Delhi High Court
Ms. Madhushree Gupta vs Union Of India And Anothers on 24 July, 2009
Author: Rajiv Shakdher
Bench: Vikramajit Sen, Rajiv Shakdher
+* THE HIGH COURT OF DELHI AT NEW DELHI
% Judgment Reserved on : 27.04.2009
Judgment Delivered on: 24.07.2009
+ WP(C) No. 5059 of 2008
MS. MADHUSHREE GUPTA ..... Petitioner
versus
UNION OF INDIA & ANR. ..... Respondent
WP(C) No. 6272 of 2008
BRITISH AIRWAYS PLC ..... Petitioner
versus
UNION OF INDIA & ORS. ..... Respondent
Advocates who appeared in this case:
For the Petitioner : Mr O.S. Bajpai, Mr Bibhuti Singh & Mr V.N. Jha,
Advocates in WP(C) No. 5059/2008
Mr M.S. Syali, Sr. Advocate with Mr Satyen
Sethi, Ms Mahua Kalra, Mr Peeyoosh Kalra & Ms
Vidushi Chandana, Advocates in WP(C) No.
6272/2008
For the Respondent : Mr P.P.Malhotra, Additional Solicitor General
with Ms Sonia Mathur, Advocate for the UOI.
Ms Prem Lata Bansal & Mr Sanjeev Sabharwal,
Sr. Standing Counsels for Revenue.
CORAM :-
HON'BLE MR JUSTICE VIKRAMAJIT SEN
HON'BLE MR JUSTICE RAJIV SHAKDHER
1. Whether the Reporters of local papers may
be allowed to see the judgment ? Yes
2. To be referred to Reporters or not ? Yes
3. Whether the judgment should be reported
in the Digest ? Yes
RAJIV SHAKDHER, J
1. The captioned writ petitions lay challenge to the provisions of
Section 271(1B) of the Income Tax Act, 1961 (hereinafter referred to
WP(C) No. 5059-2008 Page 1 of 64
as the ‗Act') on the ground that it is ultra vires the Constitution of
India. The impugned provision which was brought on to the statute
book by the Finance Act, 2008 with retrospective effect from (w.r.e.f.)
01.04.1989, has resulted in a grievance in so far as the
petitioners/assessees are concerned, in as much as, apropos to its
insertion in the Act, the salutary requirement of the Assessing Officer
arriving at his own ―satisfaction‖ during the course of assessment
proceedings that the assessee has concealed the particulars of his
income or has furnished inaccurate particulars before initiating
penalty proceedings has been done away, by a deeming fiction
encapsulated therein. This, in short, is the kernel of the controversy
before us. As is evident on a bare reading of the provisions of Section
271(1B) of the Act that the deeming fiction envisaged in the said
provision which is to operate retrospectively, pertains only to clause
(c) of sub-section (1) of Section 271 of the Act.
1.1 Consequently, the writ petitioners before us have made the
following main prayers in their respective writ petitions:
Writ petition No. 5059/2008
―i) That the impugned sub-section (1B) of Section 271 of
the Act may be struck down as constitutionally invalid; or
alternatively, it may be read down to the effect that the
satisfaction should be deemed to have been recorded only
where reasons are specified with respect to specific items
of additions or disallowances leading to the initiation of
penalty proceedings.‖
Writ petition No. 6272/2008
―a. A writ of Certiorari or Writ, order of Direction in the
nature of Certiorari, or any other appropriate Writ, Order
WP(C) No. 5059-2008 Page 2 of 64
or Direction under Article 226/227 of the Constitution of
India quashing sub-section (1B) to section 271 inserted by
Finance Act, 2008 as arbitrary, ultra virus and violative of
Article 14 of the Constitution of India.
b. A Writ of Certiorari or Writ, Order of Direction in the
nature of Certiorari, or any other appropriate Writ, Order
or Direction under Article 226 / 227 of the Constitution of
India declaring that sub-section (1B) to section 271 inserted
by Finance Act, 2008 cannot be given retrospective effect
from 1.4.1989.
c. A Writ of Prohibition or Writ, Order of Direction in the
nature of prohibition, or any other appropriate Writ, Order
or Direction under Article 226/227 of the Constitution of
India restraining the respondents No. 3 & 4/ or their
officers, agents, etc., from taking any proceedings by way of
rectification or otherwise to give effect to retrospective
insertion of sub-section (1B) in section 271 of the Act, in
respect of assessment years 1996-97 to 2001-02.‖
2. In order to adjudicate upon the writ petitions the following facts
are required to be noticed.
Writ petition No. 5059/2008
2.1 In respect of Writ Petition No. 5059/2008, we had called for ITA
No. 548/2006, which is an appeal filed by the Department against the
order of the Income Tax Appellate Tribunal (hereinafter referred to as
the ‗Tribunal') quashing the penalty proceedings, in order to ascertain
the bare facts; the writ petition being bereft of facts essential for the
WP(C) No. 5059-2008 Page 3 of 64
purposes of adjudication. The following facts, which are not disputed,
emerge on reading of the file.
2.2 On 29.10.2001 the petitioner filed a return of income declaring
a loss of Rs 53,54,135/-. The said return was processed under
Section 143(1) of the Act. However, on 25.10.2002 notices under
Section 143(2) of the Act were issued. Consequent thereto, even
though the Assessing Officer by an order dated 20.02.2004 assessed
the taxable income of the assessee as ‗nil', he made two adjustments
to the returned income. First, an addition of Rs 3,82,636/- as income
from undisclosed sources. Second, he restricted the deduction under
Section 80HHC of the Act to Rs 53,17,841/- as against the claim of the
assessee of Rs 1,03,61,340/-. Importantly, by the very same order, the
Assessing Officer initiated penalty proceedings under Section
271(1)(c) of the Act by making the following endorsement at the foot
of the order:
―Initiate penalty proceeding u/s 271(1)(c) of the I.T. Act
separately. Issue necessary forms.‖
2.3 By an order dated 31.08.2004 the Assessing Officer after
considering the reply filed by the petitioner imposed a penalty of
Rs 18,79,303/- at the minimum rate of 100% of tax evaded. Being
aggrieved, the assessee preferred an appeal to the Commissioner of
Income Tax (Appeals) [hereinafter referred to as the ‗CIT(A)']. The
CIT(A) vide order dated 04.03.2005 sustained the penalty imposed by
the Assessing Officer. Aggrieved, the assessee carried the matter
further in appeal to the Tribunal. The Tribunal by an order dated
15.07.2005 deleted the penalty imposed on the petitioner. In doing so
it posed to itself the following two issues:
WP(C) No. 5059-2008 Page 4 of 64
(i) Whether penalty under Section 271(1)(c) of the Act could be
imposed on the assessee if the taxable income was nil?
(ii) Whether penalty under Section 271(1)(c) of the Act could be
imposed in the event the satisfaction arrived at by the Assessing
Officer before initiation of the penalty proceedings is not recorded by
the Assessing Officer?
2.4 In respect of the first issue the Tribunal relied upon the
judgment of the Supreme Court in CIT vs Prithipal Singh & Co
(2001) 249 ITR 670 to hold that no penalty under Section 271(1)(c)
of the Act could be levied in view of the fact that the assessee's
taxable income was nil. We may point out at this stage that this view
found resonance in another judgment of the Supreme Court in the
case of Virtual Soft Systems Ltd vs CIT (2007) 289 ITR 83 which,
however, now stands reversed by a judgment of a larger bench of the
Supreme Court in the case of CIT vs Gold Coin Health Food Pvt
Ltd (2008) 304 ITR 308.
2.5 As regards the second issue the Tribunal opined, in line with the
judgment of this Court, which is the Jurisdictional High Court, in the
case of CIT vs Ram Commercial Enterprises Ltd (2000) 246 ITR
568 (Del) and Diwan Enterprises vs CIT (2000) 246 ITR 571
(Del), that the Assessing Officer having not recorded his satisfaction
that the assessee had concealed particulars of his income or furnished
inaccurate particulars before completion of the assessment
proceedings, the initiation of penalty proceedings was bad in law and
hence the order imposing penalty must fail. The Department being
aggrieved preferred an appeal, being ITA No. 548/2006 to this court
WP(C) No. 5059-2008 Page 5 of 64
under Section 260A of the Act. The said appeal is pending
adjudication and is listed for hearing on 28.10.2009.
Writ petition No. 6272/2008
3. The petitioner is a company incorporated in United Kingdom
and is engaged in the business of air transportation service. The
petitioner has branch offices in India at New Delhi, Mumbai, Chennai
and Kolkata.
3.1 The operations of the petitioner in India essentially pertain to
the following activities:
(i) air-transportation of passengers, cargo and mail to and from
India; and
(ii) rendering engineering and ground-handling services to aircrafts
operated by other airlines in India.
3.2 On 11.02.1994, the Government of India as empowered under
the provisions of Section 90 of the Act, entered into a Double Taxation
Avoidance Agreement (in short ‗DTAA') with the Government of
United Kingdom.
3.3 It was the claim of the petitioner that by virtue of the provisions
of Article 8 of DTAA the profits from both the activities described
hereinabove, were not taxable in India in view of the fact that the
petitioner was a tax resident of United Kingdom and the profits
earned from the said activities were taxable only in United Kingdom.
3.4 The stand taken by the petitioner was not accepted by the
Department with respect to engineering and ground-handling
services. Consequently, a notice dated 09.06.1998 was issued by the
WP(C) No. 5059-2008 Page 6 of 64
Assessing officer calling for information with regard to the
engineering and ground-handling services, in respect of assessment
years 1996-97, 1997-98 and 1998-99. Pursuant thereto, the petitioner
filed returns for the aforementioned assessment years on 30.11.1998,
offering to tax 15% ‗deemed profit' from engineering and ground-
handling services.
3.5 The Assessing Officer in March, 1999, completed the
assessment of the petitioner. By his assessment order, the Assessing
Officer while rejecting the stance of the petitioner that engineering
and ground-handling services were not amenable to tax in India by
virtue of Article 8(2) of the DTAA, brought to tax petitioner's income
in excess of 80% of gross receipts, from engineering and ground-
handling services. By the same assessment order the Assessing
Officer also initiated penalty proceedings against the petitioner. The
CIT(A) sustained the assessment order. The matter was carried
further in appeal to the Tribunal. The Tribunal by an order dated
26.03.2003, in-principle, sustained the assessment order in so far as it
brought to tax profits which the petitioner-assessee had earned from
engineering and ground-handling services. The matter was, however,
remanded to the Assessing Officer for re-computation of taxable
profits from the said activities.
3.6 The Assessing Officer by an order dated 23.02.2004 gave effect
to the order of Tribunal in respect of the assessment year 1996-97,
1997-98 and 1998-99. It is important to note that at the foot of the
assessment order, the Assessing Officer made the following
endorsement with respect to initiation of penalty proceedings:
WP(C) No. 5059-2008 Page 7 of 64
―Initiate penalty proceedings under Section 271(1)(c) for
furnishing inaccurate particulars of income‖
3.7 In the meanwhile, the petitioner had also filed its returns for
assessment years 1999-2000, 2000-01 and 2001-02 declaring nil
income. In respect of these years too, the Assessing Officer
completed the assessment in the same manner as was done in the
earlier years. Importantly, the Assessing Officer, as was done in the
earlier years, by the very same order initiated penalty proceedings.
Consequent thereto, the Respondent No. 4, that is, the Assistant
Director of Income Tax, by an order of even date i.e., 30.03.2006
imposed penalty separately, equivalent to 100% of tax sought to be
evaded on the aforesaid concealed income, in respect of, all six
assessment years mentioned hitherto, that is, assessment years 1996-
97 to 2001-02.
3.8 Aggrieved, the assessee preferred an appeal to the CIT(A). The
CIT(A) by an order dated 30.12.2006 confirmed the penalty imposed
by the Assessing officer under Section 271(1)(c) of the Act.
