1962 (1) TMI 10 - SC - Income Tax

Whether in any event, penalty for the assessment year 1949-50 could not be imposed upon the assessee firm because there was no evidence that the Income-tax Officer was satisfied in the course of any assessment proceedings under the Income-tax Act that the firm had concealed the particulars of its income or had deliberately furnished inaccurate particulars of the income? Held that - The High Court was in error in holding that penalty could not be imposed under section 28(1)(c) upon the firm Messrs. S. V. Veerappan Chettiar & Co. after its dissolution. Appeal allowed.

Issues Involved:
1. Imposition of penalty under Section 28(1)(c) of the Indian Income-tax Act.
2. Validity of penalty imposition after the dissolution of the firm.
3. Applicability of Section 44 to registered firms.
4. Requirement of tax liability for penalty imposition.
5. Satisfaction of the Income-tax Officer regarding concealment of income.

Detailed Analysis:

1. Imposition of Penalty under Section 28(1)(c) of the Indian Income-tax Act:
The firm, S. V. Veerappan Chettiar & Co., was penalized by the Income-tax Officer for concealing particulars of its income for the assessment years 1947-48, 1949-50, and 1950-51. The penalties imposed were Rs. 20,000, Rs. 10,000, and Rs. 5,000 respectively. The firm's partner unsuccessfully sought revision from the Commissioner of Income-tax, Madras, and subsequently filed petitions under Article 226 of the Constitution in the High Court of Madras, which set aside the penalty orders.

2. Validity of Penalty Imposition After Dissolution of the Firm:
The High Court accepted the firm's plea that the firm was dissolved on April 13, 1951, and again on May 5, 1953, due to the death of a partner. It was argued that the Income-tax Officer could not impose penalties after the firm's dissolution. However, the Supreme Court referenced a recent judgment in Abraham v. Income-tax Officer, Kottayam, which held that the Income-tax Officer could impose penalties even if the firm was dissolved by the death of a partner. The court clarified that Section 44 of the Income-tax Act sets up machinery for assessing tax liability of a discontinued firm, and the term "assessment" includes both computation of income and imposition of tax liability.

3. Applicability of Section 44 to Registered Firms:
Counsel for the respondents argued that Abraham's case pertained to an unregistered firm and was not applicable to registered firms. The Supreme Court rejected this contention, stating that Section 44 applies to all discontinued firms, whether registered or unregistered. The court cited the Andhra Pradesh High Court's decision in Mareddy Krishna Reddy v. Income-tax Officer, Tenali, which involved a registered firm, to support its stance.

4. Requirement of Tax Liability for Penalty Imposition:
Counsel argued that a registered firm could not be penalized under Section 28(1) because it was not liable to pay tax under Section 23(5) of the Act. The Supreme Court dismissed this argument, noting that the definition of "person" in Section 2(a) and the General Clauses Act includes a firm. The court emphasized that liability to pay tax is not a prerequisite for penalty imposition. The Calcutta High Court's decision in Khusiram Murarilal v. Commissioner of Income-tax was cited, which clarified that a person could be liable for penalty even if not chargeable to tax.

5. Satisfaction of the Income-tax Officer Regarding Concealment of Income:
Counsel contended that there was no evidence of the Income-tax Officer's satisfaction regarding the firm's concealment of income for the assessment year 1949-50. The Supreme Court noted that the assessment order dated November 10, 1951, included an endorsement indicating the Income-tax Officer's satisfaction about the firm's concealment of income. The court clarified that satisfaction before the conclusion of the assessment proceedings, not the initiation of penalty proceedings, is required.

Conclusion:
The Supreme Court concluded that the High Court erred in holding that penalties could not be imposed on the firm after its dissolution. The appeals were allowed, and the High Court's orders were set aside. The petitions filed by the respondents were dismissed with costs awarded to the appellants. The Supreme Court reaffirmed the applicability of penalty provisions to both registered and unregistered firms, even after dissolution, and clarified the conditions under which penalties could be imposed.

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