Kerala High Court
Commissioner Of Income-Tax vs D.K.B. And Co. on 3 January, 2000
Equivalent citations: [2000]243ITR618(KER)
Author: Arijit Pasayat
Bench: Arijit Pasayat, K.S. Radhakrishnan
JUDGMENT Arijit Pasayat, C.J.
1. Pursuant to the direction given by this court in Original Petition No. 7138 of 1991-S, the following question has been referred for opinion in terms of Section 256(2) of the Income-tax Act, 1961 (in short the "Act"), by the Income-tax Appellate Tribunal, Cochin Bench (in short "the Tribunal").
"Whether, on the facts and in the circumstances of the case and also in the light of the findings in the quantum appeal, the Tribunal was justified in setting aside the order of penalty ?"
2. A brief reference to the factual aspects would suffice. The assessee is a partnership firm, which during the relevant period, i.e., assessment year 1983-84, was having abkari contracts in and around Quilon. The premises of the firm, and the residence of its partners were searched by the Departmental authorities on February 14, 1984. Certain incriminating materials were found, on the basis of which further investigations were carried out. Since the materials found by the Departmental authorities disclosed suppressions, the assessee approached the Department for a settlement of the income-tax liability of the firm and its partners. Several rounds of discussions were held. It is to be noted that by the time of the search, the return for the concerned assessment year 1983-84 had been filed. On March 29, 1985, four of the partners wrote a letter to the Assessing Officer agreeing for an addition of Rs. 41 lakhs, but indicated that they were agreeable for such addition only if the penal provisions were not applied. From the letter dated March 29, 1985, it is evident that the partners agreed to accept Rs. 41 lakhs as additional profit for the concerned assessment year. The Income-tax Officer wrote a letter to the assessee suggesting that it may file a revised return since the amount involved was substantial. The assessee filed a revised return adding Rs. 41 lakhs to the income already disclosed. The assessment was accordingly completed. Penalty proceedings were also initiated. The assessee preferred appeal questioning the correctness of the addition made as well as the penalty levied before the Tribunal, after the appeals before the Commissioner of Income-tax (in, short "the CIT(A)"), were dismissed. So far as levy of penalty is concerned, the Tribunal did not consider the case of the assessee on the merits, but proceeded on the ground that after having agreed not to initiate penalty proceedings it is not open to the Revenue to initiate penalty proceedings. The concept of promissory estoppel was pressed into service. The addition of Rs. 41 lakhs was upheld in the appeal relating to the quantum of addition. Learned standing counsel for the Revenue submitted that there was in fact no agreement as was presumed by the Tribunal. In any event, there cannot be an estoppel against a statute. Learned counsel for the assessee, on the other hand, submitted that the Assessing Officer having agreed not to initiate penal proceedings, should not have imposed penalty merely on the ground that some amount was offered for addition. Reference is made to the letter of the assessee and the response of the Income-tax Officer in this regard.
3. The Tribunal has proceeded to decide the matter by bringing in the concept of promissory estoppel. So far as the plea relating to promissory estoppel is concerned, as indicated above, great emphasis is laid on the practice relating to earlier years and it is submitted with emphasis that sudden withdrawal of the benefit is barred by the principles of promissory estoppel. The principle of promissory estoppel is that where one party has by his word or conduct made to the other a clear and unequivocal promise or representation which is intended to create legal relations or affect a legal relationship to arise in the future, knowing or intending that it would be acted upon by the other party to whom the promise or representation is made and it is in fact so acted upon by the other party, the promise or representation would be binding on the party making it and he would not be entitled to go back upon it, if it would be inequitable to allow him to do so, having regard to the dealings which have taken place between the parties. The doctrine of promissory estoppel is now well established one in the field of administrative law. The foundation for the claim based on the principle of promissory estoppel in public law was laid by Lord Denning in 1948 in Robertson v. Minister of Pensions [1949] 1 KB 227. Prof. De Smith in his Judicial Review of Administrative Action (4th edition at page 103) observed that "the citizen is entitled to rely on their having the authority that they have asserted."
4. The doctrine of promissory estoppel has been evolved by the courts, on the principles of equity, to avoid injustice.
5. "Estoppel" in Black's Law Dictionary, is indicated to mean that a party is prevented by his own acts from claiming a right to the detriment of other party who was entitled to rely on such conduct and has acted accordingly. Section 115 of the Indian Evidence Act is also, more or less, couched in a language which conveys the same expression.
