P. Arunachala Mudaliar vs Commissioner of Income Tax, Madras

Jagadisan, J.—This is a reference application under the Indian Income Tax Act and the following question has been referred to us :

Whether, on the facts and in the circumstances of the case, the levy of penalty of Rs. 1,000 on the assessee u/s 18A(9)(a) read with section 28(1)

(c) of the Act was valid in law ?

The facts giving rise to this application are as follows : The assessee is a partner in several firms carrying on business. These firms were registered

under the Indian Income Tax Act. They were (1) K. N. P. Arunachala Mudaliar and Co., Tiruchi, (2) P. Ramaswami, Woraiyur, (3) Arunachala

Knitting Factory, Karur, (4) P. Perianna Mudaliar Weaving Factory, Srirangam.

The assessee was served with a demand notice from the department for payment of advance tax of Rs. 7,947-8-0 u/s 18(A)(1) for the

assessment year 1952-53. The amount demanded was calculated on the basis of the assessment for the previous completed year 1951-52. The

date of the notice was 20th August, 1952. The assessee estimated his total income for the assessment year 1953-54 at Rs. 27,500 and calculated

the tax payable for that year at Rs. 3,962-1-0. He submitted this estimate to the department on 13th September, 1952, and he paid three

instalments of advance tax on the basis of the estimates in September, 1952, December, 1952, and March, 1953.

For the year ended 12th April, 1953, relevant to the assessment year 1953-54, the assessee made a return declaring his total income at Rs.

37,578. The department computed the total income for that year at Rs. 53,582 and levied a tax of Rs. 6,794-11-0. The Income Tax Officer found

that the tax estimated by the assessee u/s 18A(2) fell below 80 per cent of the final assessment of tax. A notice u/s 28 of the Act was issued to the

assessee asking him to show cause why a penalty should not be levied u/s 18A(9)(a) read with section 28(1)(c) of the Act. The assessee

submitted the explanation that he was bona fide under the impression that his income assessable for the year 1953-54 would be very much less

than the income assessed in respect of the financial year 1951-52, that though in the early part of the year 1952-53 the trend of income from all his

business was downward, there was a sudden spurt of income on and from November, 1952, in the business of K. N. P. Arunachala Mudaliar and

Co., due to removal of price control and other factors, and that there was every justification for his making the estimate in September, 1952, in the

manner he did. In the statement of explanation the assessee set out the following tabular statement :

1952-53 1953-54

Rs. Rs.

Arunachala Knitting Factory 9,806 2,508

P. Perianna Mudaliar Weaving Factory 3,730 1,299

P. Ramaswami, Woraiyur 13,742 8,661

K. N. P. Arunachala Mudaliar & Co. 15,677 20,597

The Income Tax Officer, Tiruchirapalli, took the view that it was upon the assessee to prove that the estimate filed by him was actually based on

his accounts, that it was not difficult for the assessee to submit a revised statement of estimate in March, 1953, after the income shot up and that

the assessee failed to show sufficient cause to avoid penalty. Accordingly, a penalty of Rs. 1,000 was levied by him.

On appeal the Appellate Assistant Commissioner of Tiruchirapalli confirmed this levy of penalty. He was of the opinion that it was the duty of

the assessee to submit a revised return when he got better income as and from November, 1952, than previously and that this failure on his part to

submit the revised estimate was sufficient to bring him within the penal provisions of section 18A(9)(a).

There was a further appeal to the Income Tax Appellate Tribunal by the assessee which resulted in the confirmation of the levy. The Tribunal

observed that it was for the assessee to show on what basis he made the estimate of Rs. 27,500 and that he failed to establish that basis. The

Tribunal also pointed out that the assessee omitted to take advantage of the position to make a revised estimate. The Tribunal rested its conclusion

in the following words :

Though there may not be any obligation cast on the assessee to submit a revised return later, yet as he is possessed with the knowledge of the

income which was likely to accrue to him on later dates than the date when he submitted his original estimate, it is up to him before payment of later

instalment of tax to submit a revised estimate to safeguard his own interest. If he does not choose to do so, he must take the full responsibility for

the original estimate. In the present case, since before the close of the year, the assessee had every reason to know approximately the increase

over the figure submitted by him in the original estimate, and as he paid the later instalment of tax only on the basis of the original estimate, a case

has been established by taking action u/s 28(1)(c) read with section 18A(9)(a) .

