TMI Blog1966 (9) TMI 7X X X X Extracts X X X X X X X X Extracts X X X X ..... n or about 13th September, 1963. In this order the Income-tax Officer recorded a finding that the item of Rs. 25,000 could not be allowed as admissible expenditure and he added it as concealed income. An appeal was preferred against this order by the petitioner which was decided by the Appellate Assistant Commissioner on July 25, 1964. The Appellate Assistant Commissioner has upheld the finding regarding this item of concealed income. The Income-tax Officer issued a notice purporting to act under section 274 read with section 271 of the Income-tax Act, 1961. This notice was issued on September 13, 1963, calling upon the petitioner to show cause why they should not be penalised for having concealed their income. It appears that when this notice was pending, the Inspecting Assistant Commissioner also issued a notice under section 274(1), read with section 271 of the Income-tax Act, 1961, on 30th April, 1965. The Inspecting Assistant Commissioner passed an order on 7th September, 1965, imposing a penalty of Rs. 30,000 on the petitioner under section 271(1)(c) of the Income-tax Act, 1961. The petitioner challenges the power of the Inspecting Assistant Commissioner or, for the matter of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ecause they did not commit any breach of any of the terms of section 271. The challenge to the vires of section 297(2)(g) is grounded on the averments in the petitions that the petitioners are those assessees who had filed returns of their income for the year prior to the assessment year ending 31st March, 1962, before April 1, 1962. From the mere fact that in cases of the petitioners the assessment was not completed before April 1, 1962, they could not be given a different treatment from several other assessees who had filed their returns before April 1, 1962, but in whose cases the assessments were completed before April 1, 1962. In other words, their contention is that the legislature having made a provision as to the manner in which proceedings for assessment pending on the date of the coming into force of the new Income-tax Act, 1961, should be dealt with in a particular way in respect of the assessees who have been grouped together as assessees who had filed their returns before April 1, 1962, a further differentiation could not be made rationally or reasonably merely on the ground that in some cases the assessments were completed before April 1, 1962, while in the case of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... as other assessees in the same class are concerned. As regards the applicability of section 271 to the penal proceedings provided in clause (g) of sub-section (2) of section 297 of the Income-tax Act, 1961, the contention of the respondents is that the provisions of the Income-tax Act of 1961 must be held to be applicable so far as may be, and this may be in the matter of quantum of punishment or penalty that the provisions of the Act of 1961 have been made applicable and not other conditions such as a notice under section 139 which in terms could not be available. In other words, the provisions of clause (g) of sub-section (2) of section 297 of the Income-tax Act of 1961 is a separate and independent code providing for imposition of penalty in respect of assessees who have filed their returns already, i.e., before April 1, 1962, but in whose cases the assessment came to be completed after April 1, 1962. It is not necessary, according to this line of argument, to go to any other section of the Income-tax Act, 1961, as clause (g) merely speaks of penal provisions under the new Act applicable in such cases. In support of their contention the petitioners have pointed out that the s ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... (d) when the person liable to penalty is a registered firm or an unregistered firm which has been assessed under clause (b) of sub-section (5) of section 23, then, notwithstanding anything contained in the other provisions of this Act, the amount of income-tax and super-tax payable by the firm itself shall be taken to be an amount equal to the tax which would have been payable by an unregistered firm on an income equal to the firm's total income, and, in the cases referred to in clauses (b) and (c), the amount of the income-tax and super-tax which would have been avoided if the income as returned had been accepted as the correct income, shall be taken to be the difference between the amount of the tax which would have been payable by an unregistered firm on an income equal to the firm's total income and the amount of the tax payable by an unregistered firm on an income equal to the income of the firm as actually returned by the firm. (2) If the Income-tax Officer, the Appellate Assistant Commissioner or the Appellate Tribunal, in the course of any proceedings under this Act, is satisfied that the profits of a registered firm have been distributed otherwise than in accordance wit ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n addition to the amount of the tax, if any, payable by him, a sum equal to two per cent. of the tax for every month during which the default continued, but not exceeding in the aggregate fifty per cent. of the tax ; (ii) in the cases referred to in clause (b), in addition to any tax payable by him, a sum which shall not be less than ten per cent., but which shall not exceed fifty per cent. of the amount of the tax, if any, which would have been avoided if the income returned by such person had been accepted as the correct income ; (iii) in the cases referred to in clause (c), in addition to any tax payable by him, a sum which shall not be less than twenty per cent. but which shall not exceed one and a half times the amount of the tax, if any, which would have been avoided if the income as returned by such person had been accepted as the correct income. Explanation.