Chunnilal And Bros. v. Commissioner Of Income-Tax, M.P

1. This reference has been made under Section 256(1) of the I.T. Act, 1961 (hereinafter called " the Act "), to decide the following questions, viz.:

" (1) Whether, on the facts and in the circumstances of the case, the show-cause notices dated 23-11-1964 issued by the Income-tax Officer under Section 274(2) of the Income-tax Act, 1961, were invalid because they did not specifically mention the section of the 1961 act, but mentioned the section of the 1922 act under which the default in not filing the return of income was committed ?

(2) Whether, on the facts and in the circumstances of the case, the subsequent show-cause notices dated 27-7-1966 issued under Section 274(2) of the Income-tax Act, 1961, were invalid as they did not specifically mention the section of the 1922 Act or of the 1961 Act under which the default in not filing the return of income was committed ?

(3) Whether, on the facts and in the circumstances of the case, penalty could be legally levied for the assessment year 1962-63 under section 271(1)(a) for the default in not filing the return under Section 139(1) when the return was filed in response to a specific notice under Section 148 read with Section 139(2)?

(4) Whether the penalties could be legally levied in view of the fact that the assessee had committed the default only in respect of the time allowed for filing the return and not in respect of the manner in which it was required to be furnished under Sub-section (1) of Section 139 ?

(5) Whether, on the facts and in the circumstances of the case, penalty could be levied under Section 271(1)(a) of the Income-tax Act, 1961, when the return was filed within the time allowed under Section 139(4) of the said Act ?

(6) Whether, on the facts and in the circumstances of the case, the orders under section 271(1)(a) are invalid because they did not specifically set out the period of default and other particulars on the basis of which the amount of penalty was worked out ?

(7) Whether, on the facts and in the circumstances of the case, penalty could be imposed under section 271(1)(a) for the assessment years 1962-63 and 1963-64 at a rate less than 2% of the tax for every month during which the default continued for each of the years ?

(8) Whether, on the facts and in the circumstances of the case, the Tribunal was right in holding that default under Section 139(1) of the Income-tax Act, 1961, continued only up to the date of issue of notice under Section 139(2) of the Income-tax Act, 1961 ? "

2. It may be mentioned that the last question has been referred at the instance of the CIT, while all the other questions are referred at the instance of the assessee.

3. The assessee, M/s. Chunnilal & Bros., Raipur, is a partnership firm which was constituted on November 2, 1959. For the assessment years 1962-63 and 1963-64, which are the only relevant years for the present reference, the assessee failed to file any return in accordance with Sub-section (1) of Section 139 of the Act for which the last dates were September 30, 1962, and June 30, 1963, respectively. The ITO then sent notices under Sub-section (2) of Section 139 of the Act which were served on the assessee on October 3, 1963, requiring the assessee to file returns for both these years by November 2, 1963. The assessee did not file the return for any of these years even by that date. It was only much later on February 22, 1964, that returns for both these years were filed by the assessee. In the assessment order dated November 21, 1964, for the assessment year 1962-63, while making the assessment for that year, the ITO stated that penalty proceedings will be initiated against the assessee for late submission of return beyond September 30, 1962, and a direction for initiation of penalty proceedings on this basis was also made therein. A similar direction for the assessment year 1963-64 was made by the ITO in the assessment order dated November 23, 1964, for that year, to initiate penalty proceedings for late submission of the return beyond June 30, 1963.

