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Citation Codes
Equivalent Citations
citation codes
Case Number
Advocates
  • S.R. Rajasekhara Murthy
  • A.R. Srinivasa
Judges
  • G.K. Govind Bhat
  • Justice B. Venkataswami
Acts
  • section 139(2) of the Income-tax Act, 1961 (hereinafter referred to as "the Act")
  • subsection (1) or sub-section (2) of section 22 or section 34
  • section 271(1)(a)(i) of the Income-tax Act 1961,
  • section 256(1) of the Income-tax Act, 1961.
  • SECTION 219 INCOME TAX ACT 1961
  • section 274 read with section 271(1)(a).
  • sub-section (1) and (3) of section 143,
  • section 274(1) with section 271(1)(a)
  • sub-section (1) of section 139
  • section 28 (1) of the 1922 Act
  • Act. Section 2(43)
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Cites
Cited by
Citation Codes
Equivalent Citations
citation codes
Case Number
Advocates
  • S.R. Rajasekhara Murthy
  • A.R. Srinivasa
Judges
  • G.K. Govind Bhat
  • Justice B. Venkataswami
Acts
  • section 139(2) of the Income-tax Act, 1961 (hereinafter referred to as "the Act")
  • subsection (1) or sub-section (2) of section 22 or section 34
  • section 271(1)(a)(i) of the Income-tax Act 1961,
  • section 256(1) of the Income-tax Act, 1961.
  • SECTION 219 INCOME TAX ACT 1961
  • section 274 read with section 271(1)(a).
  • sub-section (1) and (3) of section 143,
  • section 274(1) with section 271(1)(a)
  • sub-section (1) of section 139
  • section 28 (1) of the 1922 Act
  • Act. Section 2(43)
See more information ...
Smart Summary

Structured Summary of the Opinion: Reference under section 256(1) of the Income-tax Act, 1961

Factual and Procedural Background

The reference arises from questions submitted by the assessee under section 256(1) of the Income-tax Act, 1961. The two questions of law referred are reproduced in the opinion and concern (1) the validity of a notice issued under section 274(1) read with section 271(1)(a) dated October 7, 1964, and the penalty proceedings under it; and (2) whether the penalty leviable under section 271(1)(a)(i) must be calculated with reference to the gross tax as reduced by advance tax and self-assessment tax (i.e., the balance tax payable at the date of final assessment).

Chronology and material facts (as stated in the opinion):

  • Notice to file return for assessment year 1964-65 issued to the assessee on 6 March 1964 under section 139(2), requiring return by 15 October 1964.
  • On 13 October 1964 the assessee applied for time to file until 31 October 1964; no order was passed on this application.
  • The assessee was served with a notice dated 17 October 1964 under section 274 read with section 271(1)(a).
  • The assessee filed a belated return on 6 February 1965 declaring income Rs. 57,697 and paid advance tax of Rs. 15,430 previously and Rs. 3,627 under section 140A with the return.
  • By assessment order dated 3 March 1965 the tax on total income was determined at Rs. 23,539.13. After adjusting advance tax and tax paid under section 140A, a notice of demand under section 156 claimed the balance Rs. 4,482.13.
  • The Income-tax Officer levied penalty at 2% for a three-month default on the entire tax of Rs. 23,539.13, amounting to Rs. 1,412.34.
  • The assessee appealed to the Appellate Assistant Commissioner (AAC). Before AAC the assessee argued invalidity of the pre-due-date notice, reasonable cause for delay, and that penalty should be computed on the balance tax payable (Rs. 4,482.13). AAC rejected the first two grounds but agreed that penalty should be computed on the balance tax payable.
  • The Income-tax Officer (department) appealed to the Income-tax Appellate Tribunal (ITAT), which restored the Income-tax Officer's order and held penalty must be computed on the total tax determined (Rs. 23,539.13). The assessee obtained a reference under section 256(1) to this court on the second question; before this court the assessee did not press the first question.

Legal Issues Presented

  1. Whether, on the facts and in the circumstances of the case, the notice dated October 7, 1964, issued under section 274(1) read with section 271(1)(a) by the Income-tax Officer to the assessee, and the penalty proceeding as well as the order in pursuance thereof are valid in law?
  2. Whether, on the facts and in the circumstances of the case, the penalty leviable within the meaning of section 271(1)(a)(i) shall be with reference to the gross tax as reduced by the advance tax and self-assessment tax under section 140A and remaining due and payable at the date of final assessment?

