Repaka Seetharamaswamy And Another v. Commissioner Of Income-Tax, Hyderabad.

Anantanarayana Ayyar, J.:— In compliance with the requisition of this court under section 66(2) of the Indian Income-tax Act in Civil Miscellaneous Petitions Nos. 4613 and 4614 of 1954, dated August 4, 1955, the Income-tax Appellate Tribunal, Hyderabad Bench, has stated a case regarding the assessee, a firm consisting of two partners, namely, Repaka Seetharamaswamy and Achanta Pydisetty, Pondur, as follows:

C.M.P No. 4613 of 1954: “Whether, on the facts and in the circumstances of the case, there was any justification for imposing a penalty of Rs. 4,000 under section 16 of the Excess Profits Tax Act?”

C.M.P No. 4614 of 1954: “Whether, on the facts and in the circumstances of the case, there was any justification for imposing a penalty of Rs. 2,000 under section 28(1)(b) of the Indian Income-tax Act, 1922?”

2. The facts of the case relevant for answering the above questions of law are as follows:

The assessee firm was carrying on business in yarn, food-grains and manufacture and sale of groundnut oil. For the assessment year 1946-47, the assessee duly filed a return of income on September 19, 1946. The assessee also filed a return of income for the chargeable accounting period from March 15, 1945, to March 31, 1946, in respect of the assessment under the Excess Profits Tax Act. The Income-tax Officer, who was also the Excess Profits Tax Officer, proceeded to take up both the income-tax and excess profits tax assessments together. As required by the Income-tax Officer, the firm produced accounts at various places and on various dates. But, on December 12, 1949, the date fixed by the Income-tax Officer (who is referred to as such in these proceedings in his capacity as Income-tax Officer as well as Excess Profits Tax Officer) for final hearing, no one appeared on behalf of the firm or produced accounts as required by the Income-tax Officer. Instead, the Income-tax Officer received a telegram from the assessee on that day as follows:

“Our head clerk still under sick. Medical officer advises not to take journey. Pray adjournment two months' time more. Medical-certificate follows.”

3. The Income-tax Officer did not adjourn the case. He passed an order which included the following conclusion:

“If the head clerk was unable to be present with the accounts, I do not see why one of the accountants or the partners did not turn up with the books. As the assessee has not complied with the terms of the notice under section 22(4) of the Act I complete the assessment under section 23(4) of the Act to the best of my judgment.”

4. The Income-tax Officer also proceeded to refuse registration of the firm acting under the discretionary powers vested under section 23(4) of the Income-tax Act. The assessee filed a petition on January 4, 1950, under section 27 of the Act. The Income-tax Officer rejected that petition. The assessee filed an appeal to the Appellate Assistant-Commissioner regarding the rejection of the petition under section 27, refusal under section 23(4) of the Income-tax Act and quantum of income under section 14(1) of the Excess Profits Tax Act, which was consequential to the quantum determined for income-tax purposes. The Appellate Assistant Commissioner dismissed the appeal confirming all the orders of the Income-tax Officer. The assessee filed appeals before the Income-tax Appellate Tribunal. The Tribunal dismissed all the appeals. It also refused to state a case under section 66(1) of the Income-tax Act in respect of those orders. The assessee filed petitions before the Andhra High Court under section 66(2) regarding all the four appeals dismissed by the Tribunal. Thereupon the Andhra High Court directed the following question to be referred, viz.:

“Whether, on the facts and in the circumstances of the case, there was material to support the finding that there was wilful default on the part of the assessee in producing the accounts?”

5. Accordingly, the Tribunal made a reference in Referred Case No. 9 of 1955. The Andhra High Court passed an order dated February 10, 1956, answering the question in the affirmative and against the assessee. The assessee applied for leave to appeal to the Supreme Court against that judgment but such leave was refused.

6. It is the common case of both sides that the evidence on which the Income-tax Officer had to pass earlier orders in the proceedings under section 27 was absolutely identical with the evidence on which he had to pass the latter orders under section 28(1)(b) and the corresponding section of the Excess Profits Tax Act and that the evidence included the oral evidence of the two witnesses.

