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PETITIONER: D. M. MANASVI

       Vs.

RESPONDENT: C.I.T., GUJARAT II, AHMEDABAD

DATE OF JUDGMENT19/09/1972

BENCH: KHANNA, HANS RAJ BENCH: KHANNA, HANS RAJ HEGDE, K.S. REDDY, P. JAGANMOHAN

CITATION:  1973 AIR   22            1973 SCR  (2) 389  1973 SCC  (3) 207

ACT: Income Tax Act, 1961-Section 271(1)(c)-Scope of-Satisfaction regarding  matters in cls. (a) to (c) precedes the issue  of notice-Notice need not be issued in the course of assessment proceedings-No  notice contemplated before arriving  at  the satisfaction-Provision for reference to Inspecting Assistant Commissioner  does not mean proceedings cannot be  initiated by Income Tax Officer.

HEADNOTE: What  is contemplated by clause (1) of section  271,  income Tax  Act,  1961,  is  that the Income  Tax  Officer  or  the Appellate Assistant Commissioner should have been  satisfied in the course of proceedings under the Act regarding matters mentioned  in  the clauses of that sub-section.  It  is  not however  essential  that  notice  to  the  person  proceeded against  should have also been issued during the  course  of the  assessment  proceedings.   Satisfaction,  in  the  very nature of things, precedes the issue of notice and it  would not be correct to equate the satisfaction of the Income  Tax Officer or Appellate Assistant Commissioner with the  actual issue  of  notice.   The  issue  of  notice,  indeed,  is  a consequence of the satisfaction of the Income Tax Officer or the  Appellate  Assistant  Commissioner  and  it  would   he sufficient compliance with the provisions of the statute  if the   Income   Tax  Officer  or  the   Appellate   Assistant Commissioner  is satisfied about the matters referred to  in clauses (a) to (c) of sub-section (1) of section 271  during the course of proceedings under the Act, even though  notice to  the  person  proceeded  against  in  pursuance  of  that satisfaction  is  issued  subsequent to the  making  of  the assessment   orders  would  not  show  that  there  was   no satisfaction of the Income Tax Officer during the assessment proceedings, that the assessee had concealed the particulars of his income or had furnished incorrect particulars of such income. [393E] Commissioner  of  Income  Tax, Madras and.  Anr.  v.  S.  V. Angidi Chettiar, [1962] 44 I.T.R. 739, referred to. The  fact that the Income Tax Officer has to refer the  case to  the  Inspecting Assistant Commissioner  if  the  minimum imposable penalty exceeds the sum of rupees one thousand  in

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a  case  falling  under clause (c)  of  sub-section  (1)  of section  271 would not show that the proceedings in  such  a case cannot be initiated by the Income Tax Officer. [394F] It  is  not necessary that the Income  Tax  officer,  before feeling  satisfied  regarding the  necessity  of  initiating proceedings  for imposition of penalty  and  before  issuing consequential  notice should have issued another  notice  to the  assessee and held a preliminary enquiry  regarding  the necessity  of initiating proceedings.  Such a  course  would result  in  mere duplication of the  procedure  without  any advantage to the parties.  The final conclusion on the point as  to whether the requirements of clauses (a), (b) and  (c) of  s. 271 have been satisfied would be reached  only  after the  assessee has been heard or has been given a  reasonable opportunity of being heard. [395E, B]

