PRITHVIRAJ., J.

( 1 ) AN interesting question regarding imposition of penalty under section 271 (l)

(a) of the Income Tax Act, 1961, (hereinafter referred to as the Act) is raised in

this case.

( 2 ) THE assessee is a registered firm. It had to submit its return of income for the

assessment year 1962-63 on or before 30th June, 1962. The assessee made an

application to the Income Tax Officer on 28th September, 1962 for extension of time

for filing the return of income on the ground that the audit of books of accounts of

the assessee was not complete. The Income Tax Officer granted time uptil 29th

October, 1962. A notice dated 23rd February, 1963, under section 139 (2) of the Act

was served on the assessee on 14th March, 1963, requiring it to furnish the return

of its income within thirty days from the date of service of the notice. The assessee

submitted its return showing its income at Rs. 1,95,132-00. On this amount of

income shown and keeping in view the status of the registered firm the tax payable

by it was Rs. 16,665-00. After giving credit of advance tax paid amounting to Rs.

7,564-00, the tax payable by the assessee was determined at Rs. 9,101-84. The

Income Tax Officer also levied penal interest in the sum of Rs. 596-00 under section

139 (1) of the Act. The assessee having failed to file its return of income by 30th

June, 1962, the Income Tax Officer started penalty proceedings against it. The

assessee explained its failure to file the return in time on the ground that its books

of account were not audited. This explanation was not accepted by the Income Tax

Officer showing a reasonable cause for not having filed the return in time and he

levied a penalty of Rs. 14,530-00 under section 271 (l) (a) of the Act. The penalty

was calculated at the rate of 2 per cent per month on the tax due from the assessee

from 22nd October, 1962.

( 3 ) FEELING aggrieved by the order of the Income Tax Officer, the assessee filed

an appeal before the Appellate Assistant Commissioner and held that the penalty

should have been levied for five months. Before the Department the assessee relied

upon a circular letter of the Central Board of Direct Taxes by which an automatic

extension of time to submit the return of income by an assessee, was given upto

30th November, 1962 as 1962-63 was the first assessment year under the

provisions of Income Tax Act, 1961.

( 4 ) FEELING dis-satisfied with the order of the Appellate Assistant Commissioner,

the assessee filed an appeal before the Tribunal. One of the contentions urged

before the Tribunal was that the assessee was prevented from submitting its return

of income within the time allowed by the Income Tax Officer as the audit of its

books of account could not be completed due to labour strike and the partners of

the firm were not able to obtain access to the premises where the books of account

were lying. The other contention urged before the Tribunal was that the Income Tax

Officer was wrong in imposing penalty upon it for having not filed the return in

pursuance to the provisions of section 139 (1) of the Act as the assessee had filed

the return in compliance with the notice served upon it under section 139 (2) of the

Act and that on a reasonable construction of section 271 (l) (a) of the Act, the

penalty could not be imposed as the default in not submitting the return under

section 139 (1) of the Act, if at all. had ceased when the notice under section 139

(2) of the Act was issued to it. That being so the argument of the assessee

proceeded, that the default at best could be from 1st December, 1962 to 23rd

February, 1963,. e. , the date on which notice under section 139 (2) was issued as

in the circular letter issued by the Central Board of Direct Taxes, 1st December,

1962. was specified as the date for filing of return for the assessment year 1962-63,

as already noted above. In this view of the matter the asses- see contended that the

default continued for two months only,. e. . during December, 1962 and. January,

1963 as month would mean a full month. The assessee further contended that since

the notice under section 139 (2) was served upon it on the 14th March, 1963 and it

submitted its return of income on 15th April, 1963, the intervening period could not

be treated as period of default as it could file the return within thirty days from the

date of service of notice. It may be stated here that for imposing penalty the firm

was treated as unregistered firm. Another contention raised was that in computing

the quantum of penalty, all the tax paid by the firm as well as by its partners should

be taken into account. The Tribunal held that the assessees default for noncompliance

of the provisions of section 139 (1) of the Act continued from 21st

October, 1962 till 13th March, 1963 on which date the notice under section 139 (2)

of the Act was served on the assessee. In other words, the Tribunal held that for the

purposes of computation of penalty the default of the assessee in terms of section

139 (1) of the Act would be for four months only The Tribunal further held that the

assessee had been treated as an un-registered firm, all the taxes that were paid by

the firm as well as by its partners, were to be taken into account for the

determination of tax on which penalty is to be levied under the Act.

