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Shyam Gopal Charitable Trust v. Director Of Income Tax (Exemption) .

Delhi High Court

Nov 7, 2006

Judgment

Subsequent
References

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Structured Summary of the Opinion (Dr. S. Muralidhar, J.)

Factual and Procedural Background

The appeals arise under Section 260A(1) of the Income Tax Act, 1961 and challenge a common order dated 25.11.2002 of the Income Tax Appellate Tribunal (ITAT), Delhi Bench 'A' in ITA No. 3631-3634/Del/98. The appellant is a charitable trust established by a trust deed dated 3.10.1983 and registered under Section 12A of the Act. The trust runs a school for poor children in slums.

The proceedings concern penalties levied under Section 272A(2)(e) for delay in filing income-tax returns for assessment years 1990-91, 1991-92, 1995-96, 1996-97 and 1997-98. The returns were filed belatedly on 15.9.1998 and 17.9.1998 as nil returns and were accepted by the Department. Despite acceptance, the Assessing Officer referred the matter for penalty proceedings. The Joint Director of Income Tax (Exemption) purportedly issued three notices (10.9.1999, 4.2.2000 and 2.3.2000) and on 22.7.2003 imposed separate penalties calculated at Rs.100 per day of delay for each AY, in the amounts listed in the opinion.

The appellant appealed to the Commissioner (Appeals) who dismissed the appeals on 5.7.2001, and the ITAT affirmed the penalty. The present appeals to the High Court challenge the orders below.

Legal Issues Presented

Whether, before imposing a penalty under Section 272A(2)(e) of the Income Tax Act, 1961, the Department must not only issue but also serve notice upon the assessee so as to satisfy the principles of natural justice.
Whether the Department discharged the burden of proving that the notices it alleges were issued in fact were served on the appellant.
Whether the explanation offered by the appellant (advice of its Chartered Accountant that returns were not required and later filing on advice to avoid complications) constitutes "reasonable cause" within the meaning of Section 273B of the Act, justifying waiver of penalty.
Whether the levying of penalties under the facts of this case was justified where returns were nil and accepted but filed belatedly.

Arguments of the Parties

Appellant's Arguments

The appellant contended that it did not receive the notices said to have been issued under Section 272A(2)(e) and therefore was not afforded an opportunity to be heard before penalty was imposed.
The appellant relied on the advice of its Chartered Accountant who initially advised that returns were not required because income was below taxable limit; later advice prompted belated filing to avoid complications under Section 139(4A). The appellant contended this explanation ought to constitute reasonable cause under Section 273B for waiver of penalty.
The appellant relied on the Full Bench decision in J.T. (India) Exports v. Union of India, 262 ITR 269 (Del) to argue that service of notice prior to penalty proceedings is imperative (even if statute does not explicitly require it).
The appellant also relied on the Supreme Court decision in Concord of India Insurance Co. Ltd v. Smt. Nirmala Devi, 118 ITR 507, to argue that mistaken legal/accounting advice can amount to reasonable cause and cannot be lightly dismissed.

Revenue's Arguments

The Revenue submitted that Section 139(4A) requires strict compliance and failure to comply attracts penalty under Section 272A(2)(e).
Although prior service was not mandatory under the relevant provision, the Department had issued three notices to which no response was received, and therefore the appellant had sufficient opportunity.
The Revenue argued that requirements of equity under Section 273B were not met and that penalty waiver was not justified; in tax statutes, there is no place for equity to override statutory requirements.

