1981 PLP (Trib (PTD)

S. 46 (l)‑Imposition of penalty ‑Assessee given adequate oppor tunity of payment of outstanding demand before taking action under S. 46(1)‑Income‑tax Officer not found to have acted illegally or with material irregularity in passing order Imposition of penalty at rate of 10% of outstanding demand for first default however, held, to be highly excessive and reduced to 21 %. Ebrahim S. H. Dhadwala, F. C. A. for Appellant. S. A. Khan, D. R. for Respondent. Date of hearing : 3rd June, 1977. MUHAMMAD MAZHAR ALI (MEMBER).‑‑These appeals are directed against consolidated order of the Appellate Assistant Commissioner, A‑Range, Karachi, confirming the orders imposing penalty under section 46(i) passed by the Income‑tax Officer, Company's Circle‑XIII, Karachi. The assessment years involved are 1972‑73 and 1973‑74. The assessee was found to have defaulted in payment of outstanding demand of tax amounting to Rs. 34,305 for the charge year 1972‑73 as per demand notices issued to it. The Income‑tax Officer, without issuing show -cause‑notice, imposed a penalty of Rs. 3,420 under section 46(i) of the Income tax Act. The appellant's Authorised Representative raised three‑fold contentions before us. Firstly, he maintained that no show‑cause notices was issued to the assessee prior to the passing of the impugned penalty order. Secondly, he submitted that the assessment order out of which the demand in question had arisen, has been amended or modified by the Tribunal in appeal vide its order in I. T. A. No. 470/KB of 1975‑76 dated 7‑9‑1976. Lastly, he complained against excessiveness of the amount of penalty imposed, which is 10% of the outstanding demand. We have heard the learned Depart mental Representative as well. He supported the order under appeal by contending that no relief in the trading account had been allowed by the Tribunal and further that impugned order was, passed before the Appellate Order. We have given due consideration to the submissions made by the representative of the parties before us. We find that there is much force in the contention of the appellant's authorised representative. It is now a well- settled proposition of law by authorities that the Appellate order supercedes the Income‑tax Officer's order and any modification by an appellate order wipes off the earlier penalty based on original order, see (1967) 15 Taxa tion 191 and A T 1978 1 T 339. The order of the Income‑tax Office was also liable to be cancelled for having been passed in violation of the of natural justice inasmuch as no show‑cause notice was issued to the principal assessee prior to the passing of the order of penalty under sec tion 46(i) of the Act. Besides, the levy of penalty 10% of the respective tax demands was also excessive. We also understand that there are certain instructions issued by the Central Board of Revenue in this behalf, according to which, penalty at lesser rate is to be levied for the first default in payment of tax demand. At any rate, since we have already taken a decision that consequent to the passing of the Appellate order modifying the original demand the default of the demand raised in pursuance of the original assess ment, order stood wiped out, we would cancel the impugned order. 1973‑74: The Income‑tax Officer has imposed a penalty at the rate of 10% under section 46(i) of the Act, for default of payment of tax amounting to Rs. 66,955. Assailing the order under appeal the learned Authorised Repre sentative of the appellant submitted that demand notice was issued on 5‑6‑1976 requiring the assessee to pay the full amount of demand by 9th of June, 1975. This demand notice was served upon assessee on 6‑6‑1975. An application for instalment was moved before the Income‑tax officer on 9‑6‑1975 who, without disposing of the said application passed the impugned order of penalty on 10‑6‑1975. The learned Departmental Representative, on the other hand submitted that original demand notice was issued on 17‑2‑1975 and it was made payable by 10‑3‑1975. The second letter dated 5‑6‑1975 was issued to give another opportunity of payment of the outstanding demand before taking an action under section 46(1) of the Act. It is admitted by the learned Authorised Representative before us that order on the application for instalment dated 9‑6‑1975 was not obtained by the assessee or his counsel. The said application was not also submitted to the Income tax Officer personally but it was admitted to have been filed in the office oft the Income‑tax Officer. It was not even brought to the notice of the Income tax Officer on 10‑6‑1916 when the case came up before him. In these circumstances, we do not find that the Income‑tax Officer in any manner acted illegally or with material irregularity, to passing the order under appeal. However, we are of the view that the imposition of penalty at the rate 10% of the outstanding demand for the first default of the assessee cannot but be said to be highly excessive besides being contrary 'to specific instructions of the Central Board of Revenue on the subject. It would, therefore, in our opinion, be just and fair if the amount of penalty is reduced to the extent of 2 % of respective outstanding demands instead of 10% levied by the Income‑tax Officer and confirmed by the learned Appellate Assistant Commissioner. We order accordingly. In the result, both the appeals succeed and are allowed to extent and in the manner indicated above. Appeal allowed.