1. These two income-tax references, pertaining to the assessment years 1960-61 and 1961-62 (the relevant previous years being the financial years 1959-60 and 1960-61), can be disposed of by a common judgment as they raise the same question and on similar facts.
2. Madan Lamba, the assessed, is the managing partner of a firm known as Volga Restaurant, New Delhi. He had an eight annas' share in the firm and was also entitled to a salary of Rs. 12,000 from the firm. The two other partners, together entitled to the other half share, were ladies who were closely related to the assessed. During the financial year 1959-60, the assessed was also a partner in a firm known as Volga Caterers, the business of which ended in a loss during the said year.
3. For the assessment years 1960-61 and 1961-62, notices under s. 22(2) of the Indian I.T. Act, 1922, had been served on the assessed. The returns of income for the two assessment years should, in compliance with these notices, have been submitted by the assessed on or before July 12, 1960, and July 18, 1961, respectively. It, however, appears that, for the assessment year 1960-61, the audit of the accounts of the firm, Volga Restaurant, was competent on December 22, 1962, and its return of income filed only on December 24, 1962, and that for the assessment year 1962-62, the firm filed its return of income only on November 5, 1965. Consequently, the assessed filed his returns for the two assessment years in question on January 10, 1963 and November 5, 1965, respectively.
4. The ITO completed the assessment for the year 1960-61 on March 10, 1965. The share income from Volga Restaurant was assessed at Rs. 1,65,848 on the basis of the assessment of the firm. After setting off the assessed's share of the loss of Rs. 3,853 from Volga Caterers, the total income was determined at Rs. 1,61,995. For the assessment year 1961-62, the assessment was completed by the ITO on March 21, 1966. As already stated, the only income of the assessed was the share income from Volga Restaurant and this was taken at Rs. 94,007 on the basis of the firm's assessment.
5. The ITO also issued notices to the assessed calling upon it to show cause why penalties should not be levied under s. 271(1)(a) for filing the returns for the two ears belatedly. In response to the notices issued under s. 271(1)(a) read with s. 274, the assessed filed written Explanationns. It was stated that the assessed could not file his returns of income within time as his share of profits from the firm had not been properly determined and intimated earlier. It was stated that the delay was unintentional. The ITO did not accept the Explanationn as reasonable. He observed in his order of 1960-61 that the assessed could have filed the return within time by declaring the share income as per the books of the firm. He was of opinion that it was a fit case for the imposition of a penalty. For the assessment year 1961-62, he proceeded to impose of penalty without specifically adverting to the assessed's Explanationn for the delay, calculating the penalty at 2% per month in respect of each month of default, the ITO imposed a penalty of Rs. 48,460 for the assessment year 1960-61 and Rs. 22,430 for the assessment year 1961-62.
6. The assessed preferred appeal to the AAC and contended, inter alia, that the main/only source of income being the share of the profits from Volga Restaurant and the firm itself having submitted its return of income belatedly due to delay in the closing of its books, the appellant had a reasonable cause of submitting his returns of income late. It was contended that as the books of the firm had not been closed. The assessed's share income had not been determined and was not known to him, and as such there was reasonable cause for his not filing the returns of income till the date when his share of profit was intimated. The AAC found that the assessed had filed his returns soon after the firm had filed its return for the assessment year 1960-61 and on the same date as the firm for the assessment year 1961-62. He accepted the assessed's contention that the delay in the firm's accounts should be considered as sufficient cause for the delay in the submission of a partner's return. He pointed out that under s. 271(1)(a) a registered firm is liable to penalty on the same basis as if it were an unregistered firm; this, according to him, indicated that, if a registered firm delayed its return of income, the delay in the filling of returns by its partners should be attributed to a reasonable cause, for, it a contrary view were held, the penalty livable on the registered firm and on its partners would be far in excess of the penalty livable on an unregistered firm and its partners for the same default and this could not have been the intention of the Legislature. He also pointed out that, having regard to the statutory obligation on an assessed to satisfy himself that the return filed by him is correct and complete in all respects, he could not safely file the same before his share income was intimated to him by the firm. He, thereforee, cancelled the penalties for the two years in question.