Table of Precedents Cited

Precedent	Rule or Principle Cited For	Application by the Court
J.T. (India) Exports v. Union of India, 262 ITR 269 (Del) (Full Bench)	Implied requirement that before imposing a penalty (in that case under the Imports and Exports (Control) Act, 1947) service of notice is required by principles of natural justice.	The Court adopted and respectfully applied the reasoning of the Full Bench to hold that there is an implied requirement of issuance and service of notices before imposing penalty under Section 272A(2)(e) of the Income Tax Act.
Concord of India Insurance Co. Ltd v. Smt. Nirmala Devi, 118 ITR 507 (Supreme Court)	Support for the proposition that mistaken legal advice can be a legitimate basis for excusing delay or failure where no taint of mala fides exists; the Court quoted and approved reasoning from the Kerala High Court.	The Court relied on the Concord decision to accept that advice of the appellant's Chartered Accountant could constitute reasonable cause under Section 273B in the present facts.
State of Kerala v. Krishna Kurup Madhava Kurup, AIR 1971 Ker 211	Observation that legal advice may sometimes be wrong and that an honest advice, without mala fides or recklessness, may amount to sufficient cause (as quoted and approved in Concord).	The Court cited this passage (as approved in Concord) to support the proposition that acting on honest professional advice can constitute reasonable cause when assessing whether penalty should be imposed.

Court's Reasoning and Analysis

The Court proceeded in two principal strands: procedural fairness (service of notices) and merits (reasonable cause under Section 273B).

Procedural issue — service of notices:
The Department asserted three prior notices had been issued. The appellant consistently denied receipt. The CIT (Appeals) and the ITAT did not record any finding that the notices were in fact served; the CIT (Appeals) incorrectly shifted the burden to the appellant to show non-receipt. The High Court held that where the Department contends that notices were issued and the assessee denies receipt, the burden is on the Department to prove service.

The Court adopted the Full Bench reasoning in J.T. (India) Exports and held that principles of natural justice imply that notices must not only be issued but also served upon the assessee before imposing a penalty under Section 272A(2)(e). The Court observed that imposition of penalty carries adverse civil consequences and therefore must be preceded by an opportunity to be heard so the assessee can present factors relevant to penalty independently of assessment proceedings.

Because neither the CIT (Appeals) nor the ITAT found that the notices were served, the Court concluded the assessee was not afforded an opportunity to be heard and that this procedural defect alone warranted setting aside the penalty orders.
Merits — reasonable cause under Section 273B:
On the merits, the Court considered the appellant's explanation that its Chartered Accountant initially advised no return was required because income was below taxable limit, and only later advised filing to avoid complications under Section 139(4A). The Court found this explanation plausible.

The Court relied on the Concord decision and the Kerala High Court passage to recognize that honest professional/legal advice may sometimes be wrong yet constitute reasonable cause provided there is no mala fides, recklessness or ruse. The Court emphasized it was not laying down a blanket rule that professional advice will always suffice; each case must be decided on its facts.

Applying these principles to the facts, the Court concluded the appellant proved reasonable cause within the meaning of Section 273B for the failure to file returns within time, and therefore no penalty was required to be levied under Section 272A(2)(e).

Holding and Implications

Holding: The Court allowed the appeals and set aside the impugned orders of the AO, the Commissioner (Appeals) and the ITAT; the penalties levied under Section 272A(2)(e) for the specified assessment years were quashed. The appeals were allowed with no orders as to costs.

Implications:

The Court held that, as a matter of principle, there is an implied requirement that notices relevant to penalty proceedings under Section 272A(2)(e) must be both issued and served upon the assessee to satisfy the rules of natural justice. In the circumstances of this case, the Department failed to prove service.
On the substantive question of waiver under Section 273B, the Court accepted that honest advice from a professional (here, the Chartered Accountant) can constitute reasonable cause for delay in filing returns, if there is no mala fides or recklessness. The Court, however, expressly refrained from announcing a general rule that reliance on Chartered Accountant's advice will always justify waiver; each case depends on its facts.
The direct effect is that the penalties imposed in respect of the assessment years in question are set aside. The Court did not purport to create an absolute rule exempting all assessees who rely on professional advice from penalties; rather it affirmed the need for factual inquiry and adherence to principles of natural justice.

This summary is drawn exclusively from the provided opinion and does not add or infer information beyond that text.

Show all summary ...

Dr. S. Muralidhar, J.— These four appeals under Section 260 A(1) of the Income Tax Act, 1961 (Act) are directed against the common order dated 25.11.2002 passed by the Income Tax Appellate Tribunal (Tribunal), Delhi Bench ‘A’ in ITA No 3631-3634.Del/98.

