TMI Blog1975 (7) TMI 10X X X X Extracts X X X X X X X X Extracts X X X X ..... bay-1, and also at No. 31, Binoy Badal Dinesh Bag, in the town of Calcutta. The business of the company consists in the importation and of purchase and storage, sale and distribution of petroleum and allied products. The capital of the company has been contributed in pounds sterling and as on 31st December, 1966, the authorised capital of the company consisted of Pound 2,50,00,000, divided into 1,25,00,000 " A " ordinary shares of pound one each and 1,25,00,000 " B " ordinary shares of pound one each. All the shares of the company have been issued and are fully paid up. The accounts of the company are expressed in terms of pounds sterling including the profit and loss account of the company. The company is obliged by law to lay before its shareholders at its annual general meeting a profit and loss account expressed in terms of pounds sterling. The financial year of the company is from January to December. The company has been assessed to income-tax in India for a number of years. For the assessment year 1967-68, the company duly filed its return and the assessment year in question in the present proceeding is the assessment year 1967-68. On the 5th of June, 1966, the rupee was dev ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... r depreciation and also development rebate the petitioner in the return originally filed had shown substantial loss of over Rs. 68,00,000 (Sixty-eight lakhs). In the course of the assessment proceeding before the Income-tax Officer, the petitioner was represented by Shri V. Newatia of M/s. Price Waterhouse Peat Co., and Shri O. P. Mathur, Taxation Officer of the company. They were heard by the Income-tax Officer and the Income-tax Officer for reasons recorded in his order disallowed the entire claim of the petitioner on account of devaluation loss and added back an amount of Rs. 8,19,01,945 to the petitioner's income claimed by the petitioner by way of deduction on this account. The Income-tax Officer also disallowed a large part of the petitioner's claim on account of depreciation, terminal allowance and development rebate. On the basis of the view expressed by the Income-tax Officer that the entire claim of the petitioner on account of devaluation loss and that the greater part of the claim of the petitioner on account of depreciation, terminal allowance and development rebate were not allowable and on the basis of the said claims being rejected and being added to the income of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tax Act, 1961, to the principal officer of the company at Bombay and the said notice reads as follows : " Whereas the Income-tax Officer, Central Circle XXIII, Calcutta, has under sub-section (2) of section 274 of the Income-tax Act, 1961, referred your case to me in connection with the penalty proceedings under clause (c) of sub-section (1) of section 271 and whereas it appears to me that you have concealed the particulars of your income or deliberately furnished inaccurate particulars of such income for the assessment year 1967-68. You are hereby requested to appear before me at 11-30 AM on 20th September, 1971, and show cause why an order imposing a penalty on you, should not be made under section 271(1)(c) of the said Act. If you do not wish to avail yourself of this opportunity of being heard in person or through authorised representative you may show cause in writing on or before the said date which will be considered before any such order is made under section 271(1)(c)." This notice appears at page 152 of the annexures to the petition. The validity of the aforesaid two notices had been questioned in this writ petition filed by the company. The principal grievance of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... sed with you and/or recorded in our/the company's earlier letters to you and that you verbally confirmed at our meeting on 27th February, 1974, that you were satisfied with the explanations on these matters and that you would drop the penalty proceedings if you were also satisfied with the company's explanation for making the claim for depreciation. In the circumstances, it seems that the penalty proceedings can be now dropped and that there is no need for further explanations from the company. If you agree, please let the company have your confirmation immediately that you will be pleased to drop the penal proceedings, under advice to us, so that the company is spared further expenses in this matter." This letter is at pages 656-57 of the annexures to the petition. As the authorities concerned did not inform the company that the penalty proceedings against the company had been dropped, the company has presented this petition under article 226 of the Constitution for the issue of appropriate writs for quashing the said two notices and for prohibiting the authorities from continuing the said penalty proceeding against the petitioner and also for restraining the authorities from ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... furnished any inaccurate particulars of the income and there is no question of deliberately furnishing any inaccurate particulars of such income in the return. Mr. Ginwalla has contended that the company after having submitted proper return setting out correctly all particulars of income has claimed certain allowances on the basis of devaluation loss, increased depreciation and development rebate. It is his contention that the claim of the company for deduction of devaluation loss, increased depreciation and development rebate is