- Where the total income returned by any person is less than eighty per cent. of the total income (hereinafter in this Explanation referred to as the correct income) as assessed under section 143 or section 144 or section 147 (reduced by the expenditure incurred bona fide by him for the purpose of making or earning ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... be claimable by any other partner by reason of such direction. (4A) Notwithstanding anything contained in clause (i) or clause (iii) of sub-section (1), the Commissioner may, in his discretion--- (i) reduce or waive the amount of minimum penalty imposable on a person under clause (i) of sub-section (1) for failure, without reasonable cause, to furnish the return of total income which such person was required to furnish under sub-section (1) of section 139, or (ii) reduce or waive the amount of minimum penalty imposable on a person under clause (iii) of section (1), if he is satisfied that such person--- (a) in the case referred to in clause (i) of this sub-section has, prior to the issue of notice to him under sub-section (2) of section 139, voluntarily and in good faith, made full disclosure of his income ; and in the case referred to in clause (ii) of this sub-section has, prior to the detection by the Income-tax Officer, of the concealment of particulars of income in respect of which the penalty is imposable, or of the inaccuracy of particulars furnished in respect of such income, voluntarily and in good faith, made full and true disclosure of such particulars ; (b) h ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... maximum up to one and a half times of tax was imposable. Under the 1922 Act there was no limit of time for commencement of penalty proceedings, but under the new Act the penal proceedings are required to be commenced before the completion of the proceedings in which the Income-tax Officer or the Appellate Assistant Commissioner are satisfied that the default attracting the penalty has been committed. Under the 1922 Act there was no limit of time within which the order imposing the penalty could be passed, while under the 1961 Act such a time-limit is imposed under section 275. Another important feature of distinction is regarding prosecution. Under the 1922 Act no prosecution could be instituted in respect of same facts giving rise to penalty, while under the 1961 Act penalty can be imposed and in addition a prosecution can be launched on certain facts. We have reproduced above briefly the distinguishing features of the provisions for imposing penalty, the manner in which the proceedings are to be initiated, the authorities which are competent to impose penalty, the limitation of time and the maximum and the minimum amount of penalty which can be imposed. There is, therefore, no ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... oming into force of the Income-tax Act of 1961. They did file a return on December 28, 1962. The assessment was completed on April 19, 1963, in accordance with the provisions of the new Act, but while doing so the Income-tax Officer issued a notice to the petitioners to show cause why penalty should not be imposed on them for their failure to submit returns in time in pursuance of the notice on 30th May, 1961. The contention of the petitioners was that section 297(2)(g) which made a special provision in respect of penalty proceedings being taken against the assessees in whose cases assessment was completed after April 1, 1962, violated the guarantee under article 20 of the Constitution. The case appears to have been argued on the footing that the failure to submit the return in pursuance of the notice had taken place prior to the coming into force of the new Act, which came into force on April 1, 1962, and at that time the penalty was imposable under section 28(1)(a) of the Income-tax Act of 1922 ; but under the provisions of that Act there was a minimum amount of penalty which was liable to be imposed. On the other hand, the petitioners before the court having been dealt with unde ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... on to the following effect : " What this article hits at is the infliction of a penalty greater than the one that could be inflicted at the time the act was done. However, the procedure prescribed under the new Act cannot on this account be held to be bad. It will be open to the petitioners to urge before the taxation authorities as to what extent a penalty could, if at all, be legally imposed on them." Our attention was invited to another decision of the Kerala High Court in a