7. Aggrieved by the order of the AAC, the ITO preferred appeals to the Income-tax Appellate Tribunal. On behalf of the appellant, it was pointed out before the Tribunal that the assessed was a major partner in Volga Restaurant, the assessed himself had the controlling interest in the firm and was also responsible for the filing of the returns of the firm belatedly, the assessed, it was contended, could not plead his own default, in nor filing the return of the firm in time, as the excuse for the delay in filing his own return. On the other hand, on behalf of the assessed, reliance was placed on certain orders of the Tribunal where a similar contention raised on behalf of the assessed had been accepted.
8. The Tribunal accepted the Department's appeals and set aside the orders of the AAC cancelling the penalties. In its order for 1960-61, the Tribunal observed that the orders of the Tribunal relied upon for the assessed could not be taken as laying down 'a universally applicable proposition that, if there is delay in the preparation of accounts of a firm constituting a reasonable cause that per se would be reasonable cause for the default of a partner in filing the return of his income'. And that each case had to be decided on its own facts. The relied by pointing out that in one of them the assessed had no income other than the share income, whereas, here the assessed had not only the share income but also salary and other income. So, it held, this was not a proper case in which the assessed could be said to have had a reasonable cause even if, for the sake of argument, it was taken that the firm had a reasonable cause. In the order for 1961-62. The Tribunal rejected an additional ground raised by the assessed. In had been pointed, out on behalf of the assessed, that a penalty under s. 271(1)(a) had been imposed on the firm and upheld by the Tribunal and that, in view of the order levying penalty on the firm, no penalty should be imposed on the partner, as that would amount to double penalty. The Tribunal rejected this contention observing that a firm and its partners were separate entities and that there was no question of double penalisation involved. As, Parliament in its wisdom had provided for the imposition of penalties on the firm as well as on its partners in respect of defaults committed by them. The appeals of the Department were, thereforee, allowed for both the years.
9. The assessed has come up on reference to this court from the orders of the Tribunal for the two years in question. The questions referred to us are :
'1. Whether, on the facts and in the circumstances of the case. The Tribunal was justified in upholding the Income-tax Officer; s order imposing penalty under section 271(1)(a) of the Income-tax Act, 1961, for the assessment year 2960-61
2. Whether, on the facts and in the circumstances of the case. The Tribunal was justified in upholding the order or penalty under section 271(1)(a) of the Income-tax Act, 1961, for the assessment year 1961-62 ?'
10. Shri G. C. Sharma, learned counsel appearing for the assessed. Contended that, under the I.T. Act, a firm and its partners enjoyed a very peculiar position. Though they were separate and independent assesseds, their assessments were mutually interconnected. The partner's total income depended on that of the firm because his share income determined on the basis of the firm's assessment was includible therein. No partner of a firm can file a valid return (whether he has other income or not) unless the books of account of the firm are finalised and its results, including his share of profits become known to him. Hence, when there is a delay in the accounts of the firm being finalised, for one reason or another, the partner is under a genuine handicap in filing his return till the firm finalises the accounts and files its return. There is, thereforee, a reasonable cause for the delay on his part in filing his return of income till then. Learned counsel, in this context, relied on the decisions in Venkateswara Power Rolling Mills v. CIT : 97ITR168(KAR) and CIT v. Baijnath Chapolia : 102ITR551(Orissa) (Orissa). He points out that this would be the position whatever may be the cause for the delay in the firm's case. If the firm is genuinely in some difficulties and had reasonable cause for the delay in filing its return. Then there was no reason why the delay of the partner stemming from the same cause should be penalised even in a case where he may have other, income but is prevented from filing his return on account of the firm's lapses. If, on the other hand. The firm's delay is not attributable to a reasonable cause, the firm would, no doubt, expose itself to penal action but to hold that such delay would also justify a penalty in the case of the partners would result in great hardship and injustice. Particularly in a case where the partners have n assessable income other that the share income. In this context, it should be remembered that the where a firm - whether registered or unregistered - delay the submission of its return a penalty was imposable on its by reference to the tax payable on its whole income as if it were an unregistered firm. In a case, where the partners