The Judgment of the Court was delivered by
Sankar Prasad Mitra, J.:— This is a reference under section 66(1) of the Indian Income-tax Act, 1922. The assessment year is 1960-61 The corresponding accounting year is the calendar year 1959. On the 13th June, 1960, a notice under section 22(2) dated the 1st June, 1960, was served on the assessee. In terms of this notice the assessee's return should have been filed by the 18th July, 1960. But, on that date, the assessee asked for two months' time to file its return. The Income-tax Officer allowed the extension but informed the assessee that there would be no further extensions. On the 16th January, 1961, the assessee was served with a notice under section 23(3). Then, on the 17th January, 1961, the assessee filed its return for the assessment year 1960-61. The Income-tax Officer, however, took more than two years to complete the assessment. The assessment was made on October 31, 1962, after the commencement of the Income-tax Act, 1961. Under the provisions of section 297(2)(g) of the 1961 Act the proceedings for imposition of penalty had to be initiated and completed (sic). That is why the assessee was served with a fresh notice under section 274(1) of the 1961 Act. In response to the show cause notice, the assessee took a preliminary objection. The assessee contended that the notice under section 274(1) was issued on the 15th May, 1963, that is, after the completion of the assessment proceedings. The notice, therefore, was invalid and no penalty proceedings could be initiated. The Income-tax Officer rejected this contention. The assessee also submitted that its audited balance-sheet, owing to the absence of its accountant, was ready only in October, 1960. In these premises, the assessee could not file its return earlier. The Income-tax Officer did not accept this explanation as sufficient for the nonfiling of the return. He imposed a penalty of Rs. 12,734 under section 271(1)(a) of the 1961 Act.
2. The Appellate Assistant Commissioner agreed with the Income-tax Officer on both the points aforesaid and sustained the order of imposition of penalty. Before the Tribunal the assessee contended that the notice was issued long after the assessment was completed; the satisfaction of the Income-tax Officer was not in the course of the assessment proceedings; and the initiation of the penalty proceedings was bad. The Tribunal held that the Income-tax Officer had already intimated his intention of initiating penalty proceedings long before the assessment was completed by issuing the notice under section 28(3) of the 1922 Act on the 13th January, 1961. The Tribunal observed, however, that it was surprising that the assessee was penalised for the delay of five months in filing its return; while the Income-tax Officer sat over the return for more than a year and a half. But ultimately the Tribunal rejected the assessee's contention that the penalty proceedings were not properly initiated. The Tribunal also did not accept the assessee's contention that it was prevented by sufficient cause from filing the return before the 17th January, 1961.
3. Finally, the assessee submitted to the Tribunal that the amount of penalty for non-filing of return in time was a sum equal to 2% of the tax for every month during which the default continues. In the instant case, a demand was made on the assessee for Rs. 1,16,601 after a provisional assessment had been made under section 23B of the 1922 Act and this demand was rectified under section 35 of the 1922 Act to Rs. 92,294.55. The assessee paid the amount on the 22nd February, 1961. The demand made under section 23(3) was also Rs. 1,59,180 but it was subsequently rectified to Rs. 1,26,51210. Therefore, the amount of tax payable by the assessee was Rs. 1,26,512.10 minus Rs. 92,294.55, that is, Rs. 34,21755. In that case, the amount of penalty to be levied at the rate of 2% per month for four months on Rs. 34,217.55 comes to Rs. 2,737.44. The Tribunal accepted this contention and held that the tax payable by an assessee is the tax ultimately determined to be so payable after giving credit for all payments made towards the tax liability. The Tribunal, accordingly, reduced the penalty to Rs. 2,737.
4. The following question of law has been referred to this court:
“Whether, on the facts and in the circumstances of the case, the Tribunal was right in holding that in calculating the penalty leviable under section 271(1)(i) of the Income-tax. Act, 1961, the amount paid by the assessee under the provisional assessment under section 23B of the Indian Income-tax Act, 1922, was to be deducted from the amount of tax determined under section 23(3) of that Act in order to determine the amount of tax on which the computation of penalty was to be based and in reducing the amount of the penalty imposed on the assessee to Rs. 2,737?”
