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Commissioner Of Income-Tax, Bombay City-Ii v. Allied Silk Mills.
Concise Analytical Summary of the Opinion (Rege, J.)
Factual and Procedural Background
The reference arises under s. 256(1) of the Income-tax Act, 1961. Initially three questions were referred to the court concerning (1) the meaning of “income” in s. 271(3)(b), (2) entitlement of an assessee-firm to carry forward a loss of Rs. 39,763 and set it off against profits when that loss had been apportioned among partners, and (3) the maximum penalty the assessee could be liable to (whether Rs. 25). The Court re-framed the controversy as a single question concerning whether the Tribunal was justified in holding that the assessee had no obligation to file a return under s. 139(1) because the income shown in its return was below the taxable limit, even though the income was chargeable to tax.
Procedurally: The assessee-firm received a notice under s. 22(2) of the Indian Income-tax Act, 1922, and failed to file its return by the due date (19 August 1961). The return was filed late on 30 August 1962, showing income of Rs. 21,219 (below the taxable threshold for firms). The ITO rejected the return and assessed income at Rs. 1,23,001; the AAC reduced assessed income to Rs. 56,553 (order not appealed by assessee). For the delay, the ITO imposed a penalty under s. 271(1)(a) at 2% amounting to Rs. 4,548. The assessee explained the delay on account of the sickness of its accountant and contended alternatively that its bona fide belief that its income was below the taxable limit limited any penalty under s. 271(3)(b) to Rs. 25. The AAC and the ITO rejected the reasonable-cause contention and denied applicability of s. 271(3)(b). The Tribunal, however, found that the assessee bona fide believed its income to be non-taxable and held that s. 271(3)(b) applied, limiting the penalty to Rs. 25. The present reference questions that Tribunal finding.
Legal Issues Presented
- “Whether, on the facts and in the circumstances of this case, the Tribunal was justified in holding that there was no obligation on the part of the assessee to file a return of income under section 139(1) of the Income-tax Act, 1961, since the income shown in the return was below the taxable limit, notwithstanding the fact that the assessee's income was chargeable to tax?”
Arguments of the Parties
Assessee's Arguments
- The delay in filing the return was caused by reasonable cause — the sickness of the firm's accountant.
- The income shown in the return (Rs. 21,219) was bona fide believed by the assessee to be below the taxable limit for firms (Rs. 40,000), so the assessee had no obligation to file a voluntary return under s. 22(2) and, if penalty were leviable, the maximum under s. 271(3)(b) was Rs. 25.
- What matters for s. 271(3)(b) is the income as reasonably reflected in the books and as honestly believed by the assessee, not the income as finally assessed by the ITO or AAC.
Revenue / Assessing Officer's Position and AAC's Views
- The ITO rejected the explanation of reasonable cause, reasoning that other partners or employees could have closed accounts and filed the return on time.
- The ITO levied penalty under s. 271(1)(a) (2% on assessed income for every completed month of delay).
- The AAC also rejected the reasonable-cause contention and held s. 271(3)(b) inapplicable because the finally assessed income (Rs. 56,553) exceeded the maximum taxable amount for a firm; the AAC therefore dismissed the assessee's appeal against the penalty order.
