S. Ranganathan, J.
1. The assessed, Freewhells India Ltd., New Delhi, filed its return of income for the assessment year 1967-68 on 8th September, 1967. Under s. 140A of the Act, as it then stood, the assessed had to deposit the amount of tax payable on the basis of the return within 30 days of the filing of the return i.e., in the present case on or before the 7th October, 1967. The tax payable on the basis of the return was Rs. 7,39,939. As the assessed-company failed to pay the tax as the required by s. 140A(1), the ITO, after giving a notice to the assessed (for which there was no reply), imposed a penalty of Rs. 73,993.
2. The assessed preferred an appeal to the AAC and contended that the amount of tax could not be paid on account of the financial strigency of the company and that the penalty imposed was excessive. The appeal was dismissed by the AAC.
3. The assessed preferred an appeal to the Appellate Tribunal. Before the Tribunal it was contended that the ITO had not given the assessed an opportunity to show cause against the proposed imposition of penalty. It was also contended that the assessed had been prevented by sufficient cause from paying the amount of tax under s. 140A and in support of this contention it was pointed out that a similar penalty levied for non-payment of advance tax for the assessment year 1968-69 had been remitted by the AAC. The Tribunal rejected the first of contentions put forward on behalf of the assessed but, so far as the second contention was concerned, it was of the view that the relevant fact had not properly consideration by the AAC. The Tribunal, thereforee, set aside the order of the AAC and restored the matter to him for fresh disposal in accordance with law.
4. When the matter thus came up again before the AAC, the assessed filed a paper book running into over 250 pages. On the strength of the various documents in this compilation it was urged that the payment of self-assessment tax could not be made for reasons beyond the company's control. In support of the plea of financial difficulties it was pointed out, (a) that the Company Law Board had been requested to condone a default in the non-payment of dividends declared at the general meeting of the company in March, 1968; (b) that the company was under the control, at the relevant time, of Globe Motors Ltd., which held 52 per cent. of its paid up capital and that this company deprived the assessed of cash resources of Rs. 20 lakhs which were got invested in certain properties belonging to another company in which Glober Motors was interested and in an unprofitable investment and also prevented the assessed-company from issuing fresh capital and getting overdraft facilities from the bank; and (c) that the CBDT had considered the financial difficulties of the company and being convinced that they were genuine permitted the company to pay and outstanding demands for the assessment year 1967-68 (including the demand under s. 141 for that year in Installments over several months).
5. The AAC considered the various contentions urged on behalf of the assessed but he came to the conclusion that the appellant-company could not escape the liability to penalty by passing on the blame on its directors and major shareholders. According to him, it was entirely an internal affairs of the general body and the management of the company as to how they arranged their affairs but they could not take refuge behind the decision of its management to explain away a default in payment of taxes. However, taking note of the fact that the default under s. 140A subsisted only for a period of about four months at the end of which there was an imposed by the ITO to Rs. 40,000 only.
