ORDER
G. SANTHANAM, A. M. :
These appeals are by the assessee against the levy of penalty under S. 273(2)(aa) of the IT Act, 1961.
2. The appellant is a firm consisting of seven partners, running a hospital and nursing home by name Upasana Hospital & Nursing Home. On 9th Dec., 1985 there was a search under S. 132 of the IT Act, 1961, in the hospital premises and residential premises of the partners. Thereupon, the assessee would appear to have discussed the tax matters with the learned CIT and then submitted returns of income on the basis of the discussions as follows :
Asst. yr.
Income returned
Rs.
1983-84
4,00,361
1984-85
6,02,707
1985-86
5,05,119
However, the assessments were completed on a larger income in all these years. The reason for arriving at a larger income was that the cost of construction of the hospital buildings admitted by the firm on estimate basis was not accepted by the Department and the assessments were completed on the basis of a different estimate of cost of construction. The assessee carried the matter in appeals and obtained certain reliefs. The contention of the assessee that the cost of constructions should be spread over six years as the construction had commenced from the asst. yr. 1981-82 was not accepted by the Tribunal since the dispute was confined to the impugned assessment years. Ultimately the income determined in the proceedings of the ITO dt. 21st May, 1992 giving effect to the orders of the Tribunal read with its rectification orders is an follows :
Asst. yr.
Amount Rs.
1983-84
4,74,600
1984-85
6,17,520
1985-86
15,44,270
The reference applications preferred by the appellant against the orders of the Tribunal are pending. In the course of the assessment proceedings, the ITO initiated action for levy of penalty as will be evident from the assessment orders for asst. yrs. 1983-84 to 1985-86 as follows :
Asst. yr.
Date of assessment order
Assessed income
Rs.
Provision of the IT Act under which penalty was proposed to be levied.
1983-84
23.12.1986
5,65,550
271(1)(a), 271(1)(c), 273(2)(c)
1984-85
22.12.1986
11,20,880
271(1)(a), 273(1)(c), 273(2)(c)
1985-86
22.12.1986
25,59,560
271(1)(a), 271(1)(c), 273(2)(c)
Thus initiation of penalty proceedings were in the course of assessment proceedings as above. Further notices of hearing on the penalty proceedings were issued to the assessee on 21st March, 1986, 22nd Dec., 1986 and 21st Aug., 1987 for the asst. yrs. 1982-83 to 1985-86. Notice dt. 21st Aug., 1987 reads as follows :
"No. 46-800-FT-9647/TVM(B) IT Office, Trivandrum. dated 21st August, 1987. To M/s. Upasana Hospital & Nursing Home, Quilon Sirs, Sub : Penalty proceedings under S. 271(1)(a), 271(1)(c), 273(2)(c) of IT Act - Asst. yrs. 1982-83 to 1985-86 Ref : This office notice dt. 21st March, 1986 and 22nd Dec., 1986
The above penalty proceedings are reported for hearing on 3rd Sept., 1987. So you are requested to file your explanations for this office notice under reference on or before 3rd Sept., 1987. Your co-operation will be highly appreciated.
1982-83 271(1)(a) Yours faithfully, 1983-84 271(1(a), 271(1)(c), 273(2)(c) Sd/- 1984-85 -do- -do- (P.T. Nethran) 1985-86 -do- -do- ITO, B-Ward, Trivandrum." These notices referred to the initiation of action under Ss. 271(1)(a), 271(1)(c) and 273(2)(c) of the IT Act. Again on 24th Sept., 1987 another notice was issued to the assessee as follows : "No. FT-9647/TVM(B)/83-84 to 85-86 IT Office, Trivandrum. Dt. 24th September, 1987 To M/s. Upasana Hospital & Nursing Home, Quilon. Sirs, Sub : Income-tax assessments - Your own - Asst. yrs. 1983-84. 1984-85 and 1985-86 - Initiation of penalty under S. 273(2)(aa) - Notice issue of - Reg.
