JUDGMENT
ISMAIL J. – The assessee is a registered firm of four partners carrying on business in forest contract and timber. It filed a return disclosing income of Rs. 16,950 for the assessment year 1964-65, the relevant accounting period being from November 16, 1962, to March 31, 1963. The Income-tax Officer noticed that during a raid of its place of business made on April 25, 1964, the sale tax authorities seized certain books and slips which disclosed certain sales that had not been accounted for in the regular books and that the sale-tax authorities had determined the turnover at Rs. 7,86,156 as against Rs. 5,20,240 admitted by the assessee. The Income-tax Officer called upon the assessee to produce the books and slips that had been seized by the sales tax authorities and which had been returned to it. The assessee did not produce them. The Income-tax Officer thereupon determined the total income as Rs. 24,990 as against Rs. 16,950 returned by the assessee. In so doing, he made an addition of Rs. 6,400, being the estimate on the turnover suppressed. The Income-tax Officer also initiated action for levy of penalty under section 271(1)(c) of the Income-tax Act 1961, for alleged concealment of income, and since the minimum penalty imposable exceeded Rs. 1,000, he referred the case to the Inspecting Assistant Commissioner who issued notice to the assessee calling upon it to show cause against levy of penalty. The assessee represented, inter alia, that there was no concealment of income and that no penalty was leviable since the addition made was only on the basis of estimate. The Inspecting Assistant Commissioner held that the suppression of sales was proved beyond doubt, that the estimated addition made by the Income-tax Officer as profit relating to the suppressed turnover was also agreed to by the assessee and that, therefore, penalty was clearly attracted. He further held that the Explanation to section 271(1)(c) of the Income-tax Act of 1961 applied, and the assessee had not discharged the onus cast upon it therein. Hence by his order dated March 20, 1971, he levied a penalty of Rs. 6,400 applying the provisions of section 271(1)(c) of the Income-tax Act, 1961 as amended by the Finance act, 1968, that being the minimum penalty impossiable.
Aggrieved by such levy of penalty, the assessee preferred an appeal to the Income-tax Appellate Tribunal, Madras Bench. Before the Tribunal the assessee contended :
(i) that since the addition agreed to by it was only for deficiency of gross profit, no penalty could be levied; and
(ii) since the total income determined was only Rs. 24,990 and since, under the Finance Act of 1964, no tax was payable by a registered firm on the first Rs. 25,000, no penalty could be levied.
It was urged before the Tribunal by the assessee that penalty under section 271(1)(c) could be levied only if there was liability to pay tax. Reference was made to the language of section 271(1)(iii) which enabled penalty being levied in addition to income-tax. On the other hand, the contention of the department before the Tribunal was that penalty could be levied for every concealment of income, even though there might not be liability to pay tax.
The Tribunal after considering the language of section 271(1)(c) and section 271(1)(iii) and, noticing the difference in language in section 271(1)(i) and section 271(1) and section 271(1)(iii), held that no penalty could be levied on the assessee for concealment of income, since its total income was only Rs. 24,990 and, under the relevant Finance Act, no tax was payable by it for the first Rs. 25,000. It accordingly cancelled the penalty. It is the correctness of this conclusion of the Tribunal that is challenged by the Additional Commissioner of Income-tax, Madras II, Madras, by applying for and obtaining a reference of the following question for the opinion of this court :
“Whether the Appellate Tribunal was right in holding that the penalty under section 271(1)(c) is not exigible for the assessment year 1964-65, because the firm was not liable to pay tax ?”
The entire question depends upon the meaning of the relevant statutory provision as it then stood as was applicable for the assessment year in question. Sub-sections (1) and (2) of section 271 of the Income-tax 1961, as they stood at the relevant time, were as follows :
“271. Failure to furnish returns comply with notices, concealment of income, etc. (1) 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 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 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 sub-section (2) of section 143, or
(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, –
(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;
(ii) in the case referred to in clause (b), in addition to any tax payable by him, a sum which shall not be less than ten per cent. but which shall not exceed fifty per cent. of the amount of the tax, if any, which would have been avoided if the income returned by such person had been accepted as the correct income;
(iii) in the cases referred to in clauses (c), in addition to any tax payable by him, a sum which shall not be less than twenty per cent. but which shall not exceed one and a half times the amount of the tax, if any, which would have been avoided if the income as returned by such person had been accepted as the correct income.