( 5 ) ON the application of the Commissioner of Income Tax, the Tribunal has

referred the following questions of law for the opinion of this Court:- (1) Whether on

the facts and in the circumstances of the case. the Tribunal was right in holding that

all the taxes paid by the partners could be taken into account for determination of

quantum of penalty payable by the firm under section 271 (1) (i) read with section

271 (2) of the Act (2) Whether on the facts and in the circumstances of the case,

the Tribunal was justified in holding that default under section 139 (1) of the Act

existed only till the date when the notice under section 139 (2) of the Act was

served upon the assessee

( 6 ) MR. G. C. Sharma, learned counsel appearing for the Revenue, contended that

section 139 (7) contemplates only one return of income which an assessee is

required to file either svo motu under section 139 (1) or in pursuance to the notice

served upon him by the Income Tax Officer under section 139 (2) of the Act. Subsection

(7) of section 139 of the Act says that no return under sub-section (1) need

be furnished by any person for any previous year if he has already furnished a

return of income for such year in accordance with the provisions of sub-section (2 ).

The learned counsel further submitted that the Act does not contemplate two

returns in view of sub-section (7) of section 139 as when a return is submitted on a

notice served by the Income Tax Officer under section 139 (2) it has to be treated

as if it was a return filed under section 139 (1) of the Act. Relying upon the

language of sub-section (2) of section 139 of the Act, Mr. Sharma contended that

the Income Tax Officer has an absolute discretion to issue a notice either in the

beginning or the end of the relevant assessment year to any person if in the opinion

of the income Tax Officer such a peers is assessable under the Act, whether on his

own total income or on the total income of any other person during the previous

year to file a return of his income. He. therefore, contended that the language of

sub-section (2) of section 139 of the Act does not by the remotest implication

suggest that a person who is otherwise required to submit a return of his income

before the 30th June of the assessment year in terms of sub-clause (b) of sub-

section (1) of section 139 could evade his obligation by not filing the return suo

motu and sit tight and wait for a notice from the Income Tax Officer in pursuance to

the provisions of sub-section (2) of section 139 of the Act, and on the receipt of

such a notice urge that he had not committed any default in not filing the return suo

motu and such a person cannot be heard to say that in submitting the return of

income in response to the notice he had complied with the statutory obligation cast

upon him to submit his return of income before the 30th June of the assessment

year as contemplated by sub-section (1) of section 139 of the Act. In this view of

the matter it was submitted that the assessee had committed default from 1st

December, 1962. till 15th April, 1963, when the return was filed. From June 30,

1962 till November 30, 1962 the period of default is to be condoned in view of the

automatic extension of time granted in the circular letter issued by the Central Board

of Direct Taxes which enabled an assessee to file the return of income upto 30th

November, 1962, for the assessment year 1962-63. To substantiate this argument

the learned counsel drew support from Commissioner of Income Tax, Rajasthan v.

Indra and Company, 79. T. R. 702 (1 ). In the said case Messrs. Indra and company

a registered firm under the Act and one of its partners, Shri Jiwanlal Maheshwari,

had to submit their income-tax returns on or before 30th June, 1962, as required

under section 139 (1) of the Act. They sought extension of time from the Income

Tax Officer, who on two occasions, extended time upto 30th September 1962. The

assessee did not file the return even during the extended time. The Income Tax

Officer served notices on them under section 139 (2) of the Act to file their returns

within 30 days. In pursuance to the said notices, returns were filed on the 25th

April. 1963. During the course of assessment pro- ceedings the Income Tax Officer

issued notices to the assessees to show cause why penalty should not be imposed

for their failure to file the returns within time as required under section 139 (1) of

the Act. The assessees submitted explanations which were not accepted by the

Income Tax Officer who imposed penalties on both the assessees under section 271

(l) (a) of the Act. Feeling dissatisfied with the order of the Income Tax Officer, the

