M. Chockalingam and Another vs Commissioner Of Income-Tax, Madras

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

Court: Supreme Court of India

Case Number: Civil Appeals Nos. 37 to 40 of 1962

Decision Date: 12 October 1962

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

In this matter the petitioners, M. Chockalingam and another, challenged the orders of the Commissioner of Income‑Tax, Madras, in a case decided by the Supreme Court of India on 12 October 1962. The judgment was authored by Justice M. Hidayatullah, with Justices J. L. Kapur and J. C. Shah forming the bench. The case is reported respectively in 1963 AIR 1456 and 1963 SCR Supl. (1) 599. The statutory framework involved the Income‑Tax Act, 1922 (11 of 1922), particularly sections 35, 184(2), (3) and (6) together with the fifth proviso, and section 184(8), as well as Income‑Tax Rules 1922, rule 48. The headnote recorded that the petitioners had failed to pay advance tax based on their own estimates for the assessment years 1951‑52 and 1952‑53, thereby attracting penal interest under section 18A(8). The assessing officer, however, omitted the penal interest from the tax demand. In 1956 the officer commenced proceedings under section 35 for rectification of the assessment and ordered the levy of the penal interest without issuing any notice to the petitioners. The petitioners then moved the Commissioner of Income‑Tax in revision; they were not afforded a hearing and were informed that their applications had been rejected. They subsequently challenged these orders before the High Court of Madras under article 226 of the Constitution, but their petitions were dismissed.

The respondents contended that the fifth proviso to subsection (6) of section 184 could not be applied to a case involving penal interest under subsection (8), arguing that the latter was mandatory and could not be overridden. The Court held that the fifth proviso to subsection (6) does indeed apply to cases arising under subsection (8). Subsection (6) was expressly made applicable, and the discretion contemplated by the fifth proviso read with rule 48 was available not only in cases under subsections (2) and (3) of section 18A but also in cases under subsection (8). The Court found no indication that any of the provisos should be excluded when applying subsection (6). The decisions in Gursahai Saigal v. Commissioner of Income‑Tax Punjab [1963] 3 SCR 893 and Income‑Tax Officer, Circle It, 600 Madura v. M. R. Vidyasagar [1962] Supp. 2 SCR 613 were referred to, while Lata Mangeshkar v. Union of India [1959] 36 ITR 527 was held inapplicable. The Court further pronounced that authorities exercising powers under the Income‑Tax Act must act judicially. Specifically, the proviso to section 35 imposes an obligation on the assessing officer to give notice and a hearing to the assessee whenever rectification would increase the assessment. Because the petitioners received no notice and were not heard, the Court concluded that the principles of natural justice had been violated.

The Court held that the actions of the tax authorities amounted to a clear breach of the principles of natural justice. It relied on the decisions in Commissioner of Inland Revenue v. Hood Barr, [1961] 39 T.C. 683 and Sinha Govindji v. Deputy Chief Controller of Import & Export, [1962] 1 S.C.R. 540. The appeals were filed under the civil appellate jurisdiction as Civil Appeals Nos. 37 to 40 of 1962. They arose from the Madras High Court judgment and order dated 30 September 1958 in Writ Petitions Nos. 501, 502, 514 and 515 of 1956. Counsel for the appellants were K.N. Rajagopal Sastri and M.S.K. Ayyanqar, while the respondents were represented by Gopal Singh, R.N. Sachthey and P.D. Menon. Justice Hidayatullah delivered the opinion of the Court on 12 October 1962. He observed that the four appeals were filed by two brothers, Chockalingam and Meyyappan, who were challenging a common judgment of the Madras High Court dated 30 September 1958. That judgment had dismissed four petitions filed under Article 226 of the Constitution. The High Court rejected each brother’s two petitions, which concerned the assessment years 1951‑52 and 1952‑53. The petitions had been dismissed because the brothers were ordered to pay penal interest under section 18A(8) of the Income‑Tax Act. The High Court certified that the issues were suitable for appeal to this Court.