case reported as P. Ummaliumma v. Inspecting Assistant Commissioner of Income-tax. In that case for the assessment year 1954-55 the Income-tax Officer initiated assessment proceedings under section 34(1)(a) of the Act of 1922, and completed the assessment on 15th September, 1962. Under section 274(2) and section 271 of the Income-tax Act, 1961, penal proceedings were commenced and penalty was imposed for deliberate concealment of a particular income. A petition under article 226 of the Constitution was moved to seek quashing of the notice demanding penalty, on the ground of violation of article 20(1) of the Constitution. In repelling this contention the High Court pointed out that there was no conviction ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... mposed upon the appellant under the law in force at the time of the cornmission of the offence, because the fine which could have been imposed upon him under section 420 was unlimited. A law which provides for a minimum sentence of fine on conviction cannot be read as one which unposes a greater penalty than that which might have been inflicted under the law at the time of the commission of the offence where for such an offence there was no limit as to the extent of fine which might be imposed.... Under article 20 of the Constitution all that has to be considered is whether the ex post facto law imposes a penalty greater than that which might be inflicted under the law in force at the time of the commission of the offence." In our opinion, the observations made in considering the applicability of article 20 of the Constitution will not be apposite in determining whether the penalty imposed under section 271 and the procedure under the Income-tax Act of 1961, in comparison with the penalty imposed and the procedure under the Income-tax Act of 1922 are onerous or not. It will be seen that by the very terms of article 20 of the Constitution the guarantee is restricted to not being s ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... whose return of income is taken to be rupees one lakh each. Assuming that the income-tax authorities had assessed rupees nine lakhs as the taxable income in the hands of each of these two assessees and a further sum of Rs. 1,000 is to be found as concealed income in the case of each of these assessees, the consequences under the two Acts will be patently different. Under section 28(1)(c) of the old Act, in the case of A whose assessment may be completed before the 1st of April, 1962, a reasonable penalty not exceeding Rs. 5,000 may be imposed. But in the case of B, by the mere fact of his assessment being completed after April 1, 1962, under section 271(1)(c) of the Income-tax Act of 1961, the penalty would not be less than Rs. 1,40,000 which is a minimum penalty under section 271(1)(a) which provides for the minimum penalty being 20 per cent. of the tax that could be levied, not exceeding one and a half times the tax, which would have been avoided if the income returned had been accepted as the correct income. That that would be the basis for calculation now seems to be judicially accepted under the decision of this court in Mansukhlal and Brothers v. Commissioner of Income-tax. T ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... divided by the legislature into two classes, namely, those cases in which assessment has been completed before the date of the coming into force of the Act and those cases in which the assessment remains to be completed till after the coming into force of the new Act. The initiation of proceedings for imposing of penalty, if any, cannot be taken unless assessment is completed. Therefore, the completion of the assessment has been properly selected as the dividing line between the two classes of assessees. That the legislature has power to classify the objects on which the provisions of a piece of legislation should operate cannot be disputed. But, in order to find out whether the classification is rational or reasonable, it is to be further established that the dividing line has some rational nexus with the object with which the classification is made. The object of classification of the two types of assessees-rather, the sub-classification, to be more precise, among the assessees who had filed their return before the coming into force of the Act in the matter of imposition of penalty has to be established. We have found it difficult to appreciate how. in order to achieve that ob ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ed has been laid down by the learned Chief Justice at page 21 thus : " The principle briefly stated is that article 14 does not prohibit the legislature from classifying or in setting up different classes to some of which the law may apply and to others the law may not. But in order that there should be a classification which can be upheld by the court, the classification must be on some rational basis. The distinction made between one class and another must be such as must be intelligible and the classification also must have some rational nexus with the object which the legislation is intended to achieve." In that case, under the M. P. Land Revenue Code pending suits were divided into two classes, (1) those which were filed before 25th March, 