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E.K. Varghese and anr. Vs. Income-tax Officer and ors. - Court Judgment

LegalCrystal Citation
SubjectDirect Taxation
CourtKerala High Court
Decided On
Case NumberO.S. Nos. 2887 of 2934 of 1972
Judge
Reported in[1974]96ITR577(Ker)
ActsIncome Tax Act, 1961 - Sections 201(1), 207 to 219 and 221; Taxation Laws (Amendment) Act, 1970
AppellantE.K. Varghese and anr.
Respondentincome-tax Officer and ors.
Appellant Advocate K. Sukumaran and; K.K. Usha, Advs.
Respondent Advocate P.A. Francis, Adv.
Cases ReferredSherras v. De Rutzen
Excerpt:
.....201 (1) and 221 of income tax act, 1961 and taxation (amendment) act, 1970 - petitioner made default in payment of tax - penalty imposed upon petitioner under act - impugned orders of assessing officer challenged - whether imposition of penalty sustainable - mere failure to carry out statutory obligation need not invite imposition of penalty - dishonest conduct on part of assessee (defaulter) must be shown - where offence creation of statute requirement of element of mens rea imported into concept of offence unless there is something contrary express or implied in language of provision - held, orders passed by assessing officer unsustainable. - - '4. this was amended by the taxation laws (amendment) act, 1970. section 38 of the said act substituted for the origional..........and that at different stages. tax is recoverable by deduction at source and is recoverable also as advance payment prior to assessment. these are adjusted at the time of assessment. in the nature of the scheme of the act and particularly in the light of the provisions in sections 207 - 219 it is not possible to characterise advance tax payable as anything other than tax. the same question had engaged the attention of the gujarat high court in swastik engineering works v. commissioner of income-tax, [1973] 87 i.t.r. 116. there is a fairly elaborate discussion of this question in that case. after referring to the various provisions of the income-tax act and the scheme of the act, bhagwati c.j., speaking for the bench, held : ' section 221, sub-section (1), being couched in wide language so.....
Judgment:

Subramonian Poti, J.

1. The petitioner in O.P. No. 2887 of 1972 is a partner of a firm, M/s. Vijaya Oil Mills, Alleppey, which firm is the petitioner in O.P. No. 2934 of 1972. The question arising for decision in both these petitions is the same. It is about the propriety of imposition of penalty against the petitioners for default in payment of advance tax payable under the Income-tax Act, 1961. A notice of demand under Section 156 of the Income-tax Act, 1961, was served on the petitioner in O.P. No. 2934 of 1972 on June 2, 1969, for payment of a sum of Rs. 43,540. The demand was payable under Section 220 of the Act. Since payment was not made, a penalty of Rs. 2,000 was imposed by exhibit P-1 order. A similar demand notice for payment of Rs. 26,962 was served on the petitioner in O.P. No. 2887 of 1972 and since such payment was not made apenalty of Rs. 1,000 was imposed. These orders were confirmed in appeal by the Appellate Assistant Commissioner of Income-tax. The orders are exhibit P-2 in the two petitions. Revisions were filed before the Commissioner of Income-tax. Kerala, who by the (c)rders marked as exhibit P-4 in both the cases dismissed the revisions. These orders are challenged by the petitioner in these petitions.

2. Three contentions by way of challenge to the orders of imposition of penalty were urged before the Commissioner of Income-tax as seen from exhibit P-3 and these three contentions are urged before this court too.

