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The Commissioner of Income-tax, Delhi Vs. Hindustan Industrial Corporation, New Delhi - Court Judgment

LegalCrystal Citation
SubjectDirect Taxation
CourtDelhi High Court
Decided On
Case NumberIncome Tax Reference Appeal No. 38 of 1970
Judge
Reported inILR1972Delhi233; [1972]86ITR657(Delhi)
ActsIncome Tax Act, 1961 - Sections 139(1), 271 and 271(1)
AppellantThe Commissioner of Income-tax, Delhi
RespondentHindustan Industrial Corporation, New Delhi
Advocates: G.C. Sharma,; V. Kumaria,; B.R. Dewan,;
Cases ReferredSabu Rajeshwar Nath v. Income
Excerpt:
(i) income tax act (1961) - section 139(1) & (2)--default in filing returns--notice issued to assessed under section 139(2)--whether default ceases to exist from the date of issuance of notice.; that the plain language of sub-section (2) of section 139 cannot be strained to hold that the assessed was absolved of its statutory obligatio from filing a return of its income voluntarily under section 139(1) and the default committed in not filing the return cannot be taken note of for initiating proceedings for imposition of penalty and that the period of default shall stand condoned from the date when the notice under section 139(2) was issued by the income-tax officer to the assessed requiring it to furnish a return of its income within 30 days from the date of service of the notice.;.....prithviraj, j.(1) an interesting question regarding imposition of penalty under section 271(l)(a) of the income tax act, 1961, (hereinafter referred to as 'the act') is raised in this case.(2) the assessed is a registered firm. it had to submit its return of income for the assessment year 1962-63 on or before 30th june, 1962. the assessed made an application to the income tax officer on 28th september, 1962 for extension of time for filing the return of income on the ground that the audit of books of accounts of the assessed was not complete. the income tax officer granted time uptil 29th october, 1962. a notice dated 23rd february, 1963, under section 139(2) of the act was served on the assessed on 14th march, 1963, requiring it to furnish the return of its income within thirty days from.....
Judgment:

Prithviraj, J.

(1) An interesting question regarding imposition of penalty under section 271(l)(a) of the Income Tax Act, 1961, (hereinafter referred to as 'the Act') is raised in this case.

(2) The assessed is a registered firm. It had to submit its return of income for the assessment year 1962-63 on or before 30th June, 1962. The assessed made an application to the Income Tax Officer on 28th September, 1962 for extension of time for filing the return of income on the ground that the audit of books of accounts of the assessed was not complete. The Income Tax Officer granted time uptil 29th October, 1962. A notice dated 23rd February, 1963, under section 139(2) of the Act was served on the assessed on 14th March, 1963, requiring it to furnish the return of its income within thirty days from the date of service of the notice. The assessed submitted its return showing its income at Rs. 1,95,132-00. On this amount of income shown and keeping in view the status of the registered firm the tax payable by it was Rs. 16,665-00. After giving credit of advance tax paid amounting to Rs. 7,564-00, the tax payable by the assessed was detemined at Rs. 9,101-84. The Income Tax Officer also levied penal interest in the sum of Rs. 596-00 under section 139(1) of the Act. The assessed having failed to file its return of income by 30th June, 1962, the Income Tax Officer started penalty proceedings against it. The assessed explained its failure to file the return in time on the ground that its books of account were not audited. This Explanationn was not accepted by the Income Tax Officer showing a reasonable cause for not having filed the return in time and he levied a penalty of Rs. 14,530-00 under section 271(l)(a) of the Act. The penalty was calculated at the rate of 2 per cent per month on the tax due from the assessed from 22nd October, 1962.

(3) Feeling aggrieved by the order of the Income Tax Officer, the assessed filed an appeal before the Appellate Assistant Commissioner and held that the penalty should have been levied for five months. Before the Department the assessed relied upon a circular letter of the Central Board of Direct Taxes by which an automatic extension of time to submit the return of income by an assessed, was given up to 30th November, 1962 as 1962-63 was the first assessment year under the provisions of Income Tax Act, 1961.