4. The ITO then issued two notices, both dated November 23, 1964, under Section 274 read with Section 271 of the Act, to the assessee (annexs. " B/I" and "B/II") for these two years requiring the assessee to show cause why an order imposing penalty under Section 271 of the Act should not be made on the ground that the assessee had " without reasonable cause failed to furnish the return of income which you were required to furnish by a notice given under Section 22(1)/22(2)/34 of the Indian I.T. Act, 1922, or have without reasonable cause failed to furnish it within the time allowed and in the manner required by the said Section 139(1) or by such notice ". The assessee filed a reply dated December 26, 1964 (annex. " C "), praying for condonation of the default on the ground that the late submission of returns was not wilful. It may be added that there is nothing either in this "reply or elsewhere to even remotely suggest that the assessee had any difficulty in understanding the contents of these notices and the ground on which penalty proceedings had been initiated against him. The ITO who had issued these notices (annexs. " B/I " and " B/II ") having been transferred thereafter, his successor-in-office, as a matter of abundant caution, issued two fresh notices dated July 27, 1966, under Section 274 read with Section 271 of the Act, the wordings of which were almost identical to those of the earlier notices, annexs. "B/I" and "B/II". These fresh notices dated July 27, 1966, are annexs. " D/I " and " D/II". The relevant portion from these notices is as under :

have without reasonable cause failed to furnish the return of income which you were required to furnish by a notice given under Section 22(1)/ 22(2)/34 of the Indian Income-tax Act, 1922, or which you were required to furnish under section 139(1) or by a notice given under Section 139(2)/148 of the Income-tax Act, 1961, No............ dated........................ or have without reasonable cause failed to furnish it within the time allowed and in the manner required by the said Section 139(1) or by such notice.

5. After holding the prescribed enquiry on the basis of the above notices, the ITO, by order dated September 26, 1966, in each case, imposed the penalty of Rs. 7,284 and Rs. 3,338, respectively, for these two assessment years under section 271(1)(a) of the Act. The AAC dismissed the assessee's appeals against the imposition of penalty for both years by his consolidated order dated January 4, 1967.

6. The assessee then preferred an appeal" to the Income-tax Appellate Tribunal. The Tribunal, vide its order dated September 17, 1969, partly accepted the assessee's contention and reduced the period of default for the purpose of imposition of penalty. The Tribunal held that the default in not complying with the requirements of Sub-section (1) of Section 139 which commenced on September 30, 1962, for the assessment year 1962-63 and June 30, 1963, for the assessment year 1963-64 ceased in each case on October 3, 1963, the date on which notices under Sub-section (2) of Section 139 were served on the assessee for these two years. Accordingly, the penalty imposed was reduced for both these years. The assessee as well as the CIT applied for referring certain questions of law said to arise out of the Tribunal's order dated September 17, 1969. This has resulted in the present reference being made for answering the aforesaid questions.

7. There can be no dispute that the aforesaid questions Nos. (1) and (2) do not at all arise for decision by us. Question No. (1) has been referred on the basis that the notices dated November 23, 1964 (annexs. "B/I" and " B/II"), did not specifically mention the section of the 1961 act under which the default in not filing the return of income was committed. Similarly, question No. (2) is referred on the basis of the same omission in notices dated July 27, 1966. A bare perusal of the notices, annexures " B/I ", " B/II ", " D/I" and " D/II" reveal that there is no such defect in any of these notices, inasmuch as Sub-section (1) of Section 139, for the default of which provision penalty has been imposed on the assessee, was clearly mentioned in all these notices. This is evident from the relevant extracts from the two sets of notices given earlier. Accordingly, we decline to answer the aforesaid questions Nos. (1) and (2) which do not arise for the decision of this court in the present case.

8. Question No. (4) and question No. (7) referred at the instance of the assessee were not pressed at the hearing before us by the learned counsel for the assessee. We, accordingly, answer these questions against the assessee.

9. That leaves for our decision only questions Nos. (3), (5) and (6) referred at the instance of the assessee and question No. (8) referred at the instance of the CIT. We shall consider these questions hereafter. We may add that questions Nos. (3), (5) and (8) are connected and, therefore, it would be more appropriate to consider them together. For this reason, we would first deal with the only other remaining question, viz., question No. (6), before we come to a discussion of questions Nos. (3), (5) and (8). Question No. (6):

