Penalty order not valid if requisite prior approval of higher authority is not obtained.

[CA DEV KUMAR KOTHARI]

Section 18(1) (c) and 42C of the Wealth Tax Act,1957.

Indrajit Banerjee Versus Commissioner of Wealth Tax -IX & Another- 2014 (1) TMI 415 - CALCUTTA HIGH COURT

Approval of higher authorities – general discussion:

In many proceedings law provide that concerned authority should obtain prior approval of another concerned authority/ a senior authority/ or a court, before initiating a proceeding or before passing an order. Obtaining prior approval of such senior authority or court is an important aspect of administration. This has specific purpose of safeguarding certain aspects related to proceedings and its outcome. One of purpose is to provide a safeguard , a check and balance, and to avoid arbitrariness in administration of administrative and judicial proceedings.

Though law require that the authority seeking such approval must apprise the approving authority all aspects of proposed proceeding and  justification for such proceedings and the approving authority must also take a reasoned and judicious decision while approving or rejecting the approval or permission sought. However, unfortunately, even in such cases, many times approval of concerned authority is sought and granted in a very routine manner. In case the fact that approval was  granted without proper application of mind on relevant facts, the approval can also be held illegal and void.

Approval is must and a precondition to assume jurisdiction:

When law require a prior approval to initiate or conclude any proceeding, such approval is a precondition to initiate or conclude such proceedings as the case may be. If a proceedings is initiated without requisite approval, then all subsequent proceedings will be invalid.

Lack of approval is not a procedural defect or defect in relevant documents:

When approval is a precondition, lack of prior approval cannot be considered as a mere technical or clerical defect in the procedure or in relevant documents like notice or order. Lack of approval cannot be considered as a rectifiable defect.  

 Penalty under section 18(1) ( c ) of the Wealth Tax Act:

Penalty for concealment of wealth or furnishing of inaccurate particulars of wealth can be imposed under section 18 (1) ( c ) of the Wealth Tax Act. This section is, principally similar to section 271 (1) ( c ) of the Income-tax Act. 1961.

The section requires prior approval of senior authority in certain circumstances.

Section 42C is a provision to validate certain proceedings even if there is some defect in form etc.

 The relevant portion of these sections are  reproduced below with highlights added by author:

[Penalty for failure to furnish returns, to comply with notices and concealment of assets, etc.

    18. (1) If the Assessing Officer, Deputy Commissioner (Appeals)], Commissioner (Appeals), Chief Commissioner or Commissioner] or Appellate Tribunal in the course of any proceed­ings under this Act is satisfied that any person—

           (a) 

           (b) 

           (c) has concealed the particulars of any assets or fur­nished inaccurate particulars of any assets or debts,

he or it may, by order in writing, direct that such person shall pay by way of penalty—

                (i)  

                              ¹¹[(iii) in the cases referred to in clause (c), in addition to any wealth-tax payable by him, a sum which shall not be less than, but which shall not exceed five times, the amount of tax sought to be evaded by reason of the concealment of particu­lars of any assets or the furnishing of inaccurate particulars in respect of any assets or debts :

     Explanation 1.—For the purposes of clause (iii) of this sub-section, the expression "the amount of tax sought to be evaded"—       

           (a) in a case to which Explanation 3 applies, means the tax on the net wealth assessed ;

           (b) in any other case, means the difference between the tax on the net wealth assessed and the tax that would have been chargeable had the net wealth assessed been reduced by the amount which represents the value of any assets in respect of which particulars have been concealed or inaccurate particulars have been furnished and of any debts in respect of which inaccurate particulars have been furnished.

     Explanation 2.—Where in respect of any facts material to the computation of the net wealth of any person under this Act,—

           (A) such person fails to offer an explanation or offers an explanation which is found by the ¹³[Assessing Officer] or the [Deputy Commissioner (Appeals)] ¹⁵[or the Commissioner (Ap­peals)] ¹⁶[or the Commissioner] to be false, or

           (B)  such person offers an explanation which he is not able to substantiate  [and fails to prove that such explanation is bona fide and that all the facts relating to the same and materi­al to the computation of his net wealth have been disclosed by him],

then, the amount added or disallowed in computing the net wealth of such person as a result thereof shall, for the purposes of clause (c) of this sub-section, be deemed to represent the value of the assets in respect of which particulars have been con­cealed.

[Explanation 3.—Where any person  fails, without reasonable cause, to furnish within the period specified in sub-section (1) of section 17A, a return of his net wealth which he is required to furnish under section 14 in respect of any assessment year commencing on or after the 1st day of April, 1989, and until the expiry of the period aforesaid, no notice has been issued to him under clause (i) of sub-section (4) of section 16 or sub-section (1) of sec­tion 17 and the Assessing Officer or the Deputy Commissioner (Appeals) or the Commissioner (Appeals) is satisfied that in respect of such assessment year such person has assessable net wealth, then, such person shall, for the purposes of clause (c) of this sub-section, be deemed to have concealed the particulars of his assets or furnished inaccurate particulars of any assets or debts in respect of such assessment year, notwithstanding that such person furnishes a return of his net wealth at any time after the expiry of either of the periods aforesaid applicable to him in pursuance of a notice under section 17.]