2. These proceedings concern the penalty levied on the appellant under Section 272 A(2)(e) of the Act for the delay in filing income tax returns for the assessment years (AYs) 1990-1991, 1991-1992, 1995-1996, 1996-1997 and 1997-1998. The period of delay and the corresponding penalty imposed are set out in the table below:

ASSTT YEAR RETURN FILED ON PERIOD OF DELAY IN DAYS PENALTY IMPOSED (RS.) 1990-1991 17.9.1998 2875 2,87,500 1991-1992 17.9.1998 2510 2,51,000 1995-1996 17.9.1998 1050 1,05,000 1996-1997 17.9.1998 655 65,500 1997-1998 15.9.1998 318 31,800.

3. The Appellant is a charitable trust which came to be established by a Trust Deed dated 3.10.1983 The appellant was granted registration under Section 12 - A of the Act by the Commissioner of Income Tax, Delhi - 110 006 vide order dated 31.10.1983/1.11.1983. The Appellant trust was created with an object of running a school to provide education to poor children living in slums and who cannot avail the opportunity of going to municipal or public schools.

4. The Appellant claimed that for the relevant AYs its income was not taxable in view of the exemption under Section 10 (22) read with Section 11 of the Act. According to the Appellant, as per its audited account, its income for the relevant AYs were as under:

ASSTT YEAR INCOME FUNDS AS ON 31st MARCH 1990-1991 14,521 35,656 1991-1992 1,097 35,753. 1995-1996 (-) 7,266 69,305 1996-1997 13,364 82,689 1997-1998 15,593 98,282

5. The Appellant claimed that initially its Chartered Accountant advised that since the income of the Appellant was below the taxable limit, it was not required to file any return of income for the above AYs. Later, the Chartered Accountant reconsidered his opinion and advised that with a view to avoiding any complication arising under Section 139 (4A) of the Act, the Appellant should file its returns. Accordingly, on 15.9.1998 and 17.9.1998 the Appellant filed returns for the aforementioned AYs declaring Nil income. It is not in dispute that these returns were accepted by the Department. However, since the returns were filed belatedly, the Assessing Officer (AO) referred the case to the Joint Director of Income Tax (Exemption) for initiating penalty proceeding under Section 272A (2)(e) of the Act.

6. It is the case of the Department that a notice under Section 272 A (2)(e) was issued to the appellant on three dates, i.e, 10.9.1999, 4.2.2000 and 2.3.2000 for each AY for which the return was filed late and that the Appellant assessee did not respond to any of these notices. Consequently, on 22.7.2003 the Joint Director passed an order levying separate penalties for each of the AYs in the amounts indicated hereinabove.

7. The Appellant filed appeals before the Commissioner of Income Tax (CIT) (Appeals) assailing the levy of penalty. It was urged before the CIT (Appeals) that “after filing the return of income, no notice whatsoever was received by the assessee.” It was further stated that “as alleged in the order under Appeal, no notice under Section 272 A(2)(e) of the Act for the above assessment years was served on the assessee or its representative.” Apart from contending that the Appellant was not afforded an opportunity by the AO of adducing evidence relevant to the question of penalty, the Appellant also filed an application before the CIT (A) under Rule 46 A of the Income Tax Rules seeking place on record a copy of the income and expenditure account and supporting details as evidence in support of its claim for withdrawing the penalty.

8. By its order dated 5.7.2001, the CIT (Appeals) dismissed the appeal. After referring to the notice issued to the Appellant on the three dates as mentioned hereinabove, the CIT (Appeals) observed that “the learned AR has brought no evidence on record to show that the aforecited notices were not received.” The CIT (Appeals) proceeded to conclude that:

“Since the appellant has brought forth no evidence or convincing reasons to show that the appellant was prevented by sufficient reasons from complying with the notices issued by the JDIT (E), I see no infirmity in the decision taken by the JDIT (E) in levying the aforesaid penalties which are hereby confirmed. The five appeals in question are thus dismissed.”