7. For not complying with the terms of the statutory notices issued under sections 23(2) and 22(4) of the Income-tax Act and the corresponding provisions of the Excess Profits Tax Act, the Income-tax Officer issued penalty notices under section 28(1)(b) of the Indian Income-tax Act and the corresponding section 16 of the Excess Profits Tax Act. In the course of those proceedings the assessee examined two witnesses, namely, one partner, R. Tharinayya, and one clerk, Kurmaiab, of the assessee. The Income-tax Officer after considering the material on record, held that there was no reasonable cause for the assessee not complying with the provisions of section 22(4) of the Income-tax Act or the corresponding provisions, section 16 of the Excess Profits Tax Act. Accordingly, the Income-tax Officer levied a penalty of Rs. 7,500 under the Income-tax Act and a further penalty of Rs. 25,000 under section 16 of the Excess Profits Tax Act. On appeal, the Appellate Assistant Commissioner and later the Tribunal reduced the penalties as follows:

S. No. By whom penalty was imposed Under section 28(1)(b of the Income-tax Act Under section 16 of the Excess Profits Tax Act Rs. Rs. 1. The Income-tax Officer… 7,500 25,000 2. The Appellate Assistant Commissioner……… 4,000 10,000 3. The Income-tax Appellate Tribunal……… 2,000 4,000

8. section 28(1)(b) of the Income-tax Act runs as follows:

“28. (1) If the Income-tax Officer, the Appellate Assistant Commissioner or the Appellate Tribunal, in the course of any proceedings under this Act, is satisfied that any person—…

(b) has without reasonable cause failed to comply with a notice under sub-section (4) of section 22 or sub-section (2) of section 23…

he or it may direct that such person shall pay by way of penalty.”

9. In The Commissioner Of Income-Tax, Ahmedabad v. Messrs Gokuldas Harivallabhdas, Nadiad* [1958] 34 I.T.R 98, 106. it was observed as follows:

“It has often been said that each proceeding under the Income-tax Act is a self-contained proceeding and the findings in one proceeding do not become binding in respect of other proceedings. Now, it is difficult to understand why this well-known principle should be departed from in penalty proceedings. If anything, if the principle is not well established so far as the assessment proceedings are concerned, then it should be established so far as penalty proceedings also are concerned. The assessment proceedings are taxing proceedings; the penalty proceedings are criminal proceedings in their very nature, and a decision given in an assessment proceeding cannot possibly be binding upon the authority who tries the assessee for an offence.”

10. The Income-tax Officer in his order has observed as follows:

“The partner in his deposition states that he thought that the stamping of the books with the office stamp on January 23, 1948, was an indication that the hearing was over and that he was away on pilgrimage for a long spell which prevented him from attending to the tax matters. This, I am afraid, is not sufficient ground for the non-production of the accounts on the due date…”

11. It is clear that the assessee has come under the charge, “having wilfully defaulted”. The Appellate Assistant Commissioner has given finding as follows:

“So, it is clear that the appellant had no justification for asking for a further adjournment. section 28(1)(b) of the Act contains the following provision: ‘has without reasonable cause failed to comply with a notice under sub-section (4) of section 22 or sub-section (2) of section 23.’ So, it appears to me that the penalty under section 28 of the Act was called for in this case.”

12. The Tribunal in its order held as follows:

“Moreover, it was contended that there was no wilful default inasmuch as the assessee only prayed for some time and did not withhold any books of account called for by the assessee. It is not for us to deal with the reason for not complying with the notice. That was dealt with by the Tribunal in an earlier order. What we are concerned with here is the quantum of penalties in relation to the offence committed by the assessee, viz., non-production of accounts on a particular date… No doubt, there was default by not producing the accounts on a particular date, but there is no whisper anywhere that the assessee withheld any books of account or evidence in his possession on any earlier occasion.”

13. In effect, the Tribunal held that there was default by the assessee but did not go into the question whether that default was wilful. In particular, it considered it unnecessary to deal with the question whether the non-compliance was “without reasonable cause”.

14. In R.C No. 9 of 1955, the question referred by the Tribunal was as follows:

“Whether, on the facts and circumstances of the case, there was material to support the finding that there was wilful default on the part of the assessee in producing the accounts?”

15. In the course of the judgment in that case, their Lordships of the Andhra High Court observed as follows:

“The account books could have been produced on December 12, 1949, and it is not a case that such production was physically impossible… The conduct of the assessee in applying for adjournment and when an adjournment was granted… in again applying on that day for an adjournment……… suggests a lack of bona fides on his part.

16. The expression ‘wilful default’ in the question referred to us was apparently used to denote the default of the assessee to produce accounts though the assessee had a reasonable opportunity to comply and was not prevented by sufficient cause from complying with the notice under section 22(4) of the Act. Section 27 of the Act makes no reference to ‘wilful default’ and does not lay down that an ex parte assessment should be cancelled or reopened unless there was wilful default on the part of the assessee to comply with the notices under section 22(4) or section 23(2) of the Act………

17. Section 27 of the Income-tax Act does not refer to wilful default as disentitling the assessee to a reopening of an assessment made under section 23(4). Section 27 of the Income-tax Act is analogous to the provisions of Order IX, rule 9, Order IX, rule 13, and Order XLI, rule 19, of the Code of Civil Procedure, which have been interpreted as vesting a judicial discretion in the court to be exercised in a sound and reasonable manner so as to advance justice and not arbitrarily or capriciously. Applying this test to the present case we are unable to say that the order declining to reopen the ‘best judgment’ assessment in this case is erroneous in law.