For the asst. yrs. 1983-84, 1984-85 and 1985-86, you have been assessed to tax on total income of Rs. 5,65,550, Rs. 11,20,880 and Rs. 25,59,560 as against the estimated income of Rs. 1,75,000, Rs. 1,75,000 and Rs. 3,00,000 respectively. You are therefore liable for penalty under S. 273(2)(aa) for all the three years as against the penalty under S. 273(2)(c) wrongly quoted in the assessment order. I, therefore, initiate penalty proceedings under S. 273(2)(aa) for which notices are issued separately,
Yours faithfully,
Sd/-
(P.T. Nethran)
ITO, B-Ward, Trivandrum”
Further, notice was issued on 17th March, 1989 as follows :
“No 46-800-FT-9647
TVM(1000)
IT Office,
Ayakar Bhawan, Koudiar,
Trivandrum
Dt : 17th March, 1989
To
M/s. Upasana Hospital & Nursing Home
Quilon.
Sub : Penalty under S. 271(1)(a), 273(2)(c) in the case of M/s. Upasana Hospital and Nursing Home for asst. yrs. 1983-84, 1984-85 & 1985-86.
The penalty initiated in this case under Ss. 271(1)(a) and 273(2)(c) is posted for hearing on 23rd March, 1989, at 10.00 a. m. You are requested to attend my office either in person or through your authorised representative on the date maintained above, failure of which the proceedings will be completed on merit.
Sd/-
Asst. Yr. Particulars (P.T. Pavithran) Asstt. Commissioner of Income-tax, 1983-84 271(1)(a) & 273(2)(c). Investigation circle, 1984-85 -do- -do- Trivandrum-3. 1985-86 -do- -do-"
However, on 28th March, 1989 penalty was levied on the assessee under S. 273(2)(aa) of the IT Act, 1961. The assessee appealed. The learned CIT(A) upheld the levy of penalty on the ground that there was no substance in the assessees contention that the income offered on estimate basis after discussions with the learned CIT following the search of the appellants premises under S. 132 cannot give rise to levy of penalty. He had also noticed that the ITO has levied minimum penalty on the basis of the income that was determined at the time of levy of penalty but such income had undergone changes as a result of the orders of the Tribunal read with the rectification orders passed by the Tribunal. Therefore, on principle he upheld the levy of penalty for all these years, but directed the ITO to quantify the minimum amount with reference to the income that was finally determined giving effect to the orders of the Tribunal. The assessee is on second appeal.
3. Sri C. K. Nair, the learned counsel for the assessee submitted that for levy of penalty there should be satisfaction on the part of the Assessing Officer in the course of the assessment proceedings. The satisfaction is about the nature of the offence inviting certain consequence. A perusal of the assessment orders would show that the assessing authority was satisfied that the assessees default attracted provisions of S. 273(2)(c). This was the primary satisfaction. Notices were issued only in respect of offence under S. 273(2)(c). However, all of a sudden the assessing authority changed his track and proposed to levy penalty under S. 273(2)(aa) of the IT Act as will be evident from his letter dt. 24th Sept., 1987. This proposal to levy penalty under S. 273(2)(aa) was not born out of any satisfaction on the part of the assessing authority that was reached in the course of the assessment proceedings. The assessment orders would show that the satisfaction so necessary for the levy of penalty was reached only in respect of the provisions of S. 273(2)(c). Therefore, the revision of such satisfaction on the part of the assessing authority long after the assessment proceedings were over is invalid and hence the order of penalty under S. 273(2)(aa) should be cancelled. Further, after revising his opinion that penalty is leviable not under S. 273(2)(c) but only under S. 273(2)(aa) as spelt out in his letter dt. 24th Sept., 1987, the assessing authority again changed the track when he issued the notice dt. 17th March, 1989 not for penalty under S. 273(2)(aa) but for penalty under S. 273(2)(c). Therefore, even the change of opinion as regards the sub-clause under which the penalty is leviable was not adhered to in the notice dt. 17th March, 1989 but the order of penalty was passed for default under S. 273(2)(a). Thus the initiation of penalty was under S. 273(2)(c). Long after the assessment it was changed to 273(2)(aa). Subsequent to such a change it was again reverted to S. 273(2)(c) but the penalty order had been passed under S. 273(2)(aa). Therefore, he submitted that absolutely there was no satisfaction for the levy of penalty under S. 273(2)(aa) on the part of the assessing authority in the course of the assessment proceedings. Hence the penalty order is void ab initio. In this connection he relied on the decision of the Supreme Court in the case of CIT vs. S. V. Angidi Chettiar (1962) 44 ITR 739 (SC), and also the decision of the Bombay High Court in the case of CIT vs. Dajibhai Kanjibhai (1991) 189 ITR 41 (Bom).
