T.U. Mehta, J.
1. The real question which is involved in this reference is whether a registered firm which becomes liable to penalty under clause (c) of sub-section (1) of section 271 of the Income-tax Act, 1961 (which is hereinafter referred to as 'the Act'), and attracts the provisions of sub-section (2) of that section, cannot be penalised under clause (iii) of that section, if its income is ultimately found to be not assessable tax.
2. Short facts of the case are that the respondent-assessee is a registered firm and it filed its first return of income on December 5, 1964, showing a business loss of Rs. 74,841 and the dividend income of Rs. 15,600, thus showing the net loss of Rs. 59,241. It is further found that as a result of seizure of certain documents from the assessee, it was not disclosed by its produced before the Income-tax Officer. Thereafter, on March 20, 1965, the assessee filed second return and disclosed the business income of Rs. 1,775 and the total income of Rs. 17,375 which included the above referred dividend income of Rs. 15,600. Thereafter, pending the assessment proceedings, the assessee filed the third return on February 9, 1968, disclosing further business income of Rs. 5,028 and total income of Rs. 20,628.
3. The Income-tax Officer completed the assessment March 22, 1969, assessing the total income of the assessee at Rs. 30,384, computing business income as Rs. 14,784 and dividend income of Rs. 15,600. At the time of passing this assessment order, the Income-tax Officer also ordered the issue of notice under section 271 of the Act for concealment of income. Since the income of the assessees as assessed by the Income-tax Officer came to Rs. 30,384, the assessee was liable to pay tax of Rs. 388 as a registered firm. However, if the assessee was to be treated as an unregistered firm as contemplated by sub-section (2) of section 271 of the Act, its tax liability on the income of Rs. 30,384 would have been Rs. 6,799. Since this was the assessment for the assessment year 1964-65, the minimum penalty, to which the assessee was liable under clause (iii) of section 271 of the Act, was to be computed at the rate of 20% of the tax liability. This penalty came to Rs. 1,358 on the footing that the assessee was an unregistered firm as contemplated by section 271(2) of the Act. Since this amount of minimum penalty of Rs. 1,358 was more than Rs. 1,000, the Income-tax Officer referred the question as regards the imposition of penalty to the Inspecting Assistant Commissioner under Sub-section (2) of section 274.
4. In the mean while the assessee preferred an appeal against the assessment order passed by the Income-tax Officer. The Appellate Assistant Commissioner, who heard this appeal, reduced the assessment of the income of the assessee from Rs. 30,384 to Rs. 23,094 by his order dated November 21, 1970. At this time the penalty proceedings were pending before the Inspecting Assistant Commissioner under sub-section (2) of section 274. The Inspecting Assistant Commissioner eventually passed the order of penalty on February 27, 1971, and imposed the penalty of Rs. 5,000 for concealment of the particulars as regards the income of the assessee under clause (iii) of sub-section (1) of section 271 of the Act.
5. Being aggrieved by the decision of the Inspecting Assistant Commissioner as regards the imposition of penalty, the assessee approached the Tribunal in appeal. On behalf of the assessee it was contended before the Tribunal that as a result of the final assessment of assessee's income by the Appellate Assistant Commissioner in appeal, its income was assessed at Rs. 22,094 and as the assessee's firm was a registered firm, no tax was leviable on this amount of Rs. 22,094 as at the relevant time the income up to Rs. 25,000 earned by a registered firm was exempted from tax payable by a registered firm. It was, therefore, contended that since no tax was payable by the assessee, as a result of the final assessment made by the Appellate Assistant Commissioner, there was no question of levying any penalty from the assessee. Another contention which was raised before the Tribunal was that since there was no tax and, therefore, no penalty, the Inspecting Assistant Commissioner, who concluded the penalty proceedings, had no jurisdiction to deal with the matter under sub-section (2) of section 274. It was further contended that the tax on the dividend income was deducted at source and, therefore, in view of the final assessment of the assessee's income made by the Appellate Assistant Commissioner some refund was due to the assessee and, therefore, also, there was no question of imposing any penalty.