(4) Feeling dis-satisfied with the order of the Appellate Assistant Commissioner, the assessed filed an appeal before the Tribunal. One of the contentions urged before the Tribunal was that the assessed was prevented from submitting its return of income within the time allowed by the Income Tax Officer as the audit of its books of account could not be completed due to labour strike and the partners of the firm were not able to obtain access to the premises where the books of account were lying. The other contention urged before the Tribunal was that the Income Tax Officer was wrong in impsoing penalty upon it for having not filed the return in pursuance to the provisions of section 139(1) of the Act as the assessed had filed the return in compliance with the notice served upon it under section 139(2) of the Act and that on a reasonable construction of section 271(l)(a) of the Act, the penalty could not be imposed as the default in not submitting the return under section 139(1) of the Act, if at all. had ceased when the notice under section 139(2) of the Act was issued to it. That being so the argument of the assessed proceeded, that the default at best could be from 1st December, 1962 to 23rd February, 1963, i.e., the date on which notice under section 139(2) was issued as in the circular letter issued by the Central Board of Direct Taxes, 1st December, 1962. was specified as the date for filing of return for the assessment year 1962-63, as already noted above. In this view of the matter the asses- see contended that the default continued for two months only, i.e.. during December, 1962 and .January, 1963 as month would mean a full month. The assessed further contended that since the notice under section 139(2) was served upon it on the 14th March, 1963 and it submitted its return of income on 15th April, 1963, the intervening period could not be treated as period of default as it could file the return within thirty days from the date of service of notice. It may be stated here that for imposing penalty the firm was treated as unregistered firm. Another contention raised was that in computing the quantum of penalty, all the tax paid by the firm as well as by its partners should be taken into account. The Tribunal held that the assessed's default for non-compliance of the provisions of section 139(1) of the Act continued from 21st October, 1962 till 13th March, 1963 on which date the notice under section 139(2) of the Act was served on the assessed. In other words, the Tribunal held that for the purposes of computation of penalty the default of the assessed in terms of section 139(1) of the Act would be for four months only The Tribunal further held that the assessed had been treated as an un-registered firm, all the taxes that were paid by the firm as well as by its partners, were to be taken into account for the determination of tax on which penalty is to be levied under the Act.

(5) On the application of the Commissioner of Income Tax, the Tribual has referred the following questions of law for the opinion of this Court:-

(1) Whether on the facts and in the circumstances of the case. the Tribunal was right in holding that all the taxes paid by the partners could be taken into account for determination of quantum of penalty payable by the firm under section 271(1)(i) read with section 271(2) of the Act?

(2) Whether on the facts and in the circumstances of the case, the Tribunal was justified in holding that default under section 139(1) of the Act existed only till the date when the notice under section 139(2) of the Act was served upon the assessed?