3.9 Being aggrieved, the petitioner carried the matter further in
appeal to the Tribunal. The Tribunal by an order dated 23.11.2007
set aside the order of the CIT(A) confirming the penalty imposed by
the Assessing Officer under Section 271(1)(c) of the Act in respect of
the six assessment years referred to hereinabove. The Tribunal relied
upon the judgment of the Division Bench of this court in Ram
Commercial (supra) as also the judgment of the Supreme Court in
the case of D.M. Manasvi vs CIT (1972) 86 ITR 557, in coming to
the conclusion that the Assessing Officer is required to form his own
opinion and record his satisfaction before initiating penalty
WP(C) No. 5059-2008 Page 8 of 64
proceedings. The Tribunal observed that merely because penalty
proceedings have been initiated it cannot be assumed that such
satisfaction has been arrived at, in the absence of the same being
spelt out, in the order of the Assessing Officer. In order to ascertain
whether requisite satisfaction had been arrived at by the Assessing
officer the Tribunal was called upon to decide which of the two
assessment orders had to be looked at, that is, one which was passed
originally or the one which was passed on remand. The Tribunal after
due discussion of the case law on the issue, came to the conclusion
that since in the present case it had in the first round by its order
dated 30.10.2006 sustained the original assessment on principle by
agreeing with the Assessing Officer that the income received by the
assessee by way of engineering and ground handling services was
taxable, and had thus set aside the said assessment order partially
only for re-computation of income from the said activities; for the
purpose of ascertaining satisfaction of the Assessing Officer with
regard to initiation of penalty proceedings only the original
assessment order could be looked at. The Tribunal upon perusal of
the assessment orders for each of the six assessment years came to
the conclusion that the requisite satisfaction with regard to assessee
having concealed particulars of his income or having furnished
inaccurate particulars of such income having not been recorded by
the Assessing Officer in the relevant assessment years before
initiation of penalty proceedings under Section 271(1)(c) of the Act,
the initiation of penalty proceedings was unsustainable in law. In
these circumstances the Tribunal did not examine the matter on
merits. Being aggrieved, the Department preferred five separate
appeals in respect of the assessment years 1997-98 to 2001-02 to this
WP(C) No. 5059-2008 Page 9 of 64
Court. These being ITA Nos. 877/2008, 957/2008, 965/2008,
880/2008 & 818/2008. These appeals were disposed of by this Court
vide order dated 27.08.2008 by setting aside order of the Tribunal
dated 23.11.2007 and remanding the appeals for a decision on merits,
in view of the fact that the impugned provision, that is, Section
271(1B) of the Act was already operable. We have not been informed
whether the Department has preferred an appeal for assessment year
1996-97. The submissions of the learned counsel for the assessee,
however, to the effect that remand of the matter ought not to be
construed as, the assessee, having accepted the constitutional validity
or the applicability of the impugned provision to its case; as these
were the subject matter of the writ petition filed by the assessee, that
is, the present writ; was taken note of by this Court.
Submissions
4. Submissions on behalf of the petitioner have been made by
Mr.O.S. Bajpai, Advocate in Writ Petition No.5059/2008. The contours
of his submissions are as follows:-
(i) It is contended that the only object of the impugned
amendment, i.e., insertion of Section 271(1B) of the Act with
retrospective effect is to nullify the judgment of the Supreme Court in
D.M. Mansavi (supra) and CIT vs. S.V. Angidi Chettiar (1962) 44
ITR 739. The impugned amendment does not seek to cure any defect
and as a matter of fact the impugned provision leaves the main
penalty provision, i.e., Section 271(1)(c) of the Act intact, in as much
as it remains on the statue book.
WP(C) No. 5059-2008 Page 10 of 64
(ii) The impugned provision is not a validating Act. In this context
the judgment of the Supreme Court in the case of Shri Prithvi
Cotton Mills Ltd vs. Broach Borough Municipality (1989) 2 SCC
283 was read and sought to be distinguished. It was contended that
in the instant case there is no statute or rule which has been declared
invalid so as to impinge on the very power to levy tax or penalty. It is
submitted that the present case is not one where power to levy
penalty is wanting, but is a case where a jurisdictional error has been
committed in invoking the power to impose penalty while the power
by itself remains undisturbed under the provisions of Section
271(1)(c) of the Act. In short it is submitted that there is no challenge
to the validity of Section 271 of the Act except to a limited extent in so
far as it pertains to sub-section (1B) of Section 271 of the Act. It is
thus submitted that the ratio of Shri Prithvi Cotton Mills Ltd
(supra) would not be applicable as there is no challenge to the
competence of the legislature to levy penalty or to the provision under
which the penalty is levied.
(iii) The well settled principle established by the Courts which
includes the Supreme Court and the various High Courts is that,
before initiation of penalty proceedings, the Assessing Officer has to
arrive at a prima facie satisfaction during the course of any
proceedings before him which would include assessment, re-
assessment or even rectification proceedings. This is a jurisdictional
issue and there is not a single judgment of any Court which
propounds a principle contrary to this proposition. It is further
contended that the only difference in the judicial opinion of various
High Courts is as regards the manner in which such prima facie
satisfaction before initiation of proceedings is to be recorded.
WP(C) No. 5059-2008 Page 11 of 64
Learned counsel relied upon the Full Bench judgment of this Court in
the case of CIT vs Rampur Engineering Co Ltd (2009) 309 ITR
143(Del) in which one of us, (Rajiv Shakdher, J) was a member, as
also on the Division Bench Judgment of this Court in Ram
Commercial (supra) and Diwan Enterprises (supra) which was
affirmed by the Full Bench, to contend that satisfaction should be
spelt out in the assessment order.
(iv) In view of the position of law professed by the learned counsel,
it was submitted by him that such satisfaction which is required to be
arrived at by the Assessing Officer before initiation of penalty
proceedings and issuance of notice under Section 274 of the Act, is a
question of fact which cannot be legislatively presumed by creating a
fiction, as is sought to be done, by the impugned provision.
Furthermore, he contends that the decision to levy penalty is
discretionary which has to be exercised by the Assessing Officer,
acting in his quasi judicial capacity, based on facts and circumstances
of each case and hence cannot be substituted by legislative
presumption.
(v) The impugned provision is violative of Article 14 of the
Constitution as there is no nexus between the object sought to be
achieved by the legislature and the impugned provision. He
impugned the provisions of Section 271(1B) of the Act on the ground
that it confers on the Assessing Officer wholly arbitrary power, there
being no in-built guidelines laid down for exercising such power.
(v)(a). To buttress his submissions the learned counsel has given
examples such as the following:-
WP(C) No. 5059-2008 Page 12 of 64
(v)(b) He hypothesizes a situation by suggesting that: suppose
an Assessing Officer makes additions or disallowances in respect of
say, assessees A and B and initiates penalty proceedings against only
one of the two. The learned counsel submits that in the absence of
any guidelines as to which of the assessee's case ought to be picked
up for initiation of penalty proceedings it would lead to unnecessary
harassment and protracted litigation, besides the one who is picked
up for initiation of penalty proceedings will be meted with unequal
treatment in law.
(v)(c) The learned counsel went on to illustrate the arbitrariness
by citing another example: He submitted that say in a given case
during the course of assessment proceedings, an Assessing Officer
makes five or six additions and disallowances, but prima facie
satisfaction is not found to exist in respect of all such additions or
disallowances save and except in the case of one or two of such
additions or disallowances. The Assessing Officer by taking recourse
to the impugned provision would issue notice and initiate penalty
proceedings with respect to all additions and disallowances. To drive
home the point the learned counsel referred to facts of the instant
case. He states that the Assessing officer during the course of
assessment has made an addition of a sum of Rs 3,82,656/- on account
of undisclosed income and a disallowance under Section 80HHC by
restricting deduction to the extent of Rs 50,43,499/- as against the
claim made by the assessee of over Rs 1 crore. He submits that the
assessee's claim with respect to Section 80HHC was made based on
the following judgments: CIT vs. Shirke Construction Equipments
Ltd (2000) 246 ITR 429 (Bom) and CIT vs. Smt.T.C.Usha (2004)
WP(C) No. 5059-2008 Page 13 of 64
266 ITR 497 (Ker). The position in law was, however, set at rest,
according to the learned counsel, by a judgment of the Supreme Court
in IPCA Laboratory Ltd vs. DCIT (2004) 266 ITR 521(SC).
According to him there was an honest difference of opinion between
the Assessing Officer and the assessee in respect of the claim under
Section 80 HHC. Despite, these circumstances penalty to the tune of
Rs 18,79,303/- was imposed by the Assessing officer on the entire
additional concealed income of Rs 53,54,140/- which included
disallowance on account of claim under Section 80HHC.
(vi) The learned counsel submits that the impugned provision
deprives the tax payer a right to seek judicial review. The impugned
provision, he contends denudes the power of the court to judicially
review orders initiating penalty proceedings, and hence, according to
him, strikes at the very basic structure of the Constitution. The
learned counsel submits that the impugned provision is
unconstitutional and, therefore, void ab-initio. It is, thus submitted,
that, it can neither be held to be valid prospectively or retrospectively.
(vii) The presumption contained in Explanation 1 of Section 271
being a rule of evidence whereby the onus is shifted on to the
assessee is available only at the time of imposition of penalty. The
stage of initiation of penalty proceedings being separate and
independent to the stage of imposition of penalty, the said
presumption provided for in Explanation 1 is not available at the time
of initiation of penalty proceedings.
5. Mr M.S. Syali, Senior Advocate appearing for the petitioner in
Writ Petition No.6272/2008 while complimenting the submissions
made by Mr.O.S.Bajpai, Advocate has submitted that a bare reading of
WP(C) No. 5059-2008 Page 14 of 64
the Memorandum explaining the Finance Bill, 2008 (hereinafter
referred to as the ‗Memorandum') and the Notes on Clauses, i.e.,
Clause 48 would show that the object and reasons stated therein do
not get reflected in the impugned provision. He contends that the
very fact that sub-section (1B) of Section 271 of the Act deems
satisfaction in the order of assessment, re-assessment or rectification,
the Revenue would accept that satisfaction is required to be arrived at
by the Assessing Officer during the course of any such proceedings.
Being a quasi-judicial function the satisfaction should be reasoned.
Reliance was placed on S.N. Mukherjee vs Union of India AIR
1990 SC 1984 at 1994 (para 31) and at 1997 (para 39). The
learned counsel further submitted that while he does not question the
power of legislature to enact law retrospectively; the retrospective
amendment is not only oppressive but also fails to supply any
rationale for its applicability from 1.4.1989. In this context he relies
on the judgment of the Supreme Court in Virender Singh Hooda vs.
State of Haryana (2004) 12 SCC 588 at 605 para 33 & 34,
Empire Industries Ltd vs. UOI (1985) 3 SCC 314 and lastly, Tata
Motors Ltd vs State of Maharashtra & Ors (2004) 5 SCC 783 at
788-790, paragraphs 12 and 15. The learned counsel further
contended that penalty proceedings being penal in nature, the
principle of greater latitude in economic matters cannot apply to such
like provisions. He also contends that while constitutionality of a
provision is presumed and the onus is on the party which challenges
its constitutionality; the onus in the instant case would shift, as no
plausible reason has been given with regard to the provision coming
into force w.e.f. 01.04.1989.
WP(C) No. 5059-2008 Page 15 of 64
6. As against this Mr.P.P.Malhotra, learned Additional Solicitor
General (ASG) appearing for the Revenue contended as follows:-
(i) There is always a presumption with regard constitutionality of a
provision. The constitutionality of legislation should be judged from
the generality of its provision and not by its crudities or inequities or
by the possibilities of abuse of any of its provisions. He submitted
that hardship, financial or otherwise cannot be a ground for
challenging constitutionality of a legislation, particularly while dealing
with complex economic issues.
(ii) He refuted the submissions of the petitioner that there was no
nexus between the impugned provision and the objects sought to be
attained by the impugned legislation. The learned ASG submitted that
the purpose and object of the amendment was to clarify the
interpretation of the provisions of Section 271(1)(c) of the Act. It was
his contention that the legislative intent in bringing about the
amendment was; that the satisfaction is required to be recorded in
writing only at the time of levy of penalty and not at the time of
initiation of penalty proceedings. He submitted that taxing statute
has to be construed strictly. If the words of the statute are clear then
one need not look further to determine the purpose, meaning and
object of the legislature. He submitted that amendment was
clarificatory in as much as it sought to make clear that the Assessing
Officer is not required to record his satisfaction in writing before
initiating penalty proceedings and such satisfaction can be specifically
arrived at and hence recorded, only at the stage of levy of penalty as
against prima facie satisfaction which is arrived, at the stage of
initiation. He contended that instead of satisfaction at two stages, by
virtue of the amendment, satisfaction be arrived at and recorded only
WP(C) No. 5059-2008 Page 16 of 64
at the stage of imposition. Therefore, according to the learned ASG a
simple endorsement in the assessment order that penalty proceedings
are initiated would suffice. In this regard reference was made to
Clause 48 of Notes on Clauses of the Finance Act, 2008.
(iii) He further contended that the submissions of the petitioners
that right of judicial review is foreclosed by the impugned amendment
was unsustainable. He submitted that the writ courts were fully
competent to exercise their extra-ordinary jurisdiction vested in them
in a case where the Assessing Officer acts arbitrarily irrespective of
the stage of the proceedings. A mere apprehension of bias or abuse of
power would not be a good ground to strike down the impugned
provision. He contended that in case the Assessing Officer was asked
to record his complete satisfaction as against prima facie satisfaction
then the penalty proceedings which are independent of assessment
proceedings would become meaningless.
(iv) On the issue of retrospectivity, the learned ASG contended that
the amendment was merely procedural and did not deal with
substantive rights, as in, the penalty had not been created for the first
time. He contended that the impugned amendment will not disturb
those cases which had attained finality but will affect only those,
where penalty proceedings have been initiated or are pending
adjudication before a judicial forum. The learned ASG sought to
explain the basis for the retrospective amendment in the following
manner: The Direct Tax Laws (Amendment) Act, 1987 was enacted,
whereby Section 271(1)(c) was substituted by a new provision. This
resulted in the levy of penalty for concealment of income being
omitted. The imposition of penalty was substituted by a charge of
mandatory additional income tax at the rate of 30% of income under a
WP(C) No. 5059-2008 Page 17 of 64
new provision, that is, Section 158B, which was, inserted by the very
same Amending Act of 1987. He submitted that by the Direct Tax
Laws (Amendment) Act, 1989 the Amending Act of 1987 was removed
from the statute book and the provision with regard to levy of penalty
for concealment of income was restored. It was stated that one of the
changes effected was that a new sub-section (5) was inserted in
Section 271 to provide for a transitory provision so that the penalties
for the assessment year 1988-89 and earlier assessment years could
be levied in accordance with the provisions of Section 271 of the Act
as they stood prior to 01.4.1989. It was contended that it was in this
background that the impugned provision has been made applicable
retrospectively w.e.f. 01.04.1989.
