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Reference Case No. 4 of 1961, decided on 1st August 1962.

, S. 46 (1)‑Default in payment of tax‑Assessment subsequently set aside in appeal‑Penalty imposed for default remains unaffected.

, Ss. 46 (I) & 45 (1)‑Imposi tion of penalty‑Request for adjustment of tax against refund due to assessee‑Income‑tax Officer rejecting request and imposing penalty for non‑payment‑Injudicious exercise of discretion Penalty not maintainable.

A. P M. Mesbahuddin and A. M. Khan Chowdhury Appellant.

Asrarul Hussain and Mohd. Nurul Huq for Respondent.

.‑In this reference under section 66 (1) of the Income‑tax Act, at the instance of the Commissioner of Income‑tax, question of law referred for our opinion, as formulated in the letter of reference is as follows :‑----

"Whether on the facts and in the circumstances of the case and the assessment of income for year 1953‑54 having been set aside by the Appellate Assistant Commissioner are the penalties imposed under section 46 (1) for non‑payment of the demand based on such assessment, legally maintainable "

In other words whether penalties imposed under section 46 (1) of the Act for non‑payment of demand on assessment of a particular year is legally maintainable when such assessment itself was set aside by the Appellate Assistant Commissioner.

The facts of the case as stated in the letter of reference are as follows : For the assessment year 1953‑54 the Income‑tax officer rejected the accounts and estimated the total income of the assessee after enhancing the total sales from Rs. 3,81,468 to Rs. 5,50,000 and gross profit from Rs. 20,803 to Rs. 73,727 and assessed the Income‑tax at Rs. 36,188. Against this assessment there was an appeal by the assessee on the 9th December 1957. It was fixed for hearing on 15th December 1958. In the mean time the Income‑tax Officer issued demand notice for the tax amounting to Rs. 36,188 on 18th November 1957, that is, two days after the assessment made on 16th November 1957 asking to pay the tax in whole before the 28th November 1957, that is, within ten days from the date of the issue of notice. On the 28^th November 1957 the assessee filed an application stating that the assessment for the years 1948‑49, 1949‑50 having been set aside the provisional payment of tax for those years amounting to Rs.90,000 may be adjusted against the demand for 1953‑54. The Income‑tax Officer by his order, dated 29th November 1957 rejected that prayer and imposed a penalty of Rs. 500 under section 46 (1) of the Act and a fresh demand notice was issued on the very same day, that is, on 29th November 1957 for the tax plus the amount of penalty making it payable by 22nd December 1957, i.e., within 23 days. As the demand was not complied with a further penalty of Rs. 1,809 was imposed on the 24th December 1957 making it payable between the 15th and 18th January 1958.

The assessee preferred two appeals against the two penalty orders, which would be referred hereafter as penalty appeals, to the Appellate Assistant Commissioner on the 7th .December 1958. The assessee also filed an appeal against the assessment order of the Income‑tax Officer for the year 1953‑54, which will be referred hereafter as assessment appeal, to the Appellate Assistant Commissioner.

The assessee filed an application on the 6th May 1958 before the Appellate Assistant Commissioner requesting that the assessment appeal for the assessment year 1953‑54 should be heard and disposed of first before the penalty appeals as the appellant assessee was confident that illegal demand on the assessment under section 23 (3) could not stand. The Appellate Assistant Com missioner passed an order to put the penalty appeals after the disposal of the assessment appeal but on the 15th October 1958, though he heard both the penalty and assessment appeals, he passed an order in the penalty appeals dismissing them on technical ground and deferred the order in the assessment appeal to 24th October 1958. Penalty appeals were rejected as those were not maintainable without payment of tax under section 30 (1) of the Income‑tax Act. On 24th October 1958 the Appellate Assistant Commissioner allowed the appeal of the assessee and set aide assessment of the Income‑tax Officer. .

Against the order of rejection of the penalty appeals, the assessee filed an appeal before the Appellate Tribunal. The Appellate Tribunal allowed that appeal on the ground :‑

"Though the appeal against penalty was rejected on technical ground, the assessment itself was set aside 10 days later on. When the matter has come before the Tribunal, the position is that there is no demand outstanding in view of Appellate Assistant Commissioner's order setting aside the assessment

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The, foundation of the penalty is an existing demand under section 29. As that demand has been obliterated by the order of 'the Appellate Assistant Commissioner setting aside the assessment, the basis of the two penalties has disappeared."

Hence this reference at the instance of the Commissioner of Income‑tax, East Pakistan.