(6) Mr. G. C. Sharma, learned counsel appearing for the Revenue, contended that section 139(7) contemplates only one return of income which an assessed is required to file either svo motu under section 139(1) or in pursuance to the notice served upon him by the Income Tax Officer under section 139(2) of the Act. Sub-section (7) of section 139 of the Act says that no return under sub-section (1) need be furnished by any person for any previous year if he has already furnished a return of income for such year in accordance with the provisions of sub-section (2). The learned counsel further submilted that the Act does not contemplate two returns in view of sub-section (7) of section 139 as when a return is submitted on a notice served by the Income Tax Officer under section 139(2) it has to be treated as if it was a return filed under section 139(1) of the Act. Relying upon the language of sub-section (2) of section 139 of' the Act, Mr.Sharma contended that the Income Tax Officer has an absolute discretion to issue a notice either in the beginning or the end of the relevant assessment year to any person if in the opinion of the income Tax Officer such a peerso is assessable under the Act, whether on his own total income or on the total income of any other person during the previous year to file a return of his income. He. thereforee, contended that the language of sub-section (2) of section 139 of the Act does not by the remotest implication suggest that a person who is otherwise required to submit a return of his income before the 30th June of the assessment year in terms of sub-clause (b) of sub-section (1) of section 139 could evade his obligation by not filing the return suo motu and sit tight and wait for a notice from the Income Tax Officer in pursuance to the provisions of sub-section (2) of section 139 of the Act, and on the receipt of such a notice urge that he had not committed any default in not filing the return suo motu and such a person cannot be heard to say that in submitting the return of income in response to the notice he had complied with the statutory obligation cast upon him to submit his return of income before the 30th June of the assessment year as contemplated by sub-section (1) of section 139 of the Act. In this view of the matter it was submitted that the assessed had committed default from 1st December, 1962. till 15th April, 1963, when the return was filed. From June 30, 1962 till November 30, 1962 the period of default is to be condoned in view of the automatic extension of time granted in the circular letter issued by the Central Board of Direct Taxes which enabled an assessed to file the return of income up to 30th November, 1962, for the assessment year 1962-63. To substantiate this argument the learned counsel drew support from Commissioner of Income Tax, Rajasthan v. Indra and Company, 79 I.T.R. 702(1). In the said case Messrs. Indra and company a registered firm under the Act and one of its partners, Shri Jiwanlal Maheshwari, had to submit their income-tax returns on or before 30th June, 1962, as required under section 139(1) of the Act. They sought extension of time from the Income Tax Officer, who on two occasions, extended time up to 30th September 1962. The assessed did not file the return even during the extended time. The Income Tax Officer served notices on them under section 139(2) of the Act to file their returns within 30 days. In pursuance to the said notices, returns were filed on the 25th April. 1963. During the course of assessment pro- ceedings the Income Tax Officer issued notices to the assesseds to show cause why penalty should not be imposed for their failure to file the returns within time as required under section 139(1) of the Act. The assesseds submitted Explanationns which were not accepted by the Income Tax Officer who imposed penalties on both the assesseds under section 271(l)(a) of the Act. Feeling disatisfied with the order of the Income Tax Officer, the assesseds filed appeals before the Appellate Assistant Commissioner and urged two contentions, viz., (a) that as soon as notices under section 139(2) of the Act were issued, it must be taken that the Income Tax Officer condoned the delay for not filing the returns within time in pursuance to the provisions of section 139(1) and that no action can be taken against the assesseds for not filing the returns within time as described under section 139(1), and (b) that the Income Tax Officer had not mentioned in the assessnient order that the penalty proceedings were initiated for default committed under section 139(1) and. thereforee, the proceedings could not be said to have been initiated during the course of assessment 237 Hindustan Industrial Corporation, New Delhi proceedings. Both these contentions were negatived by the Appellant Assistant Commissioner. On further appeal the Tribunal held that as the assessment proceedings were initiated and completed on the basis of returns submitted under section 139(2) of the Act, it was not open to the department under law to impose any penalty for not having filed the returns, in pursuance of the provisions of section 139(1) of the Act. The question 'whether the Tribunal rightly held that the orders of penalties in question under section 271(l)(a) of the Income Tax Act, 1961, were not tenable in law' was referred to the Rajasthan High Court. A Bench of the said High Court while considering the approach of the Tribunal to the question, observed as follows at page 706 :-

'IF the view taken by the Tribunal is adopted, the result will be that if a person has not filed any return under section 139(1) he cannot be penalised if he has filed a return after a notice has been given under sub-section (2) of section 139. It may be pointed out that before taking any assessment proceedings, it is incumbent on the Income Tax Officer to issue notice under sub-section (2) of section 139. Such a view would mean that any person liable to pay income-tax may sit comfortably without any fear of the imposition of penalty and not furnish his return, as required under section 139(1) and wait till a notice is given to him under section 139(2) and then file a return within the time mentioned in that notice. This view does not appeal to us.

An argument has been addressed to us that as soon as a notice is issued under sub-section (2) of section 139 giving time for furnishing the return, it must be taken that the Income-tax Officer had condoned whatever the default may have been in not furnishing the return under sub-section (1) of section 139. Unless there is any express order for condensation of such default, we cannot take it that the Income-tax Officer, merely because he has issued a notice under section 139(2) to a person who has not filed the return under section 139(1), must be taken, to have condoned his default in not furnishing the return under section 139(1).'