5. The relevant provisions of section 271 of the 1961 Act are as follows:
“271. Failure to furnish returns, comply with notices, concealment of income, etc.—(1) If the Income-tax Officer or the Appellate Assistant Commissioner, 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 total income which he was required to furnish under sub-section (1) of section 139 or by notice given under sub-section (2) of section 139 or section 148 or has without reasonable cause failed to furnish it within the time allowed and in the manner required by sub-section (1) of section 139 or by such notice, as the case may be, or
(b) has without reasonable cause failed to comply with a notice under sub-section (1) of section 142 or sub-section (2) of section 143, or
(c) has concealed the particulars of his income or deliberately furnished inaccurate particulars of such income,
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 aggregate fifty per cent. of the tax;
(ii) in the cases referred to in clause (b), in addition to any tax payable by him, a sum which shall not be less then ten per cent but which shall not exceed fifty per cent. of the amount of the tax, if any, which would have been avoided if the income returned by such person had been accepted as the correct income;
(iii) in the cases referred to in clause (c), in addition to any tax payable by him, a sum which shall not be less than twenty per cent. but which shall not exceed one and a half times the amount of the tax, if any, which would have been avoided if the income as returned by such person had been accepted as the correct income….
(3) Notwithstanding anything contained in this section,—
(a) no penalty for failure to furnish the return of his total income under sub-section (1) of section 139 shall be imposed under sub-section (1) on an assessee whose total income does not exceed the maximum amount not chargeable to tax in his case by one thousand five hundred rupees;
(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;….”
6. On behalf of the department reliance has been placed on a judgment of the Lahore High Court and a judgment of the Allahabad High Court. In Vir Bhan Bansi Lal v. Commissioner of Income-tax [1938] 6 I.T.R 616 Lah.. the Lahore High Court has held that, where notice under section 28 of the Indian Income-tax Act, 1922, for the imposition of penalty has been issued before the assessment order is made, a penalty under that section may be imposed on a date subsequent to the date of the assessment order and even after the income-tax assessed has been paid by the assessee. The word “payable” in the latter portion of the section means, according to the Lahore High Court, “to which he has been assessed”, whether the amount has been paid or not. In Income-tax Officer, “A” Ward, Agra v. Firm Madan Mohan Damma Mai [1968] 70 I.T.R 293, 309 All.. the Allahabad High Court has observed as follows:
“All that was provided under section 28 of the Income-tax Act, 1922, was that in certain cases, the assessee was liable to pay something more in addition to the tax already assessed. Formerly, there was no separate chapter dealing with penalties but in the Act of 1961, Chapter XXI has been separately provided dealing with penalties alone and under the new scheme it was necessary that section 297 of the Act should provide definitely and separately for the procedure to be followed in penalty matters and, therefore, clauses (f) and (g) separately deal with the question of penalty and it cannot be said that the matter of penalty is also by necessary implication included within clauses (a) and (b) which deal with only that assessment. Since penalty has to be calculated and then imposed according to the tax assessed, the penalty being proportionate to the tax, the imposing of the penalty must necessarily follow the assessment. The question of imposition of penalty thus arises after the assessment has been completed and, therefore, the provision that in cases where assessment has been completed after the new Act had come into force, the penalty would be imposed according to the new Act, appears to be a reasonable classification”.
7. Counsel for the revenue has urged that the provisions of section 271(1)(i) of the Act of 1961 should be construed in the light of the decisions aforesaid of the Lahore and Allahabad High Courts. The default in the submission of the return, according to the learned counsel, is a distinct offence under section 271(1)(a). For this offence a penalty may be levied; and this penalty has nothing to do with other payments for other liabilities under various other provisions of the Act. In this view of the matter the default, according to Mr. Sen Gupta, for the revenue, starts from the day when the return ought to have been filed and the penalty is to be calculated on the tax assessed and not on the tax payable. The department's counsel proceeds to add that this interpretation of section 271(1)(i) is apparent from the language of clause (i).
8. It is urged that the clause provides that the penalty is in addition to the amount of the tax, if any, payable by the assessee. This shows that even though the assessee has no liability to pay any tax after deductions are made of what the assessee has already paid, it is open to the authorities concerned to impose a penalty and this penalty would be at the rate of 2% “of the tax”. The expression “of the tax” in the latter part of clause (i), therefore, cannot but mean, contends learned counsel for the revenue, “the tax assessed”. It is submitted that this construction of clause (i) would rule out all anomalies that may occur in giving effect to the penalty provisions of the statute.
