1. This is a reference under Section 256(1) of the I.T. Act, 1961.

2. The assessee is a registered firm consisting of four partners. During the relevant accounting period the business of the assessee-firm consisted of money-lending and sale of petroleum products and also sale of motor parts, tyres and tubes. The assessee-firm came into existence after a partial partition in the family in April, 1956, and the accounts of the firm closed for the first time on March 31, 1957.

3. For the assessment year 1958-59, the return of income was due on June 30, 1958, as per the public notice given under the Indian I.T. Act, 1922. The assessee did not file its return of income by that date. On March 15, 1963, the assessee was served with a notice under Section 148 of the I.T. Act, 1961, which had come into force in the meantime. On March 7, 1964, the assessee filed its return of income of Rs. 42,851, on the basis of which the ITO passed the order on March 13, 1964, computing the assessee's income at Rs. 45,527. This order was passed under Section 143(3) of the I.T. Act, 1961. On the same date the ITO also issued a penalty notice under section 271(1)(a) for filing the return after the time allowed under Section 22(1) of the Indian I.T. Act, 1922. In its reply dated June 7, 1965, the assessee requested the ITO to drop the penalty proceedings. By his order dated August 2, 1965, the ITO, while rejecting the assessee's request, imposed a penalty of Rs. 6,856 under Section 271(1)(a) of the I.T. Act, 1961.

4. The assessee's appeal was dismissed by the AAC. On a further appeal, the Tribunal rejected the assessee's contentions, which may be summed up thus :

(i) No penalty could be levied inasmuch as it was obligatory upon the department to issue a notice for filing the return, the appellant being a regular assessee. Therefore, there was reasonable cause for not filing the return in time.

(ii) No penalty could be imposed for delay in filing the return in response to the public notice under Section 22(1) of the Indian I.T. Act, 1922, inasmuch as those proceedings became superseded when notice under Section 148 of the I.T. Act, 1961, was issued. Moreover, the delay could be computed only after the expiry of 35 days after March 15, 1963.

(iii) The penalty could be inflicted only in consonance with the provisions of the Act of 1922, which was in force at the relevant time. All these contentions were rejected by the Tribunal.

5. On an application made by the assessee, the Tribunal has referred to this court the following question for its opinion :

"Whether, on the facts and in the circumstances of the case, the Tribunal was justified in holding that the assessee is liable to penalty of Rs. 6,856 under section 271(1)(a) of the Income-tax Act, 1961 ?"

6. The learned counsel for the assessee has pressed before us into service only two questions. Firstly, no reasons were given when penalty was imposed. The matter was discretionary and while exercising the discretion, the department was bound to give reasons. Secondly, since interest was charged because of the delay, penalty could not be imposed inasmuch as it amounts to double punishment.

7. The Tribunal has not framed these two questions, but since the question referred to us is comprehensive, we have heard Shri Dabir for the assessee and Shri Khirwadkar for the department on both these questions, with which we shall deal presently.

8. There are three other cases, each of which is a reference under Section 256(1) of the I.T. Act, 1961, the assessee being the same. They are Misc. Civil Case No. 165 of 1972, relating to the assessment year 1960-61, Misc. Civil Case No. 116 of 1972, relating to the assessment year 1961-62 and Misc. Civil Case No. 584 of 1971, relating to the assessment year 1962-63. Although the dates are necessarily different, yet for the purposes of the reference, the material facts are the same in each case :

(i) The assessee did not file the return of income on the due date, i.e., before 30th June, 1960; 30th June, 1961, and 20th November, 1962 (sic), respectively. In the third case, it was the first' assessment order under the new I.T. Act, 1961.

(ii) The notice was served on the assessee under Section 148 of the I.T. Act, 1961. In the first two cases, it was served on March 15, 1963.

(iii) The assessee filed the return (of taxable income) on March 9, 1964, May 18, 1964, and July 30, 1,964, respectively.

(iv) In each case, while completing the assessment, the ITO directed penalty notice to be issued for late filing of the return.

