1. This is a reference under s. 256(1) of the I.T. Act, 1961 (Referred to hereinafter as 'the said Act').
2. The question referred to us for our determination in this reference is as follows :
'1. Whether, on the facts and in the circumstances of the case, in computing the penalty imposable on the assessee (registered firm) under section 271(1)(a) read with section 271(2) of the Income-tax Act, 1961, for the assessment year 1966-67, the Tribunal was justified in so construing section 271(2) as to allow deduction under section 280-O of the amount of annuity deposit which the assessee might have paid if it were an unregistered firm when, in fact, no annuity deposit had been paid by it ?'
3. The assessee is a firm registered under the I.T. Act and carries on business at Kolhapur. The assessee was required to file its returns of income for assessment year 1966-67 by September 30, 1966, under s. 139(1) of the said Act. However, the said return was filed on February 17, 1969, i.e., after a delay of 28 months. The ITO condoned the to levy a penalty of Rs. 29,196, taking the default as from April 1, 1967. An appeal preferred by the assessee against the order of the ITO was rejected by the AAC. On a further appeal to the Income-tax Appellate Tribunal, the said Tribunal condoned the delay for a further period of 9 months, up to December 31, 1967. The Tribunal confirmed the levy of penalty in principle. However, before the Tribunal, a contention was raised by assessee with regard to the quantification of the amount of the penalty leviable on the assessee. It was contended by the assessee that in calculating the amount of penalty, the tax payable should be determined after giving deduction in respect of the annuity deposit under the provisions of s.280-O of the said Act. It was contended that penalty in accordance with the provisions of s. 271(2) of the said Act, on a fictional basis, the fiction should be carried to its logical conclusion and the benefit of annuity deposit should be given to the assessee. The Tribunal accepted this contention and held that the tax should be computed on the balance of the amount called 'adjusted total income' under s.280B of the said Act. The aforesaid question arises from this decision of the Tribunal.
4. Section 271 of the said Act deals with the failure to furnish returns, comply with notices, concealment of income, and so on. There is no dispute that under the provisions of sub-s. (1) of s. 271, the assessee became liable to the payment of penalty for the late submission of its returns. Sub-section (2) of s. 271 read thus :
'When the person liable to penalty is a registered firm or an unregistered firm which has been assessed under clause (b) of section 183, Act, the penalty imposable on that firm if that firm were an unregistered firms.'
5. A perusal of s. 280A of the said Act shows that an unregistered firm is liable to make payments of annuity deposits, but not a registered firm Sub-section (1) of s.280-O reads thus :
'Notwithstanding anything to the contrary contained in the provisions of this Act relating to the computation of income chargeable under any head of income, the annuity deposit required to be made under this Chapter shall, subject to the provisions of sub-section (2) be allowed as deduction in computing the total income assessable for the assessment year in respect of which the annuity deposit is required to be made.'
6. There is a proviso to this section, which has been introduced by way of substitution of the entire section by the Finance Act, 1966, with effect from April 1, 1966. It is unnecessary to set out the said proviso herein, because it is clear that by reason of the said proviso, the deduction to be granted in respect of annuity deposits is restricted to the annuity to be actually made, in a case where it is required to be made.
7. Now, no a perusal of sub-s.(2) of s. 271, it appears to us that where a registered firm becomes liable to penalty, for the purpose of determining the penalty imposable, a fiction is introduced by the said sub-section that the said registered firm is to be treated as an unregistered firm. If such a fiction is introduced, there is no reason why it should not carried to its logical conclusion, which would be that, in the computation of its total income, the assessee-firm would be entitled to a deduction of an amount equivalent to the annuity deposit which it would have had to pay ad it been an unregistered firm. Once the firm is treated, for the purposes of penalty, as an unregistered firm, there is no reason why it not required to pay any annuity deposit at all, but that, to our mind, computation of its total income for the purposes of determination of the tax payable, on which penalty is based, of the amount of the annuity deposit which it would have been required to pay, had it, in fact, been an unregistered firm.
8. We find that the view which we re taking is supported by a decision of the Madras High Court in CIT v. Palaniappa Transports : 124ITR634(Mad) , where it has been held that the language of s.280-O of the I.T. Act, 1961, namely, 'required to be made under this chapter' envisages deduction being given of the amount had envisaged as payable by statute even if the amount had not been actually paid by the assessee as the actual payment is not the statutory criterion. In other words, if an individual was liable to pay annuity deposit and also penalty under s. 271(1), the computation of tax would have to be on the basis of the annuity deposit statutorily due from him, and the annuity deposit so due, irrespective of payment would have to be deducted out of total income. The fact that the amount was not actually paid is not relevant on the language of the provision as it initially stood. The amendment to s.280-O does not really affect a registered firm which is treated as an unregistered firm for the purpose of levy of penalty under s. 271(2). Under the amended law, provision was made for deduction of only the amount actually paid. A registered firm treated as an unregistered firm is under no obligation to pay annuity deposit. The registered firm would be eligible for the deduction of the firm cannot pay any such deposit under the law, the proviso to s. 280-O assessee, a registered firm, was entitled to deduct the annuity deposit which would have been payable by it had it been an unregistered firm for the purpose of determining the quantum of penalty leviable on it under s. 271(2). We are in respectful agreement with the aforesaid decision.
9. The view which we have taken is further supported by the decision of the Karnataka High Court in Addl. CIT v. Khanchand Thakurdas : 114ITR223(KAR) and the decision of the Gujarat High Court in CIT v. Gujarat Automobiles : 105ITR588(Guj) . No contrary decision has been shown to us.
10. In view of the aforesaid, the question referred to us is answered in the affirmative and in favour of the assessee. No order as to costs, as the assessee is not appearing.