1982 (10) TMI 122 - AT - Income Tax

Issues Involved:
1. Legitimacy of penalty proceedings initiated under section 271(1)(c) of the Income-tax Act, 1961.
2. Applicability of Explanation 2 to section 271(1)(c) in the context of retrospective effect.
3. Authority competent to levy penalty under section 271(1)(c).
4. Substantive versus procedural nature of Explanation 2 to section 271(1)(c).
5. Jurisdiction to levy penalty based on appellate proceedings.

Issue-wise Detailed Analysis:

1. Legitimacy of penalty proceedings initiated under section 271(1)(c) of the Income-tax Act, 1961:
The assessee filed a return for the assessment year 1971-72 showing an income of Rs. 6,674, which was later assessed at Rs. 24,772. The Income Tax Officer (ITO) initiated penalty proceedings on 10-3-1978 under section 271(1)(c) for concealment of income. The penalty of Rs. 6,000 was levied on 28-3-1980, which was upheld by the Appellate Assistant Commissioner (AAC). The Tribunal noted that penalty under section 271 can only be levied if the ITO, AAC, or Commissioner (Appeals) is satisfied about the defaults specified therein. It was held that the satisfaction must be of the person who is empowered to levy the penalty, and the ITO cannot levy a penalty if the satisfaction is of another authority.

2. Applicability of Explanation 2 to section 271(1)(c) in the context of retrospective effect:
Explanation 2 to section 271(1)(c) was introduced with effect from 1-4-1976. The return was filed on 7-12-1974. The Tribunal opined that penalty provisions, including Explanation 2, are substantive provisions of law and cannot be applied retrospectively. The default, if any, occurred when the return was filed, i.e., in 1974. Therefore, the penalty cannot be levied retrospectively for the assessment year 1971-72.

3. Authority competent to levy penalty under section 271(1)(c):
The Tribunal emphasized that the satisfaction to levy penalty must be of the authority who is competent to levy it. The ITO cannot levy a penalty based on the satisfaction of the AAC or Commissioner (Appeals). The Tribunal held that the penalty should be canceled as the ITO had no jurisdiction to levy it based on the satisfaction of another authority.

4. Substantive versus procedural nature of Explanation 2 to section 271(1)(c):
The Tribunal clarified that Explanation 2 is not merely a rule of evidence but introduces a legal fiction, treating certain amounts as concealed income. This affects the substantive rights of the assessee and cannot be regarded as a procedural matter that can be applied retrospectively. The Tribunal rejected the department's argument that Explanation 2 is a rule of evidence and held that it directly affects substantial rights and obligations.

5. Jurisdiction to levy penalty based on appellate proceedings:
The Tribunal noted that for the assessment year 1971-72, there were no proceedings pending before the ITO when the penalty was levied. The appellate proceedings before the AAC or Tribunal do not give jurisdiction to the ITO to levy a penalty. It was held that the ITO cannot levy a penalty when the finding of default is in the course of proceedings before another authority. The penalty was canceled as the ITO had no jurisdiction to levy it based on the appellate proceedings.

Conclusion:
The Tribunal held that the ITO was not competent to levy the penalty under section 271(1)(c) for the assessment year 1971-72. Explanation 2 to section 271(1)(c) cannot be applied retrospectively, and the penalty provisions are substantive, affecting the rights of the assessee. The penalty levied was canceled, and the appeal was allowed.

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