1970 (7) TMI 3 - HC - Income Tax

Summary

Issues Involved:

1. Validity of the penalty proceedings initiated under Section 271(1)(c) of the Income-tax Act, 1961.
2. The requirement of satisfaction by the appropriate authority under Section 271(1) and Section 274(2) of the Income-tax Act, 1961.
3. The timing and procedural compliance for initiating penalty proceedings.

Detailed Analysis:

1. Validity of the Penalty Proceedings:

The petitioner challenged the notices dated 31st March 1965 and 24th February 1967, and the subsequent penalty proceedings. The primary contention was that the penalty proceedings were not in compliance with the statutory requirements under Section 271(1)(c) and Section 274(2) of the Income-tax Act, 1961. The court examined whether the penalty proceedings initiated by the Income-tax Officer and subsequently referred to the Inspecting Assistant Commissioner were valid.

2. Requirement of Satisfaction by the Appropriate Authority:

The court scrutinized the statutory provisions, particularly Section 271(1) and Section 274(2), which mandate that the satisfaction of the Income-tax Officer in the course of any proceedings under the Act is a prerequisite for initiating penalty proceedings. It was argued that in cases where the minimum penalty exceeds Rs. 1,000, the case must be referred to the Inspecting Assistant Commissioner, who then assumes all powers for imposing the penalty. The court emphasized that the satisfaction required under Section 271(1) must be formed by the appropriate authority, which, in cases exceeding Rs. 1,000, is the Inspecting Assistant Commissioner.

The court referred to the Supreme Court's decision in M/s. Daluram Pannalal Modi v. Assistant Commissioner of Sales Tax, which emphasized that the power and duty or conditions for exercising the power are interwoven and cannot be separated. Thus, the satisfaction and the imposition of the penalty must be integrated and performed by the same authority.

3. Timing and Procedural Compliance for Initiating Penalty Proceedings:

The court highlighted that the satisfaction of the appropriate authority must be arrived at "in the course of proceedings under this Act," which means proceedings other than penalty proceedings, such as assessment or reassessment proceedings. The court cited the Supreme Court decision in Commissioner of Income-tax v. S. V. Angidi Chettiar, which clarified that the satisfaction must be formed during the assessment proceedings and not during the penalty proceedings.

The court found that in the present case, the assessment was completed on 31st March 1965, and the notice by the Income-tax Officer was issued on the same day, referring the case to the Inspecting Assistant Commissioner. However, the notice by the Inspecting Assistant Commissioner was issued nearly two years later, on 24th February 1967. There was no evidence that the Inspecting Assistant Commissioner had formed the requisite satisfaction before the completion of the assessment proceedings.

Conclusion:

The court concluded that the penalty proceedings were incompetent due to the lack of proper compliance with the statutory requirements. The satisfaction required under Section 274(2) must be formed by the Inspecting Assistant Commissioner before the completion of the assessment proceedings. The court held that the satisfaction and imposition of the penalty are integrated functions that must be performed by the same authority.

Reliefs Granted:

The court made the rule absolute to the extent that the notice issued by the Inspecting Assistant Commissioner on 24th February 1967, was to be recalled, canceled, and withdrawn. The court issued a writ of mandamus directing the respondent to withdraw the notice and a writ of prohibition restraining the respondents from taking any steps in pursuance of the notice dated 24th February 1967. There was no order as to costs.