2004 (4) TMI 40 - HC - Income Tax

Penalty firm/partner - Whether Tribunal was justified in confirming the order passed by the Appellate Assistant Commissioner holding that as the penalty was imposed on the firm for delay in filing the return, no penalty was leviable on the assessee, who was a partner of the firm under section 271(1)(a)? - The appellate authority has cancelled the order of penalty on both grounds, namely, that there cannot be double penalty in the case of a firm where the partners have only the source of income from the firm and also there is reasonable cause shown by the assessee for not imposing the penalty. The Tribunal has concurred with the same. - Thus, the question under reference is answered in favour of the assessees/ partners/opposite parties and against the Department.

Summary

Issues:
Imposition of penalty on partners for delay in filing return when penalty already imposed on the firm under section 271(1)(a) of the Income-tax Act, 1961.

Analysis:
The judgment involved a reference under section 256(2) of the Income-tax Act, 1961, regarding the imposition of penalties on partners for not filing returns within the specified time frame, when penalties had already been levied on the firm. The cases revolved around partners of a firm named "M/s. Quality" in Patna, where penalties were imposed for assessment years ranging from 1973-74 to 1977-78. The partners argued that as their only income source was the share from the firm, and the firm had not filed returns, they were unaware of their share income, thus providing reasonable cause for the delay.

The Income-tax Officer imposed penalties under section 271(1)(a) of the Act on the partners, despite penalties already being imposed on the firm. The partners contended that the firm and partners were not distinct legal entities, and any penalty on the firm was essentially a penalty on the partners. They cited various judgments supporting their stance, emphasizing that the penalty on the firm translated to a penalty on the partners, hence double penalties were unjustifiable.

The High Court analyzed conflicting judgments from various High Courts, particularly focusing on the legal status of a firm and the nature of penalties. It was established that a firm, while assessable as a separate unit, was not a legal person, and penalties were essentially additional taxes. The Court agreed with the view that imposing penalties on partners after penalties on the firm amounted to double punishment, supported by precedents from Allahabad, Punjab, and Haryana High Courts.

Furthermore, the Court highlighted that the assessing authority must consider reasonable cause for delayed filings, which varies case by case. They referenced decisions emphasizing that penalties should not be imposed when sufficient cause for delays is demonstrated. Ultimately, the Court upheld the appellate authority's decision to cancel penalties on partners based on the grounds of double penalty and reasonable cause.

In conclusion, the judgment favored the partners, ruling against the Department's appeal. The Court emphasized that penalties on partners, when the firm had already been penalized, were unjust, and reasonable cause for delays should be considered before imposing penalties. The cases were disposed of accordingly, with each party bearing their own costs.