6. It is regretted to note that from the order recorded by the Tribunal while disposing of the appeal preferred before it, it is not possible to locate the exact facts but since the above-mentioned facts are admitted facts and are taken from the record, we have mentioned them in order to appreciate the contentions raised by the parties in this reference. The conclusions arrived at by the Tribunal have been recorded in few lines as under :
'We have considered the arguments put forward by the authorised representatives of both the sides and are of the view that since it is a case of refund we do not think that any penalty could be leviable as per the calculations furnished to us in that the refund would be Rs. 1,436. Since the order of the learned Inspecting Assistant Commissioner is without jurisdiction, the penalty levied would not be sustainable.'
7. This is the only reasoning which is found in the order of the Tribunal while disposing of the contentions raised by the parties in the course of the appeal before it.
8. The assessee having thus won in its appeal before the Tribunal, the department has referred this reference, in which the following question of law is referred to us by the Tribunal for our opinion :
'Whether, on the facts and in the circumstances of the case, the Tribunal was justified in law in cancelling the penalty imposed by the Inspecting Assistant Commissioner under section 271(1)(c) read with section 274(2) of the Act ?'
9. For the reasons which follow, our answer to this question is in the negative.
10. Before proceeding further with the discussion of the points which are involved in this reference, it is necessary to note that clause (iii) of sub-section (1) of section 271 of the Act was at the relevant time as under :
'(iii) in the cases referred to in clause (c), in addition to any tax payable by him, a sum which shall not be less than twenty per cent. But which shall exceed one and a half times the amount of the tax, if any, had been accepted as the correct income.'
11. It should be noted here that in the scheme of section 271 this clause (iii) finds its place in those provisions which direct the authorities concerned as to how penalty should be calculated. Section 271 contemplates cases where an assessee has failed to furnish returns to comply with notices or has concealed the particulars of his income. Sub-section (1) of section 271 read with clause (c) says that if the Income-tax Officer or the Appellate Assistant commissioner, in the course of any proceedings under the Act, is satisfied that any person had concealed the particulars of his income or has furnished in accurate particulars of his income' he may direct that such person shall pay, by way of penalty, a sum calculated in accordance with clause (iii) thereof. Of course, the section contemplates offence other than the concealment of particulars income, but so far as this reference is concerned, we are not concerned with these other offence, and, therefore, we have referred only to that portion of section 271 which has reference to concealment of particulars of income. Thus, if sub-section (1) of section 271, as it stood at the relevant time, is read with regard to the facts of the present case, it becomes evident that if the Income-tax Officer found that the assessee had concealed the particulars of his income, then it was open to him to impose penalty as indicated in clause (iii) which is quoted by us above. According to this clause (iii) the penalty was related to the amount of tax which was sought to be avoided by the assessee.
12. Now, the contention of the assessee is that since in this case no tax ultimately found to be payable by it, and since on the contrary, it was found that if was entitled to some refund, it was not possible to assess any amount of penalty in compliance with the provisions contained in the above-quoted clause (iii). As a consequence of the above-referred contention, another contention which is raised by the assessee, is with regard to the jurisdiction of the Inspecting Assistant Commissioner to impose penalty. Here the argument was that penalty proceedings could have been referred by the Income-tax Officer concerned to an Inspecting Assistant Commissioner only if the amount of penalty, which was imposable, was more than Rs. 1,000 but since as a result of the order passed by the Appellate Assistant Commissioner in appeal no tax was found leviable from the assessee, there was no question of levying any penalty, much less penalty exceeding Rs. 1,000 and hence the Inspecting Assistant Commissioner had no jurisdiction to decide the penalty proceedings. The Tribunal has accepted this contentions and has consequently held that the assessee was not liable to any penal action, under section 271(1)(c) read with section 274(2) of the Act. We, therefore, first purpose to consider the question whether the Inspecting Assistant Commissioner had jurisdiction to deal with the question of penalty.
13. It is obvious from the above stated contentions of the assessee that the assessee wants us to decide the question of the jurisdiction of the Inspecting Assistant Commissioner with reference to the ultimate decisions as regards the assessment of the assessee's income given by the Appellate Assistant commissioner in appeal and not with reference to what the Income-tax Officer found as a result of assessment of the assessee's income as per his order dated March 22, 1969. Now, if a reference is made to the scheme contemplated by sections 271, 274 and 275 of the Act, it will be evident that the jurisdiction of the Inspecting Assistant Commissioner depends not on subsequent events but on the facts which were found on the date of the initiation of the proceedings contemplated by sub-section (2) of section 274. This sub-section (2) of section 274 in the following terms :
'(2) Notwithstanding anything contained in clause (iii) of sub-section (1) of section 271, if in a case falling under clause (c) of that sub-section, the minimum penalty imposable exceeds a sum of rupees one thousand, the Income-tax Officer shall refer the case to the Inspecting Assistant commissioner who shall, for the purpose, have all the powers conferred under this Chapter for the imposition of penalty.'
