Jammu & Kashmir High Court

B. Johar Forest Works vs Commissioner Of Income-Tax on 30 April,

1973
Equivalent citations: 1977 107 ITR 409 J K
Author: Thakur
Bench: S Ali, D Thakur

JUDGMENT Thakur, J.

1. This reference under Section 256 of the Income-tax Act, 1961, has been made by the
Income-tax Appellate Tribunal, Chandigarh Bench. The question of law which is
referred to this court for consideration and determination is as follows :

"Whether, on the facts and in the circumstances of the case, the penalty was exigible?"

2. The question arose out of the order of the Appellate Tribunal dated December 17,
1970, passed in appeal filed by the assessee against the order of the Appellate Assistant
Commissioner who while maintaining the findings of the Income-tax Officer, Ward
"C", Jammu, that the assessee was in default in not having filed a return of its income
pursuant to a notice under Section 22(2) of the Indian Income-tax Act, 1922,
hereinafter called as the "old Act", reduced the amount of penalty from Rs. 26,335 to
Rs. 16,925. The facts which give rise to the question now before us are as under :

The assessee is a partnership-firm with four partners, namely; (1) Shri-mati

Bhupinder Kaur, wife of Shri Surrinder Singh Johar, (2) one married daughter of S.
Surrinder Singh Johar, (3) Amarjit Singh, and (4) Prabjit Singh, the two sons of S.
Surrinder Singh Johar. For the assessment year 1959-60, the Income-tax Officer,
Ward "C", Jammu, issued a notice to the assessee, dated June 10, 1959, under Section
22(2) of the old Act. This notice has been found by the Tribunal to have been served
on one D. B. Thappa, an employee of the assessee. A similar notice, dated May 3, 1960,
for the assessment year 1960-61 was issued by the Income-tax Officer, Ward "C",
Jammu. This notice the Appellate Assistant Commissioner, found to have been served
on S. Surrinder Singh Johar, the husband of partner No. 1 and the father of partners
Nos. 2 to 4, who was the general manager of the assessee during the relevant period.
This notice also was issued under Section 22(2) of the old Act calling upon the
assessee to file a return of its income.

3. The Tribunal found that after the service of the notice under Section 22(2) for the
assessment year 1959-60 on Shri D. B. Thappa, an employee of the assessee, S.
Surrinder Singh Johar, the general manager, applied for extension of time for filing
the return till September 17, 1959, which was allowed by the Income-tax Officer.
Despite the extension of time the assessee did not file a return. Thereafter, notice
under Section 22(4) of the old Act was issued on February 22, 1960, but regarding this
notice the Tribunal held that the same is not proved to have been served. Another
notice under the aforesaid Section was issued on September 17, 1960, which was
served on an employee of the firm and the service was not denied before the Tribunal.

4. S. Surrinder Singh Johar died in December, 1961. Notices under Section 22(4) of
the old Act were issued on 21st August, 1962, 25th August, 1962, and 18th October,
1962. An application for adjournment was filed before the Income-tax Officer on
November 20, 1962, the date fixed for filing the return by the last notice. But the same
was refused with the result that the Income-tax Officer proceeded to assess the income
of the assessee ex parte and passed the assessment order on the same date assessing
the income at Rs. 1,01,000. While passing the assessment order ex parte the Income-
tax Officer issued a notice under Section 271 read with Section 274 of the Income-tax
Act of 1961, hereinafter called the "new Act", to the assessee calling upon it to show
cause why penalty be not imposed on it for having committed a default in not having
filed a return of its income despite notice. Counsel for the assessee appeared before
the Income-tax Officer and contended that the penalty was not imposable. As
application under Section 27 of the Income-tax Act of 1961 was also made by the
assessee seeking reopening of the assessment proceedings by the Income-tax Officer
which was dismissed. So far as the notice under Section 271 read with Section 274 is
concerned the Income-tax Officer after hearing counsel for the assessee imposed a
penalty of Rs. 26,335. The assessee filed two appeals before the Appellate Assistant
Commissioner, one against the order of the Income-tax Officer refusing to reopen the
assessment proceedings and the other against his order imposing a penalty of Rs.
26,335. The Appellate Assistant Commissioner maintained the order of the Income-
tax Officer holding that the assessment proceedings could not be reopened but
reduced the amount of assessed income from Rs. 1,01,000 to Rs. 76,024. A corres-

