Bishambhar Dayal, C.J.
1. This is a reference under Section 256(1) of the Income-tax Act, 1961. The question referred to this court by the Income-tax Appellate Tribunal is as under :
'Whether, on the facts and in the circumstances of the case, for the purpose of calculating the tax with reference to which the penalty was leviable in the case of a registered firm under Section 271(1) read with Section 271(2) of the Income-tax Act, 1961, the tax payable by such firm should be determined after deducing the advance tax paid by the partners under Section 18A of the Indian Income-tax Act, 1922, in respect of their shares of profits from the firm from the gross tax payable by the firm on the basis that it was an unregistered firm ?'
2. The assessee-respondent is a firm having four partners. The relevant year is 1958-59, the return for which was filed by the firm on 8th July, 1959, i.e., it was filed 11 months after the due date. In the assessment year the firm was registered and had made a deposit of Rs. 2,500 by way of advance tax. The assessment of the firm was finally made on 25th May, 1965, on a total income of Rs. 85,797. In the meanwhile penalty proceedings were started under Section 271 of the Income-tax Act, 1961. The relevant part of Section 271 is as follows :
'If the Income-tax Officer. .... .is satisfied that any person-
(a) has without reasonable cause failed to furnish the return of total income which he was required to furnish under Sub-section (1) of Section 139 or ...... has without reasonable cause failed to furnish it within the timeallowed and in the manner required..... he may direct that such person shall pay by way of penalty :-- (i) in the cases referred to in Clause (a), in addition to the amount of the tax, if any, payable by him, a sum equal to 2 per cent. of the tax for every month during which the default continued, but not exceeding in the aggregate fifty per cent of the tax. .....'
3. From the above it is quite apparent that the amount of penalty has to be calculated on the basis of the tax payable by the assessee. Therefore, in order to find out the amount of penalty leviable if is first necessary to find out the tax payable by the assessee.
4. In the case of registered firms no tax was payable before 1956. Since 1956 some nominal amount of tax has been made payable by registered firms also but they remain free from payment of the bulk of the tax. In such a case, therefore, if a registered firm makes default in furnishing the return within time, it was not possible to calculate the penalty as there was practically no tax payable. In order to obviate this difficulty the legislature has enacted Sub-section (2) of Section 271, which is as follows :
'When the person liable to penalty is registered firm or an unregistered firm which has been assessed under Clause (b) of Section 183, then, notwithstanding anything contained in the other provisions of this Act, the penalty imposable under section (1) shall be the same amount as would be imposable on that firm if that firm were an unregistered firm.'
5. This sub-section creates a fiction in law. Although the firm against which penalty is to be imposed is a registered firm therefore not liable to pay tax, yet that firm has to be assumed to be unregistered for the purpose of calculating tax liability and on that basis penalty has to be imposed.
6. The next step, therefore, is to find out tax payable by the firm as unregistered firm. For that purpose the first step to be taken is to find out the total income of the firm and this has to be done both in the case of registered as well as unregistered firms. On that income, in the case of an unregistered firm, tax has to be calculated and the firm has to pay the tax. But, in the case of a registered firm, the income so found is allocated to individual partners according to their share and it is the partners who are liable to pay tax on their own personal income including the allocated share from the firm. Since the relevant year of assessment in this case is 1958-59, the liability to tax had to be determined under the Income-tax Act of 1922, as amended till then. Under Section 18A of that Act advance payments had to be made by every assessee. Thus, in the case of unregistered firms, advance tax had to be deposited by the firm and, in the case of registered firms, the! individual partners deposited advance tax according to their own personal liability. This advance payment of tax was gives credit in the ultimate tax liability found at the end of the year. Since this was a registered firm, there was to be no determination of tax liability,--of course, apart from the nominal tax which the registered firms had to pay after the year 1956. Nor did it make advance deposits on the basis that it will ultimately have to pay tax on the whole of its income. The individual partners of the firm, however, made deposits on the basis of their personal liability on their personal income which included the share received by the partners from the profits of the firm. Thus, as a registered firm, there was a very small advance deposit, which in this case was Rs. 2,500 as mentioned earlier.
7. However, when penalty has to be calculated in the case of a registered firm, as observed earlier, the tax liability of the firm has to be determined as if the firm were not registered. Therefore, the whole income of the firm which was assessed as its income (Rs. 85,797) is to be taken into consideration for calculating the tax liability. Now the question is as to what amount of advance tax is to be deducted from this tax liability in order to find out the exact amount of tax which the assessee-firm would have to pay on the basis that it was an unregistered firm. The case of the department is that only the amount deposited in advance by the firm can be deducted, but the case of the assessee is that the advance tax deposited by the partners of the firm individually in connection with the assessment on their individual income in respect of their respective shares in the profits of the firm should also be deducted. The contention of the assessee was accepted by the Income-tax Appellate Tribunal which is contested by the department and hence this reference.