14. This sub-section, therefore, clearly shows that it is for the Income-tax Officer to make a reference on the question of penalty to the Inspecting Assistant Commissioner, if he finds that the minimum penalty impossible exceeds the sum of Rs. 1,000. Obviously, the Income-tax Officer would have arrived at the finding about the minimum penalty imposable at the conclusion of during the course of assessment proceedings. Sub-section (2) of section 274, which is quoted above, leaves no option to the Income-tax Officer but to make a reference to the Inspecting Assistant Commissioner provided the minimum penalty imposable exceeds the sum of Rs. 1,000. It, therefore, follows that the jurisdiction of the Inspecting Assistant Commissioner to deal with the penalty matter contemplated by sub-section (2) of section 274 is to be looked at as on the day of initiation of proceedings and not with reference to the subsequent events. If proceedings are once initiated under section (2) section 274, then the jurisdiction, which is already vested in the Inspecting Assistant Commissioner to proceed with the penalty proceedings, cannot be divested by what has subsequently happened. In this connection it would not be out of place to make a reference to the decision given by the Supreme Court in Commissioner of Income-tax v. S. V. Angidi Chettiar wherein, Shah J. speaking for the court while dealing with section 28 of the Indian Income-tax Act, 1922, has observed as under :
'The power to impose penalty under section 28 depends upon the satisfaction of the Income-tax Officer in the course of proceedings under the Act; it cannot be exercised if he is not satisfied about the existence of conditions specified in clauses (a), (b) or (c) before the proceedings are concluded. The proceedings to levy penalty has, however, not to be commenced by the Income-tax Officer before the completion of the assessment proceedings by the Income-tax Officer. Satisfaction before conclusion of the proceedings under the Act, and not the issue of a notice or initiation of any step for imposing penalty is condition for the exercise of the jurisdiction.'
15. These observations have been accepted by the supreme court in the sub-sequent decision in D. M. Manasvi v. Commissioner of Income-tax wherein the Supreme Court has observed that it is satisfaction of the Income-tax officer in the course of assessment proceedings regarding the concealment of income which constitutes the basis and foundation of the proceedings for levy of penalty, and the said satisfaction, in the very nature of things, proceeds the issue of notice and it would not be correct to equate the satisfaction of the Income-tax Officer with the actual issue of notice. It is thus clear that the Inspecting Assistant commissioner gets jurisdiction to deal with the penalty proceedings contemplated by sub-section (2) of section 274 on the facts which were in existence at the time of the initiation of these proceedings by the Income-tax Officer and not on any other subsequent facts.
16. This particular aspect of the matter becomes more evident if a reference is made to section 275 of the Act, which says that no order imposing a penalty shall be passed after the expiration of two years from the date of the completion of the proceedings in the course of which the proceedings for the imposition of penalty have been commenced. It is obvious that proceedings for imposition of penalty are commenced when the Income-tax officer decided to issue for imposition of penalty on the assessee. Therefore, the limitation period of 2 years, which is contemplated by section 275 begins from the date on which the Income-tax passed an order for the commencement of proceedings for imposition of penalty. Looking to this starting point of limitation, it is obvious that the Inspecting Assistant commissioner gets jurisdiction to proceed with the penalty proceedings with reference to the facts which existed when the income-tax officer commenced the penalty proceedings and not with reference to the facts or events which subsequently came into existence.
17. Therefore, the contention of the assessee that the inspecting Assistant commissioner lost jurisdiction to deal with the penalty proceedings, as a result of the order passed by the Appellate Assistant Commissioner in appeal with regard to assessment of assessee's income, must stand rejected.
18. This brings us to the next question, namely, whether in view of the provisions of clause (iii) of sub-section 271, as it stood at the relevant time, and in view of the fact that no tax liability attached to the assessee with reference to the assessment year in question on the footing that it was a registered firm, any penalty under the said clause is impossible. Now, while considering the question, the most important aspect to be borne in mind is the legal impact of the provisions contained in sub-section (2) of section 271 which provides for the penalty which is imposable in cases where a registered firm becomes liable under section 271(1). This sub-section (2) of section 271 is in the following terms :
'(2) When the person liable to penalty is a registered firm or an unregistered firm which has been under clause (b) of section 183, then, notwithstanding anything contained in the order provisions of this Act, the penalty imposable under sub-section (1) shall be the same amount as would be imposable on that firm were an unregistered firm.'