18. For these reasons, the answer to the question referred to us is in, the affirmative and against the assessee…”

19. In effect that finding is to the effect that the failure to comply with the Income-tax Officer's order was “without reasonable cause”. The finding in R.C No. 9 of 1955 is binding on us and we respectfully agree with that finding. All the same, we are dealing below with the arguments advanced by the learned advocate for the assessee to the effect that the assessee's failure to comply with the notice under section 22(4) of the Income-tax Act was not without “reasonable cause” and that that phrase is distinct from the phrase “sufficient cause”.

20. In Stroud's Judicial Dictionary it is stated as follows:

“The word ‘reasonable’ has in law the prima facie meaning of reasonable in regard to those circumstances of which the actor, called on to act reasonably, knows or ought to know.”

21. In the present case, their Lordships have arrived at that judgment in R.C No. 9 of 1955 after considering the question with reference to the circumstances in which the assessee was placed and the facts which he knew or ought to know.

22. In Commissioner Of Income-Tax, Madras v. Vedlapatla Veera Venkataramiah it was observed as follows:

“The imposition of a penalty under section 28 is not a matter of guess work. Before imposing a penalty in such a case as this the Income-tax Officer must have in his possession such evidence as would convince a reasonably minded man… It is not possible to lay down any hard and fast rule as to what is actually required. Each case must depend upon its own circumstances.”

23. In the present case, the Income-tax Officer, the Appellate Assistant Commissioner and the Income-tax Appellate Tribunal have carefully considered the evidence concerned and have passed their orders.

24. In Moore v. Naval Colliery Co. Ltd. [1912] 1 K.B 28., it was held as follows:

“The workman, thinking the strike would give him an opportunity for getting well, did not give notice of his illness… Held, that the failure to make a claim within six months was occasioned by a ‘reasonable cause’ within the meaning of section 2(1)(b) of the Workmen's Compensation Act, 1906 (6 Edw. 7, c. 58).”

25. That decision was arrived at on the peculiar facts of that case.

26. The decision itself says at page 30:

“It is a very peculiar case, the like of which, so far as I am aware, has never come before this court.”

27. It was a case of a worker not being able to know as to what was the crucial date for the purposes of his application, until he obtained a certificate and when he obtained the certificate, he found that the crucial date was so far back that his application was time-barred, with reference to that date. The facts of the present case before us have nothing in common with the peculiar facts concerned in that English case. So the decision in that case cannot apply here or help the assessee.

28. Another decision which has been relied on by the learned advocate for the assessee is in Glynoeron, wherein it was held:

“that the salvors were entitled to salvage, as they had ‘reasonable cause’ for their failure, if there was any failure, to comply with section 518 of the Merchant Shipping Act, 1894, in not delivering the wreck to the receiver of the district.”

29. In that case, it was observed as follows:

“In the view of the court, the plaintiffs had behaved extremely well and shown great skill… In this case, the Coastguard, the chief officer of whom was the receiver of wrecks for the district, had full knowledge of all that was going on. He thought that in the circumstances of the case the plaintiffs had ‘reasonable cause’ for their failure, if any, to comply with the terms of the section, which did not, he thought, in fact apply to this case.”

30. That decision does not apply to the facts of the present case.

31. The learned advocate for the assessee has failed to convince us that, on the facts and circumstances of this particular case, there is a substantial difference between the words “sufficient cause” and “reasonable cause”, or that the assessee's failure to comply with the notice under section 22(4) was not “without reasonable cause”.

32. It is clear as a matter of fact that, on the facts and in the circumstances of the case, the failure of the assessee to comply with the notices concerned was “without reasonable cause” and that, therefore, the imposition of the penalty in each case was justified. The Tribunal itself ought to have (in its order concerned) considered this question (as to whether the failure to comply with the notices was without “reasonable cause”) and given its finding. But it failed to do so. This does not affect the fact that the failure to comply was “without reasonable cause”. Even if the Tribunal were to consider that question afresh, it will have to give its finding against the assessee on that question, in view of the decision of this court in Referred Case No. 9 of 1955 which is binding on it (the Tribunal). So, no purpose would be served by directing the Tribunal to decide that question afresh.

33. Therefore, we answer each of the two questions referred to us in the affirmative with costs to the Department. Advocate's fee Rs. 250, one set.

34. Questions answered in the affirmative.