ponding reduction was accordingly made in the amount of penalty as the penalty
imposed was determined at 50% of the tax payable. The amount of penalty on such
reduction came to Rs. 16,944 as stated earlier. The assessee felt contented with the
order of the Appellate Assistant Commissioner refusing to reopen the assessment
proceedings and did not choose to file an appeal before the Tribunal. The ex parte
order of assessment passed by the Income-tax Officer on November 20, 1962, thus
became absolute. Two appeals, however, were filed before the Tribunal against the
orders of the Income-tax Officer imposing penalty being Income-tax Appeals Nos.
9538 and 9541 of 1965-66 for the assessment years 1959-60 and 1960-61, respectively.
Appeal No. 9541 pertaining to the assessment year 1960-61 was not pressed before the
Tribunal and was, therefore, dismissed. Appeal No. 9538 pertaining to assessment
year 1959-60 only was pressed.

5. Before the Tribunal it was argued on behalf of the assessee that (1) even if the service
of the notice under Section 22(2) be taken as good for purpose of an assessment, the
same service cannot be taken as valid service for the purpose of imposition of penalty,
(2) that the delay in the riling of the return was not the assessee's creation; and (3)
that the quantum of the penalty should be determined under the old Act of 1922.
6. After having considered the case law bearing on the subject the Tribunal came to
the finding that the assessee was in default inasmuch as it did not file a return of its
income despite service of the notice under Section 22(2) as the service of notice on D.
B. Thappa was not denied by the assessee before the Tribunal. On the second question
the Tribunal found that the mere delay in the issuance of the notice under Section
22(4) by the Income-tax Officer cannot justify the failure of the assessee to file a return
of its income even on receiving a notice under Section 22(2) of the old Act. Regarding
the quantum of penalty the Tribunal held that the amount of penalty was reasonable
even according to the old Act. In consequence, the Tribunal dismissed the appeal filed
by the assessee and upheld the order of the Appellate Assistant Commissioner, vide
order dated December 17, 1970. After the passing of the order by the Tribunal dated
December 17, 1970, the assessee made an application before it requesting it to frame
and refer to this court three questions mentioned in the statement of the case. The
Tribunal, however, framed only one question noted above and referred the same to
this court for determination ; hence, the present reference.

7. It may be stated at the very outset that Appeal No. 9541 pertaining to the assessment
year 1960-61 was not pressed before the Tribunal and, therefore, the same was
dismissed. The exigibility of the penalty, therefore, for default of the assessee to file its
return for the assessment year 1960-61 was not the subject-matter of dispute before
the Tribunal nor is this court called upon to consider the question of exigibility of
penalty in regard to the assessment year 1960-61. The order of the Income-tax
Appellate Tribunal dated December 17, 1970, is confined only to Appeal No. 9538 and
as such the reference to this court under Section 256 of the Income-tax Act is relatable
to the question of the exigibility of the penalty pertaining to the said assessment year
only.

8. We have heard counsel for the parties at length. Mr. Randhawa, counsel for the
assessee, argued before us that service of the notice under Section 22(2) of the old Act
on the assessee was not proved. He submitted that the service of the notice
under Section 22(2) of the old Act was a condition precedent for imposition of penalty
under Section 271(1)(a) of the Act. He further submitted that D. B. Thappa on whom
the service of the notice is found to have been made was not duly authorised on behalf
of the assessee to accept service of the notice. The mere fact, according to him, that S.
Surrinder Singh Johar, who was the general manager of the firm, applied for time for
filing of the return on behalf of the assessee did not constitute a valid and a legal
service of the notice under Section 22(2) of the Income-tax Act.

9. The next contention of Mr. Randhawa was that the Indian Income-tax Act, 1922,
was repealed by the Act of 1961. The assessment in the present case was made on
November 20, 1962, a date long after the date of enforcement of the new Act. The
proceedings taken under the old Act, according to him, did not survive after the repeal
of the old Act. Fresh notice, therefore, was necessary to be served on the assessee
before initiation of the penalty proceedings under Section 271 read with Section 274.
We take up the last contention of Mr. Randhawa first, but feel that the same is without
force. In the present case the proceedings pertain to the assessment year 1959-60. The
same could be continued under the new Act provided the assessment was completed
after the first day of April, 1962. Clause (g) of Sub-section (2) of Section 297 of the
Income-tax Act of 1961 reads as under :

"Any proceeding for the imposition of a penalty in respect of any assessment for the
year ending on the 31st day of March, 1962, or any earlier year, which is completed on
or after the 1st day of April, 1962, may be initiated and any such penalty may be
imposed under this Act."

