1960-VIL-63-KAR-DT

Equivalent Citation: [1961] 41 ITR 125 (Mys)

MYSORE HIGH COURT

Dated: 30.11.1960

S. NARAYANAPPA AND BROTHERS

COMMISSIONER OF INCOME-TAX, MYSORE

K. Srinivasan, for the Appellant

G. R. Ethirajulu Naidu, for the Respondent

Bench

A. R. SOMANATH IYER and K. S. HEGDE, JJ.

JUDGMENT

SOMNATH IYER, J.

This is a reference under the provisions of section 66(1) of the Income-tax Act made by the Income-tax Appellate Tribunal, Hyderabad Bench, on an application made by an assessee which was a Hindu undivided family during the relevant assessment years.

In respect of income of the assessee during the four assessment years to which this reference relates, viz., 1951-52, 1952-53, 1953-54, and 1954-55, the assessee committed default in furnishing its return, although called upon to do so by a notice issued to it under the provisions of section 22(4) of the Act. After the Income-tax Officer completed his assessment under section 23(4) of the Act, he issued a notice to the assessee why penalties should not be imposed on it under the provisions of sections 28(1)(a) and 28(1)(b) of the Act for failure to furnish the return under section 22(2) and for failure to produce the accounts as required by the notice issued under section 22(4) of the Act. After hearing the assessee, the Income-tax Officer imposed penalties under both these clauses of sub-section (1) of section 28 of the Act, amounting in the aggregate to a sum of ₹ 15,278. The Income-tax Officer did not however quantify the penalties imposed under those two clauses separately. In respect of the default relating to the year 1951-52, as against the maximum penalty of ₹ 4,315 which according to the Income-tax Officer could have been imposed on the assessee, a penalty of ₹ 1,438 was imposed. Similarly for the assessment years 1952-53, 1953-54 and 1954-55, as against the maximum penalties of ₹ 11,171, ₹ 13,813 and ₹ 33,080 which according to the Income- tax Officer could have been respectively imposed upon the assessee, he imposed penalties of ₹ 3,723, ₹ 4,604 and ₹ 5,513. From those orders the assessee appealed to the Appellate Assistant Commissioner and to the Income-tax Appellate Tribunal. Both those sets of appeals were dismissed. The assessee applied for a reference to be made to this court of two questions of law which were formulated by the assessee and those two questions are the questions before us now. They read:

"(1) When the defaults to comply with the notices under section 22(2) and under section 22(4) of the Income-tax Act are committed by an assessee, whether the Income-tax Officer has got right to levy penalties under both sub-sections (1)(a) and (1)(b) of section 28 of the Income-tax Act?

(2) Whether an order passed by the Income-tax Officer under section 28(1)(a) and under section 28(1)(b) is opposed to law if the quantum of penalty for each default under section 28(1)(a) and under section 28(1)(b) is not specified in the order?"

It will be pointed out by me--and it had also to be admitted by Mr. Srinivasan appearing for the assessee--that the two questions which the assessee wanted to be referred to this court did not bring out the real issue between the parties. Now, before proceeding to consider the contentions which were urged on behalf of the assessee before the various Income-tax authorities, it would be necessary to set out the relevant provisions of section 28 of the Income-tax Act.

"28. (1) If the Income-tax Officer, the Appellate Assistant Commissioner or the Appellate Tribunal, in the course of any proceedings under this Act, is satisfied that any person--

(a) has without reasonable cause failed to furnish the return of his total income which he was required to furnish by notice given under sub-section (1) or sub-section (2) of section 22 or section 34 or has without reasonable cause failed to furnish it within the time allowed and in the manner required by such notice, or

(b) has without reasonable cause failed to comply with a notice under sub-section (4) of section 22 or sub-section (2) of section 23, or

he or it may direct that such person shall pay by way of penalty, in the case referred to in clause (a), in addition to the amount of the income-tax and super-tax, if any, payable by him, a sum not exceeding one and a half times that amount and in the cases referred to in clauses (b) and (c), in addition to any tax payable by him, a sum not exceeding one and a half times the amount of the income-tax and super- tax, if any, which would have been avoided if the income as returned by such person had been accepted as the correct income..........."

It would not be necessary for me to set out the other parts of this section.