assessees filed appeals before the Appellate Assistant Commissioner and urged two

contentions, viz. , (a) that as soon as notices under section 139 (2) of the Act were

issued, it must be taken that the Income Tax Officer condoned the delay for not

filing the returns within time in pursuance to the provisions of section 139 (1) and

that no action can be taken against the assessees for not filing the returns within

time as described under section 139 (1), and (b) that the Income Tax Officer had

not mentioned in the assessnient order that the penalty proceedings were initiated

for default committed under section 139 (1) and. therefore, the proceedings could

not be said to have been initiated during the course of assessment 237 HINDUSTAN

INDUSTRIAL CORPORATION, NEW DELHI proceedings. Both these contentions were negatived by the Appellant Assistant Commissioner. On further appeal the Tribunal held that as the assessment proceedings were initiated and completed on the basis of returns submitted under section 139 (2) of the Act, it was not open to the

department under law to impose any penalty for not having filed the returns, in

pursuance of the provisions of section 139 (1) of the Act. The question "whether the

Tribunal rightly held that the orders of penalties in question under section 271 (l) (a)

of the Income Tax Act, 1961, were not tenable in law" was referred to the Rajasthan

High Court. A Bench of the said High Court while considering the approach of the

Tribunal to the question, observed as follows at page 706 :-"if the view taken by the

Tribunal is adopted, the result will be that if a person has not filed any return under

section 139 (1) he cannot be penalised if he has filed a return after a notice has

been given under sub-section (2) of section 139. It may be pointed out that before

taking any assessment proceedings, it is incumbent on the Income Tax Officer to

issue notice under sub-section (2) of section 139. Such a view would mean that any

person liable to pay income-tax may sit comfortably without any fear of the

imposition of penalty and not furnish his return, as required under section 139 (1)

and wait till a notice is given to him under section 139 (2) and then file a return

within the time mentioned in that notice. This view does not appeal to us. AN

argument has been addressed to us that as soon as a notice is issued under subsection (2) of section 139 giving time for furnishing the return, it must be taken that

the Income-tax Officer had condoned whatever the default may have been in not

furnishing the return under sub-section (1) of section 139. Unless there is any

express order for condonation of such default, we cannot take it that the Income-tax

Officer, merely because he has issued a notice under section 139 (2) to a person

who has not filed the return under section 139 (1), must be taken, to have

condoned his default in not furnishing the return under section 139 (1 ). "

( 7 ) THERE appears to be force in the contention of the learned counsel for the

Revenue. All that sub-section (7) of section 139 says is that no return under subsection (1) need be furnished by any person for any previous year if he has already

furnished a return of income for such year in accordance with the provisions of subsection (2 ). but this by itself does not absolve the assessee form the statutory

obligation cast upon him under section 139 (1) to voluntarily submit his return. We

have given our anxious consideration to the provisions of sub-sections (1) and (2) of

section 139 of the Act and we are inclined to agree with the learned counsel for the

revenue that two separate and independent returns of income are not contemplated

or envisaged by the said sub-sections. On a careful reading of section 139, there can

be no dispute that an assessee is required to file only one return of his income for

the relevant assessment year as required under subsection (1) of section 139. Subsection (2) of section 139, however, clothes the Income-tax Officer with a discretion to issue a notice to any person before the end of relevant assessment year if in the opinion of the Income-tax Officer such a person is assessable under the Act, calling upon him to file a return of his income within 30 days from the date of service of

notice and such a notice can be issued by the Incomtax Officer before the end of

the relevant assessment year. In other words the Income-tax Officer can issue a

notice in pursuance to subsection (2) of section 139 at his discretion either in the

beginning of the assessment year or before the end of the assessment year. No

fetters by way of time factor are imposed upon the Income-tax officer in issuing a

notice under sub-section (2) of section 139. An assessee who has not filed a return

voluntarily as required under section 139 (1), cannot be absolved of the default

committed by him on the ground that he has filed the return of his income within

30 days of the service of notice under section 139 (2) of the Act by the Income-tax

Officer calling upon him to submit the return of his income and thereby say that as

soon as he complied with the orders of the Income-tax officer and filed the return

within 30 days of the service of the notice, he has also complied with the provisions

of section 139 (1) of the Act.