1954, and (2) others which were filed after that date. In finding that there was no justification for dividing the suits in these two classes and directing that the latter class of suits should be dismissed, the learned Chief Justice observed as follows : " Now, let us apply these two tests to the legislation we have before us. It is perfectly true that it is open to the legislature to have a classification on the basis of time just as ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... that a reference was also made to a later decision of the Supreme Court in Thangal Kunju Musaliar v. Venkatachalam, which explained the decision in Shree Meenakshi Mills case and in which the view is taken that if the classification is justified on administrative grounds the legislation may not be vulnerable. We do not find that in the present case the department seeks to justify the classification between the assessee whose assessment is completed prior to April 1, 1962, and those in whose cases assessments have been completed after April 1, 1962, on the ground of any administrative convenience. We are not, therefore, required to examine in detail the reasoning under which the subsequent case was decided in the Supreme Court. It seems to have been held that the classification was not made with reference to the date of reference but on the ground of administrative expediency. It is true that before the classification made by the legislature could be struck down, it is to be established that it is either arbitrary or fanciful or capricious or unjust. That such a finding is necessary is now well-settled. The learned counsel for the revenue also invited our attention to two American ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rent set of provisions in the matter of penalty in another case. A similar view has been taken in the Punjab High Court in the case in State of Punjab v. S. Kehar Singh. In that case different consequences were provided for according as allottees of land under the provisions of the Displaced Persons (Compensation and Rehabilitation) Act, 1954, were either prior or subsequent to a particular date. A similar contention was advanced before the Full Bench that properties regarding which schemes were published between particular specified dates were covered by the Act while those schemes which were published later were not within its scope. The result was that in village " A " the impugned Act would be operative and in the neighbouring village " B " it would not be so, although the persons in both the villages would be similarly placed and circumstanced, with this difference that in the former village the scheme was published between particular dates and in the latter it was not. The dividing line having been found to have no nexus with the object of classification or object of the legislation, it was struck down by the Full Bench as violating the guarantee under article 14 of the Con ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... er there has been failure to comply with the provisions of the Act in respect of matters provided in section 28 of the old Act or section 271 of the new Act. The date of completion of the assessment makes no difference so far as this aspect is concerned. In fact, it has no impact either on incurring of the liability or for imposition of penalty. We are therefore unable to see how the classification made by clause (g) of sub-section (2) of section 297 of the Income-tax Act of 1961 can be justified either as relevant or having any relation to the object with which it is concerned. So far as making a provision for imposing a penalty is concerned, there is no difference between the assessees who have filed returns but in whose cases the assessment was completed prior to April 1, 1962, and assessees who have filed returns but in whose cases assessment was not completed or could not be completed till April 1, 1962. In this connection the learned counsel for the revenue invited our attention to a decision of the Supreme Court in Hathising Manufacturing Company v. Union of India. The case arose under the provisions of the Industrial Disputes Act and of section 25-FFF, which was subsequen ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... f legislative power, but the validity of exercise of that power has to be decided on the touch-stone of equality and equal protection before the laws guaranteed under article 14 of the Constitution. The mere fact that the legislation divides assessees into two classes cannot by itself be its justification. Justification has to be found somewhere else, namely, in a rational nexus between the classification and the object to be achieved. If the respondents are not able to show that nexus, then, in our opinion, it is not possible to uphold the contention that classification is rational or just. That it is arbitrary is obvious when the date of coming into force of the Act is found to have no bearing on the division of assessees into two classes, one governed by one set of provisions and the other governed by another set of provisions. The learned counsel for the petitioners has made available to us privately a printed copy of the judgment of their Lordships of the Supreme Court in what is known as the Bonus case (Civil