Zaffar Hussain Mirza, J.-This is an application under Section 66(2) of the Income Tax Act seeking an order for a direction to the Income Tax Appellate Tribunal to refer the specified question of law to this court for decision. As since the making of application, Section 66 has been amended to enable this Court to frame the question and give its decision, we have addressed ourselves accordingly and since no objection was raised on behalf of the respondent to the prayer in the application, we have considered the question proposed in the application, with a view to give a decision thereon.
2. The facts briefly are that the respondent is a private limited company carrying on business of cotton ginning. For the Assessm ent year 1960-61 the demand of Rs. 44,193 was payable as determined by the Income Tax Officer by 21-7-1965. However, the Inspecting Assistant Commissioner allowed the assessee to pay the demand in three equal instalments by 10-2-1966, 10-3-1966 and 10-4-1966. The assessee failed to avail of this facility. The Income Tax Officer, therefore, imposed a penalty of Rs. 2,210 under Section 46 (1) of the Income Tax Act by his order dated 28-5-1966.
3. The respondent/assessee thereupon appealed against the order imposing the penalty to Appellate Assistant Commissioner of Income tax who dismissed the same by his order dated 26-9- 1966. The assessee challenged the order in a second appeal before the Income Tax Appellate Tribunal and succeeded in obtaining the reversal of the penalty order vide order dated 26-6-1962.
The Tribunal in coming to this decision took into consideration the fact that the assessment on the basis of which the above said penalty was imposed no longer existed in so far as the Tribunal ultimately did not maintain the assessment and remitted the case back to the Appellate Assistant Commissioner for acceptance of the book results after a fresh scrutiny of the accounts. In this situation, the Tribunal expressed the view that there was no subsisting valid demand at the time for default of which penalty was imposable and following the view held in Bawany Vilion Textile Mills Limited v. Commissioner of Income tax 1967 PTD 622, accepted the appeal and set aside the penalty order.
4. The Commissioner of Income tax (East), Karachi, then moved the Income Tax Appellate Tribunal under Section 66(1) of the Income Tax Act to refer the following question to this Court: "Whether on the facts and in the circumstances of the case the Tribunal was justified in holding that the order imposing penalty under Section 46(1) of the I.T. Act could not be sustained on the ground that subsequent to the passing of that order the Tribunal set aside the Appellate Assistant Commissioner's order confirming the Assessing Officer's order creating the demand for the non- payment of which the penalty was imposed, and directed the Appellate Commissioner to accept the book results after fresh scrutiny of the accounts?''
The Tribunal by its order dated 2-1-1970 although holding that the question of law as raised did arise out of its order, but declined to refer the same to this Court in view of the fact that the question of law already stood answered in the Bawany Vilion Textile Mills' case. As already stated we have framed the question as proposed and would give a decision thereon.
5. It is clear from the provisions of Section 46(1) of the Income Tax Act that the Income Tax Officer can impose a penalty under that provision only in case the assessee is "in default in making payment of the Income tax". Defauit can only occur after a notice of demand is issued to the assessee. The question therefore, is, whether once the assessment A order which is foundation of the notice of demand and subsequent imposition of penalty, is itself set aside or altered, can the assessee be said to have committed default in the payment of the tax? It would be best to quote the observations of Wahiduddin, J. (as he then was) in the case of Bawany Violin Textile Mills referred to above: "If the order of the Income Tax Officer had remained unchallenged or was not modified by the Income Tax Commissioner, it was open to the applicant-Company to argue that they did not commit default in the payment of tax. In the present case the position had changed after the Commissioner granted instalments. Admittedly the Income tax Commissioner allowed the applicant-Company to put the income tax due from them in three equal monthly instalments starting from 15th November 1955. After the passing of this order it is difficult to hold that the applicant- Company was in default or the penalty imposed on them survived. In law any order passed by a Subordinate Officer is subject to any order passed in appeal or revision. Since the very basis of the order of penalty had disappeared, the learned Appellate Assistant Commissioner would have perfectly justified in setting aside both the orders of penalty. The contention of the Department's counsel that the default referred to in Section 46(1) is that which is committed by an assessee before the Income Tax Officer passed the order is illusory. If the mode of payment of the demand order had not been modified his contention would have been tenable but after the mode and time of payment was changed, the assessee cannot be accused of committing any default in respect of the payment of arrears of tax due from him. It was urged that the penalty imposed was maintainable even after the Commissioner's order because of the default of the existing demand.
This argument is fallacious. it is needless to emphasize that after the appeal was filed before Appellate Assistant Commissioner, his power as an Appellate Authority was the same as that of Income Tax Officer. It was open to him to take into consideration subsequent event in determining the question of default and he very rightly held that the appellant-company could not be held in default. As held in I.T. Officer, Kolar Circle and another v. Seghu Buchiah Setty (1964) 52 I TR 538, on the Income Tax Officer having revised in appeal, the default based on his order and all consequential proceedings must be taken to have been superseded".
6. A Division Bench of the Lahore High Court had the occasion to examine this question at great length and after a review of the relevant case law for and against the view expressed in the Karachi case, their Lordships in Commissioner of Income tax v. Begum Mumtaz Jamal 1976 PTD 182 followed the view in the Bawany Violion Textile Mill's case and observed as follows:- "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 demand notice served on him in pursuance to an original assessment which continue 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 of 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 that 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 assessm ent order on which the demand itself was based. As discussed above the assessm ent 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 contemplates that a notice of demand may be served on the assessee in consequence of an order passed on 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 recognized 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."
7. A contrary view was taken by the Dacca High Court in Commissioner of Income Tax v. Baijunath Prasad Mahadeo Prasad (1963) 7 Taxation 10 in which was held that the penalty imposed by reason of the default committed in the payment of the tax demanded at the time, remain unaffected by any subsequent change in the original demand of the tax on appeal. But this view was not approved in the case of C.I.T. v. Begum Mumtaz Jamal referred to above, In the Indian jurisdiction also the conflict of opinion on this question was set at rest by the Supreme Court in the case of I.
T.O. v. Seghu Buchiah Set ty (1964) 10 Taxation 12 which was noticed by the learned Judges in the case of Bawany Violin Textile Mills referred to above.
8. Respectfully agreeing with the view expressed in the Karachi and Lahore cases referred to above, we are also of the opinion that the assessment order which furnished the basis for the recovery proceeding culminating in the order of penalty, having been set aside in appeal by the Tribunal, the penalty order itself was wiped off alongwith the entire superstructure of recovery proceedings founded on the assessm ent order. The default, if any, that followed as a resuit of the non-payment of tax liability created by the assessment order originally passed by the Income Tax Officer could not, therefore, survive and likewise disappeared.
9. In the resuit, the question framed by us is answered in the affirmative and the reference shall be disposed of accordingly. In the circumstances, there will be no order as to costs.
I. Mahmud J.- I agree.