6. The assessed again preferred an appeal to the Tribunal and reiterated its contentions that on account of the financial difficulties which the company was undergoing at the relevant time, there were genuine difficulties in paying the self-assessment tax and that, thereforee, the imposition of penalty was not justified. There was difference of opinion between the two learned Members who heard the appeal. Both the learned members agreed that for a default under s. 140A(1) the imposition of a penalty was not obligatory and that the ITO had a discertion to levy or not to levy a penalty depending upon the circumstances of each case. The learned Judicial members, however, was of opinion that in the circumstances of the present case no reasonable cause has been made out by the assessed for the default in the payment of the tax under s, 140A. He was of opinion that the cancellation of the penalty previewed for non-payment of advance tax for the assessment years 1968-69 and 1969-70 stood on a different footing. In his view the self-assessment tax became payable after the end of the accounting period when the income had already been earned by the assessed and if an assessed ignored his responsibility to pay this tax and placed himself in financial difficulties he alone would be to blame. The learned Judicial member recognised that there could be occasions where at a given point of time, an assessed might bona fide carry the impression that temporary user of money in his normal business errands would not prevent the same being available to him at the appropriate time for being deposited with the Government but he observed that if an assessed chose to deliberately use funds available with him elsewhere with his eyes open with the result that they were not available when the tax fell due, he need not receive any indulgence from the Revenue at the time of levy of penalty. Examining the facts of the case from this point of view the learned Judicial members came to the conclusion that though the assessed-company's financial year had come into an end on 30th April, 1967, and it was aware that it had to effect a deposit of Rs. 7,39,939 as tax as per its own books by about mid-1967 'it elected to give away and if we may say fritter Rs. 20,00,000 in April, 1967, in most doubtful and shady deals'. He pointed out that Rs. 10 lakhs had been given for purchasing immovable properties from a firm in which some of the directors were vitally interested which was not a prudent transaction consideration particularly that in fact no sale deed in respect of these properties materialised at any time in favor of the assessed. Another sum of Rs. 10 lakhs had been equally recklessly invested in expectation of becoming a partner in a concern in which the directors were again invested, which share in partnership again became illusory and was never available to the assessed thereafter. These long range investment were made by the assessed with open eyes. Ignoring its responsibility towards tax dues the company embarked upon 'what appeared to be collusive deals with the other company and the firm'. The learned Judicial Member did not also attach much weight to the plea of the assessed that these investment were made at the behest of Globe Motors Ltd. in the hands of which the assessed was entirely a tool. The learned Judicial Members observed that a company being a legal entity acting through its directors must fact the consequence of their acts and could not disown the acts of its own directors. Merely because subsequently the two groups of shareholders separated and their holding went into the hands of two different groups, it would not make any difference to the responsibility of the assessed-company to file its return and pay the tax in accordance therewith. However, the learned Judicial member was of opinion that as there was a default under s. 140A only for a period of about four months, the penalty should be restricted to 4 per cent. of the tax payable.
7. The learned Accountant member did not agree with the view of the learned Judicial Member. He did not see any difference between the default made by the assessed in the payment of advance between the respect of which had been cancelled by the Tribunal and the default in the payment of self-assessment tax. He also disagreed with the view of the learned Judicial Member that the diversion of funds by the assessed had been made with mala fide intentions and in his view there was no suggestion or evidence to show that the assessed joined hands with Globe Motors Ltd. (which was the holding company) with the ulterior notice of defrauding the Revenue. On the other hand, the correspondence and subsequent proceedings amply justified the view advanced on behalf of the assessed that the relationship between the assessed-company and the holding company were really strained and that in fact the assessed-company had been cheated by the holding company. The learned Accountant Member further pointed out that apart from the fact that penalty for non-payment of advance taxes for the assessment years 1968-69 and 1969-70 had been cancelled, there was also evidence to show that the CBDT before which application had been filed seeking the postponement of payment of tax in arrears (including the advance tax for the assessment years 1968-69 and 1969-70, and self-assessment tax for the assessment years 1967-68) accepted the position that the assessed-company was not in possession of funds to effect payments of tax on due dates and allowed the assessed-company to make the payment of tax in suitable Installments. The Board had also accepted the position that the investment of funds to the extent of Rs. 20,00,000 had not been made in any mala fide manner pointing out that there could be no objection to an assessed utilising its funds for legitimate business needs. No penalty could be imposed unless there is something to show that the assessed had fraudulently and with a view to avoid payment of tax on due dates fitted away his investible funds. For these reasons the learned Accountant Member was of opinion that the assessed had been wrongly punished and that the penalty should be cancelled. On accountant of the difference of opinion between the two members the matter was referred to the learned Vice-President of the Tribunal who was inclined to agree with the conclusion of the learned Accountant