     Explanation 4.—Where the value of any asset returned by any person is less than seventy per cent of the value of such asset as determined in an assessment under section 16 or section 17, such person shall be deemed to have furnished inaccurate particu­lars of such asset within the meaning of clause (c) of this sub-section, unless he proves that the value of the asset as returned by him is the correct value.]

     Explanation 5.—Where in the course of a search under section 37A, the assessee is found to be the owner of any money, bullion, jewellery or other valuable article or thing (hereafter in this Explanation referred to as assets) and the assessee claims that such assets represent or form part of his net wealth,—

           (a) on any valuation date falling before the date of the search, but the return in respect of the net wealth on such date has not been furnished before the date of the search or, where such return has been furnished before the said date, such assets have not been declared in such return ; or

           (b) on any valuation date falling on or after the date of the search,

then, notwithstanding that such assets are declared by him in any return of net wealth furnished on or after the date of the search, he shall, for the purposes of imposition of a penalty under clause (c) of sub-section (1) of this section, be deemed to have concealed the particulars of such assets or fur­nished inaccurate particulars of such assets,

[unless—

      (1) such assets are recorded,—

           (i) in a case falling under clause (a), before the date of the search ; and

           (ii) in a case falling under clause (b), on or before such date,

in the books of account, if any, maintained by him or such assets are otherwise disclosed to the ²³[Chief Commissioner or Commis­sioner before the said date ; or

      (2)  he, in the course of the search, makes a statement under sub-section (4) of section 37A that any money, bullion, jewellery or other valuable article or thing found in his pos­session or under his control, forms part of his net wealth which has not been disclosed so far in his return of net wealth to be furnished before the expiry of the time specified in sub-section (1) of section 14, and also specifies in the statement the manner in which such net wealth has been acquired and pays the tax, together with interest, if any, in respect of such net wealth].]

     [Explanation 6.—Where any adjustment is made in the wealth declared in the return under the proviso to clause (a) of sub-section (1) of section 16 and additional wealth-tax charged under that section, the provisions of this sub-section shall not apply in relation to the adjustments so made.]

     [(1A) Where any amount is added or disallowed in computing the net wealth of an assessee in any order of assessment or reassessment and the said order contains a direction for initiation of penalty proceedings under clause (c) of sub-section (1), such an order of assessment or reassessment shall be deemed to constitute satisfaction of the Assessing Officer for initiation of the penalty proceedings under the said clause (c).]

      (2) No order shall be made under sub-section (1) unless the person concerned has been given a reasonable opportunity of being heard.

         [(3) No order imposing a penalty under sub-section (1) shall be made,—

           (i) by the Income-tax Officer, where the penalty exceeds ten thousand rupees ;

           (ii) by the Assistant Commissioner or Deputy Commissioner, where the penalty ex­ceeds twenty thousand rupees, except with the prior approval of the Joint] Commissioner.

            (4) A Deputy Commissioner (Appeals)], a Commissioner (Ap­peals), Chief Commissioner or Commissioner] or the Appellate Tribunal on making an order under this section imposing a penalty, shall forthwith send a copy of the same to the Assessing Officer.

Return of wealth, etc., not to be invalid on certain grounds.

42C. No return of wealth, assessment, notice, summons or other proceeding furnished or made or issued or taken or purported to have been furnished or made or issued or taken in pursuance of any of the provisions of this Act shall be invalid or shall be deemed to be invalid merely by reason of any mistake, defect or omission in such return of wealth, assessment, notice, summons or other proceeding if such return of wealth, assessment, notice, summons or other proceeding is in substance and effect in conformity with or according to the intent and purpose of this Act.]

Discussion:

A reading of the above provisions shows that levy of penalty is considered a serious matter and the law provide certain check and balances. In case amount of penalty exceed prescribed limit (presently it is Rs.20,000/- earlier it was Rs.10,000/) in case of penalty for concealment of wealth, the law require that no order levying penalty shall be passed without prior approval of Joint Commissioner. In this case requirement of such stage of prior approval is order levying penalty, however, in interest of justice and to save administrative work, it will be more sensible if prior approval for initiation of proceedings is required.

Section 42C provide certain safeguards to avoid invalidation of certain documents and proceedings, if the document or proceeding is  in substance and effect in conformity with or according to the intent and purpose of this Act.

