VARKEY CHACKO

COMMISSIONER OF INCOME TAX

AUGUST 24, 1993

[B.P. JEEVAN REDDY AND S.P. BHARUCHA, J.J.]

Income Tax Act, 1961 Section 274(2)

Effect of Taxation Laws (Amendment) Act 1971)-(; onceabnent of C incon1e-Penalty-ln1position of-fVho 1nay inipose and in what 111easure--

Jwisdiction 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 D (iii) of sub-section (1) of Section 276, the minimum penalty imposable 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 amendme.nt the Income-tax Officer was obliged to refer to the Inspecting Assistant !Commissioner such cases falling under clause (c) of sub-section E (1) of section 271 where the amount of income, as determined 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.

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 of a 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.

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 H Tribunal, which confirmed the order of the Appellate Assistant Commisv ARKEY v. err. 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 return in which the concealment had been made was filed and that the 1970 amendment had no application to the case Iiecause 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.

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 27l(l)(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 power of imposition of penalty against an assessee under section 271 (l)(c) was to depend tipon the findings arrived at by him in the assessment proceedings as to the factum of concealment and the amount of income in respect of which such concealment has taken place, and that it was only on arriving at such a finding that the question 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.

The assessee appealed to this Court and submitted reling on this Court's decision in C.l.T. v. Mis Ollkar Saran and Salls, [1992] 2 S.C.C. 514 and B1ij Mohan v. C.I. T. 120 ITR 1, that the offence of concealment

had been committed when the return 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.

The Revenue contested the appeal by submitting that the High Court had answered the reference correctly because the J.T.O. has satisfied himself that there had been concealment of income on 27th March, 1972, G \Vhen he made the order of assessment, that such satisfaction was a pre-requisite to the initiation of the penalty proceedings which were initiated 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.

A Dismissing the appeal, this Court

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 has been such concealment or fnrnishing of inaccurate particulars. [807-B]

A penalty proceeding, therefore, can be initiated only after an assessment order has been made which finds such concealment or furnishing of inaccurate particulars. [807-C]

C Who at this point of time has 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 concealment of income was committed, that is to say, on the date of the offending return. [807-C]

D The two aspects namely, who may impose the penalty and in what 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 E March, 1972 the amended provisions of section 274(2) were in operation and they entitled the ITO to impose penalty in cases where the amount of income in respect of which particulars had b~'1 concealed were, as here, • less that Rs. 25,000. The High Court therefore, answered the question referred to it correctly. [807-E-F]


Jain Brotl1e1~ and Ors. v. Union of India, 77 l.T.R. 107 and D.M.

Manasvi v. C.I.T, 86 ITR 557 and Cl. T v. Dhadi Salm, 199 !TR 610, relied G on.

CIVIL APPELLATE JURISDICTION : Civil Appeal No. 1151 of 1982.

From the Judgment and Order dated 7.11.1980 of the Kerala High H Court in I.T.R. 42/1978.

VARKEY v. C.l.T. [BHARUCHA, J.] 803

M.T. George, M.M. George and R. Sathish for the appellant.

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 ( assessce) and in favour of the 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 Commissioner 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 imposable exceeded the sum of Rs. 1,000, the Income Tax Officer was obliged to refer the case to the Inspecting Assistant Commissioner. By reason of the said amendment the Income-tax Officer was obliged to refer 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 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 assessec's objections, the ITO, by order dated 26th March, 1974, imposed a penalty of Rs. 10,000.

The assessee appealed to tne Appellate Assistant Commissioner, who set aside the penalty order on the ground that the ITO did not have H

A the jurisdiction to levy the penalty. The Revenue carried the matter to the 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 Tribunal, 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 C taken in the case were governed by the provisions of section 274(2) as they stood prior to the said amendment or whether it was the sub-section as amended that would apply. It 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 D proceedings. A combined reading of section 27(l)(c)(iii) 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 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 conceahnent 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 a;1d ors. v. Unio~ of India, 77 LT.R. 107. Accordingly, the Tribunal was held to be in error and F the question referred to the High Court was answered in the negative, that

is, against the assessee and in favour of Revenue.

'Section 271(l)(c) confers upon the assessing authority the power to direct an assessee 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:

"Notwithstanding anything contained in clause (iii) of sub-section H

(1) of section 271, if in a case falling under clause (c) of that

sub-section, the minimum penalty imposable exceeds a'?ui, n of A rupees one thousand, the Income-ta.'< Officer shall refer the case to the Inspecting Assistant Commissioner who shall, for the p\rpose, have all the powers conferred under this Chapter for the imposition of penalty".

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 Incometax Officer on assessment) in respect of which the particulars have been concealed or inaccu.-ate particulars have been furnished exceeds a sum of twenty-five thousand rupees the Income-tax Officers shall refer the case to the Inspecting Assistant Commissioner who shall, for the purpose, have all the powers conferred under this Chapter for the imposition of penalty."


Emphasis was laid upon the statement in the judgment that, after the decision of this Court in Brij Moh an v. C.J. T., 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.

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 statoment 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

A ty. Whatever the stage at which the satisfaction was reached, the order 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. Ma11asvi v. CIT, 86 ITR 557, this was reiterated. Counsel for the Revenue laid great stress upon the judgment of B this court in CIT v. Dhadi Sahu, 199 !TR 610. In this case the assessee had 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 C stood, to the !AC. Pending the penalty proceedings, section 274(2) was 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 be referred to the !AC. In the assessee's case referred to the IAC the income concealed was less than Rs. 25,000. Even so, the !AC D passed orders on 15th February, 1973, imposing penalty in the sums of Rs.

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 amendment that came into effect on 1st April, 1971 divested the !AC 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 final orders if the amount of income in respect of which particulars had been concealed did not exceed Rs. 25,000. This supported F the inference that in a pending reference the IAC continued to have 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, enabling 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.

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

income on 27th March, 1972, when he made the order of assessment. Such , 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 iuaccurate 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- C ment or furnishing of inaccurate particulars. Who at this point of time has 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 concealment 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 whal 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 in cases where the amount of 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.

N.V.K.

Appeal dismissed.