Appeal No. 187 of 1966, Writ Petition No. 3 of 1966, and Writ Petition No. 32 of 1966, decided on August 5, 1966). A copy of this judgment is also furnished to the l ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... f their contention that there is no rational nexus between the object with which the provision has been made for imposing penalty and selecting the date for differentiating as to this provision of law by which the proceedings should be governed. In our opinion, this contention is well-founded and has not been satisfactorily answered by the respondents. We may now notice one more argument in support of the legislation. The particular provision appears in a section of the new Act dealing with repeals and consequences of repeals. Sub-section (1) of section 297 says that the Indian Income-tax Act, 1922, is repealed. But sub-section (2) of section 297 keeps alive the provisions of the repealed Act for certain purposes. Under clause (a) of sub-section (2) where a return of income has been filed before the commencement of the new Act by any person for any assessment year, proceedings for assessment of that person for that year may be taken and continued as if this Act has not been passed. The case of this assessee is covered by this clause and so far as the assessment of income is concerned, it will be governed by the repealed Act. So far as the assessees who have not filed their return ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d that is a purpose for which clause (g) has been enacted in the new Act. Now, clause (g) speaks of any proceedings for the imposition of a penalty in respect of any assessment for the year ending 31st March, 1962, or any earlier year which is completed on or after the 1st day of April, 1962, and which may be initiated and any such penalty may be imposed under the provisions of the new Act. Now this clause contemplates two types of proceedings. In other words, proceedings in which return has been filed Prior to April 1, 1962, but in which assessment has been completed after April 1, 1962, are obviously covered by clause (g). But, in our opinion, there is nothing to indicate why clause (g) would not be applicable even to those assessees who filed their returns after April 1, 1962, in respect of assessment year ending 31st March, 1962, and prior period, and in whose cases assessments must necessarily be completed after April 1, 1962. The case which went to the Rajasthan High Court was obviously a case falling under clause (g) because the return in that case was filed in receipt of notice after April 1, 1962, in respect of the preceding assessment year. That being the position, we do ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nd such penalty may be imposed under this Act, i.e., the Income-tax Act of 1961. That clause by itself cannot be said to make a provision for imposing of penalty. In other words, that itself is not a charging section. What if provides is indication of the law by which the penal proceedings should be governed. Therefore, one is referred back to the provisions in the Income-tax Act of 1961 to find out which provision is applicable in the matter of imposition of penalty. Those provisions are sections 271 to 275. But as we have pointed out already, the opening words of section 271(1) postulate that the proceedings must be proceedings under the Act of 1961, during the course of which the Income-tax Officer or the Appellate Assistant Commissioner has to be satisfied either that the assessee has failed to furnish a return or failed to comply with a notice or has concealed a particular part of his income. if the proceedings are initiated under the repealed Act, it would not be said that the Income-tax Officer would be satisfied, in the course of the proceedings under the Income-tax Act of 1961, that the assessee has infringed one or the other of the provisions mentioned in clause (a), (b) ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... f late filing of return, supported the order on the ground that the penalty imposed under the Income-tax Act of 1961 is actually less so far as the maximum is concerned though there is also a minimum, namely, 2 per cent. of the tax for every month of default. The argument is that whereas there was a regulated discretion under section 28(1)(a) and the maximum penalty would be as high as one and a half times the amount of the tax, the new provision in limiting the penalty to 50 per cent. of the tax is more rational and, therefore, it could not be complained that it was discriminatory. The short answer to this argument is that there are other disabilities under which even an assessee who has made a default in complying with the notice for filing of the returns suffers under the provisions of the new Income-tax Act, which he did not under the provisions of the repealed Act. It is not possible for courts to say which of the two sets of provisions is more or less onerous and what will be their combined effect on the rights of the assessee. The glaring fact is that the assessees who have filed their returns prior to April 1, 1962, are being sub-divided into two categories in respect of im ..... X X X X Extracts X X X X X X X X Extracts X X X X
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