19. This sub-section obviously directs how the penalty impossible a registered firm, which has rendered itself liable to penalty, should be calculated. The non-obstante clause of the sub-section shows that its provisions as regards the computation of the penal amount shall prevail in spite of other provisions of the Act. The sub-section further provides for a deeming fiction that for the purpose of computing the amount of penalty, even a registered firm shall be treated as if it were an unregistered firm, provided it has rendered itself liable to penalty. Thus, it becomes apparent that this sub-section controls clauses (i), (ii) and (iii) of sub-section (1) of section 271 for the purpose of computation of the amount of penalty. The contention of the assessee's no tax was found leviable, clause (iii) of sub-section (1) of section 271 becomes unworkable, loses all its force, if once the above-referred provisions of sub-section (2) are borne in mind. These provisions show that even if, in ordinary course, a registered firm is not found liable to the payment of any tax, it may become so liable by being treated as an unregistered firm on account of having incurred a penal liability contemplated by sub-section (1). Therefore, when a registered firm is treated as an unregistered one, and on being so treated it is found liable to tax, clause (iii) of section 271(1) becomes fully workable.
20. But then, the patient question is when can it be said that a registered firm has become 'liable to penalty' within the meaning of the above-referred sub-section (2). The assessee's contention is that liability to lay penalty would arise only if, as a result of the final assessment, an assessee is found liable to the payment of some tax. This contention has found favour with the Tribunal. But it is difficult to comprehend what connection the penal liability has with the liability to pay tax. Penal liability contemplated by sub-section (2) of section 271 falls within any of the clauses (a), (b) or (c) of section 271(1). These three clauses contemplate three distinct types of defaults. The moment it is found that any one of these three defaults is committed by an assessee which is a registered firm the said assessee becomes 'liable to penalty' within the meaning of sub-section (2). Clauses (a), (b) and (c) constitute the first part of sub-section (1) of section 271. This part shows when and under what circumstances a penal liability comes into existence. Second part of this sub-section is constituted by clause (i), (ii) and (iii). These clauses have nothing to do after the liability has already come into existence as their function is to provide for the method to quantify the different amounts of penalties with reference to the different defaults contemplated by clauses (a), (b) and (c). Thus, while the function of clauses (a), (b) and (c) is to create penal liability, the function of clauses (i), (ii) and (iii) is to quantify the said liability. Now, if the quantification if penal liability is based on the amount of tax, if any, payable by an assessee, and if, in a given case, the assessee is not found liable to pay any tax, the quantification of penal liability would be impossible; and in that case, no penalty is leviable; but that does not mean that penal liability under the first part of sub-section (1) was not incurred by that assessee. Impossibility of quantifying penal liability would not obliterate the fact that the assessee had rendered himself liable to a penal action. It is, therefore, a mistake to say that if there is no tax liability and if, consequent to that, quantification of penal liability is not possible, there was never any penal liability incurred by the assessee.
21. Shri Shah contended on behalf of the assessee that the purpose of section 271 is to see that proper tax is paid and, hence in a case where no tax is payable, there does not arise any question of the evasion of tax and, therefore, there is also no question of any penal liability. These contentions are fallacious as they are based on the incorrect postulate, that the object of section 271 is only to see that proper tax is paid. The main object of section 271 is to see that correct returns are filed within the stipulated time and that necessary particulars of income are revealed. For the purpose of section 271 it is not material whether as a result of the revelation of correct and accurate particulars of income, any tax actually becomes leviable. Therefore, even if, in a given case, an assessee is not found liable to pay any tax with reference to a particular period, he is bound to reveal true and accurate particulars of his income, and if he does not to do so, he becomes liable to penalty. In other words, section 271 directs the assessees to avid foul-play in filing their returns irrespective of the question whether they are eventually liable to pay tax or not.