OUR ANALYSIS
7. Before we deal with the various contentions raised by both sides
it would perhaps be of some relevance to briefly note the legislative
history of Section 271 of the Act.
7.1 Section 271 of the Act corresponds to the provisions contained
in sub-sections (1), (2) and (6) of Section 28 of the Income Tax Act,
1922 (hereinafter referred to as the ‗1922 Act'). The relevant
provision of the 1922 Act which are pari materia with clause (c) of
sub-section (1) of Section 271 reads as follows:-
―28. Penalty for concealment of income or improper
distribution of profits. - (1) if the income-tax Officer, the
Appellate Assistant Commissioner or the Appellate Tribunal
in the course of any proceedings under this Act, is
satisfied that any person-
(a) has without reasonable cause failed to furnish the return of
his total income which he was required to furnish by notice
given under sub-section (1) or sub-section (2) of section 22
or section 34 or has without reasonable cause failed to
WP(C) No. 5059-2008 Page 18 of 64
furnish it within the time allowed and in the manner
required by such notice, or
(b) has without reasonable cause failed to comply with a
notice under sub-section (4) of section 22 or sub-section (2)
of section 23, or
(c) has concealed the particulars of his income or
deliberately furnished inaccurate particulars of such
income,
he or it may direct that such person shall pay by way of
penalty, in the case referred to in clause (a), in addition to
the amount of the income-tax and super-tax, if any, payable
by him, a sum not exceeding one and a half times that
amount, and in the cases referred to in clauses (b) and (c), in
addition to any tax payable by him, a sum not exceeding one
and a half times the amount of the income-tax and super tax,
if any, which would have been avoided if the income as
returned by such person had been accepted as the correct
income:‖
7.2. With the enactment of Income Tax Act, 1961, i.e., the Act,
Section 271 was brought on to the statute book. At the relevant time,
Section 271 comprised of only sub-section (1), (2), (3) and (4). Section
271(1)(c) at that point in time to the extent it is relevant read as
follows:-
―271. Failure to furnish returns, comply with notices,
concealment of income, etc. -
(1) If the Income-tax Officer or the Appellate
Assistant Commissioner in the course of any
proceedings under this Act, is satisfied any person -
(a) has without reasonable cause failed to furnish the
return of his total income which he was required to
furnish under sub-section (1) of section 139 or by
notice given under sub-section (2) of section 30 or
section 148 or has without reasonable cause failed to
furnish it within the time allowed and in the manner
required by sub-section (1) of section 139 or by such
notice, as the case may be, or
(b) has without reasonable cause failed to comply with a
notice under sub-section (1) of section 142 of sub-
section (2) of section 143, or
(c) has concealed the particulars of his income or
deliberately furnished inaccurate particulars of
such income,
he may direct that such person shall pay by way of
penalty‖
WP(C) No. 5059-2008 Page 19 of 64
7.3 Interestingly, by the Finance Act, 1964 the word ―deliberately‖
which preceded the expression ‗furnished inaccurate particulars of
income' appearing in clause (c) of sub-section (1) of Section 271, was
omitted. However, by the said Finance Act an explanation to sub-
section (1) was inserted which in sum and substance provided that
where an assessee's total returned income was less than 80% of the
total income assessed under Section 143 or Section 144 or even
Section 147 as adjusted by bonafide expenditure incurred by him for
making or earning any income included in the total income, but which
had been disallowed as deduction; it shall be presumed by a deeming
fiction that the assessee had concealed the particulars of his income
or furnished inaccurate particulars of such income for the purpose of
clause (c) of sub-section (1) of Section 271, unless the assessee
proved that failure to return the correct income was not on account of
fraud or any gross or willful neglect on his part. The purpose of this
explanation obviously was to shift the onus, which even though
rebuttable, on to the assessee as against the Department with respect
to a charge of concealment of particulars of income or furnishing
inaccurate particulars of income by the assessee. In sum and
substance the effect of the Amendment was that in a case of penalty
proceedings under Section 271(1)(c) of the Act, where the assessee's
returned income was less than 80% of the assessed income after
making due adjustment for expenditure incurred bonafide, the onus
lay upon the assessee to establish that his failure to declare in his
return the amount of assessed income after due adjustment for
expenditure, was not on account of fraud or any gross or any willful
neglect on his part. In other words the provision was not to be taken
WP(C) No. 5059-2008 Page 20 of 64
recourse to where the difference in the returned income and the
assessed income was due to a bonafide mistake.
7.4 Thereafter, there were amendments made in 1971, 1974, 1975,
1977 and 1984. We are not referring to the same as they are not
presently very material to the issue under consideration. It would,
however, be perhaps of some relevance to only note that by way of the
Taxation Laws (Amendment in Misc. Provisions) Act, 1986 w.e.f.
10.09.1986 the following amendment in sub-section (1) were made.
―(i) In clause (a) as it was then, and clause (b), the words
―without reasonable cause‖, were omitted.
(ii) In clause (B) of Explanation I the words ―and fails to
prove that such explanation is bonafide and that all the
facts relating to the same and material to the computation
of his total income have been disclosed by him‖ were
inserted.
(iii) The proviso to Explanation I, as originally enacted, was
omitted.
(iv) In explanation 5, the word ―unless, -‖ followed by
clauses (1) and (2) as at present were substituted for the
earlier words.‖
7.5 It is important to note that the expression ‗without reasonable
cause' was also omitted with respect to other provisions under which
penalty was leviable under Chapter XXI, such as, Sections 270 (the
expression omitted was ‗without reasonable excuse' as against
‗without reasonable cause'), 271A, 271B, 272B, 273(1)(b), 273(2)(b)
and 273(2)(c). The legislature's intent was, it seems, to put the onus
for the default contemplated in each of these provisions on the
assessee and unless the assessee was able to show a reasonable cause
for his failure, penalty would be attracted. This is evident as with the
WP(C) No. 5059-2008 Page 21 of 64
amendment in the aforesaid provisions, a new Section 273B was
added.
7.6 By the Direct Tax Laws (Amendment) Act, 1987 the existing
provisions of Section 271 as then obtaining on the statute book was
substituted w.e.f 01.04.1989 with the following provision:
―271. Failure to comply with notices. - If the Assessing
Officer, in the course of any proceedings under this Act, is
satisfied that any person has failed to comply with a notice
under sub-section (1) of Section 142 or sub-section (2) of
section 143 or with a direction issued under sub-section
(2A) of section 142, the Assessing Officer may direct that
such person shall pay, by way of penalty, a sum which shall
not be less than one thousand rupees but which may extend
to twenty five thousand rupees for each such failure.‖
7.7 Apart from the above, a new provision for levy of additional tax
in the form of Section 158B alongwith a provision for interest under
Section 234A was also inserted. The intent being to substitute
penalty, on account of failure or delay in filing of returns under clause
(a), failure to comply with the notices and directions under clause (b),
and on account of concealment of particulars of income or of
furnishing of inaccurate particulars income under clause (c) of sub-
section (1) of Section 271 of the Act was sought to be supplanted by
additional tax under Section 158B and interest under Section 234A of
the Act.
7.8 Curiously, the aforesaid amendment was not brought into
operation and by virtue of Direct Tax Laws (Amendment) Act, 1989
the provision of Section 271 prior to its substitution by Direct Tax
Laws (Amendment) Act, 1987 was re-introduced w.e.f. 01.04.1989,
with certain other modifications. Section 158B was also omitted w.e.f.
01.04.1989. Importantly, as contended by the Learned ASG
WP(C) No. 5059-2008 Page 22 of 64
appearing on behalf of the Revenue, sub-section (5) was introduced as
a transitory provision in order to get over the possible hiatus created
by Direct Tax Laws (Amendment) Act, 1987.
7.9 Thereafter, amendments were also made in 1998, 2001, 2007
and the present amendment in 2008. Once again amendments in 1998
to 2007 not being material for our purposes the same are not touched
upon by us.
8. What is, however, clear to us by virtue of a brief review of the
legislative history of Section 271 is that the provision of clause (c)
which deals with imposition of penalty for concealment of particulars
of income or furnishing of inaccurate particulars of income by the
assessee, has remained untouched since the 1922 Act was enacted,
(at which point in time, it appeared on the statute book as Section
28(1)(c)) except for a brief interval in 1987 when the Direct Tax Laws
(Amendment) Act, 1987 was passed. As noticed above, the same was
not brought into force and the original position was reverted to, with
the enactment of the Direct Tax (Amendment) Act, 1989. The gap, if
any, in the interregnum was sought to be filled up by insertion of sub-
section (5) in Section 271 of the Act which reads as follows:
―(5) the provisions of this section as they stood
immediately before their amendment by the Direct Tax
laws (Amendment) Act, 1989 shall apply to and in relation
to any assessment for the assessment year commencing on
the 1st day of April, 1988 or any earlier assessment year
and references in this section to the other provisions of this
Act shall be construed as references to those provisions as
for the time being in force and applicable to the relevant
assessment year.‖
8.1 Therefore, the reasoning spelt out both during the course of the
hearing and in the counter affidavit filed by the Department for
making the impugned provision operable w.e.f. 01.04.1989, does not
WP(C) No. 5059-2008 Page 23 of 64
hold good because what was sought to be achieved by the Direct Tax
Law (Amendment), Act 1987 was restored by Direct Tax Law
(Amendment) Act, 1989, in so far as clause (c) of Sub-Section (1) of
Section 271 was concerned. There is according to us no cogent
reason articulated as to why retrospectivity to the impugned provision
was w.e.f. 01.04.1989. It is not the case of the Revenue that this has
been done keeping in mind its administrative convenience or for the
reason that it did not want to continue with penalty proceedings in
respect of stale cases.
8.2 But would the cut off date of 01.04.1989 create an invidious
discrimination or result in a class legislation vis-à-vis those whose
case is to be considered on the basis of law obtaining prior to
01.04.1989. We are of the view that there would be no violation of the
equality clause under Article 14 of the Constitution on this ground
alone, for the reason that if an assessee has fallen foul of the law, that
is, penalty provisions are otherwise applicable to him, he cannot be
heard to say that rigours of law ought not to apply to him because
another person similarly placed has not exposed to such a rigour.
There is no equality in illegality. This is not the case where a more
onerous procedure is applied to him as against an assessee to whom
pre-amendment law is applied. While considering a challenge to the
vires of a Statute, the Court is required to lean in favour of its validity,
preferring an interpretation that would preserve its constitutionality
as the legislature, it is presumed, does not exceed its jurisdiction. The
onus is squarely on the person challenging the constitutional vires of
the Statute. The exception to the Rule is that where a challenge is
made on the ground of infraction of fundamental rights, then the State
must justify its action. In ascertaining the intention of the Parliament,
WP(C) No. 5059-2008 Page 24 of 64
the court is required to come to its own view based on the language of
the Statute and the not be governed by affidavits filed in court by
parties to ‗justify and sustain the legislation'. (See UOI vs
Elphinstone Spinning and Weaving Co Ltd & Ors. JT 2001 (1)
SC 536 at page 552, paragraph 9)
SCHEME OF CHAPTER - XXI
9. This brings us to the scheme of the penalty provisions. Penalty
provisions find mention in Chapter XXI of the Act, while the provisions
for prosecution are contained in Chapter XXII. For the purposes of
the issues raised in the instant case we will limit our discussion only
to Sections 271, 271(1B), and 274 of the Act. For the sake of
convenience it would be relevant to cull out the relevant parts of
Section 271(1), Section 271(1B) and Section 274.
―271 (1) If the [Assessing Officer] or the
[Commissioner (Appeals)] [or the Commissioner] in the
course of any proceedings under this Act is
satisfied that any person--
(a) xxxxx
(b) xxxxx
(c) has concealed the particulars of his income
or furnished inaccurate particulars of [such
income, or]
(d) xxxxx
he may direct that such person shall pay by way of
penalty--
(i) xxxx
(ii) xxxx
(iii) xxxx
Explanation 1 xxxxxx
Explanation 2 xxxxxx
Explanation 3 xxxxxx
Explanation 4 xxxxxx
WP(C) No. 5059-2008 Page 25 of 64
Explanation 5 xxxxxx
Explanation 6 xxxxxx
Explanation 7 xxxxxx
[(1A) xxxxxx]
[(1B) Where any amount is added or disallowed in
computing the total income or loss of an assessee in any
order of assessment or reassessment and the said order
contains a direction for initiation of penalty proceedings
under clause (c) of sub-section (1), such an order of
assessment or reassessment shall be deemed to
constitute satisfaction of the Assessing Officer for
initiation of the penalty proceedings under the said
clause (c).]‖
―274 (1) No order imposing a penalty under this
Chapter shall be made unless the assessee has been
heard, or has been given a reasonable opportunity of
being heard.