9. The CIT (Appeals) nevertheless also dealt with the case on merits and held as follows:

“In view of the admitted claim of exemption under Sections 11 and 12 by the appellant [and not under Section 10(22)] in the returns of income filed, the appellant's case is squarely covered by the provisions of section 139 (4a) read with section 139 (1), infringement whereof is clearly covered by the penalty proceedings under Section 272A (2)(e). It is also seen that the instant appeal has been argued by top notch C As/lawyers and as such, it is also not clear that if the appellant was in doubt regarding the filing of the returns why it could not consult the battery of legal luminaries whom it has consulted during the appellate proceedings.”

10. The Tribunal noticed the Appellant's contention that it received no notice under Section 272 A (2)(e) of the Act. It further took note of the net income of the Appellant for the relevant assessment years and held that:

“As the net income of the assessee in all the years was in excess of the minimum exemption limit for taxation, we hold that it was obligatory on the part of the assessee to file the return of income on or before due dates.”

The Tribunal negatived the appellant's plea that there was reasonable cause shown by it for not filing the returns in time. The penalties imposed by the JDIT were affirmed by the Tribunal.

11. Mr. C.S Aggarwal, the learned senior counsel appearing for the Appellant submits that the authorities below failed to return a finding on the contention of the appellant that it was not served with notices under Section 272 A (2)(e) of the Act. He argued that the mere issuance of a notice did not amount to service of such notice. He placed reliance upon the judgment of the Full Bench of this Court in J.T (India) Exports v. Union of India, 262 ITR 269 (Del) to contend that service of such notice prior to the penalty proceedings, was imperative even if the statute did not provide for it. While not denying that the filing of returns under Section 139 (4A) of the Act was mandatory, Mr. Aggarwal submits that the explanation offered by the Appellant for filing them belatedly constituted a reasonable ground for waiver of the penalty in terms of Section 273 B of the Act. He also relied upon the judgment of the Supreme Court in Concord of India Insurance Co. Ltd v. Smt. Nirmala Devi, 118 ITR 507 to contend that the mistaken advice given by the Chartered Accountant could not be brushed aside as unbelievable in order to visit the Appellant with adverse consequences.

12. On the other hand, Mr. R.D Jolly, the learned counsel for the Revenue submits that Section 139 (4A) of the Act requires strict compliance and the failure to comply with the said provision had to perforce attract the penalty under Section 272 A (2)(e) of the Act. Although the issuance of a notice prior to imposition of the penalty was not mandatory under that provision, the Department had nevertheless issued three notices to the Appellant despite which no response was forthcoming. Therefore, the Appellant had been given sufficient opportunities. The imposition of penalty was, in the circumstances, totally justified. Contending that there was no question of equity in taxing statutes, Mr. Jolly, submitted that the requirement of Section 273 B of the Act cannot be said to have been met in the present case and the penalty could not be waived.

13. The undisputed fact is that the Appellant is a charitable trust. The income tax returns for the relevant AYs were filed late. They were, however, Nil returns and accepted as such by the Department. The only issue, therefore, is whether there was a justification for imposition of penalty on the appellant for its failure to file the returns within the time stipulated.

14. The provisions of the Act relevant for the present purposes are under:

“Section 139 4A Return of Income: Every person in receipt of income derived from property held under trust or other legal obligation wholly for charitable or religious purposes or in part only for such purposes, or of income being voluntary contributions referred to in sub-clause (iia) of clause (24) of section 2, shall, if the total income in respect of which he is assessable as a representative assessee (the total income for this purpose being computed under this Act without giving effect to the provisions of Sections 11 and 12) exceeds the maximum amount which is not chargeable to income tax, furnish a return of such income of the previous year in the prescribed form and verified in the prescribed manner and setting forth such other particulars as may be prescribed and all the provisions of this Act shall, so far as may be, apply as if it were a return required to be furnished under sub-section (1).

Section 272 A (2)(e) If any person fails to to furnish the return of income which he is required to furnish under sub-section (4a) or sub-section (4c) of section 139 or to furnish it within the time allowed and in the manner required under those sub-section he shall pay, by way of penalty, a sum of one hundred rupees for every day during which the failure continues.