Now in this case, the Income-tax Officer imposed a penalty on the assessee under clause (a) of sub-section (1) for failure on the part of the assessee to furnish its return in compliance with the notice given to it under sub-section (2) of section 22. The maximum penalty which he could have imposed under the provisions of this sub-section as provided by that sub-section is a sum equivalent to one and a half times the tax determined as payable by the assessee. Under clause (b) of this sub- section, the Income-tax Officer imposed a penalty for failure to produce the accounts though called upon to do so under sub-section (4) of section 22. The maximum penalty which he could have imposed as provided by sub-section (1) of section 28 is a sum equivalent to one and a half times the amount of income-tax and super-tax which would have been avoided if the tax had been determined on the basis of the return furnished by the assessee.

It is not Mr. Srinivasan's contention that the assessee in this case did not fail to furnish its return in compliance with the notice issued to it under section 22(2) of the Act. He does not also dispute that such failure did make the assessee liable for a penalty under section 28(1)(a). But the argument presented by him before us was that this was not a case in which the Income-tax Officer could at all have imposed a penalty on the assessee under section 28(1)(b). According to Mr. Srinivasan, the language of sub-section (1) of section 28 makes it clear that no penalty could be imposed on an assessee under section 28(1)(b) of the Act if such penalty is proposed to be imposed for failure to produce by an assessee of his accounts when called upon to do so under section 22(4), if such failure is not preceded by the furnishing of a return under section 22(2) of the Act. The contention urged before us is that the provision contained in section 28 for the quantification of the penalty which may be imposed under section 28(1)(b) makes it clear that in cases where the assessee has furnished no return at all, but has failed to produce his accounts when called upon to do so under section 28(4), it would not be possible for the Income-tax Officer to impose any penalty on the assessee since its quantification is, under the provisions of the Act, absolutely impossible.

As already stated, in cases where a penalty is proposed to be imposed under section 28(1)(b), the maximum penalty which could be so imposed is a sum representing one and a half times the difference between the tax payable on the income returned by the assessee and the tax payable on the income as determined under the Act. The two factors on the basis of which the amount of the penalty payable can be determined by the Income-tax Officer are, the tax payable by the assessee on the return furnished by him and the tax as determined by the Income-tax Officer. As the assessee did not at all furnish a return to the Income-tax Officer, though called upon to do so under section 22(2), one of the factors which should form the basis for the quantification of the penalty being non-existent, it seems to me clear that it would not be possible at all for an Income-tax Officer, to impose any penalty on such assessee. The view that I take is, in my opinion, what is indicated by the plain rational meaning to be given to the language of section 28.

In the portion specifying the maximum penalty which may be imposed on an assessee under section 28(1)(b) the words "a sum not exceeding one and a half times the amount of the Income-tax and super-tax, if any, which would have been avoided if the income as returned by such person had been accepted as the correct income" occur. The words "the income as returned by such person" are unambiguous and make it clear that for the imposition of penalty under section 28(1)(b) the indispensable condition precedent is that before the assessee commits the default referred to in section 28(1)(b) such default must have been preceded by the production of a return under section 22(2). If the assessee has not furnished any such return, it would not be possible for the Income-tax Officer to measure the penalty with reference to any maximum, the determination of the maximum itself being one which he would not find it possible to do.

But the learned Government Pleader at one stage urged before us that the mere fact that an assessee has not produced a return before the Income-tax Officer in a case like the one which is before us, would not necessarily make it incompetent for the Income-tax Officer to impose a penalty under section 28(1)(b). What was urged before us was that in a case where an assessee has furnished no return at all before the Income- tax Officer, it should be presumed for the purposes of section 28(1)(b) that he has furnished a return of his income intimating the Income-tax Officer that his income is nil. It seems to me that the language of section 28(1) does not admit of any such construction since the clear requirement of the provisions of this sub-section is that an assessee on whom a penalty is proposed to be imposed under section 28(1)(b) should have in the first instance furnished his return. That, in my opinion, is the ordinary and grammatical meaning of the words occurring in the Act. To interpret the language of this provision in the manner suggested by the learned Government Pleader would, in my opinion, be too artificial and too far-fetched to commend itself for acceptance. Although it is true that the provisions of a statute like those contained in section 28(1)(b) have to receive a construction so as to promote the object of the statute, it is clear that when we interpret a penal provision like that contained in section 28(1)(b), the interpretation we should place upon it must accord with reason and justice and must be in accordance with the plain ordinary and rational meaning of the words contained in those provisions. So interpreted, I would not, in my opinion, be right in placing on section 28(1)(b) the construction for which the learned Government Pleader contends.