10. In the present case, there is enough material to indicate that the assessee was apprised of the fact that the penalty proceedings had been instituted against it for non-compliance with the provisions of Sub-section (1) of Section 139, according to which it was required to file the returns for these two years up to September 30, 1962, and June 30, 1963, respectively. To begin with, this fact was expressly stated in, the assessment orders dated November 21, 1964, and November 23, 1964, copies of which were admittedly given to the assessee. The assessee knew very well the only other date relevant, i.e., the date on which it did actually file the returns which was February 22, 1964. The notices expressly stated that the penalty proceedings had been initiated for failure to furnish the return of income for these assessment years within the time allowed and in the manner required by Sub-section (1) of Section 139, without any reasonable cause. We fail to understand what other particular was needed by the assessee to effectively show cause against the notice proposing imposition of penalty under section 271(1)(a) of the Act. It is also significant that the assessee never complained of any ambiguity in the notice or lack of particulars and the very first reply (annex." C ") dated December 26, 1964, indicates that the assessee was fully aware of all the relevant facts which he should have known in this connection. No prejudice of any kind to the assessee was alleged at any stage during the penalty proceedings and learned counsel for the assessee could not tell us even at the hearing as to what prejudice, if any, was caused to the assessee by non-mention of the dates admittedly known to the assessee, in these notices. Learned counsel for the assessee strenuously urged that penalty proceedings are in nature quasi-criminal proceedings. There can be no dispute with that proposition. However, it is obvious that the assessee's rights cannot be higher than those of an accused in a criminal trial. Even applying the principles of a criminal trial, the argument advanced on behalf of the assessee cannot be accepted when admittedly there was absolutely no prejudice to the assessee. There is no dispute that any prescribed requirement for giving such a notice has not been violated. There being no non-compliance of any prescribed requirement, this point does not require any further consideration. In Hajarilal Kishorilal v. CIT [1967] 64 ITR 563 (MP), one of the questions referred to this court for decision was whether the order imposing penalty under Section 271 of the Act was invalid on the ground that the notice issued to the assessee did not correctly specify the default committed by the assessee and that the notice was not signed by the ITO. It was held that no prejudice to the assessee being shown because of any defect in the notice and adequate opportunity to show cause why penalty should not be imposed being given to the assessee, the opportunity contemplated under Section 274 of the Act had been given and the defect in the notice did not invalidate the imposition of penalty. It is obvious that the assessee's challenge to the validity of penalty proceedings in the present case is much weaker. The answer to this question must, therefore, be given against the assessee. Questions Nos. (3), (5) and (8) :

11. The first point to be considered while dealing with these questions is whether the default in compliance with the provisions of Sub-section (l)of Section 139 of the Act is wiped off or even arrested on issuance of a notice by the ITO under Sub-section (2) of Section 139. The Tribunal has taken the view that the giving of a notice under Sub-section (2) of Section 139 by the ITO has the effect of stopping the default committed by the assessee under Sub-section (1) of Section 139 from the date of service of the notice, even though the default prior to that date survives. On this view, the period of default taken into account for imposition of penalty under section 271(1)(a) has been computed by the Tribunal in the manner already indicated.

12. A Full Bench of the Orissa High Court in CIT v. Gangaram Chapolia [1976] 103 ITR 613 held that the conjunctive " and " in the second clause of section 271(1)(a) should be construed as "or", and, therefore, even if the return of the assessee had been filed in the manner prescribed, as it was not filed within the time allowed under Section 139(1), one of the two conditions prescribed in section 271(1)(a) had not been fulfilled and the assessee would be liable to penalty under section 271(1)(a). It was also held in that case that where the assessee had filed the return within the time allowed under Section 139(4) of the Act, he could not be deemed to have filed the return within the time allowed under Section 139(1) to avoid imposition of penalty under Section 271(1)(a) since Section 139(4) was not in the nature of a proviso to Section 139(1) for all purposes under the Act. The decision of their Lordships in CIT v. Kulu Valley Transport Co. P. Ltd. [1970] 77 ITR 518 (SC) was distinguished and it was pointed out that the concession given under Section 139(4) is restricted to the assessment and was not available to the assessee for all purposes under the Act including a penalty proceeding under Section 271. It was pointed out that the opposite view would render the time limit prescribed in Section 139(1) otiose and wholly unnecessary except for purposes of charging interest. With respect, we find ourselves in full agreement with this conclusion as there is no cogent reason warranting the acceptance of the opposite view canvassed by the assessee.

