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TMI Blog2005 (7) TMI 72X X X X Extracts X X X X X X X X Extracts X X X X ..... of Income-tax. "Whether the Appellate Tribunal is right in law and on facts in setting aside the order made by the Commissioner of Income-tax invoking the provisions of section 263 of the Income-tax Act wherein he had directed the Income-tax Officer to consider initiation of penalty proceedings under section 271(1)(a) of the Act?" The assessment year is 1982-83 and the relevant accounting period is the year ended on Aso Vad Amas S.Y. 2039. The assessee filed a return of income on August 13, 1984, and the assessment came to be completed on November 26, 1984, under section 143(3) of the Act. The Commissioner of Income-tax (the Commissioner) initiated revisional proceedings under section 263 of the Act on the ground that scrutiny of the assessment records showed that the Assessing Officer had failed to charge interest under section 139(8) of the Act and had also not taken steps to initiate penalty proceedings under section 271(1)(a) of the Act, there being unexplained delay in filing the return by 25 months. The assessee objected to the show-cause notice, but after hearing the representative of the assessee the Commissioner passed an order on March 17, 1987, holding that intere ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... issioner was partially struck down whereby the Commissioner had directed initiation of penalty proceedings. Mr. M.R. Bhatt, learned senior standing counsel appearing on behalf of the applicant-Revenue, submitted that admittedly the return was filed belatedly. As provided in section 271(1) of the Act the Assessing Officer was required to initiate proceedings "in the course of any proceedings" and this phrase would include assessment proceedings under section 143(3) of the Act. He relied on a decision of the apex court in the case of D.M. Manasvi v. CIT [1972] 86 ITR 557. That the Assessing Officer was required to apply his mind as to initiation of penalty proceedings and in the absence of any explanation, filing of a belated return was sufficient for the Assessing Officer to be satisfied for initiation of penalty proceedings in the course of assessment proceedings. That non-application of mind by the Assessing Officer would make the assessment order revisable under section 263 of the Act. In this context the decision of the hon'ble Supreme Court in the case of Malabar Industrial Co. Ltd. v. CIT [2000] 243 ITR 83, with special reference to the observations at page 87, was relied up ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... oke powers of suo motu revision. Reliance was placed on the decisions of this court and the Bombay High Court in the cases of (i) Bhavnagar Chemical Works (1946) Ltd. v. CST [1991] 83 STC 409 (Guj); and (ii) Tata Exports Ltd. v. State of Maharashtra [1995] 98 STC 314 (Bom). Secondly, it was submitted that section 275(1)(b) of the Act as applicable from April 1, 1989, indicates that there has to be an assessment or other order which could be revised, viz., in the absence of any pre-existing other order the revisional authority cannot exercise jurisdiction. That mere failure of the Assessing Officer to initaite penalty proceedings per se cannot be termed to be erroneous and prejudicial to the interests of the Revenue as initiation would depend upon the facts and circumstances of each case. That it could not be stated in such circumstances that there was non-application of mind. The revisional authority could not invoke powers of revision under section 263 of the Act on the ground that the order of assessment was erroneous and prejudicial to the interests of the Revenue because the Assessing Officer had failed to initiate penalty proceedings, as the term "assessment" as defined unde ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ] 140 STC 267 was in the context of the provisions of the Karnatka Sales Tax Act, 1957, and the scheme of the said Act was different from the Income-tax Act and there the authority was not required to record any satisfaction. That accordingly the said decision could not be applied to the facts of the case. In the case of Malabar Industrial Co. Ltd. v. CIT [2000] 243 ITR 83 (SC) the apex court has laid down the parameters on the basis of which an order can be termed to be erroneous and prejudicial to the interests of the Revenue. However, it is also laid down that before the Commissioner can exercise jurisdiction of suo motu revision he has to be satisfied about the fulfilment of twin conditions, namely, (i) the order of the Assessing Officer sought to be revised is erroneous; and (ii) it is prejudicial to the interests of the Revenue. If one of them is absent, recourse cannot be had to section 263(1) of the Act. If the order is erroneous but is not prejudicial to the interests of the Revenue, or if the order is not erroneous but is prejudicial to the interests of the Revenue, the Commissioner of Income-tax cannot exercise revisional powers. It is further held that when an Assessi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... y way of penalty" links the two sets of clauses. The use of the word "may" in the earlier portion of the aforesaid phrase is relatable backwards to the existence or otherwise of the defaults mentioned in the clauses (a), (b) and (c) of sub-section (1) of section 271 of the Act; the said term "may" permits the Assessing Officer to exercise discretion as to whether penalty should be leived or not upon fulfilment of the prerequisite conditions in either of the situations mentioned in clause (a), (b) or (c). But thereafter, the word "shall" appearing in the latter part of the aforesaid phrase comes into play and applies to clauses (i), (ii) and (iii), as the case may be. The use of the word "shall" indicates that the Assessing Officer having made up his mind to levy penalty is left with no further discretion as regards the quantum of the penalty to be imposed. On a plain reading section 271(1) of the Act stipulates that either the assessing authority or the appellate authority in the course of any proceedings under the Act is satisfied that any person- (a) has without reasonable cause failed to furnish the return of income, or failed to furnish the return of income within the time al ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... (in Briginshaw v. Briginshaw [1938] 60 CLR 336) defined as "an actual persuasion". That means a mind not troubled by doubt or, to adapt the language used by Smith J. in Angland v. Payne [1944] NZLR 610 at 626, (CA), "a mind which has reached a clear conclusion". If a formula has to be phrased, I would adopt one analogous to that expressed in Edwards v. Edwards [1947] SASR 258 at 271, and would say that the judge must be "satisfied with the preponderance of probability arrived at by due caution in the light of the seriousness of the charge".' Re Woodcock [1957] NZLR 960 at 963, 964, CA, per Finlay A.C.J. '.. The mind of the court must be "satisfied"- that is to say, it must arrive at the required affirmative conclusion- but the decision may rest on the reasonable probabilities of the case, which may satisfy the court that the fact was as alleged, even though some reasonable doubt may remain.' (ii) Satisfied: To be satisfied with a state of things means to be honestly satisfied in your own mind. The phrase 'satisfied' occurs in many taxing statutes and is a familiar one for a great many years. The phrase 'is satisfied' means simply 'makes up its mind'. Dixon J. defined it as 'ac ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ction 271(1) of the Act makes it clear that the Commissioner does not have any powers to direct either of the authorities, the Assessing Officer or the appellate authority, to initiate and levy penalty. The section requires the Assessing Officer or the appellate authority to be satisfied in the course of "any proceedings". This means, any proceedings before either of the specified authorities. The Commissioner cannot create proceedings. If he is not permitted to direct the appellate authority (and this is an accepted position) he cannot be permitted to substitute jurisdiction/powers of only the Assessing Officer by his satisfaction by creating proceedings where none exist-assessment having already been completed. Considering the matter from a slightly different angle. Section 275 of the Act as it then stood imposes a bar of limitation for imposing penalty and under clause (b) the period prescribed is expiration of two years from the end of the financial year in which the proceedings, in the course of which action for imposition of penalty has been initiated, are completed. In other words, as and when either the Assessing Officer or the specified appellate authority, in the course ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the authority is required to record satisfaction, the apex court in the case of D.M. Manasvi [1972] 86 ITR 557 has stated thus: "The fact that notices were issued subsequent to the making of the assessment orders would not, in our opinion, show that there was no satisfaction of the Income-tax Officer during the assessment proceedings that the assessee had concealed the particulars of his income or had furnished incorrect particulars of such income. What is contemplated by clause (1) of section 271 is that the Income-tax Officer or the Appellate Assistant Commissioner should have been satisfied in the course of proceedings under the Act regarding matters mentioned in the clauses of that sub-section. It is not, however, essential that notice to the person proceeded against should have also been issued during the course of the assessment proceedings. Satisfaction in the very nature of things precedes the issue of notice and it would not be correct to equate the satisfaction of the Income-tax Officer or Appellate Assistant Commissioner with the actual issue of notice. The issue of notice is a consequence of the satisfaction of the Income-tax Officer or the Appellate Assistant Commiss ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... be recorded by the Assessing Officer or the appellate authority has to be in the context of the discretion vested in the said authority. The Assessing Officer or the appellate authority has to record satisfaction as to existence or otherwise of reasonable cause and as held in the case of D.M. Manasavi [1972] 86 ITR 557 (SC) the occasion to levy penalty would arise at a subsequent stage. In other words, the authority is called upon to exercise discretion in the first instance at the time of initiation, and in the second instance at the time of levy after granting hearing as required under section 274 of the Act to an assessee. In this context support may be drawn from what is stated by the apex court in the case of Hindustan Steel Ltd. v. State of Orissa [1972] 83 ITR 26: "An order imposing penalty for failure to carry out a statutory obligation is the result of a quasi-criminal proceeding, and penalty will not ordinarily be imposed unless the party obliged, either acted deliberately in defiance of law or was guilty of conduct contumacious or dishonest, or acted in conscious disregard of its obligation. Penalty will not also be imposed merely because it is lawful to do so. Whethe ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... mendment. Even if for the sake of argument, it may be conceded that the Commissioner is entitled to exercise revisional powers in such circumstances, a further question that will have to be raised and answered is as to whether the entire assessment order is required to be set aside considering the fact that there is no error found in the assessment per se. The total income at which the assessee is assessed and the tax payable by the assessee do not undergo any change. In these circumstances, can the provision be interpreted so as to permit quashing and setting aside the assessment for the limited purpose of initiation of penalty proceedings. When this query was put to Mr. Bhatt it was submitted that the assessment had to be set aside because, according to him, levy of penalty was also a part of the assessment. In this connection he placed reliance on the decision rendered by the Madhya Pradesh High Court in the case of Addl. CIT v. Indian Pharmaceuticals [1980] 123 ITR 874. On going through the said decision it becomes clear that the Madhya Pradesh High Court, speaking through the Indore Bench has primarily read the term "assessment" to mean as having the widest connotation in Ch ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t which falls for determination is whether the imposition of penalty is in the nature of a penal provision. The determination of the question of burden of proof will depend largely on the penalty proceedings being penal in nature or being merely meant for imposition of an additional tax, the liability to pay such tax having been designated as penalty under section 28. One line of argument which has prevailed particularly with the Allahabad High Court in Lal Chand Gopal Das case [1963] 48 ITR 324 is that there was no essential difference between tax and penalty because the liability for payment of both was imposed as a part of the machinery of assessment and the penalty was merely an additional tax imposed in certain circumstances on account of the assessee's conduct. The justification of this view was founded on certain observations in C.A. Abraham v. ITO [1961] 41 ITR 425 (SC). It is true that penalty proceedings under section 28 are included in the expression 'assessment' and the true nature of penalty has been held to be additional tax. But one of the principal objects in enacting section 28 is to provide a deterrent against recurrence of default on the part of the assessee. The ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e, if the original authority has not passed any penalty order either expressly or impliedly by invoking its penalty jurisdiction, the revisional authority could not pass such an order of penalty in exercise of its revisional jurisdiction. This position of law emerges from the clear distinction that exists between the assessment jurisdiction and the penalty jurisdiction. The distinction between the two is now accepted by the judicial pronouncement. In the case of Dhanvantrai Ratilal Shah v. Sales Tax Officer, in Spl. C.A. No. 4650 of 1984 decided on 5th March, 1987 by the Division Bench of this court, to which one of us (G.T. Nanavati, J.) was a party, the Division Bench referred to decisions reported in Abraham v. ITO [1961] 41 ITR 425 (SC); CIT v. Bhikaji Dadabhai and Co. [1961] 42 ITR 123 (SC); Jain Brothers v. Union of India [1970] 77 ITR 107 (SC) and found that imposition of penalty can take place only after the assessment has been completed. Though penalty has been regarded as additional tax in certain sense and for certain purposes penalty proceedings are not essentially continuation of proceedings relating to assessment. The assessment proceedings and the penalty proceedings ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... o the time-limit of two years after which no order for penalty can be passed. But the Commissioner by cancelling the assessment and directing a fresh assessment will open the door to the Income-tax Officer to start everything de novo. Even then the Income-tax Officer may say: 'I find no case for the imposition of penalty.' With this the Commissioner may disagree. He will again cancel the assessment and direct a fresh assessment. Every time the assessment will have to be cancelled. Because, without a regular assessment, penalty proceedings cannot be commenced. Is assessment more important or penalty proceedings? Of central importance is the assessment. That is the cornerstone of the Act. Cancelling an assessment wholesale has far-reaching consequences, as was pointed out in D'Costa: 'Such a wholesale cancellation of the assessment with a direction to make a fresh assessment is called for only in cases where there is something totally or basically wrong with the assessment which is not capable of being remedied by amendments to the assessment order itself.' The view contended for would require much to be written into the section which is not there, would complicate its operation ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the Act enables the authority to pass all such orders as the circumstances of the case justify; and that the same phrase has been interpreted by the apex court in the aforesaid decision, therefore, the ratio of the decision would squarely apply to the present case. Considering the fact that, at first blush, the apex court decision appears to be laying down a legal proposition as contended by the Revenue it is necessary to examine the decision closely. For doing so it is necessary to recapitulate the legal position as to how a decision has to be understood and read. The Supreme Court has time and again laid down