(2) When the 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 this Act, the penalty impossible under sub-section (1) shall be the same amount as would be impossible on that firm if that firm were an unregistered firm.”
It will be seen that sub-section (1) of section 271 itself falls into two parts. The first part deals with the defaults in clauses (a), (b) and (c) and the second part deals with the respective penalties in clauses (i), (ii) and (iii). Clause (a) deals with the failure to furnish a return under the circumstances mentioned therein. Clause (i) is the related provision for levy of penalty which states that in case coming under clause (a), the concerned authority may, in addition to the amount of tax, if any, payable by the assessee, direct him to pay by way of penalty, a sum equivalent 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. Clause (b) deals with another kind of default. That is, failure to comply with a notice under sub-section (1) of section 142 or sub-section (2) of section 143. Section 142(1) enables the Income-tax Officer to serve on any person who has made a return under section 139 or upon whom a notice has been served under sub-section (2) of section 139, a notice requiring him on a date to be therein specified, to produce accounts or documents or to furnish in writing and verified in the prescribed manner certain information. Section 143(2) states that where a return has been made under section 139 but the Income-tax Officer is not satisfied without requiring the presence of the assessee of the production of evidence that the return is correct and complete, he shall serve on the assessee a notice requiring him, on the date to be specified therein, either to attend at the Income-tax Officers office or to produce, or or cause to be there produced, any evidence on which the assessee may rely in support of the return. Thus, it will be seen that the notice under section 142(1) can call upon the assessee only to produce accounts or document or to furnish in writing certain information, while the notice under section 143(2), in addition to such a requirement, can call upon him to appear before the Income-tax Officer also in person. Failure to comply with any of these requirements constitutes a default under section 271(1)(b). Clause (ii) of section 271(1) is the corresponding provision for the levy of penalty. This clause also states that in the cases to which clause (b) applied, the authority concerned may direct the assessee that he shall pay by way of penalty, in addition to any tax payable by him, a sum which shall not be less than ten per cent., but which shall not exceed fifty per cent. of the amount of the tax, if any, which would have been avoided if the income returned by such person had been accepted as the correct income. Clause (c) of sub-section (1) of section 271 provides for the case where the assessee had concealed the particulars of his income and the related provision for levy of penalty is clause (iii) of that sub-section. That clause provides that the authority concerned may direct the assessee in the cases referred to in clause (c) to pay by way of penalty, in addition to any tax payable by him, a sum which shall not be less than twenty per cent. but which shall not exceed one and a half times the amount of the tax, if any, which would have been avoided if the income as returned by such person had been accepted as correct income.
It will be seen from the language of sub-section (2) of section 271 that it is concerned only with a registered firm or an unregistered firm which has been assessed under clause (b) of section 183, and the amount of penalty imposable on such firm under sub-section (1). In the present case, we have already referred to the fact that the assessee is a registered firm and its total income as finally assessed was Rs. 24,990 and the case of the assessee fell within the scope of section 271(1)(c). Dealing with the liability of the assessee to penalty under such circumstances, the Tribunal held that, in view of the difference in the language between section 271(1)(i) on the one hand clauses (ii) and (iii) on the other, the assessee was not liable to any penalty because no tax was payable by the assessee, as under the relevant provisions income up to Rs. 25,000 in the hands of a registered firm was exempt from tax. With reference to this question, the Tribunal observed in the order as follows :
“In the first place, while Parliament has used the words tax, if any, which would have been avoided in clauses (i) and (ii) of section 271(1), the words that are used in clause (iii) thereof are as follows :- in addition to any tax payable by him.
The omission of the word if in the above clause is significant. Bearing in mind the basic principle underlying the levy of penalty, namely, that evasion of tax should be discouraged and penalised, we find that the provisions of clause (iii) of section 271(1) are so framed as to penalised an assessee who is liable to pay some tax and conceals or furnishes inaccurate particulars of his income with a view to evade payment of tax due by him. If no tax is due, obviously there could be no evasion of any tax. For example, if an assessees income as per books is, say, Rs 2,500 and he is found to have omitted from the books an income of Rs. 1,000, still his total income being below the taxable minimum, there would be no liability to tax on his part. If we accept the contention of the learned departmental respective, simply because he has concealed an income of Rs. 1,000, penalty of a minimum of Rs. 1,000 and a maximum of Rs. 2,000 would be exigible, which proposition leads to absurdity.”
