RAMAPRASADA RAO J. - The revenue sought for a reference and, consequently, the following question of law has been referred under section 256(1) of the Income-tax Act, 1961, for our decision :
'Whether, on the facts and in the circumstances of the case, the Appellate Tribunal was right in law in cancelling the penalty of Rs. 52,747 levied under section 271(1)(a) of the Income-tax Act, 1961, for the assessment year 1961-62 ?'
Shri Janakidas Baijnath of Nepal, hereinafter referred to as the assessee was a non-resident. On February 11, 1963, the Income-tax Officer issued a notice under section 163 of the Income-tax Act to the principal officer of the Express Newspapers (Private) Ltd., Madras (hereinafter referred to as the 'representative-assessee'), proposing to treat it as the agent of the assessee for the assessments to be made against the non-resident for the assessment years 1960-61 to 1962-63. He called for objections and gave time till February 20, 1963. No representations were made by the representative-assessee or, in common parlance, the agent. On February 27, 1963, the Income-tax Officer served on the agent a notice under section 139(2) read with section 148 of the Act calling upon the agent to file returns of the income of the assessee for the assessment year 1961-62. The representative-assessee filed such a return on January 28, 1965. The assessment was completed by the officer on February 27, 1965. Contemporaneous with the completion of the assessment, the officer issued a notice to the agent to show cause why penalty proceedings should not be initiated and levied penalty under section 27(1)(a) of the Act for filing returns belatedly. The agent's reply was that he could not file the returns earlier, as he had to be instructed by his principal and that he had to obtain some particulars from him and also pleaded that due to unsettled political conditions prevalent in Nepal, the delay has occurred. The Income-tax Officer has rejected this explanation and levied a penalty of Rs. 52,747. He calculated the penalty at 2 per cent. of the tax due for each month of default for a period of 22 months. The Appellate Assistant Commissioner on appeal confirmed the penalty. On a further appeal by the representative-assessee, the Tribunal was of the view that the contention of the representative-assessee had to be accepted. In the peculiar circumstances, the Tribunal held that the representative-assessee could only be liable for tax and not for penalty. It was in those circumstances the above question of law has been referred to us.
Two points were urged before the Appellate Tribunal. Firstly, it was contended that the agent cannot be assessed without being appointed as such as required under the provisions of the Act and, in any event, an agent cannot at all be penalised. The revenue's contention was that if there is no dispute about the status of a resident as a representative-assessee of a non-resident, then there is no obligation on the part of the revenue to pass an order recognising such status and appointing the resident as the agent of the non-resident. In the alternative, it was pleaded that by the issuance of the notice under section 148 read with section 139(2) the provisions of law have been in substance and in effect complied with and as the agent has filed the returns pursuant to the said notice, the agent is estopped from contending otherwise. Whether an agent could be assessed without being appointed as such under the provisions of the Act, is the primary question which looms large in this case. Section 5 of the Act defining the scope of the total income includes within it any income of any previous year of a person, who is resident, but which income accrued or arose to him outside India during such year. Thus, a non-resident is assessable on the income accruing or arising to him in India. Section 9(1) of the Act explains the scope of the expression 'income deemed to accrue or arise in India'. All income accruing or arising whether directly or indirectly through or from a business connection in India, etc., is one such head of income which is deemed to accrue or arise in India. One other head of income, which would come under the deeding provision provided in section 9 is through the transfer of a capital asset situate in India. There is no dispute in the present case that such income to the non-resident arose by a transfer of a capital asset situate in India. An agent of a non-resident accepted and appointed as such, is called a representative-assessee of such a non-resident. Under section 160, a representative-assessee is defined. It means in respect of the income of a non-resident specified in clause (i) of sub-section (1) of section 9, the agent of the non-resident including a person, who is treated as an agent under section 163. The other sub-clauses in section 160 are not relevant for our consideration. Section 163 is a residuary section providing for the contingency when in certain circumstances certain persons would be treated as an agent of a non-resident. One such person is, who is employed by and on behalf of the non-resident; the others may have business connections with the non-resident or from whom or through whom the non-resident is in receipt of any income directly or indirectly or who is a trustee of the non-resident. It also includes such other person, who has acquired by means of a transfer a capital asset in India. Certain exceptions also are created in section 163 in the matter of such statutory treatment of person as agents of non-resident. We are not, however, concerned with them. Under section 246 appearing in Chapter 20 of the Act appealable orders are enumerated. One such order which is appealable under section 246(g) is an order made under section 163 treating the representative-assessee as agent of a non-resident.