( 8 ) IN this connection it would be relevant to examine case, Tarzan Hosiery Private

Ltd. v. Income-Tax Officer, District 1 (B Ward, Kanpur, 69. T. r. 842 (2) In that case

the assessee on 22nd June, 1964, received a notice under section 139 (2) of the Act

directing it to file a return of its total income for the assessment year 1964-65. ft

was required to file the return by 25th July, 1964. On 24th July, 1964, he filed an

application seeking extension of time by 30th August, 1964. The application was not

granted. Since the appellant had not filed a return within the time allowed it became

liable for payment of intrest as also to the imposition of penalty. A contention was

raised by the assessee that according to section 1-39 (1) of the Act it was entitled to

file the return of his income for the relevant assessment year upto 30th September,

1964 and that the Income-tax Officer could not require him to file it earlier under

section 139 (2 ). The argument advanced on behalf of the assessee was that resort

to sub-section (2) of section 139 of the Act could only be made when the period for

filing a return voluntarily under section 139 (1) had expired, and that the notice

served upon him under section 139 (2) requiring it to file a return on or before 25th

July. 1964. was illegal. In the alternative the assessee pleaded that in construing

section 139 (2) and in asking the assessee to file the return of his income before the

expiry of the period described under section 139 (1) would be violative of Article 14

of the Constitution as it would amount to giving unfettered discretion to the lncometax

Officer to discriminate at his whim between the assessees similarly placed by

directing one to submit a return before the expiry of the period described under

section 139 (1) and allowing the other to file a return after the expiry of that period.

Rejecting the contention, the High Court stated that no incompatibility or

repugnance " could be found between the aforesaid two provisions and both of

them can operate simultaneously to their full extent as it was clear from sub-section

(7) of section 139 that a return under sub-section (2) of section 139 could be

demanded and furnished before the return under section (1) was due.

( 9 ) AS already stated above the Act contemplates only one income- tax return to

be furnished by every person in respect of his total income. However, sub-section

(2) of section 139-invests the Income- tax Officer with a discretion to call upon any

person who in the opinion of the Income-tax Officer is assessable under the Act, to

furnish a return of his income within 30 days from the date of service of the notice

but this sub-section (2) by no stretch of imagination can be said to envisage a

return other than a return which normally a person is required to file voluntarily in

pursuance of the provisions of section 139 (1), A person need not file a return if not

already filed under subsection (1) of section 139 in case he had furnished a return

of income for the relevant assessment year in accordance with the provisions of

sub-section (2 ).

( 10 ) A careful reading of two sub-sections amply justifies a conclusion that the

return of income required to be filed under either of the two sub-sections is a return

of the total income of a person which he otherwise is under obligation to file

voluntarily, under section 139 (1) of the Act. That being so if an assessee does not

file a return voluntarily as is required of him under section 139 (1) the default would

start from the date when the return ought to have been filed and not from the day

when he files the return in pursuance to the directions issued by the Income-tax

Officer in the exercise of his discretion under section 139 (2 ). In this view of the

matter the default in the instant case was committed by the assessee with effect

from 1st December, 1962 as an automatic extension of time to submit the return

stood granted upto 30th November, 1962, on the basis of circular letter issued by

the Central Board of Direct Taxes and the default continued till 15th April. 1963

when the assessee submitted its return of income in compliance with the notice

served upon it by the Income-tax Officer in pursuance to the provisions of section

139 (2 ). The plain language of sub-section (2) of section 139 cannot be strained to

hold that the assessee was absolved of its statutory obligation from filing a return of

its income voluntarily under section 139 (1) and the default committed in not filing

the return cannot be taken note of for initiating proceedings for imposition of

penalty and that the period of default shall cease from the date when the notice

under section 139 (2) was issued by the Incometax Officer to the assessee requiring

it to furnish a return of its income within 30 days from the date of service of the

notice. We are, therefore, of the opinion that on the facts and in the circumstances

of the case the Tribunal was not justified in holding that the default under section

139 (1) of the Act existed only till the date when the notice under section 139 (2) of

the Act was served upon the assessee. There is no warrant in law for holding that

the default in not filing a return voluntarily ceased from 14th March, 1963, when the

notice under section 139 (2) was served upon the assessee. If any other

interpretation of sub-sections (1) and (2) of section 139 is given, it would create

discrimination between the assessees,. e. , those who had filed the return

voluntarily in pursuance to sub-section (1) of section 139 and those who infringed

the said provisions and chose to wait for a direction from the Income-tax Officer.