3. The assessment order relacing to which the demand for payment of advance tax was made concerned the year 1970-71. Section 221(1) of the Income-tax Act, 1961, as it then stood read as follows :

'221. (1) When an assessee is in default or is deemed to be in default in making a payment of tax, he shall, in addition to the amount of the arrears and the amount of interest payable under Sub-section (2) of Section 220, be liable to pay by of penalty, an amount which, in the case of a continuing default, may be increased from time to time, so, however, that the total amount of penalty does not exceed the amount of tax in arrears :

Provided that before levying any such penalty the assessee shall be given a reasonable opportunity of being heard. '

4. This was amended by the Taxation Laws (Amendment) Act, 1970. Section 38 of the said Act substituted for the origional Sub-section (1) of Section 221 of the Income-tax Act, the following sub-section :

' (1) When an assessee is in default or is deemed to be in default in making a payment of tax, he shall, in addition to the amount of the arrears and the amount of interest payable under Sub-section (2) of Section 220, be liable, by way of penalty, to pay such amount as the Income-tax Officer may direct, and in the case of a continuing default, such further amount or amounts as the Income-tax Officer may, from time to time, direct, so, however, that the total amount of penalty does not exceed the amount of tax in arrears :

Provided that before levying any such penalty, the assessee shall be given a reasonable opportunity of being heard :

Provided further that where the Income-tax Officer is satisfied that the default was for good and sufficient reasons, no penalty shall be levied under this section. '

5. This amendment came into force with effect from April 1, 1971, and, therefore, does not cover the cases before me.

6. The case of the petitioners in these petitions is that advance tax is not a ' tax ' within the meaning of Section 221 of the Income-tax Act and, therefore, where the assessee is in default in making payment of advancetax he cannot be subjected to the imposition of a penalty in exercise of the power under Section 221(1) of the Act. It is also contended that as the section stood prior to its amendment the authority who could impose the penalty is not specified and, therefore, the Income-tax Officer who passed the orders could not have assumed the authority to pass such orders. The 3rd and last contention of the petitioners concerns the nature of the offence for which the penalty is sought to be imposed. According to them mens rea must necessarily be found to be a requirement of the offence under Section 221 of the Income-tax Act, 1961, and unless it is found, there is no justification for imposing any penalty against the petitioners. None of these contentions found acceptance with the Commissioner of Income-tax.

7. Section 221(1), no doubt, refers only to the default in payment of ' tax '. ' Tax ' is a term defined in Section 2(43) of the Act and it means :

' ' Tax ' in relation to the assessment year commencing on the 1st 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 prior to the aforesaid date. '

8. Income-tax is chargeable under the Act by reason of the charging provision in Section 4(1), which reads :

'4. (1) Where any Central Act enacts that income-tax shall be charged for any assessment year at any rate or rates, income-tax at that rate or those rates shall be charged for that year in accordance with, and subject to the provisions of, this Act in respect of the total income of the previous year or previous years, as the case may be, of every person :

Provided that where by virtue of any provision of this Act income-tax is to be charged in respect of the income of a period other than the previous year, income-tax shall be charged accordingly. '

9. Therefore, if what is demanded as advance tax is tax charged in accordance with the provisions of the Income-tax Act in respect of the total income of the previous year of any person, it would be tax within the meaning of Section 2(43) of the Act. The Liability to pay advance tax is provided under Section 210 of the Act. Section 210 reads :

'210. (1) Where a person has been previously assessed by way of regular assessment under this Act or under the Indian Income-tax Act, 1922 (11 of 1922), the Income-tax Officer may, on or after the 1st day of April in the financial year, by order in writing, require him to pay to the credit of the Central Government advance tax determined in accordance with the provisions of Sections 207, 208 and 209.

(2) The notice of demand issued under Section 156 in pursuance of such order shall specify the instalments in which the advance tax is payable under Section 211.

(3) If, after the making of an order by the Income-tax Officer under this section and before the 15th day of February of the financial year, tax is paid by the assessee under Section 140A, or a regular assessment or a provisional assessment under Section 141 of the assessee (or of the registered firm of which he is a partner) is made in respect of a previous year later than that referred to in the order of the Income-tax Officer, the Income-tax Officer may make an amended order requiring the assessee to pay in one instalment, on the specified date, or in equal instalments on the specified dates, if more than one, falling after the date of the amended order, the advance tax computed on the basis of the total income on which tax has been paid under Section 140A or in respect of which the regular assessment or the provisional assessment aforesaid has been made, as reduced by the amount, if any, paid in accordance with the original order.'

