Commissioner of Income Tax, Andhra Pradesh v. Mis. Bhikaji Dadabhai and Co

Rewritten Version Notice: This is a rewritten version of the original judgment.

Court: Supreme Court of India

Case Number: Civil Appeal No. 434 of 1960

Decision Date: 22 February 1961

Coram: J.C. Shah, J.L. Kapur, M. Hidayatullah

In this case the Supreme Court of India considered an appeal filed by the Commissioner of Income‑Tax for the State of Andhra Pradesh against Mis Bhikaji Dadabhai & Co. The judgment was delivered on 22 February 1961. The bench comprised Justice J.C. Shah, Justice J.L. Kapur and Justice M. Hidayatullah. The case is reported in the 1961 volume of AIR at page 1265 and also in the Supreme Court Reporter at 1961 SCR (3) 923. The matter involved the application of the Hyderabad Income‑Tax Act, its repeal by the Finance Act 1950, and the corresponding provisions of the Indian Income‑Tax Act 1922.

The Income‑Tax Officer, after examining the books of accounts of the respondents and finding them unreliable, made an assessment of income for the Fasli year 1357, which corresponds to the period from 1 October 1946 to 30 September 1947. On 22 December 1949 the officer issued a notice under section 40 of the Hyderabad Income‑Tax Act requiring the respondents to show cause why a penalty should not be imposed in addition to the tax assessed. Following the respondent’s failure to satisfy the notice, the officer issued an order dated 31 October 1951 directing the payment of the assessed penalty. During the pendency of these proceedings, the former State of Hyderabad merged with the Indian Union. Consequently, section 13 of the Finance Act 1950 provided that the Hyderabad Income‑Tax Act would cease to have effect from 1 April 1950, but it expressly saved the operation of the Act for the levy, assessment and collection of income‑tax and super‑tax for periods prior to that date where liability could not be imposed under the Indian Income‑Tax Act.

The Court was required to determine two principal questions. First, whether the Income‑Tax Officer retained authority on 31 October 1951 to impose a penalty under section 40(1) of the Hyderabad Income‑Tax Act despite the repeal of that Act. Second, whether the assessee was entitled to appeal the penalty order and, if so, whether the Appellate Assistant Commissioner possessed jurisdiction to hear such an appeal or whether his order would be a nullity.

The Court held that the repeal of the Hyderabad Income‑Tax Act did not extinguish the officer’s power to impose a penalty for the year preceding the repeal. Section 13 of the Finance Act 1950 saved the operation of the Hyderabad Act for matters relating to assessment and collection for periods before April 1950, and therefore the penalty proceeding could lawfully continue after the enactment of section 13(1). The Court further held that an appeal against the penalty order on the ground of the officer’s lack of competence was indeed maintainable before the Appellate Assistant Commissioner. The jurisdiction of the Appellate Assistant Commissioner was not contingent upon the officer’s competence; as a court of appeal, he could consider both factual and legal aspects of the case, including the officer’s jurisdiction, and his order was not a nullity.

The appellate officer was empowered to pass orders that were appealable; as a court of appeal, he possessed jurisdiction to examine the correctness of the Income‑tax Officer’s conclusions both on factual and legal grounds, and even to assess the officer’s own jurisdiction to issue the order under appeal, and his order was not a nullity. The case proceeded before a Civil Appeal bearing number 434 of 1960, which was taken by special leave from the judgment and order dated 4 October 1956 rendered by the Hyderabad High Court in I.T.R. No. 116/5 of 1954‑55. Counsel for the appellant, identified as K. N. Rajagopal Sastri and D. Gupta, appeared for the appellant, while counsel for the respondents, namely A. V. Viswanatha Sastri, S. N. Andley, J. B. Dadachanji, Rameshwar Nath and P. L. Vohra, represented the respondents. The judgment was delivered on 22 February 1961 by Justice Shah. The matter concerned M/s Bhikaji Dadabhai & Co., the assessee, which owned an oil mill at Khammamath in the former State of Hyderabad. For the assessment year Fasli 1357, covering the period from 1 October 1946 to 30 September 1947, the assessee reported an income of Rs. 50,384/‑. The Income‑tax Officer, however, found the books of account maintained by the assessee to be unreliable and, by an order dated 10 February 1950, reassessed the total income at Rs. 1,63,131/‑. Prior to finalising this assessment, the officer issued on 22 December 1949 a notice under section 40 of the Hyderabad Income‑tax Act requiring the assessee to show cause why a penalty should not be imposed. By an order dated 31 October 1951, the officer directed the assessee to pay a penalty of Rs. 42,000/‑ in addition to the tax liability. That penalty order was subsequently confirmed on appeal by the Appellate Assistant Commissioner. The Income‑tax Appellate Tribunal, on review, observed that under the provisions of section 13(1) of the Indian Finance Act, 1950, the Hyderabad Income‑tax Act had ceased to have effect, and because the power to impose a penalty under section 40 of that Act was not saved, the penalty order was beyond jurisdiction. The Tribunal further noted that although the Income‑tax Officer might have erred in imposing the penalty, no appeal under section 42(1) of the Hyderabad Income‑tax Act could be made to the Appellate Assistant Commissioner because section 40 itself had ceased to operate, leaving no basis for an order or an appeal. Consequently, the Tribunal dismissed the appeal. The assessee then raised three questions before the Hyderabad High Court: (1) whether, on 31 October 1951, the Income‑tax Officer of the Warrangal Circle possessed the authority to impose a penalty under section 40(1) of the Hyderabad Income‑tax Act with respect to the assessment for the year in question; (2) whether the assessee retained a right to appeal the officer’s penalty order; and (3) if the Appellate Assistant Commissioner lacked jurisdiction to hear the appeal, whether his order was a nullity, rendering the officer’s order erroneous though it might remain in force until set aside by a competent authority.

