the Commissioner of Income Tax, Madras and Another v. S. V. Angidi Chettiar

Judgment

CIVIL APPELLATE JURISDICTION : Civil Appeals Nos. 6 to 8 of 1961. Appeals from the judgment and order dated Mav 3, 1957 of the Madras High Court in Writ Petition Nos. 943 to 945 of 1955. K. N. Rajagopala Sastri and P.D. Menon, for the appellants. V. S. Venkataram and K. P. Bhat, for responflents. 1962. January 18.-The Judgment of the Court was delivered by SHAH, J.-These a,re three appeals with certificates of fitness granted by the High Court of Madras against orders passed in Petitions for the issue of writs of certiorari setting aside orders imposing penalty upon the firm of Messrs. S. V. Veerappan Chettiar & Co. passed by the Income-tax Officer under s. 28(l)(c) of the Indian Income-tax Act. Four persons carried on business in cloth at Virudhunagar in the name and style of S. V. Veerappan Chettiar & Co.-hereinafter ca.!led the firm. The firm was registered under Art. 26A of the Indian Income.tax Act, 1922, for the assessment years 19!7-48, 1949-50·and 1950-51.

The firm concealed particulars of its income in submitting its returns, and the Income-tax Officer, Virudhunagar in the course of assessment proceedings directed, by order dated May 20, 1954, payment of penalty of Rs. 20,000/- for the year 1947.48, Rs. 10,000/-for the JB6Z T 1u Comntilsio111r of lncom..tax, M•dr.., S. V.Antidi Chcttiar SMA]. 1}, c-.;,,;..,,, of l•eomNax,Madtas S. V, A111idi CMu1ot S/WiJ; 642 SUPREilE COURT REPORTS [Hlu:?] SUPP. year 1949-50 :-nd Rs. 5,000(.for the year 1950-51. Against the orders imposing ponalty, one of the partners of the firm moved the Commissioner of Income-tax, Madras in revision but without succeBB. Thereafter, petitions under Art. 226 of the Constitution for issur of writs of certiorari or other appro· priate writs oalling for records relating to the orders dated May 20, 1954, passed by the Income-tax Officer, Virudhunagar, in respect of tho three assessment orders and tho record relating to the order of the Commissioner and for quaahing tho penalty orders were filed by two partners of the firm in the High Court at Madras.

It was submitted by the petitioners that by agreement between the partners the firm stood <liBBolved on April 13, 1951, and intimation in that behalf was given to the Income-tax Officer, and that in any event the furn stood dissolved on May 5, 1953, when one of the partners died and the Income-tax Officer could not, in exercise of the power under s. 28( I) make an order imposing penalty after dissolution of the firm. The High Court accepted the plea of the petitioners and directed that the orders of the Income-tax Officer dated May 20, 1954, and the further action of the Commissioner thereon declining to revise the order of the Incom'l-tax Officer in each of the peti· tions be set aside. Against the orders paBBed by t.he liigh Court the Commissioner appPals to this Court. This Court in a recent judgment--C. A. Abraham v. Income-tax Officer, Kottayam (')-held that the Income-tax Offioer had power under s.

28 of the Income-tax Act to impoee penalty in the course of aBBessment of a firm even if the firm stood at the date of tho order diBBolved by the death of one of its partners. In so holding, this Court observed that s. 44 of the Income· tax Act sets up machinery for assessing tax liability of a firm which has discontinued its business and that the expres· sion "assessment" in the different sections of (I) [1961) 2 S.C.R. 765. 2S.C.R. Chapter IV of the Income-tax Act was not used merely in the sense of computation of income, and whens. 44 declared that the partners or members of the firm shall be jointly and severally liable to assessment, it referred to the liability to computation of income under s.23 as well as the application of the procedure• for declaration and imposition of tax liability and the machinery for enforcement thereof. Counsel for the appellants, however, contended that C. A. Abraham's rose was one of an unregistered firm and the principle of that case has no application where the firm is a registered firm.

But s. 44 makes the provisions of Chapter IV, so far as may be, applicable to assessment when any business, profession or vocation carried on by a firm h-ts been discontinued : the section declares liability of all discontinued firms and not merely of unregistered firms. There is nothing in s. 44 or the context in which it occur to indicate that it does not apply to registered firms. This Court in C. A. Abraham's rose approved the decision of. the Andhra Pradesh High Court in Mareddy Krishna Re,ddy v. lncome-tax Officer, Tenali, (') which was a case of a registered firm, which was dissolved before imposition of penalty. Counsel then argued that in any event, no penalty under s. 28 can be imposed against a registered firm either before or after dissolution, even if the defaults set out in els. (a), (b) or (c) are proved. This, counsel submits, is the result of the scheme of the Act under s. 23(5) for asaessment of tax liability of a registered firm.

