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PETITIONER: M.   CHOCKALINGAM & ANOTHER

       Vs.

RESPONDENT: COMMISSIONER OF INCOME-TAX,MADRAS & ANOTHER

DATE OF JUDGMENT: 12/10/1962

BENCH: HIDAYATULLAH, M. BENCH: HIDAYATULLAH, M. KAPUR, J.L. SHAH, J.C.

CITATION:  1963 AIR 1456            1963 SCR  Supl. (1) 599

ACT: Income  Tax-Rectification  of mistake-Assessee, if  must  be given notice and an opportunity of being heard-Principle  of natural  justice,  if violated-Incom-tax Act,  1922  (11  of 1922),  ss. 35, 184(2), (3), (6) fifth  proviso,  (8)-Income Tax Rules. 1922, r. 48.

HEADNOTE: The  appellants had not paid advance tax according to  their own estimate of the income for the assessment years  1951-52 and 1952-53 and they were liable to penal interest under  s. 18A  (8)  of  the Income Tax Act.  The  Income  Tax  Officer overlooked  this fact and did not add penal interest to  the tax leviable.  In 1956, lie started proceedings under s.  35 of  the  Act  for the rectification of  the  assessment  and ordered the levy of penal interest without sending notice to the appellants.  Against this order the appellants moved the Commissioner of Income Tax in revision.  They were not heard by  the  Commissioner and were informed by  the  Income  Tax Officer   that  their  applications  were   rejected.    The appellants challenged the orders before the High Court under Art.  226  of  the  Constitution,  and  the  petitions  were dismissed.   It was urged by the respondents in  this  Court that  the  fifth proviso to sub-s.(6) could not apply  to  a case  of penal interest leviable under sub-s (8) of  s.  18A since  that  sub-section was mandatory and  that  the  fifth proviso  to  s.  18A  (6) did  not  override  the  mandatory character of sub-s. (8). Held, that the fifth proviso to’, sub-S.(6) does apply to  a case arising under sub-s. (8).  Sub-section (6) is expressly made  applicable and the discretion contemplated  under  the fifth  proviso  read with r. 48 is open not  only  in  cases arising under sub ss.(2) and (3) of s. 18A but also in cases arising  under sub-s(8).  There is nothing to show  that  in applying sub-s. (6) any of the provisos are to be left out. Gursahai Saigal v. The Commissioner of Income-tax    Punjab, [1963] 3 S.C.R. 893 and Income-tax Officer, Circle It, 600 Madura  v.  M. R. Vidyasagar,. [1962] Supp.  2  S.C.R.  613, referred to. Lata  Mangeshkar v. Union of India, [1959] 36 I.T.R.  52  7.

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held inapplicable. Held, further, that the authorities acting under the  Indian Income-tax Act have to act judicially.  In the present  case the  proviso  to s. 35 itself makes it  incumbent  upon  the Income-tax  Officer  to  give notice and a  hearing  to  the assessee  when the effect of the rectification would be  the enhancement  of  the  assessment.  The  appellants  did  not receive  a notice and were not heard and there was  a  clear breach of the principles of natural justice. Commissioner  of  Inland Revenue v. Hood Barr,?,  [1961]  39 T.C.  683 and Sinha Govindji v. Deputy Chief  Controller  of Import8 & Export8, [1962] 1 S.C.R. 540, relied on.

JUDGMENT: CIVIL APPELLATE, JURISDICTION : Civil Appeals Nos. 37 to  40 of 1962. Appeals from the judgment and order dated September 30,1958, of  the Madras High Court in Writ Petitions Nos.  501,  502, 514 and 515 of 1956. K.N.  Rajagopal  Sastri  and M. S.  K.  Ayyanqar,  for-  the appellants. Gopal  Singh,R.   N.  Sachthey  and P.  D.  Menon,  for  the respondents. 1962.  October 12.  The judgment of the Court was  delivered by HIDAYATULLAH,  J.-These  are  four  appeals  filed  by   two brothers   Chockalingam  and  Meyyappan  against  a   common judgment  of  the High Court of Madras dated  September  30, 1958, by which the High Court dismissed four petitions under Article 226 of the Constitution filed by them.  Each of the appellants  had filed two such petitions for the  assessment years  1951-52  and 1952-53 in respect of  which  they  Were ordered to pay. penal interest under section 18 A (8) of the Income-tax Act.  The High Court 601 certified  the  cases as fit for appeal to  this  Court  and hence the present appeals. The  facts  are these.  Chockalingam and Meyyappan  are  the sons of one Meyyappa Chettiar.  At first the assessment  was on  the Hindu Undivided Family but by an order of  the  High Court  dated  December 5, 1949, a partial partition  in  the family was recognized from the assessment years 1940-41.  It is not necessary to narrate the events that transpired after the  decision of the High Court.  The judgment of  the  High Court was given effect to after 1953 and the assessments for the  years  1951-52  and 1952-53 made  on  the  brothers  as individuals were completed on July 11, 1953, and August  30, 1954,  respectively for the two years.  The  appellants  had not paid advance tax according to their own estimate of  the income  for  these two years and they were liable  to  penal interest  under section 18A (8) of the Income-tax Act.   The Income-tax Officer, Karaikudi, overlooked this fact and  did not  add  penal interest to the tax leviable.  In  1956  the Income-tax  Officer started proceedings under section 35  of the Income-tax Act for the rectification ’of the assessment. No  notice  was sent to either brother  and  the  Income-tax Officer ordered the levy of penal interest as follows I.    On Chockalingam       1951-52                       Rs. 13,391- 7-0       1952-53                       Rs. 8,281/- II.  On Meyyappan       1951-52                        Rs. 13,440-11-0       1952-53                        Rs. 8,254- 6-0

