COMMISSIONER OF INCOME-TAX VS SARA ENTERPRISES, 1998 PTD-MADRAS-HIGH-COURT-INDIA 1437 (1996)

Income-tax---

----Penalty---Limitation---Concealment of income---Revision---Limitation for levy of penalty---Limitation under S. 275 refers to initial order of penalty-- Order of penalty passed under direction of higher Authority---Limitation would not apply---Order of Commissioner likely to result in order of penalty being passed beyond two years period---Permissible---Indian Income Tax Act, 1961, Ss.263, 271(1)(c) & 275.

The bar created by the provisions of section 275 of the Indian Income Tax Act, 1961, refers only to the initial order and if an order of penalty is passed on account of the direction by a higher Authority in appeal or revision or on account of an answer given in a reference by the High Court or in exercise of original jurisdiction under Article 226 of the Constitution, then the time limit laid down in section 275 of the Act will not apply.

The assessee was a firm. Its assessment for the assessment year 1976-77 was completed by the Income-tax Officer on November 2, 1977, The Income-tax Officer during the course of the assessment proceedings, initiated penalty proceedings under section 271(1)(c) of the Act. Subsequently, the Income-tax Officer dropped the penalty proceedings on March 22, 1980. The Commissioner of Income-tax (Administration), on a scrutiny of the order passed by the Income-tax Officer, came to the conclusion that the order passed by the Income-tax Officer in dropping the penalty was erroneous and prejudice interests of the Revenue. Therefore, the Commissioner of Income-tax initiated proceedings under section 263 of the Act, set aside the order passed by the Income-tax Officer in dropping the penalty proceedings initiated under section 271(1)(c) of the Act, and directed him to reconsider the case in the light of the observations made by him in his order. The assessee appealed against that order and the Tribunal pointed out that if the order of the Commissioner of Income-tax were to be upheld by the Tribunal, then the Income-tax Officer would get an extended time to impose penalty and that was against the scheme and provisions of the Indian Income Tax Act, 1961. Accordingly, the Tribunal cancelled the order of the Commissioner of Income-tax passed under section 263 of the Act. On a reference:

Held, that even though the order passed by the Commissioner of Income-tax under section 263 of the Act empowered the Income-tax Officer to complete the penalty proceedings after the two years period prescribed under section 275(1) of the Act, such an order was a valid order and it was not hit by the provisions of section 275 of the Act.

J. P. Sharma & Sons v. CIT (1985) 151 ITR 138 (Raj.) and CIT v. Vakharia Cotton Traders (1986) 161 ITR 441 (Guj.) applied.

CIT v. National Taj Traders (1980) 121 ITR 535 (SC) and H. H. Rajdadi Smt. Badan Kanwar Medical Trust v CWT (1995) 214 ITR 130 (Raj.) ref.

C. V. Rajan for the Commissioner.

Nemo for the Assessee.

JUDGMENT

THANIKKACHALAM, J.---At the instance of the Department, the Tribunal referred the following two questions, for the opinion of this Court, under section 256(1) of the Income Tax Act, 1961:

"(1) Whether, on the facts and in the circumstances of the case and having regard to

the provisions of section 263 reads with section 275 of the Income Tax Act, 1961, the Appellate Tribunal was justified in cancelling the order passed by the Commissioner of Income-tax under section 263 of the Income Tax Act, 1961?

(2) Whether the bar of limitation contained under section 275 of the Income Tax Act, 1961, would attenuate or curtail the powers of the Commissioner of Income-tax, vested in him under section 263 of the said Act?"