JUDGMENT: CIVIL  APPELLATE JURISDICTION : Civil Appeals Nos.  1447  to 1450 of 1969. 390 Appeals  by special leave from the judgment and order  dated August  30, 1968 of the Gujarat High Court at  Ahmedabad  in Income-tax Reference No. 6 of 1968. M.   C. Chagla and I. N. Shroff, for the appellant. N.   D.  Karkhanis, R. N. Sachthey and S. P. Nayar, for  the respondent. The Judgment of the Court was delivered by KHANNA, J.-This judgment would dispose of four civil appeals Nos.  1447  to  1450 of 1969 which have been  filed  by  the assessee  by special leave against the judgment  of  Gujarat High  Court  whereby that court answered the  following  two questions in a reference under section 256(1) of the  Income Tax  Act, 1961 (hereinafter referred to as the Act)  in  the affirmative and in favour of the department               "(1)   Whether  on  the  facts  and   in   the               circumstances of the case, the proceedings for               the   imposition  of  penalty  were   properly               commenced  in the course of  any  proceedings.               under  the Act as required by section  271  of               the  Income Tax Act, 1961 for  the  assessment               ’years 1959-60 to 1962-63 ?               (2)   Whether   on  the  facts  and   in   the               circumstances  of  the  case,  there  was  any               material  or evidence before the  Tribunal  to               hold   that  the  assessee  had   deliberately               concealed   particulars  of  his   income   or               deliberately furnished inaccurate  particulars               of  such income as required by sec. 271  (1  )               (c) of the Act for the assessment years  1959-               60 to 1962-63?" While  answering question No.1 in the affirmative, the  High ’Court  observed that so far as the assessment year  1961-62 was concerned, the penalty proceedings were invalid. The assessee is an individual and the matter relates to  the assessment  years  1959-60, 1960-61,  1961-62  and  1962-63. During  the relevant years the assessee derived income  from several sources.  The assessment for the first year was made under section 23(3) of the Indian Income Tax Act, 1922.  The Income  Tax Officer subsequently found that income from  the business  in  the name of M/s.  Kohinoor Crain  Mills  Sales Depot  (hereinafter referred to as the Kohinoor  Mills)  was not included in the return filed by the, assessee and he had not  shown  any  connection with or  interest  in  the  said

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business.   For  the  subsequent three  years  the  assessee disclosed  20  per  cent as his share of  the  profits  from Kohinoor Mills.  The Income Tax Officer was of the 391 opinion  that Kohinoor Miffs was not a  genuine  partnership but was the sole proprietorship concern of the assessee  and the  whole of the income from the said concern  belonged  to the assessee.  As the assessment for the first two years had already been completed before the Income Tax Officer got the information  regarding the interest in Kohinoor  Mills,  the Income  Tax  Officer reopened the assessment for  those  two years.   The income from the Kohinoor Mills  was  thereafter included  in  the income of the assessee for the  first  two years  as  well  as  in  the  assessments  relating  to  the remaining two years.  The order of the Income Tax Officer in this   respect  was  upheld  by  the   Appellate   Assistant Commissioner  as  well  as  by  the  Income  Tax   Appellate Tribunal.. The  non-disclosure  of the business profits  from  Kohinoor Mills was considered by the Income Tax Officer to  represent deliberate   concealment,  and  so  he   initiated   penalty proceedings  under  section  271 of the  Act  for  the  four assessment  years  in question.  As,  however,  the  minimum penalty  leviable  under  section 271 (1)  (c)  of  the  Act exceeded  the  sum of rupees one thousand,  the  cases  were referred  under section 274(2) of the Act to the  Inspecting Assistant Commissioner. The  Inspecting  Assistant Commissioner thereupon  grave  an opportunity  to  the  assessee of being  heard  and,  after- hearing  him, came to the conclusion that the  assessee  had concealed  his income and deliberately furnished  inaccurate particulars  thereof  for all the four assessment  years  in question.   He accordingly levied "penalties of Rs.  21,062, Rs.  1,14,477,  Rs.  2,02,584  and  Rs.  1,02,731  for   the assessment  years  1959-60,  1960-61,  1961-62  and  1962-63 respectively.    In  appeal  before  the  Tribunal  it   was submitted  on behalf of the assessee that there had been  no valid levy of the penalties because the penalty  proceedings had  not been commenced in the course of  proceedings  under the Act.  The Tribunal rejected this contention and observed that  as the Income Tax Officer had given directions in  the assessment  order  for the issue of a notice  under  section 277(1)(c)  the  penalty proceedings could be  said  to  have commenced  during the course of the  assessment  proceedings and therefore levy of penalty was not invalid.  The Tribunal also rejected the submission made on behalf of the  assessee that there was no evidence to show that the assessee was the owner  of the business of Kohinoor Mills and that there  had been concealment of his income on the part of the  assessee. The  Tribunal, however, gave relief to the assessee  in  the matter  of quantum of penalty.  On application made  by  the assessee, the questions reproduced earlier were referred  to the  High  Court.   The High Court,  as  already  mentioned, answered 392 both  the questions in the affirmative and in favour of  the department.   So  far  as the assessment  year  1961-62  was concerned the penalty proceedings were held to be invalid on a ground with which we are not concerned. Mr. Chagla on behalf of the assessee appellant has before us assailed the answers to the two questions given by the  High Court.   It is urged that there was no proper initiation  of proceedings  for the imposition of penalty.   The  requisite satisfaction  of  the Income Tax Officer, according  to  the learned counsel, has also not been shown to have existed for

