating to penal- H 806 SUPREME COURT REPORTS [1993] SUPP. 1 S.C.R. ty. Whatever the stage at which the satisfaction was reached, the order A imposing the penalty had to be made only after the completion of the assessment. The crucial date, therefore, for purposes of penalty was the date of such completion. In D.M. Manasvi v. CIT, 86 !TR 557, this was reiterated. Counsel for the Revenue laid great stress upon the judgment of this court in CIT v. Dhadi Sahu, 199 !TR 610. In this case the assessee had B failed to disclose certain income falling to the share of his minor children for the Assessment years 1968-69 and 1969- 70. The ITO passed assessment orders on 28th February, 1970 and initiated penalty proceedings under section 271(1)(c). Since the amounts of the penalty to be imposed would exceed Rs. 1000, the ITO referred the cases under section 274(2), as it then stood, to the !AC. Pending the penalty proceedings, section 274(2) was C amended with effect from 1st April, 1971, as a result of which only cases of penalty in which the income concealed was Rs. 25,000 or more were required to he referred to the !AC. In the assessee's case referred to the !AC the income concealed was less than Rs. 25,000. Even so, the !AC passed orders on 15th February, 1973, imposing penalty in the sums of Rs. D ,J 24,000 and Rs. 12,500 respectively for the Assessment years 1968-69 and 1969-70. This Court held that the reference had been validly made by the ITO to the !AC before 1st April, 1971 and the question was whether the Apri~ amendment that came into effect on 1st 1971 divested the IAC of his jurisdiction because the amount of concealed income did not exceed E Rs. 25,000 and the case did not fall within the ambit of section 274(2) as amended. The amending Act, it was noted, did not make any provision that references validly pending before the !AC had to be returned without passing any orders the amount of income in respect of which final if particulars had been concealed did not exceed Rs. 25,000. This supported the inference that in a pending reference the !AC continued to have F jurisdiction to impose a penalty. The previous operation of section 274(2) as it stood before 1st April, 1971 and anything done thereunder continued to have effect under section 6(b) of the General Clauses Act, 1897, ena- bling the !AC to pass orders imposing penalty in pending reference. What was material was the date upon which the references were initiated. If the G references had been made before 1st April, 1971, they would be governed by section 274(2) as it stood before that date and the IAC had jurisdiction to pass orders of penalty. ~.:- I I I Learned counsel for the Revenue submitted that the I.T.O. had, in H the instant case, satisfied himself that there had been concealment of VARKEY v. C.I.T. [BHARUCHA, J.] 807 income on 27th March, 1972, when he made the order of assessment. Such A , satisfaction was a pre-requisite to the initiation of the penalty proceedings, which were initiated on the same day. On that day, under the amended provisions of section 274(2), the I.T.O. had the authority to impose the penalty upon the assessee. Therefore, the High Court had answered the reference correctly. B A penalty tor concealment of particulars of income or for furnishing inaccurate particulars of income can be imposed only when the assessing authority is satisfied that there has been such concealment or furnishing of inaccurate particulars, A penalty proceeding, therefore, can be initiated only after an assessment order has been made which finds such conceal- ment or furnishing of inaccurate particulars. Who at this point of time has c the authority to impose the penalty is what is relevant. Whoever this authority may be, he is obliged to impose such penalty as was permissible under the law in that behalf on the date on which the offence of conceal- ment of income was committed, that is to say, on the date of the offending return. The two aspects must firmly be borne in mind, namely, who may D impose the penalty and in what measure. In the instant case, when ITO reached the satisfaction that the assessee had concealed income and made the assessment order on 27th March, 1972, the amended provisions of section 274(2) were in operation and they entitled the ITO to impose penalty cases where the amount of E in income in respect of which particulars has been concealed were, as here, less than Rs. 25 ,000. We are, therefore, of the view that the High Court answered the question referred to it correctly. The appeal, therefore, is dismissed, with no order as to costs. F N.V.K. Appeal dismissed.