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There  is  no  appeal against the order  under  section  35, Income-tax  Act.   The appellants  therefore  applied  under section  33A to the Commissioner of Income-tax for  revision of those orders.  We were told at the hearing that they were not heard by the 602 Commissioner.  They were informed by the Income-tax  Officer by  a  letter dated April 9, 1956, that  their  applications were  rejected.   As  there  was  no  further  remedy,   the appellants  filed  four petitions Under Article 226  of  the Constitution,  challenging  the  orders  of  the  Income-tax Officer  and  the Commissioner of Income-tax on  the  ground that they were opposed to the principles of natural justice. Before  the  High Court it was contended by  the  Department that  there was a patent failure on the part of the  Income- tax Officer to add penal interest to the tax, which he could rectify  under  section  35 as an error  apparent  from  the record.  This contention of the Department was accepted  and the  High  Court  dismissed the  petitions  because  in  its opinion  there was no substantial but a ’Procedural’  defect and  the  failure to issue the notice  caused  no  prejudice because  the  result would have been the same  even  if  the notice  had  been  issued.  In our opinion, and  we  say  it respectfully,  the High Court was in error in  holding  that there was no breach of the principles of natural justice  in this  case  and  the High Court ought to  have  quashed  the orders. Section  35 which deals with the rectification  of  mistakes provides that the Income-tax Officer (among other  officers) may  at  any  time within four years from the  date  of  any assessment  order  etc.  passed by him, on  his  own  motion rectify  any  mistake  apparent  from  the  record  of   the assessment  and  shall within the like  period  rectify  any mistake which has been brought to his notice by an assessee. One of the provisos says that no such rectification shall be made,  having  the  effect of  enhancing  an  assessment  or reducing the refund unless the Income-tax Officer has  given notice  to  the assessee of his intention so to do  and  has allowed him a reasonable opportunity of being heard. Section  18A which was inserted by the Income-tax  Amendment Act, 1944 (11 of 1944) provides for  603 advance  payment of tax by an assessee.  Subsection  (8)  of that  section  says  that  where,  on  making  the   regular assessment, the Income-tax Officer finds that no payment  of advance  tax has been made in accordance with  the  previous provisions  of  that  section, interest  calculated  in  the manner  laid down in sub-section (6) shall be added  to  the tax  as determined on the basis of the  regular  assessment. Sub-section  (6)  says that if in any year an  assessee  has paid  advance tax under sub-section (2) or (3) on the  basis of his own estimate and the tax so paid is less than  eighty per  cent of the tax determined on the basis of the  regular assessment,  so far as such tax relates to income  to  which the provisions of section 18 do not apply, and if it is  not due to any variation in the rate of tax, simple interest  at the  rate  of  six per cent per annum from the  1st  day  of January in the year in which the tax was paid up to the date of  the said regular assessment, is payable by the  assessee on  the  amount  by which the tax paid falls  short  of  the eighty  per  cent.  A number of provisos are added  to  sub- section (6) and the fifth proviso says :-               "Provided further that in such cases and under               such  circumstances as may be prescribed,  the               Income-tax  Officer  may reduce or  waive  the