In the instant case, the facts disclosed that the representative-assessee as agent of non-resident was called upon to furnish particulars of the income of the non-resident and he was even apprised of such an obligation by a notice issued to him under section 148 read with section 139(2) of the Act. But, it is not in dispute that no order was passed treating the representative-assessee as the agent of the non-resident. The argument of the department is that there is no specific legal obligation on the part of the concerned statutory authority to pass an order declaring the status of the representative-assessee as agent, when by his conduct such representative-assessee accepted the status by filing the return. It is said that the question of passing an order under section 163 would arise only when there is a dispute about such a status. The question, therefore, is as to how far the statute by necessary implication casts legal obligation on the assessing authority to pass an order recognising the status of a representative-assessee as such. It may at once be stated that under the 1922 Act, there was no specific provision for appeal against a situation under which the status of a person recognised and treated as a representative-assessee. The aggrieved person, in those circumstances, could only agitate the matter in a regular appeal against the order of assessment. Per contra, the present position is that an order treating a person as the agent of a non-resident is made appealable. This specific modification in the Act which created a substantive right of appeal has, therefore, a special significance. The necessity or obligation to pass an order is not dispensed with as contended merely for the reason that the agent did not have or could not have any objection for such representation. Even here, there is a fallacy because the aggrieved person might at the time of the passing of the order which has to be made after hearing him make such representations not only in regard to the recognition of his status as representative-assessee but also bring home to the appropriate authority that any delay caused in the matter of filing of the returns or such other similar laches cannot be attributable to any laches on his part and that there is sufficient cause for the non-furnishing of the returns by him in time, etc. In particular, he would certainly have an opportunity of representing to the concerned authority that the penal proceedings which might follow after the completion of the assessment need not be undertaken, as there are sufficient grounds for the non-invocation of such proceedings. The decision relied upon by the revenue in Commissioner of Income-tax v. Nawal Kishore Kharaiti Lal [1938] 6 ITR 61 cannot help them. Considering a similar provision under the earlier Act, the Privy Council said :
'Under the Indian Income-tax Act it is not necessary to the validity of a notice calling for return of income under section 23(2), where it is served upon a person as agent of a non-resident under section 43, that it should have been preceded not only by the notice if the intention prescribed by section 43 and by the opportunity of being heard prescribed by the proviso thereto, but also by an order declaring the person to be the agent of the non-resident person or treating him as such agent. It is open to the Income-tax Officer under the Act to postpone any final determination of the question of agency until the time comes to make an assessment under section 23 of the Act.'
In our view, the ratio of this case cannot support the revenue for the reason that the Privy Council propounded the principle that the final determination of the question of agency has to be done, but it could be postponed till the final assessment order is made under the Act. Incidentally the principle in Commissioner of Income-tax v. Nawal Kishore Kharaiti Lal [1938] 6 ITR 61 also contemplates an opportunity being given to the representative-assessee to make his representations not only against the proposed assessment but also against his treatment as a representative-assessee as much. Equally there is a fallacy in the contention that no order recognising an assessee as an agent is necessary, as it is not expressly provided. By way of a comparison it is seen that the Income-tax Officer has the power, on sufficient cause being shown, to cancel an ex parte order of assessment made under section 144. There are no express words in section 146 which compel the income-tax Officer to pass any order. Section 246(d) provides for a right of appeal against it. Thus, it is seen that there are provisions in the Act which obligate the income-tax authorities to act in a particular situation and pass an order but there is no specific literature in those sections compelling them to make a written order as such. But, such orders are made appealable. It is this provisions as to right of appeal which creates the necessity to pass an order for a right of appeal cannot be lightly treated and dealt with. A right of appeal is one of the modes by which a decision which could otherwise be final can be challenged. It is not a procedural right but a substantive right. Indeed, it is a vested right. And such a right to enter the superior court accrues to the litigant and exists as on and from the date the lis commences, and although it may be actually exercised when the adverse situation comes into play, the record must disclose that such an order has been passed so that the aggrieved person may exercise his vested right of appeal and obtain redress. In our view, therefore, a written order treating the representative-assessee as the agent of the non-resident is necessary. Even is a person without being called upon to submit a return voluntarily sub-mits a return as agent of a non-resident, the necessity to pass an order recognising him as such agent cannot be dispensed with. The case in Jadavji Narshidas and Co. v. Commissioner of Income-tax : [1957]31ITR1(Bom) is distinguishable on the ground that it arose under the Act of 1922 which did not provide for a right of appeal against such treatment orders. In Commissioner of Income-tax V. Kanhaya Lal Gurmukh Singh a similar question arose which was in fact decided by a majority of judges as there was a difference of opinion. The learned judges in that case said (page 483) :
'It is, therefore, necessary under this (section 163(2)(i) of 1961 Act) sub-section not only to issue a notice of his intention to treat the person as the agent of a non-resident, but to pass an order treating him as an agent of the non-resident after hearing him.'
