1. The following question of law has been referred by the Income-tax Appellate Tribunal, Gauhati Bench, under Section 256(1) of the Income-tax Act, 1961, hereinafter referred to as ' the Act ' :
'Whether, on the facts and in the circumstances of the case, the Appellate Tribunal was justified in holding that the assessee firm had furnished inaccurate particulars of income and, therefore, penalty levied under Section 271(1)(c) is valid '
2. The statement of the case discloses the following facts :
The assessee is a partnership firm having seven partners during the accounting year, which is 2019 R.N. The names of the partners are-
1. Ladhuram Ajitsaria 17%
2. Madanlal Ajitsaria 12%
3. K. P. Ajitsaria 12%
4. Sitaram Ajitsaria 13%
5. Laxminarayan Ajitsaria 16%
6. Puranmal Ajitsaria 17%
7. Dindayal Ajitsaria 13%
3. The firm was carrying on business in various miscellaneous articles with head office at Gauhati and branches at Tinsukia, Calcutta and Gauhati. The assessee-firm filed the return on October 10, 1963, showing an income of Rs. 1,06,798. The Income-tax Officer found that the following interest payments were claimed as deduction :
International Finance Corpn.
Surajmal Ganeshiram & Sons
Sharma & Sons
4. At the time of assessment the assessee firm submitted that the credits appearing in the accounts in the name of the above parties were, in fact, the moneys belonging to some of the partners of the firm and these partners made voluntary disclosure under Section 24 of the Finance (No. 2) Act, 1965. The Income-tax Officer held that the interest shown as paid to these parties were not actually paid to a third party but to the partners themselves. He, therefore, added it back and allocated it among the various partners. There was an appeal against the additions made on this ground and the Income-tax Appellate Tribunal held that the additions were rightly made.
5. The Income-tax Officer initiated penalty proceedings under Section 271(1)(c) and referred the matter to the Inspecting Assistant Commissioner who found that the assessee had made a false claim for deduction. He, therefore, held that under the law any interest payable to a partner is to be included in the assessment of the firm and that the assessee in its accounts, knowing fully well that the interest should have been written back in its return, had not done so with a mala fide intention of reducing the taxable income. In view of this, he further held that the provisions of Section 27I(1)(c) were attracted, and he imposed a penalty of Rs. 15,000. Against the penalty order the assessee preferred an appeal before the Income-tax Appellate Tribunal. The Tribunal found that the assessee furnished inaccurate particulars of its income and it was within its knowledge that the particulars furnished were not correct. The Tribunal pointed out that it was not possible to accept that the partners and the firm were separate entities in so far as the consciousness about the real state of affairs was concerned, and that the partners knew that the claim for interest was not genuine, and that they also knew that' these amounts belonged to the partners themselves. In that view, the Tribunal upheld the levy of penalty and dismissed the assessee's appeal.
6. At the relevant time Section 271(1)(c) was in the following terms : '271. (1) If the Income-tax Officer or the Appellate Assistant Commissioner in the course of any proceedings under this Act, is satisfied that any person--.........
(c) has concealed the particulars of his income or deliberately furnished inaccurate particulars of such income, he may direct that such person shall pay by way of penalty,.........'
7. From the judgment of the Tribunal it is found that the assessee-firm submitted a return for the relevant assessment year on October 10, 1963, in which the six items of interest were shown as paid to the respective parties mentioned hereinabove. Subsequently, four out of the seven partners, namely, Laduram Ajitsaria, Madanlal Ajitsaria, K. P. Ajitsaria and Sitaram Ajitsaria, made declarations under Section 24 of the Finance (No, 2) Act of 1965, wherein they respectively stated that Laduram Ajitsaria received the interest paid to M/s. International Finance Corporation and M/s. Laxminarayan Mohanlal, Madanlal Ajitsaria received the interest paid to M/s. Surajmal Ganeshiram & Sons, K. P. Ajitsaria received the interest paid to M/s. Srigopal Onkarmal and Sitaram Ajitsaria received the interest paid to M/s. Sarma & Sons and M/s. Gulabrai Misrilal. When these declarations were made, the assessee-firm stated that the credits appearing in the accounts in the names of the above parties were moneys belonging to the said four partners of the firm. These facts are not disputed.
