Holding

The ITO had jurisdiction to impose the penalty because the penalty proceedings were initiated after the amendment of s.274(2), and the authority to levy penalty is determined by the law in force on the date of initiation of the proceedings.

Summary

Varkey filed his income‑tax return on 16 April 1970. The Income‑Tax Officer (ITO) made an assessment on 27 March 1972, finding concealment of income amounting to less than Rs 25,000 and, on the same day, initiated penalty proceedings and later imposed a Rs 10,000 penalty. The Appellate Assistant Commissioner set aside the penalty on the ground that the ITO lacked jurisdiction, a view affirmed by the Income‑Tax Appellate Tribunal. The Kerala High Court, on reference under s.256(2) of the Income‑Tax Act, held that the authority to levy penalty is governed by the law in force on the date the penalty proceedings are initiated, i.e., the amended s.274(2) (effective from 1 April 1971), which authorised the ITO to impose penalty where the concealed income was below Rs 25,000. The Supreme Court agreed, stating that a penalty can be imposed only after the assessing authority is satisfied of concealment and that the jurisdiction to impose the penalty is determined by the law applicable on the date of initiation of the proceedings. Consequently, the appeal was dismissed.

Issues considered

Whether the Income‑Tax Officer had jurisdiction to levy a penalty under the amended s.274(2) when the concealed income was less than Rs 25,000.
Whether the law applicable to penalty proceedings is the law in force on the date of filing of the return or on the date of initiation of the penalty proceedings.

Legislation cited

General Clauses Act, 1897s. 6(b)
Income Tax Act, 1961s. 271(1)(c), s. 274(2), s. 276(1)(iii)
Taxation Laws (Amendment) Act, 1971

Subjects

Income TaxPenaltyConcealment of incomeJurisdictionSection 274(2)Assessment orderAmendmentRetrospective effect

Judgment

A VARKEY CHACKO
(
v.
COMMISSIONER OF INCOME TAX

AUGUST 24, 1993

B [B.P. JEEVAN REDDY AND S.P. BHARUCHA, J.J.]

Income Tax Act, 1961 Section 274(2)

Effect of Taxation Laws (Amendment) Act 1971)-(;onceabnent of
C incon1e-Penalty·-ln1position of-fVho ·1nay inipose and in what 111easure--
Jwisdiction of ITO.

Sub-section (2) of section 274 of the Income Tax Act, 1961 was
amended with effect from 1st April, 1971. Prior to the amendment by the
Taxation Law (Amendment) Act, 1970 where in a case falling under clause
D (iii) of sub-section (1) of Section 276, the minimum penalty imposable
exceeded the sum of Rs. 1,000 the Income Tax Officer was obliged to refer
the case .to the Inspecting Assistant Commissioner. By reasun of the
amendme.nt the Income-tax Officer was obliged to refer to the Inspecting
Assistant !Commissioner such cases falling under clause (c) of sub-section
E (1) of section 271 where the amount of income, as determined by the ITO
on assessment, in respect of which particulars had been concealed or
inaccurate particulars had been furnished exceeded the sum of Rs. 25,000.

The appellant-assessee filed his return on 16th April, 1970. On 27th
March, 1972, the I.T.O. made the orders of assessment and initiated
F penalty proceedings against the assessee on the basis of a finding recorded
in the assessment order that there had been concealment of income in
respect of an amount which did not exceed Rs. 25,000. After considering
the assessee's objections, the ITO, by his order dated 27th March, 1974,
imposed a penalty of Rs.10,000.
G The assessee appealed to the Appellate Assistant Commissioner,
who set aside the penalty order on the ground that the ITO did not have
the jurisdiction to levy the penalty.

The Revenue carried the matter to the Income-tax Appellate
H Tribunal, which confirmed the order of the Appellate Assistant Commis-
800
vARKEY v. err. 801

sioner. It held that the law governing the imposition of penalty for con- A
cealment of income was the law that was in force on the date on which the
return in which the concealment had been made was filed and that the 1970
amendment had no application to the case Iiecause it had not been made
expressly retrospective. The Tribunal, however, referred the matter to the
High Court under Section 256(2) of the Income Tax Act, 1961.
B
The High Court relied on this Court's decision in Jain Brothers and
Ors. v. Union of India, 77 I.T.R. 107 and concluded that the competence or
jurisdiction of the authority to initiate the penalty proceedings could be
governed only by the law which was in force on the date of initiation of
such proceedings, and that a combined reading of section 27l(l)(c)(iii) C
and section 274(2) provided a clear indication that under the provisions
of section 274(2) as they stood prior to the amendment of 1970 the
competence of the ITO to exercise the power of imposition of penalty
against an assessee under section 271 (l)(c) was to depend tipon the
findings arrived at by him in the assessment proceedings as to the factum
of concealment and the amount of income in respect of which such con-
D
cealment has taken place, and that it was only on arriving at such a finding
that the question of initiation of penalty proceedings could arise.