The assessee is a firm with five partners. The assessment for the assessment year 1976-77 was complete by the Income-tax Officer on November 2, 1977, under section 143(3) of the Income Tax Act, 1961. In the course of assessment proceedings, penal action under section 271(1)(c) of the Act was initiated for the detailed reasons stated in the assessment order. The Income-tax Officer subsequently dropped the penalty proceedings on March 22, 1980, on the ground that the assessment was made on agreed basis and the assessee did no go on appeal against the assessment. The Commissioner of Income-tax (Administration) scrutinised the 'records in the exercise of his powers vested in him under section 263 of the Income Tax Act, 1961. On his scrutiny, he found that the Income-tax Officer had, without considering the various facts and circumstances of the case, which led to the initiation of the penal proceedings under section 271(1)(c), dropped the same. He, therefore, felt that the order of the Income-tax Officer in dropping the penalty proceedings was erroneous and prejudicial to the interests of the Revenue. Accordingly, the Commissioner of Income-tax Initiated proceedings under section 263 of the Income Tax Act, 1961, and after hearing the assessee, set aside the order passed by the Income-tax Officer and directed the latter to consider the case in the light of the observations made by him in his order and pass appropriate orders in accordance with law.

Aggrieved by the order of the Commissioner of Income-tax, the assessee preferred an appeal before the Appellate Tribunal. The assessee contended that the Commissioner of Income-tax was not justified in interfering with the order passed by the Income-tax Officer, wherein the Income-tax Officer had exercised his discretionary powers.

The Tribunal held that a statutory authority should not be permitted to achieve by indirect means that which cannot be achieved by direct means. According to the Tribunal any proceedings by way of imposition of penalty should have been completed by March 31, 1980, and if -no penalty is imposed by that time, the assessee would naturally get a vested right, which cannot be titled. The Tribunal further pointed out that if the impugned order of the Commissioner of Income-tax were to be upheld by the Tribunal. then the Income-tax Officer gets and extended time to impose penalty and that is against the scheme and provisions of the Income-tax Act, 1961. Accordingly, the Tribunal cancelled the order of the Commissioner of Income-tax passed under section 263 of the Act. .

Before, us learned standing counsel appearing for the Department submitted that the Commissioner of Income-tax can invoke his jurisdiction under section 263 of the Act within two years from the date of the order passed by the Income-tax Officer. In the present case, the Income-tax Officer dropped the penalty proceedings by his order, dated March 22, 1980, and the Commissioner of Income-tax invoked his jurisdiction under section 263 of the Act by issuing a notice on November 3, 1980. Learned standing counsel further submitted that the provisions contained in section 275 of the Act would apply only to the suo motu order passed by the Income-tax Officer and got to an order passed by the Income-tax Officer in pursuance of the direction given by the Commissioner. Under such circumstances, it was submitted that it cannot be argued that the direction given by the Commissioner under section 263 of the Act in the present case would virtually make the Income-tax Officer to pass an order after the period of two years initiating the penalty proceedings. In order to support this contention, learned standing counsel relied upon the decisions reported in CIT v. National Taj Traders (1980) 121 ITR 535 (SC); J.P. Sharma & Sons v. CIT (1985) 151 ITR 138 (Raj.); CIT v. Vakharia Cotton Traders (1986) 161 ITR 441 (Guj.) and H.H. Rajdadi Sint Badan Kanwar Medical Trust v. CWT 0995) 214 ITR 130 (Raj.).

We have heard learned standing counsel for the Department and perused the record carefully. The fact remains that in the present case the Income-tax Officer during the course of the assessment proceedings, initiated penalty proceedings under section 271(1)(c) of the Act. Subsequently, the Income-tax Officer dropped the penalty proceedings on March 22, 1980. The Commissioner of Income-tax (Administration), on a scrutiny of the order passed by the Income-tax Officer, came to the conclusion that the order passed by the Income-tax Officer in dropping the penalty was erroneous and prejudicial to the interests of the Revenue. Therefore, the Commissioner of Income-tax initiated proceedings under section 263 of the Act, set aside the order passed by the Income-tax Officer in dropping the penalty proceedings initiated under section 271(1)(c) of the Act, and directed him to reconsider the case in the light of the observations made by him his order.