Arguments of the Parties

Assessee's Arguments (as presented by Sir A. R. Srinivasa Rao)

  • The first question (validity of the notice) was not pressed before this court; the arguments were restricted to the second question.
  • Penalty under section 271(1)(a)(i) must be computed on the net balance of tax payable as per the demand notice under section 156 (i.e., after credit for advance tax and tax paid under section 140A), not on the gross tax chargeable on total income.
  • The Central Board of Direct Taxes (CBDT) had issued Circular No. 17(XLV-18) of 1965 (F. No. 58/35/64-IT(INV) dated 26-6-65) stating that "the net amount of tax payable by the assessee for the purpose of section 271(1) ... is to be arrived at by excluding the tax deducted at source as well as the advance tax actually paid by the assessee under sections 207 to 219 of the Act." The circular was said to be binding on the department by virtue of section 119 of the Act.
  • The Income-tax Officer conceded before the AAC that penalty should be computed on the net amount after giving deduction for advance tax.

Department / Income-tax Officer / Commissioner's Arguments

  • The Income-tax Officer initially levied penalty on the full tax determined (Rs. 23,539.13) and, after appeal, before the ITAT contended the penalty must be calculated on the tax chargeable on the total income of the assessee (i.e., gross tax), not on the net balance payable after credits.
  • It was argued (on behalf of the Commissioner) that the words "the tax" in section 271 should be understood as tax chargeable (as defined in the Act) and not limited to the net amount payable under a demand notice; the Commissioner’s counsel also submitted as an objection that if the net-payable approach were accepted an assessee who paid the full tax under section 140A might escape penalty altogether (a hypothetical concern raised in argument).
  • The Income-tax Officer did concede before the Appellate Assistant Commissioner that the penalty should be computed on the amount of tax payable after giving deduction to the advance tax paid; however the department persisted in appeal to the ITAT, which restored the original order.

Table of Precedents Cited

Precedent Rule or Principle Cited For Application by the Court
Jivatlal Purtapshi v. Commissioner of Income-tax [1967] 65 I.T.R. 261 Principle that a departmental concession made before an appellate authority cannot be challenged by the department in a subsequent appeal — voluntarily accepted concessions cannot give rise to grievance; an appeal by the department on a point conceded before the AAC is unsustainable. The court relied on this decision to hold that because the Income-tax Officer had conceded before the Appellate Assistant Commissioner that the penalty must be computed on the net tax, the department could not properly claim to be aggrieved by the AAC's order on that point; accordingly the department's appeal (to the extent it related to deduction of advance tax) was unsustainable.

Court's Reasoning and Analysis

The court proceeded by textual and contextual interpretation of section 271(1)(a)(i) read together with several other statutory provisions and authorities and by examining the departmental circular and the department's procedural position.

  1. Statutory text and the interpretive question: The court identified the central interpretive issue as whether the phrase "the amount of the tax, if any, payable by him" in clause (i) of section 271(1)(a) refers to (a) the tax chargeable on the total income (gross tax) or (b) the net amount payable after credit for advance tax and any tax paid under section 140A (i.e., the sum stated as payable in the demand notice under section 156).
  2. Comparison with earlier law: The court compared the present section 271 with the corresponding provision in the Indian Income-tax Act, 1922 (section 28(1)). The 1922 provision used the words "that amount" referring to "the amount of the income-tax and super-tax payable by him," which, the court explained, clearly tied the penal percentage to the amount payable. Parliament in the 1961 Act used the words "the tax" in place of "that amount", and the court examined whether this change altered the referent.
  3. Consideration of definitions and related provisions: The court noted section 2(43) defines "tax" to mean income-tax and super-tax chargeable under the Act. However, the court looked beyond the bare definition to the context supplied by sections which deal with assessment, self-assessment, payment and credit (notably sections 139 proviso, 140A, 143(1) & (3), 156 and 219). These provisions show that:
    • Section 140A provides self-assessment mechanics and requires payment of tax as reduced by earlier advance tax;
    • Section 219 expressly provides that advance tax is to be credited against the tax payable on assessment;
    • Section 156 is the mechanism by which the Income-tax Officer issues a demand for "the sum so payable" consequent on an assessment under section 143.
  4. Interpretation of the phrase "payable": The court discussed the word "payable" (noting it is context-dependent and may be synonymous with "due") and concluded that "the sum payable by the assessee" in section 156 and the related language in sections 143(1) and (3) refer to the net amount due after giving credit for advance tax and tax already paid (including payments under section 140A).
  5. Role of CBDT circular and departmental concession: The court observed the CBDT circular (Circular No. 17(XLV-18) of 1965) which interprets section 271(1)(a)(i) to mean that the net amount of tax payable for the purpose of section 271(1) excludes tax deducted at source and advance tax actually paid. The court noted the Income-tax Officer was bound by that circular and that the officer had conceded before the Appellate Assistant Commissioner that the penalty should be computed on the net tax. The court relied on Jivatlal Purtapshi to hold that the department, having conceded that point before the AAC, could not be treated as aggrieved by the AAC's acceptance of the concession.
  6. Penal statute principle and ultimate interpretive choice: The court applied the principle that penal provisions ought to be interpreted favourably to the assessee where more than one reasonable construction is possible. On that basis, and in light of the textual and contextual analysis of the relevant provisions (sections 139 proviso, 140A, 143, 156 and 219) and the CBDT circular, the court concluded the better interpretation is that the penalty under section 271(1)(a)(i) is to be computed on the net amount of tax payable under the demand notice (after credits), not on the gross tax chargeable on the total income.
  7. Textual anomaly noted in the opinion: The opinion consistently states that the penalty ought to be computed on the net tax payable (for example, the notice of demand amount Rs. 4,482.13). The opinion also contains an inconsistent sentence (paragraph 24 of the provided opinion) which states "In other words, the penalty ought to have been computed on the sum of Rs. 23,539.13." The court's overall analytical statements, its reliance on the CBDT circular, and its final answer favouring the assessee indicate the intended conclusion is computation on the net tax (Rs. 4,482.13), but the opinion as provided does include that textual inconsistency which is reproduced here as it appears in the source text.

