Commissioner of Income Tax Vs Smt. Kaushalya and athers (Legal Representatives of Late Sampatprasad Tiwari)

V.A. Mohta, J.

"(1) Whether, on the facts and in the circumstances of the case, the order of the Inspecting Assistant Commissioner, imposing penalty for 1967-68 was passed without giving the assessee a reasonable opportunity of being heard ?

(2) Whether, on the facts and in the circumstances of the case, the order of the Income Tax Officer imposing penalties for the assessment years 1968-69 and 1969-70 were passed without giving the assessee a reasonable opportunity of being heard ?

(3) Whether, on the facts and in the circumstances of the case, the orders of the Income Tax Officer imposing penalties for the assessment years 1968-69 and 1969-70 were without jurisdiction ?"

1. The above three questions have been referred for the opinion of this court u/s 256(1) of the Income Tax Act, 1961 ("the I.T. Act"), at the instance of the Commissioner of Income Tax, Vidarbha and Marathwada, Nagpur.

2. The assessee (deceased Sampatprasad Tiwari) declared his income from the business of supply of coal and sand and a share in a firm as under :

 
Assessment year       Date of return       Amount of income declared
                                                     Rs.
1967-68               25-8-1967                     6,410
1968-69                2-1-1969                    16,479
1969-70                3-7-1969                    15,772 

3. The assessment for the years 1967-68 and 1968-69 were completed on the basis of the returns originally filed. At the stage of assessment for the year 1969-70, the Income Tax Officer found that the assessee had also carried on the business of transport by plying trucks in the benami name. The assessments for the assessment years 1967-68 and 1968-69 were reopened u/s 147 of the Income Tax Act. In response to the notice u/s 148, the assessee filed revised returns of income disclosing income also from the transport business for the assessment years 1967-68 and 1968-69. He also filed revised return for the assessment year 1969-70, including therein also the income from the transport business. The Income Tax Officer made the assessments for all these three years by order u/s 143(1), dated March 29, 1972, indicating that the proceedings for imposing penalty u/s 271(1)(c) were being initiated. The break-up of the total income and the concealed income, as found in the order, is as under :

 
Assessment year            Total income     Concealed income
                              Rs.                 Rs.
    1967-68                 40,030              33,022
    1968-69                 38,248              19,355
    1969-70                 25,760               9,988 

4. The Income Tax Officer even before making the order dated March 29, 1972, had referred the case to the Inspecting Assistant Commissioner for the assessment year 1967-68 in the view that the Inspecting Assistant Commissioner had jurisdiction over the case for that year and the Inspecting Assistant Commissioner had issued a show-cause notice dated March 28, 1972, u/s 274(2). For the assessment years 1968-69 and 1969-70 different show-cause notices were issued by the Income Tax Officer u/s 274(2) after making the assessments vide order dated March 29, 1972. The Inspecting Assistant Commissioner imposed a penalty of Rs. 13,000 for the assessment year 1967-68 and the Income Tax Officer imposed penalties of Rs. 22,000 and Rs. 10,000, respectively for the assessment years 1968-69 and 1969-70. Being aggrieved by these orders of penalty, the assessee filed appeals before the Tribunal and the Appellate Assistant Commissioner. By a common order dated October 19, 1973, the Appellate Assistant Commissioner upheld the penalties for the assessment years 1968-69 and 1969-70. Aggrieved thereby, the assessee filed two second appeals before the Tribunal. The Tribunal heard these two second appeals and the first appeal for the assessment year 1967-68 together and disposed of them by two separate orders. All these three appeals were allowed and penalties were quashed.

5. The Tribunal held that (i) there was absence of reasonable opportunity of hearing because the three show-cause notices were ambiguous and defeated the very purpose of giving reasonable opportunity of hearing as contemplated u/s 274; and (ii) the two orders of the Income Tax Officer are without jurisdiction since on the day the returns were filed in the first instance, i.e., July 3, 1969, jurisdiction to impose penalty exceeding rupees one thousand was with the Inspecting Assistant Commissioner and the amendment brought about by the Taxation Laws (Amendment) Act, 1970, with effect from April 1, 1971, enlarging the jurisdiction of the Income Tax Officer to cases of concealment/inaccurate particulars up to rupees twenty-five thousand, could not apply.

6. We may reproduce for ready reference the material portion of the show-cause notice dated March 28, 1972 (assessment year 1967-68), and dated March 29, 1972 (assessment years 1968-69 and 1969-70) :

 
"28-3-1972        :   you have concealed the particulars of your income
                      or deliberately furnished inaccurate particulars
                      of such income for the assessment year 1967-68."
"29-3-1972        :  you have concealed the Particulars of your income
                     or furnished inaccurate particulars of such income." 

7. The Tribunal, in all these cases, has gone merely on the use of the word "or" in between the two groups of words "concealed the particulars of your income" and "furnished inaccurate particulars of such income". It held that the penalties were founded upon ambiguous and vague show-cause notices and this vitiated the opportunity of hearing contemplated u/s 274(2).

8. In our view, the Tribunal is right in holding that penalty for the assessment year 1967-68 was imposed without affording a reasonable opportunity of hearing to the assessee and is wrong in holding so for the penalties for the assessment years 1968-69 and 1969-70.

