1. This appeal by the assessee, against the imposition of penalty under Section 271(1)(c) read with Section 274 of the Income-tax Act, 1961 ('the Act') by the IAC for the assessment year 1965-66, raises a very interesting question of law. But before we record and proceed to consider the question of law raised in this appeal, we would, in brief, record the facts leading to it.
2. The assessee, Seth Panchhi Ram & Co., Manali is assessed in the status of a HUF and for the assessment year 1965-66, its original assessment was completed under Section 143(3) of the Act on 17-3-1970 at a total income of Rs. 1,02,300 on the basis of a return dated 7-8-1965 declaring income of Rs. 11,09,350 which was however, revised to Rs. 89,318 on 10-8-1967. On the basis of that assessment, a penalty under Section 271(1)(c) was levied by the IAC on 24-3-1972. The said original assessment order came up in appeal to the Tribunal and the Tribunal by its order in IT Appeal No. 1069 of 1970-71, dated 5-11-1973, set aside the assessment with directions to the ITO to make a fresh assessment in accordance with law. The penalty imposed by the IAC under Section 271(1)(c) on the basis of the original assessment was also set aside by the Tribunal by their order in IT Appeal No. 334 of 1972-73, dated 10-1-1974.
3. The ITO completed the fresh assessment, which may be for the sake of distinction, called de novo assessment, on 30-9-1974. In this assessment he once again determined the income of the assessee at Rs. 1,02,300 and further held that the assessee had 'concealed income from karyana shop by alteration and manipulation in the account books' and 'also did not disclose any income from contract business in the original return filed by the assessee' and, therefore, a notice under Section 274 read with Section 271(1)(c) has been issued. Since the penalty imposable exceeded the statutory limit prescribed for the ITO, the penalty proceedings were referred to the IAC. In the meantime, the de novo assessment travelled up before the appellate authorities and finally, on 21-1-1977 in IT Appeal No. 533 of 1975-76, the Tribunal dismissed the appeal of the revenue against the order of the AAC dated 16-6-1975. The impugned penalty, now before us in appeal, was imposed by the IAC on 23-5-1977, i.e., after the order of the Tribunal dated 21-1-1977.
4. Before us now, the learned counsel for the assessee has specifically given up the case on merits. Hence, we don't involve ourselves on facts. He, however, submitted that the order of penalty made by the IAC is bad in law. Firstly, because it is barred by limitation on the ratio of the Andhra Pradesh High Court judgment in the case of Addl. CIT v.N.V. Ganapathi Rao [1978] 115 ITR 277. It was submitted that the period of limitation of two years prescribed under Section 275 of the Act, the language of which is clear and mandatory, applies not only to the proceedings which were completed for the first time by the ITO but also to proceedings that ensue pursuant to the remand order passed by the appellate authority remanding the matter to the lower authorities. The learned counsel for the assessee further submitted that the intendment of the Legislature behind the prescription of two years of limitation is to ensure completion of penalty proceedings, which are in the nature of quasi criminal proceedings, with least possible delay. The fact that the Act provides for exclusion of time in certain circumstances enumerated under Section 153(3) of the Act for the purpose of computation of limitation for the assessment or reassessment proceedings under the said section, while it fails to provide such exclusion of time under Section 275, fortifies the above view.
5. It was, thus, submitted that the penalty imposed by the IAC on 23-5-1977 was beyond the period of two years after the end of the financial year in which the original assessment was completed on 17-3-1970. Since the penalty was imposed beyond the statutory period of limitation, it is ab initio void.
6. The learned counsel for the assessee made an alternative (second) submission that it was only the ITO who could levy the penalty and not the IAC because it is the date of assessment which determines as to who is the competent authority for imposition of penalty and not the date of filing of the return.