(7) There appears to be force in the contention of the learned counsel for the Revenue. All that sub-section (7) of section 139 says is that no return under sub-section (1) need be furnished by any person for any previous year if he has already furnished a return of income for such year in accordance with the provisions of sub-section (2). but this by itself does not absolve the assessed form the statutory obligation cast upon him under section 139(1) to voluntarily submit his return. We have given our anxious consideration to the provisions of sub-sections (1) and (2) of section 139 of the Act and we are inclined to agree with the learned counsel for the revenue that two separate and independent returns of income are not contemplated or envisaged by the said sub-sections. On a careful reading of section 139, there can be no dispute that an assessed is required to file only one return of his income for the relevant assessment year as required under subsection (1) of section 139. Sub-section (2) of section 139, however, clothes the Income-tax Officer with a discretion to issue a notice to any person before the end of relevant assessment year if in the opinion of the Income-tax Officer such a person is assessable under the Act, calling upon him to file a return of his income within 30 days from the date of service of notice and such a notice can be issued by the Incom tax Officer before the end of the relevant assessment year. In other words the Income-tax Officer can issue a notice in pursuance to subsection (2) of section 139 at his discretion either in the beginning of the assessment year or before the end of the assessment year. No fetters by way of time factor are imposed upon the Income-tax officer in issuing a notice under sub-section (2) of section 139. An assessed who has not filed a return voluntarily as required under section 139(1), cannot be absolved of the default committeed by him on the ground that he has filed the return of his income within 30 days of the service of notice under section 139(2) of the Act by the Income-tax Officer calling upon him to submit the return of his income and thereby say that as soon as he complied with the orders of the Income-tax officer and filed the return within 30 days of the service of the notice, he has also complied with the provisions of section 139(1) of the Act.

(8) In this connection it would be relevant to examine case, Tarzan Hosiery Private Ltd. v. Income-Tax Officer, District 1(BWard, Kanpur : [1968]69ITR842(All) In that case the assessed on 22nd June, 1964, received a notice under section 139(2) of the Act directing it to file a return of its total income for the assessment year 1964-65. ft was required to file the return by 25th July, 1964. On 24th July, 1964, he filed an application seeking extension of time by 30th August, 1964. The application was not granted. Since the appellant had not filed a return within the time allowed it became liable for payment of intrest as also to the imposition of penalty. A contention was raised by the assessed that according to section 139(1) of the Act it was entitled to file the return of his income for the relevant assessment year up to 30th September, 1964 and that the Income-tax Officer could not require him to file it earlier under section 139(2). The argument advanced on behalf of the assessed was that resort to sub-section (2) of section 139 of the Act could only be made when the period for filing a return voluntarily under section 139(1) had expired, and that the notice served upon him under section 139(2) requiring it to file a return on or before 25th July. 1964. was illegal. In the alternative the assessed pleaded that in construing section 139(2) and in asking the assessed to file the return of his income before the expiry of the period described under section 139(1) would be vocative of Article 14 of the Constitution as it would amount to giving unfettered discretion to the lncome-tax Officer to discriminate at his whim between the assesseds similarly placed by directing one to submit a return before the expiry of the period described under section 139(1) and allowing the other to file a return after the expiry of that period. Rejecting the contention, the High Court stated that no incompatibility or repugnance ' could be found between the aforesaid two provisions and both of them can operate simultaneously to their full extent as it was clear from sub-section (7) of section 139 that a return under sub-section (2) of section 139 could be demanded and furnished before the return under section (1) was due.

(9) As already stated above the Act contemplates only one income- tax return to be furnished by every person in respect of his total income. However, sub-section (2) of section 139 -invests the Income- tax Officer with a discretion to call upon any person who in the opi- nion of the Income-tax Officer is assessable under the Act, to furnish a return of his income within 30 days from the date of service of the notice but this sub-section (2) by no stretch of imagination can be said to envisage a return other than a return which normally a person is required to file voluntarily in pursuance of the provisions of section 139(1), A person need not file a return if not already filed under subsection (1) of section 139 in case he had furnished a return of income for the relevant assessment year in accordance with the provisions of sub-section (2).

