Rajasthan H.C : Whether the Tribunal was competent to entertain the assessee’s appeal particularly when no appeal could lie to the AAC against the ITO ‘s order under s. 46(1) due to non-payment of tax ?

Section 221(1)

Asst. Year 1956-57, 1957-58, 1958-59

Counsel Appeared

B.R. Arora, for the Revenue : Rajesh Balia, for the Assessee

BY THE COURT :

This is a consolidated reference made by the Tribunal in compliance with the direction of this Court under s. 256(2) of the IT Act, 1961, for answering certain questions of law said to arise out of the Tribunal’s common order relating to the asst. yrs. 1956-57, 1957-58 and 1958-59 in respect of the same assessee. These questions are as under :

Regarding asst. yr. 1956-57 :

“(1) Whether the Tribunal was competent to entertain the assessee’s appeal particularly when no appeal could lie to the AAC against the ITO ‘s order under s. 46(1) due to non-payment of tax ?

(2) Whether, on the facts and in the circumstances of the case, the Tribunal was right in cancelling the penalty levied upon the assessee by the ITO under s. 46(1) of the Indian IT Act, 1922 ?”

Regarding asst. yr. 1957-58.:

“(1) Whether the Tribunal was competent to entertain the assessee’s appeal particularly when no appeal could lie to the AAC against the ITO’s order under s. 46(1) due to non-payment of tax ?

(2) Whether, on the facts and in the circumstances of the case, the Tribunal was right in cancelling the penalty levied upon the assessee by the ITO under s. 46(1) of the Indian IT Act, 1922 ?”

Regarding asst. yr. 1958-59 :

“Whether, on the facts and in the circumstances of the case, the Tribunal was right in cancelling the penalty levied by the ITO under s. 221(1) of the IT Act, 1961 ?”

One of the questions relating to the cancellation of penalty is common for all the three assessment years while the other question relating to tenability of the appeal against the ITO’s order under s. 46(1) of the Indian IT Act, 1922, is a common question for two of these years only.

The material facts are these. The assessee was in arrears of income-tax to the tune of over Rs. 18,00,000 for several years from 1944-45 to 1961-62. In the recovery proceedings of tax dues, the assessee applied to the TRO for permission to pay the outstanding tax dues in monthly instalments of Rs. 15,000. The TRO granted its permission by order dt. 3rd Feb., 1964. Admittedly, the Revenue was entitled to file a statutory appeal against the order of the TRO but no such appeal was filed and a review application alone was filed which was rejected. Accordingly, the order of the TRO became final between the parties. There is no dispute that the assessee has paid the entire tax dues in accordance with the directions contained in the order dt. 3rd Feb., 1964, passed by the TRO.

It is on these facts that the question of imposition of penalty on the assessee arose under s. 46 (1) of Indian IT Act, 1922, and s. 221(1) of the IT Act, 1961, which are corresponding provisions, in respect of these three assessment years. It is clear from these provisions of s. 46(1) of the 1922 Act and the corresponding provisions contained in s. 221(1) of the 1961 Act that the imposition of penalty provided therein is within the discretion of the ITO when the assessee is in default in making payment of income-tax. Obviously, the exercise of discretion is not to be arbitrary but is dependent on the facts and circumstances of the case. It is equally clear that penalty is not automatically attracted in case of default in payment of income-tax and the same has to be imposed if the facts and circumstances on which the discretion is to be exercised justify imposition of penalty.

The assessee contended that it was not in default in making payment of income-tax since the payment was made by it in accordance with the TRO’s order dt. 3rd Feb., 1964, permitting payment in instalments. Alternatively, the assessee’s case was that since the payment was being made by the assessee as required by the TRO, the facts and circumstances did not justify the imposition of any penalty. The ITO rejected the assessee’s contention. The appeals of the assessee to the AAC were also dismissed and those for the first two years were also held to be untenable for non-payment of tax before filing the appeals.

The assessee’s further appeals to the Tribunal have, however, succeeded. The Tribunal has held that the TRO could not have permitted payment of the tax due in instalments as it did by the order dt. 3rd Feb., 1969. However, then, it was held that the order of the TRO having become final since no appeal was filed against the same by the Revenue, the same could not be ignored as suggested by the Revenue. In these circumstances, and on account of compliance with that order by the assessee, the Tribunal has held that the imposition of penalty for all these three years is not justified. Aggrieved by the Tribunal’s order, the Revenue has obtained reference in the above manner for answering the abovequoted questions of law.

In our opinion, the common question No. (1) for the asst. yrs. 1956-57 and 1957-58 relating to the tenability of the appeal to the AAC against the ITO ‘s order under s. 46(1) of the 1922 Act due to non-payment of tax need not be answered on the short ground that it does not arise out of the Tribunal’s order. No doubt, the Tribunal’s order does mention the fact of dismissal of appeal for these two years by the AAC on the ground of tenability for this reason, but the point does not appear to have been canvassed in support of the dismissal of the appeal by the AAC, since there is no mention of the same in the Tribunal’s orders. It is settled that in a case under s. 256 of the IT Act, 1961, only that question of law can be answered which arises out of the Tribunal’s order and no others. Since this question does not arise out of the Tribunal’s order, the same not being even mentioned therein and there being no decision of the Tribunal on that point, this question need not be decided.

The only surviving question for decision now is the common question for all the three assessment years relating to the cancellation of penalty. It has been indicated earlier that the penalty is not attracted on a default being committed in payment of income-tax and that the same can be imposed by the ITO in his discretion on the facts and circumstances of the case. It is, therefore, obvious that even when the assessee is in default so that the power to impose penalty is attracted, it is not incumbent on the ITO to impose the penalty if the facts and circumstances of the case justify non-imposition of penalty. As stated earlier, the assessee has fully complied with the requirement of the TRO’s order dt. 3rd Feb., 1964, by making payment in accordance therewith. The Tribunal was undoubtedly impressed by this fact. It was open to the Tribunal to take this fact into account while reviewing the decision of the imposition of penalty by the ITO . Having done so, the Tribunal has reached the conclusion that the imposition of penalty in these circumstances was not justified. This alone is sufficient to sustain the ultimate conclusion reached by the Tribunal.

No doubt, the Tribunal has also held that on account of the TRO’s order dt. 3rd Feb., 1964, the assessee cannot be treated as a defaulter for attracting s. 46(1) of the 1922 Act or the corresponding provision of s. 222(1) of the 1961 Act. It is unnecessary for us to consider and decide this point since the conclusion reached by the Tribunal can be sustained on the ground already stated. For this reason, it is also not necessary to refer to the decisions cited by learned counsel for the Revenue for construing the meaning of the word “default” in s. 46(1) of the 1922 Act.

9. Consequently, the reference is answered against the Revenue and in favour of the assessee for all the three asst. yrs. as under : “(1) Common question No. (1) for the asst. yrs. 1956-57 and 1957-58 need not be answered since the same does not arise out of the Tribunal’s order. (2) Common question No. (2) for the asst. yrs. 1956-57 and 1957-58 and the only question in the asst. yr. 1958-59 : The Tribunal was justified in cancelling the penalty on the ground that it was not justified in the facts and circumstances of the case.”

No costs.

[Citation : 170 ITR 491]