This plea was not set up in the petition, and there is no reference to it in the judgment of the High c~mrt and even in the statement of the case filed in this Court there is no trace of it. On that ground alone the plea raised by the appollant is liable to be rejected. Even if the appellant is permitted to raise the contention there G I) [1957] 31 l. T. R. 678. The Commissioner of lnrom11-t~.Y, M adr•s s. V. Angidi- CMUiar SluzhJ. Tiu C!1mmiriio~ of lnc11mt-'4x, .ll adras S. V. A t1&idi Clutti4r Shah]. is, in our judgment, no force in it. Section 28(1) of the Act (in so far as it is mat..rial to these appeals) providP-s :

"If the Income-tax Officer x x x x x x in the course of any proceedings und<·r this Act is satisfied that any person- (a} has without reasonablo <',ause failed to furnish the return of his total income which he was required to furnish by notice given under sub-B<'ction ( 1) or sub·section (2) of section 22 or section 34 or has without reasonable cause failed to furnish it within the time allowed and in the manner required by such notice, or has without reasonable cause failed to comply with a notice under subsection (4) of section 22 or sub-section (2) of section 23, or (c) bas concealed the particulars of his income .or deliberately furnished inaccurate particulars of ~uch income, he or it may direct tba.t such persons shall by way of penalty, in the case referred to in els.use (a), in addition to the amount of the income-tax and super-tax, if any, payable by him, & sum not exooeding one and a ha.If tim<'s that amount, and in the caBCB referred to in clauses (b) and (c), in addition to any tax payable by .him, a sum not exceeding one and a half times the amount of the income-tax and super-tax, if any, which would have been avoided if the income as returned by such person had been acoopted as the correct income".

The expreBBio11 "person" is defined in s. 2(a) of the Act as· including "a Hindu undivided family and a local authority". That evidently is not an exhaustive definition and recourae SUPREME COURT REPOR~S is permissible to the. General Clauses Act whioh says in s. 3( 42) that a "person" includes "any company or association or body of individuals whether incorporated or not." A firm is manifestly a body of individuals and would therefore fall within the definition of "person", and may be exposfld to an order for payment · of penalty in the circumstances set out in cl!. (a}, (b) and (c} of s. 28 of the Income-tax Act. That a firm, registered or unregistered, may be liable to pay penalty has been further clarified by proviso (d) which declares the quantum of penalty payable by fiims, registered as well as unregistered. Counsel for the appellant however contends . that even if a fi~m be regarded as a person within the meaning of the operative part of s.

28 and the proviso thereof, because of an obvious defect in drafting no liability for payment of penalty can be imposed upon a registered firm and in support of that contention he relies upon the last clause of the Ist sub-section which provides for imposition of penalty "in addition to any tait payable by him". Counsel submits that only the person liable to pay tax, may if found guilty of wrongful conduct specified in. els. (a), (b) and (c) be ordered to pay penalty, and. by the scheme adopted by the Legislature for imposing tait liability upon registered firms under s. 23(5) tax is never payable by a registered firm. Counsel says that when the Legislature by Act 40of1940 enacted cl.

(d) of the proviso; only the quantum of penal liability of a registered firm was declared but the liability could not still be enforced because by the substantive provision, it depended solely upon the existence of an enforceable obligation ofthe firm, and so long as 4n obligation was not imposed upon the firm to pay tax by an adequate amendment of s. 23 (5), the li&bility though quantified W&!l unenf9rce&ble. It is urged that there were two defects in s. 28(1), as origina.lly drafted : ( 1) that t)te (ltinalty could be Thi Commissiorur of InerJme-tax, .tl adriJs 8. V. Angidi Chettiar Shah]. 7111 CommUJiofw of ltu#t•IU, Madras s. v. Jl.,iii · Cittti.r 5hhJ. imposed only upon a person who was liable to pa.y income-tax or super-tax, and (2) that the penalty which may be imposed wa.s a. multiple of the income-tax and super-tax if any, which would have been a.voided if the income as returned by such person would bavo been accepted as the correct income, and by tho enactment of ol.

