1971 (8) TMI 67 - HC - Income Tax

Delay in filing the return levy of penalty notice u/s 139(2) - Tribunal was not right in holding that all the taxes paid by the partners could be taken into account for determination of quantum of penalty payable by the firm under section 271(1)(i) read with section 271(2) - Whether Tribunal was justified in holding that default under section 139(1) of the Act existed only till the date when the notice under section 139(2) of the Act was served upon the assessee

Issues Involved:
1. Whether taxes paid by the partners should be considered in determining the quantum of penalty payable by the firm under section 271(1)(i) read with section 271(2) of the Income-tax Act, 1961.
2. Whether the default under section 139(1) of the Act ceases once a notice under section 139(2) is served.

Detailed Analysis:

Issue 1: Determination of Quantum of Penalty Payable by the Firm
The first issue revolves around the interpretation of "tax payable" under section 271(1)(i) of the Income-tax Act, 1961. The Tribunal held that all taxes paid by the partners could be taken into account for determining the quantum of penalty payable by the firm. However, the High Court disagreed with this interpretation.

The Court emphasized that the words "tax payable" mean "the amount of tax assessed" and not the residual tax after giving credit for taxes already paid by the partners. The Court cited the case of Vir Bhan Bansi Lal v. Commissioner of Income-tax, where it was held that "payable by him" means "to which he has been assessed," regardless of whether the tax has been paid.

The Court further clarified that section 271(2) treats a registered firm as an unregistered firm for the purpose of penalty imposition. This fiction does not extend to considering the advance tax paid by individual partners as a credit for the firm. The Court referenced Commissioner of Income-tax v. Chhotelal Kanhaiyalal, which held that the advance tax deposited by individual partners cannot be considered for calculating the penalty for the firm.

The Court concluded that the "tax, if any, payable by him" refers to the tax chargeable from the firm, and no allowance should be given for advance tax paid by individual partners. Thus, the Tribunal's decision to consider taxes paid by the partners was incorrect.

Issue 2: Continuation of Default Under Section 139(1)
The second issue concerns whether the default under section 139(1) ceases once a notice under section 139(2) is served. The Tribunal had held that the default under section 139(1) continued only until the notice under section 139(2) was served.

The Court rejected this view, stating that section 139(7) does not absolve the assessee from the obligation to file a return under section 139(1). The Court emphasized that an assessee is required to file only one return, and the issuance of a notice under section 139(2) does not condone the failure to file a return under section 139(1).

The Court referenced the case of Commissioner of Income-tax v. Indra and Company, where it was held that the issuance of a notice under section 139(2) does not imply condonation of the default under section 139(1). The Court also cited Tarzan Hosiery Private Ltd. v. Income-tax Officer, where it was held that section 139(2) allows the Income-tax Officer to call for a return before the due date under section 139(1) without any incompatibility or repugnance between the two provisions.

The Court concluded that the default in not filing a return under section 139(1) starts from the due date and continues until the return is filed, regardless of the issuance of a notice under section 139(2). Therefore, the Tribunal was incorrect in holding that the default ceased upon the service of the notice under section 139(2).

Conclusion
The High Court answered both questions in favor of the revenue and against the assessee. The Court held that:
1. The taxes paid by the partners should not be considered in determining the quantum of penalty payable by the firm.
2. The default under section 139(1) continues until the return is filed, and is not absolved by the issuance of a notice under section 139(2).

The reference was answered accordingly, and the Court suggested that the department may consider granting relief to the assessee under the law due to the harsh operation of the penal provisions in this case.

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