Holding and Implications

Holding:

Question No. 2 was answered in favour of the assessee and against the department: the penalty under section 271(1)(a)(i) is to be computed with reference to the net amount of tax payable as determined in the demand notice under section 156 (i.e., after giving credit for advance tax and tax paid under section 140A).

Direct implications (as stated in the opinion):

  • The penalty levied by the Income-tax Officer on the full assessed tax (Rs. 23,539.13) was incorrect; the penalty should have been calculated on the net balance payable as per the demand notice (Rs. 4,482.13) — this is the practical effect established by the court's answer to Question 2.
  • The court additionally held that, because the Income-tax Officer conceded before the Appellate Assistant Commissioner that the penalty should be computed on the net tax, the department could not be regarded as aggrieved by the AAC's acceptance of that concession (relying on Jivatlal Purtapshi), making the departmental appeal on that point unsustainable.
  • The assessee was awarded costs; advocate's fee of Rs. 250 was directed to be paid to the assessee by the department.

Note: The opinion does not assert or state that it is establishing any wider novel principle beyond its statutory interpretation and application to the facts; the decision's immediate effect is the recalculation of penalty on the net amount payable for this case and the award of costs to the assessee.

Disposition

The court answered Question No. 2 in favour of the assessee and against the department. The assessee is entitled to costs (Advocate's fee Rs. 250). Question No. 1 was not pressed before the court and was therefore not decided on contested argument in this opinion.

This summary is prepared strictly on the basis of the content appearing in the provided opinion. No facts or legal propositions beyond those present in that text have been added.

Show full summary ...

    M.M. Annaiah v. Commissioner Of Income-Tax, Mysore

    1. This is a reference at the instance of the assessee under section 256(1) of the Income-tax Act, 1961. The question of law referred for our opinion are :

    "(1) Whether, on the facts and in the circumstances of the case, the notice dated October 7, 1964, issued under section 274(1) with section 271(1)(a) by the Income-tax Officer to the assessee, and the penalty proceeding as well as the order in pursuance there of are valid in law ?

    (2) Whether, on the facts and in the circumstances of the case, the penalty leviable within the meaning of section 271(1)(a)(i) shall be with reference to the gross tax as reduced by the advance tax and self-assessment-tax under section 140A and remaining due and payable due and payable, at the date of final assessment ?"