4. Sri C. K. Nair further submitted that the penalty as proposed in the course of assessment proceedings of S. 273(2)(c) is not leviable at all. As per S. 273(2)(c) penalty is leviable only if the assessee failed to furnish an estimate of the advance tax payable by him in accordance with the provisions of sub-s. (4) of S. 209A or sub-s. (3A) of S. 212. In the case of the assessee no notice for payment of advance tax was issued under S. 210 and, therefore, S. 212(3)(a) was not attracted. Sec. 209A(4) would be attracted only when there was a liability to pay advance tax under sub-s. (1) or sub-s. (2) or sub-s. (3) thereof and the assessee failed to make an estimate under sub-s. (4) on or before the date on which the last instalment of advance tax was payable by him. In the case of the assessee for the first two years, viz., asst. yrs. 1983-84 and 1984-85 there was no liability for it to pay advance tax under sub-s. (1) or sub-s. (2) or under sub-s. (3) of S. 209A and, therefore, there was no question of making any estimate as prescribed under sub-s. (4) of S. 209A because the very first assessment in the case of the assessee for the asst. yr. 1981-82 was made only on 20th Feb., 1984 and the assessment for the asst. yr. 1982-83 was made on 21st March, 1986. Therefore, at the relevant point of time when the instalments of advance tax were due for the asst. yrs. 1983-84 and 1985-86, the assessee was one who was not previously assessed to income-tax and, therefore, the question of making an estimate under S. 209A(4) cannot arise. Therefore, at any rate, even the satisfaction reached by the assessing authority in respect of the offence under S. 273(2)(c) for the asst. yrs. 1983-84 and 1984-85 cannot be said to be based on any material before him. But, on the other hand, the material before him militated against such satisfaction. At any rate there was no satisfaction on the part of the Assessing Officer in the course of the assessment proceedings in respect of the default mentioned in S. 273(2)(aa) of the IT Act, 1961 for those two years. As far as the asst. yr. 1985-86 is concerned, the appellant was one who was previously assessed to income-tax and, therefore, it was liable to make an estimate under S. 209A(4) of the IT Act and it did make a estimate though it was not in accordance with the assessed income. The assessing authority, no doubt, had a prima facie satisfaction regarding the default under S. 273(2)(c) in so far as the asst. yr. 1985-86 was concerned. But then he chose to levy penalty under S. 273(2)(aa) contrary to the satisfaction reached in the course of the assessment proceedings. Therefore, that part of the penalty referable to the asst. yr. 1985-86 cannot also be sustained.
5. Sri Nair, the learned counsel for the assessee, submitted that the legal stand against the maintainability of the penalty order was unfortunately not taken up before the first appellate authority. As only a question of law is involved which did not require any investigation the same is raised for the first time before the Tribunal by way of an additional ground and he pleaded that in the interests of justice and equity the additional ground may be admitted.
6. This apart Sri Nair submitted that the construction had begun in 1980-81 onwards. Expenditure was incurred on the construction of the hospital buildings which was incomplete in the impugned assessment years. The assessee was under the bona fide belief that it has to properly ascertain the cost of construction and any filing of the returns in the meanwhile might result in incorrect statement of income. Therefore, the appellant did not file the returns of income for these years. In the meanwhile there was a search on the assessee and its partners and immediately the assessee wanted to settle the tax affairs and approached the CIT so that the income could be offered on agreed basis. The learned CIT indicated that as the construction was upto 1986-87, the cost could be reasonably estimated at Rs. 41,00,000. This amount was staggered over the asst. yrs. 1983-84 to 1986-87. Accordingly, the assessee filed the returns of income. Of course, it was a different story that the ITO did not accept the estimate and the Revenue did not honour the previous CIT figure of Rs. 41,00,000 since he was transferred in the meanwhile. Hefty additions were made to the income of the appellant again on estimate basis against which there were appeals. Ultimately, the income determined corresponded to approximately the income offered by the assessee on the basis of the understanding reached with the then CIT. It is in these circumstances that the estimate of advance tax filed by the assessee for the impugned assessment years was not in accordance with the income returned by it. Therefore, it cannot be said that the assessee had deliberately furnished false estimate of advance tax.
