P L D 1964 Dacca 765 (PLP)

The assessee filed an application on the 6th May 1958 before the Appellate Assistant Commissioner requesting that the assessment appeal for the assessment year 1953‑54 should be heard and disposed of first before the penalty appeals as the appellant assessee was confident that illegal demand on the assessment under section 23 (3) could not stand. The Appellate Assistant Com missioner passed an order to put the penalty appeals after the disposal of the assessment appeal but on the 15th October 1958, though he heard both the penalty and assessment appeals, he passed an order in the penalty appeals dismissing them on technical ground and deferred the order in the assessment appeal to 24th October 1958. Penalty appeals were rejected as those were not maintainable without payment of tax under section 30 (1) of the Income‑tax Act. On 24th October 1958 the Appellate Assistant Commissioner allowed the appeal of the assessee and set aide assessment of the Income‑tax Officer. . Against the order of rejection of the penalty appeals, the assessee filed an appeal before the Appellate Tribunal. The Appellate Tribunal allowed that appeal on the ground :‑ "Though the appeal against penalty was rejected on technical ground, the assessment itself was set aside 10 days later on. When the matter has come before the Tribunal, the position is that there is no demand outstanding in view of Appellate Assistant Commissioner's order setting aside the assessment

The, foundation of the penalty is an existing demand under section

29. As that demand has been obliterated by the order of 'the Appellate Assistant Commissioner setting aside the assessment, the basis of the two penalties has disappeared." Hence this reference at the instance of the Commissioner of Income‑tax, East Pakistan. It is contended, before us, by the learned Advocate for the Commissioner of Income‑tax that without necessary deposit as required under proviso to section 30 (1) of the Act the penalty appeals were not maintainable before the Appellate Assistant Commissioner and if it is not maintainable before the Appellate Assistant Commissioner the appeal before the Tribunal against the order of the Appellate Assistant Commissioner is also not maintainable and, therefore, the order passed by the Appellate Tribunal is without jurisdiction. Whether appeal before the Appellate Tribunal against the order of the Appellate Assistant Commissioner is maintainable or not is not before us, for our opinion: The question that is referred to us is whether imposition of penalty under section 46 (1) of the Act is legally maintainable in view of the fact that when the assessment for non‑payment of which penalty was imposed itself was set aside by the Appellate Assistant Commissioner. We are unable to contribute to the view taken by the Appellate Tribunal that when the matter has come up before the Tribunal there was no demand outstanding and the foundation of penalty is an existing demand under section 29 of the Act and as that demand has been obliterated by the order of the Appellate Assistant Commissioner, the basis of the two penalties has disappeared. 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 founda tion continued up to the appellate stage or not is a different matter, but 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 provides that if the assessment is set aside, the penalty imposed for non‑payment of the demand on that assessment will also fall through. Of ‑ course; the learned Advocate for the assessee has pointed out certain provisions in section 45 of the Income‑tax Act which gives discretion to the Income‑tax Officer in respect of imposition or penalty for non‑payment of demand in cases where appeal is pending. Therefore, under the existing provisions of the Income‑tax Act and the Rules framed thereunder we think, that the penalty imposed is legally maintainable even after the assessment order is 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 but 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. We are not unconscious of the disastrous result that will follow from this view of ours but we cannot help it except to draw the attention of the authorities to make suitable provision in the Act or in the rules regarding remission of penalty in case of setting aside of the assessment partly or wholly and to make further provision for refund of the penalty in such circumstance if already paid. The matter does not end there. We are to give opinion on the facts and circumstances of the case. The facts, stated above clearly manifest the arbitrariness of the order of the Income‑tax Officer who not only issued notice of payment of demand within two days from the date of assessment but also directed the assessee to pay the entire demand within 10 days from the issue of the notice of demand. The assessee asked for adjustment of the demand against the sum of Rs. 90,000 already due to him by way of refund. The Income‑tax Officer not only rejected that prayer arbitrarily and illegally but also imposed penalty of Rs. 500 at the first instance making the demand including the penalty payable within 23 days, and within two days of the date fixed for payment of that demand, on the assessee's failure to make payment, imposed another penalty of Rs. 1,809 on the 24th December 1957. The ground of refusal is not only illegal but also arbitrary, namely, that the assessment fox the years 1948‑49, 1949‑50 set aside by the Appellate Assistant Commissioner, was separately fixed on 17th December 1957 for fresh assessment: "The assessee himself returned about Rs. 60,000 in both the years. So there is no question of refund of the tax paid in toto." The learned Advocate for the assessee in the presence of the learned Advocate for the Commissioner of Income‑tax represented to us that the tax on that amount of Rs. 60,000 cannot exceed Rs. 36,000 and after, deducting that tax in advance though there is no ground for such advance deduction, there still remains a balance of Rs. 44,000 to cover the demand for the year 1953‑

54. There is no provision in the Income‑tax Act to withhold the money refundable to the assessee in anticipation of tax liability to be assessed in future. Therefore, there is no doubt that there was no real basis for imposition of penalty in the circumstances of the case and the Income‑tax Officer could not impose penalty, and the illegal imposition of penalty is not maintainable in law. Section 46 (1) of the Income‑tax Act provides for imposition of penalty according to the discretion of the Income‑tax Officer. But that discretion certainly cannot be arbitrary and unreason able discretion but a judicial discretion which he not only failed to exercise in this case but capriciously exercised it for reasons best known to him. On this ground we hold that the penalties imposed are not legally maintainable. In the circumstances of the case, as stated above, we answer the question in the negative and we a think the assessee must get cost of this reference which we assess at ten gold Mohurs. Let a copy of this judgment be forwarded to the Central Board of Revenue for necessary action in the light of the observation made above. M. R. KHAN; J.‑I agree with My Lord, the Chief Justice. Question answered in the negative.