(2) No order imposing a penalty under this Chapter shall
be made-
(a) by the Income Tax Officer, where the penalty
exceeds ten thousand rupees;
(b) by the Assistant Commissioner [or Deputy
Commissioner] where the penalty exceeds twenty
thousand rupees,
Except with the prior approval of the [Joint]
Commissioner]
(3) An income-tax authority on making an order under
this Chapter imposing a penalty, unless he is himself the
Assessing Officer, shall forthwith send a copy of such
order to the Assessing Officer.]‖
10. A bare reading of section 271(1)(c) would show that to initiate
penalty proceedings following pre-requisites should obtain.
(i) The Assessing Officer should be ‗satisfied' that:-
a) The assessee has either concealed particulars of his
income; or
b) furnished inaccurate particulars of his income; or
c) infracted both (a) and (b) above
WP(C) No. 5059-2008 Page 26 of 64
(ii) This ‗satisfaction' should be arrived at during the course
of ‗any' proceedings. These could be assessment,
reassessment or rectification proceedings, but not penalty
proceedings.
(iii) If ingredients contained in (i) and (ii) are present a notice
to show cause under Section 274 of the Act shall issue
setting out therein the infraction the assessee is said to
have committed. The notice under Section 274 of the Act
can be issued both during or after the completion of
assessment proceedings, however, the satisfaction of the
Assessing Officer that there has been an infraction of
clause (c) of sub-section (1) of Section 271 should precede
conclusion of the proceedings pending before the
Assessing Officer.
(iv) The order imposing penalty can be passed only after
assessment proceedings are completed. The time frame
for passing the order is contained in Section 275 of the
Act.
11. It is important to note that these provisions of Section 271(1)(c)
remain insulated from the amendment brought about by the Finance
Act, 2008 whereby the impugned provision, that is, Section 271(1B)
was inserted.
11.1 The reasons for bringing about the amendment is contained
both in the Memorandum and in Clause 48 of Notes on Clauses.
Being relevant they are extracted hereinbelow:-
Notes on Clauses to the Finance Bill, 2008
WP(C) No. 5059-2008 Page 27 of 64
―Clause 48 seeks to amend Section 271 of the Income
Tax Act, which relates to failure to furnish returns,
comply with notices, concealment of income, etc.
Under the existing provisions contained in Chapter
XXI the Assessing Officer is required to be satisfied
during the course of penalty proceedings. Legislative
intent was that such a satisfaction was required to be
recorded only at the time of levy of penalty and not at the
time of initiation of penalty. However, some of the
judicial interpretations on this issue are favouring the
view that satisfaction has to be recorded at the time of
initiation of penalty proceedings also.
It is therefore proposed to insert a new sub-section
(1B) in section 271 of the Income-tax Act so as to provide
that where any amount is added or disallowed in
computing the total income or loss of an assessee in any
order of assessment or reassessment and if such order
contains a direction for initiation of penalty proceedings
under sub-section (1), such an order of assessment or
reassessment shall be deemed to constitute satisfaction
of the Assessing Officer for initiation of the penalty
proceedings under sub-section (1).
This amendment will take effect retrospectively from 01st
April, 1989.‖
Memorandum Explaining Provisions in the Finance
Bill, 2008
Satisfaction for initiation of penalty under section 271(1)
Sub-section (1) of Section 271 of the Income-tax Act
empowers the Assessing Officer to levy penalty for
certain offences listed in that sub-section. It is a
requirement that the Assessing Officer is required to be
satisfied before such a penalty is levied.
There is a considerable variance in the judicial
opinion on the issue as to whether the Assessing Officer
is required to record his satisfaction before issue of
penalty notice under this sub-section. Some judicial
authorities have held that such a satisfaction need not be
recorded. However, Hon'ble Delhi High Court in the case
of CIT v. Ram Commercial Enterprises Ltd (246 ITR 568)
has held that such a satisfaction must be recorded by the
Assessing Officer.
Given the conflicting judgments on the issue and the
legislative intent, it is imperative to amend the Income
Tax Act to unambiguously provide that where any amount
is added or disallowed in computing the total income or
loss of an assessee in any order of assessment or
reassessment; and such order contains a direction for
initiation of penalty proceedings under sub-section (1),
such an order of assessment or reassessment shall be
WP(C) No. 5059-2008 Page 28 of 64
deemed to constitute satisfaction of the Assessing Officer
for initiation of penalty proceedings under sub-section(1).
Similar amendment has also been proposed in the
Wealth-tax Act.
These amendments will take effect
retrospectively from 1st April, 1989.‖
LAW AS IT STOOD PRIOR TO THE AMENDMENT
12. The state of the law prior to the impugned amendment is best
enunciated in the two judgments of the Supreme Court in the case of
D.M. Manasvi (supra) and S.V. Angidi Chettiar (supra). Therefore,
it is relevant at this stage to examine briefly facts of the said cases
and the observation made by the Supreme Court therein.
13 S.V. Angidi Chettiar (supra) is a case where essentially the issue
for consideration which arose before the Supreme Court was whether
penalty proceedings against a registered firm could continue under the
provisions of the 1922 Act even after the firm's dissolution. The
Supreme Court while answering the question in the affirmative, also
dealt with the submission of the learned counsel for the assessee that
the Assessing Officer having not arrived at a satisfaction during the
course of the proceedings about existence of conditions contained in
clause (a) & (c) of Section 28(1) of the 1922 Act, no penalty could be
levied. This ground was repelled by the Supreme Court with following
observations:
―Counsel contended that in any event, penalty for the
assessment year 1949-50 could not be imposed upon the
assessee firm because there was no evidence that the
Income-tax Officer was satisfied in the course of any
assessment proceedings under the Income-tax Act that the
firm had concealed the particulars of its income or had
deliberately furnished inaccurate particulars of the income.
The power to impose penalty under section 28
depends upon the satisfaction of the Income-tax
Officer in the course of proceedings under the Act; it
cannot be exercised if he is not satisfied about the
WP(C) No. 5059-2008 Page 29 of 64
existence of conditions specified in clauses (a), (b) or
(c) before the proceedings are concluded. The
proceeding to levy penalty has, however, not to be
commenced by the Income-tax Officer before the
completion of the assessment proceedings by the
Income-tax Officer. Satisfaction before conclusion of
the proceeding under the Act, and not the issue of a
notice or initiation of any step for imposing penalty is
a condition for the exercise of the jurisdiction. There is
no evidence on the record that the Income-tax Officer was
not satisfied in the course of the assessment proceeding
that the firm had concealed its income. The assessment
order is dated the 10th November, 1951, and there is
an endorsement at the foot of the assessment order by
the Income-tax Officer that action under S. 28 had
been taken for concealment of income indicating
clearly that the Income-tax Officer was satisfied in the
course of the assessment proceeding that the firm had
concealed its income.‖
(Emphasis is ours)
13.1 Briefly, let us also examine the facts of D.M. Manasvi's case
(supra). The assessee in the said case was an individual. He was
assessed to tax for four (4) assessment years, i.e., assessment year
1959-60 to assessment year 1962-63. After completion of assessment
for two years it was discovered by Assessing Officer that the assessee
had failed to disclose income from one entity, namely, M/s Kohinoor
Grain Mills Sales Depot (in short Kohinoor). The Income Tax Officer (in
short the ‗I.T.O.') was of the opinion that this entity was not a genuine
partnership firm but a sole proprietorship concern of the assessee.
Accordingly, income from Kohinoor was added to assessee's income in
the two assessment years under consideration as well as in the other
two assessment years in which assessment had been completed after
they were duly reopened. This circumstance propelled the I.T.O. to
initiate penalty proceedings. The assessee lost through-out. In the
Supreme Court it was contended on behalf of the assessee that the
penalty proceedings were not properly commenced, as also, there was
no material or evidence before the Tribunal to hold that the assessee
WP(C) No. 5059-2008 Page 30 of 64
had deliberately concealed particulars of his income or deliberately
furnished inaccurate particulars of his income. While answering the
question against the assessee the Supreme Court made the following
crucial observations:-
―According to Clause (c) of Sub-section (1) of Section 271
of the Act, if the Income Tax Officer or the Appellate
Assistant Commissioner in the course of any proceedings
under the Act is satisfied that any person has concealed
the particulars of his income or furnished inaccurate
particulars of such income, he may direct that such person
shall pay in addition to the amount of tax, by way of
penalty a sum calculated in accordance with Clause (iii) of
that sub-section.....
.....Clause (c) of Sub-section (1) of Section 271 shows that
occasion for taking proceedings for payment of penalty
arises if the Income Tax Officer or the Appellate Assistant
Commissioner is satisfied that any person has concealed
the particulars of his income or furnished inaccurate
particulars of such income. It has also to be shown that the
Income Tax Officer or the Appellate Assistant
Commissioner was so satisfied in the course of proceedings
under the Act. In the present case, we find that the Income
Tax Officer, while making the assessment orders for the
assessment years in question held that Kohinoor Mills had
been wrongly shown to be a partnership firm and that the
other alleged partners were simply name lenders for the
assessee. It was further held that Kohinoor Mills was the
Proprietary concern of the assessee and the income from
that concern should be considered to be the income of the
assessee. Notice was ordered to be issued for proposed
penalty Under Section 271(1)(c) of the Act to the assessee
"in regard to the concealment of and furnishing
inaccurate particulars of income" from Kohinoor
Mills. Notices, it would appear, were thereafter issued by
the Income Tax Officer to the assessee.
The fact that notices were issued subsequent to the making
of the assessment orders would not, in our opinion, show
that there was no satisfaction of the Income Tax Officer
during the assessment proceedings that the assessee had
concealed the particulars of his income or had furnished
incorrect particulars of such income. What is contemplated
by Clause (1) of Section 271 is that the Income Tax Officer
or the Appellate Assistant Commissioner should have been
satisfied in the course of proceedings under the Act
regarding matters mentioned in the clauses of that sub-
section. It is not, however, essential that notice to the
person proceeded against should have also been issued
during the course of the assessment proceedings.
WP(C) No. 5059-2008 Page 31 of 64
Satisfaction in the very nature of things precedes' the issue
of notice and it would not be correct to equate the
satisfaction of the Income Tax Officer or Appellate
Assistant Commissioner with the actual issue of notice. The
issue of notice indeed is a consequence of the satisfaction
of the Income Tax Officer or the Appellate Assistant
Commissioner and it would, in our opinion, be sufficient
compliance with the provisions of the statute if the Income
Tax Officer or the Appellate Assistant Commissioner is
satisfied about the matters referred to in clauses (a) to (c)
of Sub-section (1) of Section 271 during the course of
proceedings under the Act even though notice to the
person proceeded against in pursuance of that satisfaction
is issued subsequently.......
.....It would, indeed, be the satisfaction of the Income Tax
Officer in the course of the assessment proceedings
regarding the concealment of income which would
constitute the basis and foundation of the proceedings for
levy of penalty.....
......It may also be observed that what is contemplated
by Sections 271 and 274 of the Act is that there
should be, prima facie, satisfaction of the Income Tax
Officer or the Appellate Assistant Commissioner in respect
of the matters mentioned in Sub-section (1) before he
hears the assessee or gives him an opportunity of
being heard. The final conclusion on the point as to
whether the requirements of clauses (a), (b) and (c)
of Section 271(1) have been satisfied would be
reached only after the assessee has been heard or has
been given a reasonable opportunity of being heard.
(Emphasis is ours)
The argument that there was no material or evidence
before the Tribunal to hold that the assessee had
deliberately concealed the particulars of his income or had
deliberately furnished in-accurate particulars of such
income is equally bereft of force. The Tribunal while
dealing with this aspect of the matter referred to its earlier
observations in the appeal relating to the refusal of the
Income Tax authorities to register Kohinoor Mills as a
firm......
......It would thus follow that the Tribunal came to the
conclusion on the basis of relevant evidence that the
business of Kohinoor Mills was under the control of the
assessee and that there was no firm in existence as
alleged. The Tribunal also found that the income of the said
concern belonged to the assessee himself even though the
business was run in the guise of a firm. It was held that the
whole scheme was to disguise the profits of the assessee as
those of the firm. It cannot, therefore, be said that there
was no relevant material or evidence before the Tribunal to
WP(C) No. 5059-2008 Page 32 of 64
hold that the assessee had deliberately concealed the
particulars of his income or had deliberately furnished
inaccurate particulars of such income.
Mr. Chagla has referred to the case of Commissioner of
Income Tax v. Anwar Ali........