Chockalingam and Meyyappan were the sons of Meyyappa Chettiar, and initially the income‑tax assessment had been made against the Hindu Undivided Family. The Madras High Court, by its order of 5 December 1949, recognised a partial partition of the family for assessment years beginning 1940‑41. The subsequent events following that decision need not be recounted in full, as the High Court’s decree was implemented after 1953. Individual assessments for the brothers for the years 1951‑52 and 1952‑53 were completed on 11 July 1953 and 30 August 1954 respectively. The appellants had failed to pay advance tax based on their own estimates of income for those years, thereby attracting liability for penal interest under section 18A(8) of the Income‑Tax Act. However, the Income‑Tax Officer at Karaikudi overlooked this liability and did not include the penal interest in the tax demand. In 1956 the Officer commenced proceedings under section 35 of the Income‑Tax Act to rectify the assessment. He issued no notice to either brother before ordering the levy of penal interest. The Officer specified the penal interest amounts for Chockalingam as Rs 13,391.70 for 1951‑52 and Rs 8,281.00 for 1952‑53. For Meyyappan, the amounts were Rs 13,440.11 for 1951‑52 and Rs 8,254.60 for 1952‑53. No appeal provision existed against the order issued under section 35. Consequently, the brothers sought revision of those orders under section 33A of the Income‑Tax Act by applying to the Commissioner of Income‑Tax. The hearing record indicated that they were not afforded an opportunity to be heard by the Commissioner. They received a letter dated 9 April 1956 from the Income‑Tax Officer stating that their applications had been rejected. Finding no further remedy, the brothers subsequently filed four petitions under Article 226 of the Constitution challenging the orders of both the Income‑Tax Officer and the Commissioner on the ground of violation of natural justice.

In this case the petitioners filed petitions under Article 226 of the Constitution challenging the orders issued by the Income‑tax Officer and the Commissioner of Income‑tax on the basis that those orders violated the principles of natural justice. Before the High Court the Revenue Department argued that the Income‑tax Officer had committed a clear failure by not adding penal interest to the tax and that such a failure could be corrected under section 35 of the Income‑tax Act as an error apparent from the record. The High Court accepted the Department’s contention, dismissed the petitions and held that the defect was merely procedural rather than substantive and that the failure to serve notice did not cause any prejudice because the outcome would have been the same even if notice had been issued. The Court, however, respectfully disagreed with that view, stating that the High Court erred in concluding that there was no breach of the principles of natural justice and that the orders should have been set aside. Section 35, which governs the rectification of mistakes, provides that the Income‑tax Officer, as well as other designated officers, may at any time within four years from the date of an assessment order, on his own motion, rectify any mistake that is apparent from the record of the assessment. The provision also requires the officer, within the same four‑year period, to rectify any mistake that has been brought to his attention by an assessee. One of the provisos to section 35 stipulates that no rectification which would increase an assessment or reduce a refund may be made unless the officer has given notice of his intention to the assessee and has afforded the assessee a reasonable opportunity to be heard. Section 18A, inserted by the Income‑tax Amendment Act, 1944 (Act 11 of 1944), deals with the requirement of advance tax payment by an assessee. Sub‑section (8) of that section provides that where, on making the regular assessment, the officer finds that no advance tax has been paid in accordance with the earlier provisions, interest calculated in the manner laid down in sub‑section (6) shall be added to the tax as determined on the basis of the regular assessment. Sub‑section (6) explains that if, in any year, an assessee pays advance tax under sub‑section (2) or (3) based on his own estimate and the tax paid is less than eighty percent of the tax determined on the regular assessment, and if the shortfall relates to income to which section 18 does not apply and is not due to any variation in the rate of tax, then simple interest at the rate of six per cent per annum from the first day of January of the year in which the tax was paid up to the date of the regular assessment is payable on the amount by which the tax paid falls short of the eighty percent. A number

The Court explained that several provisos are attached to sub‑section (6) of section 18A, and that the fifth proviso provides that “provided further that in such cases and under such circumstances as may be prescribed, the Income‑tax Officer may reduce or waive the interest payable by the assessee.” The term “prescribed” is defined as prescribed by rules made under the Income‑tax Act. Rule 48 of the Indian Income‑tax Rules, 1922, enumerates the situations in which the Officer may exercise this power. According to rule 48 the Officer may reduce or waive the interest payable under section 18A in the following circumstances: (1) when the assessment is completed more than one year after the return has been filed and the delay is not attributable to the assessee; (2) where a person, under section 43, is deemed an agent of another person and is assessed on the latter’s income; (3) where the assessee derives income from an unregistered firm to which clause (b) of sub‑section (5) of section 23 applies; (4) where the “previous year” coincides with the financial year or a year ending close to the financial year and large profits are realised after 15 March in circumstances that could not have been anticipated; and (5) any case in which the Inspecting Assistant Commissioner is of the opinion that the circumstances justify a reduction or waiver of the interest payable under section 18A(6).

