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Commissioner Of Income-Tax, Madhya Pradesh, Bhopal v. Agrawal Brothers

Madhya Pradesh High Court
Mar 14, 1978
Judgment
Subsequent
References
CaseIQ
Case Information
CITATION CODES
citation codes
CASE NO.

Miscellaneous Civil Case No. 202 of 1972

JUDGES

G.L Oza

G.G Sohani, JJ.

ACTS

Section 271(1)(a) of the I.T. Act, 1961. 7. Section 271(3)(a)

Sub-section (2) of Section 139 or Section 148

Sub-section (1) in view of Section 271(3)(b)

Section 22 of the Indian I.T, Act, 1922,

Section 271(1)(a) of the I.T. Act, 1961,

Section 271(3)(b) of the I.T. Act, 1961.

Section 256(2) of the I.T. Act, 1961.

Sub-section (1) of Section 139

Sub-section (2) of Section 139,

Section 271(1)(c)

Section 271(3)(b)

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Judgment Summary: Oza, J. — Application under Section 256(2) of the I.T. Act, 1961

Factual and Procedural Background

This application was filed by the Commissioner of Income Tax (CIT), Madhya Pradesh, Bhopal, under Section 256(2) of the Income-tax Act, 1961.

Relevant facts and procedural history as set out in the opinion:

  • Assessment year involved: 1961-62 (accounting period ended 31 March 1961).
  • The assessee filed a return declaring Rs. 12,811.
  • The Income-tax Officer (ITO), by order dated 26 February 1966, determined the total income at Rs. 1,16,494.
  • A notice under Section 22 of the Indian I.T. Act, 1922, was served on the non-applicant on 20 June 1961; the return was due within 35 days but was ultimately filed on 21 December 1962 (delayed).
  • The ITO, by order dated 15 February 1968, found a delay of 17 months and issued a show-cause notice for penalty under Section 271(1)(a) of the I.T. Act, 1961; a penalty of Rs. 20,393 was levied on 15 February 1968.
  • On appeal, the AAC (order dated 20 December 1968) reduced the total income to Rs. 78,265, found default of 14 months, and directed the ITO to modify the penalty.
  • On further appeal, the Tribunal reduced the total income in the assessment proceedings to Rs. 22,017 and held that, as a registered firm, the assessee's income fell below the taxable limit (registered firms liable only if income exceeded Rs. 40,000). The Tribunal held that penalty under Section 271(1)(a) could not be imposed but, since default occurred after service under Section 22(2), a penalty of Rs. 25 under Section 271(3)(b) was leviable.
  • The petitioner (CIT) sought a statement of case from the Tribunal on two questions of law; the Tribunal (order dated 10 September 1971) refused, saying no question of law arose. The CIT then filed the present petition under Section 256(2) of the Act seeking a direction to the Tribunal to state a case on those two questions.

Legal Issues Presented

  1. Whether, on the facts and circumstances of the case, the Appellate Tribunal was justified in holding that no penalty could be levied under Section 271(1)(a) of the Income-tax Act, 1961?
  2. Whether the Appellate Tribunal was right in holding that the penalty was leviable only under Section 271(3)(b) and in further reducing the penalty to Rs. 25 only?

Arguments of the Parties

Petitioner's (CIT) Arguments

  • The petitioner asked the Tribunal to state a case on two questions of law (the two questions listed above) and contended that the Tribunal was incorrect in holding that no penalty could be levied under Section 271(1)(a).
  • The petitioner also contested the Tribunal's decision to treat the penalty as leviable only under Section 271(3)(b) and to reduce it to Rs. 25.

Non-Applicant's (Assessee) Arguments

  • The non-applicant contended that the Tribunal, in the assessment proceedings, assessed the total income at Rs. 22,017, which was below the taxable limit for a registered firm (income liable to tax only if over Rs. 40,000 for that year); hence no penalty under Section 271(1)(a) could be levied.
  • The non-applicant pointed out that the Tribunal accepted that the assessee had a reasonable belief that the income was not taxable — in particular, a disputed hedging loss of Rs. 56,248 was treated as a controversial question, and the Tribunal apparently accepted the assessee's contention regarding hedging loss, providing a factual basis for reasonable cause.
  • It was also noted that a reference against the Tribunal's assessment order was pending in this Court because of a difference of opinion between judges.