10. It may be useful in this context to refer to Section 207 of the Act. It is indicated in this provision that advance tax is tax payable in advance in accordance with the provisions of the Income-tax Act. Therefore, while the charging section gives the authority to impose tax upon the income of any person, provision for payment of such tax in advance, in certain cases and according to certain procedure, is made in Sections 207 - 219 of the Act. The Income-tax Act contains provisions concerning the different modes by which tax is to be recovered from the assessees and that at different stages. Tax is recoverable by deduction at source and is recoverable also as advance payment prior to assessment. These are adjusted at the time of assessment. In the nature of the scheme of the Act and particularly in the light of the provisions in Sections 207 - 219 it is not possible to characterise advance tax payable as anything other than tax. The same question had engaged the attention of the Gujarat High Court in Swastik Engineering Works v. Commissioner of Income-tax, [1973] 87 I.T.R. 116. There is a fairly elaborate discussion of this question in that case. After referring to the various provisions of the Income-tax Act and the scheme of the Act, Bhagwati C.J., speaking for the Bench, held :

' Section 221, Sub-section (1), being couched in wide language so as to cover default in payment of tax, whatever be the stage at which tax is payable by the assessee, there may be some words in the section which are applicable only in relation to tax payable at one stage and not applicable in relation to tax payable at another, but on such account we cannot narrow down the scope and ambit of Section 221, Sub-section (1). '

11. I am in respectful agreement with the view taken by the High Court of Gujarat in the above case. The same view was adopted by the Division Bench of the Allahabad High Court in Smt, Kusum Kumari v. Union of India, : [1972]85ITR19(All) .

12. It has already been noticed that while Section 221(1), as amended by the taxation Laws (Amendment) Act, 1970, specified the Income-tax Officer as the authority who could direct the payment of penalty, such authority was not mentioned in the section prior to its amendment. Since the cases here are covered by the provision as its stood prior to its amendment, it is the petitioner's case that the Income-tax Officer, in passing exhibit P-1 order, assumed jurisdiction which was not conferred on him. This necessarily calls for consideration of the question whether in spite of the omission to specifically mention the authority which could pass an order under Section 221(1), the Income-tax Officer could be considered as the person who could pass such an order. If the contention of the counsel for the petitioners is accepted, it would necessarily mean that Section 221(1) is otiose. It would mean that notwithstanding a provision for imposition of a penalty for certain defaults specifically provided for in the section by reason of the omission to mention the authority who could exercise such power, there would be no case where the provision would be operative. The legislature would then have enacted a still-born provision. Normally, when interpreting statutes such a result should be avoided, if possible. That is not to say that in construing the language of the provision any departure should be made from the plain meaning or any strained construction should be attempted. But, if reading the provision along with other provisions of the statute, it would be possible to read it so as to give it sense and a meaning, that would be the appropriate way to construe it. A look at the scheme of Sections 210 - 226 of the Act may be useful to understand the setting in which Section 221(1) appears in the Act. Section 210 enables the Income-tax Officer to issue an order requiring payment of advance tax. Section 212(1) provides for the filing of an estimate of the income before the Income-tax Officer if, according to the assessee, he is not bound to pay the advance tax in accordance with the demand made under Section 210. Section 213 provides for intimation to the Income-tax Officer by persons who are in receipt of commission receivable periodically. Section 215(4) of the Act enables the Income-tax Officer to reduce or waive the interest payable by an assessee under Section 215. Section 217 invests the Income-tax Officer with certain powers on making regular assessments. Section 222 enables the Income-tax Officer to forward a certificate for recovery of tax to the Tax Recovery Officer. Section 225 confers the power on the Income-tax Officer to grant time for payment of tax in spite of issue of certificate to the Tax Recovery Officer. Section 226 enables the Income-tax Officer to recover arrears of tax by any of the methods provided for in this section.

13. The setting of Section 221 is, therefore, indicative that the authority contemplated in Section 221 could only be the Income-tax Officer.