7. These submissions were opposed by the revenue. It was submitted that the contention regarding limitation is absolutely untenable because the penalty imposed by the IAC is on the basis of the assessment made de novo on 30-9-1974 and it is within the time limit prescribed under Section 275, taking into consideration the order of the Tribunal dated 21-1-1977 in IT Appeal No. 533 of 1975-76. In this regard, the learned departmental representative invited our attention to the provisions of Sub-section (2A) of Section 153 which was inserted by Section 31 of the Taxation Laws (Amendment) Act, 1970, with effect from 1-4-1971. It was pointed out that this sub-section makes it clear that notwithstanding anything contained in Sub-sections (1) and (2) of Section 153, prescribing time limit for completion of the assessment and reassessments, in relation to the assessment year commencing of the first days of April, 1971, and any subsequent assessment year, an order of fresh assessment under Section 146 of the Act or in pursuance of an order, under Section 250, Section 254, Section 263 or Section 264 of the Act, setting aside or cancelling an assessment, may be made at any time before the expiry of two years from the end of the financial year in which the order under such section was made. It was also contended that there is nothing like original assessment and a de novo assessment because in law there is only one assessment for one assessment year.
The rights and liabilities of the parties flow from the assessment only when it is completed or finalised. Since an assessment which has been set aside is no assessment at all, the ITO has to proceed afresh in accordance with law. The assessment made by him would give jurisdiction for initiation of penalty proceedings and imposition of penalty with reference to that assessment and the period of limitation cannot be calculated only with reference to, what the learned counsel for the assessee called, an original assessment.
8. It was also submitted that, the jurisdiction once vested in an authority cannot be divested. The ITO, it was submitted, has to levy penalty in the light of the law that existed at the time when the offence for which penalty was levied was committed. The date of filing the return and not the date of completion of assessment; nor the date of satisfaction of the ITO or the AAC, is the date for deciding as to who is the competent authority to levy the penalty on the ratio of the Andhra Pradesh High Court judgment in the case of Addl. CIT v. Dr.
Khaja Khutabuddinkhan [1978] 114 ITR 905. It was submitted, thus, that the position of law is very clear and the assessee has admitted that on merits there is no case. Therefore, the penalty was rightly imposed by the IAC. It may be confirmed.
9. We have given careful thought to the rival submissions. We shall first dispose of the alternative submission of the learned counsel for the assessee that the ITO alone was competent to levy penalty and not the IAC, because it is the date of the assessment that is the material date. This bench, as presently constituted, disposed of appeal in IT Appeal No. 679 of 1976-77 (relate to the assessment year 1969-70) on 20-7-1978 holding the view that it is the date of filing the return that determines competence of an authority for the purpose of penalty and not the date of assessment. This view has found favour with the Andhra Pradesh High Court in the case of Dr. Khaja Khutahuddinkhan.
(supra). In this regard the contention of the revenue has to be upheld and that of the assessee rejected. We proceed further from here.
10. Now coming to the first submission of the learned counsel for the assessee that the impugned order of penalty is ab initio void in law by reason of limitation, we find that limitation prescribed under Section 275 as substituted by Section 50, Taxation Laws (Amendment) Act, 1970, with effect from 1-4-1971 is as under: 275. Bar of limitation for imposing penalties.--No order imposing a penalty under this Chapter shall be passed-- (a) in a case where the relevant assessment or other order is the subject-matter of an appeal to the Appellate Assistant Commissioner under Section 246 or an appeal to the Appellate Tribunal under Sub-section (2) of Section 253, after the expiration of a period of-- (i) 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, or (ii) six months from the end of the month in which the order of the Appellate Assistant Commissioner or, as the case may be, the Appellate Tribunal is received by the Commissioner, whichever period expires later; (b) in any other case, after the expiration of two years from the end of the financial year in which the proceedings, in the course of which an action for imposition of penalty has been initiated, are completed.
