1. In T.C. No. 191 of 1976, which relates to the assessment year 1966-67, the following question has been referred to this court:
'Whether, on the facts and in the circumstances of the case, in determining the quantum of penalty leviable under Section 271(2) of the Income-tax Act, 1961, in the assessee's case the annuity deposit that was payable by the unregistered firm for the assessment year 1966-67 should be taken into consideration ?'
2. In T.C. No. 400 of 1976, which relates to the assessment year 1965-66, the question referred runs as follows:
'Whether, on the facts and in the circumstances of the case, in determining the quantum of penalty leviable under Section 271(2) of the Income-tax Act, 1961, in the assessee's case the annuity deposit that was payable by the unregistered firm for the assessment year 1965-66 should be taken into consideration ?'
3. The question for each year is thus identical except, for the year.
4. The assessee is a firm carrying on business in operating transport vehicles. The firm filed a return of income for the assessment year 1966-67 admitting a total income of Rs. 76,946. The ITO made, the assessment on the total income of Rs. 5,41,087. Penalty proceedings under Section 271(1)(c) were also initiated and the matter was referred to the IAC under Section 271(2) of the Act as required by the provisions then in force. After completion of the assessment, the assessee came to a settlement with the department, according to which, the income as determined, viz., Rs. 5,41,087 was accepted and the assessee wanted that the minimum penalty in accordance with law should alone be levied for the relevant assessment year. The IAC, after giving the assessee the necessary opportunity, levied Rs. 73,679 as penalty rejecting the assessee's contention that under Section 271(2), it was to be treated as an unregistered firm and the deduction for the annuity deposit payable by the unregistered firm should be allowed from the total income assessed, and the minimum penalty computed accordingly. On appeal before the Appellate Tribunal, the contention was that the penalty computation should be on the basis of the firm being an unregistered firm as required under Section 271(2) and that the annuity deposit payable by the unregistered firm should be deducted from the total income as required by the provisions of law then in force. The Tribunal had dealt with a similar question in its order dated September 21, 1973, in I.T.A. No. 333 of 1971-72 and following the said order, it held that the annuity deposit had to be taken into account for quantifying the penalty. The result was that the penalty levied was reduced. The Commissioner has brought this matter on reference on the questions already set out.
5. For the assessment year 1965-66, the position is identical. The assessee returned a loss of Rs. 47,279 while the ITO computed the total income at Rs. 1,97,000. After the completion of the assessment, the assessee agreed to a settlement with the department, as a result of which the income was finally determined at Rs. 2,50,463 and only the minimum penalty was to be levied. The IAC levied Rs. 30,366 as penalty and the Tribunal on appeal reduced the penalty on the basis that the assessee was an unregistered firm, which was liable to pay annuity deposit and which annuity deposit was liable to be deducted out of the total income. The Commissioner challenges the order of the Tribunal for this year also. Section 271(2) provides:
'When the 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 this Act, the penalty imposable under Sub-section (1) shall be the same amount as would be imposable on that firm if that firm were an unregistered firm.'
6. The I.T. Act classifies the firms under two heads, viz , registered firms and unregistered firms. As far as the registered firms are concerned, if their income exceeds a particular limit, they are liable to pay tax at a comparatively smaller rate and the income earned by the firm is apportioned between the partners who pay the tax due on the basis of the apportioned amount forming part of their total income. In the case of an unregistered firm, the firm itself is an entity so that it pays tax on the total income earned by it like an individual.