Table of Precedents Cited
| Precedent | Rule or Principle Cited For | Application by the Court |
|---|---|---|
| CIT v. N. Khan and Brothers, [1973] 92 ITR 338 (Allahabad High Court) | Held that the “income” in the provision means the income which the assessee believes to be his income (bona fide belief), not the income as finally assessed by the ITO; if the assessee's believed income is less than the maximum not chargeable to tax, penalty under s. 271(3)(b) will not exceed Rs. 25. | The court cited and accepted this principle and relied on it in concluding that the assessee's bona fide belief that its income was non-taxable brings it within s. 271(3)(b). |
| CIT v. Assam Automobile and Accessories Agency, [1978] 111 ITR 411 (Gauhati) | Expressed a similar view that the assessee's bona fide belief about his income is relevant to whether he has “no income liable to tax.” | The court noted this decision as consonant with the principle adopted from N. Khan and saw no reason to disagree with the view. |
| CIT v. Agrawal Brothers, [1979] 116 ITR 768 (M.P.) | Also expressed the view that the assessee's bona fide belief about his income governs applicability of s. 271(3)(b). | The court cited this decision as another authority supporting the same principle and accepted the view. |
| Ballarpur Collieries Co. v. Commissioner Of Income-Tax, Poona, [1973] 92 ITR 219 (Nagpur Bench) | Addressed the question whether loss carry-forward treatment claimed by a firm could be applied in the manner the Tribunal suggested (relevance on carry-forward and set-off argument). | The court observed that the Tribunal's view on the entitlement to carry forward the loss could not be considered correct in view of this decision; however, it also held that that particular point was irrelevant to the ultimate question before the court. |
Court's Reasoning and Analysis
The Court proceeded by reframing the originally referred three questions into a single, central question focused on whether the Tribunal was justified in holding that the assessee had no obligation to file a return because the income shown was below the taxable limit despite being chargeable to tax.
Key steps in the Court's analysis (as expressed in the opinion):
- The Court identified that the penalty in issue (Rs. 4,548) was levied under s. 271(1)(a) based on an assessed income figure, and that s. 271(3)(b) provides a statutory exception where a person “proves that he has no income liable to tax” — limiting the penalty to Rs. 25.
- The Court examined authorities construing the phrase “no income liable to tax” and relied on three earlier decisions (N. Khan; Assam Automobile; Agrawal Brothers) which held that the relevant “income” is that which the assessee bona fide believes to be his income (i.e., the assessee's honest belief rather than the amount finally assessed by the ITO).
- Applying those authorities to the facts: the assessee had returned Rs. 21,219, which was admittedly below the taxable limit for the firm. The crucial factual question was whether that disclosure was bona fide. That is a question of fact, primarily for the Tribunal to decide.
- The Tribunal had found that the assessee bona fide believed its income to be non-taxable and gave reasons: the differences between returned income and assessed income arose mainly from disallowance of an advance to workers and partial disallowance of dyeing and bleaching expenses — matters on which honest differences of opinion could exist regarding deductibility. The Tribunal therefore concluded s. 271(3)(b) applied.
- The Court concluded that the Tribunal had arrived at that factual finding on proper considerations and for cogent reasons; therefore the Court would not interfere with the Tribunal's finding of fact.
- The Court noted the Tribunal's separate view that a loss of Rs. 39,763 in the earlier year could be carried forward and set off, but observed that the Nagpur Bench decision in Ballarpur Collieries showed that that aspect of the Tribunal's reasoning was not correct. The Court nonetheless considered that issue irrelevant to the primary question before it.
Holding and Implications
Holding: The re-framed question is answered in the affirmative and in favour of the assessee. The Court upheld the Tribunal's finding that the assessee bona fide believed its income to be below the taxable limit, bringing the case within s. 271(3)(b).
Implications (as stated in the opinion):
- The Tribunal's factual finding that the assessee honestly believed its returned income to be non-taxable is sustained and not interfered with by this Court.
- By applying the authorities cited, the Court accepts that the assessee's bona fide belief about its income (as disclosed in its books/return) is the relevant inquiry under s. 271(3)(b), rather than the income as finally assessed by the ITO or AAC.
- The Court observed that the Tribunal's separate view about carry-forward of the earlier loss was incorrect in light of Ballarpur Collieries, but that observation was not material to the decision on the penalty issue.
- The parties were directed to bear their own costs.
This summary is prepared strictly from the content of the provided opinion and contains no information beyond what is contained in that opinion.
Rege, J.:— In this reference under s. 256(1) of the I.T Act, 1961, the questions referred to us for our opinion are as follows:
“(1) Whether the expression ‘income’ in section 271(3)(b) of the Income-tax Act, 1961, means assessable income or income as bona fide believed by the assessee to be its assessable income?