6. "Promissory estoppel" is defined in Black's Law Dictionary as "an estoppel which arises when there is a promise which promisor should reasonably expect to induce action or forbearance of a definite and substantial character on the part of promisee, and which does induce such action or forbearance, and such promise is binding if injustice can be avoided only by enforcement of promise."
7. These definitions in Black's law Dictionary which are based on decided cases, indicate that before the Rule of promissory estoppel can be invoked, it has to be shown that there was a declaration or promise made which induced the party to whom the promise was made to alter its position to its disadvantage.
8. In this backdrop, let us travel a little distance into the past to understand the evolution of the doctrine of promissory estoppel.
9. Dixon J., an Australian jurist, in Grundt v. Great Boulder Pty. Gold Mines Ltd. [1938] 59 CLR 641, laid down as under :
"It is often said simply that the party asserting the estoppel must have been induced to act to his detriment. Although substantially such a statement is correct and leads to no misunderstanding, it does not bring out clearly the basal purpose of the doctrine. That purpose is to avoid or prevent a detriment to the party asserting the estoppel by compelling the opposite party to adhere to the assumption upon which the former acted or abstained from acting. This means that the real detriment or harm from which the law seeks to give protection is that which would flow from the change of position if the assumption were deserted that led to it."
10. The principle, set out above, was reiterated by Lord Denning in Central London Property Trust Ltd. v. High Trees House Ltd. [1947] 1 KB 130, when he stated as under (page 136) :
"A promise intended to be binding, intended to be acted on, and in fact acted on, is binding
11. Lord Denning approved the decision of Dixon J., in Grundt v. Great Boulder Pty. Gold Mines Ltd. [1938] 59 CLR 641 in Central Newbury Car Auctions Ltd. v. Unity Finance Ltd. [1956] 3 All ER 905. Apart from propounding the above principle on the judicial side, Lord Denning wrote out an article, a classic in legal literature, on "Recent Developments in the Doctrine of Consideration", Modern Law Review, volume 15, in which he expressed as under :
"A man should keep his word. All the more so when the promise is not a bare promise but is made with the intention that the other party should act upon it. Just as a contract is different from tort and from estoppel, so also in the sphere now under discussion promises may give rise to a different equity from other conduct.
The difference may lie in the necessity of showing 'detriment'.
Where one party deliberately promises to waive, modify or discharge his strict legal rights, intending the other party to act on the faith of promise, and the other party actually does act on it, then it is contrary, not only to equity but also to good faith, to allow the promisor to go back on his promise. It should not be necessary for the other party to show that) he acted to his detriment in reliance on the promise. It should be sufficient that he acted on it."
12. This principle has been evolved by equity to avoid injustice. It is neither in the realm of contract nor in the realm of estoppel. Its object is to interpose equity shorn o-f its form to mitigate the rigour of strict law. In Union of India v. Anglo Afghan Agencies [19681 AIR 1968 SC 718, it was, inter alia, observed as follows (page 723) :
"We are unable to accede to the contention that the executive necessity releases the Government from honouring its solemn promises relying on which citizens have acted to their detriment. Under our constitutional set up, no person may be deprived of his right or liberty except in due course of and by authority of law : if a member of the executive seeks to deprive a citizen of his right or liberty otherwise than in exercise of power derived from the law--commoner statute--the courts will be competent to, and indeed would be bound, to protect the rights of the aggrieved citizen."
13. It was further held in its summing up thus (page 728) :
"Under our jurisprudence the Government is not exempt from liability to carry out the representation made by it as to its future conduct and it cannot on some undefined and undisclosed ground of necessity or expediency fail to carry out the promise solemnly made by it, nor claim to be the judge of its own obligation to the citizen on an ex parte appraisement of the circumstances in which the obligation has arisen."
14. In Century Spinning and Manufacturing Co. Ltd. v. Ulhasnagar Municipal Council [1971] AIR 1971 SC 1021 ; [1970] 3 SCR 854, this doctrine of promissory estoppel against public authorities was extended thus:
"This court refused to make a distinction between a private individual and a public body so far as the doctrine of promissory estoppel is concerned."