14. Section 246 of the Act deals with appealable orders. An order passed under Section 221 is made appealable under Section 246. Referring to various orders, the section says :

' Any assessee aggrieved by any of the following orders of an Income-tax Officer, may appeal to the Appellate Assistant Commissioner against such order.'

15. When one of the orders so referred to is an order under Section 221, it goes without saying that Parliament has indicated unequivocally that the orders mentioned in Section 246 as that in regard to which appeals are provided to the Appellate Assistant Commissioner are orders passed by the Income-tax Officer. Reference may also be made to Section 246(1) which provides for a similar appeal against the order of the Income-tax Officer under Section 201 to the Appellate Assistant Commissioner, It may be necessary to refer to Section 201(1). The proviso to this sub-section indicates that an order under Section 221 is that of the Income-tax Officer. Thus, the provisions in the same enactment indicate quite clearly that the order has to be passed by the Income-tax Officer. Hence, even before the amendment, the Income-tax Officer could have passed the order imposing penalty. The amendment was apparently to clarify the position and not to alter it.

16. I am aware that a different view has been taken on the question which I have just now discussed by the Allahabad High Court in Smt. Kusum Kumari v. Union of India. Reference is made only to Section 221 by the learned judges. The learned judges observed :

' As the authority has not been specified for the purposes of Section 221, that section is an incomplete provision, and it is not for the court, we think, to supply the omission and complete it.'

17. The substance of the new provision is then referred to and noticing thefact that the substitution is not with retrospective effect, the learnedjudges express their opinion that the Income-tax Officer had no power toimpose penalty under Section 221. With great respect to the learnedjudges, I am unable to agree with this. I am afraid there has not been aconsideration of or advertence to all the relevant provisions in the Income-tax Act having a bearing in this matter in the judgment. I am supportedin my view by a decision of the Full Bench of the Allahabad High Court inD. C. Puliani v. Commissioner of Income-tax, : [1973]89ITR164(All) . The learned judges examined the provisions of the Income-tax Act, and in the light of those provisionsthey have held that Parliament intended to authorise the Income-taxOfficer to impose penalty. The earlier decision of the Allahabad High Court,to which I have made reference, was dissented from by the Full Bench.

18. The last of the questions which I have to consider here concerns the plea that no absolute offence is created by Section 221 and, therefore, the question whether penalty should be imposed must necessarily depend on the finding as to mens rea. In this context it may be profitable to refer to the observations of Shah, Actg, C.J., in Hindustan Steel Ltd v. State of Orissa, : [1972]83ITR26(SC) . The matter arose out of proceedings for assessment to tax under the Orissa Sales Tax Act, 1947. Whether M/s. Hindustan Steel Ltd. could be considered as ' dealer ' within the meaning of the Act, whether the company sold buiding materials to the contractors and whether the imposition of penalty for failure to register as a dealer was justified were the questions which the Supreme Court had to consider in that case. Under the Orissa Sales Tax Act, 1947, penalty could be imposed for failure to register as a dealer. This was provided by Section 9(1) read with Section 25(1)(a) of the Act. The question that the learned judges had to consider was whether mere proof of default in seeking to register as a dealer would be sufficient to justify applying the penal provisions. Dealing with this, Shah, Actg. C.J., said !

' But the liability to pay penalty does not arise merely upon proof of default in registering as a dealer. An order imposing penalty for failure to carry out a statutory obligation is the result of a quasi-criminal proceeding, and penalty will not ordinarily be imposed unless the party obliged, either acted deliberately in defiance of law or was guilty of conduct contumacious or dishonest, or acted in conscious disregard of its obligation. Penalty will not also be imposed merely because it is lawful to do so. Whether penalty should be imposed for failure to perform a statutory obligation is a matter of discretion of the authority to be exercised judicially and on a consideration of all the relevant circumstances. Even if a minimum penalty is prescribed, the authority competent to impose the penalty will be justified in refusing to impose penalty, when there is a technical or venial breach of the provisions of the Act or where the breach flows from a bona fide belief that the offender is not liable to act in the manner prescribed by the statute. Those in charge of the affairs of the company in failing to register the company as a dealer acted in the honest and genuine belief that the company was not a dealer. Granting that they erred, no case for imposing penalty was made out.'