    2. The assessee by notice dated March 6, 1964, issued under section 139(2) of the Income-tax Act, 1961 (hereinafter referred to as "the Act") was required to file his return of income for the assessment year 1964-65, on or before the 15th of October, 1964. On October 13, 1964, the assessee asked for time for filing the return up to October 31, 1964. On the said application no order was passed by the Income-tax Officer. On October 17, 1964, the assessee was served with a notice issued by the Income-tax Officer under section 274 read with section 271(1)(a). The assessee filed his return only on February 6, 1965, showing an income of Rs. 57,697. The assessee had paid by way of advance tax a sum of Rs. 15,430; with his return he paid a sum of Rs. 3,627 under section 140A of the Act. By the assessment order made on March 3, 1965, the tax on the total income of the assessee was determined at Rs 23,539 13. After adjusting the advance tax and the tax paid under section 140A, a notice of demand was issued to the assessee claiming the balance sum of Rs. 4,482 13. The assessee submitted his explanation for not filing the return on the due date. The Income-tax Officer was not satisfied with the said explanation and he proceeded to levy penalty which he levied at 2 per cent for the default period of three months on the whole of the tax of Rs. 23,539 13 and the penalty levied was Rs. 1,412 34.

    3. Aggrived by the said order of penalty, the assessee preferred an appeal to the Appellate Assistant Commissioner of Income-tax, Bangalore. Before the said appellate authority, the assessee contended that the notice dated October 17, 1964, under section 271(a) had been issued before the due date for filing the return and therefore was invalid. He further contended that the assessee was prevented by reasonable cause in filing his return within the due date and that in any event the penalty amount should have been calculated on the balance amount of the tax payable, viz., Rs. 4,482 13 and not on the entire tax of Rs. 23, 539 13. The Appellate Assistant Commissioner rejected the first two grounds urged by the assessee, but he agreed with the assessee's contention that the penalty ought to have been calculated with reference to the balance tax payable, viz, Rs. 4,482 13. In the course of his order, the Appellate Assistant Commissioner observed :

    "The Income-tax Officer however is prepared now to agree that on the basis of executive instruction, the word 'tax' should mean the tax as demanded on the income assessed less the tax deducted at source and/or the tax paid in advance."

    4. The Income-tax Officer appealed to the Income-tax Appellate Tribunal, Madras Bench, against the order of the Appellate Assistant Commissioner. The assessee preferred cross-objections contending that the order of penalty imposed on him was made on the basis of an illegal notice. The Appellate Tribunal dismissed the cross-objections of the assessee and restored the order of the Income-tax Officer. According to the Appellate Tribunal, the penalty had to be computed on the basis of the total amount of tax determined on the total assessable income of the assessee. Aggrieved by the said order, the assessee sought a reference to this court under section 256(1) of the Act and the Tribunal has referred the above question of law for our opinion.

    5. Sir A. R. Srinivasa Rao, the learned counsel for the assessee, submitted that he does not press the first question of law and restricted his arguments to the second question. According to the learned counsel for the assessee, the penalty under section 271(1)(a)(i) has to be computed not on the amount of tax assessed but on the balance amount of tax payable as per the demand notice under section 156. He further contended that the Central board of Direct Taxes, New Delhi, had issued a circular to the department to the effect that the net amount of tax payable by the assessee for the purposes of section 271(1)(a) is to be arrived at excluding the tax deducted at source as well as the advance tax actually paid by the assessee under sections 207 to 219 of the Act, and that the said direction is binding on the department by virtue of section 119 of the Act. The learned counsel argued that the Income-tax Officer conceded before the Appellate Assistant Commissioner who has referred to the circular issued by the Central Board of Direct Taxes that the penalty had to be computed on the net amount of tax payable after giving deduction to the advance tax paid.

    6. The Circular issued by the Central Board of Direct Taxes under section 119 of the Act reads thus :

    "Circular No. 17(XLV-18) of 1965.

    F. No. 58/35/64-IT`(INV) dated 26-6-65 from CBDT.

    2. On a representation made by the Gujarat Chamber of Commerce, the matter has been reconsidered by the Board in consultation with the Ministry of Law. Under section 271(1)(a)(i) of the Income-tax Act 1961, the penalty is to be 2% of the tax, if any, payable by the assessee. Section 219 of the Income-tax Act, 1961, makes it clear that any sum other than penalty or interest, paid by or recovered from the assessee as advance tax in pursuance of Chapter XVII shall be treated as payment of tax respect of the income of the period which would be the previous year for an assessment for the assessment year next following the financial year in which it was payable and credit therefor shall be given to the assessee in the regular assessment." The two section read together make it perfectly clear that tax payble by an assesseee as referred to in section 271(1)(a) is the tax payable after giving credit the advance tax paid by him as contemplated under section 219.

    3. It has, therefore, been decided that the net amount of tax payable by the assessee for the purpose of section 271(1) of the Act, is to be arrived at by excluding the tax deducted at source as well as the advance tax actually paid by the assessee under sections 207 to 219 of the Act..."