(2) Whether the assessee-firm was entitled to carry forward and set off the loss of Rs. 39,763 incurred by it in assessment year 1960-61, against its profits for the assessment year 1961-62, notwithstanding the fact that the said loss was apportioned amongst the partners and was carried forward in their individual assessments?
(3) Whether, on the facts and in the circumstances of the case, the maximum amount of penalty imposable against the assessee was Rs. 25?”
2. On hearing the points at issue between the parties, we think that instead of the said three questions, only one question framed by Us below would cover fully the controversy. The question as re-framed by us would be as follows:
“Whether, on the facts and in the circumstances of this case, the Tribunal was justified in holding that there was no obligation on the part of the assessee to file a return of income under section 139(1) of the Income-tax Act, 1961, since the income shown in the return was below the taxable limit, notwithstanding the fact that the assessee's income was chargeable to tax?”
3. We are concerned in this case with the question of penalty of Rs. 4,548 levied by the ITO on the assessee-firm under s. 271(1)(a) of the I.T Act at the rate of 2% on the sum of Rs. 1,23,001, being the income of the assessee as assessed by the ITO. Pursuant to the notice by the ITO dated 4th July, 1961, under s. 22(2) of the Indian I.T Act, 1922, calling upon the assessee-firm to file its return in respect of the assessment year 1961-62, the assessee did not file its return in time which, in the ordinary course, it should have filed by 19th August, 1961. However, the assessee filed the return on 30th August, 1962, that is, after a delay of one year and 11 days. In the said return the assessee-firm showed its income as Rs. 21,219, below the taxable income for firms. The ITO, however, did not accept the said return, and, for various reasons, assessed the income of the assessee at Rs. 1,23,001.
4. In appeal, the AAC confirmed the order of the ITO. However, he reduced the assessee's income to Rs. 56,553. The assessee did not appeal against the said order.
5. Thereafter, in view of the delay on the part of the assessee in filing the return, the ITO issued a notice under s. 22(2) of the Indian I.T Act to the assessee to show cause why penalty should not be imposed on the assessee. The said notice was admittedly served on the assessee. In reply to the said notice, the assessee sought to explain the delay by stating that it was prevented from filing a return as its accountant was not well. The ITO rejected the said explanation, as according to him out of the six partners of the firm or the employees of the firm, any one could have closed the accounts and filed the return in time. The ITO thereafter made an order under s. 271(1)(b) of the I.T Act, imposing on the assessee a penalty at the rate of 2% on the amount of taxable income for every completed month of delay in filing the return for the said assessment year.
6. In the appeal to the AAC against the said order, two contentions were raised by the assessee. Firstly, it was contended that there was a reasonable cause for the delay in filing the return due to the sickness of the accountant. Secondly, it was contended that as the income of Rs. 21,219, as disclosed by the assessee, was below the taxable limit for the assessee-firm, which was Rs. 40,000, the assessee was under no obligation to file the return voluntarily under s. 22(2) of the Indian I.T Act, and, therefore, the, maximum penalty that was leviable, if any, was only Rs. 25 under s. 271(3)(b) of the I.T Act.
7. The AAC also did not accept the contention of the assessee that it was prevented by reasonable cause from filing the return in time. The AAC further held that since the finally assessed income of Rs. 56,553 exceeded the maximum taxable amount of income for a firm in this case, s. 271(3)(b) was not applicable. He, therefore dismissed the assessee's appeal.
8. On appeal to the Tribunal against the said order, the assessee again contended that for a reasonable cause, namely, the illness of its accountant, the assessee was prevented from filing the return in time. This contention was rejected by the Tribunal. The assessee further contended that as per its bona fide belief it had shown in its return its income at Rs. 21,219 and, therefore, if at all, the maximum penalty imposable was Rs. 25. It further contended that what was relevant for the purpose of s. 271(3)(b) of the I.T Act was not the finally assessed income but the income as reasonably reflected in the books of account, as the assessee was not expected to anticipate the income that was likely to be determined by the ITO or by the AAC. On the said contention the Tribunal held that as the assessee bona fide believed that its income was Rs. 21,219 and as the AAC had disallowed the deduction, on which there could be an honest difference of opinion, the assessee's income was not liable to tax within the meaning of the provisions of the it. act and the maximum amount of penalty imposable was Rs. 25 only. The said finding of the Tribunal has been questioned before us in this reference.
