R KUPPUSWAMY CHETTY Vs. COMMISSIONER OF INCOME TAX

JUDGEMENT

(1.) THE question of law is referred to this court under s. 256(1) of the I.T. Act, 1961, runs as follows :"Whether, on the facts and in the circumstances of the case, the Appellate Tribunal was justified in law in upholding the levy of penalties for the assessment years 1954-55 to 1961-62, under s. 271(1)(c) of the Income-tax Act, 1961 ?" *THE case was originally heard by a Division Bench of this court. Though the learned judges were of the opinion that the facts in the present case were identical with those in Seth Lunidaram Tikamdas v. CIT they were of the view that the attention of the court had not been specifically focused in that case to cases where the exact meaning that has to be assigned to the words "assessment completed" occurring in s. 297(2)(f) and (g) of the Act had been considered. It was in this connection that the learned judges referred to two decisions of the Gujarat High Court in Sheth Gunvantlal Mangaldas v. CIT and CIT v. Kiranchandra Madhusudan Patel, wherein the scope of the provisions of s. 297(2)(f) and (g) had been specifically considered. In order that the matter may be reconsidered in the light of the said decisions, the case was referred to a Full Bench.THE relevant facts leading to the reference are as follows : THE assessee is one R. Kuppuswamy Chetty. He is now no more and the reference is pursued by his son, Janakiah Chetty, as the legal representative. Kuppuswamy Chetty was running a business in gunny bags under the name and style of "R. Kuppuswamy Chetty & Sons". In view of his advancing age, he settled all his properties and the business on his son, Janakiah Chetty. THE settlement was to take effect from 1st April, 1961. Kuppuswamy Chetty was assessed on the business profits earned up to 31st March, 1961, and Janakiah Chetty was assessed on the business profits earned thereafter. During the assessment for the assessment year 1962-63, on Janakiah Chetty, it was found that there were credits ostensibly as borrowing on hundis. When these transactions were traced backwards, it was found that the relevant credit entries came to be made from 4th June, 1960. THE highest amount of the credits shown as borrowings as against the hundis came to Rs. 3, 15, 000 an on 11th March, 1961, relevant for the assessment year 1961-62. During the accounting year ended on 31st March, relevant for the assessment year 1962-63, the peak or the highest amount of credits on similar borrowings increased to Rs. 6, 80, 000 as on 15th March, 1962. During the accounting year ended on 31st March, 1963, to 31st March, 1965, relevant for the assessment years 1963-64 to 1965-66, the hundi borrowings gradually decreased, and ultimately during the year ended 31st March, 1965, the borrowings stood squared up.