clearly justified in law and the Income-tax Officer was not right in disallowing the said claim of the company ; and in view of the claim of the company in respect of the said items being disallowed by the Income-tax Officer, the petitioner is pursuing the matter and has taken appropriate proceedings and the appeal filed by the petitioner against the decision of the Income-tax Officer which was upheld by the Appellate Assistant Commissioner is now pending before the Tribunal. Mr. Ginwalla has argued that though in this proceeding the court is not undoubtedly concerned with the merits of the said claims of the company for deduction, the said claims of the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... and validly initiated, as no penalty can be imposed unless the requirements for imposition of penalty are satisfied. Mr. Ginwalla contends that in the facts and in the circumstances of this case there cannot be any question of fulfilment of any of the conditions which may justify the imposition of the penalty on the petitioner. It is the contention of Mr. Ginwalla that in the instant case there could have been no satisfaction on the part of the Income-tax Officer in the course of the assessment proceedings that. the company has concealed any part of its income or has furnished any inaccurate particulars of its income in the return. Mr. Ginwalla has argued that the order of the Income-tax Officer in the assessment proceeding clearly goes to indicate that before him the company had raised certain questions of law in support of the company's claim for deduction of devaluation loss, increased depreciation and development rebate. It is the argument of Mr. Ginwalla that full and frank disclosure was there with all particulars and proper material and on the basis thereof the company, after getting proper advice, had made the claims for deduction and raised the aforesaid contentions of law ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... f any inaccurate particulars within the Act, the facts and circumstances of this case and the order passed by the income-tax Officer in the instant case clearly establish that there could have been no question of any concealment of income or of furnishing any inaccurate particulars. Mr. Ginwalla, therefore, submits that the Income-tax Officer cannot, in the facts and circumstances of this case, be satisfied that there has been any concealment of income on the part of the company or that the company has furnished any inaccurate particulars, as there were indeed no materials which cart bring about such satisfaction. Mr. Ginwalla in this connection has further commented that the notices issued by the authorities and the subsequent correspondence between the parties also go to indicate that the authorities did not indeed know whether, according to the authorities, it was a case of concealment of income or of furnishing of inaccurate particulars Within the meaning of section 271(1)(c) of the Act. It is the further comment of Mr. Ginwalla that the authorities also did not know whether the case came under section 271(1)(c) of the Act or the case was one covered by the Explanation. Mr. Gin ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... icated upon. It is the argument of Mr. Ginwalla that as raising the said questions of law can never be considered to be an act of fraud or of gross or wilful neglect, the Explanation will also have no application. Mr. Ginwalla has argued that though the requirements of section 271 are not satisfied in the instant case, the authorities concerned are still persisting in proceeding with the penalty proceedings by applying wrong principles of law. The wrong principles of law which, according to Mr. Ginwalla, are being sought to be applied by the authorities concerned in persisting with the penalty proceeding wrongfully and illegally, are (1) legal contentions, which do not find favour with the authority, if raised before the authority, will result in concealment of income and furnishing of inaccurate particulars, (2) urging all questions of law in support of claims for deduction before the Income-tax Officer ill be an act of fraud or of gross or wilful neglect on the part of the assessee, if the contentions are not accepted by the Income-tax Officer, (3) mere rejection of a question of law urged before the Income-tax Officer by the Income-tax Officer may form the basis of satisfaction ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... penalty proceeding that the requirements of section 271 have been satisfied, the authority concerned will proceed to impose penalty, as the authority concerned is lawfully empowered to do so. If, however, the authority concerned, argues Mr. Pal, is of the opinion on a consideration of the relevant materials that the requirements of section 271 have not been satisfied, the authority concerned will not exercise the power of imposing any penalty against the petitioner, Mr. Pal has contended that the statute does not require any notice to be given to the petitioner for initiating the penalty proceedings and the notice that has been given to the petitioner is not a statutory notice. It is the contention of Mr. Pal that the notices have been given in compliance with the provisions contained in section 274 to give the assessee the necessary opportunity of showing cause as to why penalty should not be imposed on the petitioner. Mr. Pal argues that the said notices not being statutory notices cannot be challenged and the validity thereof cannot be questioned in this writ proceeding. Mr. Pal has further argued that, in the instant