10. In the instant case the ex parte assessment order was passed by the Income-tax
Officer on the 20th November, 1962, long after the first day of April, 1962, the date
prescribed by Clause (g) of Sub-section (2) of Section 297. The proceedings initiated
under the old Act could, therefore, be continued even without fresh notice under the
new Act. As a matter of fact, the provisions contained in Section 22(2) of the old Act
were substantially altered and an obligation to file a return of income which was more
than the taxable, limits was cast on the assessee by Section 139 of the new Act. The
question of issuing a notice under Section 22(2)on or after Novemher 20, 1962, when
the assessment order was passed and when Section 22(2) had ceased to exist, could
not at all arise. The submission of Mr. Ran-dhawa that the proceeding came to an end
with the repeal of the old Act, therefore, is not at all tenable, and is repelled and it is
held that the continuance of the proceedings of assessment and the initiation of the
proceeding of penalty under the new Act was legally valid and without any infirmity.

11. The next contention of the counsel for the assessee is that there is a finding by the
Tribunal that the notice under Section 22(2) in regard to the assessment year 1959-60
was served neither on any partner of the assessee-firm nor on the general manager of
the firm but on one D. B. Thappa. Therefore, according to him, this could not be
treated to be a valid service for purposes of imposition of penalty under Section 271 of
the new Act.

12. Mr. Bhan, standing counsel for the income-tax department, argued that once the
general manager of the assessee-firm had applied for extension of time for filing of the
return the service on the general manager of the firm has to be presumed.

13. So far as the notices under Section 22(4) are concerned, we think it is not necessary
to consider whether or not the same were duly served on the assessee for it is not a
notice under Section 22(4) which is necessary to be served on the assessee for
purposes of penalty but one under Section 22(2) of the Act. The reply to the question
referred to us, therefore, will depend on the question whether the service on D. B.
Thappa was a legally valid service for purposes of initiating the imposition of penalty
proceedings. We have considered the question and we are of the opinion that the
notice in the present case under Section 22(2) of the Act cannot be said to have been
duly served upon the assessee, when, admittedly, there is no finding by the Tribunal
that D. B. Thappa, the employee of the assessee, was authorised to accept such service
on behalf of the assessee. It is true that J. S. Johar, the general manager of the
assessee, applied for extension of time for filing the return but this conduct may at
best be suggestive of the fact that the general manager had known about the issuance
of such a notice to the assessee. Acquisition of knowledge in regard to the issuance of
a notice under Section 22(2) cannot be considered to be equivalent to, or a substitute
for, the service of the notice on the assessee. It has to be borne in mind that the penalty
proceedings under the Income-tax Act are of a quasi-criminal nature and the
requirement which the statute itself prescribes to be satisfied must be positively
proved to have been satisfied before a penal action against the assessee can be
sustained. Section 63 of the old Act, which prescribed the mode of service of notice on
an assessee, reads as under :

"(1) A notice or requisition under this Act may be served on the person therein named
either by post or, as if it were a summons issued by a court, under the Code of Civil
Procedure, 1908.

(2) Any such notice or requisition may, in the case of a firm or a Hindu undivided
family, be addressed to any member of the firm or to the manager, or any adult male
member of the family....."

14. A perusal of the abovesaid Section would show that a service or requisition must
be served in one of the modes mentioned in the Section before an assessee can be
considered to be in default. Admittedly, D. B. Thappa was not the manager of the
assessee-firm during the relevant period. Therefore, the service of the notice on him
cannot be considered to be a service of notice on the assessee. The partners of the
assessee or its manager may have known about the issuance of such a notice but that
does not suggest that the service had been affected on them. Knowing about the
issuance of the notice otherwise than by its service on the person concerned is one
thing and the service of the notice on the person is another.

15. We are fortified in this view by a Full Bench judgment of the Rangoon High Court
in Commissioner of Income-tax v. Dey Brothers [1935] 3 ITR 213 (Rang) [FB]. The
facts of that case were that the assessee, who was residing at Calcutta, owned a
business at Rangoon styled as Dey Brothers. This business was carried on by one Mr.
Dutta who had been appointed as manager by the assessee. A process issued by the
Income-tax Officer in connection with the assessment of the business was served
during the absence of D on M, one of his assistants working in the shop, who signed
on the back of the copies, "for Dey Brothers" under a rubber stamp. The question arose
whether there was a sufficient service of the notice. Page C.J. who delivered the
judgment for the Full Bench, observed as under (page 215):