This section has an Explanation which was substituted by Section 66 of the Taxation Laws (Amendment) Act, 1975, with effect from 1-4-1976 and is as under: Explanation: In computing the period of limitation for the purpose of this section:-- (i) the time taken in giving an opportunity to the assessee to be re-heard under the proviso to Section 129; (ii) any period during which the immunity granted under Section 245H remained in force; and (iii) any period during which a proceeding under this Chapter for the levy of penalty is stayed by an order or injunction of any court, Any analysis of this section indicates that Clause (a) Sub-clause (i) postulates a bar of limitation, for imposition of penalty, of two years from the end of the financial year in which the proceedings, in the course of which action for impostition of the penalty has been initiated, are completed. Under Clause (a) Sub-clause (ii) the period of limitation is extended by six months from the end of the month in which the order of the AAC or, as the case may be, the Tribunal is received by the Commissioner. Now the contention of the learned counsel for the assessee before us was that he is not at all concerned with Clause (a) of this section. His submission was that this case is covered by Clause (6) only and according to him, this clause covers any other case except the cases covered under Clause (a) and in the cases falling under Clause (b), no order imposing a penalty shall be passed after the expiration 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. According to him, the proceedings in the course of which action for imposition of penalty has been initiated in the case of the assessee is the assessment made on 17-3-1970 determining the total income at Rs. 1,02,300. In other words, the limitation, according to him, has to be seen with reference to the original assessment order and nothing else. To our mind, this does not appear to be in accordance with the provisions of law.
11. A careful analysis of Section 275 shows that under Section 275(a)(i), the period of two years limitation will apply absolutely if the further period of six months, available under Clause (ii) from the end of the month in which the order of the AAC or, as the case may be, the Tribunal, is received by the Commissioner, ends within the 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, were finalised.
12. However, if an assessment is taken up in appeal before the AAC or the Tribunal and either of these appellate authorities gives a decision which is received by the Commissioner on a date (end of the month in which order is received) which either falls within a period of two years or beyond the period of two years mentioned in Clause (i) the limitation is extended by six months which may take the bar of limitation either partly or wholly, beyond the 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 taken, were completed.
13. This clearly shows that the bar of limitation for imposition of penalty in case of contested assessments varies depending upon the date of receipt by the Commissioner of the decision of the appellate authority before whom the assessment is contested. Thus, if the AAC or the Tribunal decides an appeal and the decision is received by the Commissioner beyond the period of two years and there are proceedings pending by way of penalty initiated at the time of assessment, these proceedings can be finalised or closed or brought to an end within a period of six months from the end of the month in which the order of the respective appellate authority is received by the Commissioner.
14. In the case of the assessee, the original assessment made on 7-3-1970 was set aside by the Tribunal by their order in IT Appeal No.1069 of 1970-71 dated 5-11-1973 and as such there was no assessment on the basis of which penalty could be imposed. Therefore, the penalty levied by the IAC on 24-3-1972 was also set aside by the Tribunal in IT Appeal No. 334 of 1972-73 dated 10-1-1974. Thus, the proceedings with reference to which the bar of limitation could apply under Section 275(a) in the case of the assessee had ceased to exist and the penalty emanating therefrom had also been set aside by the Tribunal on 10-1-1974.
15. It is now well settled that once an assessment is set aside, the assessment is at large and the rights of the parties are the same as would flow to them as if the ITO proceeds to make the assessment right from the time of filing the return. This is subject only to the directions issued by the appellate authority. In these proceedings, the ITO may disregard his own previous findings, may take into account materials not previously considered or existing and even tax income not originally assessed. The fresh assessment could be made without any time limit under the cognate provisions of the Indian Income-tax Act, 1922 ('the 1922 Act') but the 1961 Act now provides and prescribes time under Section 153(2A) from 1971. The assessment made by the ITO on 30-9-1974 was, therefore, an assessment in which the ITO could take any action that he thought fit and that was in accordance with law as he could do when he made the first assessment on 17-3-1970. In the fresh or de novo assessment, the ITO has initiated penalty proceedings that culminated into the imposition of penalty which is now under appeal before us. This penalty was levied by the IAC on 23-5-1977. The Tribunal dismissed the quantum appeal by the revenue in IT Appeal No.533 of 1975-76 dated 21-1-1977. None of the sides has brought to our notice when this order of the Tribunal was received by the Commissioner but it is clear that the order of the penalty imposed by the IAC was apparently within the period of six months envisaged in Section 215(a)(ii). We, therefore, see no reason why this penalty did not suffer from a bar of limitation of time. It cannot be held as a penalty ab initio void because of limitation.
