Madhya Pradesh H.C : Whether, on the facts and in the circumstances of the case, the Tribunal is justified in holding that since penalty proceedings were not initiated during the course of the regular assessment proceedings but were initiated while revising the assessment under s. 155(1) of the IT Act, the levy of penalty under s. 273(b) of the IT Act is bad in law ?

Counsel Appeared

Mukati, for the Revenue : Bagadiya, for the Assessee

G.G. SOHANI, J.:

By this reference under s. 256(1) of the IT Act, 1961 (hereinafter referred to as ” the Act”), the Tribunal, Indore Bench, has referred the following question of law to this Court for its opinion :

” Whether, on the facts and in the circumstances of the case, the Tribunal is justified in holding that since penalty proceedings were not initiated during the course of the regular assessment proceedings but were initiated while revising the assessment under s. 155(1) of the IT Act, the levy of penalty under s. 273(b) of the IT Act is bad in law ? “

2. The material facts giving rise to this reference, briefly, are as follows : The assessees are partners in a registered firm. They filed returns of income for the asst. yrs. 1974-75 to 1976-77 declaring their share income from the firm. The ITO completed the assessments and did not initiate any action against the assessees under s. 273 of the Act. Later on, on completion of the assessment of the firm, the ITO proceeded to rectify the assessments under s. 155 of the Act and at that stage, proceedings under s. 273(b) of the Act were initiated against the assessees. It was contended on behalf of the assessees that as the penalty proceedings were not initiated against them in the course of the regular assessments, the proceedings commenced by the ITO were not valid. The ITO overruled that objection and levied penalties under s. 273(b) of the Act. Aggrieved by those orders, the assessees preferred appeals. The AAC upheld the contentions urged on behalf of the assessees and held that since the penalty proceedings had not been initiated during the course of the regular assessment-proceedings under s. 143 or s. 144 of the Act, penalty proceedings initiated by the ITO while revising the assessments under s. 155 of the Act were illegal. The orders imposing penalty passed by the ITO were accordingly set aside. Aggrieved by those orders, the Revenue preferred appeals before the Tribunal. The Tribunal held that no case was made out for interference with the orders passed by the AAC. The Tribunal, therefore, dismissed the appeals. Aggrieved by those orders, the Revenue sought a reference and it is at the instance of the Revenue that the aforesaid question of law has been referred to this Court for its opinion.

Shri Mukati, learned counsel for the Revenue, contended that the Tribunal erred in holding that the penalty proceedings initiated under s. 273 of the Act were not valid. Placing reliance on the decision of the Supreme Court in S. Sankappa vs. ITO (1968) 68 ITR 760, it was contended that proceedings under s. 155 of the Act were part of the proceedings for assessment and hence the provisions of s. 273 of the Act were attracted. In reply, Shri Bagadiya, learned counsel for the assessees, contended that proceedings under s. 273 of the Act could be initiated only if in the course of the proceedings in connection with the regular assessment, the ITO was satisfied that the assessee had committed any act specified in that provision. . It was contended that the expression ” regular assessment ” did not take within its ambit proceedings under s. 155 of the Act.

From a perusal of the provisions of s. 273 of the Act, it is clear that it contemplates initiation of proceedings under s. 273 of the Act ” in the course of any proceedings in connection with the regular assessment for the assessment year “. The expression ” regular assessment ” occurring in s. 273 has been defined by s. 2(40) of the Act to mean, unless the context otherwise requires, the assessment made under s. 143 or s. 144 of the Act. There was no corresponding provision in the 1922 Act defining the expression ” regular assessment “. In view of the provisions of s. 2(40) of the Act, the short question that arises for consideration is whether proceedings under s. 155 of the Act can be held to be part of the proceedings under s. 143 or 144 of the Act.