Question No. 2, referred to this Court is accordingly decided in favour of the

Revenue and against the assessee.

( 11 ) THIS bring us to the first question, namely, as to what is the meaning of the

expression of "tax payable". Another question by way of corollary that arises is that

if the expression "tax payable" be held to mean "tax chargeable", then in that event

can rebate be given for the tax deposited by the partners of the firm and regarded

as tax paid- by the firm.

( 12 ) WITH a view to appreciate the respective contentions of the parties it would

be appropriate to reproduce section 271 of the Act. Section 271 reads as follows :-

( 13 ) "271. (L) If the Income-tax Officer or the Appellate Assistant Commissioner in

the course of any proceedings under this Act, 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 (B) has without reasonable

cause failed to comply with a notice under sub-section (1) of section 142 or subsection

(2) of section 143, or (C) has concealed the particulars of his income or

furnished inaccurate particulars of such income, he may direct, that such person shall

pay by way of penalty :- (I) 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 tax

for every month during which the default continued, but not exceeding in the

aggregate fifty per cent, of the tax. "

( 14 ) ACCORDING to the above-quoted section the Income-tax Officer can direct

that an assessee who has without reasonable cause failed to furnish the return of

his 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, shall pay by way of

penalty in addition to the amount of tax, if any, payable by him, a sum equal to 2%

of the tax for every month during which the default continued, but not exceeding in

the aggregate 50% of the tax. This brings us back to the question that we have

already posed above, namely, what do the words "tax, if any. payable by him",

mean. The learned counsel appearing for the Revenue has contended that the

words "tax payable" connote the amount of tax assessed while the learned counsel

for the respondent on the other hand has suggested that the words "tax payable"

would signify the amount of tax which a person is required to pay after giving him

rebate for the tax already deposited by him. This question was considered in Vir

Bhan Bansi Lal v. Commissioner of Income Tax, Punjab, 6. T. R. 616 (3 ). In the

said case, the Income-tax Officer initiated penalty proceedings under sub-section (1)

of section 28 of the Indian Income-tax Act, 1922 during the course of assessment

but the penalty proceedings were finalised after the assessment had been made. A

contention was. raised by the assessee that the Income-tax Officer becomes functus

officio after making the assessment order and he can impose a penalty at the lime

when he makes the assessment and not thereafter at any subsequent period. The

contention was founded on the reasoning that the Income-tax Officer has to satisfy

himself and exercise his discretion in the course of:the proceedings only which

ceases after the assessment order is made. The department on the other hand

urged that if once an Income-tax Officer starts proceedings under sub-section (1) of

section 28 within the time prescribed there, he is empowered to make an order

imposing penalty under that sub-section ever after the assessment order has been

finally made and the tax paid. On the contentions of the parties the question that

was referred by the Tribunal for the decision of the Punjab High Court was "whether

although notice issued under section 28 of the Act a day before the assessment

order was made by the.. T. O. . that officer had power on a date subsequent to the

date of the assessment order, to impose a penalty under section 28. " On examining

the language of section 28 of the 1922 Act the Court observed that the language of

sub-section (1) of section 28 was not happily worded and from the language of the

said section one encounters some difficulty in determining the point of time when

the discretion for the imposition of penalty has to be exercised. The asses- see

relying upon the term "payable" as used in the sub-section, urged that by the use of

that term the Legislature intended to restrict the exercise of power conferred by the

sub-section to the period when the liability of the assessee was determined and the

power could not be exercised at a time when the tax had already been paid. The

Court held that in their view the words "payable by him" without any unnecessary

straining of language could be taken to mean "to which he has been assessed"

whether the amount has been paid or not.