Thus, the Tribunal rests its conclusion on two different grounds. One ground is that in section 271(1). clause (i), the words “if any” occurs after the words “the amount of the tax” and before the words “payable by him”, while such an expression is absent in clauses (ii) and (iii) of sub-section (1) of section 271 where the expression which occurs is “in addition to any tax payable by him”. Therefore, in the view of the Tribunal, under clause (i) of sub-section (1) of section 271, which is referable to section 271(1)(a), penalty will be leviable, whether the tax was payable or not. But under clauses (ii) and (iii) of sub-section (1) of section 271 which are referable to sections 271(1)(b) and (c), penalty will be leviable only if tax is payable by the assessee, and the present case falls under section 271(1), clause (iii), referable to section 271(1)(c) since the registered firm was not liable to pay any tax up to an income Rs. 25,000 and the income of the assessee being Rs. 24,990 and no tax being payable, no penalty was leviable. The second ground given by the Tribunal has reference to the illustration which it had given. In giving that illustration and referring to the minimum penalty of Rs. 1,000 and the maximum penalty of Rs. 2,000 the Tribunal did not consider the statutory provision as it stood and was applicable to the relevant year, but took into account the amendment of section 271(iii) which came into force from April 1, 1968. Notwithstanding this mistake committed by the Tribunal, we are of the opinion that its final conclusion is correct for the reasons which we shall immediately indicate.
A perusal of all the three clauses in section 271(1), namely, clauses (i), (ii) and (iii), will clearly indicate that the penalty contemplated in all the three clauses is a measure of the tax payable by the assessee. In other words, if no tax was payable by the assessee, there will be no penalty which could be levied on the assessee. As a matter of fact, the language of clauses (i), (ii) and(iii) are such as there could be no case in which penalty could be levied where no tax is payable by the assessee since the quantification of the penalty is totally dependent upon the tax payable by the assessee. In other words, the penalty leviable is a measure of the tax payable. Therefore, the conclusion is irresistible that when an assessee is not liable to pay any tax, no penalty can be levied on the said assessee.
In this particular case, as we have pointed out already and as was admitted before the Tribunal itself, no tax was payable by the assessee and, therefore, no penalty is leviable on the assessee. This conclusion of ours is based on the interpretation of all the three clauses, namely, clauses (i), (ii) and (iii) of section 271(1) and for such a conclusion, the presence of the words “if any” in clause (i) and the absence thereof in clauses (ii) and (iii) are totally immaterial. Therefore, it is clear that the legislature intended the penalty as a deterrent to prevent evasion of tax and therefore, there was no question of levying any penalty as a deterrent for the evasion of tax.
In this connection, our attention was drawn by the learned counsel for the revenue to a decision of the Gujarat High Court in Commissioner of Income-tax v. R. Ochhavlal & Co. [1976] 105 ITR 518. That judgment dealt with the construction of section 271(1). The learned judges observed as follows (page 527).
“The assessees contention is that liability to pay penalty would arise only if, as a result of the final assessment, an assessee is found liable to the payment of some tax. This contention has found favour with the Tribunal. But is is difficult to comprehend what connection the penal liability has with the liability to pay tax. Penal liability contemplated by sub-section (2) of section 271 falls within any of the clauses (a), (b) or (c) of section 271(1). These three clauses contemplate three distinct types of defaults. The moment it is found that any one of these three defaults is committed by an assessee which is a registered firm the said assessee becomes liable to penalty within the meaning of sub-section (2). Clauses (a), (b) and(c) constitute the first part of sub-section (1) of section 271. This part shows when and under what circumstances a penal liability comes into existence. Second part of this sub-section is constituted by clauses (i), (ii) and (iii). These clauses have nothing to do with the creation of penal liability, because they come into operation after the liability has already come into existence as their function is to provide for the method to quantify the different amounts of penalties with reference to the different defaults contemplated by clauses (a), (b) and (c). Thus, while the function of clauses(a), (b) and (c) is to create penal liability, the function of clauses (i), (ii) and (iii) is to quantify the said liability. Now, if the quantification of penal liability is based on the amount of tax, if any, payable by an assessee, and if, in a given case, the assessee is not found liable to pay any tax, the quantification of penal liability would be impossible; and in that case, no penalty is leviable; but that does not mean that penal liability under the first part of sub-section (1) was not incurred by that assessee. Impossibility of quantifying penal liability would not obliterate the fact that the assessee had rendered himself liable to a penal action. It is, therefore, a mistake to say that if there is no tax liability and if, consequent to that, quantification of penal liability is not possible, there was never any penal liability incurred by the assessee.”