have no income other than the share income from the firm, the penalty will again be by reference to the tax payable by each of them in respect of their respective share incomes. That is to say, in the hands of each of the partners individually and all of them put together there will be another penalty in respect of the same income or portions thereof. This, he submitted, would amount to a double penalty for what is. In essence, a single offence and he contended that this was not permissible in law. In support of this contended, learned counsel drew our attention to the decision in CIT v. Pratap Chand Maheswari . Following an earlier decision of the Allahabad High Court in Addl. CIT v. Smt. Triveni Devi : 97ITR390(All) . He further submitted that the position would be the same even in a case where the partner concerned has other sources of income. Though perhaps in such a case it may be a matter for investigation whether, on the facts, the delay in the filing of the return was really due to a delay in the finalisation of the firm's books or whether it was merely an excuse utilised by the partner as a cover to postpone his return of income and the consequent payment of tax on other substantial items of income earned by him. Finally, learned counsel submitted that the imposition of the penalty is not automatic but should be based on some contumacious conduct or willful disregard of the statutory obligation on his part (vide Hindustan Steel Ltd. v. State of Orissa : 83ITR26(SC) ). Even assuming that, on account of some bona fide mistake or misapprehension, the assessed though that he was at liberty to postpone the filing of the return until the firm's books had been completed, a penalty would not be imposable.
11. On the other hand, Mr. K. K. Wadhera, learned counsel of the Department, submitted that the question whether there is reasonable cause or not for the delay in the filing of the returns is a pure finding of fact. He cited a large number of decisions in support of his contention. He urged that the issue of double jeopardy is an irrelevant consideration in the context of the I.T. Act and that it would not be correct to import that concept, pertaining to the domain of criminal offences, into the present context which is governed by the explicit language of s. 271(1)(a). He relied upon the decisions in Addl. CIT v. Dargapandarinath Tuljayya & Co. : 107ITR850(AP) . Smt. Kamla Vati v. CIT and Hanutram Ramprasad v. CIT .
12. As we understand it, the case of Department is very simple. It says : the firm of Volga Restaurant is a separate assessable entity. As such, it is under an obligation to file a return of income and if it delays the filing of the return without reasonable cause, it may be subjected to a penalty. But this has nothing whatever to do with the present assessed though he is a partner in the firm. He is a distinct and separate assessed and he is under an entirely independent, obligation to file his own return of income. His income may consist not only of the share income of the income, his income may consist not only of the share income of the firm but other income as well. But whatever it is, if it exceeds the exemption limits, he had to file a return, particularly when called upon to do so by a notice under s. 22(2). When such an assessed does not file his return as so required he has to show that the delay is attributable to reasonable cause. In the very nature of things, the question whether the firm had finalised its accounts for the relevant year or filed its return in time, or, where its return had been delayed, whether the firm had good reason to delay its return is wholly irrelevant to decide the nature of the assessed's default. He could and should have filed the returns in time in compliance with his statutory obligations including therein the share income from the firm correctly (if the relevant figures were available) or on the basis of an estimate subject to correction later (if such figures were not available). He cannot avoid or postpone this obligation merely because another assessed connected with him. Namely, the firm has also not been diligent in complying with its statutory obligation. That this cannot constitute reasonable cause will be easily appreciated if one remembers that the delay in the finalisation of the firm's accounts or in its filling the return. Is also attributable only to the partners. The acceptance of such a plea, particularly in a case like this where the firm is practically controlled by the concerned partner, will only mean that a person can placed his own delay and default in a different capacity as a reasonable cause for the filing of his return belatedly. There are two different default s by two different assesseds and there can be no valid objection to two different penalties being imposed. An apparent harshness of the result should not the intention of the legislature, when it inserted a provision that the penalty imposable on a registered firm should be on the same basis as an unregistered firm, that no advantage should be taken by the registered firm in the matter of levy of penalty of the lower rates of tax applicable to it and the concessional treatment accorded to it by the statute.
