1962 (10) TMI 48 - SC - Income Tax

Whether an opportunity had to be given to the appellants as required by the proviso to section 35 to show cause against the demand for penal interest? Held that - Appeal allowed. The word assessment is used in the proviso not as an equivalent of the tax calculated at the rate given in the Finance Act but the total amount which the assessee is required to pay. The proviso applies whenever the effect of the order is to touch the pocket of the assessee and in our opinion this was such a case.

Issues Involved:
1. Breach of principles of natural justice.
2. Applicability of Section 35 of the Income-tax Act.
3. Mandatory nature of Section 18A(8) of the Income-tax Act.
4. Discretion under the fifth proviso to Section 18A(6) and Rule 48 of the Income-tax Rules.
5. Enhancement of assessment and the requirement of notice.

Issue-wise Detailed Analysis:

1. Breach of principles of natural justice:
The appellants, Chockalingam and Meyyappan, challenged the orders of the Income-tax Officer and the Commissioner of Income-tax on the grounds that they were opposed to the principles of natural justice. The High Court dismissed the petitions, considering the failure to issue a notice as a procedural defect that caused no prejudice. However, the Supreme Court held that the High Court erred in this view and emphasized that the principles of natural justice were indeed breached. The court stated, "The High Court ought to have quashed the orders."

2. Applicability of Section 35 of the Income-tax Act:
Section 35 deals with the rectification of mistakes apparent from the record. The Income-tax Officer initiated proceedings under this section without issuing a notice to the appellants, leading to the levy of penal interest. The Supreme Court clarified that Section 35 requires the Income-tax Officer to give notice to the assessee and allow a reasonable opportunity of being heard if the rectification results in enhancing the assessment or reducing the refund. This was not done in the present case, constituting a breach of natural justice.

3. Mandatory nature of Section 18A(8) of the Income-tax Act:
Section 18A(8) mandates the addition of interest to the tax if no advance tax is paid. The department argued that this provision is mandatory and does not require the issuance of a notice. The Supreme Court acknowledged that Section 18A(8) is mandatory but emphasized that the procedural requirements of Section 35, including the issuance of a notice, must still be followed.

4. Discretion under the fifth proviso to Section 18A(6) and Rule 48 of the Income-tax Rules:
The fifth proviso to Section 18A(6) allows the Income-tax Officer to reduce or waive interest under certain circumstances, as prescribed by Rule 48. The Supreme Court held that this discretion applies to both Section 18A(6) and Section 18A(8). The court noted, "The proviso operates after the amount of tax is determined and cuts across the sub-section." The appellants were denied the opportunity to seek relief under this proviso due to the lack of notice, which was a significant procedural lapse.

5. Enhancement of assessment and the requirement of notice:
The Supreme Court rejected the department's argument that the addition of penal interest does not constitute an enhancement of assessment. The court clarified that the term "assessment" in the proviso to Section 35 includes the total amount payable by the assessee, and any action that affects the assessee's financial liability requires notice and a hearing. The court stated, "The word 'assessment' is used in the proviso not as an equivalent of the tax calculated at the rate given in the Finance Act but the total amount which the assessee is required to pay."

Conclusion:
The Supreme Court allowed the appeals, quashing the orders of the Income-tax Officer due to the breach of natural justice and the failure to issue a notice as required by Section 35. The court emphasized the necessity of following procedural requirements to ensure fair hearing and judicial action. The Income-tax Officer was granted the liberty to take appropriate action in compliance with the legal provisions. The parties were directed to bear their own costs.

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