In the proceedings before the High Court, the Tribunal asked three matters for determination: first, whether on 31‑10‑1951 the Income‑tax Officer of the Warrangal Circle possessed authority to levy a penalty under section 40(1) of the Hyderabad Income‑tax Act in respect of the assessment for the year 1357 F; second, whether the assessee was entitled to file an appeal against the officer’s penalty order; and third, if the Appellate Assistant Commissioner lacked jurisdiction to hear such an appeal, whether the commissioner’s order would be a nullity and consequently render the Income‑tax Officer’s order erroneous, albeit it might remain in force until set aside by a competent authority. The High Court rejected the first and third propositions and affirmed the second. It held that the Appellate Assistant Commissioner did have the power to entertain an appeal that challenged the Income‑tax Officer’s authority to impose a penalty, and consequently the commissioner’s decision was not ultra vires. In a separate petition filed by the assessee, the High Court also directed the Income‑tax Appellate Tribunal to set aside the officer’s penalty order, reasoning that the Tribunal’s earlier finding of the officer’s lack of power logically required cancellation of the penalty. Against the High Court’s order, the present appeal was filed with special leave. The Court agrees with the High Court that the appeal to the Appellate Assistant Commissioner was proper. Even assuming that the Income‑tax Officer had erred in imposing the penalty because the statutory conditions for exercising that power were absent, an appeal on the ground of the officer’s incompetence was nevertheless maintainable before the Appellate Assistant Commissioner. Under the Act, the commissioner is constituted as an appellate authority for certain orders of the Income‑tax Officer, and his jurisdiction to hear such appeals does not depend on the competence of the officer to have made the appealed‑to order. The commissioner’s appellate jurisdiction includes the authority to examine the correctness of the officer’s findings on both factual and legal questions, and even to assess whether the officer possessed jurisdiction to issue the impugned order. Nevertheless, the Court cannot agree with the High Court’s view that the repeal of the Hyderabad Income‑tax Act by the Finance Act 1950 extinguished the power to levy a penalty for years preceding the repeal. The State of Hyderabad merged with the Indian Union while the proceedings before the Income‑tax Officer were still pending, and thereafter the Indian Parliament enacted the Finance Act, 1950. Section 13(1) of that Act, insofar as it is relevant, provides that any law relating to income‑tax or super‑tax that was in force immediately before 1 April 1950 shall cease to have effect, except for purposes of levy, assessment and collection of income‑tax and super‑tax with respect to periods not included in the Indian Income‑tax Act, 1922.

The Finance Act of 1950, in its section 13, declared that the Hyderabad Income‑tax Act would cease to have effect from 1 April 1950. However, the same provision expressly preserved the operation of that Act with respect to the levy, assessment and collection of income‑tax and super‑tax for periods that fell before the repeal date, where liability could not be imposed under the Indian Income‑tax Act of 1922. In other words, while the Hyderabad Act was generally repealed, its mechanisms for assessing and collecting tax relating to earlier assessment years were saved. The Judicial Committee of the Privy Council, in the case of Commissioner of Income‑tax, Bombay Presidency and Aden v. Messrs Khemchand Ramdas, explained that the term “assessment” in most income‑tax statutes is used in a variety of ways: sometimes to denote the mere computation of income, sometimes to indicate the determination of the tax payable, and sometimes to refer to the entire procedural scheme laid down for imposing liability on the taxpayer. The Hyderabad Income‑tax Act likewise employed the expression “assessment” in different senses. For example, sections 31 and 39 used the term in the narrow sense of computing income, whereas other sections employed it to signify the determination of liability, and still other provisions used it to describe the procedural machinery for imposing that liability. By expressly keeping the Hyderabad Act alive for those periods that included the assessment year in question, the Finance Act intended that the procedures for levy, assessment and collection of income‑tax would continue to apply to those years.