13. There is an apparent plausibility about this argument, but we think, it is too broadly stated and is also based on an over simplification of the several difficulties that arise in such cases. To begin with, while it is true that an firm is a distinct taxable entity under the Act, the dichotomy between a firm and its partners is not complete and does not urn through the entire scheme of the Act, it is mainly for purposes of conveniences that the income of a firm is assessed at the point of first accrual to, or receipt by, the firm. However, the treatment given to the partners and the firm under the Act would show that they are not treated as completely independent entities and that the proceedings in the case of one have very much to do with the proceedings in the case of the other. There are a large number of contexts in the Act where it has not been possible to keep up the duality of the entities completely apart, but, for our present purposes, it is unnecessary to dilate on those aspects.
14. For purposes of assessment, the Act makes a clear distinction between a registered firm and an unregistered firm. Till 1956, a registered firm paid no tax; its income was taxable only in the hands of the partners. However, after 1956, such a firm pays tax on its total income; its income is distributed among the various partners and the share of each is included in his total income; and the partners pay tax on their income inclusive of such share income minus the partners' share of the taxes already paid by the firm in respect of its total income. The result is that, in the case of a registered firm, though theoretically both the firm and the partners are taxable. The form is taxed at concessional rates, this tax is treated by treating the share income from the firm as part of their total income. On the other hand, in the case of an unregistered firm, the firm is taxed on the same footing as an HUF or an association of person and at fairly heavy rates. So far as the partners are concerned they are not again taxed in respect of the share income though such share n taken into account only in order to arrive at the rate of tax applicable to them. The effect is that, in the case of an unregistered firm the income earned by the firm is taxed in the hands of the firm but is not again brought to tax in the hands of the partners. In other word, as the revenue looks for its tax, in the case of a registered firm, primarily from the partner and in the case of an unregistered firm, primarily from the firm.
15. The above distinction is a very important one which has to be kept in mind when we come to consider the special provision contained in the Act in regard to the levy of penalty in such cases, viz., clause (d) to the proviso to ss. 28(1) and 271(2) of the 1922 and the 1961 Acts respectively. The languages of clause (d) of the proviso to s. 28(1) of the 1922 Act was rather involved. It was introduced originally at a time when no tax was at all payable by a registered firm but was continued even after 1956 in the same form. Section 271(2) is more sufficiently expressed. The brief effect of both the provision is that the penalty on a registered firm is to be calculated in the same manner as if the firm were an unregistered one.
16. What is the reason of the legislature introducing such a provision One reason could be that the legislature proceeded on the basis that a penalty could be levied only on the firm and not the partners in such cases where there is delay, default of concealment of the types envisaged in s. 28(1)/271(1) on the part of the firm as such and that it enacted the provision because it did not want registered firms to escape the rigour of the penal provisions by reason of their tax rate being nil or minimal. We say this, for, were one to consider that the partners were also liable to penalty in such cases, such a provision would not at all have been necessary, for, the partners of a registered firm. Who are the real persons taxable, would be called upon to pay penalties on the basis of their share income and no question would have arisen of the firm, as such, securing any undue advantage which needed to be provided against by the legislature. Another way of looking at the provision would be this. It is clear that the legislature intended to equate a registered firm with an unregistered one in the matter of penalty. In the case of an unregistered firm, the firm pays penalty on the basis of the tax on its total income. Even if penalty proceedings are initiated against a partner, and a penalty is imposed on him it will be only with reference to the tax payable by him and since he is not liable to pay tax on his share income from the firm there will be no penalty in his hands qua the share income, on the other hand, in the case of a registered firm, the share income will be taxable in the hands of the partner and so a penalty in his hands would heave relevance to the share income in his hands. It is the discrimination that this situation entails which the legislature court to avoid in an indirect manner by enacting the above provision. Looked at from the above angles. The provision in regard to penalty on registered firms noticed above can be interpreted as an implied prohibition against the imposition of a penalty on a partner for the dely, default or concealment referable to his income from the firm, this would not only give full meaning and content to the proviso but also obviate an imposition of a double penalty qua the same income. It is on this approach that the decisions of the Punjab Haryana High Court and of the Allahabad High Court which have been relied upon by Shri Sharma are based.