13. In CIT v. Indra and Co. [1971] 79 ITR 702, a Division Bench of the Rajasthan High Court held that an assessee is liable to penalty for not submitting his return as required by Section 139(1) of the Act, even though he subsequently files a return in pursuance of a notice under Section 139(2) and an assessment is made on the basis of that return. In that case, the Income-tax Appellate Tribunal took the view that since the assessment proceedings had been initiated and completed on the basis of return submitted under Section 139(2), it was not permissible under law to impose penalty for any default committed in not submitting the return as required by Section 139(1). The Rajasthan High Court reversed the Tribunal's conclusion and took the view already indicated. The reasoning adopted for taking this view is as under (p. 705) :

" The Tribunal appears to be unduly obsessed by the fact that if a return has not been furnished as required under Sub-section (1) of Section 139 and has been furnished after the giving of the notice under Section 139(2), it must be deemed that the default so far as the furnishing of the return under Sub-section (1) of Section 139 is concerned, continued for all the time. The default is in not furnishing the return and as soon as the return is furnished, there is an end of the default. Moreover, it has been expressly laid down under Section 139(7) that no return under Sub-section (1) need be furnished by any person for any previous year if he has already furnished the return of income for such year in accordance with the provisions of of Sub-section (2). In our opinion, in all the cases mentioned in section 271(1)(a) of the Act, the default continues only till the time when the return has been furnished or if no return has been furnished at all, it continues till the assessment is completed. But, if the return has been furnished, the default ceases whether such return is furnished under Sub-

section (1) of Section 139 or by notice, given under Sub-section (2) of Section 139 or under Section 148. It is immaterial for the purpose of cessation of default that the return has been filed in obedience to any particular provision of law.

If the view taken by the Tribunal is adopted, the result will be that if a person has not filed any return under Section 139(1), he cannot be penalised if he has filed a return after a notice has been given under Sub-section (2) of Section 139. It may be pointed out that before taking any assessment proceedings, it is incumbent on the Income-tax Officer to issue notice under Sub-section (2) of Section 139. Such a view would mean that any person liable to pay income-tax may sit comfortably without any fear of the imposition of penalty and not furnish his return as required under Section 139(1) and wait till a notice is given to him under Section 139(2) and then file a return within the time mentioned in that notice. This view does not appeal to us.

An argument has been addressed to us that as soon as a notice is issued under Sub-section (2) of Section 139 giving time for furnishing the return, it must be taken that the Income-tax Officer had condoned whatever the default may have been in not furnishing the return under Sub-section (1) of Section 139. Unless there is any express order for condonation of such default, we cannot take it that the Income-tax Officer, merely because he has issued a notice under Section 139(2) to a person who has not filed the return under Section 139(1), must be taken to have condoned his default in not furnishing the return under Section 139(1).

It is further argued before us that it will be equitable to construe Section 271(1) in such a manner that if there is a longer period of default in not furnishing the return as required under Sub-section (1) of Section 139 and if there is a shorter period of default or no default at all in furnishing the return under Sub-section (2) of Section 139, then action for imposition of penalty can be taken only for a shorter period of default. This argument has got no merit because the law makes one default as much liable for penalty as another and it is for the Income-tax Officer to take action for whatever default he thinks proper by issuing a notice under Section 274 to the assessee for showing cause why penalty should not be imposed on him and by giving reasonable opportunity to him of being heard. "

14. With respect, we are in agreement with this view and the reasons given by the Rajasthan High Court to support the same. It is obvious that the contention of the assessee, if accepted, would lead to the result that a wilful and contumacious default in filing the return in accordance with Section 139(1) will go unpunished, even though penalty is provided in section 271(1)(a) for such a default.