9. Four questions have been referred in Misc. Civil Case No. 165 of 1972 and the same four questions are referred in Misc, Civil Case No. 116 of 1972, which read as follows :

"1. Whether on the facts and circumstances of the case, when return was filed within four years and before the assessment under Section 139(1), the provisions of the proviso to Section 139(1)(b)(iii) will apply and the time for filing the return will be extended and interest alone will be charged and no penalty is leviable ?

2. Whether, on the facts and in the circumstances of the case, the Tribunal was legally justified in retaining the penalty under Section 271(1)(a) of the Income-tax Act, 1961, when notice under Section 148 read with Section 139(2) has been served upon the assessee and by reading Section 139(7) the assessee-firm cannot be treated in default of Section 22(1) of the old Act or Section 139(1) of the new Act ?

3. Whether, on the facts and in the circumstances of the case, the delay was from 30th June, 1960, or from 15th March, 1963, when the notice under Section 148 of the Income-tax Act was issued ?

4. Whether the Tribunal could not have reduced the penalty from Rs. 17/361 to any other lower sum ?"

10. In Misc. Civil Case No. 584 of 1971, only two questions have been referred, which are questions Nos. 1 and 2 reproduced above.

11. It will be convenient to deal with all these four cases together because Shri R. 3. Dabir, learned counsel for the assessee, who appears in all these four cases, conceded for the assessee that there was default in filing the return; that the penalty which was imposed was paid and that the assessee does not challenge the quantum of penalty in case his other contentions are not accepted.

12. Shri Dabir urged that the word "may" in Section 271(1) connotes a discretion to be exercised by the authority and whenever a discretion is conferred, reasons must be stated for exercising it one way or the other. Section 271 reads as under :

"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 his 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 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 than 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, but which shall not exceed twice, the amount of the income in respect of which the particulars have been concealed or inaccurate particulars have been furnished......"

13. The language of the section is abundantly clear and certain. Penalty can be imposed only under one or more of the circumstances mentioned in Clauses (a), (b) and (c) of Sub-section (1) of Section 271 of the I.T. Act, 1961, and the quantum of penalty is prescribed in Clauses (i), (ii) and (iii) of the same sub-section. Much argument was constructed on the words "may" and "shall " (which have both been applied in the same sense in the sentence) to urge that the first is discretionary, while the quantum of penalty is fixed, certain and mandatory. In our opinion, nothing much turns upon the use of the word "may". The income-tax authorities have been empowered to impose penalty only if there exists one or more of the circumstances enumerated in Clauses (a), (b) and (c), but not otherwise. But, where any of these circumstances exist, the authority has power to impose penalty. The element of discretion steps, in when, under Clause (a), the authority has to satisfy itself whether the return was not furnished "without reasonable cause", so also in Clause (b). Now, in order to determine whether the cause was reasonable or not, the matter is left to the discretion of the authority. So also under Clause (c), it is for the authority to decide whether there has been concealment of the particulars of the income or that there was any inaccurate furnishing of the particulars. If the ITO is satisfied that under Clause (a) or (b), there was absence of reasonable cause or under Clause (c) there was concealment or inaccurate furnishing of the particulars, and imposes the penalty, no other reason need be given for imposing the penalty. In Susannah Sharp v. Wakefield [1891] AC 173 (HL), Lord Halsbury's classical observations may be recalled (p. 179):

"'Discretion' means when it is said that something is to be done within the discretion of the authorities that that something is to be done according to the rules of reason and justice, not according to private opinion: according to law, and not humour. It is to be, not arbitrary, vague, and fanciful, but legal and regular. And it must be exercised within the limit, to which an honest man competent to the discharge of his office ought to confine himself."