They were of the view that the status as an agent of the non-resident must be determined before the issue of notice under section 148. They also refer to section 249(2) of the Act which provides that an appeal should be presented against such a recognition order within 30 days from the date on which the intimation of the order treating him as agent is served. No doubt in that case the assessee made a return in protest. But that would not make any difference. We are not called upon in this case, however, to hold whether an order of assessment which is made without serving a recognition order on the representative-assessee is void and unenforceable. We are, however, concerned in the instant case with the limited question whether the levy of penalty on the representative-assessee is justified.
It is very well established that the penal proceedings which begin at the close of the assessment proceedings are quasi-penal in nature and unless an element of contumaciousness or a deliberate avoidance of law is brought home, such penalties should not be lightly imposed. It is conceivable in a case like this that the contentions of the assessee that he could not file the returns in time because he was not fully instructed and since there were political disturbances in Nepal, could have urged successfully before the appellate authority under section 246(g) of the Act, so that even at that time he could have made it clear that his inaction in not filing the returns in time was not deliberate. In fact, he could have successfully invoked the sympathetic exercise of judicial discretion by the appellate authority, who could have made certain observations even at that time setting out the limits within which such person could be treated as the agent of a non-resident.
Mr. Rangaswamy does not dispute the above possibility. It is, therefore, possible to conceive that even the representative-assessee might have made it clear that penal proceedings cannot be invoked as against him in the peculiar circumstances of this case. This right was denied to him. He did not have that opportunity of placing his case. It is in this light the levy of penalty by the revenue has to be considered. The ground on which the penalty is sought to be imposed in the present case is that the representative-assessee has without reasonable cause failed to furnish the return within the time prescribed. We are of the view that a consideration of the cause of delay during the course of the penalty proceedings initiated would be to place the cart before the horse. We have also seen that under section 161, the representative-assessee is subjected to the same responsibilities and liabilities as the non-resident, as if the income was received by him. Section 161 as such refers to taxes and not to any penalty. Even section 2(43), prior to its amendment on April 1, 1965, refers only to income-tax and super-tax chargeable under the Act. Having regard to the express provisions which create a vicarious liability on the representative-assesses to be liable for tax, as it is popularly understood, the necessity to provide him with an order treating him as agent of the non-resident becomes all the more important. This would enable him to place his difficulties in the matter of the delays in submission of his return even in the appeal under section 246(g) of the Act and secure a limited relief. He could have by initiating and participating in such an appeal relieve himself of the liability to pay penalty for no fault of his. Though the words 'assessment proceedings' are comprehensive enough, yet having regard to the two distinct chapters provided in the Act dealing with the assessment proceedings and penalty, the significance which such a dichotomy projects has to be borne in mind. Under the 1961 Act unlike the Act of 1922, this distinction in placing the two proceedings in two distinct compartments and chapters gives the impression that one is not telescoped with the other but they stand on their own. If the assessment proceedings and penalty proceedings have distinct purpose to serve, then the procedure contemplated in the Act and the substantive rights given to the assessees in the course of such enquiries have to be literally complied with. Any non-compliance of such a provision which would result in the violation of a vested right in an assessee is certainly a factor which has to be taken into consideration to find whether the penalty which is imposed generally in the exercise of the quasi-penal jurisdiction of the taxing authority could be justified. It is by now established that the penalty is not additional tax. There is no finding by the revenue in the instant case that there has been supine indifference or a wilful default on the part of the representative-assessee in the matter of the submission of the returns. His explanation that he was not sufficiently instructed before he could file the return and that there was some political disturbance in Nepal where his residence was, was rejected per se. Equally, it is clear that such rejected of the explanation of the representative-assessee without a further probe and finding, that such explanation is the resultant of the design to escape penalty is not justifiable either. This is not a case in which the assessee avoided his responsibility. But he explained the delay from which situation he could have got out even at the stage of appeal provided for in section 246(g). In the absence of any deliberateness or a conscious avoidance of responsibility and having regard to the peculiar circumstances of this case that the assessee was denied a legitimate opportunity earlier to escape from the clutches of penalty we are of the view that the penalty was not properly levied. At no time an order appointing the representative-assessee as an agent has been made. There has been, therefore, a departure from the express norm set by the statute after the enactment of the 1961 Act. That the assessment proceedings are not disputed cannot be only foundation for the purpose of levying penalty which provision could be thought of only under a set of circumstances laid down in the chapter dealing with penalty proceedings.
Having regard to our opinion as above, we answer the question in favour of the representative-assessee and against the department with costs. Counsel's fees Rs. 250.