1. This reference under the Income-tax Act, 1961, relates to the levy of penalty on the assessee for the assessment year 1961-62 under section 271(1)(a) of the Act. The question is as follows :
'Whether, on the facts and in the circumstances of the case, the Tribunal was justified in law in reducing the penalt ?'
2. The provisions of section 271(1)(a) provide for the levy of penalty where an assessee has without reasonable cause failed to furnish his return of income or has without reasonable cause failed to furnish it within the time limited by the Act or by a statutory notice. The quantum of penalty leviable in respect of delayed submission of return is to be measured in terms of a percentage of the assessed tax on a time basis. The precise provision is to the following effect. The penalty levied would be a sum equal to 2% of the assessed tax for every month during which the default continues. The quantification of the penalty on the basis of every month's default is an echo of the very basis for the levy itself, namely non-submission of a return or delayed submission of a return, the laches of the assessee in both cases being without reasonable cause. In other words, only in respect of months of default, in which default can be said to be unreasonable, can there be a quantification of penalty at the rate of 2% of the assessed tax.
3. In this case, the penalty was levied for the assessment year 1961-62. The assessee's relevant previous year ended on March 31, 1961. The return of income had to be filed pursuant to a notification issued under section 22(1) of the Indian Income-tax Act, 1922. Incidentally, the Tribunal was hard put to it to discover the exact date on which the public notification was published in the newspapers calling for the return for the assessment year 1961-62. But on the basis of the general requirements as to public notice set out in section 22(1) of the 1922 Act, the Tribunal held that such a notification had to be made before May 1, 1961, and since at least sixty days' clear notice will have to be given for furnishing of the returns and since, in the opinion of the Tribunal, it would take normally at least six months for assessee carrying on business to prepare and furnish their returns of income, the Tribunal held that the return in the assessee's case for 1961-62 could have been filed without any question of delay by September 30, 1961. The Tribunal, however, was also of the view that normally the Income-tax Officer would be inclined to grant further time of three months to enable the assessee to finalise the accounts. Thus, according to the Tribunal, it would be safe to hold that the period till the end of December, 1961, can be regarded as the time requisite for the assessee to prepare and file the return of income for 1961-62. With this date as the starting point, the Tribunal went into the question as to how long was the delay on the part of the assessee in the matter of filing the return and as to what extent the assessee was in position to make out that the delay was not unreasonable. The Tribunal took note of the fact that return actually came to be filed by the assessee for the year only on April 15, 1964. This time lag had to be explained by the assessee. It was common ground that on April 28, 1962, there was a raid on the assessee's business premises by the Foreign Exchange Regulation Authorities in the course of which all important accounts, records and other documents were seized by the those authorities and taken away from the premises of the assessee. In consequence, those documents and account books became unavailable to enable the assessee to prepare the return of income for being filed with the income-tax authorities. But the raid was only in April, 1962. This left the three months immediately before the raid, January, 1962, to March, 1962, during which the assessee might possibly have got ready the return of income and filed with the Income-tax Officer. The Tribunal, however, accepted the assessee's submission that important accounts, records and other documents were taken away from the assessee's custody by the raid squad of the Enforcement Directorate and, therefore, it became extremely difficult, if not quite impossible, for it to make a return of income with any reasonable degree of accuracy. But so far as the three months January, February and March, 1962, were concerned, the Tribunal was of the view that the assessee ought to be able to explain why even during these three month, the assessee could not have filed the return and had delayed the matter. The assessee explained that one of its partners was suffering from jaundice and another partner had gone to his village and these were the reasons why the return could not be prepared and filed during those months. The Tribunal considered that this was not a good enough explanation justifying the default of the assessee in not filing the return at least during this period of three months.
4. Having discussed the delay or default in the filing of the return from the point of view of reasonable cause therefor, the Tribunal was of the view that penalty under section 271(1)(a) should be quantified at the rate of 2% on the assessed tax for the three months of January, February and March, 1962.
5. Once we accept the finding of the Tribunal that the assessee had reasonable cause for the delay in the furnishing of the return for the entire period of the delay excepting for the first three months in the year 1962, it would follow therefrom that penalty in terms of the provisions of section 271(1)(a) has got to be quantified only with reference to those three months default. Penalty cannot be levied with reference to months during which there was reasonable cause for the delay.
6. The question, therefore, is easily answered in favour of the assessee on the basis of the factual finding of the Tribunal. No attempt was made either at the stage of applying for a stated case or at the time of finalising the question of law to challenge the factual finding of the Tribunal as respects the reasonable cause for the delay in the filing of the return for the period other than the three months of the year 1962. In the absence of any appropriate question challenging that factual finding, this question will have to be answered on the basis of the clear conclusion of the Tribunal that the default must be limited, on the facts and on the explanation by the assessee, only to three months. It follows, therefore, that the quantification of the penalty was made by the Tribunal on very correct lines. The reference is accordingly answered against the Department. The assessee will be entitled to is cost. Counsel's fee Rs. 500.