Member. At the outset the pointed out that both the learned members were agreed that s. 140A(3) left a discertion to the ITO to refrain from levying a penalty in appropriate cases. The sole question to be decided, thereforee, was whether on the facts and in the circumstances of the present case the ITO should have exercised such a discertion. The learned Vice-President pointed out that in deciding this issue two aspect were relevant. The first was the financial condition of the assessed at the relevant time and the second was the view which the I.T. authorities had taken in regard to that financial condition. On the first aspect it was pointed out that in October, 1967 (which is the relevant date), it was not in dispute that the company was financial in straitened circumstances. It was no doubt true that this financial stringency arose primarily because a sum of Rs. 20,00,000 had been paid over to concerns connected with Globe Motors Ltd. Examining the circumstances under which according to this diversion took place the learned Vice-President found that while according to the assessed this was the result of the holding company siphoning away its funds for rescuing other companies in which the directors of the holding company were interested and the assessed-company was a helpless spectator to the ruination of its finances, the department's plea was a technical one that a company had to operate through its directors and that if the directors which was ultimately responsible. Analysing the position, the learned Vice-President pointed out that it was nobody's case that the transfer of funds of the assessed-company had been made to avoid payment of tax by the assessed-company. On the other hand, there was an evidence to show that the funds were transferred in order to tide over the financial difficulties of other companies in which the holding company or its director were interested. The assessed-company could be said to have colluded with the holding company only in the sense that it acquiesced in the transfer of funds, but it was not possible to suggest that this acquiescence was actuated by a desire to avoid payment of taxes on its own income. Pointing out that there was a struggle between the two groups of shareholders in the company and that ultimately both the holding company and the assessed-company passed under the control of different groups of person the learned Vice-President observed that even though the assessed-company retained its identity as a company it was not reasonable to ignore the fact that to a considerable extent it was heldless in the manner of preserving its funds for its own use. After all, it is a part of the existence of a joint stock company that sometimes it might have controlling shareholders or a holding company, which might abuse their control and when one preceded to examine the guilt of the assessed in respect of a statutory obligation one had necessarily to take into account the possible incidence of its existence and to draw a line between misconduct or misfeasance of the company as a company on the one hand and misfeasance of misconduct of the holding company or its controlling shareholder. The conclusion of the learned Vice-President in this regard was that the financial condition of the assessed was really bad and that very little of the blame for it, if any, could be attached to the company as such. Turning next to the view which the I.T. authorities had taken about the financial condition of the company, the learned Vice-President pointed out that what was sought to be compared on behalf of the assessed was the position in regard to the advance tax which became payable during the financial year 1967-68 (relevant to the assessment year 1968-69) and the self-assessment tax in respect of the assessment year 1967-68, both of which arose at about the same time. While it was true that there was some difference in the procedure and incidents in relation to an advance tax and the tax payable on a self-assessment it was important to remember that in the present case the liability for advance tax as well as the liability on the basis of the self-assessment arose at about the same time and were also payable out of the same source, namely, the income for the assessment year 1967-68, and part of the income which was in the process of accrual for the assessment year 1968-69. The comparison, thereforee, of the circumstances regarding both was quite valid and, thereforee, the view taken by the department and the Tribunal in relation to the assessment year 1968-69 was also quite relevant. Referring to the Tribunal's finding on the basis of which the penalty levied for non-payment of advance tax for the assessment year 1968-69 was cancelled and to the decision of the CBDT granting Installments for the large amount of taxes payable by the assessed at about this time, the learned Vice-President was of opinion that it would be inconsistent both with the position taken by the I.T. authorities and by the Tribunal vis-a-vis the financial condition of the assessed in the relevant period to hold that it should be treated as in default in respect of the demand under s. 140A. With respect to the observation of the learned Judicial Member that the full facts regarding the decision of the CBDT were not before the Tribunal, the learned Vice-President pointed out that the entire correspondence in the matter had been placed before the Tribunal and that this correspondence gave full details of the liabilities and difficulties which the assessed was experiencing. For the above reasons, the learned Vice-President endorsed the conclusion of the Accountant Member and agreed with him that the penalty imposed ought to be cancelled.
8. In conformity with the view of the majority of the members who heard the appeal, the appeal preferred by the assessed was allowed and the penalty stood cancelled. The Addl. Commissioner of Income-tax has, thereforee, come to this court under s. 256(1) of the I.T. Act, 1961. The question preferred to us for decision is in the following terms :
'Whether, on the facts and in the circumstances of the case, the Tribunal was legally correct in holding that no penalty under section 140A(3) of the Income-tax Act, 1961, was livable in this case and thus cancelling the penalty of Rs. 40,000 imposed on the assessed under the section 140A(3) of the Income-tax Act, 1961 ?'
