N.A. Malbari And Bros vs Commissioner Of Income-Tax, Bombay

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

Court: supreme-court

Case Number: Civil Appeal No. 78 of 1962

Decision Date: 25 November 1963

Coram: A.K. Sarkar, M. Hidayatullah, J.C. Shah

In the case titled N.A. Malbari And Bros versus the Commissioner of Income‑Tax, Bombay, the matter was heard by the Supreme Court of India on 25 November 1963. The judgment was authored by Justice A. K. Sarkar, with Justices M. Hidayatullah and J. C. Shah sitting on the bench. The petitioner was the firm N.A. Malbari and Bros, and the respondent was the Commissioner of Income‑Tax, Bombay. The official citation of the decision is 1964 AIR 1807 and 1964 SCR (5) 560, with additional citator references including E 1969 SC 835, (6) RF 1992 SC 1139, and the relevant statutory provision being Section 28 of the Income‑Tax‑Penalties‑One Act, 1922 (the earlier Act, the second Act dealing with full‑fact disclosure, and the question of its justification). The headnote explains that the petitioner, a firm based in Surat, operated a branch in Bangkok that exported cloth and also conducted local purchases and sales. The branch’s operations were halted during the war but resumed after hostilities ended. In the income‑tax return for the assessment year 1949‑50, the firm did not report any profit from the Bangkok branch, stating that the branch’s books of account were unavailable, and therefore requested that its profit be assessed on an estimate basis subject to action under Sections 34 or 35. The assessing authority estimated the profit at five per cent of the export value recorded in the Surat books, and a similar estimate was made for the year 1950‑51. For the year 1951‑52 the firm again omitted the branch’s profit, prompting the Income‑Tax Officer to issue a notice requiring the production of the relevant accounts and books. The firm responded by promising to present the accounts for the year 1950 in the following year. Consequently, the Officer estimated the branch’s sales and net profit at five per cent, resulting in an amount of Rs 37,500, and on the same day issued a notice asking why a penalty for concealment of income for 1951‑52 should not be imposed. The officer later imposed a penalty of Rs 20,000 after finding the firm’s explanation unsatisfactory. While assessment proceedings for 1952‑53 were underway, the firm repeated its earlier stance, forcing the Officer to demand the branch’s accounts, which revealed that for 1951‑52 the firm had earned a profit of Rs 1,25,520. The Officer then issued another notice asking why a penalty should not be levied for deliberate concealment of income for that year, and subsequently imposed a further penalty of Rs 68,501. The firm appealed the two penalty orders to the Appellate Assistant Commissioner, whose decision was rejected. On further appeal, the Tribunal set aside the first penalty order but upheld the second. The firm then obtained a reference to the High Court questioning the legality of the Rs 68,501 penalty for concealment in the original return for 1951‑52. The High Court affirmed the legality of the penalty, and the matter subsequently reached this Supreme Court on special leave, where the central issue was whether the second penalty order was invalid because a prior penalty of Rs 20,000 had already been imposed for the same concealment, whether the officer lacked jurisdiction to issue the second order while the first stood, and whether the later cancellation of the first order by the Tribunal affected the validity of the second order.

The reference presented to the High Court asked whether the imposition of a penalty of Rs 68,501 for concealment in the original return for the assessment year 1951‑52 was lawful. The High Court responded affirmatively, holding that the penalty was within the powers of the tax authority. After the High Court decision, the appellant obtained special leave to appeal before this Court. In that appeal, the appellant contended that the second penalty order was void. The appellant argued that there was a single act of concealment and that a penalty of Rs 20,000 had already been imposed for that concealment; consequently, the tax officer lacked jurisdiction to issue a further penalty while the first order remained in force. The appellant further asserted that because the first order was later set aside by the Tribunal, the second order should be treated as a nullity from the outset, since it was supposedly made while the first order was still effective. The Court rejected all of these contentions. It held that the Income‑Tax Officer possessed full authority to make the second penalty order and that failing to recall the earlier order did not deprive him of that authority, although two orders relating to the same concealment could not be enforced concurrently. The Court observed that when the officer discovered the true facts and recognized that a substantially higher penalty was justified, he was entitled to rescind the earlier order and issue a new order imposing the greater penalty. The omission to formally recall the first order did not render the second order invalid. Moreover, in the present case the earlier order had been cancelled and no objection to that cancellation had been filed; therefore only the second order remained in force and it was a valid legal order. The Court distinguished the decision in C V Govindarajulu Iyer v. Commissioner of Income‑Tax, Madras, 16 ITR 391, indicating that the present circumstances were different.

