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Judgment
Mehta, J.—The relevant assessment year is 1964-65. The assessee is a firm which carried on business as Civil Engineering Contractors
since many years prior to the relevant assessment year. For the assessment year 1964-65, it did not file return of income u/s 139(1) of the Income
Tax Act. A notice u/s 139(2) was served on the assessee on September 16, 1964. In response to this notice, the assessee filed its return of
income on January 22, 1965 showing a total income of Rs. 81,896/-. A revised return was also filed by the assessee-company on June 30, 1966
showing a reduced income of Rs. 33,392/- but the same was not entertained by the Income Tax Officer. We are not concerned with the question
of the revised return in this reference. A show cause notice was issued upon the assessee to explain why penalty should not be levied. The
assessee did file its written explanation to the show cause notice on December 15, 1969. The Income Tax Officer considered the various
contentions raised by the assessee. He did not find any merit in the contention of the assessee that the return could not be filed for the reason that
there was difficulty in settlement of accounts since the assessee maintained accounts on mercantile basis. He, therefore, imposed a penalty of Rs.
8,080/- by his order of September, 28, 1970 purported to have been made u/s 271(1)(i) as it stood then. The assessee carried the matter in
appeal before the Appellate Assistant Commissioner who was of the opinion that after giving appeal effect the tax payable by the assessee-firm
which was registered was only Rs. 1,270/- since the assessee had already paid Rs. 4,862/- by way of provisional tax u/s 140-A, and no demand
could have been raised as there was no tax payable by the assessee as a result of regular assessment. The Appellate Assistant Commissioner,
therefore, following the decision of the Calcutta High Court in Commissioner of Income Tax, West Bengal v. Vegetable Products Ltd. and also of
Mysore High Court in N. M. Annaian v. C.I.T. Mysore held that the imposition of penalty was not justified. The Income Tax Officer, being
aggrieved with the order of the Appellate Assistant Commissioner went in appeal before the Tribunal. In the opinion of the Tribunal, the question
was concluded by the decision of the Supreme Court in Commissioner of Income Tax v. Vegetable Products Limited (1973) 83 ITR 192 where
the Supreme Court held that the meaning of the term ""net tax payable"" under the provisions of Section 271(1)(i) is the tax that is actually payable
by the assessee on making of the final assessment and that in computing the net tax payable, deduction has to be given for tax paid u/s 140A or u/s
147(1). In the case before the Tribunal since the net tax payable by the assessee firm was Rs. nil, there was no basis of leavy of penalty under Sec
271(1) (i). The Commissioner of Income Tax, therefore, sought this reference on the following three questions which have been referred to us for
our opinion :
(1) Whether on the facts and in the circumstances of the cases, the Tribunal was right in coming to the conclusion that a registered firm has to be
treated as an unregistered firm only for purposes of computation of the tax on the basis of which the penalty has to be calculated u/s 271(1)(a) ?
(2) Whether, on the facts and in the circumstances of the case, the Tribunal was right in coming to the conclusion that the stage of computation of
tax would raise only if there is any tax payable by the registered firm at the time of assessment ?
(3) Whether, on the facts and in the circumstances of the case, the Tribunal was right in holding that the assessee firm was not liable to any penalty
?
At the time of hearing of this reference, it was pointed out to us on behalf of the Revenue that Section 271(1)(i) has been amended
retrospectively with effect from 1-4-1962 by the Direct Taxes (Amendment) Act, 1974 and Section 271(1)(i) is amended by the said Act and
now reads as under :
(1) 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 assessed
tax for every month during which the default continued, but not exceeding in the aggregate fifty per cent of the assessed tax.
Expression ""assessed tax"" in this clause means tax as reduced by the sum, if any, deducted at source under Chapter XXII B as paid in advance
under Chapter XVII-C. According to the learned advocate for the Revenue the question referred to us shall be required to be reframed or
questions Nos. 1 and 2 be deleted since the assessee is entitled to deduction of the tax only to the extent of the amount of tax deducted at source
under Chapter XVII-B or paid in advance under chapter XVII-C. In his submission if the assessee was not entitled to get credit for the tax paid
alongwith his return, there would be a clear liability u/s 271(1)(i) and the liability is to be computed as provided in sub-section (2) of section 271.