Table of Precedents Cited

Precedent Rule or Principle Cited For Application by the Court
CIT v. V. M. Modi and Sons [1976] 102 ITR 548 (MP) Interprets the phrase "without reasonable cause" in Section 271(1)(a) as vesting discretion in the authority to determine whether reasonable cause exists; existence of reasonable cause is a question of fact (not law). The court relied on this authority to hold that the Tribunal's finding that the assessee had reasonable cause is a finding of fact and thus not a proper matter for reference under Section 256(2); the petition therefore could not compel the Tribunal to state a case on this factual question.
CIT v. N. Khan and Brothers [1973] 92 ITR 338 (All) Where facts show a bona fide belief by the assessee (for example, prior absolution by an inspecting officer), such belief may demonstrate reasonable cause and negate liability for penalty under the relevant provision. The court cited this case to support the proposition that a bona fide belief that certain items were not taxable can remove liability for penalty; the Court used the reasoning by analogy to uphold the Tribunal's factual finding of reasonable cause in the present matter.

Court's Reasoning and Analysis

The court proceeded by setting out the relevant factual findings and statutory provisions and by evaluating whether the questions raised by the petitioner were questions of law that could be referred under Section 256(2).

  1. Findings of fact: The Tribunal had assessed the total income at Rs. 22,017, and it was not disputed that a registered firm was taxable for that year only if its income exceeded Rs. 40,000; therefore the Tribunal concluded the assessee's income fell below the taxable limit. A reference against the Tribunal's assessment order was pending in the Court.
  2. Statutory framework considered:
    • Section 271(1)(a): penalty may be imposed where a person has "without reasonable cause failed to furnish the return of total income" required under Section 139(1) or by notice.
    • Section 271(3)(a): no penalty under subsection (1) if the total income does not exceed the maximum amount not chargeable to tax by Rs. 1,500 (text of the provision quoted in the opinion).
    • Section 271(3)(b): where non-compliance with notice under Section 139(2) is proved but total income is not liable to tax, the penalty under subsection (1) shall not exceed Rs. 25 (the court references this to explain the Tribunal's imposition of Rs. 25).
  3. Application to facts:
    • The Tribunal's factual finding was that the assessee's total income (as finally assessed by the Tribunal) fell below the taxable limit, making the Tribunal's conclusion that Section 271(1)(a) could not be applied to impose penalty sustainable under Section 271(3)(a) and (3)(b).
    • The court emphasized the centrality of "reasonable cause" in Section 271(1)(a): where the assessee honestly believes income is not taxable and that belief is supported by the Tribunal's decision, it cannot be said there was no reasonable cause for failing to file the return.
    • The Tribunal had considered the matter of a Rs. 56,248 loss said to be a hedging loss and treated that matter as controversial; the Tribunal apparently accepted the assessee's contention regarding the hedging loss sufficiently to find reasonable cause. The court treated this as a factual determination by the Tribunal.
  4. On the nature of the questions: relying on the precedents cited, the court observed that the existence of reasonable cause is a pure question of fact. Because Section 256(2) permits this Court to require the Tribunal to state a case only on questions of law, a request to refer factual determinations (such as reasonable cause) could not be entertained.
  5. Consequence for the petition: since the two questions posed by the petitioner ultimately turned on factual findings made by the Tribunal (and were, in the court's view, corollaries of those factual findings), the Court concluded no question of law arose that warranted directing the Tribunal to state a case.

Holding and Implications

Holding: The petition filed by the Commissioner under Section 256(2) is DISMISSED.

Implications and direct effects:

  • The Tribunal's factual findings — namely, that the assessee's total income (as assessed by the Tribunal) fell below the taxable limit and that the assessee had reasonable cause for failing to furnish the return — stand; the Court declined to direct the Tribunal to state a case on those matters.
  • The Tribunal's consequential order — that no penalty be imposed under Section 271(1)(a) and that a penalty of Rs. 25 under Section 271(3)(b) be imposed — is effectively upheld by the dismissal of the petition.
  • The Court noted that the determination of reasonable cause is a question of fact; because the Tribunal resolved that question in favour of the assessee, there was no question of law for referral and the Court could not, and did not, interfere under Section 256(2).
  • No broader or new precedent was announced by this judgment beyond its application of existing authorities to the facts; the decision declines to entertain the petition and directs parties to bear their own costs.