14. In U.J.S. Chopra v. State of Bombay [1955] 2 SCR 94, 115 (SC), their Lordships have reiterated the above dictum.

15. In our opinion, the decisions relied on by Shri Dabir in Madanlal Fakirchand Dudhediya v. Shree Changdeo Sugar Mills Ltd. [1962] 32 Comp Cas 604; AIR 1962 SC 1543, Neel v. State of West Bengal, AIR 1972 SC 2066, Union of India v. M.L. Capoor, AIR 1974 SC 87 and Hindustan Steel Ltd. v. State Of Orissa†. [1972] 83 ITR 26 (SC) do not help the assessee. The quantum of penalty is a matter of arithmetic calculation, which has to be peremptorily based on the second part of Section 271(1). The penalty can be neither more nor less than that prescribed.

16. Adverting now to the second contention that by imposing the penalty, double punishment has been inflicted on the assessee, it must be said that the contention is misconceived. Interest is not penalty when it is charged from a person who does not file his return within the time allowed under Section 139(1) of the present Act (corresponding to Section 22(1) of the old Act), Where time is extended for filing the return beyond a certain limit and the extended date falls due on a particular date, then also the assessee becomes liable to pay interest, but he is not liable to pay any penalty because, time having been extended, it cannot be said that he is in default. But interest becomes payable because, by reason of extension of time, the filing of the return would be delayed, which, in its turn, will entail delay in assessment and consequent delay in realisation of tax from the assessee. Thus, interest is by way of compensation for the delay in the realisation of tax. It is not penalty for committing default in filing the return of income within the time allowed, under Sub-section (1) or Sub-section (2) of Section 139 of the Act. Penalty is punishment I it is in terrorem. Therefore, no question arises for imposition of double penalty. The view we take was also taken in K.C. Vedadri v. CIT [1973] 87 ITR 76 (Mad), Express Newspapers (P.) Ltd. v. ITO [1973] 88 ITR 255 (Mad), Addl. CIT v. Santosh Industries [1974] 93 ITR 563 (Guj), Narandas Paramanand Das v. ITO [1975] 98 ITR 453 (Cal) and D.B. Navalgundkar & Co. v. CIT [1975] 98 ITR 675 (Kar). See also the principle laid down in Gursahai Saigal v. CIT [1963] 48 ITR (SC) 1.

17. In CIT v. Kulu Valley Transport Co. P. Ltd. [1970] 77 ITR 518 (SC), their Lordships said as follows (p. 529) :

"Now, the question which was submitted for the opinion of the High Court, in the present case, consisted of two parts, viz., (1) whether the loss returned by the assessee for the assessment years in question was required in law to be determined by the Income-tax Officer, and (2) whether those losses could be carried forward after being set off under section 24(2) of the Act. The first part of the question stood concluded by the decision of this court in Ranchhoddas Karsondas' case [ 1959] 36 ITR 569 (SC). The Income-tax Officer could not have ignored the return and had to determine those losses. section 24(2) confers the benefit of losses being set off and carried forward and there is no provision in section 22 under which losses have to be determined for the purpose of section 24(2). The question which immediately arises is, whether Section 22(2A) places any limitation on that right. This sub-section which has been reproduced before simply says that, in order to get the benefit of section 24(2), the assessee must submit his loss return within the time specified by Section 22(1). That provision must be read with Section 22(3) for the purpose of determining the time within which a return has to be submitted. It can well be said that Section 22(3) is merely a proviso to Section 22(1). Thus, a return submitted at any time before the assessment is made is a valid return. In considering whether a return made is within time, Sub-section (1) of Section 22 must be read along with Sub-section (3) of that section. A return whether it is a return of income, profits or gains or of loss must be considered as having been made within the time prescribed if it is made within the time specified in Section 22(3). In other words, if Section 22(3) is complied with, Section 22(1) also must be held to have been complied with. If compliance has been made with the latter provision, the requirements of Section 22(2A) would stand satisfied."

18. It is clear enough that their Lordships did not hold that penalty proceedings under Section 271 cannot be initiated.

19. Accordingly, we answer the question referred to us in the affirmative. The question is answered against the assessee. The parties shall bear their own costs.