(d) to the proviso, the second defect was removed, but not first. In support of this argument, counsel relied upon s. 23(5) as it stood, before it waa amended by s. 14 ofthe Finance, Act of 1956. The clause provided that where an assossee is a. firm and the total income of the firm ha.a been &BBessed under sub-s. (1), sub·s. (3) or sub-s. (4), as the case may be, the sum payable by the firm shall not be determined but the total income of each partner of the firm, including therein his share of its income, profits or gaina of the previous year ahall be asseBSed and the sum payable by him on the basis 0f such assossment shall be determined.

Under this scheme the income of the registered firm was to be computed but ta.x was not a&l!CBl!ed on the total income of the registered firm : the income was distributed aocording to the terms of the agreement amongst the partnel'I of the registered firm, and added to the separate income of the partners and ta.x was levied on the partners individually. Relying upon this scheme of levying tax, it was urged by counsel for the respondent that as the registered firm was not liable to pay tax it could not be rendered liable to pay penalty under s. 28 ( 1) ( c). Section 28, a.a it was originally enacted, was somewhat obscure. The penalty which could be impoeed in caaes referred to in ols. (b) and (c) was to be a llUIII not exceeding one and a. half times the a.mount of the ta.x which would have been avoided if the income as returned by such person had been aceepted as the correct income.

But the Legi.sfature did not give any indication whether the penalty was related to the tax avoided by the partners of the firm, or by the firm on the footing ttiat it was to be regarded as an unregistered firm. By a. 23( 5), income· tax not being made payable by the firm but by the individual partneri of a registered firm the legislative intention was not clearly expressed. The Legislature to rectify the defect fixed an artificial basis for computing the penalty payable by a registered firm : it provided that in the cases referred to in els. ( b) and ( c), the amount of the income-tax and super-tax which would have been avoided if the income as returned had been accepted as the correct income, shall be taken to be the difference betwfen the amount of the tax which would have been payable by an unregistered firm, on an income equal to tht> firm's total income. But the provision relating to imposition of liability to pay penalty by registered firms was clearly expressed.

The assumption that the expression "any tax" used ins. 28 ( 1) is intended to indicate that there must be some tax payable by the assessee before penalty could be imposed is wholly unwarranted. The futility of the assumption is exhibited by the terms of cl. (b). Penalty may be imposed for failure to comply with the notice under sub-s. (4) of s. 22 or sub-s, (2) of s. 23 even if the assessee has no assessable income. To the imposition on of a penalty liability to pay tax by the person against whom the penalty is sought to be imposed is therefore not a condition precedent. The Calcutta High Court in Khushiram Murarilal v. Commissioner of Income-tax, Central Calcutta(') was called upon to deal with the submission made before us in this case. In that case the question which fell to be determined was whether imposition of a penalty on a registered firm under s. 28 (1) (b) of the Income Tax Act was justified in law. It was urged in that case on behalf of tho (I) [1954]25 I. T. R. 572. li62 The Commissioner of Incame~tax, Jladras s.

V. Angidi Chettiar Shah]. n. C.....Usiootr •! l11C011V-l4X, M °"" s. v. "•1iJi Cj,uiu SA.Ji J, a.sl!eSSCe-a. registered firm -that inasmuch as under s. 28 (I) (b) a. person can be ma.de liable to pay penalty, in addition to the amount of income-tax and eupor-ta.x, if any, pa.ya.hie by him in ca.sea falling under els. (bl and ( c), no order for payment of penalty ca.n be made against a. registered firm, beoau.eo under the Income Ta.x Act no tax is ma.de payable by the firm. Chief Justice Cha.kra.va.rtti, speaking for tho Court, observed," ............... even when construed by its own language tho concluding para.graph of section 28 (l) cannot be said to make it a condition precedent that a person must be liable to pa.y some income-tax or it ma.y be also super-tax if ho is to hr made liable for a penalty.

Clause (b) of the proviso to my mind emphasizes that meaning of the concluding para.graph of Section 28 (I) a.nd rests on an a.ssumption that under that provision a person may be chargeable to penalty although he ma.y not be ohargeablo to tax." The learned Chief Justice also obaerved, " ......... it wa.s not really necessary for ola.u116 (d) ef the pro- . viso to enact 1pecifioally that a. registered firm would be liable to pay a penalty despite the fact that it could not be charged and was not, in fa.ct, charged to income-tax or super-tax. The whole argument of Dr. Sen Gupta was that tho concluding paragraph o! Section 28 (1) had loft a ga.p which had been attempted to be filled up by clause (d) of ilie proviso, but the attempt had not been suoce- Aful.