7. Sri C. Abraham, the learned senior Departmental Representative. Submitted that the assessee is raising a legal ground for the first time before the Tribunal and the same should not be admitted. The Assessing Officer had only misquoted the sub-sections of S. 273 of the IT Act in the assessment orders and also in the penalty notices issued on the earlier occasion. This was only quoting of a wrong provision. In the facts of the case, when there was wide disparity between the estimate of income for advance tax purposes and even the returned income and that too after a search under S. 132, penalty is leviable under S. 273(2)(aa) of the IT Act, 1961, and, therefore, no interference is called for. The assessee should not be permitted to seek shelter in legal nuances to escape from the clutches of law for the default committed.
8. Sri Nair in reply submitted that the action of the ITO cannot be construed as mere quoting of a wrong sub-section of a section. The legislature has specified different categories of offences and has also specified varying quantum of penalty for each of such offences. It is settled law that the ITO must be satisfied in the course of the assessment proceedings as to the nature of the offence before the levy of penalty. When there is confusion about the nature of the offence itself it cannot be said that there was satisfaction on the part of the ITO regarding the commission of a particular offence. In other words, when the nature of the offence itself is changed in the penalty order, it would remain unsupported by the satisfaction so necessary for the levy of penalty. The lapse is a serious one. Levy of penalty also has other consequences, viz., it might lead to prosecutions. When there was no proper application of mind on the part of the ITO in the initiation of the penalty proceedings, the Tribunal is bound to cancel the penalty.
9 We have heard rival submissions and perused the records. The additional grounds are as follows :
1. The penalty orders are bad in law because the ITO had not reached the satisfaction in the course of assessment proceedings. The satisfaction was reached later.
2. Sufficient opportunity had not been given to meet the case for imposition of penalty.
3. The provisions of S. 209A(4) are not applicable for asst. yrs. 1983-84 and 1984-85. Hence penalty orders may be quashed on that ground.
As only legal issues are involved which do not require any investigation of facts, we admit the additional grounds for consideration. It is on record that the assessee was not previously assessed to income-tax until 20th Feb., 1984 when the assessment for for the asst. yr. 1981-82 was completed. Therefore, for the asst. yr. 1983-84 there was no liability for the assessee to file a statement of advance tax payable by him computed in the manner laid down in cl. (a) or, as the case may be, sub-cl. (1) of cl. (d) of sub-s. (1) of S. 209. For the asst. yr. 1984-85, as the pervious assessment had taken place only on 20th Feb., 1984, the assessee was liable to file an estimate of advance tax on or before the date on which the last instalment of advance tax was to be paid, i.e., on or before 15th March, 1983. In both cases, the assessee was not liable to file a statement of advance tax on the due dates for payment of the first or the second instalment of advance tax in the relevant years. For both these assessment years its liability was to file an estimate of advance tax on or before the last date for payment of advance tax, viz., for the asst. yr. 1983-84 on or before 15th March, 1984 and for the asst. yr. 1984-85 on or before 15th March, 1983. The assessee has complied with this requirement on its own when it filed an estimate though it was in fact a revised estimate on the relevant due dates for both these years. Sec. 273(2)(c) provides for levy of penalty if the ITO is satisfied that the assessee “has without reasonable cause failed to furnish an estimate of the advance tax payable by him in accordance with the provisions of [sub-s. (4) of S. 209A or sub-s. (3A) of S. 212]”. From the facts emerging in the case of the assessee, narrated as above, we hold that as the assessee was not under an obligation to file a statement of advance tax or revised estimate of advance tax under sub-s. (2) or sub-s. (3) of S. 209A, leading to the necessity for filing an estimate on the last of the instalments in each of these years did not arise in the case of the assessee. Further, as the assessee itself has filed an estimate though purported to be a revised estimate on the date on which the last instalment was due in each of these impugned assessment years, there was also no violation of the provisions of sub-s. (4) of S. 209A. Therefore, the penalty envisaged in sub-cl. (c) of sub-s. (2) of S. 273 is not attracted in the case of the assessee for the asst. yrs. 1983-84 and 1984-85. For the asst. yr. 1985-86, the assessee is one who was previously assessed to income-tax and, therefore, the assessee had to file a statement of advance tax or estimate of its current income in accordance with the provisions of S. 209A(1), (3) and (4). In this case, the assessee had filed an estimate of advance tax and further revised it by filing another estimate