    7. It is not disputed that the Income-tax Officer was bound by the above circular. Notwithstanding the said circular, the Income-tax Officer levied the penalty on the basis of the total amount of tax assessed on the income of the assessee but before the Appellate Assistant Commissioner, the Income-tax Officer was agreeable to the penalty being computed on the amount of tax payable after giving deduction to the advance tax paid.

    8. In Jivatlal Purtapshi v. Commissioner of Income-tax [1967] 65 I.T.R. 261, 266., the High Court of Bombay held that where the department had agreed to delete the amount from the assessee and having conceded the deletion before the Appellate Assistant Commissioner, could not be held to be aggrieved by that part of the order to enable it to file an appeal of the department regarding the deletion of the amount was neither competent nor capable of being entertained by the Tribunal. In the course of order, the High Court of Bombay observed thus :

    "An appeal to the Tribunal could only be taken against a part of the order against which the appellant can be said to be feeling aggrieved. What is voluntarily accepted cannot give rise to a grievance which can be taken further in appeal. In the appeal memo, which was filed by the department the only ground taken was that the deletion of the item by the Appellate Assistant Commissioner was erroneous. The said ground was obviously unsustainable, since there could be no error on the part of the Appellate Assistant Commissioner in accepting the concession which was made by the department before him."

    9. The Income-tax Officer as stated earlier was bound by the Circular of the Central Board of Direct Taxes. The Income-tax Officer conceded before the Appellate Assistant Commissioner that the penalty has to be computed on the basis of the net tax only. When the Appellate Assistant Commissioner acted on the said contention, it cannot be said that the Income-tax Officer was aggrieved by the order of the Appellate Assistant Commissioner. Therefore, his appeal so far as it related to the deduction of the advance tax paid by the assessee was clearly unsustainable.

    10. We do not rest our opinion the basis of the circular of the Central Board of Direct Taxes. On an interpretation of section 271(1) of the Act, we are of the opinion that the penalty amount ought to have been computed only on the basis of the balance tax payable, viz., Rs. 4,482.13, and not on the entire tax of Rs. 23,539.13. The relevant portion of section 271(1) of the Act reads thus :

    "(1) If the Income-tax Officer or the Appellate Assistant Commissioner, in the court of any proceedings under this Act, is satisfied that any person -

    (a) has without reasonable cause failed to furnish the return of his total income which he was required to furnish under sub-section (1) of section 139 or by notice given sub-section (2) of section 139....

    he may direct that such person shall pay by way of penalty, -

    (i) in the cases referred to in clause (a) in addition to the amount of the tax, if any, payable by him, a sum equal to two per cent. of the tax for every month during which the default continued, but not exceeding in the agregate fifty per cent. of the tax...

    That the assessee is liable to pay penalty for failure to furnish his return within the time allowed was not disputed before us. The dispute relates to the question as to what is the amount of tax on the basis of which the penalty has to be computed. According to the assessee the penalty should be computed at 2 per cent. per month for the default period on the sum of Rs. 4,482.13 which is the amount of tax payable as per notice of demand; but, according to the counsel for the Commissioner, the penalty amount has to be computed on the amount of the tax chargeable on the total income of the assessee.

    11. The provision in the Indian Income-tax Act, 1922, corresponding to section 271 of the Act is section 28(1). The said section did not provide for a minimum penalty but fixed the maximum penalty that could be imposed. The relevant portion of section 28 (1) of the 1922 Act reads :

    "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 -

    (a) has without reasonable cause failed to furnish the return of his total income which he was required to furnish by notice given under subsection (1) or sub-section (2) of section 22 or section 34 or has without reasonable cause failed to furnish it within the time allowed and in the manner required by such notice, or...

    he or it may direct that such person shall pay by way of penalty, in the case referred to in clause (a), in addition to the amount of the income-tax and super-tax, if any, payable by him, a sum not exceeding one and half times that amount..."

    12. The words "that amount" occuring in section 28(1) of the 1922 Act is clearly referable to the expression the amount of the income-tax and super-tax payable by him. In section 271 of the Act, instead of the words that amount, Parliament has used the words "the tax". According to the Tribunal, the words "the tax" in section 27(1)(i) are not referable to the expression "the amount of tax if any payable by him", but they relate to the tax as defined in the Act. Section 2(43) defines the word "tax" to mean income-tax and super-tax chargeable under the provision of the Act in relation to the assessment year.

