Decided on March 04,1972



CHINNAPPA REDDY, J. - (1.) : For the asst. yr. 1956-57 the petitioner was assessed to income- tax of Rs. 64,963.56 on a total income of Rs. 1,12,417. A demand dated March 30, 1961, was raised against the petitioner for the amount of income-tax due from him. The amount was not paid by the petitioner within the stipulated time. The petitioner was later informed that if he did not pay the tax before the end of February, 1962, a penalty would be imposed on him. As the petitioner failed to comply with this last notice also, the ITO, on a consideration of the facts and circumstances of the case, levied a penalty of Rs. 6,500 under S. 46(1) of the IT Act by his order dated March 1, 1962. Against the order of assessment, the petitioner preferred an appeal to the AAC objecting to the inclusion of an amount of Rs. 1,05,130 as income from other sources. He claimed that the amount represented a debt borrowed by him and did not represent an income receipt. The appeal was dismissed by the AAC. But, on a further appeal preferred by the petitioner to the Tribunal, it accepted the contention of the petitioner and allowed the appeal. The total assessable income of the petitioner was thus reduced and the tax payable by the petitioner also stood correspondingly reduced. Against the order levying penalty the petitioner preferred an appeal to the AAC under S. 33A of the IT Act, 1922. The CIT rejected the revision by his order dated September 28, 1966, on the ground that the revision was barred by time. The petitioner has now invoked the jurisdiction of this Court under Art. 226 of the Constitution for the issue of a writ of mandamus or other direction directing the respondents not to take any further steps to recover the penalty imposed on the petitioner.
(2.) SRI T. Ramachandra Rao, learned counsel for the petitioner, submitted that the effect of the order of the Tribunal allowing the appeal against the order of assessment was to wipe out of existence the original notice of demand issued by the ITO and all consequential proceedings, including penalty levied under S. 46(1) of the Indian IT Act, 1922, for failure to comply with the notice of demand. We are not prepared to agree with this submission. To our minds the correct position appears to be this : When a demand is made under the Act, a person to whom the demand is addressed is bound to comply with it. If he does not comply with the demand, he becomes a defaulter and it is then open to the ITO to levy a penalty in accordance with the provisions of S. 46 (1) of the Act. Once the default merges into an order levying penalty, the assessee cannot take advantage of the later result of an appeal against the assessment proceedings reducing the demand. The assessment proceedings and the penalty proceedings are two distinct matters. The incurring of a liability to the levy of penalty is independent of the correctness of the demand. It is a statutory liability for failure to comply with the statutory requirement that a demand must be met within the stipulated time. That is irrespective of the correctness of the demand. The position may be different if the demand is ultra vires or if the demand is reduced in appeal even before the expiry of the time stipulated in the notice of demand. SRI T. Ramachandra Rao relied on the judgment of the Supreme Court in ITO vs. Seghu Buchiah Setty (1964) 52 ITR 538 (SC). In that case the facts were as follows : The ITO made assessments for two years on estimates to the best of his judgment and issued notices of demand under S. 29 of the IT Act, 1922. The assessee preferred appeals against the assessment orders but failed to pay the tax. A certificate was forwarded to the Collector under s. 46(2) of the Act for recovery of the tax as arrears of land revenue. Thereafter the tax payable by the assessee was substantially reduced by the AAC and the ITO informed the assessee of the reduced liability and called upon him to pay the reduced amount. No fresh notice of demand was issued. Sarkar and Hidayatullah, JJ. held that on the amount of tax assessed being reduced as a result of the orders of the AAC, fresh demand notices had to be served on the assessee before he could be treated as a defaulter and recovery proceedings instituted against him. Shah, J., however, dissented from the majority view and held that notices of demand issued by the ITO may be enforced in the manner provided by S. 46 even after the appeal against the order of assessment was disposed of, subject to adjustment of the amount to be recovered in the light of the orders of the AAC. His Lordship held that a person who failed to comply with a notice of demand would continue to be a defaulter notwithstanding the reduction of his liability by an order of the appellate authority. All that the ITO was expected to do was to give information to the recovering authority about the reduction in the liability for tax, penalty or interest made by the appellate authority and to request such authority to adjust his proceeding to the modified demand. From the facts of the case, it is clear that their Lordships of the Supreme Court were dealing with the question whether it was open to the IT authorities to proceed to recover income-tax without issuing a fresh notice of demand after the tax liability was reduced by an appellate authority. Their Lordships were not considering a case where a penalty was levied before the appellate order reducing tax liability was made or a case where recovery proceedings had been completed, for instance, by sale of property even before the appellate order. SRI T. Ramachandra Rao invited our attention to certain observations appearing in the judgment of Sarkar, J., to the following effect : "If the effect of an appellate order reducing the assessment as in the present case did not wipe out the original order, a most anomalous situation would, in my view, arise. Under S. 46(1) of the Act after a default has been committed in terms of S. 45(1) the ITO may impose a penalty not exceeding the amount of the tax due in respect of which the default has occurred. This penalty may be recovered in the same way as the tax due, that is to say, by a notice under S. 29 and thereafter by a certificate issued under S. 46(2). Now suppose the penalty for the full amount of the tax found due by the ITO has been imposed and, thereafter, the appellate order reduces the amount of the tax. What happens to the order of penalty then? Obviously, it does not automatically stand reduced to the reduced amount of the tax. It would again be absurd if the penalty could be recovered for the full original amount. The only sensible view to take in such a case would be that the order of penalty falls to the ground and the only logical way to support that conclusion would be to say that the original default has disappeared." Hidayatullah, J. (as he then was), who delivered a separate judgment, agreed with the view of Sarkar, J. that a fresh notice of demand was necessary but his Lordship did not consider the question of the effect of the appellate order reducing tax liability on an order levying penalty Shah, J., as we already pointed out, did not agree with the majority view. The observations of Sarkar, J. are, therefore, clearly obiter. Subsequent to the pronouncement of their Lordships of the Supreme Court in ITO vs. Seghu Buchiah Setty (supra), Parliament enacted the Taxation Laws (Continuation and Validation of Recovery Proceedings) Act, 1964, presumably to get over that pronouncement. Sec. 3(b) of the Act provides that where a notice of demand in respect of any Government dues is served upon an assessee by a taxing authority under any Scheduled Act and such dues are reduced in an appeal or other proceeding, it shall not be necessary for the taxing authority to serve upon the assessee a fresh notice of demand, but the taxing authority shall give intimation of the fact of such reduction to the assessee and to the TRO where a certificate has been issued for recovery of such amount. The first proviso to S. 3 further provides that if as a result of any final order such Government dues have been reduced and the penalty imposed on the assessee for default in payment thereof exceeds the amount so reduced, the excess shall not be recovered and if it had already been recovered, it shall be refunded to the assessee on an application made by him to the taxing authority within such time and in such manner as may be prescribed by rules made under this Act. By S. 5 of the Act, the provisions of the Act were given retrospective effect. The result, therefore, is that under the proviso to S. 3 of the Act (XI of 1964) the penalty imposed on the petitioner cannot be recovered to the extent that it exceeds the reduced amount of Government dues. The respondents are, therefore, directed not to recover the amount of penalty which is in excess of the reduced amount of tax imposed on the petitioner as a result of the order of the Tribunal. There will be no order as to costs.;

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