The High Court, however, interpreted the word “assessment” in section 13(1) to cover the whole process of imposing tax liability but not the procedure for imposing a penalty. It observed that the Hyderabad Act dealt with liability to pay income‑tax and liability to pay penalty in separate provisions, each relating to imposition and recovery. The Court reasoned that, had the Legislature intended to preserve the Hyderabad Act for all purposes, including the levy of penalties for any particular year or years of assessment, it could have expressed that intention in clear and unambiguous language rather than limiting the saved operation to “levy, assessment and collection.” Accordingly, the High Court concluded that while the saving clause preserved the entire procedure for imposing and collecting tax, the provisions relating to the imposition and collection of penalties did not survive the repeal of the Hyderabad Income‑tax Act. The Court noted that the penalty provision referred to was cited as (1) (1938) L.R. 65 I.A. 236; [1938] 6 I.T.R. 414. The Supreme Court later examined the issue in C. A. Abraham v. The Income‑tax Officer, Kottayam, considering whether the expression “assessment” used in section 44 of the Indian Income‑tax Act also encompassed the procedure for imposing a penalty.

In this case the Court observed that the term “assessment” used in the provisions of Chapter IV of the Indian Income‑tax Act does not refer only to the computation of income. The Court held that there is no basis for interpreting section 44, which makes the partners or members of an association jointly and severally liable to assessment, as limiting liability solely to the calculation of income under section 23. Rather, the term “assessment” also embraces the procedures for declaring and imposing a tax liability and the mechanisms for enforcing that liability. The Court further explained that under section 28 the liability to pay additional tax, which is designated as a penalty, is imposed because of the dishonest or contumacious conduct of the assessee. Accordingly, the Court described a penalty as an additional tax levied on a person because of such dishonest or contumacious behaviour. The Court acknowledged that the Hyderabad Income‑tax Act contains separate provisions for the recovery of tax due and for the recovery of penalty, but it stated that this distinction does not alter the essential character of the penalty imposed under either the Hyderabad Act or the Indian Income‑tax Act.

The Court then expressed disagreement with the view that the situation should be treated in the same way as the statutes listed – namely the Sea Customs Act 1878, the Indian Tariff Act 1934, the Land Customs Act 1924, the Central Excise and Salt Act 1944, and the Indian Post Offices Act 1898 – which were extended to the whole of India by section 11 of the Finance Act 1950. The Court noted that the corresponding provisions of those statutes were repealed by a proviso that expressly provided that any penalty, forfeiture or punishment ordered for an offence committed under the earlier law, or any investigation, legal proceeding or remedy relating to such penalty, could continue as if the repealing Act had never been enacted. The Court observed that sub‑section (1) of section 13 was intended to prohibit authorities competent to commence or continue penalty proceedings from doing so, even when the circumstances would otherwise justify such action. The Court pointed out that the scheme of the statutes mentioned in section 11, which were repealed by sub‑section (2) of section 13, differs from the scheme of the Indian Income‑tax Act. Specifically, by sub‑section (1) of section 13 of the Finance Act 1950, the Hyderabad Income‑tax Act was to cease operating from 1 April 1950, except for the purposes of levy, assessment and collection of income‑tax and super‑tax. In contrast, for the other Acts listed in section 11, provisions similar to those in section 6 of the General Clauses Act were enacted to allow penalty proceedings to be commenced and continued. Consequently, the Court concluded that while penalty proceedings may be initiated and pursued under the Acts specified in section 11, no such proceedings may be commenced or continued under the Hyderabad Income‑tax Act.

In this matter the Court observed that the specific Act under which the assessment had been made was not identified in the material before it. After reviewing the record, the Court concluded that the High Court had been mistaken in holding that the proceedings for levying a penalty could not be pursued after the commencement of section 13(1) of the Finance Act, 1950. The Court determined that the statutory provision did not bar the continuation of penalty proceedings and therefore those proceedings remained lawfully open. On the basis of this finding, the Court allowed the appeal that had been filed and recorded a positive answer to the first question that had been presented for decision. The Court further expressed that, given its conclusion, there was no necessity to issue any order in respect of the petition that had been brought under article 226 of the Constitution and that had been before the High Court. In addition, the Court directed that the appellant should be awarded the costs of the appeal in both this Court and the High Court. Accordingly, the appeal was allowed and the appropriate costs were granted to the appellant.