(10) A careful reading of two sub-sections amply justifies a conclusion that the return of income required to be filed under either of the two sub-sections is a return of the total income of a person which he otherwise is under obligation to file voluntarily, under section 139(1) of the Act. That being so if an assessed does not file a return voluntarily as is required of him under section 139(1) the default would start from the date when the return ought to have been filed and not from the day when he files the return in pursuance to the directions issued by the Income-tax Officer in the exercise of his discretion under section 139(2). In this view of the matter the default in the instant case was committed by the assessed with effect from 1st December, 1962 as an automatic extension of time to submit the return stood granted up to 30th November, 1962, on the basis of circular letter issued by the Central Board of Direct Taxes and the default continued till 15th April. 1963 when the assessed submitted its return of income in compliance with the notice served upon it by the Income-tax Officer in pursuance to the provisions of section 139(2). The plain language of sub-section (2) of section 139 cannot be strained to hold that the assessed was absolved of its statutory obligation from filing a return of its income voluntarily under section 139(1) and the default committed in not filing the return cannot be taken note of for initiating proceedings for imposition of penalty and that the period of default shall cease from the date when the notice under section 139(2) was issued by the Incometax Officer to the assessed requiring it to furnish a return of its income within 30 days from the date of service of the notice. We are, thereforee, of the opinion that on the facts and in the circumstances of the case the Tribunal was not justified in holding that the default under section 139(1) of the Act existed only till the date when the notice under section 139(2) of the Act was served upon the assessed. There is no warrant in law for holding that the default in not filing a return voluntarily ceased from 14th March, 1963, when the notice under section 139(2) was served upon the assessed. If any other interpretation of sub-sections (1) and (2) of section 139 is given, it would create discrimination between the assesseds, i.e., those who had filed the return voluntarily in pursuance to sub-section (1) of section 139 and those who infringed the said provisions and chose to wait for a direction from the Income-tax Officer. Question No. 2, referred to this Court is accordingly decided in favor of the Revenue and against the assessed.

(11) This bring us to the first question, namely, as to what is the meaning of the expression of 'tax payable'. Another question by way of corollary that arises is that if the expression 'tax payable' be held to mean 'tax chargeable', then in that event can rebate be given for the tax deposited by the partners of the firm and regarded as tax paid- by the firm.

(12) With a view to appreciate the respective contentions of the parties it would be appropriate to reproduce section 271 of the Act. Section 271 reads as follows :-

(13) '271.(L) If the Income-tax Officer or the Appellate Assistant Commissioner in the course of any proceedings under this Act, 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 by notice given under sub-section (2) of section 139 or section 148 or has without reasonable cause failed to furnish it within the time allowed and in the manner required by sub-section (1) of section 139 or by such notice, as the case may be, or

(B) has without reasonable cause failed to comply with a notice under sub-section (1) of section 142 or sub-section (2) of section 143, or

(C) has concealed the particulars of his income or furnished inaccurate particulars of such income,

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 two 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.'