........On the basis of the dictum laid down in the above
case, it is urged by Mr. Chagla that from the mere fact that
the explanation of the assessee in the present case was
found to be false it did not follow that the disputed amount
represented his income and that the assessee had
consciously concealed the particulars of his income or had
deliberately furnished inaccurate particulars. In this
respect we find that in the present case the inference that
the assessee had consciously concealed the particulars of
his income or had deliberately furnished inaccurate
particulars is based not merely upon the falsity of the
explanation given by the assessee. On the contrary, it is
made amply clear by the order of the Tribunal that there
was positive material to indicate that the business of
Kohinoor Mills belonged to the assessee and the whole
scheme was to disguise the profits of the assessee as those
of a firm of four partners. The present is not a case of
inference from mere falsity of explanation given by the
assessee, but a case wherein there are definite findings
that a device had been deliberately created by the assessee
for the purpose of concealing his income. The assessee as
such can derive no assistance from Anwar Ali's case‖
13.2 To summarize: the Supreme Court held that the ‗satisfaction'
which the Assessing Officer was required to arrive at during the
course of assessment proceedings for initiation of penalty proceedings
was ‗prima facie' in nature as against a ‗final conclusion', that the
assessee had committed an act of omission or commission which
would bring him within the ambit of the provisions of clause (c) of
sub-section (1) of Section 271. The notice under Section 274 was to
follow. What was important was that ‗satisfaction' had to be arrived
at during the course of assessment proceedings and not issuance of
notice under Section 274 of the Act. (See D.M. Manasvi (supra) and
S.V. Angidi Chettiar (supra)
WP(C) No. 5059-2008 Page 33 of 64
13.3 Having noted the ratio of the judgment of the Supreme Court in
D.M. Manasvi and S.V. Angidi Chettiar (supra), it would also perhaps
be relevant to briefly examine the facts obtaining in Ram Commercial
(supra) as the Department is most aggrieved by the observations
contained therein which have been subsequently followed by other
Division Benches of this Court and is the reason for the impugned
amendment. The facts as recorded in Ram Commercial (supra) are
briefly as follows:-
13.4 The assessee had filed a return for assessment year 1986-87
declaring an income of Rs 15,700/-. There was a survey conducted on
the assessee pursuant to which it was found that assessee had earned
additional income. The assessee filed a revised return surrendering an
income of Rs 5,50,000 over and above what was declared earlier. This
was followed by another communication by the assessee in continuation
of his earlier revised voluntary return, surrendering yet another amount
of Rs 8,99,000/-. An additional amount of Rs 1000/- which the assessee
could not explain was also added to its income. The total additions
made to the assessee's income was Rs 24,50,000/-.
13.5 With the completion of assessment proceedings by the very same
order, the Assessing Officer directed initiation of penalty proceedings
under Section 271(1)(c), separately. Thereupon, after giving the
assessee an opportunity of being heard, the Assessing Officer imposed
penalty of Rs 9,77,100/- on the ground that he was of the opinion that
the assessee deliberately concealed his income by filing inaccurate
income to the tune of Rs 15,51,000/-. Based on these facts, the matter
travelled to the Tribunal. The Tribunal deleted the penalty primarily on
the ground that in the absence of the Assessing Officer having not
recorded requisite satisfaction of concealment of income during the
WP(C) No. 5059-2008 Page 34 of 64
course of the assessment proceedings, the Assessing Officer lacked the
jurisdiction for initiation of penalty proceedings. The Tribunal refused
to refer the question of law under Section 256(1) of the Act as it
obtained at the relevant point of time; consequently a petition under
Section 256(2) of the Act was preferred in this Court. A Division Bench
of this Court after taking note of the law laid down by the Supreme
Court in both S.V. Angidi Chettiar (supra) and D.M. Manasvi (supra)
noted very carefully that the law requires that before initiating penalty
proceedings it is the Assessing Officer who is required to be satisfied as
to whether penalty proceedings have to be initiated. The submission of
the Revenue that having regard to the material on record an inference
could be made that a requisite satisfaction had been arrived at by the
Assessing Officer was expressly rejected by this Court by observing that
the Court in the proceedings pending before it, could not based on the
material available on record substitute, the requisite finding which the
law requires the Assessing Officer to make with its own findings for
sustaining the initiation of penalty proceedings by the Assessing Officer.
This is quite evident from the submissions made by the Revenue before
the Court and the observations thereafter made by the Division Bench.
It would be evident from the observations extracted hereinafter that the
Division Bench concluded by observing that merely because penalty
proceedings have been initiated, it cannot be assumed that such
satisfaction was arrived at in the absence of the same being ‗spelt out'
by the order of the Assessing authority. The Court went on to hold that
the assessment order does not record the satisfaction as warranted by
Section 271 for initiating penalty proceedings. The relevant extract of
the judgment is as follows:-
WP(C) No. 5059-2008 Page 35 of 64
―Learned senior standing counsel for the Revenue, on the
other hand, submitted that all the facts available on record
and as pointed out by him coupled with the fact that by the
assessment order itself the assessing authority has chosen
to initiate proceedings under section 271(1)(c) of the Act
leads to an inference that the requisite satisfaction was
arrived at by the assessing authority. Therefore, the
initiation of penalty proceedings cannot be found fault with
and hence a question of law does arise.
Having heard learned counsel for the parties and
having given our anxious consideration to the material
available on the record, in the light of the law laid down by
their Lordships of the Supreme Court, we are of the
opinion that no fault can be found with the judgment of the
Tribunal and, therefore, the question suggested by the
Revenue does not arise as a question of law from the order
of the Tribunal.
The law is clear and explicit. Merely because this
court while hearing this application may be inclined to
form an opinion that the material available on record could
have enabled the initiation of penalty proceedings that
cannot be a substitute for the requisite findings which
should have been recorded by the assessing authority in
the order of assessment, but has not been so recorded.
A bare reading of the provisions of Section 271 and
the law laid down by the Supreme Court makes it clear
that it is the assessing authority which has to form its own
opinion and record its satisfaction before initiating penalty
proceedings. Merely because the penalty proceedings
have been initiated, it cannot be assumed that such a
satisfaction was arrived at in the absence of the same
being spelt out by the order of the assessing authority.
Even at the risk of repetition we would like to state that
the assessment order does not record the satisfaction as
warranted by Section 271 for initiating the penalty
proceedings.‖
13.6 What is obvious is that in the facts of the said case there was
nothing on record which would suggest that the Assessing Officer had
applied his mind to the material on record and thereupon arrived at a
prima facie satisfaction that it was a fit case for initiation of penalty
proceedings against the assessee. The argument of the Department
that based on material on record the Tribunal should have inferred
that requisite satisfaction had been arrived at by the Assessing
Officer, was expressly rejected by the Court, as the provision
mandated that it had to be the satisfaction of the Assessing Officer.
WP(C) No. 5059-2008 Page 36 of 64
13.7 The ratio of Ram Commercial (supra) was applied by the same
Division Bench which decided Ram Commercial (supra) in Diwan
Enterprises (supra). The observations made therein being relevant
are extracted hereinafter:-
―In spite of the abovesaid plea of the petitioner having
been rejected, the penalty imposed under section
271(1)(c) has still to be set aside though for a different
reason and because the very foundation for initiation of
the penalty proceedings is conspicuous by its absence.
The opening clause of sub-section (1) of section 271
itself contemplates a finding as regards satisfaction of
availability of grounds under clause (c) being recorded
during the assessment proceedings. Recently, in CIT vs
Ram Commercial Enterprises Ltd. (I.T.C No. 13 of 1996
decided on October 8,1998-since reported in (2000) 246
ITR 568 (Delhi), following the law laid down by their
Lordships of the Supreme Court in D.M.Manasvi v. CIT
(1972) 86 ITR 557 and CIT v. S.V.Angidi Chettiar (1962)
44 ITR 739 (SC), we have held that unless requisite
satisfaction was recorded in the proceedings under the
Act, which would mean the assessment proceedings, the
jurisdiction to initiate the penalty proceedings could not
have been exercised. Satisfaction has to be before the
issue of notice or initiation of any step for imposing
penalty. In the case at hand we find the Assessing
Officer having nowhere recorded till the conclusion of
the assessment proceedings his satisfaction that the
assessee had concealed the particulars of his income or
furnished inaccurate particulars of such income. This is
a jurisdictional defect which cannot be cured. The
initiation of the penalty proceedings was itself bad and,
consequently, all the subsequent proceedings leading
up to the passing of the penalty order must fail. C.W.P.
No. 3869 of 1997 is, therefore, liable to be allowed.‖
13.8 A careful reading of the judgment would once again
demonstrate that the Court upheld the contention of the assessee that
there was nothing to suggest that the Assessing Officer had arrived at
a prima facie satisfaction. This is quite clear from the extract of the
assessment order in the earlier part of Diwan Enterprises the same
being relevant is quoted hereinbelow:-
―Penalty proceedings under Section 271(1)(c) or
furnishing inaccurate particulars of income and under
Section 271D for accepting the loan of Rs 30,000 in
WP(C) No. 5059-2008 Page 37 of 64
cash in violation of the provisions of Section 269SS
have been initiated separately.‖
13.9 It is important to note that in both Ram Commercial (supra)
and Diwan Enterprises (supra) there is no mention of the fact that
reasons ought to be recorded. The emphasis in both the judgment is
recordal of satisfaction. This according to us is an important
distinction which is to be borne in mind. Another Division Bench of
this Court in CIT vs. Vikas Promoters P. Ltd. (2005) 277 ITR 337
(Delhi) while dismissing the appeal of the Revenue made note of the
fact from the order of the Tribunal that there was no record of
satisfaction before initiation of penalty proceedings. The Assessing
Officer it seems had perfunctorily initiated the penalty proceedings by
simply stating in the assessment order ‗penalty proceedings under
Section 271(1)(c) are initiated separately'. In this background the
Division Bench while applying the ratio of the judgment in Ram
Commercial as follows:-
―Learned counsel appearing for the petitioner while relying
upon CIT v. S.V. Angidi Chettiar (1962) 44 ITR 739 (SC)
contended that it was not necessary for the authorities to
record reasons of satisfaction before issuing the demand
notice as the proceedings taken by the Assessing Officer
per se reflected the ingredients of section 271(1)(c) of the
Act that there was concealment of income and as such the
assessee was liable for penal action within the provision of
the said Act. Having perused the judgment of the Supreme
Court aforereferred, we are of the opinion that the
argument of learned counsel appearing for the Department
is misconceived. Their Lordships of the Supreme Court
have repeatedly emphasized the word ―satisfaction‖ and the
satisfaction is not to be in the mind of the Assessing Officer
but must be reflected from the record. It is a settled rule of
law that the authorities performing quasi-judicial or judicial
function must give reasons in support of its order so as to
provide in the order itself the ground which weighed with
the authorities concerned for passing an order adverse to
the interest of the assessee. Furthermore the provisions of
section 271(1)(c) are penal in nature thus must be strictly
construed, the element of satisfaction should be apparent
from the order itself. It is not for the courts to go into the
WP(C) No. 5059-2008 Page 38 of 64
mind of the authorities or trace the reasons from the files of
such authorities.‖
13.10 As is evident, the observations of the Court make it clear that
the satisfaction which the Assessing Officer has reached, must be
‗reflected' and/or ‗apparent' from the order itself. It is in this context
the Division Bench perhaps observed that it is not for the Courts to go
into the mind or trace reasons from files of such authorities. A
reading of the observations of various Division Benches of this court
would show that the Court did not suggest that at the stage of
initiation of penalty proceedings reasons had to be recorded. What
the Court held in Vikas Promoters (supra) is in line with the view
held in Ram Commercial (supra) wherein it observed that the
satisfaction of the Assessing Officer should be demonstrable from the
order.
13.11 A similar opinion was expressed by other Division Benches of
this Court in the following cases: CIT vs Super Metal Roller:
(2004) 265 ITR 82; CIT vs Auto Lamps: (2005) 278 ITR 32 and
Shri Bhagwant Finance Company vs CIT: 280 ITR 412. The facts
in Bhagwant Finance Company (supra) were rather peculiar.
Briefly, in the said case assessee's case was taken up for scrutiny
wherein it was discovered that there was an increase in fresh
unsecured loans to the extent of Rs 16.5 lacs in the assessment year
under consideration, which was, 1992-93. The assessee surrendered
a sum of Rs 11.10 lacs on account of principal and Rs 1.65 lacs on
account of interest in the aforesaid assessment year. Similar amounts
were surrendered in respect of earlier assessment years i.e, 1989-90,
1990-91 and 1991-92 amounting to Rs 2 lacs, Rs 7 lacs and Rs 5 lacs
respectively. Thus, the total amount which was surrendered, which
WP(C) No. 5059-2008 Page 39 of 64
included interest as well, for the aforesaid assessment years was
Rs 26.75 lacs. The assessee, even before investigation could be
launched to ascertain reasons for increase in unsecured loans
accepted that it would pay the tax demanded for not only assessment
year 1992-93 but also for earlier assessment years i.e, 1989-90, 1990-
91 and 1991-92. Importantly, during the course of the assessment
proceedings the Assessing Officer had made a record in an ‗office
note' that: since the Director of the assessee company had filed an
indemnity bond undertaking therein to pay tax for the afore-
mentioned assessment years; in event of a default penalty
proceedings may be initiated under Section 271(1)(c) of the Act.
Similarly, in respect of assessment year 1992-93, the office note
specifically stated that; if tax for the said assessment year was paid by
the stipulated date i.e, 30.06.1995 then penalty proceedings ―shall be
dropped since the assessee had made a surrender of its own accord
before the entire increase of unsecured loans was investigated‖. The
Court observed that this office note was not brought to the notice of
the authorities below. The Revenue on being confronted with the
office note accepted these facts. The Court based on the facts
obtaining in the said case, came to the conclusion that it would not
only be unjust and unfair but also contrary to the scheme of the Act
that the Revenue was ‗permitted to use initiation, continuation of
penalty proceedings and imposition thereof as a threat to an assessee
for recovery of tax due from the concerned assessee.' The Division
Bench observed that the Assessing Officer had not recorded his
satisfaction before initiation of penalty proceedings, and that, in the
said case, it was used as a coercive measure to recover Revenue
rather than being founded on a satisfaction in regard to the fact that
WP(C) No. 5059-2008 Page 40 of 64
the assessee had concealed particular of his income or furnished
inaccurate particulars of its income.