It is contended, before us, by the learned Advocate for the Commissioner of Income‑tax that without necessary deposit as required under proviso to section 30 (1) of the Act the penalty appeals were not maintainable before the Appellate Assistant Commissioner and if it is not maintainable before the Appellate Assistant Commissioner the appeal before the Tribunal against the order of the Appellate Assistant Commissioner is also not maintainable and, therefore, the order passed by the Appellate Tribunal is without jurisdiction. Whether appeal before the Appellate Tribunal against the order of the Appellate Assistant Commissioner is maintainable or not is not before us, for our opinion:

The question that is referred to us is whether imposition of penalty under section 46 (1) of the Act is legally maintainable in view of the fact that when the assessment for non‑payment of which penalty was imposed itself was set aside by the Appellate Assistant Commissioner.

We are unable to contribute to the view taken by the Appellate Tribunal that when the matter has come up before the Tribunal there was no demand outstanding and the foundation of penalty is an existing demand under section 29 of the Act and as that demand has been obliterated by the order of the Appellate Assistant Commissioner, the basis of the two penalties has disappeared. It is no doubt true that the foundation of the penalties is an existing demand but existing at the time when the penalty was imposed. Whether that founda tion continued up to the appellate stage or not is a different matter, but default is there. In the absence of any provision in the Act or the Rules framed thereunder, penalty imposed for non payment of existing demand would be valid imposition under the Income‑tax Act. We have not been able to find any provision in the Act or in the rules framed thereunder nor anything has been brought to our notice by the learned Advocates of the parties which provides that if the assessment is set aside, the penalty imposed for non‑payment of the demand on that assessment will also fall through. Of ‑ course; the learned Advocate for the assessee has pointed out certain provisions in section 45 of the Income‑tax Act which gives discretion to the Income‑tax Officer in respect of imposition or penalty for non‑payment of demand in cases where appeal is pending. Therefore, under the existing provisions of the Income‑tax Act and the Rules framed thereunder we think, that the penalty imposed is legally maintainable even after the assessment order is set aside in appeal either by the Appellate Assistant Commissioner or by the Appellate Tribunal. The foundation of penalty is not exactly the existing demand but the default of payment of that demand. Though the demand is obliterated, the default of payment of the then existing demand is there for which penalty was imposed. In the absence of any provision in the Act or in the rules framed thereunder to the contrary, the penalty imposed will continue.

We are not unconscious of the disastrous result that will follow from this view of ours but we cannot help it except to draw the attention of the authorities to make suitable provision in the Act or in the rules regarding remission of penalty in case of setting aside of the assessment partly or wholly and to make further provision for refund of the penalty in such circumstance if already paid.

The matter does not end there. We are to give opinion on the facts and circumstances of the case. The facts, stated above clearly manifest the arbitrariness of the order of the Income‑tax Officer who not only issued notice of payment of demand within two days from the date of assessment but also directed the assessee to pay the entire demand within 10 days from the issue of the notice of demand. The assessee asked for adjustment of the demand against the sum of Rs. 90,000 already due to him by way of refund. The Income‑tax Officer not only rejected that prayer arbitrarily and illegally but also imposed penalty of Rs. 500 at the first instance making the demand including the penalty payable within 23 days, and within two days of the date fixed for payment of that demand, on the assessee's failure to make payment, imposed another penalty of Rs. 1,809 on the 24th December 1957. The ground of refusal is not only illegal but also arbitrary, namely, that the assessment fox the years 1948‑49, 1949‑50 set aside by the Appellate Assistant Commissioner, was separately fixed on 17th December 1957 for fresh assessment:

"The assessee himself returned about Rs. 60,000 in both the years. So there is no question of refund of the tax paid in toto."

The learned Advocate for the assessee in the presence of the learned Advocate for the Commissioner of Income‑tax represented to us that the tax on that amount of Rs. 60,000 cannot exceed Rs. 36,000 and after, deducting that tax in advance though there is no ground for such advance deduction, there still remains a balance of Rs. 44,000 to cover the demand for the year 1953‑54. There is no provision in the Income‑tax Act to withhold the money refundable to the assessee in anticipation of tax liability to be assessed in future. Therefore, there is no doubt that there was no real basis for imposition of penalty in the circumstances of the case and the Income‑tax Officer could not impose penalty, and the illegal imposition of penalty is not maintainable in law. Section 46 (1) of the Income‑tax Act provides for imposition of penalty according to the discretion of the Income‑tax Officer. But that discretion certainly cannot be arbitrary and unreason able discretion but a judicial discretion which he not only failed to exercise in this case but capriciously exercised it for reasons best known to him. On this ground we hold that the penalties imposed are not legally maintainable.

In the circumstances of the case, as stated above, we answer the question in the negative and we a think the assessee must get cost of this reference which we assess at ten gold Mohurs. Let a copy of this judgment be forwarded to the Central Board of Revenue for necessary action in the light of the observation made above.

I agree with My Lord, the Chief Justice.

Question answered in the negative.

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