ORDER
D. MANMOHAN, J. M. :
This appeal filed by the assessee-company relates to the asst. yr. 1987-88.
2. The assessee-company initially filed a statement of advance-tax in Form No. 28A on 16th June, 1986, estimating the income at Rs. 6,08,050. On 12th Sept., 1986, it filed an estimate in Form No. 29 for a sum of Rs. 9,00,000. This estimate was revised on 15th Dec., 1986, by filing a fresh From No. 29 estimating its income at Rs. 9,78,000. Finally, the return of income was filed disclosing an income of Rs. 16,21,229 and the tax payable was Rs. 8,91,667. The assessment was finalised on total income of Rs. 17,42,915.
3. In view of the above facts, the AO has initiated penalty proceedings by issuing a show-cause notice under s. 273(1)(a) of the Act. The AO observed that the assessee has not responded to the first notice and in response to the second notice, the authorised representative did not file any written submission. He was, therefore, of the opinion that the assessee-company has nothing to say for non-payment of advance-tax. He thus imposed penalty of Rs. 64,778 under s. 273(1)(a) of the Act.
4. Aggrieved by the said order, the assessee has taken up the matter to the CIT(A) wherein it was contended (i) that full effect of the TDS was not given credit and hence, the calculation of penalty is not in accordance with law; (ii) the assessee was not given proper opportunity of being heard, inasmuch as the second notice dt. 29th Oct., 1990, was served on the assessee barely two days before the date fixed for hearing and, hence, the assessee could not file any written explanation. However, the oral explanation submitted by the authorised representative was not considered by the AO; (iii) penalty proceedings were initiated in terms of s. 273(1)(b) but the AO could not ultimately levy penalty in terms of s. 273(1)(b) and, hence, the penalty was levied under s. 273(1)(a). As such, the assessee had no opportunity to explain its case in terms of the alleged default under s. 273(1)(a) of the Act, and hence, the penalty proceedings are invalid in law; and (iv) the estimates filed by the assessee are bona fide as this is the second year of the assessees business of execution of contracts. The first year consists of a period of 6 months only and as a result, the assessee-company was unable to make a more realistic estimate for its income for the year under consideration in view of the nature of its business activities.
5. The CIT(A) has called for the information from the AO with regard to the claim of the assessee that TDS was not properly given credit. As no reply was received from the AO, the matter was proceeded with, of course, by giving a direction to the AO to redetermine the assessed tax.
6. With regard to the second contention, i.e., no reasonable opportunity was afforded by the AO, as the penalty notice was served on the assessee barely two days before the date of hearing, the CIT(A) did not consider the same probably because the explanation of the assessee was reconsidered by him at the appellate stage.
7. With regard to the third contention, i.e., notice was issued under s. 273(1)(b) of the Act whereas the penalty was levied for an altogether different offence, i.e., under s. 273(1)(a) of the Act, the CIT(A) has accepted the claim of the assessee and further observed that since the assessee-company has filed revised estimate on 15th Dec., 1986, the estimate was one within the meaning of s. 209A(4) of the Act, and the penalty should accordingly be levied under s. 273(2)(aa) of the Act.
8. With regard to the fourth contention of the assessee, i.e., reasonable cause for failure to make a more realistic estimate for advance-tax purpose, he held that the explanation given by the assessee is not satisfactory as the revised estimate was filed on 15th Dec., 1986, i.e., exactly a fortnight before the close of the accounting year and the yawning gap between the income returned and the income estimated speaks volume about the mental state of the management of the assessee-company.
