The Hyderabad Income-tax Act was kept alive for the purposes of levy, assessment, and collection of income-tax, including the imposition of a penalty, in respect of periods prior to April 1, 1950.

Judgment

SHAH, J. : M/s. Bhikaji Dadabhai & Co. - hereinafter called the assessees - owned an oil mill at Khammamath in the area of the former State of Hyderabad. For the year of assessment Fasli 1357 (October 1, 1946, to September 30, 1947), the assessees returned an income of Rs. 50,384/-. The income-tax Officer found that the books of account maintained by the assessees were unreliable and by his order dated February 10, 1950, he assessed their total income at Rs. 1,63,131/-. The Income-tax Officer had, before finalising the assessment, issued on December 22, 1949, a notice to the assessees under S. 40 of the Hyderabad Income-tax Act requiring them to show cause why penalty should not be imposed upon them and by order dated October 31, 1951, directed the assessees to pay by way of penalty Rs. 42,000/- in addition to the tax. This order was confirmed in appeal by the Appellate Assistant Commissioner. In appeal, the Income-tax Appellate Tribunal observed that by virtue of the provisions of S. 13(1) of the Indian Finance Act, 1950, the Hyderabad Income-tax Act had ceased to have effect and as the power to impose penalty under S. 40 of the Hyderabad Income-tax Act was not saved, the order of imposing penalty was without jurisdiction. The Tribunal observed :

"The Income-tax Officer may have been in error in imposing the penalty, but there was no appeal against the order of the Income-tax Officer to the Appellate Assistant Commissioner. Section 42(1) of the Hyderabad Income-tax Act gives a right to an assessee to appeal if he objects to an order under S. 40 made by an Income-tax Officer. Section 40 ceased to have effect. There can therefore be neither an order under S. 40 nor an appeal against the order if an order has been wrongly made. The remedy of the assessee lies elsewhere, and not by way of an appeal to the Appellate Assistant Commissioner, and on that view dismissed the appeal. At the instance of the assessees, the following questions were referred by the Tribunal to the High Court of Judicature at Hyderabad :

1. Whether on 31-10-1951, the Income-tax Officer, Warrangal Circle had the power to impose a penalty under S. 40(1) of the Hyderabad Income-tax Act in respect of the assessment for the year 1357F. ?

2. Whether the assessee had a right to appeal against the order of the Income-tax Officer imposing the penalty ?

3. If the Appellate Assistant Commissioner did not have jurisdiction to hear the appeal, whether the order of the Appellate Assistant Commissioner is a nullity and therefore the order of the Income-tax Officer erroneous, though it may stand until it is set aside by a competent authority?

2. The High Court answered the first and the third questions in the negative and the second question in the affirmative. The High Court observed that the Appellate Assistant Commissioner had power to entertain the appeal in which the question of the power of the Income-tax Officer to impose a penalty was challenged, and the decision of the Appellate Assistant Commissioner was not without jurisdiction. The High Court also proceeded in a petition separately filed by the assessees to direct the Income-tax Appellate Tribunal to set aside the order of the Income-tax Officer imposing a penalty as a logical consequence of the view the Tribunal had taken regarding the absence of power in the Income-tax Officer to levy a penalty. Against the order passed by the High Court, this appeal with special leave is preferred.

3. We are in agreement with the High Court that the appeal to the Appellate Assistant Commissioner was competent. Even if the Income-tax Officer committed an error in passing the order imposing penalty because the conditions necessary for invoking that jurisdiction were absent, an appeal against his order on the ground that he was not competent to pass the order did lie to the Appellate Assistant Commissioner. The Appellate Assistant Commissioner is under the Act constituted an appellate authority against certain orders of the In