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1984 Supreme(AP) 136
Andhra Pradesh High Court
Judges : B.P.JEEVAN REDDY, Y.V.ANJANEYULU
Commissioner of Income Tax, A.P. - Appellant
Versus
Chandulal - Respondent
Decided On : 03-27-84
A penalty notice issued under s. 274 of the I. T. Act is not invalid merely because the ITO does not strike out inappropriate portions.
Headnote:
INCOME TAX - Penalty - Notice - Validity - ITO not striking out inappropriate portions - Whether notice invalid - Explanation offered by assessee disbelieved - Whether penalty can be levied - Explanation to s. 271 (1) (c) - Applicability.
Fact of the Case:
The assessee was found to have made money-lending advances of Rs. 8,200 and received a commission of Rs. 1,000, which were not recorded in his books of account. The ITO included the sum of Rs. 9,200 in the assessee's total income and levied a penalty of Rs. 9,200 under s. 271 (1) (c) of the I. T. Act, 1961. The assessee appealed to the AAC, who confirmed the order of the ITO. The assessee then appealed to the Tribunal, which quashed the penalty order on the ground that the penalty notice issued by the ITO was invalid as it did not strike out inappropriate portions.
Finding of the Court:
The court held that the notice issued by the ITO was not invalid merely because the ITO did not strike out inappropriate portions. The court also held that the Tribunal erred in cancelling the penalty proceedings as invalid.
Issues: 1. Whether the penalty notice issued by the ITO was invalid as it did not strike out inappropriate portions? 2. Whether the Tribunal erred in cancelling the penalty proceedings as invalid?
Ratio Decidendi: 1. The notice issued under s. 274 is not prescribed under the rules. It is a notice administratively devised for the purpose of putting the assessee in the knowledge of the fact that the ITO initiated proceedings for levy of penalty in order to enable him to show cause why penalty should not be levied. 2. So long as the object of putting the assessee in the awareness and knowledge of the initiation of the penalty proceedings is accomplished by the issuance of a notice, the question of invalidity does not arise on account of either inappropriate language in the notice or on account of any inappropriate portions of the notice not being stuck off. 3. The principle of natural justice contained in s. 274 which requires that an assessee shall be heard before levying penalty under s. 271 is to ensure that the basic requirement of fair play in action is fulfilled. 4. The rules of natural justice are flexible and cannot be put on any rigid formula. 5. In order to sustain a complaint of violation of principles of natural justice on the ground of absence of opportunity, it has to be established that prejudice has been caused to the party concerned by the procedure followed.
Final Decision: The court declined to answer the question referred to it as the Tribunal failed to deal properly with the question regarding the applicability of the Explanation to s. 271 (1). The Tribunal was directed to re-hear the appeal in accordance with the directions given by the court.
( 1 ) THE Income-tax Appellate Tribunal has refer the following question of law for the opinion of this court under s. 256 (1) - of the I. T. Act, 1961 :"whether, on the facts and in the circumstances of the case, the Appellate Tribunal is justified in law in quashing the order of penalty ?"
( 2 ) THE matter relates to the income-tax assessment year 1968-69. The assessee filed a return declaring income of Rs. 2,321 from business. During the course of investigation, the ITO found that, in the previous year relevant to the assessment year 1968-69, the assessee advanced loans to five individuals aggregating to Rs. 6,900. These loans were not recorded in the assessees book of account. The ITO observed that the peak amount of the loans advanced to the five individuals was Rs, 3,200 in as much as there were some repayments by the individuals and fresh advances. The ITO also found that a sum of Rs. 5,000 advanced to one Shri Miraz Ali Khan on Augu 10/08/1967, was also not entered in the assessees books of account. The ITO further found that a sum of Rs. 1,000 received from Smt. Jamalunnisa Begun by way of commission was also not accounted in the books. Thus, the ITO found that money-lending loans to the extent of Rs. 8,200 were not entered in the assessees accounts apart from a sum of Rs. 1,000 received by way of commission from Smt. Jamalunnisa Begum. The ITO included the sum of Rs. 9,200 in the assessees total income for the assessment year 1968-69. The assessee carried the matter in appeal, but the assessment was confirmed and the matter became final.
( 3 ) BEFORE the completion of the assessment proceedings, the ITO initiated proceedings for the levy of penalty for concealment of income or for furnishing inaccurate particulars of such income under s. 271 (1) (c) of the I. T. Act, 1961. The assessee explained that the money-lending advances of Rs. 8,200 referred to above were made from out of the assessees winnings in card games. It does not appear that any specific explanation was offered in respect of the sum of Rs. 1,000 received from Smt. Jamalunnisa Begum by way of commission. The ITO declined to accept the assessees explanation that the money-lending advances of Rs. 8,200 were made from out of the assessees winnings from card games. Accordingly, the ITO levied Rs. 9,200 under s. 271 (1) (c) which is equivalent to the amount of income considered to have been concealed by the assessee.
( 4 ) THE assessee appealed against the levy of penalty to the AAC who confirmed the order of the ITO levying the penalty and dismissed the appeal.
( 5 ) THE assessee carried the matter in second appeal to the Income-tax Appellate Tribunal and raised a number of contentions both legal and factual. The Tribunal declined to accept most of the contentions raised by the assessee, but finally accepted one contention and that was regarding the validity of the penalty notice issued. The assessee urged before the Tribunal that the penalty notice issued by the ITO was invalid in as much as the ITO did not strike our inappropriate portions of the notice. The notice required the assessee to show cause why penalty should not be levied for concealment of income and also for furnishing inaccurate particulars of such income. In the notice issued by the ITO, both the item mentioned above, were kept without either of them being struck off. The assessee urged before the Tribunal that the penalty in this case was levied for alleged concealment of income and on account of the ITO not striking out the portion relating to furnishing of inaccurate particulars of the income, the notice issued by the ITO was rendered invalid and, consequently, the order of penalty is invalid in law. Reliance was placed by the assessee on the decision of the Kerala High Court in Subramania Iyer v. Union of India [1974] 97 ITR 228 (Ker ). The Tribunal found that the decision of the Kerala High Court supported the contention urged by the assessee. The Tribunal eventually held