Under section 275 of the Income-tax Act, 1961, no order imposing a penalty under this Chapter, shall be passed after the expiration of a period of two years from the end of the financial year in which the proceedings, in the course of which action for imposition of penalty has been initiated, are completed. Therefore, normally when the penalty proceedings are initiated under section 275(1) of the Act the Income-tax Officer was to complete the proceedings within two years from the date of initiating the proceedings, as otherwise the order passed by the Income-tax Officer would be barred by limitation. In the present case, the penalty proceedings were dropped by the Income-tax Officer on March 22, 1980. Within two years from this date, on November 3, 1980, the Commissioner of Income-tax initiated proceedings under section 263 of the Act. therefore, the Commissioner of Income-tax is well within the period of limitation in invoking his jurisdiction under section 263 of the Act. But the point for consideration is that if the Income tax Officer completed his penalty proceedings as directed by the Commissioner of Income-tax in his order under section 263 of thebeyond the period of two years prescribed under section 275( 1) of the Income-tax Act, whether such an order is hit by the provisions of section 275(1) of the Act .

The Supreme Court had an occasion to consider a question of similar mature in the decision in CIT v. National Taj Traders (1980) 121 ITR 535, wherein while considering sections 33(4) and 33-B(2)(b), (4) of the Indian Income-tax Act, 1922, and section 263(3) of the Income Tax Act, 1961, it held (headnote): "The words 'no order shall be made under subsection (1) after the expiry of two years from the date of the order sought to be revised', in section 33-B(2)(b) of the Indian Income Tax Act, 1922, are applicable only to suo motu orders of the Commissioner in revision and not to orders made by him pursuant to a direction or order passed by the Appellate Tribunal under subsection (4) or, by a higher authority. Section 33-B is not a charging section.

The enactment of section 263(3) of the Income Tax Act, 1961, must be regarded declaratory of the law which was already prevailing. The enactment ex major cautela provision in the 1961 Act would be a legislative recognition of the legal position that obtained as a result of 2udicial pronouncement qua the 1922 Act"

In similar circumstances, the Rajasthan High Court in J.P. Sharma & Sons v. CIT (1985) 151 ITR 138, while considering the provisions of sections 271(1)(a) and 274(1) of the Income Tax Act, 1961, was of the opinion that (headnote): "it is firmly established that the bar created by provisions of section 275 of the Income Tax Act, 1961, refers only to the initial order and if an order of penalty is passed on account of the direction by a higher authority in appeal or revision or on account of an answer given in a reference by the High Court in the exercise of original jurisdiction under Article 226 of the Constitution, then the time-limit laid down in section 275 will not apply .

So also the Gujarat High Court in CIT v. Vakharia Cotton Traders (1986) 161 ITR 441, while considering the provisions of section 275 of the Income Tax Act, 1961, held that the bar of limitation under section 275 would apply only to the initial order of the authority, which imposes penalty and the bar would not apply to a fresh order passed on remand:

In H.H. Rajdadi Smt. Badan Kanwar Medical Trust v. CWT (1995) 214 ITR 30 (Raj.), the Rajasthan High Court, while considering the provisions of section 25(2) of the Wealth Tax Act, 1957, held that the Commissioner of Wealth Tax can invoke his revisional jurisdiction under section 25 of the Wealth Tax Act, 1957, even with regard to an order dropping penalty proceeding.

Thus, we have seen that even though the order passed by the Commissioner of Income-tax under section 263 of the Act empowers the Income-tax Officer to complete the penalty proceedings after the two-year period prescribed under section 275(1) of the Act, such an order is a valid order and it is not hit by the provisions of section 275 of the Act as per the decisions cited supra. Accordingly, the order passed by the Tribunal, canceling the order passed by the Commissioner of Income-tax under section 263 of the Act is not in order.. In that view of the matter, we answer the first question referred to us in the negative and in favour of the Department. Inasmuch as question No.l is answered in the negative and in favour of the Department, it is not necessary to answer question No.2, which is of academic nature. No costs.

Under these circumstances, it is open to the assessee to contest the order passed by the Commissioner of Income-tax under section 263 of the Income Tax Act, on the merits, while the Tribunal proceeds to pass the consequential order in pursuance of the order passed by this Court in this tax case.

M.B.A./1403/FC Order accordingly.