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the  initiation  of  the proceedings.   There  was  also  no material  or evidence before the Tribunal, it is  submitted, to  hold  that the assessee had deliberately  concealed  the particulars  of  his income or  had  deliberately  furnished inaccurate particulars of his income.  The above submissions have  been  controverted by Mr. Karkhanis on behalf  of  the department and, in our opinion, are without merit. According  to clause (c) of sub-section (1) of  section  271 ,of  the  Act, if the Income Tax Officer  or  the  Appellate Assistant  Commissioner  in the course  of  any  proceedings under the Act is satisfied that any person has concealed the particulars   of   his  income   or   furnished   inaccurate particulars  of such income, he may direct that such  person shall  pay  in  addition to the amount of  tax,  by  way  of penalty a sum calculated in accordance with clause, (iii) of that  sub-section.   Section 274 of the Act  prescribes  the procedure for the imposition of penalty and reads as under :               "274.  Procedure.-No order imposing a  penalty               under  this Chapter shall be made  unless  the               assessee  has been heard, or has been given  a               reasonable opportunity of being heard.               (2)   Notwithstanding  anything  contained  in               clause (iii)of sub-section (1) of section 271,               if in a case falling under clause (c) of  that               sub-section,  the  minimum  penalty  imposable               exceeds  a  sum of rupees  one  thousand,  the               Income Tax Officer shall refer the case to the               Inspecting  Assistant Commissioner who  shall,               for the purpose, have all the powers conferred               under  this  Chapter  for  the  imposition  of               penalty.               (3)   An  Appellate Assistant Commissioner  on               making an order under this Chapter imposing  a               penalty,  shall forthwith send a copy  of  the               same to the Income Tax Officer." Clause  (c)  of sub-section (1) of section  271  shows  that occasion  for  taking  proceedings for  payment  of  penalty arises if the Income Tax Officer or the Appellate  Assistant Commissioner is 393 satisfied  that any person has concealed the particulars  of his  income  or  furnished inaccurate  particulars  of  such income. it has also to be shown that the Income Tax  Officer or the Appellate Assistant Commissioner was so satisfied  in the  course  of proceedings under the Act.  In  the  present case,  we find that the Income Tax Officer while making  the assessment orders for the assessment years in question  held that  Kohinoor  Mills  had  been  wrongly  shown  to  be   a partnership  firm and that the other alleged  partners  were simply  name lenders for the assessee.  It was further  held that  Kohinoor  Mills  was the Proprietary  concern  of  the assessee  and  the  income  from  that  concern  should   be considered  to  be the income of the assessee.   Notice  was ordered  to  be issued for proposed  penalty  under  section 271(1)(c)  of  the  Act to the assessee "in  regard  to  the concealment  of  and furnishing  inaccurate  particulars  of income" from Kohinoor Mills.  Notices, it would appear, were thereafter issued by the Income Tax Officer to the assessee. The  fact that notices were issued subsequent to the  making of  the  assessment orders would not, in our  opinion,  show that  there  was no satisfaction of the Income  Tax  Officer during  the  assessment proceedings that  the  assessee  had concealed  the  particulars of his income or  had  furnished incorrect particulars of such income.  What is  contemplated by clause (1) of section 271 is that the Income Tax  Officer

