1993 (11) TMI 94 - AT - Income Tax

Issues Involved:
1. Levy of penalty under section 271(1)(a) of the Income-tax Act, 1961.
2. Reasonable cause for delay in filing the return of income.
3. Role of the managing partner and other partners in filing the return.
4. Impact of criminal proceedings on the firm's operations and return filing.
5. Previous conduct of the assessee in filing returns.
6. Assessment of the explanation provided by the assessee regarding the loss or misplacement of account books.
7. Consistency in the treatment of similar cases by the tax authorities.

Detailed Analysis:

1. Levy of Penalty under Section 271(1)(a) of the Income-tax Act, 1961:
The primary issue in this appeal is the levy of penalty on the assessee for the delayed filing of the return of income for the assessment year 1986-87. The assessee, a firm of Abkari Contractors, failed to file the return by the extended due date of 31-10-1986 and subsequently ignored multiple notices from the tax authorities, ultimately filing the return on 1-3-1989, resulting in a delay of 31 months. The Assessing Officer (AO) concluded that the explanation provided by the assessee was false and levied a penalty of Rs. 1,21,231 under section 271(1)(a).

2. Reasonable Cause for Delay in Filing the Return of Income:
The assessee argued that the delay was due to the managing partner, Shri P.K. Narayanan, being involved in criminal proceedings, which led to his arrest and subsequent custody from 29-11-1986 to 9-3-1989. This situation caused significant disruption in the firm's operations and family affairs, leading to the delay in filing the return. Despite these circumstances, the AO and the learned departmental representative contended that the firm, consisting of six partners, should have managed to file the return through other partners.

3. Role of the Managing Partner and Other Partners in Filing the Return:
The partnership deed designated Shri P.K. Narayanan as the managing partner responsible for the day-to-day affairs of the firm. The defense argued that the criminal proceedings against Narayanan, which included his wife and son as prosecution witnesses, caused severe distress and dislocation, making it unreasonable to expect them to file the return. The AO argued that other partners could have signed and verified the return under section 140(cc), but this was not done.

4. Impact of Criminal Proceedings on the Firm's Operations and Return Filing:
The criminal proceedings had a profound impact on the firm's ability to function normally. The managing partner's arrest and the involvement of his family members as prosecution witnesses created an environment of stress and disruption, which the tribunal found to be a reasonable cause for the delay. The tribunal noted that the investigations and raids by the CBI and State Police could have led to the loss or misplacement of account books, further complicating the return filing process.

5. Previous Conduct of the Assessee in Filing Returns:
The AO highlighted the assessee's history of delayed return filings for the preceding three years, with delays of 14, 15, and 17 months respectively. This pattern of habitual default was used to argue against the credibility of the assessee's explanation. However, the tribunal considered the unique circumstances of the current assessment year and the impact of the criminal proceedings on the firm.

6. Assessment of the Explanation Provided by the Assessee Regarding the Loss or Misplacement of Account Books:
The assessee consistently maintained that the account books for the relevant assessment year were either lost or misplaced. The tribunal found this explanation plausible given the raids and the chaotic circumstances surrounding the criminal case. The tribunal noted that the assessee had maintained books in previous years, and the absence of books for this particular year was likely due to the extraordinary situation.

7. Consistency in the Treatment of Similar Cases by the Tax Authorities:
The tribunal referenced the case of Polakulath Wines, where the managing partner was also Shri Narayanan, and the return was filed late with no penalty imposed. Additionally, the tribunal noted that the Dy. Commissioner of Income-tax had waived 50% of the interest for the same assessment year on the grounds of lost or misplaced books. These precedents supported the tribunal's decision to cancel the penalty in the present case.

Conclusion:
The tribunal concluded that the assessee had reasonable cause for the delay in filing the return of income due to the extraordinary circumstances surrounding the criminal proceedings against the managing partner. The penalty levied under section 271(1)(a) was therefore cancelled, and the appeal of the assessee was allowed.

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