In my view the gap which undoubtedly existed in the concluding paragraph of section 28 (I) was only a.n absenoe of a. provision regarding the quantum of the penalty that .oould be leTied from a. regi.ltered firm because tho quantum depends upon the amount of income-tax payable". In our view the lea.med Chief Justice was right is so e. nunoiating the law. Under a. 23 (5) of the Indian Income-tax Act, before it was amend- ·.a· in 1956, ~·the case of a regiltered firm the tax payable by the firm italf waa not required to be determined but the total income of each partner of the firni including therein the share of its income, profits and gains of the previous year was required to be assessed and the sum p11yable by him on the basis of such assessment was to be determined. But this was merely a method of collection of tax due from the firm. The penalty provisions under s. 28 would therefore in tho event of the default contemplated by els.

(a}, (b) or ( c) be applicable in the course of assessment of a registered firm. If a registered firm is exposed to liability of paying pcncilty, by committing any of the defaults contemplated by els. (a), (b) or (c) by virtue of s. 44, notwithstanding the dissolution of tlie firm the assessment proceedings are liable to be continued against the registered firm, as if it has not been dissolved. Counsel contended th'l.t in any event, penalty for the assessment year 1949-50 could not be imposed upon the assessee firm because there was no evidence that the Income-tax Officer was satisfied in the course of any assessment proceedings under the Income-tax Act that the firm had concealed the particulars of its income or had deliberately furnished inaccurate particulars of the income.

The power to impose penalty under s.28 depends upon the satisfaction of the Income-tax Officer in the course of proceedings under the Act: it cannot be exercised if he is not satisfied about the existence of conditions specified in els. (a), (b) or (c) before the proceedings are concluded. The proceeding to levy penalty has, however, not to be commenced by the Income Tax Officer before the completion of the assessment prpceedings by the Income-tax Officer. Satisfaction before conclusion of the proceeding under the Act, and not the issue of a notice of initia· tion of any step for imposing penalty is a condition for the exercise of the jurisdiction. There is no evidence on the record that the Income-tax Officer Tht Commissiomr of Income-lax, Madras S. V Ant:idi Chettfor Sh,h J, 19' 2 74'C-isfton.rof laeotN-to.x, Madror S. I'. A n1idi 0/wtliar Bi..h J. was not satisfied in the course of the assessment proceeding that the firm had concealed its income.

The assessment order is dated November 10, 1951, and there is an endorsement at the foot of the assessment order by the Incomt.-tax Officer that action under s. 28 had been taken for concealment of income indicating clearly that the Income-tax Officer waa satiBfied in the course of the assessment proceeding that the firm had conoealed its income. In our view, the High Court was in error ·in holding that penalty could not be imposed under s. 28 (l) (c) upon the firm Messrs. S. V. Veerappan Chettiar & Co.,.after its disaolution. The appeals will therefore be allowed and the orders pB.118Cd by thl" High Court will be set a.aide and the petitions filed by the respondents dismissed with ooats in this Court and the High Court. One hearing fee. Appeals allowed. PALAKDHARI SINGH & OTHEHS. THE STATE OF UTl'AR PRADE.<::H A~'TI ANOTHER (J.L. KAPUR and RAGHUBAR DAYAL, JJ.) /,imitation-Panchayati Adaiat-Fine i111po8fd on con· i>i<lion-RUO!ltry aftu expiry of .i:r: year1-IJ barred-U .P. l'amhayat Had Act, 19,7.

(U.P; XXVI of 1947) 88. 54, 83, 94- lndian Penal Code, 1860 (XI.I of 1960) B. 70. The appellant was convicted by the Panchayati Adalat for theft and sentenced to pay a fine of Rs. 75/- in 1950. The conviction and sentence was confirm_ed in 1953 by the High Court in revision. In 1958 proceedings were taken to recover the fine. The appellant contended that the recovery was barred by s. 70 The Indian Penal Code. Th~ .rcspon· dent contended thats. 70 was not applicable to conv1ruons by Pauchayati Adalats and that the limitation started from the date of the order of the High Court.