(14) According to the above-quoted section the Income-tax Officer can direct that an assessed who has without reasonable cause failed to furnish the return of his total income which he was required to furnish under sub-section (1) of section 139 or by notice given under sub-section (2) of section 139, shall pay by way of penalty in addition to the amount of tax, if any, payable by him, a sum equal to 2% of the tax for every month during which the default continued, but not exceeding in the aggregate 50% of the tax. This brings us back to the question that we have already posed above, namely, what do the words 'tax, if any. payable by him', mean. The learned counsel appearing for the Revenue has contended that the words 'tax payable' connote the amount of tax assessed while the learned counsel for the respondent on the other hand has suggested that the words 'tax payable' would signify the amount of tax which a person is required to pay after giving him rebate for the tax already deposited by him. This question was considered in Vir Bhan Bansi Lal v. Commissioner of Income Tax, Punjab In the said case, the Income-tax Officer initiated penalty proceedings under sub-section (1) of section 28 of the Indian Income-tax Act, 1922 during the course of assessment but the penalty proceedings were finalised after the assessment had been made. A contention was .raised by the assessed that the Income-tax Officer becomes functus officio after making the assessment order and he can impose a penalty at the lime when he makes the assessment and not thereafter at any subsequent period. The contention was founded on the reasoning that the Income-tax Officer has to satisfy himself and exercise his discretion in the course of:the proceedings only which ceases after the assessment order is made. The department on the other hand urged that if once an Income-tax Officer starts proceedings under sub-section (1) of section 28 within the time prescribed there, he is empowered to make an order imposing penalty under that sub-section ever after the assessment order has been finally made and the tax paid. On the contentions of the parties the question that was referred by the Tribunal for the decision of the Punjab High Court was 'whether although notice issued under section 28 of the Act a day before the assessment order was made by the. I.T.O.. that officer had power on a date subsequent to the date of the assessment order, to impose a penalty under section 28.' On examining the language of section 28 of the 1922 Act the Court observed that the language of sub-section (1) of section 28 was not happily worded and from the language of the said section one encounters some difficulty in determining the point of time when the discretion for the imposition of penalty has to be exercised. The asses- see relying upon the term 'payable' as used in the sub-section, urged that by the use of that term the Legislature intended to restrict the exercise of power conferred by the sub-section to the period when the liability of the assessed was determined and the power could not be exercised at a time when the tax had already been paid. The Court held that in their view the words 'payable by him' without any unnecessary straining of language could be taken to mean 'to which he has been assessed' whether the amount has been paid or not.

(15) The above-cited authority is earliest in point of time in which the words 'payable by him' have been interpreted to mean 'the amount of tax to which an assessed has been assessed.' We are inclined to follow the view taken by the Punjab High Court. The words 'tax, if any, payable by him' as used in section 271(l)(i) would without doubt mean 'the tax which has been assessed on an assessed and is. chargeable' and by no stretch of imagination it could mean the residuary of the tax to be paid by him after making adjustment of the tax already deposited by him. The word 'tax' has been defined in section 2(43). According to the said section 'tax' in relation to the assessment year commencing on the first day of April 1965' and any subsequent assessment year means income-tax chargeable under the provisions of this Act and in relation to any other assessment year income-tax and super tax chargeable under the provisions of this Act in relation to any other assessment year income-tax and super-tax chargeable under the provisions of this Act prior to the aforesaid date.' If the defination of the term 'tax' means 'income-tax chargeable' under the provisions of the Act it is difficult to interpret that the words 'payable by him' would mean anything different than the 'income tax chargeable' under the provisions of the Act. To our mind the words' Payable by him 'cannot mean anything else than 'income-tax chargeable' from an assessed after the same has been assessed. That being so, the amount of penalty at 2% per month is to be charged on the income-tax assessed on an assessed.

(16) This brings us to the other contention of the learned counsel for the Revenue that in assessing the penalty at 2% on the income-tax chargeable from the respondent credit for the amounts deposited by the partners of the firm could not be given. The argument of the learned counsel is that according to section 271(1)(i) penalty at 2% is to be calculated on the amount of tax payable by the assessed in the instant case it would mean the respondent-firm and not its individual partners. The learned counsel for the Revenue further submitted that according to sub-section (2) of section 271 when a person liable to penalty is a 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 the Act, penalty imposable under sub-section (1) shall be the same amount as would be impossable on that firm if that firm were an unregistered firm. That is to say for the purpose of assessing penalty a registered firm by fiction of law shall be treated as if it is an unregistered firm though in fact it may not be so. But this fiction, goes the argument, cannot be carried for all purposes, i.e., in assessing the penalty the Income-tax Officer cannot give rebate for the advance tax deposited by the individual partners of the registered firm because the advance tax, if any, so deposited by them was deposited as advance tax against the amount of tax chargeable from the individual partners, on the basis of their individual income. The amount so deposited by them, it was submitted, cannot be taken into consideration and the respondent firm cannot be allowed rebate for the amount of advance deposited by individual partners in calculating the the penalty at 2% on the tax chargeable from the respondent. There seems to be force in the contention of the learned counsel. All that sub-section (2) of section 271 says is that when the person liable to penalty is a registered firm for the purposes of imposing the penalty the said firm shall be treated as if it were an unregistered firm. The words of sub-section are plain and it is not possible to read anything more in that or extend the fiction imported by law to any other purpose except to treat the registered firm as if it were an unregistered firm for the purposes of imposing penalty. It would be relevant here to examine a Bench decision in Commissioner of Income-fax, Madhya Pradesh and Nagpur v. Chhotelal Kanhaiyalal, So I.T.R. 656. In that case the assessed filed the return of income for the assessment year 1958-59 on 8th July, 1959. The return was filed 11 months after the due date by which it should have been filed. The firm was registered in the assessment year. The firm deposited a sum of Rs. 2500.00 by way of advance tax. The firm was assessed on a total income of Rs.85,797.00. The assessment was made on 25th May, 1965. Penalty proceedings were also started against the firm under section 271. A question arose in that case as to What amount of advance lax was to be deducted in order to find out the exact amount of tax, the firm had to pay on the basis that it was an unregistered firm. The contention of the department in that case was that only the amount deposited in advance by the firm could be deducted while the assessed submitted that the advance tax deposited by the partners of the firm individually in connection with the assessment of their individual income in respect of their respective shares in the profits of the firm should also be deducted. The Tribunal accepted the contention of the assessed. On the application of the department the Tribunal referred the following question of law for decision of the Madhya Pradesh High Court :-

