P. Venkatarama Reddy, J.
1. The Commissioner of Income-tax, Andhra Pradesh-II, seeks reference of the following two questions of law arising out of the orders of the Income-tax Appellate Tribunal by which the Tribunal accepted the assessee's contention regarding the mode of calculation of penalty payable :
'1. Whether the Income-tax Appellate Tribunal was correct in law in holding that in view of the non-obstante clause found in section 271(2) of the Income-tax Act, 1961, the term 'assessed tax' occurring in section 271(1)(i)(b) has to be construed de hors the Explanation thereto
2. Whether, the Income-tax Appellate Tribunal was correct in law in holding that reading together the provisions of sub-section (1)(i) and (2) of section 271 it is not the amount of advance tax which was actually paid by the registered firm that is material for deduction from the amount of tax payable on the income of a registered firm treated as an unregistered firm under section 271(2), but it is the amount of advance tax payable by such an unregistered firm, which is relevant for the purpose of quantifying the amount of penalty leviable under section 271(1) in the manner provided under section 271(1)(i)(b) of the Income-tax Act, 1961 ?'
2. The respondent is a registered firm and penalty was levied under section 271(1)(a) for the delay in filing the return of income. On a consideration of the additional ground raised by the assessee, the Tribunal held that when once the registered firm is treated as an unregistered firm for purposes of levying penalty, all consequences incidental thereto should follow and, therefore, the rate of tax applicable to an unregistered firm and also the amount of advance tax referable to an unregistered firm, whether paid or not, becomes applicable. The Tribunal concluded as follows :
'Thus, we hold that it is not the amount of advance tax which was actually paid by the registered firm as a registered firm that is material for deduction from the amount of tax payable on the income of a registered firm treated as an unregistered firm. Rather, it is the amount of advance tax payable by the unregistered firm which is relevant for purposes of quantifying the amount of penalty in the manner provided under section 271(1)(i)(b) of the Income-tax Act. The assessee succeeds on the additional ground.'
3. The Tribunal declined reference on the ground that the case does not raise a debatable question of law which ought to be decided by the High Court. We are unable to agree with the Tribunal. The question raised as regards the calculation of penalty leviable on an unregistered firm in accordance with the provisions of section 271(1), in our view, give rise to an arguable question of law. There is no direct decision of this court on the point. Though learned counsel for the respondent relied on some of the observations in P. Venkata Krishnayya Naidu and Son v. CIT : [1984]150ITR545(AP) , we do not think that the ratio of that judgment directly gets attracted to the present case. We are not at all sure that the said judgment comes to the aid of the respondent, as the question involved therein was not identical.
4. Learned counsel for the respondent then relied on a decision of this court in R.C. No. 105 of 1987 (CIT v. Om Trading Co. : [1996]220ITR149(AP) ), dated August 24, 1995, wherein the Division Bench referred to a circular issued by the Central Board of Direct Taxes, dated July 12, 1984, followed by Instruction No. 1764, dated July 14, 1987, to the effect that the Board had taken a policy decision not to file references in cases where the tax effect was going to be less than Rs. 30,000 per year and the decision of the Bombay High Court in CWT v. Executors of late D.T. Udeshi : [1991]189ITR319(Bom) rejecting reference based on that circular. In R.C. No. 105 of 1989, the tax involved was less than Rs. 500 and standing counsel for the Department reported that he had instructions from the Commissioner to withdraw the reference application. In the light of this representation and in view of the fact that the tax effect was meagre, the learned judges declined to answer the reference and permitted the Commissioner of Income-tax to withdraw the reference. But that is not the situation here. There is no such request for withdrawal. It is also doubtful whether the said circular applies to penalties and whether this court should give effect to the policy decision taken by the Central Board of Direct Taxes by declining reference even when a debatable question of law is raised.
5. No doubt, the Bombay decision seems to be in favour of the assessee. But learned standing counsel submits that the Bombay High Court assumed that the circular was issued under section 119 of the Income-tax Act, and, therefore, it had statutory force. Anyway, at this stage, we need not enter into a discussion on the correctness of the view expressed by the Bombay High Court.
6. With regard to R.C. No. 105 of 1989, learned standing counsel clarifies that the Commissioner had decided to withdraw the reference not because of the circular but because by the time R.C. came up for hearing, the principle of law was settled by the Supreme Court.
7. For all these reasons, we are of the view that it is a fit case to direct reference of the following questions :
'1. Whether the Income-tax Appellate Tribunal was correct in law in holding that in view of the non-obstante clause found in section 271(2) of the Income-tax Act, the term 'assessed tax' occurring in section 271(1)(i)(b) has to be construed de hors the Explanation thereto
2. Whether the Tribunal is justified in holding that the advance tax payable by the unregistered firm shall be deducted, but not advance tax paid as registered firm for the purpose of quantifying the quantum of penalty under section 271(2) read with section 271(1)(i)(b) of the Income-tax Act ?'
8. We may mention here that the second question has been slightly recast by us.
9. Accordingly, the I.T.C. is allowed. No costs.