17. We may next refer to another aspect, which is of some importance, of considering how far the firm and partners could be considered totally independent of each of each other in the matter of filing the returns. As we have already pointed out, the share income derived by a partner from a firm has to be included in his return as a part of his total income whether the firm be a registered one or an unregistered one. Unless it is included in his total income the tax payable thereon (in the case of a registered firm) and the tax rate at which he has to be taxed on his other income (in the case of an unregistered firm cannot be known. Such tax determination at the time of filing the return is of great importance in view of the provisions for self-assessment contained in the Act and will also have several consequential results. Hence, the details of the share income constitute one of the columns which has to be filled in when filing his return. It is highly doubtful whether a return. Filed by him without including his share income or by purely estimating it, would be a valid return at all. It is, thereforee, essential that the figures of his share income must be available to him before he can file a correct and complete return. If such figures are not available because of the delay in the completion of the firm's accounts the partner cannot be said to be without reasonable cause for delaying his return and this would be so whether there was reasonable cause of the delay in the firm's completion of accounts or not. If such delay is attributable to a reasonable cause, a fortiori the partner's delay is also due to reasonable cause. To give an illustration, suppose a firm were to delay the filing of its return because the finalisation of its accounts is held up due to the serious illness of the munim or the partner who is in charge of the accounts and the ITO accepts the position that the delay in the filing of the return is attributable to reasonable cause, then it would be inconsistent and inequitable to hold, in the case of a partner who files his return soon after the books are finalised and the firm's return is filed, that the delay is without reasonable cause. To us, it appears that if there is a delay on the part of the firm in the filing of its return which could be attributed to reasonable cause, a delay on the part of the partner to the same extent and perhaps for a reasonable time thereafter, would certainly be attributable to reasonable cause. The view taken by the Tribunal that even if there was a reasonable cause for the delay in the filing of the return by the firm there could not be said to be a reasonable cause for the partner's delay is incorrect. If, on the other hand. There was, no reasonable cause for the delay on the part of the firm, the firm itself would be liable to a penalty and as it could not be said that the partner should have filed his return without the final figures in the case of the firm, he cannot be penalised for the delay or default. This broadly, is the basis of the decision of Venkateswara Power Rolling Mills v. CIT : 97ITR168(KAR) , CIT v. Baijnath Chapolia : 102ITR551(Orissa) and CIT v. Pratap Chand Maheswari .
18. It appears to us that, while the two aspects which we have discussed above, are relevant and have to be taken into account to decide whether the delay in a particular case is attributable to reasonable cause, neither of them can be made the sole ground for relieving the partner of all liability to penalty in all cases where the delay in the partner filing a return is attributed to a delay on the part of the firm in finalising its accounts. We say so because the statute does not expressly or impliedly bar proceedings against both the firm and the partners. The only statutory requirement for the imposition of a penalty on an assessed - whether he be a firm or a partner - is that contained in s. 271(1). All we have to see is whether there was a reasonable cause for the default of delay in filing a return. While the considerations above indicated could be relevant in most cases, they cannot be conclusive, in all cases, for answering this question. We shall not indicate the situations in which those aspects lose their significance in judging the conduct of a partner.