Order: Petition dismissed. Parties directed to bear their own costs.

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JUDGMENT Oza, J.

1. This is an application submitted by the CIT, Madhya Pradesh, Bhopal, under Section 256(2) of the I.T. Act, 1961.

2. The assessment year about which this application is made is 1961-62 for which the accounting period ended on 31st March, 1961. The assessee filed the return of his income declaring only Rs. 12,811. The ITO by his order dated February 26, 1966, determined the total income of the non-applicant-assessee at Rs. 1,16,494. It is alleged that notice under Section 22 of the Indian I.T, Act, 1922, was served on the non-applicant on June 20, 1961, and the return was due to be filed within 35 days thereof. The return, however, was ultimately filed on 21st December, 1962. The ITO by his order dated February 15, 1968, held that there was delay of 17 months in filing the return. He, therefore, issued a notice for showing cause for penalty under Section 271(1)(a) of the I.T. Act, 1961. It appears that the non-applicant did not appear and no explanation was submitted. A penalty, therefore, of Rs. 20,393 was levied by orders dated February 15, 1968. Against this order the non-applicant preferred an appeal before the AAC and the AAC by his order dated December 20, 1968, held that by his appellate order the total income was reduced to Rs. 78,265 and there was default only of 14 months. He, therefore, directed the ITO to modify the amount of penalty.

3. Against this order the non-applicant preferred an appeal before the Tribunal. It was contended before the Tribunal that by the orders of the Tribunal in the assessment proceedings the total income was further reduced to Rs. 22,017 only and as it was a registered firm it was not an assessee with taxable income and consequently no penalty could be levied under section 271(1)(a). The Tribunal observed that for the relevant assessment year a registered firm with income over Rs. 40,000 only was liable to pay income-tax. In this view, it was held that the non-applicant's income fell below the taxable limit. However, it was held by the Tribunal that since the default occurred after the service of notice under Section 22(2), penalty of Rs. 25 only was leviable under Section 271(3)(b) of the I.T. Act, 1961.

4. After the order passed by the Tribunal, the petitioner requested the Tribunal to state the case on two questions of law. But the Tribunal by orders dated September 10, 1971, rejected the petition holding that no question of law arose out of this order and, therefore, the present petition has been filed by the CIT under Section 256(2) of the I.T. Act, 1961.

5. According to learned counsel for the petitioner the two questions :

"(1) Whether, on the facts and circumstances of the case, the Appellate Tribunal was justified in holding that no penalty could be levied under section 271(1)(a) of the Income-tax Act, 1961 ?

(2) Whether the Appellate Tribunal was right in holding that the penalty was leviable only under Section 271(3)(b) and in further reducing the penalty to Rs. 25 only ?"

are questions of law and the Tribunal be directed to state a case.

6. It is not in dispute that in the assessment proceedings ultimately the Tribunal assessed the income at Rs. 22,017 only and it is also not in dispute that for the year under assessment a registered firm with income over Rs. 40,000 only was taxable and, therefore, the non-applicant firm had income which did not fall within the taxable limits. Both the learned counsel frankly conceded that in a reference against the order of the Tribunal in the assessment proceedings the matter is pending in this court on account of difference of opinion between the learned judges who heard that reference. Learned counsel for the non-applicant contended that the assessment order passed ultimately by the Tribunal showed that the income was below the taxable limit and, therefore, no penalty could be levied under Section 271(1)(a) of the I.T. Act, 1961.

7. Section 271(3)(a) reads :

"(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."

