Maharaj Garage & Company vs. CIT (Bombay High Court)

The Bombay High Court had to consider whether while granting previous approval by the Inspecting Assistant Commissioner, as required under the proviso below Section 271(1)(c)(iii) of the Income Tax Act, the assessee was required to be given a reasonable opportunity of being heard. HELD by the High Court:

(i) S. 271(1)(c) confers a discretion upon the competent authority (in the present, the Income Tax Officer) in respect of the quantum of penalty, which ranges between twenty per cent to twice (i.e. 200%) of the amount of tax sought to be levied. While imposing penalty, the competent authority has to be satisfied that a person has concealed the particulars of his income or furnished the inaccurate particulars of such income. Such satisfaction has to be arrived at on the basis of the objective assessment of the material available on record. The power of adjudication of penalty under the said provision is quasi judicial in nature.

(ii) Section 274 of the Income Tax Act deals with the procedure for imposing penalty and subsection (1) therein states that 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 in the matter. If any order is passed imposing the penalty, it can be the subject matter of statutory appeal under Section 246 of the said Act before the Commissioner of Income Tax (Appeals) and thereafter a further appeal to the Income Tax Appellate Tribunal.

(iii) In the case of concealment of particulars of income and furnishing of inaccurate particulars of such income, clause (iii) under Section 271(1)(c) of the Income Tax Act empowers the imposition of penalty in addition to any tax payable by the assessee, a sum which shall not be less than, but which shall not exceed twice, the amount of tax sought to be evaded. If the amount of income concealed or in respect of which inaccurate particulars have been furnished exceeds a sum of Rs.25,000/, the competent authority, viz. the Income Tax Officer, cannot issue any direction for payment by way of penalty without the previous approval of the Inspecting Assistant Commissioner.

(iv) The provision of Section 271(1)(c)(iii) of the Income Tax does not attract the rule of presumption of mens rea and it cannot be equated with the provision in the Criminal Statute. The penalty is for default in complying with the provision, i.e. of furnishing true and correct particulars of the income in the return. The penalty is imposable for breach of the civil obligation. It is only the reasonable opportunity of being heard in the matter, which is required to be provided to the assessee. The enquiry seems to be of summary in nature, which does not even call for issuance of show cause notice in respect of the quantum of penalty proposed to be imposed. While exercising the discretion in respect of the quantum of penalty, the explanation furnished by the assessee to mitigate the rigour of penalty has to be considered, having regard to the intention of the assessee, if any, to evade the tax, as one of the factors.

(v) The provision of Section 271(1)(c)(iii) of the Income Tax Act contemplates only one and not the dual proceedings of imposition of the penalty in respect of the notice issued therein. The provision has to be read as a whole and it cannot be split up. The requirement of obtaining previous approval of the Inspecting Assistant Commissioner is a step in such proceedings to be mandatorily complied with by the competent authority (in the present case, the Income Tax Officer). The noncompliance of it may vitiate the order imposing the ultimate penalty. The provision nowhere contemplates another opportunity of being heard in the matter before granting approval. The power to grant previous approval is purely administrative in nature. The object is to safeguard the interest of assessee against arbitrary exercise of power by the competent authority while imposing penalty. It is in the nature of control over the action of the subordinate authority. While granting previous approval, the higher authority can see whether the procedure prescribed for it, is followed and that there is a material available on record for imposing the penalty and the extent of penalty imposed is proportionate to the act of default. If the ultimate imposition of penalty under Section 271 of the Income Tax Act is found to be bad in appeal under Section 246 of the said Act or thereafter, the previous approval granted therein shall collapse or would not survive, even in the absence of specific challenge to it.

(vi) We have gone through the several decisions cited before us by the learned counsels appearing for the assessee and the Department of Income Tax. The decisions cited by Shri Dewani for the assessee are not on the provision of Section 271 of the Income Tax Act, as it existed when the order of penalty was passed. It is not possible for us to accept the contention that wherever the Act prescribes the requirement of obtaining previous approval, the compliance of the principles of natural justice of being heard in the matter is called for. No such universal principle can be laid down and it depends upon the language of the provision and the object and purpose of it. We, therefore, hold that the requirement of following the principles of natural justice before granting approval cannot be imported in the proviso below Section 271(1)(c)(iii) of the Income Tax Act. The questions of law at serial Nos.2 and 4 are, therefore, answered in the negative.

(vii) The requirement of Section 274 of the Income Tax Act for granting reasonable opportunity of being heard in the matter cannot be stretched to the extent of framing a specific charge or asking the assessee an explanation in respect of the quantum of penalty proposed to be imposed, as has been urged. The assessee was supplied with the findings recorded in the order of reassessment, which was passed on the same date on which the notice under Section 271(1)(c) was issued, initiating the proceedings of imposing the penalty. The assessee had sufficient notice of the action of imposing penalty. We, therefore, do not find either any jurisdictional error or unjust exercise of power by the authority.

(viii) It is not in dispute that a reasonable opportunity of being heard in the matter, as required by Section 274 of the said Act was given to the assessee before imposing the penalty by the Income Tax Officer. The assessee furnished his explanation, which has been taken into consideration in the order. The mandatory requirement of obtaining the previous approval of the Inspecting Assistant Commissioner was followed. The penalty imposed by the Income Tax Officer was reduced by the Appellate Authority. There was no arbitrary exercise of discretion and the reasons are recorded after taking into consideration the explanation submitted by the assessee. The exercise of jurisdiction in respect of quantum of penalty is neither unjust nor beyond jurisdiction. The questions of law at serial Nos.1 and 3 are, therefore, answered in the negative.