Thus, it will be seen that the Gujarat High Court had compartmentalised section 271(1), one compartment consisting of clauses (a), (b) and (c) and the other compartment consisting of clauses (i), (ii) and (iii) and the former compartment creating a “penal liability” in abstract and the latter compartment quantifying the said “penal liability” in terms of money. If anyone of the three clauses (i), (ii) and (iii) of section 271(1) contemplated the levy of penalty unrelated to the tax payable by an assessee, there may be something to be said in favour of such compartmentalisation. As have pointed out already, not one of the three clauses (i), (ii) and (iii) of section 271(1) contemplates a penalty unrelated to the tax payable. In such a context, in our opinion, it is too technical to construe the section as creating a penal liability in abstract by clauses (a), (b) and (c) and quantifying the said penal liability by clauses (i), (ii) and (iii) of section 271(1). If the reasoning of the Gujarat High Court is to be accepted, the moment anyone of the defaults contemplated by clauses (a), (b) and (c) of section 271(1) has occurred, there is an automatic attraction of the liability, but the quantification of the liability may lead to no penalty being levied. As we pointed out already, if in every case the quantification of penalty will lead to a nil amount, it is reasonable to construe that the liability to penalty itself is attracted only when tax is payable by an assessee. This conclusion of ours is in consonance with the object of the section, namely, to prevent evasion of tax. Once it is found that no tax is payable, there is no question of evasion of tax and consequently there could be no attempt to prevent such evasion. In our view, the very structure the language of section 271(1) does not admit of such compartmentalisation as clauses (a), (b) and (c) creating in themselves a “penal liability” is abstract, and clauses (i), (ii) and (iii) in themselves quantifying the penalty for the liability and yet where no tax is payable, the penalty being “nil” in every case, thereby rendering the penalty only a technical and purpose less one. As a matter of fact, the amendment of clause (iii) of section 271(1) by section 19 of the Finance Act of 1968, with effect from April 1, 1968 will support our conclusion in this behalf. As far as the present case is concerned, as we pointed out already, even clause (iii) contemplated the penalty as a measure of the tax only. But when that clause was amended by the Finance Act of 1968, the penalty became not a measure of the tax, but it was made as a measure of the income in respect of which the default has been committed because clause (ii) of section 271(1), as substituted by section 19 of Finance Act of 1968, stated :
“In the cases refereed to in clause (c) in addition to any tax payable by him a sum which shall not be less than, but which shall not exceed twice, the amount of the income in respect of which the particulars have been concealed or inaccurate particulars have been furnished.”
Simply as a matter of construction of section 27(1) we come to the conclusion that the liability to penalty is attracted only in cases where some tax is payable by the assessee, and when no tax is payable by the assessee, the liability to penalty is not at all attracted.