'WHETHER on the facts and in the circumstances of the case, for the purpose of calculating the tax with reference lo which penalty was livable in the case of a registered firm u/s 271(1) read with 271(2) of the Income-tax Act, 1961, the tax payable by such firm should be determined after deducting the advance tax paid by the partners u/s 18-A 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?'

(17) On examining the contentions of the parties, Bishamber Dayal, C.J. with whom G. P. Singh, J., agreed observed as follows at page 659 :-

'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.'

(18) We are in agreement with the observations made by the Bench in the above-cited case and our reasons are that the advance deposits made by the individual partners are for their own benefit against the amount of tax that would be found chargeable from them and the firm cannot lake advantage of those deposits. Secondly as already noted in an earlier part of this judgment, the words 'tax. if any, payable by him' used in section 271(l)(i) obviously mean the tax payable by the assessed and the assessed in the instant case is a firm which for the purposes of calculating penalty was treated as if it was an unregistered firm. Beyond this, section 271(2) cannot be stretched to confer any additional benefit such as giving allowance for the advance tax deposited by individual partners which is not warranted by law.

(19) At this stage the cases cited by the learned counsel for the respondent may be noted.

(20) The learned counsel for the respondent cited case, Sabu Rajeshwar Nath v. Income-tax Officer, C-ward, Meerut and another. : [1969]72ITR617(SC) in which their Lordships of the Supreme Court held that where a person does not dispute that he was a partner of the registered-firm for the relevant accounting year, the Collector could lawfully proceed to execute the certificate for demand of income tax under section 46(2) of the Income Tax Act, 1922 against that person and recover the income tax from him. In that case the question that required determination was that when a firm not registered under the Act is assessed to income tax and a notice of demand was issued against the firm. whether a separate notice of demand was necessary against the partners of the firm when the tax assessed against the firm was sought to be recovered from a partner. On the basis of this authority the learned counsel for the respondent urged us to hold that if the notice of demand against an unregistered firm could be executed against a partner' it would be appropriate to take into consideration the amount of tax deposited by the partner of that firm while assessing the penalty at 2% on the tax payable by the firm. We are unable to agree with the learned counsel for the simple reason that the amount of advance tax deed posited by an individual partner of the firm was deposited for his own benefit and the amount was not deposited on behalf of the firm. The learned counsel next cited Commissioner of Income-tax, West Bengal v Vegetable Products Ltd., : [1971]80ITR14(Cal) . In the said case a notice under sec- corporation 22(2) was served on the assessed on the 13th June, 1969 and he was required to file the return of his income by the 18th July, I960, on which date the assessed asked for extension by two months. The extension was allowed. On the 16th January. 1961, the assessed was served with a notice under section 23(3). He filed the return on the 17th January. 1961 for the assessment year 1960-61, for the corresponding accounting calendar year 1959. The Income-tax Officer took more than two years to complete the assessment. The assessment was made on 31st October, 1962 after the-Income-Tax Act, 1961 had come into force. The assessed was served with a notice under section 274(1) of the Act in connection with the proceedings for imposition of penalty. This notice was issued on the 15th May. 1963. A preliminary objection was taken that the notice was invalid and no penalty proceedings could be initiated as the assessment proceedings had already been completed. The assessed further contended that it was prevented from filing the return within time as its audited balance sheet could not be prepared earlier than October, I960' due to the absence of its accountant. The Income-tax Officer rejected both the contentions and imposed a penalty of