22. Therefore, when we are considering the case of a registered firm, under sub-section (2) of section 271, the first question which we have to ask is whether the registered firm has committed any of the defaults contemplated by clauses (a), (b) and (c) of sub-section (1) of section 271. If the answer to this question is in the affirmative, it follows that the registered firm in question is a person 'liable to penalty' within the meaning of sub-section (2) of section 271. Once it is found that such a registered firm has contemplated by the penalty, then under the deeming fiction, which is contemplated by the latter by part of sub-section (2), such a firm should be treated as an unregistered firm and the quantification of penalty should be worked out on the amount which would be impossible on this firm as if it were an unregistered firm, it cannot be said that it was not liable to any tax, and if it cannot be said that it was not liable to any tax, then it would not be impossible to work out the penalty contemplated by clause (iii) as it was on the statute book at the relevant time.
23. Shri Shah contended that the words 'penalty imposable sub-section (1)' which appear in sub section (2) of section 271 suggest that penalty on a registered firm can be imposed only if its income is found tax-able making it possible for the taxing authority to work out the penal liability. This contention is the result of a partial to work out the penal portion of sub-section (2). The reading of this latter portion as a whole shows how the penalty which becomes 'imposable under sub-section (1)' should be computed. A penalty becomes 'imposable under sub-section (1)' if a person becomes 'liable to penalty' under that sub-section. Therefore, when one becomes 'liable to penalty' the penalty becomes 'imposable' and once it becomes imposable, the amount of penalty is required to be calculated as if the firm was an unregistered one. this is the full and correct reading of sub section (2), and hence we see no substance in this contention of Shri Shah.
24. Shri shah put some reliance on the decision of the Supreme Court in commissioner of Income-tax v. Vegetable products Ltd., and Hindustan Steel applicable to the facts of the present case. In the case of Vegetable Products Ltd., it was held that in calculating the penalty leviable under section 271(1)(a)(i) of the Act for failure to file the returns of income within time without reasonable cause, the amount paid by the assessee under provision assessment under section 23B if the Indian Income-tax Act, 1922, had to be deducted from the amount of tax determined under section 23(2) of that Act, in order to determine the amount of tax on which the computation of the penalty was to be based. This ratio has obviously with regard to the computation of income as contemplated by clause (i) of sub-section (1) of section 271. In another case of Hindustan Steel Ltd., the Supreme Court has decided that there would be justification for refusing to impose penalty, when there is a technical or vehicle breach of the provisions of the Act. Even this decision has no relevance to the facts of the present case, because bench, which the assessee is found to have made, is neither technical nor venial. The facts of the case show that the said breach was the result of conduct which was obviously contumacious and dishonest.
25. On the contrary, we find sufficient justification for the view which we are taking in the decision given by the Supreme Court in Commissioner of Income-tax v. S. V. Angidi Chettiar wherein the provisions of section 28 of the Act of 1922, which provided for the penalties of this kind, were considered and it was held that the fact that under section 23(5) of the Act of 1922, in the case of a registered firm, tax is not payable by the firm itself, does not prevent a penalty being imposed on the firm. In that case a contention, which was exactly similar to the one raised by Shri Shah in this reference, was raised before the Supreme Court. It was urged, relying upon the scheme of levying tax as found in the Act of 1922, that as a registered firm was not liable to pay tax, it could not be rendered to pay penalty under section 28(1)(c) of the Act. Repelling this contention, the Supreme Court has observed as under :
'The assumption that the expression 'any tax' used in section 28(1) is intended to indicate that there must be some tax payable by the assessee before penalty could be imposed by the terms of clause (b). Penalty may be imposed for failure to comply with the notice under sub-section (4) of section 22 or sub-section (2) of section 23 even if the assessee has no assessable income. To the imposition of a penalty liability to pay tax by the person against whom the penalty is sought to be imposed is, therefore, not a condition precedent.'
26. After making these observations, the Supreme Court approved of the decision given by the Calcutta High Court in Khusiram Murarilal v. Commissioner of Income-tax wherein also the view, which we are taking in this judgment, was taken by the said High Court.
27. Thus, in our opinion, the Tribunal was not justified in law in cancelling the penalty imposed by the Inspecting Assistant Commissioner under section 271(1)(c) read with section 274(2) of the Act. Our answer, therefore, to the question which is referred to us in the negative, i.e., in favour of the revenue and the against the assessee. This reference is accordingly disposed of and it is ordered that respondent-assessee shall bear the costs of the revenue in this reference.