The appeal before this Court is Civil Appeal No 78 of 1962, filed against the judgment and order dated 13 April 1960 of the Bombay High Court in Income‑Tax Reference No 40 of 1959. The appeal was heard on 25 November 1963, and the judgment was delivered by Justice Sarkar. The matter before the Court concerned a firm that carried on business in Surat and maintained a branch in Bangkok, from which it exported cloth and also purchased and sold goods locally. During the Second World War the Bangkok branch had been inactive, but it resumed operations after hostilities ended. In the return for the assessment year 1949‑50, the firm did not disclose any profit arising from the Bangkok branch, asserting that the books of account for that branch were unavailable and that the profit might have to be assessed on an estimated basis under the relevant provisions of the Income‑Tax Act. The assessment for the year 1950‑51 followed a similar pattern, with no reference to the Bangkok branch in the return and an estimate being made. For the assessment year 1951‑52 the firm again omitted the Bangkok branch profits, and on 11 January 1952 the Income‑Tax Officer issued a notice under section 22(4) requiring the firm to produce the profit and loss account, balance sheet and related books. The firm responded on 29 January 1952, claiming that the books were physically located in Bangkok and could not be prepared unless its partner, Hatimbhai A Malbary, travelled there personally.

In the year 1949‑50 the assessees did not include any profit of their Bangkok branch in the income‑tax return because the books of that branch were not available; they stated that the profit might have to be assessed on an estimate basis and that action under sections 34 or 35 could be taken if a statement of account were produced. Accordingly the assessing officer made an assessment based on a profit calculated at five per cent of the export value recorded in the Surat books for the Bangkok branch. For the assessment year 1950‑51 the return again omitted any reference to the Bangkok branch, and the officer made a similar estimate for that year. For the assessment year 1951‑52 the Bangkok business profits were again not shown, and on 11 January 1952 the Income‑Tax Officer issued a notice under section 22(4) requiring the assessee to produce the profit‑and‑loss account, balance sheet and the relevant books. The assessee responded on 29 January 1952, alleging that the books were in Bangkok and could not be prepared unless its partner, Hatimbhai A. Malbary, travelled there in person; the assessee could not state when that would happen but promised that the accounts for calendar year 1950 would be produced the following year. The officer then estimated the Bangkok branch’s sales at Rs 7,50,000 and the net profit at five per cent of that amount, i.e., Rs 37,500, and entered this assessment on 31 January 1952. On the same day a notice under section 28(3) was issued requiring the assessee to show cause why a penalty under section 28(1)(c) for concealment of the 1950 income should not be levied. After the assessee was heard on this notice, the officer, finding the explanation unsatisfactory, imposed a penalty of Rs 20,000 on 22 January 1954.

Subsequent assessment proceedings for the year 1952‑53 were initiated, and the assessee again adopted the same position as in earlier years. The Income‑Tax Officer, however, remained firm and, after several adjournments, the assessee finally produced the Bangkok branch books on 17 August 1953. Those books revealed that in calendar year 1950 the assessee had earned a profit of Rs 1,25,520. Consequently, the officer commenced proceedings under section 34 for the assessment year 1951‑52 and served a notice requiring the assessee to file a return. The assessee filed a return that correctly stated the profit for calendar year 1950. The officer completed the assessment and, on 8 April 1954, issued another notice under section 28(3) asking the assessee to show cause why a penalty should not be imposed for deliberately concealing the particulars of the 1950 income. Pursuant to that notice, the officer made an order on 28 February 1957 imposing a penalty of Rs 68,501.

In this case there were two separate penalty orders imposed on the assessee. The assessee first appealed both penalty orders to the Appellate Assistant Commissioner, but both appeals were dismissed. The assessment of the assessee’s income was not contested. Consequently the assessee filed an appeal before the Income‑Tax Appellate Tribunal. The Tribunal recorded that it was difficult to comprehend the Revenue Department’s practice of splitting a single offence into two separate proceedings. Regarding the penalty imposed on the basis of the assessment under section 23(3), the Tribunal observed that at that stage the Department had not succeeded in establishing any guilt, the matter was still confined to an estimate, and therefore the penalty of Rs 20,000 should be remitted in full. By contrast, the Tribunal held that the penalty of Rs 68,501 was justified because the Income‑Tax Officer had obtained definitive knowledge that the profit for the year was Rs 1,25,520, which clearly demonstrated the assessee’s concealment, and that the amount of the penalty was not excessive, so it was confirmed. The revenue authorities did not challenge the cancellation of the first penalty order. After that, the assessee obtained a reference to the High Court concerning the issue outlined at the beginning of this judgment. The reference concerned only the penalty of Rs 68,501 imposed pursuant to the second notice issued under section 28(3) for concealing the particulars of the income of 1950. It is necessary to note that in the return filed in the proceedings initiated under section 34 the assessee had supplied the correct particulars and had also produced the books of account, and therefore it had not committed any default in that respect. Accordingly the notice issued under section 28(3) must be regarded as relating to the original concealment of the income. The Tribunal had found, as a matter of fact, that the assessee’s profit for the year was Rs 1,25,520, that the profit had not been disclosed originally, and that the relevant books had not been produced, which allowed the Income‑Tax Officer to work on an estimated profit of Rs 37,500. In the High Court it was contended that the same concealment gave rise to two penalties, one of Rs 20,000 and another of Rs 68,501. The High Court accepted the assessee’s argument that two penalties could not be imposed for identical facts, but it held that the two penalties in this case were not based on the same facts because the original assessment was based solely on an estimate, whereas the second assessment was made after the full facts of the concealed income were known. In the present appeal counsel for the assessee, Mr Kolah, argued that the second penalty order was illegal because there was a single concealment and an earlier penalty of Rs 20,000 had already been imposed, and that the second order should be treated as a nullity.