( 15 ) THE above-cited authority is earliest in point of time in which the words

"payable by him" have been interpreted to mean "the amount of tax to which an

assessee has been assessed. " We are inclined to follow the view taken by the

Punjab High Court. The words "tax, if any, payable by him" as used in section 271

(l) (i) would without doubt mean "the tax which has been assessed on an assessee

and is. chargeable" and by no stretch of imagination it could mean the residuary of

the tax to be paid by him after making adjustment of the tax already deposited by

him. The word "tax" has been defined in section 2 (43 ). According to the said

section "tax" in relation to the assessment year commencing on the first day of April

1965 and any subsequent assessment year means income-tax chargeable under the

provisions of this Act and in relation to any other assessment year income-tax and

super tax chargeable under the provisions of this Act in relation to any other

assessment year income-tax and super-tax chargeable under the provisions of this

Act prior to the aforesaid date. " If the definition of the term "tax" means "incometax

chargeable" under the provisions of the Act it is difficult to interpret that the

words "payable by him" would mean anything different than the "income tax

chargeable" under the provisions of the Act. To our mind the words" Payable by him

"cannot mean anything else than "income-tax chargeable" from an assessee after

the same has been assessed. That being so, the amount of penalty at 2% per

month is to be charged on the income-tax assessed on an assessee.

( 16 ) THIS brings us to the other contention of the learned counsel for the Revenue

that in assessing the penalty at 2% on the income-tax chargeable from the

respondent credit for the amounts deposited by the partners of the firm could not

be given. The argument of the learned counsel is that according to section 271 (1)

(i) penalty at 2% is to be calculated on the amount of tax payable by the assessee

in the instant case it would mean the respondent-firm and not its individual

partners. The learned counsel for the Revenue further submitted that according to

sub-section (2) of section 271 when a person liable to penalty is a registered firm or

an unregistered firm which has been assessed under clause (b) of section 183, then,

notwithstanding anything contained in the other provisions of the Act, penalty

imposable under sub-section (1) shall be the same amount as would be impossable

on that firm if that firm were an unregistered firm. That is to say for the purpose of

assessing penalty a registered firm by fiction of law shall be treated as if it is an

unregistered firm though in fact it may not be so. But this fiction, goes the

argument, cannot be carried for all purposes,. e. , in assessing the penalty the

Income-tax Officer cannot give rebate for the advance tax deposited by the

individual partners of the registered firm because the advance tax, if any, so

deposited by them was deposited as advance tax against the amount of tax

chargeable from the individual partners, on the basis of their individual income. The

amount so deposited by them, it was submitted, cannot be taken into consideration

and the respondent firm cannot be allowed rebate for the amount of advance

deposited by individual partners in calculating the the penalty at 2% on the tax

chargeable from the respondent. There seems to be force in the contention of the

learned counsel. All that sub-section (2) of section 271 says is that when the person

liable to penalty is a registered firm for the purposes of imposing the penalty the

said firm shall be treated as if it were an unregistered firm. The words of sub-section

are plain and it is not possible to read anything more in that or extend the fiction

imported by law to any other purpose except to treat the registered firm as if it were

an unregistered firm for the purposes of imposing penalty. It would be relevant here

to examine a Bench decision in Commissioner of Income-fax, Madhya Pradesh and

Nagpur v. Chhotelal Kanhaiyalal, SO 1. T. R. 656 (4 ). In that case the assessee filed

the return of income for the assessment year 1958-59 on 8th July, 1959. The return

was filed 11 months after the due date by which it should have been filed. The firm

was registered in the assessment year. The firm deposited a sum of Rs. 2500. 00 by

way of advance tax. The firm was assessed on a total income of Rs. 85,797. 00. The

assessment was made on 25th May, 1965. Penalty proceedings were also started

against the firm under section 271. A question arose in that case as to What amount

of advance lax was to be deducted in order to find out the exact amount of tax, the

firm had to pay on the basis that it was an unregistered firm. The contention of the

department in that case was that only the amount deposited in advance by the firm

could be deducted while the assessee submitted that the advance tax deposited by

the partners of the firm individually in connection with the assessment of their

individual income in respect of their respective shares in the profits of the firm

should also be deducted. The Tribunal accepted the contention of the assessee. On

the application of the department the Tribunal referred the following question of law

for decision of the Madhya Pradesh High Court :-"whether on the facts and in the

circumstances of the case, for the purpose of calculating the tax with reference lo

which penalty was leviable in the case of a registered firm u/s 271 (1) read with.