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             interest payable by the assessee." "Prescribed"  means prescribed by rules made under  the  Act and  rule 48 of the Indian Income-tax Rules, 1922,  provides for the different cases and circumstances as follows :-               "48.   The  Income-tax Officer may  reduce  or               waive  the interest payable under section  18A               in  the  cases  and  under  the  circumstances               mentioned below, namely:-               (1)   Where   the   relevant   assessment   is               completed   more  than  one  year  after   the               submission               604               of  the  return, the delay in  assessment  not               being attributable to the assessee.               (2)   Where  a  person  is  under  section  43               deemed to be an agent of another person and is               assessed upon the latter’s income.               (3)   Where  the assessee has income  from  an               unregistered  firm to which the provisions  of               clause  (b) of sub-section (5) of  section  23               are applied.               (4)   Where   the  "previous  year"   is   the               financial  year or any year ending near  about               the  close  of the financial  year  and  large               profits  are made after the 15th of March,  in               circumstances which could not be foreseen.               (5)   Any   case  in  which   the   Inspecting               Assistant  Commissioner  considers  that   the               circumstances  are  such that a  reduction  or               waiver  of the interest payable under  section               18A(6) is justified. It  will appear from this that the action under  section  35 may be taken in favour of the taxpayer without any notice to him  but  if  the  action has the  effect  of  enhancing  an assessment  or reducing the refund, the Income-tax  Officer, acting under section 35, must send a notice’ to the assessee and give him a reasonable opportunity of being heard.   This admittedly  was not done in this case.  It is urged  by  the learned counsel for the Department that this proviso  cannot apply to a case of penal interest leviable under sub-section (8)  to section 18A because that sub-section  is  mandatory, that the fifth proviso to section 18A (6) does not  override the  mandatory character of the eighth sub-section and  that the writ jurisdiction was rightly not exercised by the  High Court in favour of the appellants because even if notice had been given to them, penal interest would                             605 have  to be added in any event since the Income-tax  Officer had no option. There is no doubt that the eighth sub-section applied to the assessments of the two appellants.  It is also  indisputable that as they had made no advance payment of tax the  Income- tax Officer was obliged under that sub-section to  calculate the interest in the manner laid down in sub-section (6)  and add  it  to the tax.  It has now been ruled  by  this  Court recently  in Gursahai Saigal v, The Commissioner of  Income- tax, Punjab, (1) that sub-section (6) can be read with  sub- section  (8) inspite of certain difficulties of language  in applying  the  provisions of the former sub-section  to  the latter.  This Court points out that the intention of section 18A  is  to  charge interest whenever the  tax-payer  is  in default  in making an advance payment of tax, and that  sub- section  (6) must be read mutatis mutandis so as to  advance the  clear intention underlying sub-section (8) and  not  to defeat that intention.  This being established, the question

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is  whether  sub-section  (6)  must be  read  with  all  its provisos.  The argument here is that according to the  terms of  sub-section (8) only the "manner" of calculation can  be taken  from sub-section (6) and the fifth proviso  does  not lay down any manner of calculation’.  The fifth proviso says that  in  certain  circumstances and in  certain  cases  the Income-tax  Officer may reduce or waive interest payable  by the assessee.  The proviso operates after the amount of  tax is determined and cuts across the sub-section.  The  Income- tax  Officer,  though  empowered  to  reduce  or  waive  the interest payable by the assessee, is controlled by the rules which prescribe the circumstances under which and the  cases in  which  he can take that action.  The relevant  rule  has been quoted above.  All the sub-rules are equally applicable to  sub-section  (6) and sub-section (8).  Sub-rule  (5)  of that rule is general in its terms and it lays down that in a case in which the Inspecting (1)  [1963] 3 S.C.R. 893, 606 Assistant Commissioner considers that the circumstances  are such that a reduction or waiver of interest is justified the Income-tax Officer may reduce or waive the interest payable. Such a case may be where a part of the tax is paid and  also a case where no tax is paid   This  right of an assessee  to obtain a decision of the Inspecting  Assistant  Commissioner in either case is   denied to the assessee if he is not sent a notice and is     not  afforded a hearing as  required  by section 35 (Proviso).  It is contended on the strength of  a ruling  of Bombay High Court in Lata Mangeshkar v. Union  of India(1)  that  the addition of  interest  being  compulsory under  sub-s.(8)  the  fifth  proviso  under  subs.(6)-which invests  the  Income-tax  Officer  with  discretion  is  not applicable.   It is also stated in that case that  sub-s.(8) only  requires that the calculation should be in  accordance with  sub-s.(6) and the fifth proviso to sub-s. (6)  is  not concerned  with calculation and cannot be applied  to  cases arising  under sub-s. (8).  We do not agree that  the  fifth proviso to sub-s.(6) does not apply to a case arising  under sub-s.(8). Sub-section (6) without reserve is-expressly made applicable and this Court in Gursahai Saihgal 8(2) case  has ruled  that in cases arising under the sub-s. (8) the  sixth sub-s. is to be applied mutatis mutandis.  If sub-s. (6)  is applicable  the discretion which is contemplated  under  the fifth  proviso read with rule 48 is open not only  in  cases arising under sub-ss. (2) and (3) of section 18A but also in cases  arising under sub-s. (8).  There is nothing  to  show that  in applying sub-s. (6) any of the provisos are  to  be left  out.   The eighth sub-section no doubt uses  the  word "shall"  but  in  the context of sub-s. (6)  and  the  fifth proviso the word can only be read as mandatory if the relief under  the  proviso is not given.  The  circumstances  which enter an Income-tax Officer to give relief in cases  arising under sub-s. (2) and (3) may also be circumstances  justify- ing relief in cases arising under sub-s. (8).  It was  ruled in   Income-tax  Officer,  Circle  II,  Madura  v.   M.   R. Vidusagar,(3) that the 5th proviso and rule 48 (1)  [1959] 36 I. T. R. 527. (2) [1963]  S.C R. 893 (3) [1962] supp. 2 S.C.R.   613.  607 Were intended to relieve against the rigour of the in flexi- ble rule originally enacted in sub-s.(6). the effect of  the introduction of the proviso mutatis mutandis affects  sub-s. (8) as well.  all the sub-rules of rule 48 apply equally  to a  case of part payment and a case of no payment of  advance