Learned counsel for the assessees referred to a number of decisions holding that reassessment proceedings under s. 147 of the Act cannot be regarded as part of regular assessment proceedings for the purpose of levying penalty under s. 273 of the Act [See Gates Foam & Rubber Company vs. CIT (1973) 90 ITR 482 (Ker), CIT vs. Ram Chandra Singh (1976) 104 ITR 77 (Pat), Smt. Kamla Vati vs. CIT (1978) 111 ITR 248 (P & H), CIT vs. Ganeshram Nayak (1981) 22 CTR (Ori) 132 : (1981) 129 ITR 43 (Orissa), D. Swarup, ITO vs. Gammon India Limited (1983) 141 ITR 841 (Bom), CIT vs. Pratap Singh of Nabha (1982) 138 ITR 27 (Delhi) and ClT vs. Smt. Jagjit Kaur (1980) 126 ITR 540 (All)]. It appears to be the view of the majority of the High Courts that an assessment under s. 147 of the Act cannot be regarded as part of assessment proceedings under s. 143 or 144 of the Act. Sec. 148 of the Act refers to assessment under s. 147. Therefore, assessment under s. 147 cannot mean the same thing as assessment under s. 143 or s. 144 of the Act. That is why an amendment was made in s. 215 of the Act by the Taxation Laws (Amendment) Act, 1984, whereby sub- s. (6) was inserted in s. 215 providing that when in relation to an assessment year an assessment is made for the first time under s. 147, the assessment so made shall be regarded as a regular assessment for the purpose of ss. 215, 216, 217 and 273 of the Act. But for this deeming provision, an assessment made for the first time under s. 147 could not have been held to be a ” regular assessment ” as contemplated by s. 273 of the Act. It was urged before us that just as an assessment under s. 147 is not part of an assessment under s. 143 or 144 of the Act, similarly amendment (of assessment) under s. 155 of the Act cannot be held to be part of the assessment under s. 143 or 144 of the Act. To appreciate this contention, it is necessary to ascertain the nature of an order passed under s. 155 of the Act. Now, s. 155 of the Act confers power on the ITO to amend the order of assessment if the conditions specified in that provision are fulfilled. The other provision which empowers the ITO to amend the order of assessment passed by him is s. 154. But for these two provisions, the ITO would have had no power to amend the order of assessment passed by him. Therefore, what the ITO does under s. 154 or 155 of the Act is to amend the assessment already made. In this connection, the following observations of the Supreme Court in S. Sankaappa’s case (supra) are pertinent (p. 764): ” It is clear that, when proceedings are taken for rectification of assessment to tax either under s. 35(1) or s. 35(5) of the Act of 1922, those proceedings must be held to be proceedings for assessment. In proceeding under those provisions, what the ITO does is to correct errors in, or rectify orders of assessment made by him, and orders making such corrections or rectifications are, therefore, clearly part of the proceedings for assessment.”

7. It was urged before us on behalf of the assessees that in Sankappa’s case (supra), the supreme Court was considering the provisions of the 1922 Act which did not contain any definition of the expression it regular assessment “. But the decision in Sankappa’s case (supra), does not turn on the meaning of the expression ” regular assessment “. That decision merely lays down that orders passed under s. 35(1) or s. 35(5)of the 1922 Act, corresponding to s. 154 or s. 155 of the 1961 Act, are clearly part of the proceedings for assessment.. If the order of assessment amended under s. 155 has been passed under s. 143 of the Act, then the order under s. 155 would be part of the proceedings for assessment under s. 143 of the Act. However, if the order of assessment, which has been amended, has been passed under s. 144 or s. 147 of the Act, then the order of amendment (of assessment) under s. 155 of the Act would be part of the proceedings for assessment under s. 144 or s. 147, as the case may be. When an order is passed under s. 155, to ascertain as to whether it is part of the proceedings for assessment under s. 143, s. 144 or s. 147 of the Act, one has to turn to the order of assessment which has been amended. If it has been passed under s. 143, as has been done in the instant case, then the action taken under s. 154 or s. 155 would be part of the proceedings for assessment under s. 143 of the Act.

It was, however, contended on behalf of the assessee that the order under s. 155 was passed by the ITO after the expiry of the period of limitation provided by s. 153 for making an assessment under s. 143 and hence, in the instant case, the order under s. 155 could not be held to be part of the proceedings for assessment under s. 143 of the Act. It was, however, conceded that the order under s. 155 was passed before the expiry of the period prescribed therefor by s. 155. Secs. 153 and 155 have to be construed harmoniously and if an order passed under s. 155 is not invalid on the ground that it is barred by limitation, then it would not cease to be part of the proceedings for assessment, as held by the Supreme Court in Sankappa’s case (supra), because it was passed beyond the period prescribed in s. 153 of the Act.

