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Issues involved: The judgment deals with the imposition of penalties on a registered firm for defaulting in submitting tax returns for assessment years 1966-67 and 1969-70, and the interpretation of provisions u/s 271(1)(a) and u/s 271(2) of the Income Tax Act, 1961.
Imposition of Penalties: The Income Tax Officer (ITO) imposed penalties on the firm for the years 1966-67 and 1969-70 under s. 271(1)(a) read with s. 271(2) of the Act, due to the firm's failure to submit returns without reasonable cause. The penalties were calculated at 2% per month for the period of default. However, the penalties were set aside by the Appellate Authority Commissioner (AAC) and upheld by the Tribunal, leading to a reference to the High Court. Interpretation of Provisions: The main question before the court was whether a registered firm could be liable to pay penalties under s. 271(1)(a) read with s. 271(2) when the assessed tax was a negative figure. The court considered the assessed tax for both years, which was lower than the advance tax paid by the firm. The Revenue argued that a registered firm must face penalties for defaulting in filing returns, but the court disagreed, citing a previous case (CIT v. Maskara Tea Estate) where it was held that penalties should be determined based on the actual assessed tax, not a notional tax. Legal Interpretation: The court highlighted the 1974 amendment to s. 271, which clarified that penalties should be calculated as "a sum equal to two per cent. of the assessed tax" and defined "assessed tax" as the actual tax paid minus any advance payments. The court emphasized that penalties should not be imposed if the advance tax paid covers the full tax liability, as penalizing in such a case would not serve the Revenue's interest in tax collection. Conclusion: The court concluded that the penalties imposed on the firm were not justified under s. 271(2) of the Act, as the assessed tax was a negative figure due to the advance tax payments exceeding the actual tax liability. Therefore, the court ruled in favor of the assessee, holding that the firm was not liable to pay penalties in the given circumstances.
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