8. This provision clearly enacts that no penalty for failure to furnish return of his total income under Sub-section (1) of Section 139 could be imposed under sub-section (1) of this section if the total income of the assessee does not exceed the maximum amount not chargeable to tax in his case by Rs. 1,500. The total income assessed on the assessee by the Tribunal clearly does not exceed the taxable income and the view taken by the Tribunal that no penalty could be imposed under section 271(1)(a) appears to be correct. Under Sub-clause (b) of Sub-section (3) for non-compliance with the notice under Sub-section (2) of Section 139, if it is proved that the total income is not liable to tax, then the penalty which could be imposed under Sub-section (1) in view of Section 271(3)(b) shall not exceed Rs. 25 and, therefore, the Tribunal ordered the imposition of penalty of Rs. 25.

9. Section 271(1)(a) of the I.T. Act, 1961, runs :

" 271. (1) If the Income-tax Officer.....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.....

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

10. The language of this section indicates that if one has failed to furnish the return of total income without reasonable cause, then alone this subsection is attracted. If the assessee honestly believes that his income is not taxable and his belief is supported by the decision of the Tribunal, it could not be said that the assessee has not submitted the return without any reasonable cause. The Tribunal considered this question that the loss of Rs. 56,248 which according to the assessee was hedging loss, even if not ultimately accepted, is a controversial issue and apparently the Tribunal did accept the contention of the assessee as regards this loss being a hedging loss. In this view of the matter, the Tribunal felt that the assessee had a reasonable cause for not submitting the return and this, according to the view taken by the Tribunal, is a question of fact and, therefore, did not call for any reference.

11. It is not in dispute that according to the decision of the Tribunal in the assessment case the total income assessed of the assessee is below the taxable limit although a reference is pending in this court. But it could not be disputed that if the assessee honestly believed that his income is not above the taxable limit it could not be said that it is not a reasonable cause and this has been accepted by the Tribunal as a reasonable cause, and, therefore, the Tribunal held that no penalty under section 271(1)(a) of the Act could be imposed on the assessee.

12. In CIT v. V. M. Modi and Sons [1976] 102 ITR 548 (MP), a Division Bench of this court considered the question of penalty under section 271(1)(a) of the Act and observed (p. 551):

"The very phrase 'without reasonable cause' vests some kind of discretion in the authority imposing the penalty to find out whether there was reasonable cause or not. If in the opinion of the authority there was reasonable cause, in that case, no penalty whatsoever may be imposed. However, if there was no reasonable cause, in that case, imposition of penalty is mandatory."

13. And after considering the facts of that case their Lordships further observed (p. 551):

"As such, the question of existence or otherwise of a reasonable cause in the instant case would be a pure question of fact and not a question of law. We cannot be approached for requiring the Tribunal to refer to us questions of fact but only questions of law."

14. It, therefore, is clear that on the facts found if the Tribunal felt that in the facts of this case where the total income which according to the Tribunal fell below the taxable limit and was in controversy, it amounted to a reasonable cause and that being a pure question of fact this court could not exercise jurisdiction under Section 256(2) of the Act to direct the Tribunal to state the case.

15. In CIT v. N. Khan and Brothers [1973] 92 ITR 338 (All), a similar question was considered and it was observed (p. 340) :

"As has been rightly pointed out by the Tribunal the fact that the Inspecting Assistant Commissioner of Income-tax had absolved the assessee of the charge of concealment with respect to the cash credits during the course of proceedings for levy of penalty under Section 271(1)(c) goes a long way to show that the belief of the assessee that cash credits were not items of taxable income was bona fide one. Thus, the sum of Rs. 40,000 must be deducted out of the income assessed to find out if the balance was still more than the maximum amount not chargeable to income-tax. Now, after deducting Rs. 40,000, the balance is less than Rs. 25,000, which is the maximum amount not chargeable to income-tax in the case of a registered firm. Clearly, the assessee was under no obligation to file any voluntary return under Section 139(1) of the Act, and, as such, was not liable to any penalty under section 271(1)(a)."

16. As discussed above it could not be doubted that the assessee had a reasonable cause for not riling the return and that finding is a finding of fact arrived at by the Tribunal. No question of law, therefore, arises and the first question suggested by the petitioner cannot be said to be a question of law. Similarly, on the finding arrived at by the Tribunal with regard to the first question, the second question is just a corollary and that too having been found by the Tribunal in favour of the assessee, it could not be said that any question of law arises.

17. We, therefore, see no reason to entertain this petition. It is dismissed.

Parties are directed to bear their own costs.

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