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or  the  Appellate Assistant Commissioner should  have  been satisfied  in  the  course  of  proceedings  under  the  Act regarding  matters  mentioned in the clauses  of  that  sub- section.   It is not, however, essential that notice to  the person proceeded against should have also been issued during the  course of the assessment proceedings.  Satisfaction  in the  very nature of things precedes the issue of notice  and it  would not be correct to equate the satisfaction  of  the Income Tax Officer or Appellate Assistant Commissioner  with the actual issue of notice.  The issue of notice indeed is a consequence  of the satisfaction of the Income Tax Officer or the Appellate Assistant Commissioner and it would, in our opinion, be sufficient compliance with the provisions of the statute if the Income Tax Officer or the Appellate Assistant Commissioner  is satisfied about the matters referred to  in clauses (a) to (c) of sub-section (1) of section 271  during the  course of proceedings under the Act even though  notice to  the  person  proceeded  against  in  pursuance  of  that satisfaction is issued subsequently.  We may in this context refer  to a decision of five judges bench of this  Court  in the  case of Commissioner of Income Tax, Madras and  Another v. S. V. Angidi Chettiar(1).  Shah J speaking for the  Court while dealing with section 28 of the Indian Income Tax  Act, 1922 observed: (1)  [1962] 441.T.R.739. 394               "The power to impose penalty under section  28               depends  upon the satisfaction of  the  Income               Tax Officer in the course of proceedings under               the  Act; it cannot be exercised if he is  not               satisfied  about the existence  of  conditions               specified  in clauses (a), (b) or  (c)  before               the proceedings are concluded.  The proceeding               to  levy penalty has, however, not to be  com-               menced  by the Income Tax Officer  before  the               completion  of the assessment  proceedings  by               the  Income Tax Officer.  Satisfaction  before               conclusion  of the proceeding under  the  Act,               and not the issue of a notice or initiation of               any  step for imposing penalty is a  condition               for the exercise of the jurisdiction." The appellant in the present case, it may be mentioned,  has not  produced  or got printed in the paper book  the  notice which  was  issued  to  him by the  Income  Tax  Officer  in connection  with the imposition of penalty.  In the  absence of that notice, it cannot be said, as has now been suggested on  behalf  of  the assessee appellant, that  there  was  no mention in the notice of the satisfaction of the Income  Tax Officer  on  the point that the assessee had  concealed  the particulars  of  his  income  or  had  furnished  inaccurate particulars thereof. We are also not impressed by the argument advanced on behalf of the appellant that the proceedings for the imposition  of penalty were initiated not by the Income Tax Officer but  by the  Inspecting Assistant Commissioner when the  matter  had been  referred to him under section 274(2) of the Act.   The proceedings  for the imposition of penalty in terms of  sub- section (1) of section 271 have necessarily to be  initiated either  by  the  Income  Tax Officer  or  by  the  Appellate Assistant  Commissioner.   The  fact  that  the  Income  Tax Officer  has to refer the case to the  Inspecting  Assistant Commissioner  if the minimum imposable penalty  exceeds  the sum  of rupees one thousand in a case falling  under  clause (c)  of sub-section (1) of section 271 would not  show  that the  proceedings in such a case cannot be initiated  by  the