The relevant provisions of section 18A may now be noted.

18A. (1)(a) In the case of income in respect of which provision is not made u/s 18 for deduction of Income Tax at the time of payment, the Income

Tax Officer may, on or after the 1st day April in any financial year, by order in writing, require an assessee to pay quarterly to the credit of the

Central Government on the 15th day of June, 15th day of September, 15th day of December and 15th day of March in that year, respectively, an

amount equal to one quarter of the Income Tax and super-tax payable on so much of such income as is included in his total income of the latest

previous year in respect of which he has been assessed.........

18A. (2) If any assessee who is required to pay tax by an order under sub-section (1) estimates at any time before the last instalment is due that

the part of his income to which that sub-section applies for the period which would be the previous year for an assessment for the year next

following is less than the income on which he is required to pay tax and accordingly wishes to pay an amount less than the amount which he is so

required to pay, he may send to the Income Tax Officer an estimate of the tax payable by him calculated in the manner laid down in sub-section

(1) on that part of his income for such period, and shall pay such amount as accords with his estimate in equal instalments....

18A. (9) If the Income Tax Officer, in the course of any proceedings in connection with the regular assessment, is satisfied that any assessee -

(a) has furnished under sub-section (2) or sub-section (3) estimates of the tax payable by him which he knew or had reason to believe to be

untrue, or

(b) has without reasonable cause failed to comply with the provisions of sub-section (3),

the assessee shall be deemed, in the case referred to in clause (a), to have deliberately furnished inaccurate particulars of his income, and in the

case referred to in clause (b), to have failed to furnish the return of his total income; and the provisions of section 28, so far as may be, shall apply

accordingly.

28. (1) If the Income Tax Officer.... in the course of any proceedings under this Act, is satisfied that any person... (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,... in addition to any tax payable by him, a sum of...

The point that arises for decision is whether the assessee furnished the estimate of the tax u/s 18A(2) on 13th September, 1952, knowing or

having reason to believe that it was untrue. Now, section 18A(9) is one of the punishment sections of the Act. It is a common feature of every

taxing statute to impose penalty for violation of all or any of the provisions therein. Such penal provision has to be construed so as not to affect the

subject, unless he or she is plainly caught within the literal statutory language. In adjudging the culpability of the assessee u/s 18A the department

has the unified role of both the prosecutor and the judge. We do not suggest that the said provision is uniform or invalid because of this

circumstance. We only wish to emphasise the fact that every care and caution must be taken by the department to see that the provision is not used

against the assessee as an instrument of oppression. The proceedings are of a quasi-judicial character and it is unnecessary to point out that the

authorities must act in a fair and unbiased. The accusation against the assessee is in the nature of criminal charge and it is obvious that the guilt must

be brought home to him by adopting the standard of proof, as far as may be possible, requisite to sustain a conviction in a criminal court.

Can it be said, in this case, that the assessee knew or had reason to believe that the estimate submitted by him was untrue at the time when he

made it. This relates to the state of his mind at the point of time when he submitted the estimate. It cannot be said that he made a random guess of

his income as Rs. 27,500 as given in his estimate. Nor can it be said that he was so reckless at that time that he did not care to ascertain whether

his estimate was true or false. Surely he had the business accounts before him when he made the estimate. There is no reason to disbelieve the

assessees version that he based the estimate only on the trend of income as disclosed by his business account. It is not the departments case that

even on the figures available to the assessee in September, 1952, the estimate submitted by him was not in accord with the book results. We have,

therefore, to proceed on the footing that the assessee made an honest and fair estimate in September, 1952, upon which he paid the advance tax

u/s 18A. The assessees failure to submit a revised return in March, 1953, towards the end of the financial year, is not a relevant consideration as

the mens rea of the assessee at the time when he made the estimate cannot be adjudged by his subsequent conduct. The charge against the

assessee now is not that he failed to submit the revised return in March, 1953, but that he knew or had reason to believe the estimate submitted by

him to be untrue at the time when he made it.

In our opinion the levy of penalty on the assessee was not warranted in law on the facts and circumstances set forth above. We answer the

question in the negative and in favour of the assessee, who will get his costs from the department. Counsels fee Rs. 250.