9. Further aggrieved, the assessee is in appeal before us. The learned counsel appearing on behalf of the assessee-company has reiterated the submissions made before the first appellate authority. Further, he has submitted that invariably an estimate involves an element of guesswork and so it cannot be accurate. It is contended that penalty proceedings are quasi criminal proceedings and the rules of evidence for the purpose of making an estimate would not apply for the purpose of levy of penalty. He has also submitted that merely because there is an yawning gap between the income returned and the revised estimate filed, the AO or the first appellate authority cannot come to an automatic conclusion that the assessee has committed an offence in filing the alleged untrue statement of advance-tax. He has relied upon the following decisions in this regard :
(a) CIT vs. Orissa Flour Mills (P) Ltd. (1993) 203 ITR 691 (Ori)
(b) Hind Products (P) Ltd. vs. CIT (1980) 121 ITR 903 (Bom)
(c) CIT vs. Birla Cotton Spg. & Wvg. Mills Ltd. (1985) 155 ITR 448 (Cal)
(d) CIT vs. Off Shore India Ltd. (1995) 209 ITR 473 (Cal)
(e) P. V. Kurian vs. ITO (1961) 43 ITR 432 (Kar)
(f) United Asian Trader vs. CIT (1970) 77 ITR 711 (Cal)
(g) Jaipur Metals & Electrical Ltd. vs. CIT (1974) 97 ITR 721 (Raj)
10. He has further highlighted that the penalty proceedings are ab initio void, inasmuch as the penalty proceedings were initiated under s. 273(1)(b) of the Act and obviously because the penalty could not be levied under that section, the penalty was levied under s. 273(1)(a) of the Act. Though the first appellate authority has given a finding that the penalty proceedings were initiated under s. 273(1)(b), instead of quashing the penalty order passed under s. 273(1)(a) of Act [which in itself is not a correct provision as the CIT(A) has ultimately held that the penalty could properly be levied under s. 273(2)(aa) of the Act], he has confirmed the penalty under a different provision without giving a specific notice to the assessee to that effect. Hence, the order of the CIT(A) is bad in law. He also submitted that the penalty proceedings initiated and completed by the AO is invalid in law and is attributable to non-application of the mind on the part of the AO.
11. On the other hand, the learned Departmental Representative submitted that the proceedings initiated under a wrong provision can only be considered as defective and that by itself will not invalidate the proceedings. He has further submitted that s. 292B of the Act deals with curing of such defects and, hence, the penalty levied is in accordance with law. He has also supported the order of the CIT(A).
12. We have heard the rival submissions and also perused the records. At the outset we may observe that the entire exercise carried out by the AO as well as by the CIT(A) in imposing penalty under various provisions of the IT Act is opposed to the principles of natural justice. The first appellate authority has admitted the contention of the assessee that the penalty proceedings were initiated under s. 273(1)(b) of the Act, though the penalty was levied under s. 273(1)(a) of the Act. The Department has not challenged this finding either by filing the appeal or by objecting to the finding of the CIT(A) in the course of hearing before us. It is thus clear that the penalty proceedings were initiated under s. 273(1)(b) of the Act which seeks to levy penalty in a case where the assessee has failed to furnish a statement of advance-tax payable by him in accordance with the provisions of cl. (a) of sub-s. (1) of s. 209A of the Act. Admittedly, the charge on which the show-cause notice was issued has no legs to stand as the assessee was later on found to be not guilty of the said charge. Thus, the very basis for initiation of the penalty proceedings, i.e., issuance of notice under s. 274 of the Act, which is a mandatory proceeding for the purpose of imposing penalty, is wrong. Hence, the penalty notice issued is liable to be ignored. However, the penalty was ultimately levied under s. 273(1)(a) of the Act, whereas no consequent notice was issued on that account. Sec. 274 clearly imposes a duty on the AO to give the assessee a reasonable opportunity of being heard as the section opens with the words “No order imposing a penalty under this Chapter shall be made unless the assessee has been heard”. Penalty proceedings being quasi-criminal in nature, the legislature has guardedly provided in s. 274 of the Act that penalty cannot be imposed without giving an opportunity of being heard. In order to assume jurisdiction for imposing penalty, a notice clearly depicting the charge, on which the penalty is sought to be levied, is a pre-condition. However, as we have explained hereinbefore, though the notice for levy of penalty was issued under s. 273(1)(b) of the Act, no such notice was issued for the purpose of levying penalty under s. 273(1)(a). Apart from the said irregularity, we may further observe that s. 273(1)(a) deals with the matter where the assessee has furnished under s. 209A(1)(a), a statement of advance-tax which he knew or had reason to believe to be untrue. As has rightly been observed by the CIT(A), the assessee-company having filed a revised estimate on 15th Dec., 1986, the said estimate is one within the meaning of s. 209A(4) of the Act and provisions of s. 273(1)(a) have no application to the facts of the case. Thus, not only the initiation of the penalty but also the completion of the penalty proceedings were invalid in law, inasmuch as both the provisions were not applicable to the facts of the case and this clearly shows the non-application of the mind on the part of the AO with regard to the procedure followed by him and the consequent penalty levied. In the case of CIT vs. Smt. Kaushalya (1995) 216 ITR 660 (Bom), their Lordships have held (at page 667) that if the assessee had no knowledge of the exact charge of the Department against him and if the vagueness and ambiguity in the notice can demonstrate non-application of mind by the authority and/or ultimate prejudice to the right of opportunity of hearing contemplated under s. 274, the penalty proceedings are liable to be quashed. The learned Departmental Representative contended that s. 292B is a saving clause and, hence, the defect in the notice should be treated as curable defect. We are unable to appreciate this contention of the learned Departmental Representative. In the case of Sunrolling Mills P. Ltd. vs. ITO (1986) 160 ITR 412 (Cal) at page 416 (of ITR), their Lordships of the Calcutta High Court had considered the ambit of s. 292B wherein they have made the following observations :
“In this case, the ITO has sought to justify his action by taking recourse to s. 292B. This section is intended to ensure that on technical grounds the return of income, assessment, notice or summons or proceeding is not rendered invalid. This section does not empower the ITO to treat a proceeding taken under s. 147(b) as a proceeding under s. 147(a). This is not a mere technicality. It is a question of jurisdiction.”
