1976 (1) TMI 31 - HC - Income Tax

Summary

Issues:
Interpretation of penalty provisions under section 271 of the Income-tax Act, 1961 for late filing of return by a registered firm. Calculation of penalty based on total income and tax payable. Comparison of penalty computation under the Income-tax Act, 1961 with the provisions of the Indian Income-tax Act, 1922.

Analysis:
The case involved a reference by the Tribunal regarding the deduction of annuity deposit payable from the total income of an assessee-firm for the purpose of computing penalty under section 271(1)(a) of the Income-tax Act, 1961. The assessee, a registered firm, had filed its return late for assessment year 1965-66, leading to penalty proceedings. The Income-tax Officer initiated a penalty of Rs. 10,164 for the delay. The Appellate Assistant Commissioner confirmed the penalty but reduced the period of delay. The Tribunal held that the penalty should consider the deduction of annuity deposit payable by an unregistered firm from the total income. This interpretation was challenged by the revenue.

The key contention was whether the penalty computation should be based on the total income and tax payable by the assessee as assessed in the assessment proceedings. The revenue argued that the penalty should be computed by considering the total income of a hypothetical unregistered firm and the tax payable by such a firm. Reference was made to the provisions of the Indian Income-tax Act, 1922, where penalty computation was based on the tax payable by an unregistered firm on the total income of a registered firm.

However, the court noted a departure in the language of penalty provisions under the Income-tax Act, 1961, where the focus was on determining the penalty as if the firm were an unregistered firm, rather than calculating the tax payable by an unregistered firm on the same total income. The court emphasized that the penalty computation under section 271(1) must consider what the penalty would be if the firm were unregistered. This approach required taking into account the total income of the firm as if unregistered, including deductions like annuity deposit payable under Chapter 22A.

The court highlighted the importance of allowing deductions, such as annuity deposit, in computing the total income of an unregistered firm for penalty assessment purposes. The judgment aligned with the principle that if an imaginary state of affairs is to be treated as real, the consequences and incidents of that state must also be considered. Therefore, the court upheld the Tribunal's decision, ruling in favor of the assessee and directing the revenue to pay the costs of the reference.