8. The question that arises for determination is whether the assessee-firm is liable to penalty under Section 271(1)(c) of the Act because in its return it showed these interest amounts as paid to some other parties instead of the four partners mentioned hereinabove. The Tribunal in its appellate order has observed as follows :
' We have carefully considered the facts of the case and the arguments of the learned representative of both the sides. In our view, on facts it must be held that the assessee furnished inaccurate particulars of his income and it was in his knowledge that the particulars furnished were not correct. It is not possible to accept that the partners and the firm were separate entities in so far as the consciousness about the state of affairs was concerned. When the return was field it was shown that interest has been paid to various parties and to that extent the taxable income was reduced. The partners of the firm clearly know that this claim of interest was not genuine. They also know that these amounts belonged to the partners themselves. In view of this, it is a case of deliberate furnishing of inaccurate particulars of income.'
9. It is nobody's case that at the time of filing the return on October 10, 1963, the assessee-firm had knowledge that the interest amounts shown as paid to different parties were paid to the respective partners. This fact was disclosed only in the declarations made by the respective partners. So, at the time of filing the return it cannot be stated that the assessee-firm had consciously put these amounts of interest in the names of some nonexistent firms. Section 271(1)(c) requires that, in order to impose penalty, the authority must be satisfied that the assessee had concealed the particulars of his income or deliberately furnished inaccurate particulars of such income. In the instant case, the Tribunal has held that the assessee deliberately furnished inaccurate particulars of its income in question. While coming to this conclusion the Tribunal held that the partnership firm and the partners were not separate entities. On this proposition of law the Tribunal came to the decision that the assessee-firm was liable to penalty under Section 271(1)(c) of the Act. We are, however, unable to accept this proposition of law as propounded by the Tribunal.
10. Under Section 2(31) of the Act, 'person' has been defined as follows : ''(31) 'person' includes-
(i) an individual,
(ii) a Hindu undivided family,
(iii) a company,
(iv) a firm,
(v) an association of persons or a body of individuals, whether incorporated or not,
(vi) a local authority, and
(vii) every artificial juridical person, not falling within any of the preceding sub-clauses.'
11. Under the Income-tax Act a firm is an entity which is liable to pay tax. A firm is an assessee apart from the individual partners who also may be assessed in their individual capacities. That being the position, for the purpose of the Income-tax Act, a firm cannot be equated with the partners because from the relevant provisions of the Income-tax Act it is quite clear that a firm is an entity which may be assessed as a person as distinguished from the individual partners who may be assessed separately. That being so, the knowledge of some of the partners regarding some fact for the purposes of the Income-tax Act cannot be imputed to the partnership firm as a whole for the purposes of the Act, whether for assessment or for penalty. The disclosure made some time during the period from August 19, 1965, to April 1, 1966, by some of the partners in the instant case regarding the interest amounts shown in the return as interest paid to the respective parties, which was filed in October, 1963, may amount to knowledge of those particular partners regarding the inaccufate particulars, but that disclosure cannot prove knowledge of the assessee-firm about inaccurate particulars of income at the time of filing the return, inasmuch as the firm is a distinct entity as distinguished from the individual partners for the purposes of the Income-tax Act.
12. From the facts and circumstances of the case, we hold that the Tribunal was not justified in holding that the assessee-firm had furnished inaccurate particulars of income deliberately, bringing the case within the four corners of Section 271(1)(c) of the Act.
13. We, accordingly, answer the question in the negative and in favour of the assessee.
D.M. Sen, J.
14. I agree.