    13. Before us, the learned counsel for the assessee, as well as the learned counsel for the Commissioner, submitted, that the words "the tax" occuring in clause (i) of section 271(1)(a), are referable to the amount of "the tax, if any, payable by him."

    14. The question is whether on a proper interpretation of clause (i) of section 271(1)(a), the expression "the amount of tax, if any, payable by him" means the tax chargeable on the total income of the assessee or the net amount of tax payable by the assessee after deduction of the advance tax paid by the assessee and the tax paid under section 140A of the Act.

    15. In this connection, our attention was drawn to the provisions of section 139(1) 140A, 143, 156 and 219 of the Act.

    16. Clause(iii) of the proviso of section 139(1) provides for realisation of interest on the amount payable where the Income-tax Officer grants extension of time for filing the return; the interest has to be paid on the amount of tax payable on the total income reduced by the advance tax.

    17. In section 140A, there is provision made for self-assessment to tax and the assessee is required to pay the tax payable on the basis of his return as reduced by the tax paid earlier as advance tax.

    18. Section 143 of the Act provides for the actual assessment. In sub-section (1) and (3) of section 143, there are provision made for assessing the total income or loss of the assessee and determine the sum payable by him or refundable to him on the basis of such return.

    19. Section 219 provides for credit for advance tax paid. Any advance tax paid by the assessee has to go towards the reduction of the tax payable on regular assessment.

    20. Thus, under section 143, the Income-tax Officer has to assess the total income or loss of the assessee and determine the tax chargeable on the total income and, thereafter, he has to determine the sum payble by assessee or the sum refundable to the assessee on the basis of such assessment. Under section 156 which provides for issue of demand notice, it is provided that when any tax, interest, penalty, fine or any other sum is payable in consequence of any order passed under the Act, the Income-tax Officer shall serve upon the assessee a notice of demand in the prescribed form specifying the sum so payable.

    21. The expression "the sum so payable found" in section 156 is the same sum referred to in sub-section (1) and (3) of section 143. The expression the sum payable by him or the sum refundable to him on the basis of such assessment cannot be the total amount of tax chargeable on the basis of the assessment. The sum payable by the assessee can only mean the net tax payable after giving reduction for the advance tax and the tax paid under section 140A. The word "payable" is an adjective of ambiguous import; standig alone, the word is not confinable to one single definite meaning, nor is there such single meaning when it is used in a legal sense. It is a descriptive word and its meaning scan be determined only in the light of the situation and the circumstance of its use. The word "payable" has been held equivalent to, or synonymous with, "due". (vide Corpus Juris Secundum, volume 70, page 202).

    22. If the intention of Parliament was to compute the penalty at the percentage provided on the basis of the income-tax chargeable under the Act in relation to the assessment year in question, it was not necessary to use the expression "the amount of tax, if any, payable by him"; it would have been sufficient if section 271 had provided that the Income-tax Officer may direct that such person shall pay by way of penalty a sum equal to 2 per cent. of the tax for every month during which the default continued but not exceeding in the aggregate 50 per cent. of the tax. The expression "the amount of tax payable by him", in our opinion, means the net amount of the tax demanded in the notice of demanded in the notice of demand under section 156 and not the income-tax chargeable on the total income of the assessee in relation to the particular assessment year.

    23.It was urged strenusuly by Sri. Rajasekhara Murthy, the learned counsel for the Commissioner, that an assessee who had failed to furnish the return within the time allowed may escape penalty altogether if he pays the entire tax under section 140A and there is no tax payable as per the demand notice. In a hypothetical case no doubt such a situation is possible.

    24. Section 271 of the Act is a penal provision found in the taxation statute. If two interpretations are possible, then the duty of the court is to give that interpretation which is favourable to the assessee. Therefore, in our opnion, the penalty should have been computed on the basis of the net tax directed to be paid under section 156 of the Act. In other words, the penalty ought to have been computed on the sum of Rs. 23,539.13. The interpretation given by the department under the circular referred to earlier was a reasonable interpretation of the provisions of section 271. In that view of the matter, the Appellate Assistant Commissioner was right in the view he has taken. Though the circular does not refer to the tax paid under section 140A of the Act, the position of the tax paid under section 140A does not stand on any different footing from the advance tax paid.

    25. Our answer to question No. 2, which alone has been pressed before us, is in favour of the assessee and against the department. Question No. 2 is answered accordingly. The assessee is entitled to his costs. Advocate's fee Rs. 250.

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    M.M. Annaiah v. Commissioner Of Income-Tax, Mysore
    (Sep 9, 1969)