8. After hearing learned counsel for both the parties, I have come to the conclusion that the contention of the department is correct. The fiction created by Section 271(2) of the Act of 1961 is merely to this extent that for the purpose of calculating the penalty imposable on the firm the basis will be the same which would have been applied if the firm had not been registered. This fiction must be applied to the existing facts. It cannot further be supposed that the advance deposits made by the individual partners were deposits made by the firm. Such a supposition would not be a mere extension of the original fiction created by Section 271(2) but would be a new fiction, for which there is no warrant in law.
9. Moreover, an advance deposit is made by an assessee during the financial year in which income is earned, calculating it on the basis of his income in the year before such financial year. So the advance deposits made by the partners were based on their personal income in the financial year 1956-57 and no portion of such deposits can be said to be referable to the share of profit received from this firm in the financial year 1957-58. The argument of learned counsel for the assessee that a part of the advance deposit made by the partners was referable as payment in respect of the share of income received from the firm in the financial year 1957-58 is not supportable. Whatever advance deposit is made by each partner, it is made for his own benefit and can only be utilised to reduce his own tax liability, ultimately determined in the assessment year 1958-59, and if the deposit is in excess he would be entitled to a refund. But there is no warrant for allowing credit to be given to the firm for any deposit made by the partners individually. For income-tax purposes the firm and the partners have to be treated as separate entities and an advance deposit made by one cannot be treated as made by another,
10. I would, therefore, answer the question referred in favour of thedepartment as under :
On the facts and in the circumstances of the case, for the purposes of calculating the tax with reference to which the penalty was levilable in the case of a registered firm under Section 271(1) read with Section 271(2) of the Income-tax Act, 1961, the tax payable by such firm should be determined without deducting the advance tax paid by the partners under Section 18A of the Income-tax Act, 1922, from the gross tax payable by the firm on the basis that it was an unregistered firm.
11. There will be no order for costs on this reference.
12. The question arising in this reference relates to the construction of the following words of Section 271(2) of the Income-tax Act, 1961:
'When the person liable to penalty is a registered firm... .then notwithstanding anything contained in the other provisions, of this Act, the penalty imposable under Sub-section (1) shall be the same amount as would be imposable on that firm if that firm were an unregistered firm.'
13. As the penalty imposable under Section 271(1) is a percentage of the tax payable by a person, for determining the amount of penalty payable by a registered firm the tax payable by the firm is to be determined treating it to be unregistered. There being no difference in the computation of total income of a registered firm and an unregistered firm, the total income already determined for assessing the firm as a registered firm would also form the basis for assessing it on the footing that it is unregistered. There will also be no difficulty in computing the tax chargeable on the total income. The difficulty starts in determining the tax payable. The amount of tax payable is to be calculated by adjusting or giving credit for the amount of tax paid, if any, as advance tax. The source of this adjustment for the relevant assessment year is Section 18A(11) of the Income-tax Act, 1922, which reads :
'Any sum other than a penalty or interest paid by or recoverd from an assessee in pursuance of the provisions of this section shall be treated as a payment of tax in respect of the income of the period which would be the previous year for an assessment for the financial year next following the year in which it was payable, and credit therefor shall be given to the assessee in the regular assessment.'
14. On the language of Section 18A(11) it is clear that credit for the advance tax is given to the assessee in the regular assessment who has paid the tax. If advance tax is paid by a partner, it is in the partner's assessment that credit will be, given. It is no doubt true that the income on which a partner of a registered firm pays advance tax will include his share in the profits of the firm ; but the advance tax so paid is paid by the partner andnot by the firm and adjustment of this payment can be given to the partner in his final assessment and not to the firm. Will the legal position be different when a registered firm is assessed on the footing that it is an unregistered firm for imposing penalty? Section 271(2) of the Income-tax Act, 1961, creates a statutory fiction by direction a registered firm to be treated as an unregistered firm for the computation of penalty. It has been well said that the rules of construction 'hunt in pairs'. So, in construing a provision creating a statutory fiction, two rules , operate ; the statutory fiction should be carried to its logical conclusion, but the fiction cannot be extended beyond the language of the section by which it is created or by importing another fiction. The solution is found by harmoniously applying the rules. The logical conclusion of the fiction created by Section 271(2) is to treat a registered firm as an unregistered firm and to assess the tax on the total income of the firm for the purpose of imposing penalty. But the language used in the section does not permit the extension of this fiction by treating advance tax paid by the partners of such a firm as advance tax paid by the firm. Extension of this nature would amount to creating a fiction upon fiction which is not permissible. It is true that sometimes the minimum penalty, which is now fixed by Section 271(1), may, when so computed, look disproportionate to the lapse which is sought to be penalised in cases where the partners may have paid substantial advance tax on the income of the firm. But considerations of equity have seldom, if ever, any application in construing an Act like the Income-tax Act. Hardship of any individual case can, However, be avoided by the Income-tax Officer or the Appellate Assistant Commissioner deciding in his discretion not to impose any penalty or the Commissioner reducing or waiving the amount of minimum penalty by exercising his power under Sub-section (4A).
15. For these reasons, I agree that the question referred to us should be answered in the manner proposed by my Lord the Chief Justice.