PETITIONER: D. M. MANASVI Vs. RESPONDENT: C.I.T., GUJARAT II, AHMEDABAD DATE OF JUDGMENT19/09/1972 BENCH: KHANNA, HANS RAJ BENCH: KHANNA, HANS RAJ HEGDE, K.S. REDDY, P. JAGANMOHAN CITATION: 1973 AIR 22 1973 SCR (2) 389 1973 SCC (3) 207 ACT: Income Tax Act, 1961-Section 271(1)(c)-Scope of-Satisfaction regarding matters in cls. (a) to (c) precedes the issue of notice-Notice need not be issued in the course of assessment proceedings-No notice contemplated before arriving at the satisfaction-Provision for reference to Inspecting Assistant Commissioner does not mean proceedings cannot be initiated by Income Tax Officer. HEADNOTE: What is contemplated by clause (1) of section 271, income Tax Act, 1961, 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. 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 he 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 subsequent to the making of the assessment orders would not 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. [393E] Commissioner of Income Tax, Madras and. Anr. v. S. V. Angidi Chettiar, [1962] 44 I.T.R. 739, referred to. The fact that the Income Tax Officer has to refer the case to the Inspecting Assistant Commissioner if the minimum imposable penalty exceeds the sum of rupees one thousand in a case falling under clause (c) of sub-section (1) of section 271 would not show that the proceedings in such a case cannot be initiated by the Income Tax Officer. [394F] It is not necessary that the Income Tax officer, before feeling satisfied regarding the necessity of initiating proceedings for imposition of penalty and before issuing consequential notice should have issued another notice to the assessee and held a preliminary enquiry regarding the necessity of initiating proceedings. Such a course would result in mere duplication of the procedure without any advantage to the parties. The final conclusion on the point as to whether the requirements of clauses (a), (b) and (c) of s. 271 have been satisfied would be reached only after the assessee has been heard or has been given a reasonable opportunity of being heard. [395E, B] JUDGMENT:
CIVIL APPELLATE JURISDICTION : Civil Appeals Nos. 1447 to
1450 of 1969.
390
Appeals by special leave from the judgment and order dated
August 30, 1968 of the Gujarat High Court at Ahmedabad in
Income-tax Reference No. 6 of 1968.
M. C. Chagla and I. N. Shroff, for the appellant.
N. D. Karkhanis, R. N. Sachthey and S. P. Nayar, for the
respondent.
The Judgment of the Court was delivered by
KHANNA, J.-This judgment would dispose of four civil appeals
Nos. 1447 to 1450 of 1969 which have been filed by the
assessee by special leave against the judgment of Gujarat
High Court whereby that court answered the following two
questions in a reference under section 256(1) of the Income
Tax Act, 1961 (hereinafter referred to as the Act) in the
affirmative and in favour of the department
“(1) Whether on the facts and in the
circumstances of the case, the proceedings for
the imposition of penalty were properly
commenced in the course of any proceedings.
under the Act as required by section 271 of
the Income Tax Act, 1961 for the assessment
‘years 1959-60 to 1962-63 ?
(2) Whether on the facts and in the
circumstances of the case, there was any
material or evidence before the Tribunal to
hold that the assessee had deliberately
concealed particulars of his income or
deliberately furnished inaccurate particulars
of such income as required by sec. 271 (1 )
(c) of the Act for the assessment years 1959-
60 to 1962-63?”
While answering question No.1 in the affirmative, the High
‘Court observed that so far as the assessment year 1961-62
was concerned, the penalty proceedings were invalid.
The assessee is an individual and the matter relates to the
assessment years 1959-60, 1960-61, 1961-62 and 1962-63.
During the relevant years the assessee derived income from
several sources. The assessment for the first year was made
under section 23(3) of the Indian Income Tax Act, 1922. The
Income Tax Officer subsequently found that income from the
business in the name of M/s. Kohinoor Crain Mills Sales
Depot (hereinafter referred to as the Kohinoor Mills) was
not included in the return filed by the, assessee and he had
not shown any connection with or interest in the said
business. For the subsequent three years the assessee
disclosed 20 per cent as his share of the profits from
Kohinoor Mills. The Income Tax Officer was of the
391
opinion that Kohinoor Miffs was not a genuine partnership
but was the sole proprietorship concern of the assessee and
the whole of the income from the said concern belonged to
the assessee. As the assessment for the first two years had
already been completed before the Income Tax Officer got the
information regarding the interest in Kohinoor Mills, the
Income Tax Officer reopened the assessment for those two
years. The income from the Kohinoor Mills was thereafter
included in the income of the assessee for the first two
years as well as in the assessments relating to the
remaining two years. The order of the Income Tax Officer in
this respect was upheld by the Appellate Assistant
Commissioner as well as by the Income Tax Appellate
Tribunal..
The non-disclosure of the business profits from Kohinoor
Mills was considered by the Income Tax Officer to represent
deliberate concealment, and so he initiated penalty
proceedings under section 271 of the Act for the four
assessment years in question. As, however, the minimum
penalty leviable under section 271 (1) (c) of the Act
exceeded the sum of rupees one thousand, the cases were
referred under section 274(2) of the Act to the Inspecting
Assistant Commissioner.