Rs. 12,734.00 under section 271(l)(a) of the Act. The appellate Assistant Commissioner in appeal maintained the order of imposition of penalty. Before the Tribunal amongst other contentions. one of the contentions urged was that the amount of penalty for not filing the return was a sum equal to 2 % of the tax for every month during which default continued. A demand was made on the assessed for Rs. 1,16,601.00 after making a provisional assessment under section 23-B of the 1922 Act. Later on this demand was rectified under section 35 of the 1922 Act to Rs. 92,294-55. The amount was paid by the assessed on the 22nd February, 1961. The demand made under section 23(3) was also Rs. 1,59,180.00 but it was later on rectified to Rs. 1,26,512.00 minus Rs. 92,294-55, i.e. Rs. 34,217-55. In that event the amount of penalty levied at 2% per month for four months on Rs. 34,217-55 came to Rs. 2,737-44. The Tribunal accepted the contention of the assessed and held that tax payable by it was the tax ultimately determined to be so payable after giving credit for all the payments made towards the tax liability. The Tribunal accordingly reduced the penalty to Rs. 2,737.00. At the instance of the department a question of law, 'whether on the facts and in the circumstances of the case, the Tribunal was right in holding that in calculating the penalty livable u/s 271(l)(i) of the Income-tax Act, 1961, the amount paid by the assessed under the provisional assessment u/s 23-B of the Indian Income Tax Act, 1922, was to be deducted from the amount of tax determined u/s 23(3) of that Act in order to determine the amount of tax on which the computation of penalty was to be based and in reducing the amount of penalty imposed on the assessed to Rs. 2,737.00' was referred to the High Court. The Court held that unless on the day the penalty is imposed some amount of tax remained outstanding or payable by the assessed no penalty could be imoposed at all and that the penalty was to be calculated with reference to the actual amount due and payable by the assessed on the date of imposition of the penalty.

(21) The respondent cannot derive any help from the above-cited authority. The original assessment under section 23-B of the Indian Income- tax Act, was merely a provisional assessmerft which could be varied. It was only the amount of tax determined under section 23(3) of the Act which represented the actual assessment. But meanwhile the amount was rectified. As the assessed had paid Rs. 92,294-55 under the earlier order of provisional assessment, the amount actually assessed under section 23(3) of the Act was reduced to Rs. 34,217-55. Penalty was thereforee levied on that amount.

(22) There can be no manner of dispute that the penalty is to be calculated with reference to the actual amount due and payable by the assessed on the date of imposition of the penalty but this principle cannot be invoked to hold that the amount of advance tax deposited by the individual partners should be taken into consideration with a view to ascertain the amount of tax which remains outstanding or payable by the respondent-firm. We have already held earlier that the tax paid by the partners could not be taken into account for determining the quantum of penalty payable by the 0firm.

(23) For the reasons stated above we accordingly decide question No. I in favor of the department and against the assessed and hold that on the facts and in the circumstances of the case, the Tribunal was not right in holding that all the taxes paid by the partners could be taken into account for determination of quantum of penalty payable by the firm under section 271(1)(i) read with section 271(2) of the Act.

(24) The reference is answered accordingly but in the circumstances of the case the parties shall bear their respective costs.

(25) Before parting with this case we would like to record that it is one of those cases where the penal provisions of the Act have operated harshly and to the disadvantage of the respondent for which probably relief could be given by the department. On the facts and circumstances of the case the department may perhaps like to re-examine the matter and grant necessary relief permissible under law to the assessed so as to relieve it to some extent from the rigorous imposition of penalty.


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