COMMISSIONER OF INCOME-TAX VS JINDAL BROTHERS, 1998 PTD-PATNA-HIGH-COURT-INDIA 3397 (1996)

Income-tax---

----Penalty---Firm---Delay in filing returns---Delay in filing returns by registered firm---Advance tax paid by firm in excess of assessed tax---Penalty cannot be imposed treating firm as an unregistered one---Indian Income Tax Act, 1961, S.271.

In the case of Ganesh Dass Sreeram v. ITO (1988) 169 ITR 221 (SC), the Supreme Court was considering the question of levy of interest for delay by a registered firm in filing returns. It held that where the advance tax duly paid covers the entire amount of tax assessed, there is no question of charging the registered firm with interest even though the return is filed by it beyond the time allowed, regard being had to the fact that the payment of interest is only compensatory in nature. As the entire amount of tax is paid by way of advance tax, the question of payment of any compensation does not arise. These observations have been interpreted unanimously by different High Courts as laying down the proposition that where the amount of tax paid by way of advance tax or deducted at source covers the amount of tax assessed, no penalty can be imposed under section 271(1)(a) of the Income Tax Act, 1961. It would make no difference whether the assessee is a registered or unregistered firm. It had been held that the provisions of subsection (2) of section 271 are attracted for quantification of the penalty only when it is impossible under subsection (1). In that event, the registered firm loses the benefit of registration, and the penalty for which it has become liable has to be calculated depriving it of the benefit of registration and treating it as an unregistered firm. While deciding the liability for penalty under subsection (1) effect has to be given to subsection (2) which comes into operation only to make the formula for calculating the penalty under subsection (1) workable. When the assessed tax is nil, it would be impracticable to impose penalty under subsection (2) of section 271. There is no other decision of any High Court taking a contrary view, subsequent to the decision of the Supreme Court in Ganesh Dass Sreeram's case (1988) 1969 ITR 221. Hence, penalty cannot be levied on a registered firm by treating it as an unregistered firm in terms of section 271(2) of the Act when no tax is payable by the registered firm after giving credit to advance tax paid and/or tax deducted at source.

Ganesh Dass Sreeram v. ITO (1988) 169 ITR 221 (SC) applied.

CIT v. Braham Prakash & Co. (1989) 179 ITR 422 (P & H): CIT v. Builders Engineers Co. (1989) 175 ITR 317 (Raj.); CIT v. Deepak Trading Co. (1994) 208 ITR 304 (Cal.) and CIT v. Permilla Singh & Co. (1994) 207 ITR 887 (Orissa) fol.

Jamunadas Mannalal v. CIT (1985) 152 ITR 261 (Pat.) held no longer good law.

CIT v. Fomra Bros. (1980) 122 ITR 312 (Mad.); CIT v. India Automobiles (1983) 143 ITR 774 (Bom.); CIT v. Maskara Tea Estate (1981) 130 ITR 955 (Gauhati); CIT (Addl.) v. Murugan Tmber Depot (1978) 113 ITR 99 (Mad.); CIT v Priya Gopal Bishoyee (1981) 127 ITR 778 (Cal.); Delux Publishing Co. v. (Addl.) CIT (1981) 127 ITR 782 (MP) and Venkata Krishnayya Naidu & Son v. CIT (1984) 150 ITR 545 (AP) ref.

K.K. Vidyarthi and S.K. Sharan for the Commissioner. K.N. Prasad and Chiranjib Ranjan for the Assessee.

JUDGMENT

SACHCHIDANAND JHA, J.---In these references under section 256(1) of the Income Tax Act, 1961, at the instance of the Revenue, a common question of law has been referred to this Court for opinion. The question of law, as framed by the Tribunal, is;

"Whether on a proper construction of section 271(1)(a) read with section 271(2) of the Income Tax Act, 1961, the Tribunal was justified in upholding cancellation of penalty by the Appellate Assistant Commissioner in the case of the assessee (registered firm)'?