"Now, it is common ground that when the two summonses under consideration were
delivered at 32, Mogul Street, the manager, S. M. Dutta, was not present, and that they
were delivered to and taken by J.C. Muzum-dar, one of the assistants working at the
shop. There was evidence that each and every one of the clerks and assistants in the
shop used to accept communications addressed to the firm. The question is whether
in such circumstances there was evidence to justify the conclusion that S. M. Dutta
was served with the summonses in question. In my opinion there was not. It is not
pretended that S. M. Dutta was present, or had any personal knowledge of the delivery
of either of the notices to J. C. Mazumdar, or that J. C. Mazumdar, or any of the clerks
or assistants in the firm were persons authorised to accept service of notices within
Order V, Rule 9 and/ or Rule 13. The problem, therefore, has resolved itself to this fine
point; whether where a notice under the Income-tax Act is delivered otherwise than
by post to any clerk or servant on the premises where the assessee carries on business,
and according to the practice obtaining in the business the employee is expected to
hand over any communication which he has received to the manager, that is evidence
upon which the income-tax authorities can find as a fact that the manager was served
with the summons. I have no doubt that it is not; for if we were to hold that it was, it
would follow that merely because a process server happens to hand over a notice to a
durwan or it might be to a chaprasi, that would be evidence that the person under
whom the durwan or the chaprasi was serving had received the notice himself. In my
opinion, an inference to that effect could not be founded upon such evidence. For these
reasons, in my opinion, the question propounded should be answered in the negative.
The Rs. 100 may be refunded but we make no order as to costs."

16. From the aforesaid Full Bench authority it would appear that the mere fact that
the knowledge of the notice could be imputed to the assessee or its manager was not
considered to be a service according to Section 63 of the Income-tax Act.

17. Another judgment which can be relied upon by us for the view we propose to take
is one by the Madhya Pradesh High Court in Hajarilal Kishorilal v. Commissioner of
Income-tax [1967] 64 ITR 563 (MP). This was also a case of service of notice
under Section 22(2) of the old Act. The Tribunal in that case had found as a fact that
the service on the assessee was proved on the material before it. The High Court
examined the evidence and found on a reference to it that the material placed before
the Tribunal could not lead to the conclusion that the service had been effected on the
assessee. Justice Bhave, who spoke for the Division Bench, observed as under (page
567):

"It is no doubt true that adequacy or sufficiency of evidence is not a matter open for
consideration before this court. It is also true that this court is not entitled to question
a finding of fact if it is based on evidence. But this court has certainly jurisdiction to
question a finding recorded by the Tribunal if it is based on no evidence or if it is based
on facts which cannot lead to the conclusion arrived at by it."

18. Support for the view we arc inclined to take in this case is further available from a
judgment of the Mysore High Court in C. N. Nataraj v. Fifth Income-tax Officer [1965]
56 ITR 250 (Mys). In this case, a notice prescribed under Section 148 of the Act for
initiating reassessment proceedings were issued in the names of the assessees who
were minors and not in the names of their guardians and were served on a clerk of the
assessees' father who was neither an agent of the assessees nor authorised to accept
notices on their behalf. The court while dealing with the question of validity of service
under Section 63 of the old Act observed as under (page 252):

"There is no doubt that a notice prescribed under Section 148 of the Act for initiating
reassessment proceedings is not a mere procedural requirement ; the service of the
prescribed notice on the assessee is a condition precedent to the validity of any
reassessment made under Section 147. If no notice is issued or if the notice issued is
shown to be invalid, then the proceedings taken by the Income-tax Officer without a
notice or in pursuance of an invalid notice would be illegal and void."

19. These observations were made by the court relying on the Supreme Court
judgment in Y. Narayana Chetty v. Income-tax Officer, Nellore [1959] 35 ITR 388
(SC), where their Lordships of the Supreme Court observed as under :

"The notice prescribed by Section 34 of the Income-tax Act for the purpose of
initiating reassessment proceedings is not a mere procedural requirement; the service
of the prescribed notice on the assessee is a condition precedent to the validity of any
reassessment made under Section 34. If no notice is issued or if the notice issued is
shown to be invalid then the proceedings taken by the Income-tax Officer without a
notice or in pursuance of an invalid notice would be illegal and void."

20. Keeping in view the facts found by the Tribunal, the provisions of Section 63 of the
old Act and the case law bearing on the subject we are clearly of the opinion that the
service of notice on the assessee under Section 22(2) of the old Act was not legally
valid so as to sustain an order of penalty under Section 271(1)(a) of the new Act for
committing default in filing the return of income. We, therefore, answer the reference
in the negative and hold that, on the facts and in the circumstances of the case, the
penalty was not exigible.

21. In the circumstances of the case, we leave the parties to bear their own costs.

S.M.F. Ali, C.J.

22. I agree.