Section 273 B Penalty not. to be imposed in certain cases: Notwithstanding anything contained in the provisions of clause (b) of sub-section (1) or clause (b) or clause (c) of sub-section (2) of Section 273, no penalty shall be imposable on the person or the assessee, as the case may be, for any failure referred to in the said provisions if he proves that there was reasonable cause for the said failure.”

15. It is the case of the Department that three prior notices dated 9.9.1999, 9.2.2000 and 2.3.2000 were issued to the Appellant. However, the case of the Appellant is that it has not received any of these notices. The Appellant has maintained this both before the CIT (Appeals) and the ITAT. Unfortunately, the CIT (Appeals) did not deal with this issue and shifted the burden on to the Appellant to show that the aforesaid notices were not received by it. The ITAT, too, despite noticing this contention does not deal with at all. In our view, in the facts of the present case, where the Department contends that notices were issued, and the Assessee denies receiving such notices, the burden is on the department to show that such notices were served on the assessee. There is no finding rendered by the CIT (Appeals) or the ITAT that the notices in question were in fact served on the assessee. Therefore, the only conclusion that can be drawn is that the assessee was not served these notices and was consequently not afforded the opportunity of being heard before the penalties were imposed. In our view, this by itself is sufficient to set aside the orders imposing the penalty on the appellant for the AYs in question.

16. Respectfully adopting the reasoning of the Full Bench of this Court in J.T (India) Exports (supra) which was rendered in the context of the Imports and Exports (Control) Act, 1947 we are of the view that there is an implied requirement of the principles of natural justice that before imposing a penalty under Section 272 A (2)(e) of the Act, notices are required to be both issued and served upon the Assessee to enable it to defend itself in the penalty proceedings. It is trite that the imposition of any penalty has adverse civil consequences and has to be preceded by the affording of an opportunity of being heard to the assessee. Only then can the assessee urge factors relevant to the question of penalty and independent of the explanations offered during assessment proceedings. It affords a chance to the assessee to show why penalty should be either waived altogether or should be less than what is proposed by the Department.

17. On the merits of the case, we find that the explanation offered by the Appellant for not filing the returns within the time stipulated under the Act appears to be a plausible one. In this context, we may recall the observations of the Kerala High Court in State of Kerala v. Krishna Kurup Madhava Kurup, AIR 1971 Ker 211 which was approved and extracted by the Hon'ble Supreme Court in Concord of India Insurance Co. Ltd. (supra) (p. 511):

“I am of the view that legal advice given by the members of the legal profession may sometimes be wrong even as pronouncement on questions of law by courts are sometimes wrong. An amount of latitude is expected in such cases for, to err is human and laymen, as litigants are, may legitimately lean on expert counsel in legal as in other departments, without probing the professional competence of the advice. The court must, of course, see whether, in such cases there is any taint of male fides or element of recklessness or ruse. If neither is present, legal advice honestly sought and actually given, must be treated as sufficient cause when an application under Section 5 of the Limitation Act is being considered.”

18. We are of the view that the appellant ought not to be made to suffer enalty, in the peculiar facts of the present case, for having acted upon an advice of its Chartered Accountant and not filing the income tax returns in time. We should not be understood as laying down a general proposition that in all cases where the assessee fails to file returns in time and attributes the failure to an advice by its Chartered Accountant, that by itself constitutes a sufficient explanation in terms of Section 273 B of the Act. Each case would have to be tested on its merits by the authorities concerned or the Court, as the case may be, for coming to a conclusion that sufficient grounds in the context of Section 273 B have been made out for not imposing a penalty for the failure to file returns within the time stipulated.

19. On the facts of the present case, we are of the considered view that the Appellant has proved that there was reasonable cause within the meaning of Section 273 B of the Act for the failure to file income tax returns for the relevant AYs within the time stipulated and, therefore, no penalty was required to be levied in terms of Section 272 A (2)(e) of the Act.

20. For these reasons, the impugned orders of the authorities below, i.e, the AO, CIT (Appeals) or the ITAT are hereby set aside. The appeals are, accordingly, allowed with no orders as to costs.