There is another reason why we should reject the argument addressed before us by the learned Government Pleader. If, as contended by him, an assessee who has furnished no return before the Income-tax Officer must be regarded to have nevertheless in law furnished a return intimating the Income-tax Officer that there was no assessable income of his during the relevant assessment year, the incongruous result that would follow would be that no penalty can be imposed on any assessee by the Income-tax Officer under section 28(1)(a) for failure to furnish a return. The assessee could, when the Income-tax Officer proposes to impose a penalty on him for failure to furnish a return, turn round and contend that the omission on his part to furnish a return is equivalent in law to his furnishing a return intimating the Income-tax Officer that there was no assessable income of his which could be taxed. A construction resulting in a consequence so absurd as that should, in my opinion, be avoided.

At one stage it appeared to me that if we should accept the construction suggested by Mr. Srinivasan appearing on behalf of the assessee it would lead to the result that an assessee who furnished a return, though late, would be in a somewhat more disadvantageous position than one who had furnished no return at all. An assessee who furnished a return though not within the period allowed by the Act, incurs the risk of a penalty under section 28(1)(b) although an assessee, who committed contumacious default in furnishing his return and produced none, was not in any such jeopardy. But on further reflection it appears that this seeming incongruity is capable of the explanation that the Legislature intended that a more serious view should be taken of the conduct of a person who makes a false and inaccurate return than that of one who furnishes no return at all.

In the view that I have taken it is clear that the Income-tax Officer, in this case, in which the assessee produced no return at all, though called upon to do so under section 22(2) of the Act, had no power to impose any penalty on the assessee under section 28(1)(b) for failure on his part to produce his accounts which he was required to produce under section 22(4) of the Act. That being the position, portions of the penalties imposed on the assessee in this case for each of these four assessment years were imposed without the authority of law. But unfortunately the omission on the part of the Income-tax Officer to separate the penalties imposed under section 28(1)(a) from those imposed under section 28(1)(b) makes it difficult for the Income-tax authorities to identify that part of the penalty which is imposed under section 28(1)(a) as distinct from that imposed under section 28(1)(b).

I therefore, take the view that in a case where an assessee has produced no return at all before the Income-tax Officer but has failed to produce his books of account when called upon to do so under section 22(4) of the Act, it would not be within the competence of an Income-tax Officer to levy a penalty under section 28(1)(b) although it would be entirely within his power to levy a penalty under section 28(1)(a).

It is this principle on the basis of which we should, in my opinion, answer the reference made to us by the Income-tax Appellate Tribunal. As I have already stated, the question formulated by the Income-tax Appellate Tribunal, although it did so on the basis of the application made by the assessee for a reference, does not bring out the real question to be answered by us. We, therefore, resettle the questions by substituting for the first question referred to us by the Income-tax Appellate Tribunal the question as hereunder:

"Whether the Income-tax authorities can levy penalties on an assessee both under clauses (a) and (b) of section 28(1) of the Income- tax Act, when the assessee had committed default by not filing return at all though required to do so by a notice under section 22(2) of the Act and by further not complying with a notice under section 22(4) of the Act?"

That this question as resettled by us is the real question which has to be answered by us is what has been submitted to us both by the learned Government Pleader and by Mr. Srinivasan, the learned advocate for the assessee. Our answer, in my opinion, to this question should be in favour of the assessee. In my opinion, the Income-tax authorities cannot levy penalties on the assessee both under clauses (a) and (b) of section 28(1) of the Income-tax Act when the assessee has committed defaults by not filing a return at all though required to do so under section 22(2) of the Act and by further not complying with the notice under section 22(4) of the Act. In a case like that the only penalty which can be imposed upon an assessee is one under section 28(1)(a) of the Act.

Our answer to this question makes it unnecessary for us to answer the second question referred to us which has become purely academic. As already pointed out by me, the omission on the part of the Income- tax Officer in this case to separate the two sets of penalties has made it impossible for any one to identify the penalty imposed under section 28(1)(a). The question as to whether it is incumbent on the Income-tax Officer in all cases where he imposes penalties both under clauses (a) and (b) of section 28(1) to separately quantify the penalties imposed under each of these clauses is one which does not arise for consideration and we should not, in my opinion, express any opinion on it.

In the circumstances of this case it does not appear to me that we should direct the Commissioner of Income-tax to pay the costs of the assessee.

HEGDE, J.--I agree.

Reference answered accordingly.