The levy of penalty under Sec.28 of the Income Tax Act, 1922 is valid in Sec.34 proceedings, as the proceedings under Sec.34 relate to the same proceeding which is commenced with the publication of the general notice under Sec.22(1).

Headnote:
INCOME TAX - Penalty - Levy of penalty under Sec.28 of the Income Tax Act, 1922 - Whether valid in Sec.34 proceedings - Held, yes - Proceedings under Sec.34 relate to the same proceeding which is commenced with the publication of the general notice under Sec.22(1) - Income-tax Officer is competent to levy a penalty on any ground open to him under Sec.28(1), even though the default relates to the prior proceeding.
Fact of the Case:

The assessees were equal partners in a firm. Assessments were made for the years 1945-46, 1946-47 and 1947-48 on the share income return of the two assessees. Later, it transpired that the assessees had made substantial investments in two private limited companies. Notices under Sec.34 were issued to both the assessees in respect of the three assessment years. The assessees made returns under Sec.34 and declared certain amounts of income. The Income-tax Officer levied penalties on the basis of escaped tax as against both the assessees. The assessees preferred appeals to the Appellate Assistant Commissioner, but the appeals were dismissed. The matter was taken by the assessees on further appeals to the Income-tax Appellate Tribunal. The Tribunal held that the penalties were validly imposed upon the two assessees.
Finding of the Court:

The court held that the proceedings under Sec.34 relate to the same proceeding which is commenced with the publication of the general notice under Sec.22(1). The Income-tax Officer is competent to levy a penalty on any ground open to him under Sec.28(1), even though the default relates to the prior proceeding.
Issues: Whether on a proper construction of Sec.34 and Sec.28 of the Income Tax Act of 1922, the levy of penalties in Sec.34 proceedings is valid?
Ratio Decidendi: The court interpreted Sec.28 of the Income Tax Act, 1922 and held that the phrase "in the course of any proceedings" only governs the satisfaction of the Income-tax Officer, the Appellate Assistant Commissioner or the Appellate Tribunal, and not concealment by the assessee of the particulars of income referred to in Sub-section 1(c) of Sec.28. The court also relied on the decision of the Madras High Court in C.V. Govindrajulu Iyer v Commissioner of Income-tax Madras, 1948-16 ITR 391: (AIR 1949 Mad 399), where it was held that the Income-tax Officer was competent, in the course of the proceedings taken by him under Sec.34 of the Act, to levy a penalty under Sec.28(1)(a) for failure without reasonable cause to furnish a return pursuant to the notice under Sec.22(1).
Final Decision: The court answered the question of law referred by the Income-tax Appellate Tribunal to the High Court in favour of the Income-tax Department and against the assessee. The assessee was directed to pay the cost of the reference.

Judgment

V.Ramaswami, J.

1. In this case the two assessees were equal partners in the firm of K.C. and P.C. Mukherjee of ijua. Assessments were originally made for the years 1945-46, 1946-47 and 1947-48 on the share income return of the two assessees. Later on it transpired that the two assessees had made substantial investments in two private limited companies. Mohalbanj Collieries Limited and Central Kankanee Collieries Limited, the amounts involved being Rs. 25,000.00 for the calendar year 1944, Rs. 55,348/-for the calendar year 1945 and Rs. 55,000.00 for the calendar year 1946, in each case. After having satisfied himself that income had escaped assessment the Income-tax Officer issued notices under Sec.34 on the 8th September, 1949, to both the assessees in respect of the three assessment years. The assessees made returns under Sec.34 and declared the following amounts of income each:

Rs. 1945-46...45,325...Share income 14,000...Other sources, cash introduced shown as income in the absence of proof. Total.... 59,325 1946-47...31,772...Share income 23,448 ...Other sources Total....55,220 1947-48...24,581...Share Income 55,000...Other sources, cash introduced shown as income in absence of evidence to prove the same. Total....79,581

The Income-tax Officer levied penalties on the basis of escaped tax as against both the assessees. The assessees preferred appeals to the Appellate Assistant Commissioner, but the appeals were dismissed. The matter was taken by the assessees on further appeals to the Income-tax Appellate Tribunal. It was contended on their behalf that Sec.34-proceedings were separate and distinct from the original assessment proceedings, and as there had been no concealment in Sec.34-proceedings there could be no legal imposition of penalty under Sec.28 of the Income-tax Act. The contention was rejected by the Income-tax Appellate Tribunal and it was held that the penalties were validly imposed upon the two assessees.

2. Under Sec. 66(1) of the Income-tax Act the Income-tax Appellate Tribunal has submitted the following question of law for the determination of the High Court:

"Whether on a proper construction of Sec.34 and Sec.28 of the Income Tax Act of 1922, the levy of penalties in Sec.34 proceedings is valid?"

3. The answer to this question depends upon the proper interpretation of Section 28 of the Income-tar Act, which runs as follows:

"28. Penalty for concealment of income or improper distribution of profits. (1) If the Income-tax Officer, the Appellate Assistant Commissioner or the Appellate Tribunal, in the course of any proceedings under this Act, is satisfied that any person-- (a) has without reasonable cause failed to furnish the return of his total income which he was required to furnish by notice given under Sub-section (1) or Sub-section (2) of Sec.22 or Sec.34 or has without reasonable cause failed to furnish it within the time allowed and in the manner required by such notice or

(b) has without reasonable cause failed to comply with a notice under Sub-section (4) of Sec.22 or Sub-section (2) of Sec.23, or

he or it may direct that such person shall pay by way of penalty, in the case referred to in Clause (a), in addition to the amount of the income-tax and super-tax, if any payable by him, a sum not exceeding one and a half times that amount, and in the cases, referred to in Clauses (b) and (c), in addition to any tax payable by him, a sum not exceeding one and a half times the amount of the income-tax and super-tax, if any, which would have been avoided if the income as returned by such person had been accepted as the correct income:

x x x x x"

4. It was submitted by Mr. Mitra on behalf of the assessees that the proceedings under Sec.34 of the Income-tax Act are separate proceedings from the original assessment proceedings. It was pointed out that the proceedings under Sec.34 start with

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1959 Supreme(Pat) 70

PATNA HIGH COURTV.Ramaswami and Kanhaiya Singh JJ.K.C.MukherjeeVersusCommissioner Of Income TaxMiscellaneous Judicial Case No. 326 of 1957 ;Decided On : JULY 01, 1959

The levy of penalty under Sec.28 of the Income Tax Act, 1922 is valid in Sec.34 proceedings, as the proceedings under Sec.34 relate to the same proceeding which is commenced with the publication of the general notice under Sec.22(1).

PATNA HIGH COURT
V.Ramaswami and Kanhaiya Singh JJ.
K.C.Mukherjee
Versus
Commissioner Of Income Tax
Miscellaneous Judicial Case No. 326 of 1957 ;
Decided On : JULY 01, 1959