COMMISSIONER OF INCOME-TAX, RAWALPINDI ZONE, RAWALPINDI Versus BEGUM MUMTAZ JAMAL

MUHAMMAD AKRAM, J.‑This is an application under section 66(2) of the Income‑tax Act, 1922 for the issuance of a direction to the Income‑tax. Appellate Tribunal (Pakistan), Lahore to refer the following question of law said to arise out of its appellate order dated 9th of June 1970 passed in I. T. A. No. 5438 of 1968‑69, to the High Court for its opinion:‑

"Whether on the facts and in the circumstances of the case the penalty at Rs. 40 on the 20th of May 1968 was not sustainable in full as a result of the Appellate Assistant Commissioner's Order dated 21st of may 1968 for the assessment year 1967‑68?"

2. Briefly stated the relevant facts necessary for the disposal of this application are these. The respondent‑assessee was one of the partners of the registered firm of Messrs Pakistan Cold Storage, Rawalpindi assessed to Income‑tax for the assessment year 1967‑68. In that connection on the 3rd, of April 1948, a demand notice was served on the respondent for payment of the tax amounting to Rs. 4,058 due from her. In default of this payment, on the 20th of May 1968 the income‑tax Officer, Rawalpindi imposed at penalty of Rs. 406 on her under section 460) of the Act. Dissatisfied with the order imposing the penalty she went up in appeal against it. In the meantime, as it happened, on the 21st of May 1968 the Appellate Assistant Commissioner had on appeal before him, allowed substantial relief in the quantum of assessment originally made against the firm. In consequence, the Income‑tax demand from the respondent stood reduced: from Rs. 4,058 to about Rs. 400 only. In these circumstances the Appellate Assistant Commissioner partly accepted her appeal against the order of imposition of the penalty which was considerably reduced to Rs. 40 only. The Department went up in further appeal against this reduction in the penalty. But on 9th June 1970 the Income‑tax Appellate Tribunal, Peshawar Bench, Peshawar, refused to interfere and dismissed the appeal.

3. On this the Commissioner of Income‑tax Rawalpindi Zone. Rawalpindi moved a reference application under section 66(1) of the Act before the Appellate Tribunal. But on the 14th of December 1970 the --Tribunal rejected the application refusing to make any reference to the High Court. In its opinion, the order passed by the Appellate Assistant Com missioner in reducing the penalty imposed on the respondent to Rs. 40 only, affirmed on appeal by the Tribunal, was made in the proper exercise of the discretion vested in them and no question of law at all arose out of the order passed by the Tribunal to warrant any reference to the High Court.

4. In these circumstances the Commissioner of Income‑tax has applied to this Court under section 66(2) of the Income‑tax Act for the issuance of a direction to the Tribunal to refer the question of law reproduced above said to arise out of the appellate order dated 9th of June 1970 passed by the Tribunal.

5. We have heard the learned counsel for the parties in this application before us. It was vehemently argued before us on behalf of the Revenue that in this case the Income‑tax Officer had in his discretion lawfully imposed the penalty of Rs. 406 on the respondent under section 46(1) of the Act. This order when passed by the Income‑tax Officer on the 20th of May 1968 was unexceptionable and neither the Appellate Assistant Commissioner nor even the Tribunal was justified in appeal to interfere with it merely on the ground that subsequently the assessment order was revised in appeal and the assessee was consequently allowed substantial relief in the tax originally demanded from her. In this connection it was argued before us that there was nothing in the whole of the Income‑tax Act to warrant this reduction in the penalty merely because of the relief afterwards allowed to the assessee on the basis of the subsequent events. In support of his contention in this behalf the learned counsel for the petitioner strongly relied on the reported case of the Commissioner of Income‑tax, Dacca v. Bejunath Pershad Mahader Pershad ( (1963) 7 Taxation 10 ). In that case a Division Bench of the Dacca High Court held that the penalty was imposed under subsection (1) of section 49 of the Act for default in the payment of the subsisting demand of the tax. The penalty was imposed by reason of the default committed in the payment of tax demanded at the time. Therefore, the penalty thus imposed remains un affected by any subsequent change in the original demand of the tax on appeal. In this connection a Division Bench of the High Court in the above mentioned case observed as under:

"It is no doubt true that the foundation of the penalties is an existing demand but existing at the time when the penalty was imposed. Whether that foundation continued up to the appellate stage or not is a different matter, but the default is there. In the absence of any provision in the Act or the rules framed thereunder, penalty imposed for non‑payment of existing demand would be valid imposition under the Income‑tax Act. We have not been able to find any provision in the Act or in the rules framed thereunder nor anything has been brought to our notice by the learned Advocates of the parties which provide that if the assessment is set aside, the penalty imposed will also fall through. Of course, the learned Advocate of the assessee has pointed out certain provisions in section 45 of the Income‑tax Act which give discretion to the Income‑tax Officer its respect of imposition of penalty for non‑payment of demand in cases where appeal is pending. There fore, under the existing provisions of the Income‑tax Act and the rules framed thereunder, we think, that the penalty imposed is legally main tainable even after the assessment order i4 set aside in appeal either by the Appellate Assistant Commissioner or by the Appellate Tribunal. The foundation of penalty is not exactly the existing demand by the default of payment of that demand. Though the demand is obliterated, the default of payment of the then existing demand is there for which penalty was imposed. In the absence of any provision in the Act or in the rules framed thereunder to the contrary, the penalty imposed will continue."

Nevertheless, in that case the assessee was allowed relief on a different ground.

6. On the other hand a Division Bench of the then High Court of West Pakistan (Karachi Bench) in the case of Messrs Bawani Violen Textile Mills v. ,The Commissioner of Income‑tax (1) expressed a contrary opinion. In that case the Income‑tax Officer acting under section 46(1) of the Income‑tax Act had imposed a penalty for failure of the assessee in making the payment of the balance amount of the Income‑tax due from him. But afterwards on an application moved by the assessee the Commissioner of Income‑tax permitted him to make the payment in three monthly instalments. In these circum stances the Court observed:‑

"It is needless to emphasise that after the appeal was filed before the Appellate Assistant Commissioner, his power as an appellate authority was the same as that of the Income‑tax Officer. It was open to him to take into consideration subsequent events in determining the question of default and he very rightly held that the appellant‑Company could not be held to be in default. As held in Income‑tax Officer, Kolar Circle and another v. Seghu Buchiah Setty (1954) 52 1 T R 538, on the Income‑tax Officer's order having been revised in appeal, the default based on his order and all consequential proceedings must be taken to have been superseded."

7. Even under the Indian jurisdiction under the corresponding pro vision contained in section 46 of the Indian Income‑tax Act, 1922 there was a considerable divergence of opinion amongst the different High Courts on the point. In one of the leading cases in the Metropolitan Structural Works Limited v. Union of India (2) the Bombay High Court observed as under:

(1) P L D 1967 Kar. 688 (2) (1955) 28 1 T R 432

"The real point, however, is whether a second or third notice of demand is at all permissible under section 29, even when an assessment is altered in first or second appeal. It appears to me that the necessity of issuing a fresh notice of demand in such circumstances is beyond argument. Suppose the amount of tax assessed by the Income‑tax Officer is Rs. 2,000 and a notice of demand is issued in respect of that amount. If the assessee appeals and the assessment is reduced to pay Rs. 1,500, the notice of demand already issued in respect of Rs.2,000 will clearly cease to be appropriate. Similarly, if the assessee appeals again and the assessment is further reduced, the intermediate notice of demand issued in respect of the sum assessed by the Appellate Assistant Commissioner will again cease to be appropriate and the necessity for issuing afresh notice will again arise. Such being the necessity in actual fact, the next question is whether the necessity has been recognized by the section and whether the language of the section warrants such successive notices. In my view, the answer to that question can only be in the affirmative. The words Is with which section 29 opens are: 'When any tax, penalty or interest is due in consequence of any order passed under or in pursuance of this Act'. It is noticeable that the section does not say 'in consequence of any order'. Such order is an order 'passed under or in pursuance of this Act', and it can hardly be disputed that an order passed by an Appellate Assistant Commissioner or an order passed by a Tribunal is also an order passed under or in pursuance of the Income‑tax Act. If so when there is some tax due in consequence of an order passed by the Appellate Assistant Commissioner or in consequence of an order passed by the Appellate Tribunal, a clear occasion arises under the words of the section to serve a notice of demand upon the assessee. That such fresh notice should be issued when the assess ment is altered is but common sense and I see no reason to construe the section against reason and against the actual necessities of realisation."

