1. The assessee had been assessed as an individual for the assessment year 1950-51. In the course of the assessment proceedings of the assessee for that year, it was discovered that two sums of Rs. 15,000 and Rs. 10,000 had been debited in the names of Ratnaswami and Ramaswami, the two sons of the assessee. The assessee stated that he had advanced these moneys to the two sons to enable them to carry on independent businesses in groundnut decortication. Each of these two sons was said to have been carrying on such business in partnership with another person with a right to a 7/8ths share in the profits arising therefrom. The relevant accounts of the two sons purported to disclose losses, but the Income-tax Officer computed the profits of Ratnaswami and Ramaswami at Rs. 4,400 and Rs. 9,800 respectively. It was further held by the Income-tax Officer that the businesses were not the independent businesses of the two sons but were ventures which belonged to and were conducted by the assessee himself. It was found that all the accounts were maintained by the assessee in his books and that there was a free flow of funds from the assessee's business to the sons' businesses and vice versa.
From these facts, the Income-tax Officer concluded that the income from these businesses should be added to that of the assessee's regular business, and an assessment was made accordingly. That assessment has become final. Thereafter, the Income-tax Officer started proceedings under S. 28 of the Act. He finally held that the assessee had concealed particulars of his income and imposed a penalty of Rs. 7,500 under S. 28(1)(c). Successive appeals to the Appellate Assistant Commissioner and to the Tribunal failed.
(2) The application of the assessee for a reference under S. 66(1) of the Act failing, the assessee moved this court, under S. 66(2). This court directed the Tribunal to state a case and refer the following question:
'Whether on the facts and in the circumstances of the case, the levy of penalty of Rs. 7,500 under S. 28(1)(c) of the Act on the assessee is valid in law?'
for the determination of this Court. While directing the reference, this court instructed the Tribunal to state whether the plea of good faith advanced by the assessee, particularly in view of the fact that the businesses resulted in loss, was investigated and considered.
(3) Mr. K. Srinivasan, learned counsel for the assessee, principally contended that the two businesses did not yield any profit at all and it was only by a process of an estimate adopted by the Income-tax Officer that what was a loss according to the books stood converted to a profit and brought to tax. He points out that when the businesses according to the accounts resulted in a loss, the assessee, if the businesses were really his own, would have been fully justified in taking into account those losses for the purpose of reducing the profits in his own business. The fact that he made no attempt to do so is urged by the learned counsel to show that the businesses were really not those of the assessee, but were the separate businesses of his sons. The feature that the same premises as that of the assessee was utilised by the sons or that the assessee advanced moneys to the sons whenever required could not possibly give a different complexion to the case.
(4) We must concede that there is considerable force in the argument advanced by the learned counsel. In addition to this argument, learned counsel further urges that the imposition of the penalty in the instant case is not valid in law. It appears that by an order made under S. 25-A, the Income-tax Officer accepted the position that the Hindu undivided family consisting of the assessee and his sons became disrupted on 13-4-1964. It was also found that the family had all along been joint and that fact stood-fully confirmed by an examination of the account books for the years 1912 to 1927. The business itself had been held in certain appeals to be joint family business. The question accordingly arises whether even assuming that the penalty provisions were attracted, in view of the disruption of the family, a penalty could be imposed upon the Kartha of the erstwhile family after disruption.
(5) Mr. Balasubramaniam, for the department, contends that the question in this form was not raised before the Departmental authorities or the Tribunal; but the very orders passed by these officers took note of these features and the question that stands referred to us, to our minds, comprehends this issue as well.
(6) In a decision of this Court in Raju Chettiar v. Collector Madras, (1956) 26 ITR 241: AIR 1956 Mad 396, penalty proceedings were initiated in September 1944. The order imposing penalty was made on 18th March 1948. In between, on the 25th January 1946, the partition of the family took place. The application under S. 25-A of the Income-tax Act was allowed on the 31st December 1948. The Kartha of the family died after paying a portion of the penalty. Proceedings were taken by the Income-tax department against the other members of the family for recovery of the balance of the penalty, and at that stage, they came to this Court for the issue of a writ of prohibition. The decision of this Court was that when the family had ceased to exist in January 1946, it was not a 'person' for the purposes of Income-tax Act in March 1948, when the penalty was imposed. The learned Judges observe that in order that the proceedings under S. 28 may be validity launched and completed, in the case of Hindu undivided family, two conditions were necessary the family should be in existence when the proceedings are initiated, and it should also be in existence when the order imposing the penalty on that family as a person is passed. This decision has been followed by the Andhra Pradesh High Court in Subba Rao v. Commr. of Income-tax, : 31ITR867(AP) .
(7) Mr. Balasubramaniam, for the department, contends that it has been recognised in the decisions of the Supreme Court that the personality of a joint Hindu family is deemed to continue even after the disruption of the family for the purpose of proceedings under S. 34, and if that is so, the same principle should be applicable in the case of proceedings under S. 28. Reference has been made to Lakshminarain Badani v. Commr. of Income-tax : 20ITR594(SC) . That was a case where, after the family had become divided and orders had been passed under S. 25-A of the Income-tax Act, the Income-tax Officer purported to start proceedings under S. 34 to bring to tax income that had escaped assessment during the time when the family existed. The relevant notice was issued in the name of the joint Hindu family and served upon the person who had been the Kartha during the year in question. The validity of such a course was upheld by the Supreme Court in the decision cited above.
We are, however, unable to agree that the principle of that decision would apply to proceedings under S 28. Section 28 is well recognised to be a species of penal proceedings intended to impose a penalty upon a contumacious assessee. The law does not contemplate the imposition of a vicarious penalty on a person other than the one who is responsible for the offence. Mr. Balasubramaniam's suggestion that the decision in (1956) 26 ITR 241: AIR 1956 Mad 396 would require reconsideration for the reason that the decision of the Supreme Court in : 20ITR594(SC) was not cited before the learned Judges does not appear to us to be acceptable.
(8) Mr. Srinivasan further contends that the income in the present case was undoubtedly income which belonged to the Hindu undivided family. Reference in this regard has been made to the Commr. of Income-tax v. Palaniappa Chettiar, 1964 1 tTJ mad 92 . It is unnecessary to refer to the facts of this decision, for it has been decided in other appeals in the case of this very assessee that the family had been a Hindu undivided family for several decades in the past and that the earlier assessments made on the assessee as an individual had all been incorrectly made. But whatever that may be, the findings referred to unmistakably establish that the income in question, the concealment of which is the subject matter of S. 28 proceedings, is income of the Hindu undivided family, and if any proceedings can be taken in that regard, it can only be taken against the Hindu undivided family. Though the proceedings are initiated at a time when the Hindu undivided family was in existence, the completion of the proceedings and the imposition of the penalty were on a date when the Hindu undivided family had ceased to exist. It seems to us that the principle of the decision in : 29ITR241(Mad) fully applies.
We are also satisfied on the facts that having regard to the results of the business it was most unlikely that the assessee would not have included the results of these two businesses in his return had they really formed part of his businesses, for such a course would have been definitely to his advantage. This important feature, which is almost conclusive in favour of the contention of the petitioner, has failed to be noticed by the Tribunal.
(9) We accordingly answer the question in favour of the assessee. In the peculiar circumstances, we make no order as to costs.
(10). Answer accordingly.