(2.) THE total amount of Rs. 6, 80, 000 was partly utilised in investments in properties to the extent of Rs. 4 1/2 lakhs, the balance remaining as circulating capital in the son's business. In his assessment, Janakiah Chetty was not able to prove that the hundi borrowings represented real transactions. It was represented in the statement of disclosure addressed to the Central Board of Direct Taxes, New Delhi, that though the hundi borrowings appeared only in the accounts for the years ended 31st March, 1961, and 31st March, 1962 (assessment years 1961-62 and 1962-63), they did not represent the profits and gains of those two years alone and that they represented the income of earlier years. Accordingly, two petitions of disclosure were filed before the CBDT. THE first petition was of Janakiah of 25th February, 1967, in which he pleaded that the hundi credits represented the income of various earlier years. On 22nd February, 1969, the assessee herein, viz., Kuppuswamy Chetty, filed his own disclosure petition under s. 271(4A) of the I.T. Act of 1961 before the Commissioner of Income-tax, Madras-II. In his petition he stated that as the assessments for 1961-62 and the earlier years related to periods in which he was carrying on the business, he may be granted permission to present the petition of disclosure. He prayed for the said income of Rs. 6, 80, 000 being spread over the assessments for the assessment years 1954-55 to 1961-62. He was also agreeable to pay a penalty of 5% of the tax to be levied on the sums which were offered for assessment. It is unnecessary to detail the amounts offered for assessments in each of the relevant years.THE offer of settlement as put forward by the assessee was accepted and the assessee filed revised returns of income on 25th July, 1969, in response to the notice issued under s. 148 of the Act. In the revised return, the assessee admitted the additional amounts of income as shown in the disclosure petition to the Commissioner. THE ITO completed the assessment on 17th September, 1969, accepting the revised return of income. As the minimum penalty leviable was more than Rs. 1, 000, the matter of levy of penalty was referred by the ITO to the IAC in accordance with the provision of s. 271 of the 1961 Act.Accordingly, he levied the following amounts as penalty :Assessment years Amounts of penaltyleviedRs.1954-55 2, 9661955-56 8, 0711956-57 8, 5081957-58 12, 5861958-59 11, 5931959-60 11, 9281960-61 14, 2221961-62 6, 691THE amount so levied as penalty represented the minimum penalty leviable under the Act of 1961, i.e., 20% of the tax avoided in the original assessment.THE assessee appealed against the penalties so levied for the respective years before the Tribunal. By its order dated 31st August, 1974, the Tribunal confirmed the penalties as levied and rejected the assessee's contention that the penalty could only be levied under the Act of 1922. In the course of its order, it referred to the recommendation of the Commissioner that only 5% of the tax avoided should be levied as penalty. But in view of the statutory minimum penalty that had to be levied, the Tribunal confirmed the penalty while at the same time making a recommendation to the department to consider the case of the assessee sympathetically, if and when any application for sympathetic consideration was made to it. THE terms in which the Tribunal recommended the sympathetic consideration are those which occur in a decision of the Gujarat High Court in CIT v. Ochhavlal Panalal Kothari. THE Tribunal has, in disposing of the appeal, relied on its own order dated 30th April, 1974, which was the subject matter of a reference to this court in Seth Lunidaram Tikamdas v. CIT .

(3.) THE assessee conceded that the particulars of income had been concealed or inaccurate particulars had been furnished and that the penalties were thus exigible. THE only contention was that the provisions of the 1922 Act were applicable and not those of the 1961 Act. After extracting a passage from the decision of the Supreme Court in Jain Brother v. Union of India, it was held that the question referred to had to be answered in favour of the revenue in the sense that the Act of 1961 alone were applicable.THE decision of the Supreme Court in Jain Brothers v. Union of India followed in the decision cited above arose on the following facts :A firm filed a return on 18th November, 1961, for the assessment year 1960-61 showing an income of Rs. 3, 55, 566. THE ITO completed the assessment on November 23, 1964, computing the total income of the firm at Rs. 4, 75, 368. On the same day, he issued a notice under s. 271 read with s. 274 of the I.T. Act, 1961, calling upon the firm to show cause why an order imposing a penalty should not be passed on account of its failure to furnish the return within time. After considering the explanations submitted by the firm the ITO made an order on November 19, 1966, under s. 271(1)(a) of the Act of 1961 imposing a penalty of Rs. 1, 03, 434 for noncompliance with the notice under s. 22(2) of the 1922 Act. Apart from filing an appeal under the I.T. Act itself, the assessee filed a writ petition challenging, inter alia, the validity and the constitutionality of s. 297(2)(g) and s. 271(2) of the Act of 1961. THE High Court declined to issue a writ and the assessee carried the matter in appeal to the Supreme Court. If the 1922 Act would apply, there was no minimum penalty leviable. However, under the 1961 Act, the penalty leviable was statutorily fixed, viz., as a sum equal to 2% of the tax for every month during which the default continued, but not exceeding in the aggregate 50% of the tax (see s. 271(1)(a)). In the course of the judgments, their Lordship observed at p. 117 as follows : "We are further unable to agree that the language of section 271 does not warrant the taking of proceedings under that section when a default has been committed by failure to comply with a notice issued under section 22(2) of the Act of 1922. It is true that clause (a) of sub-section (1) of section 271 mentions the corresponding provisions of the Act of 1961 but that will not make the part relating to payment of penalty inapplicable once it is held that section 297(2)(g) governs the case. Both section 271(1) and 297(2)(g) have to be read together and in harmony and so read the only conclusion possible is that for the imposition of a penalty in respect of any assessment for the year ending on March 31 1962, the proceedings have to be initiated and the penalty imposed in accordance with the provisions of section 271 of Act of 1961.