The material facts are as follows:

The assessee is a registered firm. It filed returns of income for the assessment years 1973-74 to 1976-77 on July 28, 1977, as against the due dates being June 30, 1973, for the assessment year 1973-74, June 30, 1974, for the assessment year 1974-75, June 30, 1995 for the assessment year 1975-76 ad June 30, 1976, for the assessment year 1976-77. The Income-tax Officer in the course of assessment proceedings initiated penalty proceedings for late filing of the returns. The assessee submitted an explanation to the effect that the delay was on account of non-finalisation of the accounts by the accountant. The explanation was not accepted by the Income-tax Officer, who imposed penalty under section 271(1)(a) amounting to Rs.3,108, Rs.190, Rs.832, and Rs.4,990 for the assessment years in question, respectively. The Appellate Assistant Commissioner on appeal preferred by the assessee took the view that since the tax assessed was less than the tax paid by way of advance tax and upon completion of assessment refund had also been granted by the Income-tax Officer, no penalty under section 271(1)(a)(i) could be imposed. The Appellate Assistant Commissioner also accepted the case of the assessee regarding late filing or late-filing of the returns on facts. He, accordingly, cancelled the penalties. It was the turn of the Revenue to go in appeal before the Income-tax Appellate Tribunal. The Tribunal, following the decisions of the Madras High Court in Addl. CIT v. Murugan Timber Depot (1978) 113 ITR 99 and CIT v. Fomra Bros. (1980) 122 ITR 312 and a decision of the Gauhati High Court in CIT v. Maskara Tea Estate (1981) 130 ITR 955. held that where no tax is found payable, as a result of the assessment against a registered firm, there is no question of imposing any penalty under section 271(1)(a) of the Act for non- filing or late filing of the returns, and, accordingly, upheld the first appellate order of the Appellate Assistant Commissioner. Upon an application under section 256(1) of the Income Tax Act, however, the Tribunal made the reference of the aforestated question to this Court for its opinion.

Section 271(1)(a) of the Income Tax Act, as it stood during the relevant period, provided for imposition of penalty for failure to furnish return of total income under section 139(1) or section 139(2) or section 148. Where the person liable to pay penalty is a registered firm, in terms of section 271(2), the same penalty imposable under subsection (1) is to be imposed as if the firm were an unregistered firm. It may be stated that the rates of taxation with respect to registered firms are lower compared to rates applicable to unregistered firms. In the present case, the assessment was made and the tax already paid by the assessee by way of advance tax was found to be more than the tax assessed, treating it (the assessee) as a registered firm. The contention of the Revenue is that in terms of section 271(2) by legal fiction, the assessee had to be treated as an unregistered firm and then' its tax liability assessed. By making the assessment treating it to be a registered firm it cannot be said that the tax which it was liable to pay as an unregistered firm was less than the tax already paid by it by way of advance tax and, therefore, its net tax liability was nil and, thus, no penalty was imposable.

Having regard to the nature and the crux of the dispute, I think the question, which really arises for consideration may be refrained as follows:

"Whether penalty under section 271(l)(a) of the Income Tax Act, 1961, can be levied on a registered firm by treating it as an unregistered firm in terms of section 271(2) of the Act when no tax is payable by the registered firm after giving credit to advance tax paid and/or deducted at sources?"

Mr. K.K. Vidyarthi, learned standing counsel appearing for the Revenue, has placed reliance on a Full Bench decision of this Court in Jamunadas Mannalal v. CIT (1985) 152 ITR 261. While dealing with a somewhat similar question this Court held (at page 288):

"Legal fiction which is created by subsection (2) of section 271 is independent of the tax liability. Once it is found that there is a default so as to attract the penal provisions under section 271(1)(a), subsection (2) of section 271 shall come into play. If the assessee is a registered firm, the legal fiction created by it shall not permit to give to the assessee benefits of its being a registered firm. The assessee must answer the requirements as if it is not a registered firm. Its assessed tax for the purpose of imposition of penalty shall be that which shall be determined on the footing that it is not a registered firm."