271 (2) of the Income-tax Act, 1961, the tax payable by such firm should be

determined after deducting the advance tax paid by the partners u/s 18-A of the

Indian Income Tax Act, 1922, in respect of their shares of profits from the firm from

the gross tax payable by the firm on the basis that it was an unregistered firm"

( 17 ) ON examining the contentions of the parties, Bishamber Dayal, C.. with whom

G. P. Singh,. , agreed observed as follows at page 659 :-"the fiction created by

section 271 (2) of the Act of 1961 is merely to this extent that for the purpose of

calculating the penalty imposable on the firm the basis will. be the same which

would have been applied if the firm had not been registered. This fiction must be

applied to the existing facts. It cannot further be supposed that the advance

deposits made by the individual partners were deposits made by the firm. Such a

supposition would not be a mere extension of the original fiction created by section

271 (2) but would be a new fiction for which there is no warrant in law. "

( 18 ) WE are in agreement with the observations made by the Bench in the abovecited case and our reasons are that the advance deposits made by the individual

partners are for their own benefit against the amount of tax that would be found

chargeable from them and the firm cannot lake advantage of those deposits.

Secondly as already noted in an earlier part of this judgment, the words "tax. if any,

payable by him" used in section 271 (l) (i) obviously mean the tax payable by the

assessee and the assessee in the instant case is a firm which for the purposes of

calculating penalty was treated as if it was an unregistered firm. Beyond this,

section 271 (2) cannot be stretched to confer any additional benefit such as giving

allowance for the advance tax deposited by individual partners which is not

warranted by law.

( 19 ) AT this stage the cases cited by the learned counsel for the respondent may

be noted.

( 20 ) THE learned counsel for the respondent cited case, Sabu Rajeshwar Nath v.

Income-tax Officer, C-ward, Meerut and another. 72. T. R. 617 (5) in which their

Lordships of the Supreme Court held that where a person does not dispute that he

was a partner of the registered-firm for the relevant accounting year, the Collector

could lawfully proceed to execute the certificate for demand of income tax under

section 46 (2) of the Income Tax Act, 1922 against that person and recover the

income tax from him. In that case the question that required determination was that

when a firm not registered under the Act is assessed to income tax and a notice of

demand was issued against the firm. whether a separate notice of demand was

necessary against the partners of the firm when the tax assessed against the firm

was sought to be recovered from a partner. On the basis of this authority the

learned counsel for the respondent urged us to hold that if the notice of demand

against an unregistered firm could be executed against a partner it would be

appropriate to take into consideration the amount of tax deposited by the partner of

that firm while assessing the penalty at 2% on the tax payable by the firm. We are

unable to agree with the learned counsel for the simple reason that the amount of

advance tax deed posited by an individual partner of the firm was deposited for his

own benefit and the amount was not deposited on behalf of the firm. The learned

counsel next cited Commissioner of Income-tax, West Bengal v Vegetable Products

Ltd. , 80. T. R. 14 (6 ). In the said case a notice under sec- tion 22 (2) was served

on the assessee on the 13th June, 1969 and he was required to file the return of his

income by the 18th July, I960, on which date the assessee asked for extension by

two months. The extension was allowed. On the 16th January. 1961, the assessee

was served with a notice under section 23 (3 ). He filed the return on the 17th

January. 1961 for the assessment year 1960-61, for the corresponding accounting

calendar year 1959. The Income-tax Officer took more than two years to complete

the assessment. The assessment was made on 31st October, 1962 after the-

Income-Tax Act, 1961 had come into force. The assessee was served with a notice

under section 274 (1) of the Act in connection with the proceedings for imposition of

penalty. This notice was issued on the 15th May. 1963. A preliminary objection was

taken that the notice was invalid and no penalty proceedings could be initiated as

the assessment proceedings had already been completed. The assessee further

contended that it was prevented from filing the return within time as its audited

balance sheet could not be prepared earlier than October, I960 due to the absence

of its accountant. The Income-tax Officer rejected both the contentions and imposed

a penalty of Rs. 12,734. 00 under section 271 (l) (a) of the Act. The appellate

Assistant Commissioner in appeal maintained the order of imposition of penalty.