9. Shri G. C. Lalwani, learned counsel for the applicant, faintly urged before us that the order of the Tribunal was erroneous because s. 140A(3) leaves no discretionto the ITO but renders the levy of a penalty under that sub-section automatic, once the tax payable under sub-s. (1) was not paid on the due date. We are of opinion that this contention is clearly untenable. In the first place, all the three members who heard the appeal have held against the Revenue on this point. Indeed, it does not even appear to have been seriously argued before the Tribunal that a penalty under s. 140A(3) was obligation even in a case where an assessed experiences genuine difficulty in the payment of the tax. On this issue the Commissioner has not asked for any reference and no question specifically has been referred in regard to that point. But even on the assumption that the question which has been referred to us is wide enough to cover this aspect, we are opinion that the contention has to be rejected. As pointed out by the learned Judicial member, the language of s. 140A itself clearly shows that a penalty is not an automatic consequence of a default and that before a penalty is imposed a reasonable opportunity must be provided to the assessed to show cause why the penalty should not be imposed. This clearly implies that it is open to the assessed to show that the default in the payment was in such circumstances as do not invite the penalty and that there was a reasonable cause for the non-payment of the tax as required by the section. We have no doubt that the view taken by the Tribunal on this aspect of the matter is clearly correct and we may point out that this is also the consensus of judicial opinion. Our attention has been drawn to the decisions of the Calcutta High Court in CIT v. Wesman Engineering Co. P. Ltd. : 104ITR605(Cal) , the Punjab and Haryana High Court in CIT v. R. B. L. Banarsi Dass and Co. (P.) Ltd. , the Gauhati High Court in Bhauram Jodhraj Properties (P.) Ltd. v. CIT , the Andhra Pradesh High Court in Kashiram v. ITO : 107ITR825(AP) and Addl. CIT v. Sarvaraya Textile Ltd. : 137ITR369(AP) and the Madhya Pradesh High Court CIT v. Virjlal Manilal & Co. : 127ITR512(MP) , on this aspect and we entirely agree with this view.
10. The only other aspect urged by Shri Lalwani was that in the present case the assessed could not be said to have had reasonable cause for the default in the payment of the tax. He urges that the assessed was aware that it had to pay advance tax by the middle of September, 1967, and that it had purposely diverted its funds and invested them in long range imprudent and infructuous investments. According to him it is not very material that these investments were made because Globe Motors Ltd., by virtue of their majority shareholding, had a hold over the affairs of the company.
11. We are unable to accept this contention of the learned counsel for two reasons. In the first place, whether on the facts and circumstances of a particular case, the non-payment of tax stems from a reasonable cause or whether in the circumstances the conduct of the assessed was such as to merit the imposition of the penalty is purely a question of fact. It depends upon the examination of the facts and circumstances of each case. The position is similar to that regarding the imposition of penalty under s. 271(1)(a) under which it has been held that existence or otherwise of a reasonable cause will be a question of fact. Thus, the question whether in this particular case the circumstances were such as to call for a penalty was primarily for the Tribunal to consider. No doubt, the learned Judicial Member took view which was in favor of the Revenue but the majority of the members who heard the appeal took a contrary view. In the result, by a majority decision, the Tribunal came to the conclusion that there was a reasonable cause on the part of the assessed in its default in the payment of the self-assessment tax. This is a conclusion of fact and as rightly pointed out by the learned counsel for the respondent it is necessary where a person wants to challenge such a finding of fact that it should be challenged by raising a specific question as to whether the finding of fact was based on material or not or whether it could be described as unreasonable and perverse. No such question has been asked for by the present application. The question as framed and referred to us is only a general question as to the correctness of the conclusion of the Tribunal and this has to be answered only by pointing out that the conclusion of the Tribunal was a conclusion of fact with which this court will not interfere.