8. But a contrary view was expressed in this behalf in Ladhuram Taparia v. S. K. Ghnsh and others (1) followed in Hira Lal v. The Income‑tax Officer (2). In that case Rajasthan High Court held that "where a proper notice has already been given in respect of the tax determined by the assessment order and the subsequent orders on appeal have reduced the amount of tax and not enhanced it, it is not necessary that a second notice of demand under section 29 of the Income‑tax Act, 1922, should be served on the assessee. Nothing further than an intimation to the certificate officer and the assessee is required under the law in such a case. The reduction or elimination of the amount of the difference between the sum ultimately claimed and the larger sum mentioned in the notice of demand cannot affect the validity of the certificate or the demand so far as it is limited to the ultimate reduced sum."

(11 (1958) 33 1 T R 407 (2) 1963 P T D 851

9. This controversy on the point under the Indian jurisdiction was finally set at rest with the pronouncement by the Supreme Court of India in the Income‑tax Officer, Kolar Circle and another v. Seghu Buchiah Setty ( (1964) 10 Taxation 12 ). In that case the facts were that for the charge years 1953‑54 and 1954‑55, the Income‑tax Officer made the assessments under section 23(4) of the Income‑tax Act and issued notices of demand under section 29 of the Indian Income‑tax Act. The assessee preferred appeals against the assessment orders but did not pay the tax. The Income‑tax Officer, therefore, issued recovery certificates under section 46(2) of the Act to the Collector who attached the properties of the assessee. But afterwards the amount of the tax payable by the assessee was substantially reduced in the appeals by the Appellate Assistant Commissioner and the Income‑tax Officer was informed about this reduction in the liability. On this the Income‑tax Officer called upon the assessee to make the payment of the reduced amount demanded by him, but no fresh notice of demand was at all issued by the Income‑tax Officer. In these circumstances Sarkar and Hidayatullah, JJ. (Shah, J. dissenting) of the Supreme Court, by a majority decision, held that with the amount of tax assessed having been reduced as a result of the orders of the Appellate Assistant Commissioner, a fresh demand notice was to be served on the assessee before he could be treated as a defaulter and recovery proceedings initiated against him. In that case there was no dispute that all the steps taken by the Revenue Authorities were valid when taken for the appellate orders had not till then been made. The only question raised was ,as to the effect of the appellate orders subsequently passed in the case. Before the Supreme Court it was argued on behalf of the Revenue that the Act did not provide that the consequences of default incurred under the Act had ceased to be available to the Revenue Authorities for realization of the amount in case the order which was the basis of the default was later revised in appeal. It was, therefore, submitted that those consequences were not affected by the revision of the order except where it was annulled, and that all notices and attachments remained in force and could be acted upon for effecting the recovery of the tax. Sarkar, J. in his leading judgment observed that he was unable to agree with these contentions. He observed that it may be that the Act contains no provision stating what would happen to the default already incurred when the order under which it was incurred was later on revised in appeal. But in his opinion there was enough in the Act to indicate that the default comes to an end and that the consequences of the default must also disappear. In that connection he observed:‑

"It seems to me that the crux of it is the effect of the appellate order on the original order. If the original order has been destroyed or replaced by the appellate order, then the notice of demand and all other steps based upon the original order must be deemed to have become ineffective. In such a case the default earlier incurred must be taken to have disappeared and cannot support further action for recovery of any tax Now the general proposition is that an original order merges in the appellate order : Madan Gopal Rungta v. Secretary to the Government of Orissa (1962) 3 S C R 906). But in the present case it is not necessary to rely on that proposition. Sec tion 31(3) of the Act seems to me to make express provision on the subject. It states that in the case of an appeal from an order of assessment, which is kind of order with which we are now concerned, the Appellate Commissioner may, (a) confirm, reduce, or enhance or annul the assessment or (b) set aside the assessment and direct the Income‑tax Officer to make a fresh assessment after making such further enquiry as the Income‑tax Officer thinks fit or the Appellate Assistant Commissioner may direct, and the Income‑tax Officer shall thereupon proceed to make such fresh assessment and determine where necessary the amount of tax payable on the basis of such fresh assess ment'. There will, of course, be no occasion to determine the amount of the tax payable on the basis of the fresh assessment the income on that assessment appears to be below the taxable level"