This safeguard  of section 42C cannot save situations where the act done is without jurisdiction or is time barred etc. An authority must assume his jurisdiction in the matter and must act within allowed time strictly as per law. An action taken without having acquired proper jurisdiction and not done within prescribed period cannot be saved or protected by such provision.

A case before Calcutta High Court:

Indrajit Banerjee Versus Commissioner of Wealth Tax -IX & Another- 2014 (1) TMI 415 - CALCUTTA HIGH COURT  matter for consideration was whether penalty exceeding prescribed limit (Rs.10,000/- at the relevant time) could be legally levied by the WTO without prior approval of JCIT? Relevant question before the High Court read as follows:

 “Whether on the facts and circumstances of the case, the Appellate Tribunal should have held that the penalty order passed by the Wealth (Income) Tax Officer under Section 18(1) of the Wealth Tax Act, 1957 without prior approval of the requisite authority under section 18(3) of the said act was void ab initio and without jurisdiction and authority of law ?"

The contentions raised by counsels, observations and order of the High Court on this question are discussed below:

On behalf of revenue  Mr. Agarwal  referred to Section 42C of the Wealth Tax Act and contended that the submission that the Income Tax Officer had no jurisdiction to impose penalty exceeding a sum of Rs.10,000/- without the approval of the Deputy Commissioner is a question of fact which was never raised by the assessee at any stage and, therefore, cannot be permitted to be raised at this stage.

Mr. Murarka  on behalf of assessee, in reply submitted that omission to take prior approval under sub-Section 3 of Section 18 is not a curable defect nor has the legislature included an order without jurisdiction within the fold of Section 42C of the Wealth Tax Act.

After hearing the learned counsel appearing for the parties, the Court considered that questions of law which arise for determination in this case are as follows:

(a)
(b)
(c)
(d)		Whether the omission to take prior approval is a curable defect under Section 42C of the Wealth Tax Act ?

On this question the observations and order of the honorable High Court is analyzed below:

    27. The Income Tax Officer had no jurisdiction to impose penalty exceeding a sum of Rs.10,000/- except with the approval of the Deputy Commissioner. Mr. Agarwal submitted that it is a question of fact. We are unable to accept this submission. It was the obligation of the Income Tax Officer to indicate in his order that he passed the order after obtaining requisite approval. Since the order passed by the Income Tax Officer does not contain the requisite recital, it has to be held that no such approval was obtained. The order itself is incompetent. An incompetent order is a nullity and the point as regards nullity can be taken at any stage. It can even be taken at the stage of execution. Even if the orders imposing penalty were not set aside by us, which we propose to do, the order could not have been executed. Therefore, the third question is answered in the affirmative.

28. Section 42C of the act does not apply to imposition of penalty. The expression ' other proceeding' has to be construed ejusdem generis. The expression assessment cannot include imposition of penalty. The power to pass an order is a question of jurisdiction. When the requisite power was not there, the order could not have been passed. The order passed without power is a nullity which cannot be saved by invoking Section 42C. Therefore, the fourth question is answered in the negative.

31. For the aforesaid reasons, we are of the opinion that the appeal must succeed. The order under challenge is set aside.

Conclusion:

Thus in this case, the order levying penalty was set aside because there was no mention of the prior approval of the concerned authority in the order itself, thus the order was incompetent, it was without jurisdiction and thus void. From this order it can be said that prior approval is such a fact, that it must be evident from the order itself. This is so important because prior approval is a precondition and without such prior approval the authority is not even competent and have no jurisdiction to pass order. The court further held that even if an order is passed, then it cannot be executed. The Court also held that this issue can be raised even at stage of execution.

The Court has also ruled that penalty proceeding is not covered by S. 42C because applying Rule of construction and interpretation , particularly applying rule of ejusdem generis, the expression ‘other proceeding’ will not include penalty proceedings.

Learning for tax authorities:

Tax authorities must be very careful while complying with legal requirements about jurisdiction, proper procedure, and limitation etc. Unfortunately, many authorities take such issues in a very casual manner and have approach of ‘who care…., we can amend law to rectify our short comings”. This attitude is promoted by legislators also by making provisions to regularize irregular actions or omissions of authorities instead of taking  action against erring officers.

Learning for tax payers:

When any order is received, one must try to find out various aspects relating to procedures, jurisdiction and limitation. In some situations, it may be worthwhile to find out reasons which can render the order as illegal and void providing a winning platform. 

IT : Valuation of a vacant piece of land has to be made in accordance with provisions of Schedule III and not by any other mode

IT : Where WTO passed a penalty order exceeding a sum of Rs. ten thousand without obtaining approval of Deputy Commissioner, said order being incompetent could not have been executed

IT : A penalty order passed without obtaining approval of Deputy Commissioner is a nullity which cannot be saved by invoking section 42C

Indrajit Banerjee Versus Commissioner of Wealth Tax -IX & Another- 2014 (1) TMI 415 - CALCUTTA HIGH COURT