It was contended on behalf of the revenue that, notwithstanding the fact that no tax was payable by the assessee, in the present case in view of the fact that the assessee is a registered firm and the income has been determined as Rs. 24,990 by virtue of section 271(2), the assessee is liable to pay tax. We have already extracted section 271(2), and that sub-section itself indicates that it will apply with regard to quantification of penalty in case where sub-section (1) is attracted. When the liability provided for under sub-section (1) of section 271 is not incurred, there is no scope for applying section 271(2) at all. As a matter of fact, if this contention of the revenue is accepted, on our construction of section 271(1) a registered firm or an unregistered firm which has been assessed under clause (b) of section 183 alone will be liable to penalty when the other assessee will not be liable to penalty. The very object of section 271(2) is not to allow the registered firm to escape from the liability to penalty on the ground that it was enjoying certain concessions or privileges with regard to the liability to pay tax, and that is the reason why section 271(2) was introduced. If the argument of the revenue is to be accepted, the result will be that while other assessees will not be liable to pay penalty, the registered firm alone will be liable to pay penalty. In fact, the decision of the Gujarat High Court to which we had made reference was considering the liability of a registered firm under section 271(2). In that context only, the observation which we have extracted already happened to be made by the said High Court. Dealing with the case of a registered firm, that court observed as follows (page 528) :
“Therefore, when we are considering the case of a registered firm, under sub-section (2) of section 271, the first question which we have to ask is whether the registered firm has committed any of the defaults contemplated by clauses (a), (b) and (c) of sub-section (1) of section 271. If the answer to this question is in the affirmative it follows that the registered firm in question is a person liable to penalty within the meaning of sub-section (2) of section 271. Once it is found that such a registered firm has rendered itself liable to penalty, then under the deeming fiction, which is contemplated by the latter part of sub-section (2), such a firm should be treated as an unregistered firm and the quantification of penalty should be worked out on the amount which would be imposable on this firm as if it were an unregistered firm. Now, if the assessee-firm in this case to be treated as an unregistered firm, it cannot be said that it was not liable to any tax, and if it cannot be said that it was not liable to any tax, then it would not be impossible to work out the penalty contemplated by clause (iii) as it was on the statute book at the relevant time.”
The entire reasoning of the Gujarat High Court as pointed out already proceeds on the basis of clauses (a) to (c) creating a liability to penalty in abstract and clauses (i) to (iii) of section 271(1) working out the quantification of the penalty. For the reasons indicated above, width respect, we are unable to agree with the reasoning of the Gujarat High Court, and on the language of the section as it stood at the relevant time which we have extracted, the liability to penalty arises only if there was a liability to pay tax, and if there was no liability to pay tax, there was no liability to penalty itself.
Our attention was also drawn to a decision of ours in P. Subramaniam & Bros. v. Commissioner of Income-tax [1977] 106 ITR 508 (Mad). In that case, the question which we are considering in the present case was not posed before us in that form. The contention of the assessee in that case was, as pointed out in the judgment itself, as follows (page 511) : “The argument of the learned counsel for the assessee is that the fiction created by sub-section (2) is only for the purpose of payment of the penalty, and not for the purpose of assessing the tax as such. In other words, according to the learned counsel, the tax payable by a registered firm has to be first assessed, and once that has been done, it is on that tax the penalty has to be calculated at two per cent. for every month of default.”
We rejected the contention and pointed out :
“As per sub-section (2) of section 271, the tax payable by a registered firm has to be assessed as if it were an unregistered firm, and on the tax so assessed, the penalty has to be computed. As a matter of fact, the word amount occurring in sub-section (2) emphasises this construction, because, according to sub-section (2) the penatly imopsable under sub-section (1) shall be the same amount as would be imposable on that firm if that firm were an “unregistered firm”. The word amount can be given the meaning contemplated by section 271(2) only when the tax is assessed in the hands of the registered firm as if it were an unregistered firm, and, on that the penalty is calculated as provided in section 271(1). Further, section 271(2) would be rendered nugatory if this contention were to be accepted. The very object of section 271(2) is to treat a registered firm on a par with any other assessee, with reference to the penalty, once it commits default, notwithstanding the privilege it enjoys with regard to the quantum of tax payable by it. If the argument of learned counsel on the meaning of section 271(2) is to be accepted, section (2) will be really otiose and superfluous, because the result contended for by the learned counsel will flow from section 271(1) itself.”
Thus, it will be seen that that was not a case where no tax was payable by the registered firm, yet the penalty was levied. From what we have extracted already, the contention that was advanced in that case was that the tax payable by a registered firm has to be first assessed and once that has been done, it is on that tax, the penalty has to be calculated at two percent. for every month of default. Therefore, that decision of ours is not in any way inconsistent with the view now we have taken on the scope of section 271(1). Under these circumstances, we agree with the conclusion of the Tribunal, even though for different reasons. Hence the question referred to this court is answered in the affirmative and in favour of the assessee. There will be no order as to costs.
