Commissioner of Income Tax vs Kerala State Co-operative Rubber Marketing Federation Ltd.

V.V. Kamat, J.—u/s 256(2) of the Income Tax Act, 1961, the Revenue seeks reference of the following three questions :

"1. Whether, on the facts and in the circumstances of the case, the Tribunal is right in law and fact in holding that the bona fide belief entertained regarding the non-taxability of its income would constitute reasonable cause so as to take it out of the provisions of Section 271(1)(a) of the Income Tax Act, 1961, and are not the findings of ''bona fide belief entertained'', wrong and unreasonable ?

Whether, on the facts and in the circumstances of the case and also in view of the fact that the total income determined being far more than the income returned, the Tribunal is factually correct in holding that the bona fide belief entertained by the assessee would constitute reasonable cause ?

Whether, on the facts and in the circumstances of the case, the Tribunal is correct in law and fact in holding that the belief regarding non-taxability of the income would constitute reasonable cause for the delay of more than two years in filing the return even after a notice u/s 148 was issued on the assessee for filing their return of income ?"

The assessee is engaged in procuring natural rubber in sheet form from the member societies and selling them and in distributing fertilizers, pesticides, etc., again through the member societies and also in serial spraying.

The Tribunal has observed that the assessment year that followed was June 30 as its accounting year but for the assessment year under consideration it was changed to March 31, 1982. This was granted by the Assessing Officer.

The question that is required to be considered is compliance with the provisions of Section 271(1)(a) of the Income tax Act. Without any response to the notice u/s 148 issued on February 21, 1985, the assessee had filed a return on June 16, 1987, on a total income of Rs. 15,84,770 claiming the whole amount as exemption u/s 80P(2)(a)(iii) of the Act. The assessment appears to have been completed thereafter on February 25, 1988, on a total income of Rs. 24,49,268. It is in regard to this aspect that penalty proceedings are initiated u/s 271(1)(a) of the Act.

The assessee sought to explain the situation with regard to the existing legal position granting total exemption u/s 80P(2)(a)(iii) of the Act. Even though the Assessing Officer rejecting the explanation of the assessee levied penalty of Rs. 18,13,454, the appellate authority, the Commissioner of Income Tax (Appeals) cancelled the penalty by his order.

The appellate authority cancelled the penalty on the ground that the assessee had reasonable cause and bona fide belief that its income is exempted u/s 80P of the Income Tax Act.

Relying on the decision of the Supreme Court in The Assam Co-operative Apex Marketing Society Ltd., Assam Vs. Additional Commissioner of Income Tax, Assam, to contend that such income is not exempt at the hands of the co-operative society and also the decision of this court in Commissioner of Income Tax Vs. Kerala State Co-operative Marketing Federation Ltd., (income tax Reference No. 33 of 1991), dated August 11, 1993, urging that the view that the assessee would be entitled to exemption was no longer good law, it was contended that in view of this position that the assessee is not entitled to exemption there could be absolutely no reasonable cause.

The Tribunal took up the question for consideration and by the order dated July 25, 1994, upheld the view of the appellate authority that there was a situation under which the assessee could be said to have entertained a justifiable belief that u/s 80P of the Act the income could be exempted. The Tribunal also observed that if there is a decision of the court governing the territorial jurisdiction, the belief based on the ratio thereof would have to be a justifiable basis for a reasonable belief and it will have to be understood that the belief was honest and understandable. Reading of the provisions of Section 271(1)(a) of the Act which is the basis of the consequence arising out of failure to furnish returns, it will be seen that the situation requiring an assessee to furnish return, firstly, u/s 139(1); or, secondly, in pursuance of the notice u/s 139(2) ; and, thirdly, even in pursuance of action u/s 148, if the authority is satisfied that there is absence of reasonable cause in regard to these situations then only the question of further consequential action could be legitimately contemplated.

Relying on the provisions of Section 148 of the Act, in view of the position that the Assessing Officer issued a notice u/s 148 of the Act, it was contended that once a notice is issued the assessee was under an obligation to comply with the notice if the issuance of the notice is in accordance with the provisions of Section 148. It was contended that in such a situation satisfaction of the provisions of Section 271(1)(a) of the Act would require separate consideration. Apart from the position that we find this aspect was not pressed into service before the authorities below, even if it is considered to be a question of law raised on the material existing, in our judgment, the situation would not be with any dent in regard thereto. The provisions of Section 271(1)(a) of the Act would cover all the three contemplated situations. This would also be clear that even after reading the provisions of Section 148 Specifying that an action u/s 148 of the Act postulates a prior notice which may include the requirements of Section 139(2) of the Act the provision requires issuance of notice and supported by reasons in support of such issuance. At any rate initiation of penalty proceedings and the requirement to be considered in regard thereto that there is absence of reasonable cause would govern all the three situations specified hereinbefore.

It is also crystal clear that once the position of law creates a situation of reasonable and justifiable belief to act in good faith as a result thereof, such a situation of good faith would also equally govern the situation which is pressed for our consideration. The position would not alter the situation in any event.

The reasoning of the Tribunal to the effect that the material on record goes to make out a case of reasonable belief that the'' income would be exempt under the provisions of Section 80P, having the endorsement of judicial decision of this court, in our judgment, would govern the situation relating to any of the occasions governed by the provisions of Section 271(1)(a) of the Act. We agree with the conclusion of the Tribunal that no referable question of law arises under the above circumstances/Petition stands dismissed.