In other words, the tax assessed in case of the assessee-firm was Rs. 1,270/- and the assessee would not be entitled to get it reduced by the
payment of Rs. 4,862/- which he made by way or self-assessed tax u/s 140-A and a demand would, therefore, clearly be issued against the
assessee. In that state of affairs which has resulted on account of the amendment made in Section 271(1)(i) by the Direct Taxes (Amendment) Act,
1974, the liability is required to be computed as provided in sub-section (2) of Section 271. If that is so, it has to be found out what tax would
have been payable by the assessee, if the firm had been treated as an unregistered firm and on the basis of that tax the penalty at the rate of 2% is
to be computed.
We are of the opinion that the contentions of the Revenue should clearly prevail, in view of the amendment made by the Direct Taxes
(Amendment) Act, 1974. Section 271(1)(a) read with Section 271(1)(i) prescribes the liability and the rate of penalty. Sub-section (2) of section
271 prescribes the method of computation of penalty where the person liable to penalty is a registered firm or unregistered firm which has been
assessed under sub-clause (b) of Section 183. In cases of such firms notwithstanding anything contained in any other provision of the Act, the
penalty imposable under sub-section (1) is the same amount as would be imposable on the firm if that firm was an unregistered firm. It is on the
basis of this fiction that the penalty is to be computed when a person liable to penalty is a registered firm or an unregistered firm which is assessed
under clause (b) of section 183. The view of the Tribunal that since the net tax payable by the assessee would be nil, as it would be entitled to
reduce the tax assessed by the amount of tax paid by it u/s 140A, there would be nil demand and if there is a nil demand, there is no question of
levying any penalty, would not now be correct in view of amendment made in section 271(1)(a) by Section 13 of the Direct Taxes (Amendments)
Act, 1974, which has been brought into force retrospectively with effect from 1-4-1962, as it was on the statute book all along from the said date.
The result of the amendment would be, as rightly contended by the learned advocate for the Revenue, that the assessee would not entitled to get
reduction in the amount of the tax assessed by the amount of the tax provisionally paid u/s 140A in view of the Explanation to the amending section
which now defines the terms ""assessed tax"" as the tax reduced by the sum deducted at source under Chapter XVII-B or paid in advance under
chapter XVII-C. According to amended clause (i) of sub-section (1) of section 271, penalty is now linked up with the assessed tax and not with
the net tax payable as was the position before the amendment in question as interpreted finally by the Supreme Court in C.I.T. v. Vegetable
Products Ltd (1973) 83 ITR 192. If the assessee is entitled to reduction only to the extent of the tax deducted at source and the tax paid in
advance, a demand would be clearly issued, in the present case since the tax assessed on the assessee-firm was Rs. 1270/- because the assessee-
firm would not get this amount reduced by the amount of tax paid by it u/s 140-A. If that liability is incurred, and there is no doubt that the assessee
has incurred it in the facts of the case, the penalty is to be computed as if it is an unregistered firm, The fiction can be taken to its logical conclusion
only if, for purposes of computing the penalty, the amount of tax which such a firm would be liable to pay is computed as if it was unregistered. It is
only on that basis that the penalty could be computed. The Appellate Assistant Commissioner as well as the Tribunal proceeded on the footing that
no liability was incurred since no demand could have been issued by the Department because the assessee had paid the amount of tax u/s 140-A
and which amount should be considered to find out whether the tax assessed (Rs. 1270/-) was outstanding or not. But in the view of the
manedment made in Section 271(1)(i) by the Direct Taxes (Amendment) Act, 1974, the position would be, as stated above viz., that the liability is
incurred by the assessee to pay the penalty provided there is no reasonable cause for not filing the return in time. The Income Tax Officer did
consider this aspect of the question and held against the assessee but so far as the Appellate Assistant Commissioner and the Tribunal were
concerned, they proceeded on the footing that no liability was incurred since no demand could have been issued in view of the fact that there was
no tax outstanding against the assessee in view of the provisional payment of tax as compared with the tax assessed. In that view of the matter,
therefore, it would be necessary for the Tribunal to consider whether there was any reasonable cause which prevented the assessee from filing the
return in time. Question Nos. 1 and 2 which have been raised in view of the provision of law as it stood before the amendment made in Section
271(1)(i) by the Direct Taxes (Amendment) Act, 1974 need not be answered. We, therefore, answer question No. 3 as under :
The assessee-firm would incur a liability provided there is no reasonable cause which prevented it from filing the return in time.
The Tribunal shall have to examine this aspect of the question by itself or by remanding it to the Appellate Assistant Commissioner, if so advised,
and then decided the question of liability in view of what we have stated in this judgment. Having regard to the fact that position of law has been
altered by the amendment retrospectively with effect from 1-4-1962 in the matter of penalty u/s 271(1)(a) read with Section 271(1)(i), there
should be no order as to costs.