on or before the date on which the last instalment of advance tax was payable by it. Therefore, for the asst. yr. 1985-86 the provisions of sub-s. (4) of section 209 stood complied with. Hence for this year also penalty cannot be levied under S. 273(2)(c). Actually penalty has been levied not under S. 273(2)(c) but only under S. 273(2)(aa). It is in this context that Sri Nair vehemently contended that as the initiation of the penalty proceedings was in relation to a default under S. 273(2)(c) the satisfaction if any can be only in respect of that particular default and not with regard to any other type of default for which penalty has been provided for separately in the Act. We uphold this contention. From the copies of the assessment orders furnished before us, it is evident that, among others, penal proceedings were initiated only under S. 273(2)(c) and not under S. 273(2)(aa). It is settled law that the assessing authority should be satisfied objectively that the assessee has committed a particular default thereby attracting the penal provisions in relation to that particular default. Unless the satisfaction is reached in the course of the assessment proceedings, penalty is not leviable. In CIT vs. S. V. Angidi Chettiar (supra) the Supreme Court observed that the power to impose penalty depends upon the satisfaction of the ITO in the course of assessment proceedings it cannot be exercised if he is not satisfied about the conditions specified in such a provision before the proceedings are completed. Satisfaction before conclusion of the proceedings under the Act and not the issue of a notice or initiation of any step for imposing a penalty is a condition necessary for the exercise of jurisdiction. Again, in D. M. Manasvi vs. CIT (1972) 86 ITR 557 (SC) the Supreme Court held that what is contemplated by S. 271(1) is that the ITO should have been satisfied in the course of assessment proceedings regarding matters mentioned in cls. (a), (b) and (c) of that sub-section. It is not essential that the notice to the person proceeded against should have also been issued during the course of the assessment proceedings. This position has not changed even under the 1961 Act as has been held by the Bombay High Court in the case of CIT vs. Dajibhai Kanjibhai (supra). The true import of the word “satisfaction” is that it represented a mind not troubled by a doubt or a mind which has reached a clear conclusion, to quote the words of Smit, J. [Angland vs. Payne (1944) NZLR 610, 626]. It was held by the Delhi High Court in the case of Jiten & Co. vs. STO 39 STC 308, 312 that the assessing authority must reach a clear conclusion that a good ground exists for launching penalty proceedings and that is the foundation of action for imposition of penalty. The “satisfaction” referred to is not a subjective satisfaction but rather an objective one. If the initiation or action for penalty against the assessee is examined on the touch stone of the above legal principles, one is driven to the conclusion that the assessing authority did not have any material before him to reach a prima facie satisfaction objectively regarding the default attracting the provisions of S. 273(2)(c) of the Act. The applicability of the provisions of S. 273(2)(aa) entered the mind of the ITO only long after the completion of the assessment proceedings and, therefore, it cannot be related back to the assessment proceedings or to the point of time in such proceedings at which he could be said to have reasonably applied his mind to the existence of a default attracting the provisions of S. 273(2)(aa) and thus reached a satisfaction thereon. Hence, we hold that the levy of penalty under S. 273(2)(aa) was without jurisdiction. We are reinforced in this conclusion if regard is had to the fact that even after realising that he had initiated action under S. 273(2)(c) erroneously instead of under S. 273(2)(aa) (vide his letter dt. 24th Sept., 1987) he had proceeded to issue notices in the subsequent periods only in relation to the default under S. 273(2)(c) but not under S. 273(2)(aa) which should be the case after his revision of opinion as spelt out in his letter dt. 24th Sept., 1987 and ultimately levied penalty under S. 273(2)(aa). Thus, the assessing authority was smarting under a medley of confusion regarding the applicability of the nature of default attracting the penal provisions of the one kind or the other. Hence, it cannot be said that satisfaction was reached either under S. 273(2)(c) or under S. 273(2)(aa) of the IT Act. Further with regard to S. 273(2)(c) we have already indicated that those provisions were not attracted. In the result, we hold that no penalty is leviable as has been done in this case. In the facts and circumstances of the case, it is rather difficult to accept the plea of the Revenue that the assessing authority had misquoted the provisions of S. 273(2)(c) instead of the provisions of S. 273(2)(aa) of the Act and we reject the same.
10. In the view we have taken on the legal issue raised in the additional grounds of appeal, we do not find it necessary to go into the merits of the case for levy of penalty under S. 273(2)(aa).
11. In the result, the appeals are allowed.