case, the Explanation contained in section 271 is clearly att ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... take necessary and appropriate action for redress of his grievance in accordance with the provisions contained in the Act by preferring an appeal against the order of the authorities concerned. It is the argument of Mr. Pal that as the Act provides a complete machinery for redress of the grievance of the petitioner, if there be any, in the matter of imposition of any penalty on the petitioner, the special jurisdiction of this court should not be allowed to be invoked and the court should not exercise its power under article 226 of the Constitution. In this connection, Mr. Pal has referred to the decision of the Supreme Court in the case of Gita Devi Aggarwal v. Commissioner of Income-tax [1970] 76 ITR 496 and he has relied on the following observations at pages 497-98 : It is well settled that when an alternative and equally efficacious remedy is open to a litigant, he should be required to pursue that remedy and not invoke the special jurisdiction of the High Court for issue of a prerogative writ. It is true that the existence of an alternative remedy does not affect the jurisdiction of the court to issue a writ ; but, as observed by this court in Rashid Ahmed v. Municipal Boar ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ns as follows : " Amendment of section 271:--In section 271 of the Income-tax Act, in sub-section (1),-- (i) in clause (c), the word " deliberately " shall be omitted ; (ii) the following Explanation shall be inserted at the end, namely :-- ' Explanation.--Where the total income returned by any person is less than ninety 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 any income included in the total income but which has been disallowed as a deduction), such person shall, unless he proves that the failure to return the correct income did not arise from any fraud or any gross or wilful neglect on his part, be deemed to have concealed the particulars of his income or furnished inaccurate particulars of such income for the purposes of clause (c) of this sub-section '." Mr. Pal has also drawn my attention to the relevant note on clause 40 appearing at page 65 of the said report. The said note reads thus : " Clause 40 seeks to amend section 271 of the Income-tax Act to provide ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... o be satisfied before the appropriate authority can assume jurisdiction to initiate penalty proceedings or before any penalty proceedings can be initiated by the appropriate authority. Unlike the provisions contained in section 147 of the Act for the purpose of reopening an assessment, no condition precedent is prescribed by the statute the fulfilment of which is imperative for assumption of jurisdiction for initiation of penalty proceedings. The Act also does not require any statutory notice to be given for initiating penalty proceedings against an assessee. The requirement of the statute is to hear the assessee or to give the assessee a reasonable opportunity of being heard before an order imposing a penalty is passed. A notice is usually given to an assessee to show cause why a penalty should not be imposed by the appropriate authority, if the authority concerned is satisfied that a fit case for exercise of the power of imposition of penalty on the basis of the provisions contained in section 271 of the Act has arisen, and the notice is issued for the purpose of hearing the assessee or giving the assessee a reasonable opportunity of being heard before passing the order of imposi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nalty has been made or not has to be determined usually in any penalty proceeding by the appropriate authority and though an assessee aggrieved by an order of imposition of penalty may have his remedy under the Act, yet, in appropriate cases, to my mind, the court may interfere in this jurisdiction with the penalty proceedings, provided the court is satisfied that the facts and circumstances of the case require and justify the interference by the court in this jurisdiction in the interest of justice. Whether a proper case has been made out for interference by this court in this jurisdiction with any penalty proceedings, will necessarily depend on the facts and circumstances of each particular case. The existence of remedy under the Act against an order of imposition of penalty and the fact that the question whether a fit case for exercise of the power of imposition of penalty on the basis of the provisions contained in section 271 of the Act has arisen or not can be determined by the appropriate authority in the penalty proceeding itself, will not, to my mind, constitute an absolute bar to the exercise of the jurisdiction of the court in a proceeding under article 226 of the Consti ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... r raised the legal contentions before the Income-tax Officer in the assessment proceeding that the petitioner was entitled to the benefit of devaluation loss, increased depreciation and development rebate. The contentions raised by the petitioner do not in any way indicate that there had been any concealment of the particulars of the income of the petitioner or that the petitioner had furnished any inaccurate particulars of the petitioner's income. On the basis of the particulars furnished and on the basis of the materials which were there before the Income-tax Officer in the assessment proceeding, the petitioner had raised the aforesaid contentions which are indeed contentions of law and