Income-tax---

----Reference---Penalty---Failure to file returns in time---Finding by Tribunal that assessee was under bona fide belief that its income was exempt from tax---Tribunal justified in cancelling the penalty---No question of law arose---Indian Income Tax Act, 1961, Ss.256 & 271(1)(a).

Held, dismissing the application for reference, that the Tribunal had found after considering the material on record that the assessee was under the bona fide belief that its income would be exempt under section 80-P of the Income Tax Act, 1961. It was justified in cancelling the penalty. No question of law arose from its order.

Assam Cooperative Apex Marketing Society Ltd. v. Additional CIT (1993) 201 ITR 338 (SC) and CIT v. Kerala State Cooperative Marketing Federation Ltd. (1994) 207 ITR 319 (Ker.) ref.

N.R.K. Nair for Petitioner.

C.N. Ramachandran Nair for Respondent.

JUDGMENT

V. V. KAMAT, J. ---Under section 256(2) of the Income Tax Act, 1961, the Revenue seeks reference of the following three questions:

"(1)Whether, on the facts and in the circumstances of the case, the Tribunal is right in law and fact in holding that the bona fide belief entertained regarding the non-taxability of its income would constitute reasonable cause so as to take it out of the provisions of section 271(1)(a) of the Income Tax Act, 1961, and are not the findings of 'bona fide belief entertained'. wrong and unreasonable?

(2)Whether, on the facts and in the circumstances of the case and also in view of the fact that the total income determined being far more than the income returned, the Tribunal is factually correct in holding that the bona fide belief entertained by the assessee would constitute reasonable cause?

(3)Whether, on the facts and in the circumstances of the case, the Tribunal is correct in law and fact in holding that the belief regarding non-taxability of the income would constitute reasonable cause for the delay of more than two years in filing the return even after a notice under section 148 was issued on the assessee for filing their return of income?"

The assessee is engaged in procuring natural rubber in sheet form the member societies and selling them and in distributing fertilizers, pesticides, etc., again through the member societies and also in serial spraying.

The Tribunal has observed that the assessment year that followed was June 30 as its accounting year but for the assessment year under consideration it was changed to March 31, 1982. This was granted by the Assessing Officer.

The question that is required to be considered is compliance with the provisions of section 271(1)(a) of the Income-tax Act. Without any response to the notice under section 148 issued on February 21, 1985, the assessee had filed a return on June 16, 1987, on a total income of Rs.15,84,770 clamming the whole amount as exemption under section 80-P(2)(a)(iii) of the Act. The assessment appears to have been completed thereafter on February 25, 1988, on a total income of Rs.24,49,268. It is in regard to this aspect that penalty proceedings are initiated under section 271(1)(a) of the Act.

The assessee sought to explain the situation with regard to the existing legal position granting total exemption under section 80-P(2)(a)(iii) of the Act. Even though the Assessing Officer rejecting the explanation of the assessee levied penalty of Rs. 18,13,454, the appellate authority, the Commissioner of Income-tax (Appeals) cancelled the penalty by his order.

The appellate authority cancelled the penalty on the ground that the assessee had reasonable cause and bona fide belief that its income is exempted under section 80-P of the Income-tax Act.

Relying on the decision of the Supreme Court in Assam Cooperative Apex Marketing Society Ltd. v. CIT (Addl.) (1993) 201 ITR 338 to contend that such income is not exempt at the hands of the co-operative society and also the decision of this Court in CIT v. Kerala State Co-operative Marketing Federation Ltd. (1994) 207 ITR 319 (Income-tax Reference No. 33 of 1991), dated August 11, 1993, urging that the view that the assessee would be entitled to exemption was no longer good law, it was contended that in view of this position that the assessee is not entitled to exemption there could be absolutely no reasonable cause.

The Tribunal took up the question for consideration and by the order dated July 25,1994, upheld the view of the appellate authority that there was a situation under which the assessee could be said to have entertained a justifiable belief that under section 80-P of the Act the income could be exempted. The Tribunal also observed that if there is a decision of the Court governing the territorial jurisdiction, the belief based on the ratio thereof would have to be a justifiable basis for a reasonable belief and it will have to be understood that the belief was honest and understandable. Reading of the provisions of section 271(1)(a) of the Act which is the basis of the consequence arising out of favour to furnish returns, it will be seen that the situation requiring an assessee to furnish return, firstly, under section 139(1); or, secondly, in pursuance of the notice under section 139(2); and, thirdly, even in pursuance of action under section 148, if the authority is satisfied that there is absence of reasonable cause in regard to these situations then only the question of further consequential action could be legitimately contemplated.

Relying on the provisions of section 148 of the Act, in view of the position that the Assessing Officer issued a notice under section 148 of the Act, it was contended that once a notice is issued the assessee was under an obligation to comply with the notice if the issuance of the notice is in accordance with the provisions of section 148. It was contended that in such a situation satisfaction of the provisions of section 271(1)(a) of the Act would require separate consideration. Apart from the position that we find this aspect was not pressed into service before the authorities below, even if it is considered to be a question of law raised on the material existing, in our judgment, the situation would not be with any dent in regard thereto. The provisions of section 271(1)(a) of the Act would cover all the three contemplated situations. This would also be clear that even after reading the provisions of section 148 specifying that an action under section 148 of the Act postulates a prior notice which may include the requirements of section 139(2) of the Act the provision requires issuance of notice and supported by reasons in support of such issuance. At any rate initiation of penalty proceedings and the requirement to be considered in regard thereto that there is absence of reasonable cause would govern all the three situations specified hereinbefore.

It is also crystal clear that once the position of law creates a situation of reasonable and justifiable belief to act in good faith as a result thereof, such a situation of good faith would also equally govern the situation which is pressed for our consideration. The position would not alter the situation in any event.

The reasoning of the Tribunal to the effect that the material on record goes to make out a case of reasonable belief that the income would be exempt under the provisions of section 80-P, having the endorsement of judicial decision of this Court, in our judgment, would govern the situation relating to any of the occasions governed by the provisions of section 271(1)(a) of the Act. We agree with the conclusion of the Tribunal that no referable question of law arises under the above circumstances. Petition stands dismissed.

M.B.A./1221/FCPetition dismissed.