The Inspecting Assistant Commissioner thereupon grave an
opportunity to the assessee of being heard and, after-
hearing him, came to the conclusion that the assessee had
concealed his income and deliberately furnished inaccurate
particulars thereof for all the four assessment years in
question. He accordingly levied “penalties of Rs. 21,062,
Rs. 1,14,477, Rs. 2,02,584 and Rs. 1,02,731 for the
assessment years 1959-60, 1960-61, 1961-62 and 1962-63
respectively. In appeal before the Tribunal it was
submitted on behalf of the assessee that there had been no
valid levy of the penalties because the penalty proceedings
had not been commenced in the course of proceedings under
the Act. The Tribunal rejected this contention and observed
that as the Income Tax Officer had given directions in the
assessment order for the issue of a notice under section
277(1)(c) the penalty proceedings could be said to have
commenced during the course of the assessment proceedings
and therefore levy of penalty was not invalid. The Tribunal
also rejected the submission made on behalf of the assessee
that there was no evidence to show that the assessee was the
owner of the business of Kohinoor Mills and that there had
been concealment of his income on the part of the assessee.
The Tribunal, however, gave relief to the assessee in the
matter of quantum of penalty. On application made by the
assessee, the questions reproduced earlier were referred to
the High Court. The High Court, as already mentioned,
answered
392
both the questions in the affirmative and in favour of the
department. So far as the assessment year 1961-62 was
concerned the penalty proceedings were held to be invalid on
a ground with which we are not concerned.
Mr. Chagla on behalf of the assessee appellant has before us
assailed the answers to the two questions given by the High
Court. It is urged that there was no proper initiation of
proceedings for the imposition of penalty. The requisite
satisfaction of the Income Tax Officer, according to the
learned counsel, has also not been shown to have existed for
the initiation of the proceedings. There was also no
material or evidence before the Tribunal, it is submitted,
to hold that the assessee had deliberately concealed the
particulars of his income or had deliberately furnished
inaccurate particulars of his income. The above submissions
have been controverted by Mr. Karkhanis on behalf of the
department and, in our opinion, are without merit.
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. Section 274 of the Act prescribes the
procedure for the imposition of penalty and reads as under :
“274. Procedure.-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) Notwithstanding anything contained in
clause (iii)of sub-section (1) of section 271,
if in a case falling under clause (c) of that
sub-section, the minimum penalty imposable
exceeds a sum of rupees one thousand, the
Income Tax Officer shall refer the case to the
Inspecting Assistant Commissioner who shall,
for the purpose, have all the powers conferred
under this Chapter for the imposition of
penalty.
(3) An Appellate Assistant Commissioner on
making an order under this Chapter imposing a
penalty, shall forthwith send a copy of the
same to the Income Tax Officer.”
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
393
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. 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. We may in this context
refer to a decision of five judges bench of this Court in
the case of Commissioner of Income Tax, Madras and Another
v. S. V. Angidi Chettiar(1). Shah J speaking for the Court
while dealing with section 28 of the Indian Income Tax Act,
1922 observed:
(1) [1962] 441.T.R.739.
394
“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 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 com-
menced 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.”
The appellant in the present case, it may be mentioned, has
not produced or got printed in the paper book the notice
which was issued to him by the Income Tax Officer in
connection with the imposition of penalty. In the absence
of that notice, it cannot be said, as has now been suggested
on behalf of the assessee appellant, that there was no
mention in the notice of the satisfaction of the Income Tax
Officer on the point that the assessee had concealed the
particulars of his income or had furnished inaccurate
particulars thereof.
We are also not impressed by the argument advanced on behalf
of the appellant that the proceedings for the imposition of
penalty were initiated not by the Income Tax Officer but by
the Inspecting Assistant Commissioner when the matter had
been referred to him under section 274(2) of the Act. The
proceedings for the imposition of penalty in terms of sub-
section (1) of section 271 have necessarily to be initiated
either by the Income Tax Officer or by the Appellate
Assistant Commissioner. The fact that the Income Tax
Officer has to refer the case to the Inspecting Assistant
Commissioner if the minimum imposable penalty exceeds the
sum of rupees one thousand in a case falling under clause
(c) of sub-section (1) of section 271 would not show that
the proceedings in such a case cannot be initiated by the
Income Tax Officer. The Income Tax Officer in such an event
can refer the case to the Inspecting Assistant Commissioner
after initiating the proceedings. 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.