15. In Motilal Padampat Sugar Mills Co. Ltd. v. State of Uttar Pradesh [1979] 118 ITR 326 ; [1979] 44 STC 42 (SC), the doctrine of promissory estoppel was applied to the executive action of the State Government and also denied to the State the doctrine of executive necessity as a valid defence. It was held that in a republic governed by rule of law; no one high or low, is above the law. Everyone is subject to the law as fully and completely as any other and the Government is no exception. The Government cannot claim immunity from the doctrine of promissory estoppel. Equity will, in a given case where justice and fairness demands, prevent a person from exercising strict legal rights even where they arise not in contract, but on his own title deed on in statute. It is not necessary that there should be some pre-existing contractual relationship between the parties. The parties need not be in any count of legal relationship before the transaction from which the promissory estoppel takes its origin. The doctrine would apply even where there is no pre-existing legal relationship between the parties, but the, promise is intended to create legal relations and effect a legal relationship which will arise in future. It was further held that it is indeed the pride of constitutional democracy and rule of law that the Government stands on the same footing as a private individual so far as the obligation of the law is concerned. The former is equally bound as the latter. Therefore, the Government cannot claim any immunity from the doctrine of promissory estoppel and it cannot say that it is under no obligation to act in a manner, i.e., fair and just or that it is not bound by the considerations of honesty and good faith. In fact, the Government should be held to a high standard of rectangular rectitude while dealing with citizens. Since the doctrine of promissory estoppel is an equitable doctrine, it must yield where equity so requires. If it can be shown by the Government that having regard to the facts as they have transpired, it would be inequitable to hold the Government or public authority to the promise or representation made by it, the court would not raise an equity in favour of the promisee and enforce the promise against the Government. The doctrine of promissory estoppel would be displaced in such a case, because on the facts, equity would not require that the Government should be held bound by the promise made by it. But the Government must be able to show that in view of the facts as have transpired, public interest would not be prejudiced. Where the Government is required to carry out the promise the court would have to balance the public interest in the Government's carrying out the promise made to the citizens, which helps citizens to act upon and alter their position and the public interest likely to suffer if the promises were required to be carried out by the Government and determine which way the equity lies. It would not be enough just to say that the public interest requires that the Government should not be compelled to carry out the promise or that the public interest would suffer if the Government were required to honour it. In order to resist its liability the Government should disclose to the court the various events insisting its claim to be exempt from liability and it would be for the court to decide whether those events are such as to render it equitable and to enforce the liability against the Government.
16. It is equally settled law that the promissory estoppel cannot be used for compelling the Government or a public authority to carry out a representation or promise which is prohibited by law or which was devoid of the authority or power of the officer of the Government or the public authority to make. The doctrine of promissory estoppel being an equitable doctrine, it must yield place to equity, if the larger public interest so requires, and if it can be shown by the Government or public authority having regard to the facts as they have transpired that it would be inequitable to hold the Government or public authority to the promise or representation made by it. The court on satisfaction would not, in those circumstances raise the equity in favour of the persons to whom a promise or representation is made and enforce the promise or representation against Government or the public authority. These aspects were highlighted by the apex court in Vasantkumar Radhakishan Vora v. Board of Trustees of Port of Bombay [1991] AIR 1991 SC 14 ; STO v. Shree Durga Oil Mills [1998] 108 STC 274 and Dr. Ashok Kumar Maheshwari v. State of U. P. [1998] 2 Supreme 100.
17. It is the settled position in law that there cannot be estoppel against a statute. There is no provision in the statute which permits a compromise assessment. The above position was indicated by the apex court in Union of India v. Banwari Lal Agarwal [1999] 238 ITR 461. It cannot be laid clown as a principle of universal application that whenever an assessment has been completed by accepting the offer of an assessee, no penalty can be imposed. It has not been so observed by the apex court in Sir Shadilal sugar and General Mill Ltd. v. CIT [1987] 168 ITR 705, as the Tribunal held. Its conclusion has been arrived at by a clear misappreciation of the ratio laid down in the said case.
18. It is for the Department to consider the explanation offered by the assessee in respect of an amount which was offered to be taxed. It is not automatic that whenever an amount has been offered by the assessee, penalty is to be levied (sic). Therefore, in the penalty proceedings which conceptually differ from assessment proceedings, the assessee can file an explanation justifying its action in not including a particular item of income in its return, though it may have offered the amount to be taxed subsequently. If such an explanation is offered, the Department has to examine its acceptability and record a finding as to whether the explanation is acceptable or not. Only if the explanation is not found acceptable, the question of penalty will arise. In other words, the explanation of the assessee has to be considered on the merits. The Tribunal has not kept this aspect in view.
19. Learned counsel for the parties suggested that the matter may be remitted back to the Tribunal for consideration of the explanation of the assessee already filed and if any to be filed. Though the scope of reference jurisdiction is limited, we accept the suggestion and remit the matter back to the Tribunal for fresh consideration on the merits. It is open to the parties to place such materials in addition to those already produced, for disposal of the matter.
20. The reference is answered accordingly.