1958 (11) TMI 2 - SC - Income Tax

Whether under section 28(1) read with section 18A(9) of the Act, it is competent to the Income-tax authorities to impose a penalty on a person who has failed to comply with section 18A(3) of the Act. ? Held that - It was competent to the Income-tax authorities to impose a penalty under section 28 read with section 18A(9)(b) where there has been a failure to comply with section 18A(3). Set aside the order of the court below and answer the reference in the affirmative. Appeal allowed.

Summary

Issues Involved:
1. Vires of an order made under section 28 read with sections 18A(3) and 18A(9) of the Indian Income-tax Act, 1922.
2. Interpretation of section 18A(9)(b) read with section 28 regarding the imposition of a penalty for failure to comply with section 18A(3).
3. Application of legal fiction under section 18A(9)(b).

Issue-wise Detailed Analysis:

1. Vires of an order made under section 28 read with sections 18A(3) and 18A(9) of the Indian Income-tax Act, 1922:
The respondent had not been assessed to income-tax prior to the assessment year 1948-49. He made suo motu returns for the assessment years 1948-49 and 1949-50, and the Income-tax Officer assessed the income for these years. The correctness of these assessments was not in question. The issue arose from an order made on October 9, 1950, under section 28 read with sections 18A(3) and 18A(9), imposing penalties for failure to comply with section 18A(3).

2. Interpretation of section 18A(9)(b) read with section 28 regarding the imposition of a penalty for failure to comply with section 18A(3):
Section 18A(3) mandates that any person not previously assessed should send an estimate of tax if their income is likely to exceed six thousand rupees. Section 18A(9) deems failure to comply with section 18A(3) as a failure to furnish the return of total income, applying the provisions of section 28 accordingly. Section 28 provides for penalties in cases of failure to furnish returns or deliberately furnishing inaccurate particulars.

The High Court held that section 28 did not cover failure to comply with section 18A(3) as it required notice under sections 22(1) or 22(2). However, the Supreme Court found that section 18A(9)(b) created a legal fiction that failure to send an estimate under section 18A(3) is deemed a failure to furnish a return under section 22. This fiction implies that the conditions for issuing a notice under section 22 are deemed to be satisfied, allowing the imposition of penalties under section 28.

3. Application of legal fiction under section 18A(9)(b):
The legal fiction in section 18A(9)(b) treats the failure to send an estimate under section 18A(3) as a failure to furnish a return under section 22. This fiction requires assuming all facts necessary for failure to furnish a return, including the issuance of a notice under section 22. The Supreme Court emphasized that legal fictions must be fully applied to achieve the legislative intent, as illustrated by Lord Asquith's observations in East End Dwellings Co. Ltd. v. Finsbury Borough Council.

The court concluded that the fiction in section 18A(9)(b) means notices under section 22 are deemed to have been issued, satisfying the conditions for imposing penalties under section 28. The respondent's argument that section 18A(9)(b) would be nugatory if sections 22(1) and 22(2) did not apply was rejected. The court noted that interpreting the statute to avoid rendering it ineffective aligns with the principle of "utres magis valeat quam pereat."

Conclusion:
The Supreme Court held that it was competent for the Income-tax authorities to impose a penalty under section 28 read with section 18A(9)(b) for failure to comply with section 18A(3). The order of the lower court was set aside, and the reference was answered in the affirmative. The appellant was awarded costs for both the Supreme Court and the lower court proceedings. The appeal was allowed.