In this case the appellant contended that the tax authority had no jurisdiction to issue the second penalty order while the first penalty order remained in force, and therefore the later order should be regarded as a nullity. The appellant further argued that even though the tribunal later cancelled the first order, the second order could not become valid because it was originally issued at a time when the first order still existed, making it void from the outset. The court was unable to accept this line of argument. While it may be true that two penalty orders cannot both stand for the same concealment, the issue was not one of jurisdiction. The court explained that the penalty provision must be linked to the amount of tax that would have been evaded had the assessee succeeded in concealing the income. In the present matter, the income‑tax officer initially assessed the income on the basis of an estimate and consequently imposed a penalty calculated from that estimate. When the officer later discovered the full facts and realised that a substantially higher penalty could have been justified, he was entitled to rescind the earlier penalty order and issue a new order imposing the higher amount. The failure to formally rescind the first order would not render the later order invalid; the officer retained full authority to make the second order and did not lose that authority simply because he had not withdrawn the earlier order, although both orders could not be enforced together. In the circumstances before the court, the first order had been cancelled and no objection to that cancellation had been raised, leaving only the second order, which the court considered to be a lawful order.

The appellant also pointed out that when the first penalty order was passed the tax officer already possessed the complete facts that would have warranted the higher penalty. The appellant highlighted that the first penalty order was dated 22 January 1954, whereas the books revealing the true financial situation were produced before the officer on 17 August 1963. The appellant argued that, despite having the full facts, the officer issued a lower penalty and therefore had no right subsequently to alter that order. To support this contention, the appellant referred to the decision in C. V. Govinderajulu Iyer v. Commissioner of Income Tax, Madras, where it was submitted that a proceeding under section 23(3) and a subsequent proceeding under section 34 concerning the same period were distinct, and that in the latter proceeding a penalty could not be imposed for a concealment already dealt with in the earlier proceeding. The court noted that the earlier judgment, delivered by Chief Justice Rajamannar, rejected that submission and held that so long as the proceedings under section 34 relate to the assessment for the same period as the original assessment, the income‑tax officer remains competent to levy a penalty on any ground available under section 28(1), even though it relates to the prior proceeding. This reasoning was acknowledged by the court in evaluating the present arguments.

The Court observed that the Chief Justice had suggested a possible limitation on the authority of an Income‑tax Officer to levy a penalty. The limitation, as articulated, would arise where the default or act forming the basis of the penalty was already known to the officer who had rendered the final order in the earlier proceeding, and where that officer had failed to exercise his power under Section 28 during that earlier proceeding. In such a circumstance, the Court noted, the officer might lack authority to impose a later penalty. Counsel for the appellant relied on this observation to support his argument. However, the Court expressed the view that the Chief Justice did not intend to lay down this limitation as a definitive rule of law. The Court further stated that the observation was not essential to the resolution of the case before the Chief Justice and that it should not be taken as a binding proposition. While the Court was prepared to assume, for the sake of argument, that the statement reflected correct law, it concluded that the proposition did not apply to the present matter. The principle articulated was that if the default justifying a penalty was already within the knowledge of the authority at the time it issued the earlier final order, a later penalty could not be imposed. The Court clarified that the earlier case considered by the Chief Justice did not involve the imposition of two separate penalties; rather, it concerned a situation where no return had been filed following a general notice, after which proceedings under Section 34 were instituted, leading to an assessment and the subsequent imposition of a penalty. Consequently, the “final order” referred to by the Chief Justice must be understood as the final assessment order of those prior proceedings.

Applying those principles to the present case, the Court noted that the final order in the earlier assessment proceedings was dated 31 January 1952. At that time, the Income‑tax Officer was unaware of the concealment of income amounting to Rs 1,25,520. Accordingly, the Court found that the observation of the Chief Justice offered no assistance to the appellant, Mr Kolah. The Court also observed that the first penalty order, dated 22 January 1954, was issued pursuant to a notice issued on 31 January 1952, to which the assessee had responded on 11 March 1952. That notice did not concern the concealment discovered through the production of books on 17 August 1953, and the assessee had never been heard on that later concealment. Therefore, any knowledge acquired after the notice was irrelevant to the assessment of the penalty. On this basis, the Court concluded that the appeal failed, dismissed it with costs, and entered an order of dismissal.