15. The above view of the Rajasthan High Court was referred and followed by the Delhi High Court in CIT v. Hindustan Industrial Corporation [1972] 86 ITR 657. Same is the view taken by the Andhra Pradesh High Court in Mullapudi Venkatarayudu v. Union of India [1975] 99 ITR 448, following the above Rajasthan view. It was clearly held that a default having been committed in not filing the return in accordance with Section 139(1), that default continued up to the date on which the return was filed either in response to the notice under Section 139(2) or under Section 139(4). The argument that issuance of a notice under Section 139(2) by the ITO after commencement of the default under Section 139(1) would be deemed to have condoned the default under Section 139(1), was rejected. The Allahabad High Court has also taken the same view in Addl. CIT v. Seth Devi Chand & Sons [1978] 111 ITR 724 (All). It was held that the assessee's default in not furnishing the return within the time allowed and in the manner required by Section 139(1) or by a notice under Section 139(2) or by Section 148 exposed him to the liability of imposition of penalty under section 271(1)(a) and the imposition of penalty would not be invalid merely because the assessee had subsequently filed a return under Section 139(4).

16. The decision of the Patna High Court in Addl. CIT v. Bihar Textiles [1975] 100 ITR 253 is the only case taking a contrary view, which has been cited before us. The Allahabad High Court, in the above decision, referred to the Patna case and said that it was distinguishable. It may be mentioned that in the Patna case, no reference is made to any of the above decisions, even though, except for the Allahabad decision, the others are prior in point of time and were all reported decisions. The Patna High Court has taken the view that once a notice under Section 139(2) of the Act has been issued to the assessee, there cannot be any penalty under section 271(1)(a) for failure to furnish the return as required by Section 139(1). It was also held that where the return was in fact filed even after expiry of the time given in the notice under Section 139(2) the period of default for imposition of penalty has to be calculated only from the expiry of the time fixed for filing the return in the notice under Section 139(2) and not from any earlier date. We regret our inability to agree with the Patna view which was taken without even referring to the earlier decisions, on the point taking a contrary view. Some of the reasons given in the Rajasthan decision, which have been followed by the High Courts of Delhi, Andhra Pradesh and Allahabad, are not even considered in the Patna decision. It has already been indicated that the ITO is bound to give a notice under Section 139(2) before making the assessment, in case the assessee does not file a return in accordance with Section 139(1). If that is so, the view taken by the Patna High Court would lead to the result already pointed out that a wilful and contumacious default under Section 139(1) would also go unpunished, in spite of the provision made in section 271(1)(a) for punishing such a default. In our opinion, this reason alone is sufficient to prefer the majority view already indicated in preference to the opposite view shown to have been taken only by the Patna High Court. The Allahabad High Court also did not agree with the view taken in the Patna decision, in the above case. It must, therefore, be held that the default made under Section 139(1) ceases only on filing the return whether in answer to the notice under Section 139(2) or under Section 139(4) and that the default is not either arrested or wiped out on a notice being issued under Section 139(2). It is also clear that the filing of a return in accordance with Section 139(4) does not absolve the assessee from the liability of penalty under section 271(1)(a). These questions must, therefore, be answered accordingly and against the assessee. The result, therefore, is that the assessee's default under Section 139(1) commenced on October 1, 1962, for the assessment year 1962-63 and July 1, 1963, for the assessment year 1963-64 and it continued for both these years up to February 22, 1964, when returns for these years were actually filed by the assessee, for which default the assessee was liable to imposition of penalty for each of these years under section 271(1)(a) of the Act.

17. As a result of the above discussion, our answers to the aforesaid questions Nos 3, 4, 5, 6, 7 and 8 are against the assessee and in favour of the revenue, while questions Nos. (1) and (2) arc not answered as they do not arise in the present case. The reference is answered accordingly. The assessee shall pay the costs of this reference. Counsel's fee Rs. 200, if certified.