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Income Tax Officer.  The Income Tax Officer in such an event can refer the case to the Inspecting Assistant  Commissioner after initiating the proceedings.  It would, indeed, be  the satisfaction of the Income Tax Officer in the course of  the assessment  proceedings regarding the concealment of  income which  would  constitute  the basis and  foundation  of  the proceedings for levy of penalty. There  is also no force in the submission made on behalf  of the  appellant  that the Income Tax Officer  before  feeling satisfied regarding the necessity of initiating  proceedings for imposition 395 of  penalty and before issuing consequential  notice  should have  issued  another  notice to the  assessee  and  held  a preliminary  enquiry regarding the necessity  of  initiating proceedings.  Such a course, in our opinion, would result in mere  duplication of the procedure without any advantage  to the  parties.  A similar contention was advanced in  a  case relating  to initiation of proceedings under section  34  of the  Indian  Income Tax Act, 1922 and was  repelled  by  the Judicial  Committee  in the case of Commissioner  of  Income Tax, Bengal v. M/s.  Mahaliram Ramjidas(1) in the  following words :               "Therefore a construction of section 34  which               requires  a quasi-judicial enquiry to be  held               before  the  powers under the section  can  be               operated  would result in mere duplication  of               procedure  and  in two enquiries of  the  same               kind, into the same matter, conducted by  the               same  official, and without any  advantage  to               the  parties.  A construction so  unreasonable               and unpractical ought not to be preferred when               another  construction is  open.   Accordingly,               their Lordships are of opinion that the Income               Tax Officer is not required by the section  to               convene  the assessee, or to intimate  to  him               the  nature of the alleged escapement,  or  to               give him an opportunity of being heard, before               he decides to operate the powers conferred  by               the section." It  may  also  be  observed that  what  is  contemplated  by sections  271  and 274 of the Act is that  there  should  be prima  facie satisfaction of the Income Tax Officer  or  the Appellate  Assistant Commissioner in respect of the  matters mentioned in subsection (1) before he hears the assessee  or gives  him  an  opportunity  of  being  heard.   The   final conclusion  on the point as to whether the  requirements  of clauses  (a),  (b)  and  (c) of  section  271(1)  have  been satisfied would be reached only after the assessee has  been heard  or has been given a reasonable opportunity  of  being heard. The  argument that there was no material or evidence  before the  Tribunal  to hold that the  assessee  had  deliberately concealed the particulars of his income or had  deliberately furnished  inaccurate particulars of such income is  equally bereft  of  force.   The Tribunal while  dealing  with  this aspect of the matter referred to its earlier observations in the  appeal  relating  to  thE refusal  of  the  Income  Tax authorities  to  register Kohinoor Mills as a  firm.   Those observations ’Were as under :               "In our view, the Income-Tax authorities  were               fully   justified   in   refusing   to   grant               registration to the firm for (1)  [1940] 8 IJR 442. 8-L498 SupCI/73

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396               all  the  three years.  On going  through  the               statements   of   Ramanbhai Thakorlal   and               Gopaldas,  we  have  no  doubt  at  all   that               Ramanbhai,   Thakorlal  and  Kirit  were   not               partners in this business.  Thakorlal was mere               student for a considerable part of the period,               during which he masqueraded as a partner.  The               qualifications of both Thakorlal and Ramanbhai               to  be  partners of this  business  were  only               wholly inadequate to, the point of being  non-               existence.   They  had  no  knowledge  of  the               happening of the business and they had no con-               trol  whatsoever  on the  profits  which  were               accumulated in their names.  The profits  were               finally  disposed of after Shri D. M.  Manasvi               became the sole proprietor of the business and               even  before he became the sole proprietor  he               had  extracted the profits from  the  business               under  guise of loans to be utilised  for  his               own  purpose.  There is no doubt left  in  our               minds that the business was under the  control               of  Shri D. M. Manasvi once the three  dummies               are out of the way, Shri D. M. Manasvi is  the               only  adult  person  left  in  charge  of  the               business  and  the three minors are  only  his               grand  children.   We are, therefore,  of  the               view  that  not  only there  was  no  firm  in               existence  as alleged by the partnership  deed but t hat the business belonged to Shri D.  M.               Manasvi.  The inclusion of the profits of  the               business  in  the  assessment of  Shri  D.  M.               Manasvi  is not far fetched or  fantastic,  as               the learned counsel suggested in the course of               his  arguments.  According to the  partnership               deed,  there  were four  adult  partners.   If               three out of these four were dummies the  only               real  and  effective partner was  Shri  D.  M.               Manasvi.   The three minors who were  admitted               to  the benefits of the partnership  were  his               grand children.  The accumulated profits while               the  business was run in the guise of a  firm               were taken over by Shri D. M. Manasvi for  use               according  to his own sweet will.   The  final               disposition of the profits was made only after               he  shed  the  disguise and  became  the  sole               proprietor  of the business and the manner               in which the funds were ultimately channelised               into  the investment in the company  in  which               his  family was interested in the name of  his               son Ravindra only adds the finishing touch  to               the scheme.  We would, therefore, confirm  the               orders of the Income Tax authorities  refusing               registration  to  the firm for all  the  three               assessment years in question." It  would  thus  follow  that  the  Tribunal  came  to   the conclusion  on  the  basis of  relevant  evidence  that  the business of Kohinoor 397 Mills  was under the control of the assessee and that  there was  no  firm in existence as alleged.   The  Tribunal  also found  that the income of the said concern belonged  to  the assessee  himself  even though the business was run  in  the guise  of a firm.  It was held that the whole scheme was  to disguise  the profits of the assessee as those of the  firm.