those contentions of law do not yet appear to have been finally decided or settled by any authoritative judicial pronouncement. The Income-tax Officer has no doubt rejected the said contentions of the petitioner in the assessment proceeding. The said questions, however, await final determination. Whether the said contentions of the petitioner are ultimately upheld or turned down, it cannot, in my opinion, be said that the said contentions are frivolous, dishonest or mala fide. By raising the said ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n precedent to the exercise of the power of imposition of penalty under section 271, though it may not constitute any condition precedent to the assumption of the jurisdiction for initiating the penalty proceeding. The satisfaction of the Income-tax Officer may be his subjective satisfaction but there must be materials which go to show that the satisfaction of the Income-tax Officer is justified. The sufficiency or the adequacy of the materials may or may not be considered by the court, but the court must, in any event, be satisfied that materials do exist. As in the instant case there does not exist any material which can lead to the satisfaction of the Income-tax Officer that the petitioner has concealed particulars of its income or has furnished inaccurate particulars of the income, the power conferred on the authority by the Act for imposing any penalty on the petitioner can never be exercised. As I have already observed, the penalty proceedings against the petitioner have been initiated on the basis of the provisions contained in section 271(1)(c) of the Act and no reference has been made in the two notices to the petitioner to the Explanation contained in section 271. The fac ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... als and full particulars placed, was rejected by the Income-tax Officer. I have already held that the contentions which were raised by the assessee in the assessment proceedings are indeed contentions of law and the said contentions cannot be considered to be frivolous, dishonest or mala fide. At the time of initiation of the penalty proceedings the authority concerned has entirely proceeded on the basis of section 271(1)(c) of the Act and has not relied on the Explanation at all. The facts and circumstances of this case, therefore, clearly go to indicate that the satisfaction of the Income-tax Officer was on the basis of the provisions contained in section 271(1)(c) of the Act and was not on the basis of the provisions contained in the Explanation. Even if the said Explanation can be invoked in justification of the penalty proceedings in view of the discrepancy in the income returned and income assessed, the said Explanation cannot be applied and relied upon for exercise of the power of imposition of penalty on the petitioner in the instant case. The said Explanation provides that in the event of certain discrepancy arising between the income returned by an assessee and assessed b ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ns contained in the Explanation to section 271 of the Act cannot be attracted, even if it can be otherwise said that the said Explanation applies, because of the discrepancy in the income returned by the petitioner and the income assessed by the Income-tax Officer. The Explanation cannot in the facts and circumstances of this case, be invoked or relied upon by the authority for exercising the power of imposition of penalty on the petitioner. The conditions which are necessary to be fulfilled for exercising the power of imposing penalty under section 271 of the Act do not exist in the instant case and in the absence of the said conditions the authority concerned is not competent to exercise the power of imposing any penalty on the petitioner. It appears that the authority concerned is proceeding with and continuing the penalty proceeding against the petitioner on the basis of erroneous assumptions of law. No disputed questions of fact arise in this case. The facts and circumstances of this case are quite clear and they require no investigation. The facts and circumstances of the case clearly indicate that the authority concerned has assumed that by raising the legal contentions wh ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... to my mind, clearly indicate that the continuance of the penalty proceeding is clearly unjustified and is causing unnecessary harassment to the petitioner. I have already held that the conditions laid down in section 271 of the Act do not exist in the instant case and the authority concerned is not competent to exercise the power of imposition of any penalty on the petitioner. I have further held that the authority concerned is seeking to proceed with the matter by applying wrong legal principles and on the basis of erroneous assumptions and this case involves no disputed questions of fact. In my opinion, the facts and circumstances of this case clearly go to indicate that if the authority concerned had correctly appreciated and applied the principles of law, the authority concerned would have dropped the proceeding to save unnecessary harassment to the petitioner. The facts and circumstances of the case further go to indicate that the existence of the alternative remedy by way of appeal may not be fully effective as, apart from the financial aspects of the matter, the harassment of the petitioner will indeed be great. The decisions of the Supreme Court relied on by Mr. Pal lay do ..... X X X X Extracts X X X X X X X X Extracts X X X X
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