9. Section 271 of the I.T Act deals with the imposition of penalty for failure to file a return, non compliance with notices, etc.
10. Section 271(3)(b) which is relevant for our purpose provides:
“271. Failure to furnish returns, comply with notices, concealment of income, etc.—
(3) Notwithstanding anything contained in this section,—
(b) where a person has failed to comply with a notice under subsection (2) of section 139 or section 148 and proves that he has no income liable to tax, the penalty imposable under sub-section (1) shall not exceed twenty-five rupees.”
(Underlining* supplied)
11. The expression “no income liable to tax” appearing in the said provision came to be considered in three decisions which the learned counsel for the assessee has relied upon. The first was the decision of the Allahabad High Court in the case of CIT v. N. Khan and Brothers, [1973] 92 ITR 338. In that case it was pointed out (headnote):
“The income contemplated by this provision is the income which the assessee believes to be his income and not the income as finally assessed by the Income-tax Officer. It is possible that an assessee may not consider a particular item to be his income and the Income-tax Officer may hold otherwise. In such a case if what the assessse considers to be his income is less than the maximum not chargeable to tax, he is not required to file a voluntary return even if his income as finally assessed is more than such maximum and he will not be liable to penalty for failure to file his return. It is essential that the belief of the assessee must be bona fide.”
(Underlining supplied)
12. Similar view has been expressed in two other decisions, namely, (1) CIT v. Assam Automobile and Accessories Agency, [1978] 111 ITR 411 (Gauhati) and (2) CIT v. Agrawal Brothers, [1979] 116 ITR 768 (MP). We see no reason to disagree with the said view.
13. In this case, admittedly, the income disclosed by the assessee-firm in its return, namely, Rs. 21,219, was below the limit of the taxable income for the firm. The only question that would, therefore, survive for consideration would be whether such disclosure of income by the assessee could be considered to be bona fide. The question whether such a disclosure was bona fide or not was a question of fact and was primarily for the Tribunal to decide.
14. In this case the Tribunal held that the provisions of s. 271(3)(b) were attracted as the assessee had filed its return showing non-taxable income under a bona fide belief. In doing so, the Tribunal observed:
“The difference between the returned income and the assessed income as per the Appellate Assistant Commissioner's order arises mainly from the fact that the Appellate Assistant Commissioner did not allow the advance to the workers to be deducted and also did not allow the full deduction of the dyeing and bleaching expenses treating a part of them as not relating to the year under appeal. These are matters on which there could be honest difference of opinion and the assessee cannot be held guilty of any default, if this honest view regarding the deductibility or otherwise of an expense is not shared by the assessing authority. The assessee will consider whether it has an assessable income and whether it should file its return suo motu or should comply with a notice under section 22(2) of the Act on the facts as are known and honestly believed by him to be true. In the present case, we are of the opinion that the assessee rightly considered that it did not have income liable to tax.”
15. In our view, the Tribunal has arrived at the said finding on proper considerations and after giving cogent reasons, and we do not think that this court would be justified in interfering with the said finding of fact. We may incidentally point out that the Tribunal had also held that the assessee had suffered a loss of Rs. 39,763 during the previous year, that is, in 1959-60, which it was entitled to carry forward and set off against the profits in the concerned assessment year 1960-61 and if that was done, then even on the basis of the assessee's assessed income of Rs. 56,553 the assessee's income for the said assessment year would be below the taxable income of the firm. However, the said view of the Tribunal cannot be considered to be correct, in view of the decision of the Nagpur Bench of this court in the case of Ballarpur Collieries Co. v. Commissioner Of Income-Tax, Poona., [1973] 92 ITR 219. However, for the purpose of determining the question before us, the said view of the Tribunal is not relevant and unnecessary to be considered.
16. We would, therefore, answer the re-framed question in the affirmative and in favour of the assessee. The parties to bear their own costs.
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