1960 (3) TMI 75 - SC - Income Tax

Summary

1. ISSUES PRESENTED and CONSIDERED

- Whether the Income-tax Officer's imposition of penalty without affording a reasonable opportunity of hearing to the assessee violated the procedural safeguards prescribed under section 28(3) of the Income-tax Act.

- Whether the order of the Appellate Assistant Commissioner setting aside the penalty order and directing refund of the penalty, without expressly remanding the matter, precluded the Income-tax Officer from continuing penalty proceedings afresh.

- Whether the Income-tax Officer could validly proceed with penalty assessment after the appellate order, given that the appellants had filed a writ petition under article 226 challenging the proceedings.

- The applicability and effect of precedent decisions, particularly the Kerala High Court decision in Jos Chacko Poothokaran, on the question of finality of the appellate order and the jurisdiction of the Income-tax Officer to proceed further.

2. ISSUE-WISE DETAILED ANALYSIS

Issue 1: Validity of penalty imposition without hearing under section 28(3) of the Income-tax Act

The relevant legal framework is section 28 of the Income-tax Act, which provides that if an assessee fails to file a return within the prescribed time, the Income-tax Officer may impose a penalty under sub-section (1)(a). However, sub-section (3) mandates that the penalty shall not be imposed without affording the assessee a reasonable opportunity of being heard.

The Court observed that the appellants had failed to file their return for the assessment year 1948-49 within time, thereby attracting the penalty provision under section 28(1)(a). The Income-tax Officer issued a notice but proceeded to levy a penalty of Rs. 16,000 without granting a hearing, violating the procedural safeguard under sub-section (3).

The Appellate Assistant Commissioner rightly held the penalty order defective on this ground and directed refund of penalty if recovered. The Court emphasized that the denial of hearing was a supervening illegality occurring during the proceedings, rendering the penalty order vitiated.

Applying the law to facts, the Court concluded that the penalty order was invalid due to failure to afford a hearing, affirming the principle that procedural fairness is mandatory before imposing penalty under section 28.

The Court rejected any contention that the initial omission by the appellants to file the return justified dispensing with the hearing requirement, underscoring the mandatory nature of sub-section (3).

Issue 2: Jurisdiction of the Income-tax Officer to continue proceedings after appellate order

The Appellate Assistant Commissioner's order set aside the penalty order and directed refund but did not expressly remand the matter for fresh proceedings. The question arose whether the Income-tax Officer could proceed further or if the appellate order was final and conclusive.

The Court interpreted the appellate order as correcting the illegality and leaving the matter open for the Income-tax Officer to continue proceedings from the stage at which the illegality occurred. It held that no express remand was necessary for this purpose.

The Court reasoned that the illegality supervened during the assessment proceedings and the appellate order's effect was to vacate the defective penalty order, thereby reviving the original notice and allowing continuation of proceedings.

It rejected the appellants' argument that the assessment proceedings were concluded and that no further action could be taken. The Court held that since the notice to show cause had not been disposed of validly, the proceedings were still "during the course of assessment proceedings."

The Court further observed that the Income-tax Officer's jurisdiction to proceed afresh was well within the statutory framework and consistent with procedural fairness, as the appellants were to be given an opportunity of hearing before any new penalty was imposed.

Issue 3: Effect of writ petition and High Court's dismissal on continuation of proceedings

The appellants filed a writ petition under article 226 challenging the penalty proceedings. The High Court dismissed the petition in limine, holding that the appellants could raise their contentions before the Income-tax authorities.

The Supreme Court, on special leave, considered whether the High Court's dismissal precluded continuation of proceedings. It held that the High Court was correct in its approach, as the remedy under article 226 was not to forestall the statutory proceedings but to ensure they were conducted lawfully.

The Court emphasized that the appellants were entitled to a hearing and fair procedure before penalty imposition, but the writ jurisdiction was not to substitute the statutory appellate or revisional remedies.

Issue 4: Precedential value of Jos Chacko Poothokaran decision

The appellants relied on a Kerala High Court decision which held that where no appeal was taken by the Commissioner of Income-tax to the Appellate Tribunal under section 33(2), the appellate order of the Appellate Assistant Commissioner became final, and the Income-tax Officer could not reassess penalty.

The Supreme Court distinguished that case, stating that the reason given was beside the point. The appellate order in the present case was to vacate the defective penalty order due to illegality, not a final adjudication on merits.

The Court held that the Income-tax Officer could validly continue proceedings from the point of illegality, as the notice to show cause remained operative and the proceedings related back to the time of the original notice.

This interpretation preserved the statutory scheme and the principle that procedural irregularities can be cured by continuing proceedings afresh with due compliance.

3. SIGNIFICANT HOLDINGS

"The order of the learned Appellate Assistant Commissioner pointed out the ground on which the illegality proceeded and his order directing the refund of the penalty, if recovered, cannot but be interpreted as correcting the error and leaving it open to the Income-tax Officer to continue his proceedings from the stage at which the illegality occurred."

"The penalty shall not be imposed without affording to the assessee a reasonable opportunity of being heard."

"The notice issued to the appellants to show cause why penalty should not be imposed on them did not cease to be operative because the Appellate Assistant Commissioner pointed out an illegality which vitiated the proceeding after it was lawfully initiated."

"The Income-tax Officer is well within his jurisdiction to continue the proceedings from the stage at which the illegality has occurred and to assess the appellants to a penalty, if any, which the circumstances of the case may require."

The Court conclusively determined that failure to afford a hearing before penalty imposition under section 28(3) vitiates the penalty order; however, such defect can be remedied by continuing proceedings afresh from the stage of illegality without the need for express remand.

The appellate order setting aside the penalty and directing refund is not final on merits but corrective, allowing the Income-tax Officer to proceed lawfully thereafter.

The writ jurisdiction under article 226 does not preclude statutory proceedings but ensures procedural compliance.