Kerala H.C : The penalty order passed on 24th March, 1988, was well within the time-limit prescribed under the Act?

Counsel Appeared

C. Kochunni Nair & Dale P. Kurian, for the Applicant : P.K.R. Menon & George K. George, for the Respondent

JUDGMENT

S. SANKARASUBBAN, J. :

This reference is at the instance of the assessee and the relevant assessment year is 1976-77. The questions of law referred are as follows :

“1. Was the Tribunal right in holding that the penalty order passed on 24th March, 1988, was well within the time-limit prescribed under the Act?

2. Was the Tribunal right in law in holding that the penalty order passed under s. 271(1)(c) in pursuance of the second notice of assessment under s. 148 is in order ?

2. The assessee is an individual carrying on business in the purchase and sale of handloom clothes. For the asst. yr. 1976-77, the assessee filed the return of income on 12th June, 1977, declaring a total income of Rs. 1,43,470. The assessment was completed on 4th June, 1979, determining the total income at Rs. 7,22,350. During the assessment proceedings, it was found that the assessee had concealed an amount of Rs. 57,294. Hence, penalty proceedings were initiated under s. 271(1) (c) of the IT Act (hereinafter referred to as ‘the Act’). The assessment order was challenged in appeal before the CIT(A). The CIT(A) passed an order on 24th March, 1980. The appellate authority while upholding the additions to the extent of Rs. 57,294, set aside the assessment order with direction to redo the same after examining certain details relating to the assessee’s claim of shrinkage of cloth.

3. Thus, the matter came back. After remand, the AO issued a notice under s. 148 of the Act on 27th Nov., 1981, to reopen the assessment. In response to the notice, the assessee filed a return of income on 2nd Jan., 1982, declaring a total income of Rs. 2,16,730, which included a sum of Rs. 57,294, which had already been confirmed by the CIT(A). The AO passed the order of assessment under s. 143(3) r/w s. 251 and s. 147(a) of the Act on 21st Feb., 1986, determining the total income at Rs. 2,41,930. The AO again issued a notice under s. 274 r/w s. 271(1)(c) of the Act on 21st Feb., 1986, calling for the assessee’s explanation as to why penalty should not be levied for concealment of income. Penalty of Rs. 45,000 was levied under s. 271(1)(c) of the Act on 24th March, 1988, treating the sum of Rs. 57,294 as the income concealed by the assessee. This was confirmed by the CIT(A). The matter was taken up before the Tribunal. The main contention of the assessee was that the penalty order passed by the AO was invalid as it was barred by limitation. The assessee took up the contention that the assessment order was passed on 4th June, 1979, and the order of penalty was passed on 24th March, 1988. Thus, the order was passed beyond two years from the end of the financial year in which the original assessment was completed. Further, it was contended that no penalty could be passed on the basis of the return in which the assessee included Rs. 57,294 and hence, there was no concealment.

Learned counsel for the assessee submitted that if the time is calculated from the assessment proceedings pursuant to the reopening, there will not be any limitation. But learned counsel submitted that originally notice for imposition of penalty was issued during the original proceedings. The assessment was completed on 4th June,

1979. Appeal filed against that was disposed of on 24th March ,1980. Hence, learned counsel submitted that the limitation should be calculated either from 4th June, 1979 or from 24th March, 1980. If the limitation is calculated on the basis of the earlier proceedings, the penalty orders should have been passed on 31st March, 1982, or if it is calculated from the date of the appellate order, it should have been passed in September, 1980. But since 31st March, 1982, is a later date, that date can be accepted. The order of penalty was passed only on 24th March, 1988. Hence, it is barred by limitation.

Learned counsel brought to our notice certain observations of Rajamannar, C.J. in C.V. Gopvindarajulu Iyer vs. CIT (1948) 16 ITR 39 (Mad) : TC56R.346, which are as follows : “There may be one possible qualification of his power, and that is when the default or the act which is the basis of the imposition of the penalty was within the knowledge of the officer who passed the final order in the prior proceeding and if that officer had failed to exercise his power under s. 28 during the course of the proceeding before him. Possibly in that case he would have no power”. The argument was that if the AO was aware of the concealment in the earlier proceedings, then the orders should have been passed in the earlier proceedings and that power cannot be exercised in the subsequent proceedings.