13.12 There is one another case decided by a Division Bench of this
Court entitled CIT vs Rajan & Co : (2007) 291 ITR 340 to which a
reference requires to be made. In this case the matter travelled by way
of an appeal to this Court against the order of the Tribunal. The
Tribunal in the said case had dismissed the appeal of the Revenue on
the ground that the Assessing Officer had made an addition with respect
to two items while in the assessment order satisfaction had been
reflected vis-à-vis only one item. This Court applying the principles set
forth in S.V. Angidi Chettiar (supra) and Ram Commercial (supra)
rejected the appeal and sustained the order of the Tribunal by observing
that no satisfaction had been returned with respect to one of the two
items added to the income of the assessee. The Division Bench of this
Court dismissed the appeal holding that the appeal did not raise a
substantial question of law and in this regard it applied the judgment of
this Court in CIT vs S.R. Fragnances Ltd: (2004) 270 ITR 560. In
our view the observations of the Division Bench in Rajan & Co (supra)
are distinguishable, as a reading of the judgment seems to suggest that
there was no discussion on the aspect of satisfaction in so far as
whether or not there is a requirement by the Assessing Officer to arrive
at satisfaction vis-à-vis each and every addition or disallowance made by
the Assessee Officer. The Division Bench merely affirmed the
conclusion of the Tribunal to that effect. The dismissal of the appeal of
the Department veered on the question whether or not a substantial
question of law was raised which is why reliance was placed by the
Division Bench on the judgment in S.R. Fragnances (supra).
WP(C) No. 5059-2008 Page 41 of 64
13.13 The Punjab & Haryana High Court seems to have accepted the view
held by this Court in Ram Commercial (supra) in the case of CIT vs
Munish Iron Store (2003) 263 ITR 484. Briefly, in Munish Iron Store
(supra) the Punjab & Haryana High Court approved the order of the
Tribunal cancelling the penalty imposed on the assessee on the ground that
the satisfaction as regards concealment of income or furnishing of
inaccurate particulars by the assessee in order to assume jurisdiction,
initiated and levy of penalty was not recorded, as envisaged by law. The
Court went on to hold that this was a jurisdictional defect which could not be
cured. The relevant observations are found at pages 485 & 486 of the
report.
―Shri Sawhney argued that failure of the assessee to file a
correct return was by itself sufficient for levy of penalty
under Section 271(1)(c) of the Act and the Tribunal
committed a serious error by setting aside the orders of
the assessing authority and the Commissioner of Income-
tax (Appeals) only on the ground of non-recording of
satisfaction by the Assessing Officer in the order of
assessment.
In our opinion, there is no merit in the argument of
learned counsel. A reading of the order passed by the
Tribunal shows that after making a reference to the
judgments of the Supreme Court and some High Courts in
Jain Brothers v. Union of India (1970) 77 ITR 107(SC),
D.M. Manasvi v. CIT (1972) 86 ITR 557 (SC), CIT v. Ram
Commercial Enterprises Ltd. (2000) 246 ITR 568(Del) and
Diwan Enterprises v. CIT (2000) 246 ITR 571(Del), the
Tribunal culled out the proposition of law in the following
words :
"It is clear from above that jurisdiction to impose
penalty flows from recording of the satisfaction
and in case there is a jurisdictional defect in the
assumption of jurisdiction, it cannot be cured.
With the aforesaid legal quoting, we are to
examine the question whether the Assessing
Officer assumed proper jurisdiction. It is again to
be noted that from the issue of notice under
Section 271(1)(c), the recording of legal and valid
satisfaction cannot be assumed."
The Tribunal then referred to the order of assessment
passed by the Assessing Officer and observed :
WP(C) No. 5059-2008 Page 42 of 64
"It is clear from the above that not a word has
been written about concealment of income. The
Assessing Officer quietly accepted the revised
return and the income disclosed therein. He did
not record how and why the revised return was
submitted. The statement of the partner on pages
14-16 of the paper book, Shri Ramesh Kumar was
recorded and in that statement, he did explain
the reasons which led to filing of the revised
return. Learned counsel for the assessee
contended that those reasons were impliedly
accepted by the Assessing Officer. Looking at the
assessment order, one cannot challenge the
above assertion of learned counsel for the
assessee. At any rate, the satisfaction about the
concealment of income of furnishing of
inaccurate particulars of income to assume
jurisdiction to initiate and levy penalty is clearly
not recorded as enjoined by law. The above
jurisdictional defect in our view cannot be cured.
Accordingly, we hold that penalty imposed is not
valid and jurisdiction to impose the same was
illegally assumed without recording a proper
satisfaction. Penalty imposed is cancelled for the
above reasons."
In our opinion, the reasons assigned by the Tribunal for
cancellation of the penalty are legally correct and the
order passed by it does not give rise to any question of
law, much less a substantial question of law requiring
determination by this court under Section 260A of the Act.
Hence, the appeal is dismissed.‖
14. On the other hand the learned ASG has heavily relied upon the
judgment of the High Court of Calcutta in Becker Gray and Co.
(1930) Ltd vs. Income Tax Officer (1978) 112 ITR 503 and that
of the High Court of Allahabad in Shyam Biri Works Pvt. Ltd vs.
CIT (2003) 259 ITR 625 to propound what the Revenue considers is
a contra view.
14.1 Briefly, the facts in Becker Gray and Co (supra) are as follows:
the assessee who, carried on the business of purchase and sale of jute
WP(C) No. 5059-2008 Page 43 of 64
fabrics was issued a notice under Section 271/274 of the Act, in the
course of assessment proceedings on the ground that he had
concealed particulars of income or deliberately furnished inaccurate
particulars during the course of assessment. The Assessing Officer,
amongst others, had made an addition of Rs 25,10,315/- on account of
excess commission alleged to have been paid by assessee to one,
White Lamb Finlay carrying on business of jute fabrics in USA. At the
foot of the assessment order the Income tax Officer had recorded that
a notice under Section 274 had been issued for penalty under Section
271(1)(c) of the Act. Based on these circumstances obtaining in the
said case, the Division Bench of the Calcutta High Court while
reiterating the principle that the Income Tax Officer should be prima
facie satisfied before penalty notice is issued that the assessee
infracted the provision of Section 271(1)(c) of the Act; observed that
the Assessing Officer need not record such satisfaction in writing in
every case. The court went on to hold whether the Income Tax Officer
was so satisfied before he issued a penalty notice Section 271(1)
depended on the facts and circumstances of each case. As a matter of
fact the court returned a finding that the notice was issued by the
Income Tax Officer during the course of proceedings and, also that,
relevant material was before him at the point in time when he issued
notice. The court observed on perusal of the assessment order that
there was sufficient evidence to show that the Income Tax Officer was
prima facie satisfied before he issued a penalty notice.
14.2 In the case of Shyam Biri Works (supra) the court was
concerned with the imposition of penalty under Section 273(2)(a) of
the Act for allegedly furnishing false estimate of advance tax. By a
WP(C) No. 5059-2008 Page 44 of 64
brief order the Division Bench of Allahabad High Court observed that
even though the Assessing Officer should have satisfied himself before
initiating penalty proceedings it was not necessary for him to record
his satisfaction in writing before initiating penalty proceedings under
Section 273 of the Act. In this regard the Division Bench of Allahabad
High Court disagreed with the views expressed by this Court in Ram
Commercial (supra).
14.3 A perusal of the judgment of Calcutta High Court in Becker
Gray & Co (supra) and that of the Allahabad High Court in Shyam
Biri Works Ltd (supra) would show that there is a consensus on the
issue that before the Assessing Officer issues a notice for initiation of
penalty proceedings he must have arrived at satisfaction during the
course of assessment proceedings. As regards nature of the
satisfaction is concerned, there is no observation with respect to the
same, in the aforementioned judgments. While the Calcutta High
Court in Becker Gray & Co (supra) was, as a general proposition, of
the view that whether or not satisfaction requires to be recorded in
writing would depend on the facts and circumstances of the case;
however, in the facts of the said case the Court was of the view that
having regard to the contents of the assessment order, there was
material available with the Assessing Officer, to initiate penalty
proceedings. On the other hand, the Allahabad High Court has taken
the view it is not necessary for the Assessing Officer to ‗record his
satisfaction in writing'. Since the background facts and circumstances
do not find a mention in the said judgment of the Allahabad High
Court, we are unable to gather as to whether, like in the case of
Becker Gray and Co (supra), there was material available on record
WP(C) No. 5059-2008 Page 45 of 64
to demonstrate that before initiating penalty proceedings the
Assessing Officer had arrived at a prima facie satisfaction.
14.4 The view in Shyam Biri Works (supra) was reiterated by
another Division Bench judgment of the Allahabad High Court in
Nainu Mal Het Chand vs CIT (2007) 294 ITR 185 (All). The
Court after taking note of the view of the Delhi High Court in Ram
Commercial (supra), the Punjab & Haryana High Court in Munish
Iron Store (supra) as also, the Supreme Court judgments in D.M.
Manasvi (supra) and S.V. Angidi Chettiar (supra) observed as
follows:-
―So far as the two decisions of the Delhi High Court are
concerned, we find that under the provisions of the Act,
the Income-tax Officer is not required to record his
satisfaction in a particular manner or reduce it in
writing. It can be gathered from the assessment order
itself. In D.M.Manasvi (1972) 86 ITR 557, the apex
court has clearly held that the Income-tax Officer
should be satisfied during the course of the assessment
proceedings that the assessee had concealed his
particulars of income or has furnished inaccurate
particulars of such income. The satisfaction can be
gathered from the assessment order. In the present
case, we find that the Income-tax Officer had material
before him for being satisfied that the applicant has
concealed the particulars of his income and, therefore,
penalty proceedings have rightly been initiated. We
are, therefore, with great respect unable to persuade
ourselves to follow the view taken by the Delhi High
Court in the aforesaid two cases.‖
14.5 A more extreme view was taken by the Division Bench of the
Madras High Court in the case of M Sajjanraj Nahar vs CIT (2006)
283 ITR 230. The brief facts of this case were that: an assessee had
filed a return declaring his total taxable income in the sum of Rs
88,010/- after deducting therefrom a sum of Rs 61,200/- in respect of
interest paid on loans obtained from different parties in earlier
assessment years. The assessment was completed under Section
WP(C) No. 5059-2008 Page 46 of 64
143(1) of the Act. Thereafter a notice under Section 143(2) of the Act
was issued. In response to the said notice, the assessee filed a revised
return declaring a total income of Rs 1,49,210/- which was arrived at
after showing a further sum of Rs 61,200/- as his income. The
Assessing Officer while completing the assessment made an
endorsement that penalty proceedings should be initiated separately
under Sections 271(1)(c) and Section 273(2)(a). In the context of
these short facts the Division Bench observed at Pages 243-244 Para
29 as follows:-
―38 In both the decisions, the Delhi High Court, followed
the observations of the apex court in CIT v. S.V.Angidi
Chettiar (1962) 44 ITR 739. But, we have already pointed
out that the decision of the apex court in CIT v. S.V. Angidi
Chettiar (1962) 44 ITR 739, that a mere indication as to the
initiation of the penalty proceedings separately in the
assessment order is tantamount to an indication as to the
satisfaction of the authorities that the assessee has concealed
income or furnished inaccurate particulars, had not been
brought to the notice of the Delhi High Court in (a) CIT v.
Ram Commercial Enterprises Ltd. (2000) 246 ITR 568;
(b) Diwan Enterprises v. CIT (2000) 246 ITR 571 (Delhi); and
(c) CIT v. Vikas Promoters P. Ltd. (2005) 277 ITR 337 (Delhi).
For this reason and in the light of the law enunciated in
various decisions of this court, referred to supra, with
respect, we are unable to agree with the viewed expressed by
the Delhi High Court in
(a) CIT v. Ram Commercial Enterprises Ltd. (2000) 246 ITR 568;
(b) Diwan Enterprises v. CIT (2000) 246 ITR 571 (Delhi); and (c)
CIT v. Vikas Promoters P. Ltd. (2005) 277 ITR 337
(Delhi).......‖
―44. ............ Under the facts and circumstances of the case,
it is clear that the original return filed by the assessee, when
compared with the revised return pursuant to the notice
issued under section 143(2) of the Act forms the basis for the
satisfaction of the Assessing Officer for initiating penalty
proceedings under section 271(1)(c) of the Act. The Assessing
Officer, therefore, has rightly reached the satisfaction that the
assessee had concealed income in the original return by way
of indicating his satisfaction that the penalty proceedings are
proposed to be initiated....‖
15. As indicated above, Ram Commercial (supra) was referred to a
Full Bench of this High Court. The Full Bench dealt with cases to
WP(C) No. 5059-2008 Page 47 of 64
which law obtaining prior to 01.04.1989 was applicable. The question
of law that the Full Bench was called upon to consider was as follows:
―whether satisfaction of the officer initiating proceedings
under Section 271 of the Income-tax Act can be said to
be recorded even in cases where satisfaction is not
recorded in specific terms but is otherwise discernoble
from the order passed by the authority.‖
15.1 The Full Bench after considering judgments of the Supreme
Court in the case of D.M. Manasvi (supra), S.V. Angidi Chettiar
(supra), Ram Commercial (supra), Diwan Enterprises (supra) and
the Bombay High Court judgment in the case of CIT vs Dajibhai
(1991) 189 ITR 141 came to the following conclusion.
