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Special Jurisdiction Case No. 84 of 1963, decided on 31st March 1964,

--Levy of penalty after long delay-Validity-Indian Income-tax Act, 1922, S. 28 (c).

As the Indian Income-tax Act, 1922, which provides for special rules of limitation for the various proceedings under that Act does not contain any provision prescribing the period within which an order of penalty should be passed, no such order can be held to be bad in law merely because of inordinate delay.

Muhammad Atiq v. Income-tax Officer (1962) 46 I T R 452 and Vir Bhan Bansi Lal v. Commissioner of Income-tax (1938) 6 I T R 616 ref.

By this application the applicant, the Commissioner of Income-tax, Bihar and Orissa, Patna requires the Appellate Tribunal to refer to the High Court certain questions of law said to arise out of Tribunal's order dated November 2, 1962, in I. T. A. No. 3980 of 1960-61. Inasmuch as, in our opinion, a question of law does arise out of the aforesaid order, we hereby draw up a statement of the case and refer the question of law to the Hon'ble High Court of Orissa, Cuttack under section 66 (1) of the Indian Income-tax Act, 1922.

2. The statement of the case refers to the assessment year 1946-47. The assessee is a registered firm. For the assessment year 1946-47 it returned total income of Rs. 11,743. In the course of assessment proceedings, the Income-tax Officer came across certain cash credits amounting to Rs. 25,000 which was alleged by the assessee to be borrowings. The Income-tax Officer did not accept the assessee's explanation, and completed the assessment on October 16, 1947. On appeal, the Appellate Assistant Commissioner set aside the assessment on June 26, 1948. The Income-tax Officer thereafter made the re-assessment on October 31, 1950, including the aforesaid sum of Rs. 25,000 as income from undisclosed source (copy of Income-tax Officer's order is annexed hereto as Annexure "A-1 ".

3. On October 31, 1950, the Income-tax Officer also issued a notice under section 28(3) requiring the assessee to show cause why penalty should not be levied for concealment of income. The show-cause notice together with demand notice in respect of the assessment was served on the assessee on January 10, 1951.

4. The assessee did not file an appeal against the assessment which accordingly became final.

5. It is not clear from the records whether the assessee filed any explanation in response to the notice under section 28 (3 ) dated October 31, 1950. The order sheet of the file shows that fresh notice under section 28 (3) was served on the assessee on April 1, 1955, fixing the hearing for April 13, 1955. At assessee's request the hearing was adjourned to April 25, 1955.

6. On April 25, 1955, the order-sheet disclosed the following entry by the Income-tax Officer:

"April 25, 1955 Makanlal heard. For orders after receipt of past records,"

7. The matter was allowed to lie over for another two years. On August 28, 1957, tire Income-tax Officer fixed a further hearing on September 11, 1957. A written explanation was also taken from the assessee on that date. Ultimately, the Income-tax Officer passed the order of penalty on January 31, 1958. levying penalty of Rs. 5,000 under section 28 (1) (c) (copy of Income-tax Officer's penalty order is annexed hereto as Annexure "A-2").

8. On appeal, the penalty of Rs. 5,000 was confirmed by the Appellate Assistant Commissioner (copy of Appellate Assistant Commissioner's order is annexed hereto as Annexure "B".)

9. On further appeal before the Tribunal, it was contended that there was unreasonable delay in the passing of the penalty order, and as such it was bad. Dealing with this matter, the Tribunal observed as follows:

"4. This is again another case where there has been unconscionable delay in passing the order of penalty. Though the assessment was completed on October 31, 1950, it had taken more than seven years after the completion of assessment, before penalty came to be levied. From the end of the assessment year 1946-47, it is nearly 11 years. The assessment itself not having been appealed against, there was no reason why penalty proceedings should have been protracted. If the assessee did not shoe- cause even after being called upon to do so, the Income-tax Officer could have disposed of the penalty proceedings. Even if this is ignored, we find that the assessee having shown cause on April 25, 1955, there was no reason why the Income-tax Officer slept over the matter further. Apparently to cover up the delay, a further notice under section 21 (3) was issued after the lapse of a further period of two years."

10. The Tribunal's attention was drawn to the decision of the Allahabad High Court in Muhammad Atiq v, Income-tax Officer ((1962) 46 I T R 452), where it was held that penalty order would be bad if there had been unconscionable delay in completing the penalty proceedings. Following this decision, the Tribunal held that even though there was no time limit laid down in the Act for the passing of the penalty order it should be passed within a reasonable time unless there were special circumstances to justify the considerable delay in completing the penalty proceedings. In the present case there was no such special circumstance and there was unconscionable delay in completing the penalty proceedings. Accordingly, the Tribunal held that the penalty order was bad in law and vacated the order (copy of Tribunal's order dated November 2, 1962, is annexed hereto as Annexure "C").