Our attention was then invited to the provisions of s. 215(3) of the Act and it was contended that if an order under s. 154 or s. 155 had been part of the proceedings for regular assessment, then the Legislature would not have made a specific provision in s. 215(3), providing that where as a result of an order under s. 154 or s. 155, the amount on which interest was payable, was reduced, then the excess interest paid would be refunded. In our opinion, however, even in the absence of a specific provision contained in s. 215(3), the assessee would have become entitled to refund of interest if, as a result of an order under s. 154 or s. 155, the amount on which interest was payable, was reduced. To remove any doubt in that behalf, s. 215(3) has been enacted. In this connection, reference to the decision in CIT vs. Rajalakshmi Mills Limited (1980) 18 CTR (Mad) 48 : (1980) 125 ITR 141 (Mad) would be instructive. In that case, the question for consideration was whether in the absence of any specific provision in s. 214, corresponding to sub-s. (3) of s. 215, interest under s. 214 was to be allowed on the amount of refund attributable to the relief under s. 80J allowed in rectification proceedings under s. 154. It was urged on behalf of the Revenue that the assessee was not entitled to any further interest as a result of modification of the amount by rectification, in the absence of any specific provision in that behalf in s. 214. Dealing with this contention, it was observed as follows (p. 145): ” Thus the scheme of the Act can be described as follows: As the assessee is required to pay advance tax and as his funds are locked up with the Government, if the assessee had paid advance tax in excess of the tax due under regular assessment, then on the excess so paid, the asseseee would be entitled to interest. Similarly, where the payment of advance tax by the assessee was less than seventy-five per cent. of the assessed tax, then he has to pay interest to the Government at the rate of twelve per cent. per annum. The scheme is to see that neither the State nor the assessee loses the interest on the amount which is either overpaid or underpaid. In cases of overpayment, the State pays interest, while in cases of under-payment of advance tax, the assessee pays interest. The scales are thus held even ……

Learned counsel for the CIT contended that when once interest had been granted in the regular assessment, the assessee would be eligible for no further interest as a result of modification of the assessment either by rectification or otherwise. We are unable to accept this submission. We have already seen that there is a specific provision made under s. 215(3)of the Act in order to cover cases of interest payable by the assessee where the payment of tax was less than seventyfive per cent. as a result of the rectification or other orders passed in this case. Though such an express provision is lacking with reference to the interest payable by the Government to the assessee, the assessee would, in the scheme as envisaged above, be entitled to the interest. The rectification of the assessment has only the effect of making the assessment order passed on January 29, 1970, as a regular assessment order or correct assessment order. In other words, a ‘regular assessment’ is made regular in truth and in fact as a result of the rectification. But, if on the date on which the regular assessment order was passed, the ITO could have granted the interest under s. 214 with reference to the amount of refund due as a result of the final proceedings, then the assessee would be eligible for grant of interest, no doubt, up to the date of regular assessment with reference to the amount which was paid by him in excess as advance tax. The assessee is not to suffer by reason of the ITO not having made a proper ‘regular’ assessment.” Therefore, the fact that there is a specific provision contained in s. 215(3) for refund of excess interest where the amount on which interest is payable is reduced by an order under s. 155, does not go to prove that the order of rectification under s. 155 is not part of the proceedings for assessment, as urged on behalf of the assessee. Moreover, the clause used in s. 273 of the Act ” in the course of any proceedings in connection with the regular assessment for the assessment year ” is wide enough to include within its ambit proceedings under s. 155 of the Act for amendment of the assessment made under s. 143 or s. 144 of the Act, which is the regular assessment, as defined by s. 2(40) of the Act, in contradistinction to a selfassessment under s. 140A, a provisional assessment under s. 141 before its deletion in the year 1971 and an assessment or reassessment under s. 147 of the Act.

In the instant case, the order of assessment, which has been amended under s. 155, was passed under s. 143(3) of the Act and hence it would follow that the order passed under s. 155 is part of the proceedings for assessment under s. 143 of the Act. Therefore, the penalty proceedings, in the instant case, must be held to have been initiated during the course of proceedings in connection with the ” regular assessment ” within the meaning of that expression, as defined by s. 2(40) of the Act. In our opinion, therefore, the Tribunal was not justified in holding that the levy of penalty under s. 273(b) of the Act was bad in law.

Our answer to the question referred to this Court is, therefore, in the negative and against the assessees. In the circumstances of the case, parties shall bear their own costs of this reference.

[Citation : 171 ITR 59]