9. These arguments of Mr. A.K Basu for the Commissioner, who was followed by his learned junior, Mr. Sen Gupta, are, no doubt, weighty. But, on a closer examination of clause (i), it seems to us that a different construction is more reasonable. In the earlier part of clause (i) it is stated that penalty is in addition to the amount of “tax payable”. But in the latter part the legislature, instead of using the words “tax payable” has merely used the word “tax”. It may, therefore, be contended that in this particular clause the expressions “tax payable” and “the tax” mean one and the same thing. In other words, wherever the expression “the tax” appears it should be understood to mean “the tax payable”. The result would be that, unless on the day penalty is being imposed some amount of tax remains outstanding or payable by the assessee, no penalty can be imposed at all. This means that penalty is to be calculated with reference to the actual amount due and payable by the assessee on the date of imposition of the penalty. And from this point of view the Tribunal, in the instant reference, has come to the correct conclusions.
10. As against the latter construction, Mr. Sen Gupta for the Commissioner has placed for our consideration two other provisions of the Act of 1961. In section 2(43) “tax” has been defined. It says: “‘tax’ means income-tax and super-tax chargeable under the provisions of the Act”. It should be remembered that this definition is to be followed “unless the context otherwise otherwise”. The context of the expression “the tax” in clause (i) of section 271(1) may fully justify the construction that this expression means “the tax payable”. If the intention of the legislature was that a penalty should be imposed on the tax assessed, to remove all ambiguities, the word “assessed” could have been added after the words “the tax”, specially in view of the context in which the expression “the tax” appears in clause (i) of section 271(1).
11. The next objection of Mr. Sen Gupta is that the reading of the words “the tax” as “tax payable”, would be inconsistent with section 271(3)(b) of the Act. The inconsistency is that if an assessee, from whom tax is admittedly payable, makes payment before the penalty is imposed he escapes the penalty; but, if no tax is payable at all by the person concerned the tax authorities may still be in a position to impose penalty not exceeding rupees twenty-five. The inconsistency suggested by Mr. Sen Gupta does not seem to be correct. The provisions of section 271(3)(a) and those of section 271(3)(b) read together would make the position clear. If there be a failure merely to furnish a return under sub-section (1) of section 139 in a case where the total income does not exceed the maximum non-chargeable amount no penalty can be imposed at all. But when there is a failure to comply with a notice given by the Income-tax Officer either under sub-section (2) of section 139 or section 148 in a case where the income is not liable to tax, a maximum penalty of twenty-five rupees may be imposed. The first case is not a case of disobedience of a particular demand or direction of the authority concerned. But the second case is a case of deliberate non-compliance with a specific demand or direction. In fact, under section 276(b) if a person fails without reasonable cause or excuse to furnish in due time any of the returns or statements mentioned, inter alia, in sub-section (2) of section 139 he shall be punishable with fine which may extend to rupees ten for every day during which the default continues.
12. For the reasons aforesaid, we do not think that either section 2(43) or section 271(3)(b) is an impediment to the second construction hereinbefore referred to of section 271(1)(i).
13. At this stage it would be appropriate to cite two decisions of the Supreme Court. In Tolaram Relumal v. State of Bombay, it is observed at page 498:
“……it is a well settled rule of construction of penal statutes that if two possible and reasonable constructions can be put upon a penal provision, the court must lean towards that construction which exempts the subject from penalty rather than the one which imposes penalty.”
14. This was not a case on a taxing statute; but, the Supreme Court in Commissioner of Income-tax v. Karamchand Premchand Ltd., has said:
“……if there is any ambiguity of language, the benefit of that ambiguity must be given to the assessee.”
15. In our view the words “the tax” in clause (i) section of 271(1) of the Act of 1961 is reasonably capable of being construed as “the tax payable” and, since this construction is favourable to the assessee, this court should lean towards it. From this point of view we are inclined to support the relevant order of the Tribunal in the instant case. Our answer to the question in this reference is in the affirmative and against the department. Each party will bear and pay its own costs.
Sabyasachi Mukharji, J.:— I agree.
16. Question answered in the affirmative.