the guidelines for reading and applying its own decisions. (a) In the case of CIT v. Sun Engineering Works P. Ltd. [1992] 198 ITR 297, the apex court has cautioned against reading its own judgment in a truncated manner in these words: "It is neither desirable nor permissible to pick out a word or a sentence from the judgment of this court, divorced from the context of the question under consideration and treat it to be the complete 'law' declared by this court. The judgment must be read as a whole and the observations from the judgment have to be considered in the lig ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... er may not have a bind effect as a precedent, but it cannot be denied that it is of considerable weight. The law which will be binding under article 141 would, therefore, extend to all observations of points raised and decided by the court in a given case. So far as constitutional matters are concerned, it is a practice of the court not to make any pronouncement on points not directly raised for its decision. The decision in a judgment of the Supreme Court cannot be assailed on the ground that certain aspects were not considered or the relevant provisions were not brought to the notice of the court. When Supreme Court decides a principle it would be the duty of the High Court or a subordinate court to follow the decision of the Supreme Court. A judgment of the High Court which refuses to follow the decision and directions of the Supreme Court or seeks to revive a decision of the High Court which had been set aside by the Supreme Court is a nullity." Thus, it is necessary to ascertain as to what was the question involved in the case before the Supreme Court in the context of which the decision has been rendered. In the case before the apex court the Additional Commissioner of Co ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... i.e., section 18, section 18A provides for penalty for collection in contravention and the said provision reads as under: "18A. Penalty for collection in contravention of section 18.- If any person contravenes any of the provisions of section 18, the assessing authority may, after giving such person reasonable opportunity of being heard, by order in writing impose upon him by way of penalty a sum not less than one-half but not exceeding an amount equivalent to: Provided further that no prosecution for an offence under section 29 shall be instituted in respect of the same facts on which a penalty has been imposed under this section." The scheme of the Karnataka Act is entirely different from the one which is found in the Income-tax Act, 1961. Under section 2(f) "the assessing authority" has been defined to mean a Commercial Tax Officer or Assistant Commissioner of Commercial Taxes or any other officer of the Commercial Taxes Department authorised to make any assessment by or under the Karnataka Act. "Commissioner" is defined under section 2(g) and "Additional Commissioner" is defined under section 2(m2) to mean respectively any person appointed under section 3 of the Karnatak ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d and in addition thereto a dealer is liable to pay in addition to the tax assessed a penalty at the prescribed rate under sub-section (4) which is thus a part and parcel of assessment. Similarly, section 12B which provides for payment of tax in advance also takes within its ambit levy of penalty for the defaults stated in the provision. In these circumstances, to read the provision of section 18A of the Karnataka Act to mean levy of penalty simpliciter is not warranted. This becomes clear when one reads the requirement of section 18 of the Karnataka Act which permits collection of tax by dealers in a given set of circumstances and prohibits otherwise. Paragraph No. 17 of the judgment on which learned counsel for the Revenue has placed great emphasis itself indicates that there is a difference between exercise of revisional power over orders passed by a lower authority and exercise of revisional powers in the assessment proceedings itself. In paragraph No. 22 of the reported judgment while repelling the contention on behalf of the appellant it is observed that, it could not be stated that the revisional authority or the appellate authority superior to the assessing authority is n ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Revenue any further. Paragraph No. 21 of the apex court decision makes it abundantly clear that no procedural or substantive error in making of revisional order had been pointed out and the requirements of law relating to passing of an order under section 18A read with section 22A of the Karnataka Act were shown to have been admittedly complied with. In the present case the requirement, which is a prerequisite condition, of recording satisfaction by the Assessing Officer or the appellate authority is not shown to have been complied with while exercising revisional jurisdiction. To summarise: (a) Under section 271(1) of the Act only the Assessing Officer or the appellate authority is required to be "satisfied" in the course of "any proceedings" before either of those two authorities; (b) The term "satisfied" means make up mind not troubled by doubt, or reach a clear conclusion on the evidence before the authority; (c) The Commissioner is not empowered by section 271(1) of the Act to record satisfaction, if he cannot do so on his own he cannot direct the Assessing Officer; (d) The Commissioner cannot substitute his satisfaction in exercise of revisional powers; (e) The ..... X X X X Extracts X X X X X X X X Extracts X X X X
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