The Court noted that, under section 35, an action in favour of the taxpayer may be taken without giving any notice to the taxpayer. However, if such action results in an increase in assessment or a reduction of a refund, the Income‑tax Officer, acting under section 35, must serve a notice on the assessee and afford a reasonable opportunity to be heard. The Court observed that this procedural requirement had not been complied with in the present case. The Department counsel argued that the fifth proviso could not be applied to penal interest imposed under sub‑section (8) of section 18A because that sub‑section is mandatory, that the fifth proviso does not override the mandatory nature of sub‑section (8), and that the High Court was correct in not exercising its writ jurisdiction in favour of the appellants. The counsel further contended that even if notice had been given, penal interest would still have to be added because the Income‑tax Officer had no discretion.

The Court accepted that sub‑section (8) indeed applied to the assessments of the two appellants and that, having failed to make any advance tax payments, the Income‑tax Officer was compelled by that sub‑section to calculate interest in the manner prescribed by sub‑section (6) and to add it to the tax liability. The Court also referred to its recent decision in Gursahai Saigal v. Commissioner of Income‑tax, Punjab, wherein it held that sub‑section (6) may be read together with sub‑section (8) despite certain linguistic difficulties in applying the provisions.

The Court observed that the purpose of section 18A was to impose interest whenever a taxpayer failed to make an advance payment of tax. It held that sub‑section (6) had to be read mutatis mutandis so as to give effect to the clear intention underlying sub‑section (8) and not to defeat that intention. Having settled that point, the Court turned to the question of whether sub‑section (6) should be read together with all of its provisos. The argument advanced was that, under the terms of sub‑section (8), only the “manner” of calculation could be taken from sub‑section (6) and that the fifth proviso did not prescribe any manner of calculation. The fifth proviso, the Court noted, provides that in certain circumstances and in certain cases the Income‑tax Officer may reduce or waive the interest payable by the assessee. This proviso operates after the amount of tax has been determined and cuts across the sub‑section. Although the Income‑tax Officer is empowered to reduce or waive interest, his power is regulated by the rules that prescribe the circumstances and the cases in which such action may be taken. The relevant rule, which had been quoted earlier, applies equally to sub‑section (6) and sub‑section (8). Moreover, sub‑rule (5) of that rule is expressed in general terms and provides that where the Inspecting Assistant Commissioner, after considering the facts, is of the opinion that a reduction or waiver of interest is justified, the Income‑tax Officer may reduce or waive the interest payable. This situation may arise both where a part of the tax has been paid and where no tax has been paid at all.

The Court further explained that an assessee’s right to obtain a decision of the Inspecting Assistant Commissioner in either of those situations would be denied if the assessee were not served with a notice and not afforded a hearing, as required by the proviso to section 35. It was contended, relying on a decision of the Bombay High Court in Lata Mangeshkar v. Union of India, that because the addition of interest is compulsory under sub‑section (8), the fifth proviso to sub‑section (6)—which gives the Income‑tax Officer discretion—could not be applied. That decision also stated that sub‑section (8) merely required the calculation to follow sub‑section (6) and that the fifth proviso to sub‑section (6) did not deal with calculation and therefore could not be applied to cases arising under sub‑section (8). The Court disagreed with that view, holding that sub‑section (6) without reservation is expressly applicable. It cited the judgment in Gursahai Saigal (8)(2), which ruled that in cases arising under sub‑section (8) sub‑section (6) must be applied mutatis mutandis. Consequently, if sub‑section (6) is applicable, the discretion contemplated under the fifth proviso, read together with rule 48, is available not only in cases arising under sub‑sections (2) and (3) of section 18A but also in cases arising under sub‑section (8).