19. To take up first the ground of 'double penalty', it will be seen that this depends upon the extent of income of the firm and the sources of income of its partners. A distinction will at once be apparent between a case in which the firm has a large income and the partner has no income other that his share income and one in which where the firm's income is small and the partner has substantial income from other sources too. To given a very simple illustration where a partner of an unregistered firm has no other income, he cannot be penalised at all for the entire income would be taxed in the hands of the firm and so far as he is concerned there is nothing taxable at all. Hence, if the firm has either delayed the return or concealed its income it will be subjected to the appropriate penalties but the partner would stand outside such proceedings as they will have no impact on his individual assessment. On the other hand, it is quite conceivable, that where a partner (even of an unregistered firm) has other income, the position is quite different. He may be able to postpone a good amount of tax payable by him on his share income or other income by delaying the firm's return. The circumstance that the firm may be liable to a penalty is of no practical effect because the tax with reference to which the firm will be penalised will bear no relation at all to the tax, the payment of which has been delayed by the partner. To give an illustration, where a registered firm having five partners had an income of Rs. 50,000, but each of the partners has about a lakh of rupees of other income it would be totally impossible to consider the Revenue fully compensated for the default of delay merely because a penalty may have been imposed on the firm. The penalty on the firm in such a case would have had no relation to a major part of the partner's income and tax and the charge of double penalty would be true only in form and not in substance.
20. Taking up the second aspect again, it is easy to appreciate that the correct position would depend very much on the nature of the constitution of the firm and the relative positions of the partners. For instance, it is quite conceivable that a firm may consist of four partners, three of whom are dominant capitalist partners sharing 95% of the income and the fourth is a working partner getting only 5% of the profits. The delay in the filing of the return or any attempt at concealment made by the firm may be entirely attributable to the capitalist partners and the working partner may haves nothing to do with it. In such a case, it would not be correct to hold the working partner responsible for the delay in the filing of his individual return as he could not file it earlier due to the difficulties in the finalisation of the firm's accounts or for the concealment of the income of the firm, for which he was not responsible. On the other hand, it is equally possible that there may be a case in which the partner in question is substantially controlling the affairs of the firm and that he holds up the finalisation of the accounts and the filing of the firm's return to suit his convenience and only with a view to postpone the payment of tax on his share income or on his other income. To the extent such delay is caused by him and is instrumental in delaying the payment of tax in his individual assessment there is no reason why penalty should not be imposed on him merely because there was some delay in the firm's case. These illustrations show that it may not be equitable, just or necessary to assume always that a partner cannot be held responsible for the firm's delay. We are, thereforee. Unable to agree with the attempts of counsel before us to evolve, from the Mysore, the Orissa and the Punjab and Haryana High Court on the one hand and the Punjab and the Allahabad High Court son the other (which are based on the facts of the cases before them), certain general principle universally applicable to all cases. It seems to us that a conclusion has to be reached in each case on a consideration of all the circumstances including the two grounds indicated above and that it would be unsafe and incorrect to enunciate any principle of general application to all situation. Confining overselves for the time being to s. 271(1)(a) we think that the imposability of penalty on a partner should depend upon a consideration of the following circumstances : (a) whether he is a partner of a registered firm or unregistered firm; (b) whether he has income other than the share income or not, and if so, the nature and extent of such income; (c) whether he is one of several partners to whom any contumacious conducts on the part of the firm could not be attributed or whether he is for all practical purposes the brain behind the firm or able to control its affairs, and so, responsible for its delays and defaults; (d) whether any penalty has been or can be imposed on the firm and if so, the extent and nature thereof; and (e) whether the partner has any independent reason for the delay in the filing of the return apart from that urged in the case of the firm.
21. Applying the above principles to the facts of this case, we find that the assessed, though he is a controlling partner in the firm, has no income other than share income from the firm, in the assessment year 1961-62 (We may point out that the salary income is also part of the such share income). Also, a penalty has been imposed on the firm. So far as assessment year 1960-61, is concerned he had an interest in some other firm but it had resulted in a loss and, thereforee, the delay in the filing of the return by the partner did not affect the tax liability on any income other than the share income. As such, the fact that there was a delay of about 2 1/2 years and 4 1/2 years in filing the returns for the assessment year 1960-61 and 1961-62, respectively, is not material.
22. In these circumstances, we have come to the conclusion that the delay in the filing of the returns cannot be said to be without reasonable cause and, thereforee, no penalty could be imposed on the present assessed for the assessment years 1960-61 and 1961-62. We, thereforee, answer the questions referred to us in the negatives and in favor of the assessed. The assessed will be entitled to his costs. Counsel's fee Rs. 500 (one set).