The learned Judge on a consideration of the effect of the various orders contemplated by section 31(3)(a) and (b) of the Act observed that when an appellate order confirmed the original order, the default earlier incurred and all steps taken pursuant thereto remained unaffected, for such an order aright maintain intact the original order. If the appellate order annuls the earlier order the default disappears because section 31(3)(a) contemplates an annulment of the original order itself, which is thereby destroyed. If it disappears it could not be conceived that the default based on it would continue in force. Likewise, where under section 31(3)(h) the appellate order sets aside the assessment, the same result must clearly flow and its effect is to wipe out the original order. In examining the effect of an appellate order enhancing the original assessment Sarkar, J. held that a fresh notice of demand must issue in respect of the entire amount and in such a case the earlier notice issued in respect of the original order must be deemed to have been superseded. In examining the effect of an appellate order reducing ,the amount of the tax assessed, Sarkar, J. observed that it would be curious of in all other cases, excepting the case of confirmation, the appellate order .destroyed the original order, it did not do so in the case of reduction. In his opinion the order of reduction must necessarily have the same effect of setting aside the original order as a whole. In that connection he observed that:‑

"The order of reduction must, in my opinion, necessarily have the effect of setting aside the order as a whole. It does not simply strike a few of the figures appearing in the original order. That would really be a case of rectification for which provision is made in section 35 of the Act. What an appellate order does in a case of reduction is. as in the present case, to go into all the figures and arrive afresh at the assessable income which replaces the amount of income arrived at by the Income‑tax Officer. Therefore, it seems to me that in all cases of an appellate order reducing the assessment the original order goes and if it goes, of course, the notice of demand also falls to the ground and the default based thereupon also ceases to be default any more. :Suppose the appellate order itself states that a smaller amount of tax ,was payable after it had reduced the figure of the assessable income at which the Income‑tax Officer had arrived. Indeed I cannot imagine 'how else it can be expressed. After such an order the original order must go for the debt being one the two cannot exist together. If that ,order goes, all default arising out of it must also go." '

In conclusion Sarkar, J., was of the opinion that on the Income‑tax Officer's .order having been revised in appeal, the default based on it and all consequential proceedings must be taken to have been superseded and fresh :proceedings had to be initiated to realise the amount found due by the revised order. Hidayatullah, J. by his separate judgment agreed with these .conclusions.

10. The Income‑tax Officer, in completing the assessment under .section 23 of the Act, is required to determine the sum payable by the assessee. On appeal the Appellate Assistant Commissioner or the Tribunal, under section 3! or section 33 according as the case may be, reduce, enhance, annul or set aside the assessment and direct the Income‑tax Officer to make .a fresh assessment. A notice of demand is issued under section 29, after the income is computed and the tax determined. This section inter alias lays down that when any tax is due in consequence of any order passed under or in pursuance of the Act, the Income‑tax Officer shall serve upon the assessee .a notice of demand specifying the sum so payable. This in itself connotes that a fresh notice of demand may be issued in pursuance to or as a result of .an order passed in appeal in modification and supersession of the original order of assessment. In this connection section 45 of the Act lays down that any amount specified as payable in a notice of demand under section 29 .or an order under section 31 or section 33, shall be paid within the time ;mentioned in the notice of demand or order and any assessee failing to pay shall be deemed to be in default. Subsection (1) of section 46 further provides that when an assessee is in default in making a payment of tax, the Income‑tax Officer may in his discretion direct that, in addition to the amount of the arrears, a sum not exceeding that amount shall be recovered from the ,assessee by way of penalty.

11. There is no denying the fact that an order passed by the Income tax Officer imposing the penalty under section 46(1) of the Act enures and holds good against the assessee in default of the demand notice served on him in pursuance to an original assessment which continues to subsist and' was not afterwards modified in appeal or otherwise. This is because the Income‑tax Officer is justified in imposing the penalty for the non‑payment oft, a demand subsisting at the time. Subject to any order made by the Income tax Officer under section 45, an appeal against the assessment order does not; operate as a stay of the recovery proceedings that may be initiated in pursuance to a demand notice issued under section 29 of the Act. An assessment order passed by the Income‑tax Officer is subject to the incidents of appeal etc. In turn the demand notice and the recovery proceedings taken in pursuance thereof are likewise subject to the incidents of the appeal against the original assessment order on which the demand itself was based. As discussed above the assessment is liable to be reduced, enhanced, annulled and set aside on appeal and consequently the demand notice already issued in pursuance to original order ceases to be appropriate. Section 29 con templates that a notice of demand n‑.ay be served on the assessee in con sequence of an order passed ors appeal under the Act. So that the assessee may be faced with the predicament of two demand notices served on him, one issued before and the other after the decision in appeal. Indeed it is well recognised general principle that on appeal the original order ceases to exist and merges itself in the appellate order of variance. As a necessary corollary, with it all the proceedings taken in pursuance to the original order would be washed away and obliterated.