―In our opinion, the legal position is well settled in view of
the Supreme Court decisions in CIT vs S.V. Angidi
Chettiar (1962) 44 ITR 739 and D.M. Manasvi vs CIT
(1972) 86 ITR 557, that power to impose penalty under
Section 271 of the Act depends upon the satisfaction of
the Income Tax Officer in the course of the proceedings
under the Act. It cannot be exercised if he is not satisfied
and has not recorded his satisfaction about the existence
of the conditions specified in Clauses (a), (b) and (c)
before the proceedings are concluded. It is true that mere
absence of the words ―I am satisfied‖ may not be fatal but
such a satisfaction must be spelt out from the order of the
Assessing Authority as to the concealment of income or
deliberately furnishing inaccurate particulars. In the
absence of a clear finding as to the concealment of income
or deliberately furnishing inaccurate particulars, the
initiation of penalty proceedings will be without
jurisdiction. In our opinion, the law is correctly laid down
in Ram Commercial Enterprises Ltd. (2006) 246 ITR 568
(Del) and we are in respectful agreement with the same.
The reference is answered accordingly.‖
15.2 A bare reading of the aforesaid extract from Rampur
Engineering (supra) would show that the Full Bench:
(i) applied the law, as it ought to, as declared in D.M. Manasvi
(supra) and S.V. Angidi Chettiar (supra)
WP(C) No. 5059-2008 Page 48 of 64
(ii) a fortiori the principle for initiation of penalty proceedings being;
the prima facie satisfaction of the Assessing Officer during the
course of assessment proceedings being discernible from the
record, was reiterated.
(iii) the irrelevance of - the Assessing Officer having to say so in so
many words that ‗I am satisfied' was highlighted.
(iv) the judgment of the Division Bench in Ram Commercial was
affirmed which enunciated that: Firstly satisfaction should be that
of Assessing Officer. Secondly, the assessment order should
reflect such satisfaction.
15.3 In our opinion when the above is juxtaposed with the following
observations in Rampur Engineering (supra) ―in the absence of clear
finding as to the concealment of income or deliberately
furnished inaccurate particulars the initiation of penalty
proceedings will be without jurisdiction‖ - it could only mean that
prima facie satisfaction of the Assessing Officer as reflected in the
record as against his ‗final conclusion' should be discernible clearly
from the order passed during the course of such proceedings.
15.4 Importantly, as observed by us hereinabove, post-amendment
these provisions remained untouched. In these circumstances we do
not see how it can be argued by the Revenue that prior to the
impugned amendment ‗satisfaction' at both at the initiation stage as
also at the stage of imposition was required, however, with the
enactment of the impugned provision, that is, sought to be changed by
providing for ‗satisfaction' only at the stage of imposition of penalty.
15.5 In our opinion the impugned provision only provides that an
order initiating penalty cannot be declared bad in law only because it
WP(C) No. 5059-2008 Page 49 of 64
states that penalty proceedings are initiated, if otherwise it is
discernible from the record, that the Assessing Officer has arrived at
prima facie satisfaction for initiation penalty proceedings. The issue
is of discernibility of the ‗satisfaction' arrived at by the Assessing
Officer during the course of proceeding before him.
15.6 As indicated hereinabove, the position is no different post-
amendment. The contra-submission of the learned ASG that prima
facie satisfaction of the Assessing Officer need not be reflected at the
stage of initiation but only at the stage of imposition of penalty is in
the teeth of Section 271(1)(c) of the Act. Section 271(1)(c) has to be
read in consonance of Section 271(1B). The presence of prima facie
satisfaction for initiation of penalty proceedings was and remains a
jurisdictional fact which cannot be wished away as the provision
stands even today, i.e., post amendment. If an interpretation such as
the one proposed by the Revenue is accepted then, in our view, the
impugned provision will fall foul of Article 14 of the Constitution as it
will then be impregnated with the vice of arbitrariness. The Assessing
Officer would in such a situation be in a position to pick a case for
initiation of penalty merely because there is an addition or
disallowance without arriving at a prima facie satisfaction with
respect to infraction by the assessee of clause (c) of sub-section (1) of
Section 271 of the Act. A requirement which is mandated by the
provision itself.
15.7 Learned ASG also sought to place reliance on the Memorandum
as well as Clause 48 of the Notes on Clauses appended to the Finance
Act, 2008. Even though both the Memorandum as well as Notes On
Clauses refers to the conflict in judicial opinion and gives that, as the
WP(C) No. 5059-2008 Page 50 of 64
reason for insertion of the impugned provision, in our opinion, in sub-
section (1B) of Section 271 does not do away with the principle that
the prima facie satisfaction of the Assessing officer must be
discernible from the order passed by the Assessing Officer during the
course of assessment proceedings pending before him.
15.8 If there is no material to initiate penalty proceedings; an
assessee will be entitled to take recourse to a court of law. On the
other hand, if the Assessing officer's prima facie satisfaction is
discernible from the record ordinarily, an assessee would be required
to approach authorities under the statute.
15.9 Therefore, the submission of the petitioners that the court's
power of judicial review is taken away is completely unfounded. At
the stage of initiation the Assessing Officer cannot be expected to
reflect in his order availability of prima facie satisfaction with respect
to each and every addition or disallowance. The inter-relation of
additions or disallowances, if any, may be unravelled only at the
conclusion of the penalty proceedings. It would be sufficient
compliance with the law that there is prima facie evidence of
concealment of particulars of income or furnishing inaccurate
particulars of income. This is so as the legislature does not enjoin a
full fledged investigation at the stage of initiation of penalty
proceedings. The burden of proof on account of explanation 1 to
Section 271 has shifted on to the assessee. To that extent we do not
accept the submission of the learned counsel for the assessee that the
impugned provision gives arbitrary power to the assessing Officer to
pick and chose assessees' against whom penalty proceedings may be
initiated even though similar additions and disallowances are made or
WP(C) No. 5059-2008 Page 51 of 64
that even though there are five or six items of additions and
disallowances and infraction of clause (c) of Section 271(1) is vis-à-vis
only one or two such items of income or deduction, notice for
initiation under the impugned provision will issue in respect of all. To
our minds purported hardship cannot be a ground for striking down
the impugned provision.
16. In our view the submission of the Revenue that the impugned
provision deals with procedural aspect of the matter and hence cannot
be challenged on the ground of retrospectivity is a surplusage.
Suffice it to say that the legislature had plenary powers to enact a law
both prospectively and retrospectively subject to certain
constitutional limitations, as long its competency to do so is not under
challenge and it is not unfair or unreasonable, i.e., falls foul Article 14
of the Constitution. [See Ex Capt. K.C. Arora vs State of Haryana
& Ors (1984) 3 SCC 281 at page 288 paragraph 15 and
Bhubaneshwar Singh vs UOI; JT 1994 (5) SC 83 at page 87
paragraph 8]. This holds good also in case of a fiscal statute. [See
Commercial Tax Officer vs M/s Biswanath Jhunjhunwala; AIR
1977 SC 357 at page 360 paragraph 13 and Additional
Commissioner vs M/s JT & Anr.; JT 1998 (8) SC 60 at page 70-
71 paragraph 25] In the instant case the legislature has expressly
made a retrospective amendment by inserting Section 271(1B) w.e.f.
01.04.1989. The competency of the legislature to enact the impugned
provision is not under challenge before us. In so far as the challenge
to the impugned provision is laid on the ground of violation of Article
14; the same is not sustained when read in the manner, in which, we
have read and interpreted the impugned provision. The fact that
WP(C) No. 5059-2008 Page 52 of 64
retrospectivity is limited to 01.04.1989, as indicated hereinabove even
though perhaps carried out for obscure reasons, cannot enure to
benefit of those to whom the amended law is to apply.
16.1 The learned ASG has submitted that amended law would apply
to those proceedings which are not finalised, i.e., are pending before
various judicial forums. In our view the Revenue would do well to
keep in mind the principle setforth by the Supreme Court in the case
of CIT vs Onkar Saran & Sons. (1992) 195 ITR 1: that offence of
concealment is committed on the date on which the original return is
filed. We need not say more - as facts of each case would have to be
examined.
17. Counsel for both sides had cited many cases on the issue of
retrospectivity and scope and ambit of a validating statute in support
of their respective submission. A brief review of case laws would
show that it only brings to fore the principles applied by us
hereinabove.
17.1 The lead case on the issue is Prithvi Cotton Mills (supra).
Reliance is placed by Revenue on the observations of the Supreme
Court at pages 283 and 287 in paragraph 4 of the judgment. These
observations are as follows:-
―Before we examine section 3 to find out whether it
is effective in its purpose or not we may say a few
words about validating statutes in general. When a
legislature sets out to validate a tax declared by a court
to be illegally collected under an ineffective or an
invalid law, the cause for ineffectiveness or invalidity
must be removed before validation can be said to take
place effectively. The most important condition, of
course, is that the Legislature must possess the power
to impose the tax, for, if it does not, the action must
ever remain ineffective and illegal. Granted legislative
competence, it is not sufficient to declare merely that
WP(C) No. 5059-2008 Page 53 of 64
the decision of the Court shall not bind for that is
tantamount to reversing the decision in exercise of
judicial power which the Legislature does not possess
or exercise. A court's decision must always bind unless
the conditions on which it is based are so
fundamentally altered that the decision could not have
been given in the altered circumstances. Ordinarily, a
court holds a tax to be invalidly imposed because the
power to tax is wanting or the statute or the rules or
both are invalid or do not sufficiently create the
jurisdiction. Validation of a tax so declared illegal may
be done only if the grounds of illegality or invalidity are
capable of being removed and are in fact removed and
the tax thus made legal. Sometimes this is done by
providing for jurisdiction where jurisdiction had not
been properly invested before. Sometimes this is done
by re-enacting retrospectively a valid and legal taxing
provision and then by fiction making the tax already
collected to stand under the re-enacted law. Sometimes
the Legislature gives its own meaning and
interpretation of the law under which tax was collected
and by legislative fiat makes the new meaning binding
upon courts. The Legislature may follow any one
method or all of them and while it does so it may
neutralise the effect of the earlier decision of the court
which becomes ineffective after the change of the law.
Whichever method is adopted it must be within the
competence of the legislature and legal and adequate
to attain the object of validation. If the Legislature has
the power over the subject-matter and competence to
make a valid law, it can at any time make such a valid
law and make it retrospectively so as to bind even past
transactions. The validity of a Validating Law,
therefore, depends upon whether the Legislature
possesses the competence which it claims over the
subject-matter and whether in making the validation it
removes the defect which the courts had found in the
existing law and makes adequate provisions in the
Validating Law for a valid imposition of the tax.‖
17.2 In several judgments following Prithvi Cotton Mills (supra)
this principle, has been reiterated, that is, in M/s Ujagar Prints &
Ors vs UOI 1989 (3) SCC 488; P. Kannadasan & Ors vs State of
Tamil Nadu & Ors. 1969 (5) SCC 670; National Agricultural
Coop. Marketing Fed. of India Ltd & Anr. vs UOI & Ors. (2003)
260 ITR 548 and State Bank Staff Union (Madras Circle) vs UOI
2005 (7) SCC 584. We may only observe that the position of law
WP(C) No. 5059-2008 Page 54 of 64
with respect to the scope of a validating statute is well settled.
However, in view of opinion that we have expressed it may not be
necessary to dilate upon it further to examine the validity of the
impugned provision.
17.3 On behalf of the Revenue the following judgments were also
cited. CIT vs C. Ananthan Chettiar (2005) 273 ITR 401 (Mad);
K.P. Madhusudan vs CIT (2001) 251 ITR 99 (SC). According to
us these judgments do not have any relevance to the issue at hand as
they deal with the effect of the explanation to Section 271(1)(c) of the
Act. It may be noted that the Madras High Court judgment is based
on the opinion expressed by the Supreme Court in K.P. Madhusudan
(supra). To the same effect is the judgment of the Allahabad High
Court in the case of Saeed Ahmed vs Inspecting ACIT (1971) 79
ITR 28.
17.4 The learned ASG has also relied upon the judgment of the
Supreme Court in the case of Gold Coin Health Food P. Ltd (supra)
which, according to us, does not deal with the issue at hand. The said
judgment dealt with Explanation 4(a) to Section 271 of the Act. The
Supreme Court by that judgment reversed the view taken by it in
Virtual Soft Systems Ltd (supra), by holding that penalty could be
levied even in a case where an assessee files a loss return. The
Supreme Court went on to hold that the amendment is clarificatory in
nature and hence will apply retrospectively. In the instant case the
legislature has expressly given retrospective effect to the impugned
provision. The limits of its retrospectivity have been earmarked.