7. Section 183(b) provides for cases where the partners of the firm having substantial income may seek to avoid tax liability by not filing an application for registration. If they filed an application for registration of the firm and if the firm was assessed as a registered firm, then, as seen already, they are liable to pay tax on the total income including the apportioned income earned by the firm. This would attract tax at higher rate. In order, to plug this kind of loophole by the firm not applying for registration, Section 183 enables the ITO to treat the firm as a registered firm even if the firm had not applied for registration,
8. If a firm were registered, then, as pointed out earlier, its liability to tax was comparatively small. Section 271 contemplates levy of penalty only on the basis of the tax payable by the particular assessee. In order to see that the registered firms do not escape the proper amount of penalty leviable on them, the law has provided that the registered firms should be treated as unregistered firms for the purpose of levy of penalty. In other words, the tax due on the basis of the firm being unregistered will have to be calculated and the appropriate amount of penalty which lies between the minimum and the maximum contemplated by the law would have to be levied.
9. One curious feature of Section 271(2) may be noticed. In the case of an unregistered firm, which is treated as registered, there is virtually a deeming provision in Section 183(b) so as to treat it as a registered firm. When it comes to the levy of penalty under Section 271(1), Sub-section (2) contemplates such a firm reverting to its position as an unregistered firm by a legal fiction, as it were. Thus, the assessment on the firm is not really the criterion for the purpose of levy of penalty. It is the imaginary state of affairs postulated by the section that has to be taken into account. We have to consider the question of levy of penalty only in the light of Section 271(2). There is no dispute in this case about the tax being calculated on the basis of the firm being an unregistered firm. The dispute arises only when it relates to the assessee's claim for deduction of the annuity deposit out of the total income. Chapter XXII-A was introduced by the Finance Act of 1964 with effect from 1st April, 1964, in order to provide for annuity deposits being made by certain classes of assessees. Section 280A describes the categories of assessees who are liable to pay annuity deposit. One of those categories is an unregistered firm. Section 280C, as it was then in force, provided:
' (1) Where......any Central Act enacts that any person to whom theprovisions of this Chapter apply shall make for any assessment year an annuity deposit with the Central Government at any rate or rates, such person shall make such deposit at that rate or those rates in. accordance with, and subject to the provisions of, this Chapter in respect of the adjusted total income of the previous year or previous years, as the case may be.
(2) In respect, of the adjusted total income in relation to which an annuity deposit is to be made under Sub-section (1), such deposit shall...be made in advance in accordance with the provisions of Sections 280E to 280-1. '
10. Section 280-O provides ;
'Notwithstanding anything to the contrary contained in the provisions of this Act relating to the computation of income chargeable under any head of income, the annuity deposit required to be made under this Chapter shall, subject to the provisions of Sub-section (2), be allowed as a deduction in computing the total income assessable for the assessment year in respect of which the annuity deposit is required to be made....'
11. Sub-section (2) of Section 280-0 provides for the manner of adjustment or deduction of the annuity deposit made. It is required to be deducted from the income, if any, under the head 'Salaries' and thereafter from the income under any other head.
12. Considering the question purely as a question of interpretation of Section 280-O it would be clear that the annuity deposit ' required to be made ' under Chap. XXII-A would have to be allowed as deduction. Subsequently, this provision has been amended so that if no payment was made, no deduction would be admissible and if the, annuity deposit was less than what was actually due or required to be made under Chap. XXII-A, then, the deduction would be confined to the actual amount paid.
13. The question for our consideration is, whether in the present case, where no annuity deposit was actually made by the assessee, the assessee would be eligible for the deduction of the said amount for the purpose of computation of penalty treating the firm as an unregistered firm. The language of the provision, viz., ' required to be made under this chapter ' envisages deduction being given of the amount envisaged as payable by the statute even if the amount had not been actually paid by the assessee. The actual payment is not the statutory criterion. In other words, supposing an individual was liable to pay annuity deposit and he was also liable to pay penalty under Section 271(1), the computation of tax would have to be on the basis of the annuity deposit statutorily due from him and the annuity deposit so due, irrespective of payment, would, therefore, have to be deducted out of the total income. The fact that the amount was not actually paid is not relevant on the language of the provision as it then stood.