16. The learned counsel for the assessee submitted that the case of the assessee is covered by Section 275(6). Now Section 275 providing for a bar of limitation for imposition of penalty talks of the penalty imposable 'under this Chapter'. This Chapter is XXI of the Act and has facsiculus of sections starting from 270 to 275. The penalties provided under this Chapter are for failure to furnish information regarding securities, etc. (Section 270), failure to furnish return, comply with notices, concealment of income, etc. (Section 271), failure to keep, maintain or retain books of account, documents, etc. (Section 271A), failure to give notice of discontinuance (Section 2.72), failure to answer questions, sign statements, allow inspection, etc. (Section 272A), failure to comply with the provisions of Section 139A (Section 272B), furnishing of false estimates of, or failure to pay, advance tax (Section 273), etc. Thus, it would be seen that when Section 275 specifies penalty imposable under Clause (a), it confines the sphere of this penalty to penalty based upon and emanating from an assessment.
The Legislature has provided limitation for imposition of penalty in respect of other cases as well as the Chapter contains, as noted supra, a number of penalties which need not be based upon or referrable to an assessment order. These are apparently the penalties which will be covered under Clause (b). It has not been shown to us, on the above facts, as to how the case of the assessee will be carved out as an exception from the clear provision applicable to it under Section 275(a). This contention is, therefore, not maintainable and is rejected.
17. The learned counsel for the assessee has relied on the ratio of the Andhra Pradesh High Court judgment in the case of N.V. Ganapathi Rao (supra). In this case, the assessment for the assessment year 1955-56 in respect of the assessee, a HUF, was completed on 31-1-1956. While disposing of the appeal filed by the assessee for the assessment year 1956-57, the Tribunal noticed that there was an escapement to the tune of Rs. 16,500 in the assessment year 1955-56 and directed the ITO to take necessary action. Pursuant to the said direction, the ITO reopened the proceedings under Section 147(a) of the Act for the assessment year 1955-56 and in reply to the notice under Section 148 of the Act, the assessee filed a return on 24-9-1963, admitting a sum of Rs. 44,401 by adding the said sum of Rs. 16,500 which had been found to have escaped earlier. The ITO, by his order dated 27-1-1965, completed the assessment by determining the income of the assessee at Rs. 1,46,701 which included the said sum of Rs. 16,500. On appeal, the AAC upheld the inclusion of Rs. 16,500. Thereafter, an order was passed by the IAC levying a penalty of Rs. 6,960 under Section 271(1)(c) on 16-12-1969.
The appeal preferred against the said order was allowed by the Tribunal on the ground that it was barred by limitation under Section 275.
18. On a reference, the Hon'ble High Court held that the period of limitation of two years prescribed under Section 275 the language of which is clear and mandatory, applies not only to the proceedings which were completed for the first time by the ITO but also to the proceedings that ensue pursuant to the remand order passed by the appellate authority remanding the matter to the lower authorities.
During the course of the judgment, their Lordships had considered, inter alia, the provisions of Section 153(3) providing for exclusion, for the purposes of computing the period of limitation for assessment or reassessment, the time taken in reopening the whole or in part of the proceedings, etc. Thereafter, they have observed that the Legislature did not provide any period of limitation for the imposition of penalty under Section 28 of the 1922 Act and, similarly, the Legislature has not provided under Section 34 of the 1922 Act for excluding any period while computing the period of limitation in regard to cases where the income had escaped assessment under the 1922 Act.