The Tribunal was held to be in error and the reference was answered
against the assessee and in favour of the Revenue. E

The assessee appealed to this Court and submitted rel~ing on this
Court's decision in C.l.T. v. Mis Ollkar Saran and Salls, [1992] 2 S.C.C.
514 and B1ij Mohan v. C.I. T. 120 ITR 1, that the offence of concealment
had been committed when the return had been filed, that, therefore, the F
unamended provisions of Section 274(2) applied, and consequently the
ITO had no authority to impose the penalty.

The Revenue contested the appeal by submitting that the High Court
had answered the reference correctly because the J.T.O. has satisfied
himself that there had been concealment of income on 27th March, 1972, G
\Vhen he made the order of assessment, that such satisfaction was a
pre-requisite to the initiation of the penalty proceedings which were in-
itiated on the same day, and that on that day, under the amended
provisions of section 274(2), the ITO had the authority to impose the
penalty upon the assessee. H
802 SUPREME COURT REPORTS [1993] SUPP. 1 S.C.R.

A Dismissing the appeal, this Court
(
HEJ"D: A penalty for concealment of particulars of income or for
furnishing inaccurate particulars of income can be imposed only when the
assessing authority is satisfied that there has been such concealment or
fnrnishing of inaccurate particulars. [807-B]
B
A penalty proceeding, therefore, can be initiated only after an assess-
ment order has been made which finds such concealment or furnishing of
inaccurate particulars. [807-C]

C Who at this point of time has the authority to impose the penalty is
what is relevant. Whoever this authority may be, he is obliged to impose
such penalty as was permissible under the law in that behalf on the date
on which the offence of concealment of income was committed, that is to
say, on the date of the offending return. [807-C]
I
D The two aspects namely, who may impose the penalty and in what
measure must firmly be borne in mind. [807-D]

In the instant case, when the ITO reached the satisfaction that the
assessee had concealed income and made the assessment order on 27th
E March, 1972 the amended provisions of section 274(2) were in operation
and they entitled the ITO to impose penalty in cases where the amount of
income in respect of which particulars had b~'1 concealed were, as here,
less that Rs. 25,000. The High Court therefore,• answered the question (

referred to it correctly. [807-E-F]

F Cl. T. v. Mis Onkar Saran and Sons, [1992] 2 S.C.C. 514 and Brij
Mohan v. Cl.T., 120 ITR 1 referred to.

Jain Brotl1e1~ and Ors. v. Union of India, 77 l.T.R. 107 and D.M.
Manasvi v. C.I.T, 86 ITR 557 and Cl. T v. Dhadi Salm, 199 !TR 610, relied
G on.
CIVIL APPELLATE JURISDICTION : Civil Appeal No. 1151 of
1982.

From the Judgment and Order dated 7.11.1980 of the Kerala High
H Court in I.T.R. 42/1978.
VARKEY v. C.l.T. [BHARUCHA, J.] 803

M.T. George, M.M. George and R. Sathish for the appellant. A
B.B. Ahuja, S. Rajappa and Ms. A. Subhashini for the respondent.

The Judgment of the Court was delivered by

BHARUCHA, J. This is an appeal on a certificate granted by the B
High Court of Kerala. The judgment under appeal was delivered on a
reference under section 256(2) of the Income-tax Act, 1961. It answered in
the negative, that is, against the appellant (assessce) and in favour of the
Revenue (respondent), the following question:

"Whether on the facts and in the circumstances of the case, the C
Income-tax Appellate Tribunal is right in law in holding that the
Income-tax Officer had no jurisdiction to levy the penalty and that
he should have referred the case to the Inspecting Assistant Com-
missioner for imposition of penalty?"

The reference pertained to the Assessment Years 1968-69, the D
relevant accounting period having ended on 31st March, 1968.