12. ` Let us now revert to the facts of this case to illustrate the point. In the instant case the assessment against the respondent‑assessee was com pleted and a demand notice for recovery of the tax amounting to Rs. 4,058 was served on her. She, however, failed to comply with the notice. On 20‑5‑1968 the Income‑tax Officer imposed a Penalty of Rs. 406 on her in default of this payment under section 46(1) of the Act. In the meantime she had already filed an appeal against the original assessment order passed against her. On 21‑5‑1968, barely a day after the imposition of the penalty, the Appellate Assistant Commissioner of Income‑tax accepted her appeal, granted substantial relief to the assessee by reducing the assessment. In this manner the tax demanded from the assessee was reduced from Rs. 4,058 to about Rs. 400 only. These facts are sufficient to show that the original assessment and the demand of tax amounting to Rs. 4,058 made on the assessee were illegal, unwarranted and could not be sustained. The effect of the appellate order subsequently passed was merely to recognise this fact and declare it to be so. The assessee was never served with a demand notice for recovery of about Rs. 400 as the amount of the tax really due from her. As such she could not be held to be an assessee in default of this payment and liable for penalty whatsoever under section 46 of the Act.

13. For the reasons discussed above, in our opinion, the order passed by the Income‑tax Officer imposing the penalty of Rs. 406 on the respondent could not be sustained. However, in the instant case the respondent did not make any independent reference to the High Court against the appellate order passed by the Tribunal upholding the order dated 21‑5‑1968 of the Appellate Assistant Commissioner whereby the penalty imposed on the respondent‑assessee was reduced to Rs.

40. Nor was any question raised before the Tribunal at any stage as to how far it was justified in upholding the order of the Appellate Assistant Commissioner in imposing any penalty at all even to the extent of Rs.

40. Therefore, the order reducing the penalty an the assessee to Rs. 40 only has become final and we are unable to interfere with it. In this manner, in our opinion, both the Appellate Assistant Commissioner and the Tribunal have been more than charitable towards the revenue by reducing the penalty to Rs 40 only and not altogether quashing the order of the Income‑tax Officer in imposing the penalty of Rs. 406.

14. Before closing we would like to mention here that in this case the application made by the Commissioner of Income‑tax before the Appellate Tribunal under section 66(1) of the Act for referring the question of law arising out of its appellate order to the High Court for opinion, was dismissed by the Tribunal on 14‑12‑1970. In these circumstances the petitioner made the above application to the High Court under section 66(2) of the Act with the prayer for requiring the Tribunal to state the case and refer the question of law arising out of the appellate order for opinion by the High Court. But since then section 66 of the Act has undergone radical changes and the old and combursome procedure laid down in subsection (2) was done away. It is no longer now required of the High Court to issue a direction to the Tribunal to state a case for its opinion. The Court is now empowered to straightaway answer the question of law arising out of the appellate order passed by the Tribunal on an application made to it in this behalf under subsection (2) of section 66 of the Act. As we see them, these amendments thus introduced into section 66 of the Act are procedural only and are retrospectively applicable. Craies on Statute Law (Sixth Edition) I page 400 has observed that there is no vested right in procedure or costs, and enactments dealing with these subjects are applicable to pending actions. in the absence of anything to the contrary expressed or clearly implied. There are similar observations in Maxwell on Interpretation of Statutes (12 Edition) on page 222. Indeed the proposition is well settled by authorities. It is for these reasons that instead of sending this case to the Income‑tax Appellate Tribunal for a back reference to the High Court, we have our self answered the reference in accordance with the provisions contained in section 66(2) of the Income‑tax Act (as amended by section 2(25) of the Finance Act XL of 1974 applicable retrospectively). We are not satisfied with the order passed by the Income‑tax Appellate Tribunal in refusing to refer this case to the High Court. In our opinion the question of law reproduced in the earlier part of this judgment arises out of the appellate order passed by the Tribunal. We have, therefore, heard the case and returned our answer to the question: in terms of the above. s Q. Reference answered.