Before the Tribunal amongst other contentions. one of the contentions urged was

that the amount of penalty for not filing the return was a sum equal to 2 % of the

tax for every month during which default continued. A demand was made on the

assessee for Rs. 1,16,601. 00 after making a provisional assessment under section

23-B of the 1922 Act. Later on this demand was rectified under section 35 of the

1922 Act to Rs. 92,294-55. The amount was paid by the assessee on the 22nd

February, 1961. The demand made under section 23 (3) was also Rs. 1,59,180. 00

but it was later on rectified to Rs. 1,26,512. 00 minus Rs. 92,294-55,. e. Rs. 34,217-

55. In that event the amount of penalty levied at 2% per month for four months on

Rs. 34,217-55 came to Rs. 2,737-44. The Tribunal accepted the contention of the

assessee and held that tax payable by it was the tax ultimately determined to be so

payable after giving credit for all the payments made towards the tax liability. The

Tribunal accordingly reduced the penalty to Rs. 2,737. 00. At the instance of the

department a question of law, "whether on the facts and in the circumstances of the

case, the Tribunal was right in holding that in calculating the penalty leviable u/s

271 (l) (i)of the Income-tax Act, 1961, the amount paid by the assessee under the

provisional assessment u/s 23-B of the Indian Income Tax Act, 1922, was to be

deducted from the amount of tax determined u/s 23 (3) of that Act in order to

determine the amount of tax on which the computation of penalty was to be based

and in reducing the amount of penalty imposed on the assessee to Rs. 2,737. 00"

was referred to the High Court. The Court held that unless on the day the penalty is

imposed some amount of tax remained outstanding or payable by the assessee no

penalty could be imoposed at all and that the penalty was to be calculated with

reference to the actual amount due and payable by the assessee on the date of

imposition of the penalty.

( 21 ) THE respondent cannot derive any help from the above-cited authority. The

original assessment under section 23-B of the Indian Income- tax Act, was merely a

provisional assessmerft which could be varied. It was only the amount of tax

determined under section 23 (3) of the Act which represented the actual

assessment. But meanwhile the amount was rectified. As the assessee had paid Rs.

92,294-55 under the earlier order of provisional assessment, the amount actually

assessed under section 23 (3) of the Act was reduced to Rs. 34,217-55. Penalty was

therefore levied on that amount.

( 22 ) THERE can be no manner of dispute that the penalty is to be calculated with

reference to the actual amount due and payable by the assessee on the date of

imposition of the penalty but this principle cannot be invoked to hold that the

amount of advance tax deposited by the individual partners should be taken into

consideration with a view to ascertain the amount of tax which remains outstanding

or payable by the respondent-firm. We have already held earlier that the tax paid by

the partners could not be taken into account for determining the quantum of penalty

payable by the firm.

( 23 ) FOR the reasons stated above we accordingly decide question No. I in favour

of the department and against the assessee and hold that on the facts and in the

circumstances of the case, the Tribunal was not right in holding that all the taxes

paid by the partners could be taken into account for determination of quantum of

penalty payable by the firm under section 271 (1) (i) read with section 271 (2) of

the Act.

( 24 ) THE reference is answered accordingly but in the circumstances of the case

the parties shall bear their respective costs.

( 25 ) BEFORE parting with this case we would like to record that it is one of those

cases where the penal provisions of the Act have operated harshly and to the

disadvantage of the respondent for which probably relief could be given by the

department. On the facts and circumstances of the case the department may

perhaps like to re-examine the matter and grant necessary relief permissible under

law to the assessee so as to relieve it to some extent from the rigorous imposition of

penalty.