19. I think there is sufficient guidance in this decision to justify the view that mere failure to carry out the statutory obligation need not necessarily visit the consequence of imposition of penalty. Something more must be shown and that is whether there is dishonest conduct on the part of the defaulter who is said to have committed the breach. The Supeme Court has spoken earlier on several occasions on this question. Reference maybe made to the decisions in Ravula Hariprasada Rao v. State, : 1951CriLJ768 . and in State of Maharashtra v. Mayor Ham George, : [1965]1SCR123 .

20. Where an offence is the creation of a statute, normally without anything more, the requirement of the element of means rea is imported into the concept of the offence unless there is something express or implied in the language of the provision which goes against such presumption. There may be statutes the object of which may rule out the applicability of the presumption and may justify the assumption that what was intended was to create absolute offences in respect of which it may be necessary for the prosecution to prove a guilty mind on the part of the culprit. Such are statutes for the regulation of social or public welfare. The Drug Control Acts and Food Adulteration enactments may be cited as instances. Barring such exceptions, normally it cannot be said as a rule that the requirement of mens rea is not an element or ingredient of the offence. In State of Gujarat v. D.Pande, : 1971CriLJ760 after referring to the following passage in Sherras v. De Rutzen, [1895] 1 Q.B. 913 it was held as follows :

' There is a presumption that mens rea, an evil intension, or knowledge of the wrongfulness of the act, is an essential ingredient in every offence; but that presumption is liable to be displaced either by the words of the statute creating the offence or by the subject-matter with which it deals, and both must be considered.'

21. The learned judges proceeded to observe :

' It is further observed therein that the principal classes of exceptions may perhaps be reduced to three. One is a class of acts which are not criminal in any real sense, but are acts which in the public interest are prohibited under a penalty. Another class comprehends some, and perhaps all, public nuisances. Lastly, there may be cases in which, although the proceeding is criminal in form, it is really only a summary mode of enforcing a civil right. But, except in such cases as these, there must in general be guilty knowledge on the part of the defendant, or of some one whom he has put in his place to act for him, generally, or in the particular matter, in order to constitute an offence.'

22. Section 221, as it stands amended by the Taxation Laws (Amendment) Act, 1970, has a proviso which restricts the power of the Income-tax Officer to impose penalty under the section unless he is satisfied that the default was for good and sufficient reasons. It is easy to see in the light of the proviso that Parliament did not intend to create an absolute offence under Section 221(1). At the relevant time there was no proviso in the section as it stood. If the incorporation of the proviso was only intended to put the matter beyond doubt, then, of course, the fact that the section was in different from earlier may not be very material. I see no intention expressed nor do I read any implied intention in Section 221(1) as it stood prior to the amendment which may be sufficient to hold that the normal rule that mens rea must read as an ingredient of the offence is to be ruled out in this case. I am, therefore, of the view that the amendment did not really effect any change in the law. In order to justify the imposition of a penalty under Section 221, the Income-tax Officer should not only find that there is default but should also consider the question whether there was good and sufficient reason for the default and only if he finds that there were none, he could proceed to impose the penalty. In other words, the situation prior to the amendment of 1970 was the same as that after such amendment.

23. Neither the Income-tax Officer nor the appellate and revisional authorities have considered the question whether imposition of penalty would be justified in the circumstances of the case. The stand taken has been that where there is default penalty should automatically be imposed. Therefore, the orders call for interference. But, in view of the fact that the matter was ultimately taken in revision, it would be sufficient to direct the Commissioner of Income-tax, Kerala, to consider exhibit P-3 revision afresh in the light of what I have said here as to the nature of the offence.

24. In the result, exhibit P-4 orders in both these petitions are quashed and the Commissioner of Income-tax is directed to go into the matter afresh in the light of what I have said herein. The original petitions are allowed as above. No costs.


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