There is also no force in the submission made on behalf of
the appellant that the Income Tax Officer before feeling
satisfied regarding the necessity of initiating proceedings
for imposition
395
of penalty and before issuing consequential notice should
have issued another notice to the assessee and held a
preliminary enquiry regarding the necessity of initiating
proceedings. Such a course, in our opinion, would result in
mere duplication of the procedure without any advantage to
the parties. A similar contention was advanced in a case
relating to initiation of proceedings under section 34 of
the Indian Income Tax Act, 1922 and was repelled by the
Judicial Committee in the case of Commissioner of Income
Tax, Bengal v. M/s. Mahaliram Ramjidas(1) in the following
words :
“Therefore a construction of section 34 which
requires a quasi-judicial enquiry to be held
before the powers under the section can be
operated would result in mere duplication of
procedure and in two enquiries of the same
kind, into the same matter, conducted by the
same official, and without any advantage to
the parties. A construction so unreasonable
and unpractical ought not to be preferred when
another construction is open. Accordingly,
their Lordships are of opinion that the Income
Tax Officer is not required by the section to
convene the assessee, or to intimate to him
the nature of the alleged escapement, or to
give him an opportunity of being heard, before
he decides to operate the powers conferred by
the section.”
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 subsection (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.
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 inaccurate 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. Those
observations ‘Were as under :
“In our view, the Income-Tax authorities were
fully justified in refusing to grant
registration to the firm for
(1) [1940] 8 IJR 442.
8-L498 SupCI/73
396
all the three years. On going through the
statements of Ramanbhai Thakorlal and
Gopaldas, we have no doubt at all that
Ramanbhai, Thakorlal and Kirit were not
partners in this business. Thakorlal was mere
student for a considerable part of the period,
during which he masqueraded as a partner. The
qualifications of both Thakorlal and Ramanbhai
to be partners of this business were only
wholly inadequate to, the point of being non-
existence. They had no knowledge of the
happening of the business and they had no con-
trol whatsoever on the profits which were
accumulated in their names. The profits were
finally disposed of after Shri D. M. Manasvi
became the sole proprietor of the business and
even before he became the sole proprietor he
had extracted the profits from the business
under guise of loans to be utilised for his
own purpose. There is no doubt left in our
minds that the business was under the control
of Shri D. M. Manasvi once the three dummies
are out of the way, Shri D. M. Manasvi is the
only adult person left in charge of the
business and the three minors are only his
grand children. We are, therefore, of the
view that not only there was no firm in
existence as alleged by the partnership deed but t
hat the business belonged to Shri D. M.
Manasvi. The inclusion of the profits of the
business in the assessment of Shri D. M.
Manasvi is not far fetched or fantastic, as
the learned counsel suggested in the course of
his arguments. According to the partnership
deed, there were four adult partners. If
three out of these four were dummies the only
real and effective partner was Shri D. M.
Manasvi. The three minors who were admitted
to the benefits of the partnership were his
grand children. The accumulated profits while
the business was run in the guise of a firm
were taken over by Shri D. M. Manasvi for use
according to his own sweet will. The final
disposition of the profits was made only after
he shed the disguise and became the sole
proprietor of the business and the manner
in which the funds were ultimately channelised
into the investment in the company in which
his family was interested in the name of his
son Ravindra only adds the finishing touch to
the scheme. We would, therefore, confirm the
orders of the Income Tax authorities refusing
registration to the firm for all the three
assessment years in question.”
It would thus follow that the Tribunal came to the
conclusion on the basis of relevant evidence that the
business of Kohinoor
397
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 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, West Bengal I v. Anwar Ali(1) wherein the
relevant head-note which is based upon the observations in
the body of the judgment, reads as under:
“Proceedings under section 28 of the Income
Tax Act, 1922 are penal in character. The
gist of the offence under section 2 8 (1) (c)
is that the assessee has concealed the
particulars of his income or deliberately
furnished inaccurate particulars of such
income and the burden is on the department to
establish that the receipt of the amount in
dispute constitutes income of the assessee.
It there is no evidence on the record except
the explanation given by the assessee, which
explanation has. been found to be false, it
does not follow that the receipt constitutes
his taxable income. It would be perfectly
legitimate to say that the mere fact that the
explanation of the assessee is false does not
necessarily give rise to the inference that
the disputed amount represents income. It
cannot be said that the finding given in the
assessment proceedings for determining or
computing the tax is conclusive. However, it
is good evidence. Before penalty can be
imposed the entirety of circumstances must
reasonably point to the conclusion that the
disputed amount represented ,income and that
the assessee had consciously concealed the
particulars of his income or had deliberately
furnished inaccurate particulars.”
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
(1) [1970] 76 I.T.R. 696.
398
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.
Reference has also been made to the observations in the case
of Commissioner of Income Tax, Madras v. Khoday Eswarsa and
Sons (1) that penalty cannot be levied solely on the ‘basis
of the reasons given in the original order of assessment.
It is, however, not necessary to go into this aspect of the
matter because the penalty in the present case has not been
levied solely on the basis of the reasons given in the
original order of assessment. The Tribunal in this respect
has mainly taken into account the facts brought to light by
the order made in appeal arising out of the refusal of the
Income Tax authorities to register Kohinoor Mills.
As a result of the above, we dismiss the appeals with costs.
One hearing fee.
K.B.N. Appeals dismissed.
(1) [1972] 83 I.T.R. 369.
399