TMI Blog1975 (12) TMI 58X X X X Extracts X X X X X X X X Extracts X X X X ..... sclosed by its books of accounts produced before the Income-tax Officer and such undisclosed transactions were reflected in some other books, which were not produced before the Income-tax Officer. Thereafter, on 20th March, 1965, the assessee filed a second return and disclosed the business income of Rs. 1,775 and the total income of Rs. 17,375 which included the above-referred dividend income of Rs. 15,600. Thereafter, pending the assessment proceedings, the assessee filed the third return on 9th February, 1968, disclosing further business income of Rs. 5,028 and total income of Rs. 20,628. The Income-tax Officer completed the assessment on 22nd March, 1969, assessing the total income of the assessee at Rs. 30,384, computing business income as Rs. 14,784 and dividend income of Rs. 15,600. At the time of passing this assessment order, the Income-tax Officer also ordered the issue of notice under section 271 of the Act for concealment of income. Since the income of the assessees as assessed by the Income-tax Officer came to Rs. 30,384, the assessee was liable to pay tax of Rs. 388 as a registered firm. However, if the assessee was to be treated as an unregistered firm as contempl ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ioner, who concluded the penalty proceedings, had no jurisdiction to deal with the matter under sub-section (2) of section 274. It was further contended that the tax on the dividend income was deducted at source and, therefore, in view of the final assessment of the assessee's income made by the Appellate Assistant Commissioner some refund was due to the assessee and, therefore, also, there was no question of imposing any penalty. It is regrettable to note that from the order recorded by the Tribunal while disposing of the appeal preferred before it, it is not possible to locate the exact facts but since the above-mentioned facts are admitted facts and are taken from the record, we have mentioned them in order to appreciate the contentions raised by the parties in this reference. The conclusions arrived at by the Tribunal have been recorded in a few lines as under: "We have considered the arguments put forward by the authorised representatives of both the sides and are of the view that since it is a case of refund we do not think that any penalty could be leviable as per the calculations furnished to us in that the refund would be Rs. 1,436. Since the order of the learned Ins ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... oncealment of particulars of income. Thus, if sub-section (1) of section 271, as it stood at the relevant time, is read with regard to the facts of the present case, it becomes evident that if the Income-tax Officer found that the assessee had concealed the particulars of his income, then it was open to him to impose penalty as indicated in clause (iii) which is quoted by us above. According to this clause (iii) the penalty was related to the amount of tax which was sought to be avoided by the assessee. Now, the contention of the assessee is that since in this case no tax was ultimately found to be payable by it, and since on the contrary, it was found that if was entitled to some refund, it was not possible to assess any amount of penalty in compliance with the provisions contained in the above-quoted clause (iii). As a consequence of the above-referred contention, another contention, which is raised by the assessee, is with regard to the jurisdiction of the Inspecting Assistant Commissioner to impose penalty. Here the argument was that penalty proceedings could have been referred by the Income-tax Officer concerned to an Inspecting Assistant Commissioner only if the amount ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he course of assessment proceedings. Sub-section (2) of section 274, which is quoted above, leaves no option to the Income-tax Officer but to make a reference to the Inspecting Assistant Commissioner provided the minimum penalty imposable exceeds the sum of Rs. 1,000. It, therefore, follows that the jurisdiction of the Inspecting Assistant Commissioner to deal with the penalty matter contemplated by sub-section (2) of section 274 is to be looked at as on the day of initiation of proceedings and not with reference to the subsequent events. If proceedings are once initiated under section (2) of section 274, then the jurisdiction, which is already vested in the Inspecting Assistant Commissioner to proceed with the penalty proceedings, cannot be divested by what has subsequently happened. In this connection it would not be out of place to make a reference to the decision given by the Supreme Court in Commissioner of Income-tax v. S. V. Angidi Chettiar, wherein, Shah J. speaking for the court while dealing with section 28 of the Indian Income-tax Act, 1922, has observed as under: "The power to impose penalty under section 28 depends upon the satisfaction of the Income-tax Officer in ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... which