12. That apart, in our opinion, the view taken by the majority of the Members of the Tribunal is also the correct view on the facts. It is no doubt true that the company was in possession of substantial funds in April, 1967, but that by the time the date for the payment of self-assessment tax arrived there were no funds available with the company. The question to be examined is whether the diversion of these funds was effected by the company with any mala fide intention of avoiding the due payment of tax or whether this was an investment made by the company in the normal course of its activities and with no intention to evade the payment of the advance tax or the self-assessment tax. In considering this question both the Accountant Member and the Vice-President of the Tribunal have pointed out that there is no material on record to sustain any conclusion that the diversion of funds was collusive or that it had been made with a view to cheat the Revenue of its due taxes. Even the learned Judicial member described these in one portion of his order only as imprudent investment. He points out that these were investments made in concerns in which the holding company was interested and that these long range investments made between April and September, 1967, were against the normal conduct of a prudent man. However, in another part of the order, he refers to them as reckless, shady and collusive deals entered into by the assessed-company. The full circumstances in which the diversion of funds took place have not been brought on record by the Revenue while getting this statement of case prepared. We have, thereforee, to proceed only upon such information as is available on record and as has been considered by the Members of the Tribunal. Both the Accountant member and the Judicial Member have pointed out that at the relevant time Globe Motors Ltd. had a dominating position in the shareholding of the assessed-company and that the funds had got diverted much against the will of the minority shareholders and with a view to rescue the other companies in which Globe Motors Ltd. was interested from certain difficulties into which they had got themselves entangled. It is no doubt true that a company is a separate entity for purposes of taxation but in judging the conduct of a company and in deciding the question of penalty it is necessary to a certain extent to look at what was actually happening. We agree with the learned Vice-President of the Tribunal that it is quite common that during the existence of a joint stock company sometimes it might come to have controlling shareholders or holding company which might abuse their control or position and that the misconduct of such officers or holding company has, in certain circumstances, to be kept apart from the misconduct of the company itself as such. To attribute mala fides to a company and penalise it for the misfeasance or misconduct of its directors or controlling shareholders in all circumstances might result in visiting the company with a double calamity, one by the said directors and shareholders and another, by the Revenue because of them. To give a simple illustration if the cashier or director of a company were to misappropriate its funds, the company will naturally have to bear the financial incidence of such misfeasance and be answerable to its creditors notwithstanding the loss of the funds. The company cannot disown its liability to pay income-tax on the profits because of the directors' misconduct. But, in the context of the question whether the company could be said to have sufficient cause in those circumstances, to explain the non-payment of the taxes by it, it is necessary, as pointed out by the learned Vice-President, to keep the misfeasance of the officers part from the misconduct of the company as such. If in the illustration given above the company is unable to pay its taxes because of its funds having been frittered away by the cashier or the directors, we think that it will only be fair to take into account the absence of cash in the hands of the company and the circumstances that its inability to pay the tax was for reasons beyond its control in deciding the question whether the company is liable to pay penalty or not. We are, thereforee, of the opinion that in the present case, in view of the finding given by the learned Accountant Member and the learned Vice-President that the financial stringency of the company was not due to any collusion on its part but that this was because, either the company itself got cheated in the circumstances as found by the learned Accountant Member or because the company was so placed that it could do very little to frustrate the intention of the holding company, the fact remains that the company was not financially in a position to pay the taxes. The lenient view taken by the CBDT of the various circumstances also clearly shows that it could not have been case where the company had deliberately frittered away its funds to avoid payment of taxes. If that had been so the Central Board would not have taken a sympathetic view of the circumstances and given time to the assessed for the payment of its taxes. The view taken by the Tribunal in relation to the non-payment of advance tax is also a consistent circumstances to indicate that the non-payment of tax by the assessed at this period of time was on account of reason beyond its control.
13. For the above reasons, we are of opinion that the question referred to us should be answered in the affirmative and in favor of the assessed. As the Commissioner has failed, he will pay the costs of the reference. Counsel's fee, Rs. 350.