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tax.   There may be as good a justification for  not  paying the  advance  tax wholly as for not paying it  partly.   The present case is an apt illustration because the order of the High Court was passed in 1947 and effect to it was given  by the  Tribunal in 1950.  The compromise with  the  Income-tax Department in relation to the back years took place in  1952 and  the assessments for 1947-48 and 1949-50 were only  com- pleted on the last day of March, 1953.  It is thus  apparent that for the assessment years 1951-52 and 1952-53 the appel- lants  might  if opportunity had been given  to  them,  have convinced  the Inspecting Assistant Commissioner  that  they had  good  grounds for not paying the  advance  tax  because their  cases were still in the process of consideration  and settlement.  No doubt, the Inspecting Assistant Commissioner might have disagreed with their claim but the opportunity to bring  the cases to the notice of the  Inspecting  Assistant Commissioner  was denied to the appellants if they  did  not receive  a  notice and were not heard  against  the  express direction  in  the proviso to section 35.  In  our  opinion, there  was a clear breach of the principles of natural  jus- tice in the present case. It  is contended that this is not a case in which we  should reverse  the  order of the High Court because the  grant  of writ is discretionary and if the High Court declined to give a writ because in its opinion penal interest was payable, we should  not  take a contrary view and grant the  writ  here. The  question is not whether penal interest was  payable  or ’not  but  whether  an opportunity had to be  given  to  the appellants as required by the proviso to section. 35 to show cause against the demand for penal interest.  If this 608 opportunity  was not given the High Court should have  acted to  rectify  that error.  The authorities acting  under  the Indian Income-tax Act have to act judicially and one of  the requirements of judicial action is to give a fair hearing to a  person before deciding against him.  In a recent case  of the  House of Lords Commissioner of Inland Revenue  v.  Hood Barrs,(1)  it  was held that such  proceedings  were  quasi- judicial and if the section required a notice and notice was not  given there was a breach of the principles  of  natural justice  and Certiorari lay to quash the order  made.   Lord Reid at page 706 observed               "I  do not think it necessary in this case  to               decide  what degree of formality, if  any,  is               required in proceedings before General Commis-               sioners,  for  this  at  least  is  clear:  no               tribunal, however informal, can be entitled to               reach  a decision against any  person  without               giving  to him some proper opportunity to               put  forward  his case.  It may well  be  that               these  Commissioners acted in good  faith  and               with  the  best intentions, but  that  is  not               enough." A  simlar  view was also expressed by this  Court  in  Sinha Govindji v. Deputy Chief Controller of Imports & Exports.(2) It  is more so in this case where the proviso to section  35 itself  makes  it incumbent upon the Income-tax  Officer  to give notice and a hearing to an assessee when the effect  of the   rectification   would  be  the  enhancement   of   the assessment.  ’The learned counsel for the Department  raised the for long argument that the addition of penal interest is not enhancement of assessment as stated in the proviso.   We do  not see what else it could be The word  "assessment"  is used  in  the  proviso  not as  an  equivalent  of  the  tax calculated  at  the rate given in the Finance  Act  but  the

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total  amount  which the assessee is required to  pay.   The proviso applies whenever the effect of the order is to touch the pocket (1) (1961) 39 T. C.  683 (2) (1962) 1 S. C. R. 540. 609 of the assessee and in our opinion this was such a case. In  the  result  the  appeals,  are  allowed.   A  writ   of Certiorari  will  issue  and the  order  of  the  Income-tax Officer  will  be  quashed.  The  Income-tax  Officer  will, however, be free to take such action as may be open to  him. In  the  circumstances of the case, the  parties  will  bear their costs here and in the High Court. Appeals allowed.