The assessee filed his return on 16th April, 1970. With effect from
1st April, 1971, sub-section (2) of section 274 of the Income-tax Act, 1961,
was amended. Prior to the said amendment where, in a case falling under
clause (iii) of sub-section (1) of section 276, the minimum penalty im-
E
posable exceeded the sum of Rs. 1,000, the Income Tax Officer was obliged
' to refer the case to the Inspecting Assistant Commissioner. By reason of
the said amendment the Income-tax Officer was obliged to refer to the
Inspecting Assistant Commissioner such cases falling under clause (c) of
sub-section (1) of section 271 where the amount of income, as determined F
by the ITO on assessment, in respect of which particulars had been
concealed or inaccurate particulars had been furnished exceeded the sum
of Rs. 25,000. On 27th March, 1972, the ITO made the orders of assessment
and initiated penalty proceedings against the assessee on the basis of a
finding recorded in the assessment order that there had been concealment G
of income in respect of an amount which did not exceed Rs. 25,000. After
considering the assessec's objections, the ITO, by order dated 26th March,
1974, imposed a penalty of Rs. 10,000.

The assessee appealed to tne Appellate Assistant Commissioner,
who set aside the penalty order on the ground that the ITO did not have H
804 SUPREME COURT REPORTS [1993] SUPP. 1 S.C.R.

A the jurisdiction to levy the penalty. The Revenue carried the matter to the
Income-tax Appellate Tribunal, which confirmed the order of the AAC. It
held that the law governing the imposition of penalty for concealment of
income was the law that was in force on the date on whicn the return in
which the concealment had been was filed and that the said amendment
B had no ·application to the case because it had no been made expressly
retrospective.

Arising out of the order of the Tribunal, the question quoted above
r·
was referred to the High Court. The High Court noted that the question
to be considered was whether the proceedings for imposition of penalty
C taken in the case were governed by the provisions of section 274(2) as they
stood prior to the said amendment or whether it was the sub-section as
amended that would apply. It concluded that the competence or jurisdic-
tion of the authority to initiate the penalty proceedings could be governed
only by the law which was in force on the date of initiation of such
D proceedings. A combined reading of section 27(l)(c)(iii) and section
274(2) provided a clear indication that under the provisions of section
274(2) as they stood prior to the amendment of 1970 the competence of
the ITO to exercise the power of imposition of penalty against an assessee
under section 271(1)(c) was to depend upon the findings arrived at by him
in the assessment proceedings as to the factum of concealment and the
E amount of income in respect of which such conceahnent had taken place.
It was only on arriving at such a finding that the question of initiation of
penalty proceedings could arise. In this connection, the High Court
referred to the judgment of this Court in Jain Brothers a;1d ors. v. Unio~ of
India, 77 LT.R. 107. Accordingly, the Tribunal was held to be in error and
F the question referred to the High Court was answered in the negative, that
is, against the assessee and in favour of Revenue. r
'Section 271(l)(c) confers upon the assessing authority the power to
direct an assessee to pay a penalty where he is satisfied that the assessee
has concealed the particulars 'of his income or has furnished inaccurate
G particulars of his income. Section 274(2), before it was amended by the
Taxation Law (Amendment) Act, 1970, with effect from 1st April, 1971,
read thus:

"Notwithstanding anything contained in clause (iii) of sub-section
H (1) of section 271, if in a case falling under clause (c) of that
VARKEY v. C.l.T. [BHARUCHA,J.]

sub-section, the minimum penalty imposable exceeds a'?ui,n of A
rupees one thousand, the Income-ta.'< Officer shall refer the case
to the Inspecting Assistant Commissioner who shall, for the p\r-
pose, have all the powers conferred under this Chapter for the
imposition of penalty".

After the said amendment, it read thus: B

"Notwithstanding anything contained in clause (iii) of sub-section
(1) of section 271, if in case falling under clause (c) of that
sub-section, the amount of income (as determined by the Income-
tax Officer on assessment) in respect of which the particulars have
been concealed or inaccu.-ate particulars have been furnished
c
exceeds a sum of twenty-five thousand rupees the Income-tax
Officers shall refer the case to the Inspecting Assistant Commis-
sioner who shall, for the purpose, have all the powers conferred
under this Chapter for the imposition of penalty."
D
Learned. counsel for the assessee submitted that the offence of
concealment had been committed when the return has been filed; that,
therefore, the unamended provisions of section 274(2) applied and the ITO
had to authority to impose the penalty. He relied upon the judgment of
this Court in C./. T. v. M/s. Onkar Saran and Sons, [1992] 2 S.C.C. 514.
E
Emphasis was laid upon the statement in the judgment that, after the
decision of this Court in Brij Moh an v. C.J. T., 120 !TR 1, there could be
no doubt that the law applicable to penalty proceedings under section
271(1)(a) or (c) was the law that was in force on the date on which the
offending return had been filed.
F
The issue in the cases of Onkar Saran and Brij Mohan related to the
quantum of penalty that could be demanded, and it was in that context that
the statoment that was emphasised was made. In Brij Mohan's case it was
1 expressly stated that a penalty was imposed on account of the commission
of a wrongful act and "it is the law operating on the date on which the G
wrongful act is committed which determines the penalty."