Furthermore, as submitted by the learned ASG the impugned
WP(C) No. 5059-2008 Page 55 of 64
provision will not apply to assessments which have already attained
finality and are not pending adjudication before any judicial forum.
17.5 The learned ASG also relied upon a judgment of the Supreme
Court in the case of Pannalal Binjraj vs UOI (1957) 31 ITR 565
and Welfare Association ARP Maharashtra & Anr. vs Ranjit P.
Gohil & Ors. 2003 (9) SCC 358. To buttress his submission that
there is a presumption that a statute is constitutionally valid and the
burden is on the person who challenges its vires; the courts must
strongly lean against reducing a statute to a futility; as far as possible
the court should make a legislation effective and operative and that,
the possible abuse of power vested in statute cannot be a reason for
striking down a provision as the same can be rectified by taking
recourse to an appropriate remedy in law.
17.6 The principles enunciated by the said judgments are now fairly
well-settled. We have endeavoured, as is evident from our discussion
hereinabove, to apply the aforesaid principles by reading the amended
provision in a manner that it is in consonance with the safeguards
which are contained in Article 14 of the Constitution.
17.7 The reliance is also being placed on the judgment of the
Supreme Court in CIT vs Shelly Products & Anr. (2003) 261 ITR
367. The question which came up for consideration in this case was
whether the assessee was entitled to refund of income tax paid by it
by way of advance tax and self-assessment tax in the event of
assessment being nullified by the Tribunal on the ground of
jurisdiction and there being no possibility of framing a fresh
assessment. In this context the Supreme Court was, amongst others,
required to adjudicate as to whether proviso (b) to Section 240 of the
WP(C) No. 5059-2008 Page 56 of 64
Act which came into force w.e.f. 01.04.1989 was clarificatory and
hence retrospective in nature. The Supreme Court held that in the
facts and circumstances of the case the amendment was clarificatory
in nature and hence retrospective. It is evident that the applicability
of this principle will depend on the construction of the provision and
the fact situation obtaining in a case.
17.8 Reliance was also placed by the Revenue on the judgment of the
Supreme Court in the case of UOI vs Dharmendra Textiles
Processors (2008) 306 ITR 277. This matter came to be decided on
a reference by a Division Bench of the Supreme Court in UOI vs
Dharmendra Textiles Processors (2007) 295 ITR 244 while
doubting with the correctness of the view expressed by another Bench
of the Supreme Court in the case of Dilip N. Shroff vs Joint CIT
(2007) 8 SCALE 304. The three Judge Bench of the Supreme Court
was thus dealing with the scope and effect of the various explanations
to Section 271(1)(c) of the Act. The Court came to the conclusion that
the principle of strict liability would apply to the assessee in respect
of concealment or furnishing inaccurate particulars while filing his
return. The Court went on to hold that penalty under the said
provision was a civil liability and hence wilful concealment is not
essential ingredient for attracting civil liability as in the case of
matters of prosecution under Section 276C of the Act. The ratio of
the judgment has in our opinion no applicability to the facts of the
present case.
18 Mr Syali appearing on behalf of one of the petitioners has
placed reliance on the judgment of the Supreme Court in Virender
Singh Hooda & Ors. Vs State of Haryana & Anr. (2004) 12 SCC
WP(C) No. 5059-2008 Page 57 of 64
588. Briefly, this case dealt with the validity of the Haryana Civil
Services (Executive Branch) and Allied Services and Other Services,
Common/ Combined Examination Act, 2002. This Act came into force
with retrospective effect i.e. 29.08.1989. The Act sought to repeal
essentially the right to seek employment based on his or her position
in merit list and/or in the Common/Combined examination test,
beyond the number of advertised post. The said Act also sought to
repeal circulars dated 22.03.1957 and 26.05.1972. The petitioners
before the Court had contended that the act was a case of usurpation
of judicial power by the State Legislature with a view to over-rule the
decisions of the Supreme Court in an earlier round in the case of the
same petitioner Virender Singh Hooda vs State of Haryana 1999
(3) SCC 696 and Sandeep Singh vs State of Haryana 2002 (10)
SCC 549. The Supreme Court in paragraph 33 and34 at page 605, in
brief, reiterated the principle that the legislatures power to enact
cannot be found fault with unless it has acted unreasonably, and in
considerating whether it has acted unreasonably or not, various
factors have to be considered. The court went on to hold that the
power of the legislature to enact a law retrospectively includes the
power to affect existing contracts, reopen past, closed and completed
transactions as also effect accrued rights and remedies or effect
procedure. In other words a legislature can enact a retrospective law
which takes away or impairs vested or accrued rights under existing
law as long as it is competent to enact the said law and if the same is
not unreasonable. In the facts of the said case in paragraph 68 and
69 at page 690 the Supreme Court while applying the law observed as
follows:-
WP(C) No. 5059-2008 Page 58 of 64
―Despite the aforesaid conclusion, the Act [proviso to
Section 4(3)] to the extent it takes away the
appointments already made, some of the petitioners had
been appointed much before the enforcement of the Act
(ten in number as noticed hereinabove) in
implementation of this court's decision, would be
unreasonable, harsh, arbitrary and violative of Article 14
of the Constitution. The law does not permit the
legislature to take back what has been granted in
implementation of the court's decision. Such a course is
impermissible.‖
―In Lohia Machines Ltd vs UOI on the aspect of
reasonableness and arbitrariness of amending law, it
was observed that the power and competence of
Parliament to amend any statutory provision with
retrospective effect cannot be doubted. Any
retrospective amendment to be valid must, however, be
reasonable and not arbitrary and must not be violative of
any of the fundamental rights guaranteed under the
Constitution. In considering the question as to whether
the legislative power to amend a provision with
retrospective operation has been reasonably exercised
or not, it becomes relevant to enquire as to how the
retrospective effect of the amendment operates.‖
18.1 The judgment of the Supreme Court in Empire Industries Ltd
vs UOI 1985 (3) SCC 314 refers to the same principle. As a matter
of fact in paragraph 51 at page 341 the court makes a reference to the
statement of law given in the Harvard Law Review, Volume 73 page
692. This statement of law also finds mention, though in truncated
form, in paragraph 35 of Virender Singh Hooda (supra). The
statement of law on which reliance has been placed is given in
paragraph 51 of Empire Industries (supra) which reads as follows:-
―In the view we have taken of the expression
‗manufacture', the concept of process being embodied in
certain situation in the idea of manufacture, the impugned
legislation is only making ‗small repairs' and that is a
permissible mode of legislation. In 73rd volume of Harvard
Law Review P. 692 at P. 795, it has been stated as follows:
It is necessary that the Legislature should be able
to cure inadvertent defects in statutes or their
administration by making what has been aptly
called ‗small repairs'. Moreover, the individual
who claims that a vested right has arisen from the
WP(C) No. 5059-2008 Page 59 of 64
defect is seeking a windfall since had the
legislature's or administrator's action had the
effect it was intended to and could have had, no
such right would have arisen. Thus, the interest in
the retroactive curing of such a defect in the
administration of government outweighs the
individual's interest in benefiting from the
defect.... The Court has been extremely reluctant
to over-ride the legislative judgment as to the
necessity for retrospective taxation, not only
because of the paramount government interest in
obtaining adequate revenues, but also because
taxes are not in the nature of a penalty or a
contractual obligation but rather a means of
apportioning the cost of government among those
who benefit from it.‖
18.2 Mr Syali also placed reliance on the judgment of the Supreme
Court in Tata Motors Ltd vs State of Maharashtra & Ors. (2004)
5 SCC 783. This was a case where the assessee had claimed set off
in respect of sales tax payable by them for a certain period by
invoking the benefit available under the Rules framed under the
Bombay Sales-tax Act, 1959. By virtue of the amendment brought
about in Section 26 of the Maharashtra Tax Laws (Levy, Amendment
and Repeal) Act, 1989 (Maharashtra Act 9 of 1989) the facility of
drawback, set off etc. of tax paid by a manufacture of goods specified
in Schedule B of the Act of 1989 was not applicable to manufacture of
goods out of waste, scrap goods and products. The Supreme Court in
appeal quashed the provisions of Section 26 of the Maharashtra Act 9
of 1989. The Court observed in paragraph 15 at page 789 and 790 of
the judgment that while there it can be no dispute that the legislature
has an enormous power to enact laws prospectively as also
retrospectively, and that, the Government must be allowed leeway in
matters of taxation because several fiscal adjustments have to be
made by the government depending upon the needs of the Revenue
and economic circumstances prevailing in the State; nevertheless, the
WP(C) No. 5059-2008 Page 60 of 64
State cannot be allowed to act irrationally or arbitrarily so as to
withdraw the benefit for a particular period, resulting in a higher
burden on the assessee, without any cogent reason. In that case the
Supreme Court observed that retrospective withdrawal of the benefit
of set off only for a particular period without any cogent or rationale
ground was unsustainable. It is to be remembered in the instant case
the assessee was not conferred with any benefit and, therefore, its
subsequent withdrawal. Therefore, the retrospective amendment
cannot be find fault with only on this ground.
18.3 Mr Syali also referred the judgment of the Supreme Court in the
case of S.N. Mukherjee (supra) for the proposition that a quasi-
judicial authority must give reasons for its orders. In this regard
reliance was placed on paragraph 32 at page 1994 and paragraph 38
and 39 at pages 1996 and 1997. Briefly, this is a case where the
Supreme Court was called upon to decide as to whether while
confirming the findings in sentence of a general court martial the
chief of the army staff was required to give reasons and also whether
the Central Government while rejecting post-confirmation petition of
the petitioner was required to record reasons. The Supreme Court
after discussing the scheme of the Army Act, 1950 and the Rules
framed thereunder came, to the conclusion that under Section 162 of
the said Act reasons had to be recorded only in cases where the
proceedings of a court martial are set aside or the sentence is
reduced. It observed that section 162 negatives a requirement to give
reasons on the part of the confirming authority while confirming
findings in sentence of court martial. It held that the confirming
authority was not required to give reasons while confirming the
WP(C) No. 5059-2008 Page 61 of 64
findings of a sentence of court martial. Similarly, with respect to
post-confirmation proceedings under Section 164(2) the court
observed that since there was no requirement to give reasons at the
first two stages, that is, at the stage of recording of findings, and at
the stage of confirmation of the findings and sentence of the court
martial by the confirming authority; there could be no insistence on
giving reasons at the stage of consideration of post-confirmation
petition under Section 164(2) of the Act. We find that in the facts of
the case, the observation made in paragraph 31, 38 and 39 are
elaborated in the subsequent paragraphs of the judgment of the court,
that is, in paragraph 45 and 46 at pages 1999 and 2000. In nutshell
the ratio of the judgment is that, though the thumb-rule is that
reasons are required to be given by authorities performing judicial,
quasi-judicial and administrative acts, it can be excluded expressly or
impliedly depending on the nature of the inquiry and the scheme of
the legislation. Furthermore, in the instant case we are dealing with a
stage which relates to the initiation of penalty proceedings. The
provision does not call for recording of reasons. Section 271(1)(c) of
the Act requires only a manifestation and/or delineation of the
Assessing Officer's prima facie satisfaction that the assessee has
infracted the provisions of clause (c) of Section 271(1) of the Act. In
our opinion the ratio of the S.N. Mukherjee (supra) is not applicable
to the facts obtaining in the present case.
CONCLUSIONS:-
19 In the result, our conclusion are as follows:-
WP(C) No. 5059-2008 Page 62 of 64
(i) Section 271(1B) of the Act is not violative of Article 14 of the
Constitution.
(ii) The position of law both pre and post amendment is similar, in
as much, the Assessing Officer will have to arrive at a prima facie
satisfaction during the course of proceedings with regard to the
assessee having concealed particulars of income or furnished
inaccurate particulars, before he initiates penalty proceedings.
(iii) ‗Prima facie' satisfaction of the Assessing Officer that the case
may deserve the imposition of penalty should be discernible from the
order passed during the course of the proceedings. Obviously, the
Assessing Officer would arrive at a decision, i.e., a final conclusion
only after hearing the assessee.
(iv) At the stage of initiation of penalty proceeding the order passed
by the Assessing Officer need not reflect satisfaction vis-a-vis each
and every item of addition or disallowance if overall sense gathered
from the order is that a further prognosis is called for.
(v) However, this would not debar an assessee from furnishing
evidence to rebut the ‗prima facie' satisfaction of the Assessing
Officer; since penalty proceeding are not a continuation of assessment
proceedings. [See Jain Brothers v. Union of India (1970) 77 ITR
107(SC)]
(vi) Due compliance would be required to be made in respect of the
provisions of Section 274 and 275 of the Act.
(vii) the proceedings for initiation of penalty proceeding cannot be
set aside only on the ground that the assessment order states ‗penalty
WP(C) No. 5059-2008 Page 63 of 64
proceedings are initiated separately' if otherwise, it conforms to the
parameters set out hereinabove are met.
17. In view of the above we reject the prayers made in the writ
petitions with the caveat that provisions of Section 271(1)(c) post-
amendment will be read in the manner indicated above.
RAJIV SHAKDHER, J.
VIKRAMAJIT SEN, J. July 24, 2009 kk/da/mb WP(C) No. 5059-2008 Page 64 of 64