13. In the instant case, in view of the provisions of s. 274 of the Act, issuance of notice specifying the exact charge against the assessee is mandatory condition and the defect in the said notice cannot be considered as mere technicality as it touches the root of the matter and affects the jurisdiction of the AO in imposing penalty. By respectfully following the judgment cited (supra), we are of the opinion that s. 292B of the Act has no application to the facts and circumstances of the case. We are, therefore, of the opinion that the penalty levied by the AO is invalid. The CIT(A) having admitted that penalty cannot be levied under s. 273(1)(a) ought to have quashed the proceedings instead of directing the AO to recompute the penalty under s. 273(2)(aa) of the Act, inasmuch as this would amount to levy of penalty on an altogether different sub-section without following the mandatory procedure of issuing notice under s. 274 of the Act.
14. We may further point out that under s. 251 of the IT Act, the powers of the first appellate authority vis-a-vis disposal of the penalty appeal, is very limited. It will be useful to reproduce s. 251(1)(b) of the Act :
“in an appeal against an order imposing a penalty, he may confirm or cancel such order or vary it so as either to enhance or the reduce the penalty.
15. On a plain reading of the aforesaid provision, we are of the opinion that the CIT(A) has the power to confirm or cancel the order of penalty or vary the said order so as either to enhance or reduce the penalty. The power to vary the said order to enhance or reduce cannot be extended to impose penalty for the first time under an altogether different sub-clause of s. 273. The crucial words in the aforesaid provision viz., “vary it” and “the penalty” clearly refer to the penalty as imposed by the AO and not a fresh penalty which is imposable upon reconsideration of the matter. Apart from this, we also find on comparative reading of the provisions of ss. 271 and 273 of the Act that the power to impose penalty under s. 273 is only confined on the AO whereas the penalty imposable under s. 271 can be levied also by the CIT(A). Sec. 273 opens with the words “if the AO, in the course of any proceedings in connection with the regular assessment for any assessment year, is satisfied” whereas the opening words of s. 271 reads as “if the AO or the Dy. CIT(A) or the CIT(A) in the course of any proceedings under this Act, is satisfied”. Before parting with this matter, we would like to observe that the CIT(A) has no power to set aside the penalty order for fresh consideration by the AO. As in present case, the direction of the CIT(A) to the AO to redetermine the penalty imposable under s. 273(2)(aa) would amount to setting aside the order of the AO levying penalty under s. 273(1)(a), which is beyond the jurisdiction of the first appellate authority.
16. For the aforesaid reasons, we set aside the order of the CIT(A) and quash the penalty imposed by the AO.
17. The learned counsel for the assessee has filed a copy of the consequential order dt. 8th May, 1992, passed under s. 273(2)(aa) of the Act wherein the AO has recomputed the penalty by taking the correct figure of TDS credit. From the said order, we find that the TDS is Rs. 4,51,916 and the advance-tax paid is Rs. 1,74,400 totalling to Rs. 6,26,316, whereas the tax payable on the returned income is Rs. 8,99,667 and the tax payable on the assessed income is Rs. 8,97,545. Considering the submission of the assessee that the assessee is new to this business being second year of its business operation and also considering the nature of the business, i.e., execution of contract work, the difference between the tax paid in advance and tax payable on the assessed income is marginal and so the assessee cannot be held to have willfully filed a revised estimate showing lesser income. As we have held that the penalty proceedings are invalid in law, we do not wish to deal with this issue in further detail.
18. In the result, the appeal filed by the assessee is allowed.