It would appear that the decisions of the Madras High Court in Addl. CIT v. Murugan Timber Depot (1978) 113 ITR 99 end the Gauhati High Court in CIT v. Maskara Tea Estate (1981) 130 ITR 955 were brought to the notice of the Court. The learned Judges, however, dissented from the same and chose to follow the decisions of the Calcutta High Court in CIT v. Priya Gopul Bishoyee (1981) 127 ITR 778, the Madhya Pradesh High Court in Deluxe Publishing Co. v. Addl CIT (1981) 127 ITR 782 and the Bombay High Court in CIT v. India Automobiles (1983) 143 ITR 774. The decision of this Court, thus, does support the contention of the Revenue.

The contention of Mr. K.N. Prasad, learned counsel appearing for the assessee, however, was that the decision of this Court in Jamunadas Mannalal's case (1985) 152 ITR 261 (FB) cannot be treated as laying down the correct law in view of the observations of the Supreme Court in Ganesh Dass Sreeram v. ITO (1988) 169 ITR 221. It was submitted that although the said decision was rendered in the context of the provisions regarding chargeability of interest under clause (iii) of the proviso to subsection (1) of section 139 of the Income Tax Act, as the provisions stood at the relevant time, having regard to the similarity of the provisions as contained in clause (iii)(a) of the proviso to section 139(1) and section 271(2) of Act. The observations must be understood as laying down the law on the question of impossibility of penalty under section 271(1)(a) read with section 271(2) of the Act as well, as has been held by the different High Courts in subsequent decisions. The proviso to section 139(1) contained provisions regarding extension of the date for furnishing the return and the charging of interest within the extended time. So far as relevant, the proviso read as follows:

"Provided that, on an application made in the prescribed manner, the Income-tax Officer may, in his discretion, extend the date for furnishing the return-...

(iii) up to any period falling beyond the dates mentioned in clauses (i) and (ii), in which case, interest at nine per cent per annum shall be payable from the 1st day of October or the 1st day of January, as the case may be, of the assessment year to the date of the furnishing of the return---

(a) in the case of a registered firm or an unregistered firm which has been assessed under clause (b) of section 183, on the amount of tax which would have been payable if the firm had been assessed as an unregistered firm and... "(emphasis added).

Section 271(2) with which we are concerned in the present case runs as follows:

"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 subsection (1) shall be the same amount as would be imposable on that firm if that firm were an unregistered firm." (emphasis added).

It would, thus, appear that both in the matter of charging of interest and imposing penalty the two provisions aforesaid provide, by legal fiction, that the interest or penalty, as the case may be, is to be determined treating a registered firm as unregistered firm, that is, as if the firm were an unregistered firm.

The Supreme Court did not uphold the challenge to the vires of the provisions of clause (iii)(a) of the proviso but observed.

"Before we part with these appeals, we think we should clarify one situation, namely, where the advance tax duly paid covers the entire amount of tax assessed, there is no question of charging the registered firm with interest even though the return is filed by it beyond the time allowed, regard being had to the fact that payment of interest is only compensatory in nature. As the entire amount of tax is paid by way of advance tax, the question of payment of any compensation does not arise. "

These observations have been interpreted unanimously by different High Court as laying down the proposition that where the amount of tax paid by way of advance tax or deducted at source covers the amount of tax assessed, no penalty can be imposed under section 271(1)(a). It would make no different whether the assessee is a registered or unregistered firm. The Rajasthan High Court was the first to do so in the case of CIT v. Builders Engineers Co. (1989) 175 ITR 317. After noticing the above quoted observations of the Supreme Court, it stated.