In the matter before the Court, the applicability of sub‑section (8) of the statutory provision was considered together with the mandatory language of sub‑section (6) and its fifth proviso. The Court observed that there is no evidence to suggest that, when sub‑section (6) is applied, any of the provisos that accompany it should be disregarded. Although sub‑section (8) employs the word “shall,” the Court held that within the context of sub‑section (6) and the fifth proviso, the term “shall” can be interpreted as mandatory only in the situation where the relief contemplated by the proviso is not granted. The Court further noted that the circumstances which permit an Income‑tax Officer to grant relief in cases falling under sub‑section (2) and sub‑section (3) may similarly justify the granting of relief in cases that arise under sub‑section (8). It was pointed out that the authority in Income‑tax Officer, Circle II, Madura v. M. R. Vidusagar (3) had ruled that the fifth proviso and rule 48 were intended to mitigate the strictness of the inflexible rule originally enacted in sub‑section (6). Consequently, the introduction of the proviso, applied mutatis mutandis, also affects sub‑section (8). The Court explained that all the sub‑rules of rule 48 apply equally to a situation involving part payment of advance tax and to a situation involving no payment of advance tax at all, and that a justification for complete non‑payment of advance tax can be as legitimate as a justification for partial non‑payment. The Court then turned to the facts of the present case as an illustration. The High Court had issued its order in 1947, and the Tribunal gave effect to that order in 1950. A compromise with the Income‑tax Department concerning the earlier years was reached in 1952, while the assessments for the years 1947‑48 and 1949‑50 were finally completed only on the last day of March 1953. From these dates the Court inferred that, for the assessment years 1951‑52 and 1952‑53, the appellants, had they been afforded an opportunity, might have persuaded the Inspecting Assistant Commissioner that they possessed good grounds for not paying the advance tax because their matters were still pending consideration and settlement. The Court acknowledged that the Inspecting Assistant Commissioner could have rejected their claim, but emphasized that the appellants were denied the chance to bring their cases to his notice because they did not receive any notice and were not heard, contrary to the explicit direction contained in the proviso to section 35. In the Court’s view, this denial amounted to a clear violation of the principles of natural justice. The appellants contended that the Court should not disturb the High Court’s order because the grant of a writ is a matter of discretion, and that if the High Court had refused to issue a writ on the ground that penal interest was payable, the Court ought not to adopt a contrary stance and grant the writ in this instance. The Court clarified that the central issue was not whether penal interest was payable, but whether the appellants were afforded the opportunity required by the proviso to section 35 to show cause against the demand for penal interest. The Court concluded that, since such an opportunity was not provided, the High Court should have acted to rectify the breach of natural justice.

The Court explained that the officials who enforce the Indian Income‑tax Act are required to act in a judicial manner, and a fundamental component of such judicial action is to afford a fair hearing to any person before a decision is rendered against that person. The Court referred to a recent decision of the House of Lords in Commissioner of Inland Revenue v. Hood Barrs (1961) 39 T.C. 683, where the Lords held that the proceedings under the Revenue statutes are quasi‑judicial. The House of Lords further observed that when a provision mandates that notice be given and that notice is omitted, the principles of natural justice are violated and a petition for certiorari lies to set aside the offending order. Lord Reid, speaking at page 706, emphasized that it is unnecessary to determine the exact degree of formality required in proceedings before a General Commissioner; what is clear is that no tribunal, however informal, may render a decision adverse to a person without first providing that person a reasonable opportunity to present his case. He added that even if the Commissioners act in good faith and with the best intentions, such conduct alone does not satisfy the requirement of a fair hearing. The Court noted that a similar view had been expressed by this Court in Sinha Govindji v. Deputy Chief Controller of Imports & Exports (1962) 1 S.C.R. 540.

Applying that principle to the present matter, the Court observed that the proviso to section 35 of the Income‑tax Act expressly obliges the Income‑tax Officer to issue notice and to grant a hearing to the assessee whenever the rectification results in an increase of the assessment. The Department’s counsel argued that the addition of penal interest does not constitute an “enhancement of assessment” as described in the proviso. The Court rejected that argument, holding that the term “assessment” in the proviso is not limited to the tax calculated at the statutory rate but includes the total amount that the assessee is required to pay. Consequently, the proviso applies whenever the effect of an order is to affect the assessee’s pocket. The Court concluded that the circumstances of this case fell squarely within that ambit. Accordingly, the appeals were allowed, a writ of certiorari was issued, and the order of the Income‑tax Officer was set aside. The Court clarified that the Income‑tax Officer remains free to pursue any action that is lawfully available to him. Finally, each party was ordered to bear its own costs in both this Court and the High Court, and the appeals were permitted.