1989 (1) TMI 60 - HC - Income Tax

Summary

Issues: Liability of partners for penalty under section 271(1)(iii) of the Income-tax Act, 1961 in respect of refund of sales tax received by the firm during the assessment year 1968-69.

The judgment pertains to the liability of partners of a firm for payment of penalty under section 271(1)(iii) of the Income-tax Act, 1961, concerning the amount received by way of refund of sales tax paid by the firm during the assessment year 1968-69. The firm, initially consisting of three partners, underwent multiple reconstitutions due to deaths and changes in partners, ultimately leaving two partners during the relevant assessment year. A refund of sales tax amounting to Rs. 4,500 was received by the firm and credited equally to the two partners without being disclosed in the firm's or partners' returns.

The Income-tax Officer treated the refund amount as deemed income of the firm under section 41(1) of the Act and imposed penalties on both the firm and the two partners. However, the Tribunal later deleted the penalties, stating that penalty provisions did not apply to deemed income. The matter was referred to the High Court, which held that deemed income under section 41(1) could attract penalties under section 271(1)(c) of the Act. The Tribunal subsequently deleted the penalties against the firm and the partners. The Revenue sought a reference, which was allowed for the firm but declined for the partners.

The High Court upheld the Tribunal's decision to delete the penalty against the firm. Regarding the partners, the Court granted the mandamus requested by the Revenue, leading to the present reference. The question referred was whether the Tribunal was right in law in deleting the penalty imposed on the partners under section 271(1)(iii) of the Income-tax Act, 1961. The Court answered in the affirmative, ruling in favor of the partners and against the Revenue.

The Court analyzed the definition of "person" under section 2(31) of the Act, which includes a firm as well. As deductions for sales tax liability were allowed to the firm, the amount received as a refund was deemed income in the firm's hands. Therefore, it was impermissible to add the refund amount received by the former partners in their individual capacity under section 41(1) of the Act. Consequently, no penalty could be imposed on the partners for the said amount. The Court concluded by upholding the Tribunal's decision to delete the penalty imposed on the partners and answered the reference accordingly, with no order as to costs.