The Supreme Court had occasion to consider the above observations in N.A. Malbary & Bros. vs. CIT (1964) 51 ITR 295 (SC) : TC 50R.349. In that case, what happened was that the assessee, a firm which carried on business at Surat and had a branch at Bangkok, in its return for the asst. yr. 1951-52 did not include the profits of the Bangkok business. Nor did it comply with the notice of the ITO for the production of the accounts relating to the Bangkok branch. The ITO estimated the profits of the Bangkok branch at Rs. 37,500 and completed the assessment on 31st Jan., 1952, and on the same day he initiated proceedings for the imposition of penalty for concealment of income. The assessee offered its explanation on 11th March, 1952, but its explanation was rejected and a penalty of Rs. 20,000 was imposed on 22nd Jan., 1954. In the meantime, in the assessment proceedings for the next year, the assessee produced the account books of the Bangkok branch on 17th Aug., 1953, which disclosed that the assessee had made a profit of Rs. 1,25,520 for the asst. yr. 1951-52. The ITO issued a notice under s. 34 of the IT Act, 1922, in respect of the asst. yr. 1951-52 and the assessee submitted a return showing the correct profits. The ITO issued a notice under s. 28(3) on 8th April, 1954, and levied a second penalty of Rs. 68,501 for concealment of income in the original return. The Tribunal quashed the penalty of Rs. 20,000 but confirmed the penalty of Rs. 68,501. It was contended that the second order imposing penalty was illegal because in respect of the same concealment the ITO had no jurisdiction to make the second order while the first stood, especially as he had knowledge of the concealment is respect of which the second penalty was imposed. Rejecting the contention of the assessee, the Supreme Court held thus : “the penalty under s. 28 had to be correlated to the amount of tax which would have been evaded if the assessee had got away with the concealment and when the ITO ascertained the true facts and realised that a much higher penalty could have been imposed he had jurisdiction to recall the earlier order imposing penalty on the basis of the estimated income and pass another order imposing the higher penalty. The jurisdiction to make the second order was not lost because he had omitted to recall the earlier order, although the two orders could not be enforced simultaneously or stand together”. In the above case, the decision of the Madras High Court was cited. There, the Lordships made the following observations : “There it was argued that the original proceeding under s. 23(3) and a proceeding under s. 34 in respect of the same period were different and in the latter proceeding a penalty could not be imposed for a concealment in respect of the original proceeding. Rajamannar, C.J. rejected this contention and held, that so long as the proceedings under s. 34 relate to the assessment for the same period as the original assessment, the ITO will be competent to levy a penalty on any ground open to him under s. 28 (1), even though it relates to the prior proceeding”. He however, proceeded to observe. “There may be one possible qualification of his power, and that is when the default or the act which is the basis of the imposition of the penalty was within the knowledge of the officer who passed the final order in the prior proceeding and if that officer had failed to exercise his power under s. 28 during the course of the proceeding before him. Possibly in that case he would have no power”. Learned counsel for the appellant relied on this latter observation in support of his contention. We do not think that Rajamannar, C.J. wished to state this qualification on the power of the ITO as a proposition of law. It was not certainly necessary for the purposes of the case before him. We do not wish to be understood as subscribing to it as at present advised.”

In CIT vs. Onkar Saran & Sons (1992) 103 CTR (SC) 293 : (1992) 195 ITR 1 (SC) : TC 50R.498, the Supreme Court observed as follows : “In the case of N.A. Malbary & Bros. (1964) 51 ITR 295 (SC) : TC 50R.349, the assessee had filed a return originally and the assessment proceedings had been completed after adding the estimated profits from a business in Bangkok which had not been shown in the return. Penalty proceedings had also been initiated and a penalty had been imposed. Subsequently, reassessment proceedings were initiated. The assessee filed a return which showed a larger income from the Bangkok business than had been estimated before and this was accepted. The ITO initiated penalty proceedings again and levied a penalty with reference to the difference between the income originally returned and the income finally reassessed. If the arguments of Sri Ahuja were correct, there could have been no penalty at all imposed on such reassessment as there was no concealment in the reassessment proceedings. This Court, however, upheld the imposition of the penalty with reference to the original return but it was observed that, if a penalty had been levied earlier in the course of the original assessment proceedings, that penalty order should be recalled and substituted by the new penalty order. The decision of the Madras High Court in C.V. Govindarajulu Iyer vs. CIT (1948) 16 ITR 391 (Mad) : TC 50R.346, which was approved by the Supreme Court in N.A. Malabary & Bros. case (supra) also establishes the proposition that, even in the course of reassessment proceedings, a penalty could be imposed with reference to the concealment in the original assessment proceedings.”

The Supreme Court further relied on the decision V. Jaganmohan Rao vs. CIT (1970) 75 ITR 373 (SC) : TC 51R.313 and held that once an original assessment is reopened, the whole assessment proceedings for the year are thrown open for a fresh assessment. For all practical purposes, it is as if the original assessment order does not exist. Whether this principle can be taken as applicable for all purposes or not, the real position is that, though, technically speaking, the original assessment proceedings have been finalised and reassessment proceedings have been initiated to assess escaped income, it is only the determination of the correct total income for the assessment year in question that is being redone. In CIT vs. K. Mahim (1984) 39 CTR (Ker) 337 : (1984) 149 ITR 737 (Ker) : TC 9R.379, Sukumaran, J. speaking for the Bench, held as follows : “the filing of a revised return voluntarily by the assessee when he knew that the Department was conducting investigations against him would not exonerate the assessee from the liability to penalty under s. 271(1)(c) of the Act. Penalty under s. 271(1)(c) is geared to the amount of the income in respect of which the particulars have been concealed or inaccurate particulars have been furnished. The correct income of the assessee, after the assessments have become final, cannot be a matter of conjecture”.

8. Thus, after hearing counsel on both sides, and after going through the records, we are satisfied that the penalty proceedings are valid in law. The second notice issued is valid and the limitation has to be taken from the second assessment order. In view of the above, we answer the questions of law in the affirmative and against the assessee.

[Citation : 252 ITR 788]