9. We will first take up the show-cause notice dated March 29, 1972, pertaining to the assessment years 1968-69 and 1969-70. The assessment orders were already made and the reasons for issuing the notice u/s 274 read with section 271(1)(c) were recorded by the Income Tax Officer. The assessee fully knew in detail the exact charge of the Department against him. In this background, it could not be said that either there was non-application of mind by the Income Tax Officer or the so-called ambiguous wording in the notice impaired or prejudiced the right of the assessee to reasonable opportunity of being heard. After all, section 274 or any other provision in the Act or the Rules, does not either mandate the giving of notice or its issuance in a particular form. Penalty proceedings are quasi-criminal in nature. Section 274 contains the principle of natural justice of the assessee being heard before levying penalty. Rules of natural justice cannot be imprisoned in any straight-jacket formula. For sustaining a complaint of failure of the Principles of natural justice on the ground of absence of opportunity, it has to be established that prejudice is caused to the concerned person by the procedure followed. The issuance of notice is an administrative device for informing the assessee about the proposal to levy penalty in order to enable him to explain as to why it should not be done. Mere mistake in the language used or mere non-striking of the inaccurate portion cannot by itself invalidate the notice. The entire factual background would fall for consideration in the matter and no one aspect would be decisive. In this context, useful reference may be made to the following observation in the case of Commissioner of Income Tax Vs. Mithila Motors (P.) Limited, (headnote) :

"Under section 274 of the Income Tax Act, 1961, all that is required is that the assessee should be given an opportunity to show cause. No statutory notice has been prescribed in this behalf. Hence, it is sufficient if the assessee was aware of the charges he had to meet and was given an opportunity of being heard. A mistake in the notice would not invalidate penalty proceedings."

10. Now, the Tribunal mainly relied upon the decision of the Supreme Court in the case of Kishori Mohan Bera Vs. The State of West Bengal, ; wherein the detention order u/s 3(1) (a) (ii) of the Maintenance of Internal Security Act, stating that the detention was necessary to prevent the detenu from acting in a manner prejudicial to the "maintenance of public order or security of the State" was quashed on the ground that the two concepts "maintenance of public order" and "security of the State" were entirely different and in the whole background, use of the word "or" between them showed that there was non-application of mind on the part of the detaining authority to the grounds of detention. Now, apart from the fact that concepts of preventive detention law cannot straightaway be applied to the Income Tax Act, even they are by now well-settled. Mere use or misuse or wrong placement of the word "and" or "or" in the order of detention is not decisive of the matter. All depends upon whether the lapse, if any, demonstrates non-application of mind by the detaining authority and/or whether it prejudices or impairs the detenu''s guaranteed right of representation against the said order.

11. The case of Commissioner of Income Tax, Gujarat I Vs. Lakhdhir Lalji, is the other decision upon which the Tribunal has placed reliance. In that case a notice u/s 274 was issued on the footing of concealment of income by suppression of sales whereas the penalty was levied on the footing that there was furnishing of inaccurate particulars of income since the stock at the closing of the year was undervalued. The penalty was quashed upon a view that the very basis for the penalty proceedings had disappeared when it was held that there was no suppression of income by the assessee. Thus, it would be seen that the ratio of that decision cannot be applied to this case.

12. The last decision relied upon is the case of N.N. Subramania Iyer Vs. Union of India (UOI) and Another, . The following passage from the said decision would demonstrate how entirely different the background of that case was and, therefore, the ratio of that decision also could not be applied (at page 231) :

"The penalty notice, exhibit P-2, is illegal on the face of it. It is in a printed form, which comprehends all possible grounds on which a penalty can be imposed u/s 18(1) of the Wealth-tax Act. The notice has not struck off any one of those grounds; and there is no indication for what contravention the petitioner was called upon to show cause why a penalty should not be imposed. Even in the counter-affidavit filed by the second respondent, he has not stated for what specific violation he issued it. It is not that it would have saved his action. Apparently, exhibit P-2 is a whimsical notice issued to an assessee without intending anything."

13. No doubt, there can exist a case where vagueness and ambiguity in the notice can demonstrate non-application of mind by the authority and/or ultimate prejudice to the right of opportunity of hearing contemplated u/s 274. Take for example; the notice dated March 28, 1972, for the assessment year 1967-68. This show-cause notice was issued even before the assessment order was made. The assessee had no knowledge of the exact charge of the Department against him. In the notice, not only there is use of the word "or" between the two groups of charges but there is use of the word "deliberately". The word "deliberately" did not exist in section 271(1)(c) when the notice was issued. It is worthwhile recalling that the said word was omitted by the Finance Act, 1964, with effect from April 1, 1964, and the Explanation was added. The notice clearly demonstrated non-application of mind on the part of the Inspecting Assistant Commissioner. The vagueness and ambiguity in the notice had also prejudiced the right of reasonable opportunity of the assessee since he did not know what exact charges he had to face. In this background, quashing of the penalty proceedings for the assessment year 1967-68 seems to be fully justified.

14. This takes us to question No. 3 for recording an answer to which we see no difficulty whatsoever since the point stands concluded in the case of Commissioner of Income Tax Vs. Rizumal Pherumal, decided by this court, taking the view that the law prevailing on the date of initiation of the penalty proceedings and not on the date of filing of the original return, would govern the penalty proceedings. The case of Continental Commercial Corporation Vs. Income Tax Officer and Another, upon which the Tribunal has relied, has been dissented from. After the amendment of section 274 by the Taxation Laws (Amendment) Act, 1970, with effect from April 1, 1971, the Income Tax Officer had the jurisdiction in the matter and not the Inspecting Assistant Commissioner and, hence, the penalty orders passed by the Income Tax Officer for the assessment years 1968-69 and 1969-70 were perfectly valid and there was no justification for quashing the same on the ground of absence of jurisdiction.

15. Under the circumstances, the questions are answered as follows :

(1) Question No. 1. - In the affirmative and in favour of the assessee.

(2) Question No. 2. - In the negative and in favour of the Revenue.

(3) Question No. 3. - In the negative and in favour of the Revenue.

16. No order as to costs.