existed when the Income-tax Officer commenced the penalty proceedings and not with reference to the facts or events which subsequently came into existence. Therefore, the contention of the assessee that the Inspecting Assistant Commissioner lost jurisdiction to deal with the penalty proceedings, as a result of the order passed by the Appellate Assistant Commissioner in appeal with regard to assessment of assessee's income, must stand rejected. This brings us to the next question, namely, whether in view of the provisions of clause (iii) of sub-section (1) of section 271, as it stood at the relevant time, and in view of the fact that no tax liability attached to the assessee with reference to the assessment year in question on the footing that it was a registered firm, any penalty under the said clause is imposable, Now, while considering the question, the most important aspect to be borne in mind is the legal impact of the provisions contained in sub-section (2) of section 271 which provides for the penalty which is imposable in cases where a registered firm becomes liable to penalty under section 271(1). This sub-section (2) of section 271 is in the following terms: ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ion 271 falls within any of the clauses (a), (b) or (c) of section 271 (1). These three clauses contemplate three distinct types of defaults. The moment it is found that any one of these three defaults is committed by an assessee which is a registered firm the said assessee becomes "liable to penalty" within the meaning of sub-section (2). Clauses (a), (b) and (c) constitute the first part of sub-section (1) of section 271. This part shows when and under what circumstances a penal liability comes into existence. Second part of this sub-section is constituted by clauses (i), (ii) and (iii). These clauses have nothing to do with the "creation" of penal liability, because they come into operation after the liability has already come into existence as their function is to provide for the method to quantify the different amounts of penalties with reference to the different defaults contemplated by clauses (a), (b) and (c). Thus, while the function of clauses (a), (b) and (c) is to create penal liability, the function of clauses (i), (ii) and (iii) is to quantify the said liability. Now, if the quantification of penal liability is based on the amount of tax, if any, payable by an assesse ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e deeming fiction, which is contemplated by the latter part of sub-section (2), such a firm should be treated as an unregistered firm and the quantification of penalty should be worked out on the amount which would be imposable on this firm as if it were an unregistered firm. Now, if the assessee-firm in this case is to be treated as an unregistered firm, it cannot be said that it was not liable to any tax, and if it cannot be said that it was not liable to any tax, then it would not be impossible to work out the penalty contemplated by clause (iii) as it was on the statute book at the relevant time. Shri Shah contended that the words "penalty imposable under sub-section (1)" which appear in sub-section (2) of section 271 suggest that penalty on a registered firm can be imposed only if its income is found taxable making it possible for the taxing authority to work out the penal liability. This contention is the result of a partial reading of the latter portion of sub-section (2). The reading of this latter portion as a whole shows how the penalty which becomes "imposable under sub-section (1)" should be computed. A penalty becomes "imposable under sub-section (1)" if a person be ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ion, which was exactly similar to the one raised by Shri Shah in this reference, was raised before the Supreme Court. It was urged, relying upon the scheme of levying tax as found in the Act of 1922, that as a registered firm was not liable to pay tax, it could not be rendered liable to pay penalty under section 28(1)(c) of the Act. Repelling this contention, the Supreme Court has observed as under: "The assumption that the expression 'any tax' used in section 28(1) is intended to indicate that there must be some tax payable by the assessee before penalty could be imposed is wholly unwarranted. The futility of the assumption is exhibited by the terms of clause (b). Penalty may be imposed for failure to comply with the notice under sub-section (4) of section 22 or sub-section (2) of section 23 even if the assessee has no assessable income. To the imposition of a penalty liability to pay tax by the person against whom the penalty is sought to be imposed is, therefore, not a condition precedent." After making these observations, the Supreme Court approved of the decision given by the Calcutta High Court in Khusiram Murarilal v. Commissioner of Income-tax, wherein also the view, ..... X X X X Extracts X X X X X X X X Extracts X X X X
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