They also noticed that while no time of limitation was prescribed under Section 28, a period of limitation of two years is prescribed under the Act. Therefore, the question that they considered was as to what could be the legislative intent in fixing the period of limitation under Section 275 and not fixing the period of limitation under Section 28 and similarly, excluding certain periods for the purposes of computing the period of limitation under Section 153 and not making any provision for excluding certain periods for purposes of computing the limitation in Section 275. According to the Hon'ble High Court, it was clear that it was the intention of the Legislature that the penalty proceedings, which are essentially in the nature of quasi-criminal proceedings, should be completed with the least possible delay. The object in enacting Section 271 was to provide deterrent against recurrence of default on the part of the assessee. The section is penal in the sense that its consequences are intended to be an effective deterrent which will put a stop to practices which the Legislature considers to be against the public interest. The intention of the Legislature, therefore, according to the Hon'ble High Court, was obvious and plain in fixing the period of two years limitation for imposition of penalty.
19. The scheme of time limit for completion of the assessments under Section 153 is that in Sub-section (1) a graduated period of limitation is applied to assessments that shall be made under Section 143 or Section 144. Sub-section (2) indicates limitations in respect of the assessment or reassessment or recomputation that shall be made under Section 147. Sub-section (2A) of Section 153 was introduced by the Taxation Laws (Amendment) Act, 1970, with effect from 1-4-1971 and the position in law is that in relation to assessment years up to and including the assessment year 1970-71, there is no time limit for making a fresh assessment under Section 146 or in pursuance of an appellate or revisional order, setting aside or cancelling an assessment. But in relation to the assessment year 1971-72 and subsequent assessment years, a fresh assessment in the cases covered by Sub-section (2A) is to be made within a period of two years from the end of the financial year in which the order under Section 146 cancelling the best judgment assessment is passed by the ITO or the appellate order of the AAC or the Tribunal is received by the Commissioner or the revisional order is passed by the Commissioner himself. Sub-section (3) provides exceptions to the limitation rule subject to the provisions of Sub-section (2A). There are Explanations added and Explanation 1 which provides for exclusion in computing the period of limitation for the purposes of Section 153. It is clear that limitation for completion of the assessments only is provided because penalty for concealment, as is the case before us in appeal, is nothing but a superstructure based on the assessment and if this assessment does not exist, ordinarily, the superstructure cannot survive.
Therefore, to our mind, when the Legislature provided the limitation of time for completion of various types of assessments, it did not consider it necessary to repeat that limitation for the purposes of imposition of penalty because it had already made a comprehensive scheme of limitation for the completion of penalties under Section 275 based upon the finality of the assessment. Section 275 links the period of limitation with the assessment and, therefore, once the assessment is made, the limitation for the purposes of imposition of penalty becomes referrable to that assessment. Thus, with due respect, we think that there was no necessity for providing for limitation for imposition of penalty in Section 153 and this aspect of the matter was, it appears, not projected in proper focus for their Lordships consideration. Therefore, the argument that the absence of a provision for extending the period of limitation for imposition of penalties, as against a specific provision for extension for the assessments under Section 153, indicates the Legislature intent to place a bar of limitation of two years for imposing penalty in all cases, including penalties emanating from set aside assessments, to our mind, does not exist.
20. We have analysed the provisions of Section 275 and it is clear therefrom, that penalty in the case of the assessee in the original assessment proceedings had come to a naught. Thereafter, when the ITO made fresh assessment, which may be called assessment made de novo, the entire process of law applicable to assessments and penalties was reactivated. In this process, the authorities concerned had once again the same powers as vested in them when the assessment was originally finalised. We have seen supra that the IAC imposed the penalty within a period of six months from the receipt by the Commissioner, of the order of the Tribunal in this case. The penalty is, therefore, within the period of limitation.