14. The amendment made to Section 280-O does not really affect the registered firm, which is treated as an unregistered firm for the purpose of levy of penalty under Section 271(2). Under the amended law, provision was made for deducting only the amount actually paid. A registered firm treated as an unregistered firm, is under no obligation to pay annuity deposit. The registered firm would be eligible for the deduction of the amount required to be made under Chap. XXII-A. The proviso to Section 280-0 would not strictly apply to such a case, as the registered firm cannot pay any such deposit under the law.
15. Both the Gujarat and Karnataka High Courts had occasion to consider the identical question. In the Gujarat decision in CIT v. Gujarat Automobiles : 105ITR588(Guj) , while considering an identical case of a registered firm being treated as an unregistered firm, it was held that since the amount of penalty is co-related under Clause (i) of Section 271(1) to the amount of tax, the amount of tax payable by the firm if it were an unregistered firm would certainly arise and in ascertaining that figure, the amount of annuity deposit required to be made has to be deducted. Similarly, in Addl. CIT v. Khanchand Thakurdas : 114ITR223(KAR) , the Karnataka High Court held that the income-tax payable by an unregistered firm had to be determined after allowing deduction for annuity deposit which the unregistered firm was liable to provide and that the law did not provide that such a deduction should not be made unless the annuity deposit had actually been made. That such a deposit had not been made, in the view of the learned judges, had no effect on the right of the assessee to claim a deduction in respect of the annuity deposit required to be made by him.
16. The learned counsel for the revenue submitted that Section 271(2) indicated a statutory fiction of treating a registered firm as an unregistered firm and that the fiction had to be confined only to its legitimate limits. He submitted that, if so confined, the assessee would not be eligible for deduction of the annuity deposit. We are unable to agree with him. Section 271(2), which has already been extracted, clearly provides for the computation of tax treating the registered firm as an unregistered firm. The provisions applicable to an unregistered firm include Sections 280A, 280C and 280-O. We will have to give full effect to these provisions also in making the computation of the tax due from the unregistered firm in order to enable the computation of penalty leviable on it. We cannot stop half way imagining that we have reached the limit to the statutory fiction.
17. Though this question in the present form did not arise for consideration in P. Subyamaniam & Bros. v. CIT : 106ITR508(Mad) , the interprctation to be placed on Section 271(2) was set out by this court in the following words (p. 511);
'The argument of the learned counsel for the assessee is that the fiction created by Sub-section (2) is only for the purpose of payment of the penalty, and not for the purpose of assessing the tax as such. In other words, according to the learned counsel, the tax payable by a registered firm has to be first assessed, and once that has been done, it is on that tax the penalty has to be calculated at two per cent, for every month of default. We are unable to accept this contention. The language of Section 271(2) is clear and definite and is not capable of such an interpretation. As per Sub-section (2) of Section 271, the tax payable by a registered firm has to be assessed as if it were an unregistered firm, and on the tax so assessed, the penalty has to be computed. As a matter of fact, the word 'amount' occurring in Sub-section (2) emphasises this construction, because, according to Sub-section (2), ' the penalty imposable under Sub-section (1) shall be the same amount as would be imposable on that firm if that firm were an 'unregistered firm' '. The word 'amount' can be given the meaning contemplated by Section 271(2) only when the tax is assessed in the hands of the registered firm as if it were an unregistered firm, and, on that, the penalty is calculated as provided in Section 271(1). Further, Section 271(2) would be rendered nugatory if this contention were to be accepted. The very object of Section 271(2) is to treat a registered firm on a par with any other assessee, with reference to the penalty, once it commits default, notwithstanding the privilege it enjoys with regard to the quantum of tax payable by it.'
18. The legal position set out above would squarely apply to the facts of this case, so that the registered firm would have to be treated as an unregistered firm to the extent necessary in regard to the calculation of tax.
19. The result is, the questions referred to us for the two years are answered in the affirmative and in favour of the assessee. The assessee would be entitled to its costs. Counsel's fee Rs. 500. One set.