11. It may be mentioned that under section 275 of the Income-tax Act, 1961, it is provided that no penalty order shall be passed after the expiry of two years from the date of completion of the relevant assessment proceedings.

12. On the above facts the following question of law arises, and is referred to the Hon'ble High Court:

"Whether on the facts and circumstances of the case, the penalty order passed by the Income-tax Officer under section 28 (1) (c) of the Income-tax Act, 1922, on January 31, 1955, in respect of the assessment year 1946-47 was bad in law "

13. If the Hon'ble High Court holds that the penalty order is not bad in law, the appeal will have to be re-heard by the Tribunal on merits.

14. The draft statement was placed on the table for finalisation. The Commissioner of Income-tax has not made any suggestions. The suggestions made by the respondent have been incorporated. The statement of the case is finalised.

D. Mohanty for the Commissioner.

B. K. Mohanty for the Assessee.

-This is a reference under section 66 (1) of the Indian Income-tax Act, 1922, made by the Income-tax Tribunal, Patna, referring the following question for the opinion of this Court

"Whether on the facts and circumstances of the case the penalty order passed by the Income-tax Officer under section 28 (1) (c) of the Income-tax-Act, 1922, on January 31, 1958, in respect of the assessment year 1946-47 was bad in law "

The material facts found by the Tribunal are as follows: The assessment proceedings were completed on October 31, 1950. Thereupon, a notice under section 28 (3) of the Act was issued to the assessee to show cause why penalty may not be levied for the concealment of some income.

"A fresh notice was again issued to him on April 1, 1955, and the matter was posted for hearing on April 13, 1955. It was again adjourned to April 25, 1955, on which date the Income-tax Officer merely directed that orders will be passed on receipt of the records. Nothing was done for nearly two years and on January 28, 1957, the officer fixed the case for hearing on September 11, 1957, and after obtaining the explanation from the assessee levied penalty on January 31, 1958. It should be further noted that the assessee did not file any appeal against the order of assessment dated October 31, 1950, which became therefore final long before the penalty proceedings were disposed of."

The learned Tribunal held that there was unconscionable delay in passing order on the penalty proceedings. It relied on some observations in Muhammad Atiq v. Income-tax Officer ((1962) 46 I T R 452) and thought that mere unconscionable delay in completing the penalty proceedings may render the penalty order bad, though the Tribunal was also conscious of the fact that no special time limit was prescribed in the Act for passing an order of penalty. Ultimately, the Tribunal passed the following order

"There being no special circumstances for the considerable delay which has taken place in completing the order of penalty, we would hold that the penalty order is bad in law and vacate the same."

The learned Tribunal has clearly misconstrued the judgment of the Allahabad High Court in Muhammad Atiq v. Income-tax Officer. There, the learned Judge while rightly pointing out that there is no period of limitation for imposing the order of penalty observed that as penalty proceedings were in the nature of criminal or quasi-criminal proceedings such proceedings should be taken within a reasonable time and the delay of 14 years (which was found to have taken place in that case, was not only unreasonable but fantastic. But the learned Judge did not say that merely on the ground of unreasonable delay the order of penalty would be bad. On the other hand he examined the facts of the case and came to the following conclusion:

"I am not satisfied that in this case the Income-tax Department proved it beyond doubt that a default had necessarily been committed by the petitioner in regard to the filing of a return. For these reasons I am of the view that the impugned order of penalty is bad and must be set aside."

From the aforesaid passage it will be clear that the learned Judge held the order of penalty to be bad because the Department had not established beyond reasonable doubt that there was a default committed by the assessee in filing returns. He has nowhere stated that the order was bad solely because of the unconscionable delay.

It is well settled that a rule of limitation must be expressly provided in a statute and cannot be inferred merely on account of unreasonable delay. Once it is conceded that in the Indian Income-tax Act, 1922 (which provides for special rules of limitations for the various proceedings under that Act) there is no express provision prescribing the period within which an order of penalty should be passed, no such order can be held to be bad in law merely because of the inordinate delay. Mr. D. Mohanty for the Department rightly invited my attention to an earlier decision of the Lahore High Court in Vir Bhan Bansi Lal v. Commissioner of Income-tax ((1938) 6 I T R 616) where the learned Judge held on a construction of section 28 of the Act that no period of limitation can be even impliedly inferred from the other provisions contained in that section.

But as the Tribunal is the final appellate authority over orders passed by an Income-tax Officer, it had undoubtedly jurisdiction to set aside the order of penalty, if, after taking all the facts and circumstances of the case into consideration, it was of the view that the penalty should not have been imposed. The question is mainly one of propriety and not of law, and, as the final Court of appeal, the Tribunal could exercise all the powers which the original taxing authority had. But this reference was necessitated because the order of penalty was set aside solely on the ground that it was bad in law, and for the reasons already given above this view of the Tribunal was based on a misconception.

The question is accordingly answered in the negative, but there will be no order for costs.

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