Learned counsel for the Revenue drew our attention, first, to this
Court's judgment in Jain Brothers (ibid). It was there held, inter alia, that
it was the satisfaction of the income-tax authorities that a default had been
committed by the assessee which atcracted the provisions relating to penal- H

•
806 SUPREME COURT REPORTS [1993] SUPP. 1 S.C.R.

A ty. Whatever the stage at which the satisfaction was reached, the order
imposing the penalty had to be made only after the completion of the
assessment. The crucial date, therefore, for purposes of penalty was the
date of such completion. In D.M. Ma11asvi v. CIT, 86 ITR 557, this was
reiterated. Counsel for the ·Revenue laid great stress upon the judgment of
B this court in CIT v. Dhadi Sahu, 199 !TR 610. In this case the assessee had
failed to disclose certain income falling to the share of his minor children
for the Assessment years 1968-69 and 1969-70. The ITO passed assessment.
orders on 28th February, 1970 and initiated penalty proceedings under
section 271(1)(c). Since the amounts of the penalty to be imposed would ,
exceed Rs. 1000, the ITO referred the cases under section 274(2), as it then
C stood, to the !AC. Pending the penalty proceedings, section 274(2) was
amended with effect from 1st April, 1971, as a result of which only cases
of penalty in which the income concealed was Rs. 25,000 or more were
required to be referred to the !AC. In the assessee's case referred to the
IAC the income concealed was less than Rs. 25,000. Even so, the !AC
D passed orders on 15th February, 1973, imposing penalty in the sums of Rs.
24,000 and Rs. 12,500 respectively for the Assessment years 1968-69 and
1969-70. This Court held that the reference had been validly made by the
ITO to the !AC before 1st April, 1971 and the question was whether the
amendment that came into effect on 1st April, 1971 divested the !AC of
his jurisdiction because the amount of concealed income did not exceed
E Rs. 25,000 and the case did not fall within the ambit of section 274(2) as
amended. The amending Act, it was noted, did not make any provision that
references validly pending before the !AC had to be returned without
passing any final orders if the amount of income in respect of which ·
particulars had been concealed did not exceed Rs. 25,000. This supported
F the inference that in a pending reference the IAC continued to have
jurisdiction to impose a penalty. The previous operation of section 274(2)
as it stood before 1st April, 1971 and anything done thereunder continued
to. have effect under section 6(b) of the General Clauses Act, 1897, ena-
bling the !AC to pass orders imposing penalty in pending reference. What
was material was the date upon which the references were initiated. If the
G references had been made before 1st April, 1971, they would be governed
by section 274(2) as it stood before that date and the IAC had jurisdiction
to pass orders of penalty.

Learned counsel for the Revenue submitted that the I.T.O. had, in
H the instant case, satisfied himself that there had been concealment of
VARKEY v. C.l.T. [BHARUCHA,J.] 807

income on 27th March, 1972, when he made the order of assessment. Such A
, satisfaction was a pre-requisite to the initiation of the penalty proceedings,
which were initiated on the same day. On that day, under the amended
provisions of section 274(2), the I.T.O. had the authority to impose the
penalty upon the assessee. Therefore, the High Court had answered the
reference correctly.
B
A penalty tor concealment of particulars of income or for furnishing
iuaccurate particulars of income can be imposed only when the assessing
'\
authority is satisfied that there has been such concealment or furnishing of
inaccurate particulars, A penalty proceeding, therefore, can be initiated
only after an assessment order has been made which finds such conceal- C
ment or furnishing of inaccurate particulars. Who at this point of time has
the authority to impose the penalty is what is relevant. Whoever this
authority may be, he is obliged to impose such penalty as was permissible
under the law in that behalf on the date on which the offence of conceal-
ment of income was committed, that is to say, on the date of the offending
return. The two aspects must firmly be borne in mind, namely, who may D
impose the penalty and in whal measure.

In the instant case, when ITO reached the satisfaction that the
assessee had concealed income and made the assessment order on 27th
March, 1972, the amended provisions of section 274(2) were in operation
and they entitled the ITO to impose penalty in cases where the amount of E
income in respect of which particulars has been concealed were, as here,
less than Rs. 25,000.

We are, therefore, of the view that the High Court answered the
question referred to it correctly. The appeal, therefore, is dismissed, with
F
no order as to costs.

N.V.K. Appeal dismissed.