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It  cannot  therefore  be said that there  was  no  relevant material  or evidence before the Tribunal to hold  that  the assessee  had deliberately concealed the particulars of  his income or had deliberately furnished inaccurate  particulars of such income. Mr.  Chagla  has  referred to the case  of  Commissioner  of Income  Tax,  West  Bengal I v.  Anwar  Ali(1)  wherein  the relevant  head-note which is based upon the observations  in the body of the judgment, reads as under:               "Proceedings  under section 28 of  the  Income               Tax  Act,  1922 are penal in  character.   The               gist of the offence under section 2 8 (1)  (c)               is   that  the  assessee  has  concealed   the               particulars  of  his  income  or  deliberately               furnished   inaccurate  particulars  of   such               income and the burden is on the department  to               establish  that the receipt of the  amount  in               dispute  constitutes income of  the  assessee.               It  there is no evidence on the record  except               the  explanation given by the assessee,  which               explanation  has. been found to be  false,  it               does  not follow that the receipt  constitutes               his  taxable  income.  It would  be  perfectly               legitimate to say that the mere fact that  the               explanation of the assessee is false does  not               necessarily  give rise to the  inference  that               the  disputed  amount represents  income.   It               cannot  be said that the finding given in  the               assessment  proceedings  for  determining   or               computing the tax is conclusive.  However,  it               is  good  evidence.   Before  penalty  can  be               imposed  the  entirety of  circumstances  must               reasonably  point to the conclusion  that  the               disputed  amount represented ,income and  that               the  assessee  had consciously  concealed  the               particulars of his income or had  deliberately               furnished inaccurate particulars." On  the basis of the dictum laid down in the above case,  it is  urged  by Mr. Chagla that from the mere  fact  that  the explanation of the assessee in the present case was found to be  false  it  did  not  follow  that  the  disputed  amount represented his income and that the assessee had consciously concealed the particulars of his income or had  deliberately furnished  inaccurate particulars.  In this respect we  find that in the present case the inference that (1)  [1970] 76 I.T.R. 696. 398 the  assessee had consciously concealed the _particulars  of his   income  or  had  deliberately   furnished   inaccurate particulars  is  based not merely upon the  falsity  of  the explanation  given by the assessee.  On the contrary, it  is made amply clear by the order of the Tribunal that there was positive material to indicate that the business of  Kohinoor Mills  belonged to the assessee and the whole scheme was  to disguise  the profits of the assessee as those of a firm  of four partners.  The present is not a case of inference  from mere falsity of explanation given by the assessee but a case wherein there- are definite findings that a device had  been deliberately  created  by the assessee for  the  purpose  of concealing  his income.  The assessee as such can derive  no assistance from Anwar Ali’s case. Reference has also been made to the observations in the case of Commissioner of Income Tax, Madras v. Khoday Eswarsa  and Sons (1) that penalty cannot be levied solely on the  ’basis of  the reasons given in the original order  of  assessment.

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It is, however, not necessary to go into this aspect of the matter because the penalty in the present case has not  been levied  solely  on  the basis of the reasons  given  in  the original order of assessment.  The Tribunal in this  respect has mainly taken into account the facts brought to light  by the  order made in appeal arising out of the refusal of  the Income Tax authorities to register Kohinoor Mills. As a result of the above, we dismiss the appeals with costs. One hearing fee. K.B.N.                         Appeals dismissed. (1) [1972] 83 I.T.R. 369. 399