"We find no reason why the same principle should not be applied also to the question of imposition of penalty when the facts on which the penalty is to be levied are the same which give rise to the liability for payment of interest and the expression used in subsection (8) of section 139 for specifying the amount on which the interest is to be calculated is substantially the same as in sub clause (i)(b) of clause (a) of subsection (1) of section 271. The Supreme Court has pointed out that since the entire amount of tax had already been paid, the question of recovering any interest does not arise. In our opinion, for the same reason where the entire amount of tax had already been paid, being deducted at source or paid in advance, the question of imposing any penalty on the 'assessed tax' does not arise, because no tax i, actually due. "

Reliance on the provisions of subsection (2) of section 271 was found to be irrelevant as the said provision merely provides for quantification of the penalty "when it is imposable". Their Lordships noticed the decision of, this Court in Jamunadas Mannalal's case (1985) 152 ITR 261 (FB) wherein it has been held that penalty under section 271(1)(a) can be levied for delay in filing the return even after charging interest under section 139(8) and observed that the decision proceeds on the basis that in such a situation, where no tax is found due after adjusting the tax deducted at source or deposited as advance tax, interest also is chargeable under section 139(8) in addition to penalty under section 271(1)(a). But in view of the Supreme Court decision in Ganesh Dass Sreeram's case (1988) 169 ITR 221, it cannot be doubted that no interest can be recovered under section 139(8) in such a situation and, therefore, the assumption on which the decision was rendered (by this Court) is no longer available. The kajasthan High Court, according, dissented from the decision of this Court. It rather chose to follow the decision in CIT v. Fomra Bros. (1980) 122 ITR 312 (Mad.) and Addl. CIT v. Murugan Timber Depot (1978) 113 ITR 99 (Mad.), which had been unsuccessfully cited before this Court, as they were found to be in tune with the decision of the Supreme Court in Ganesh Dass Screeram's case (1988) 169 ITR 221.

The above decision of the Rajasthan High Court in Builders Engineers Co.'s (1989) 175 ITR 175 ITR 317 has since been followed by the Punjab and Haryana High Courts in CIT v. Braham Prakash & Co. (1989) 179 ITR 422, the Orissa High Court in CIT v. Permilla Singh & Co. (1994) 207 ITR 887 and the Calcutta High Court in CIT v. Deepak Trading Co. (1994) 208 ITR 304. In Permilla Singh & Co.'s case (1994) 207 ITR 887, the Orissa High Court held.

"The provision of subsection (2) of section 271 are attracted for quantification of the penalty only when it is imposable under subsection (1). In that event, the registered firm loses the benefit of registration, and the penalty for which it has become liable has to be calculated depriving it of the benefit of registration and treating it as an unregistered firm. While deciding the liability for penalty under subsection (1) effect has to be given to subsection (2) which comes into operation only to make the formula for calculating the penalty under subsection (1) workable. When the assessed tax is nil, it would be impracticable to impose penalty under subsection (2) of section 271. "

The citation of the case law would not be complete without making reference to the decision of the Andhra Pradesh High Court in P. Venkat Krishnayya Naidu & Son v. CIT (1984) 150 ITR 545 taking the same view, which was upheld by the Supreme Court, vide (1991) 189' ITR (St.) 117. No decision of any High Court taking contrary view, subsequent to the decision of the Supreme Court in Ganesh Dass Screeram's case (1988) 169 ITR 221, has been brought to our notice.

Thus, as rightly submitted by counsel for the assessee, not only the preponderance of opinion of different High Courts is that where no tax is payable the question of imposing penalty under section 271(1) does not arise but as a matter of fact, after the decision in Ganesh Dass Sreeram's case (1988) 169 ITR 221 (SC), they are unanimous in saying so. The decision of this Court in Jamunadas Mannalal's case (1985) 152 ITR 261 (Patna) (1713), no doubt, has held to the contrary but in view of the observations of the Supreme Court in Ganesh Dass Screeram's case (1988) 169 ITR 221, interpreted and applied unanimously by different High Courts, the same cannot be said to be laying down the correct law on the point and, therefore, I find it difficult to follow the same.

In the above view of the matter, the decision of the Tribunal upholding the appellate order of the Assistant Commissioner cancelling the levy of penalty cannot be said to be erroneous. Consequently, the question is answered in the affirmative, that is, in favour of the assessee and against the Revenue. I would make no order as to costs.

Let a copy of this order be sent to the Income-tax Appellate Tribunal, Patna Bench, Patna.

M.Y. Iqbal, J.---I agree

M.B.A./1612/FC Order accordingly.