1. Penalty of Rs. 60,000 stood imposed upon the respondent-assessee by the Deputy Commissioner of income-tax, Range-I, Ludhiana, under Section 271D of the Income-tax Act, 1961 in terms of default for failure to comply with the provisions of Section 269SS. The assessment year involved is 1989-90. The ld. first appellate authority having deleted the same, the revenue is aggrieved, hence this appeal and I have heard the ld. authorised representatives of the parties at length.
2. Feed back of facts is that the respondent, the revenue alleges, had accepted a loan of Rs. 60,000 in cash from one Kulwant Rai & Sons, Ludhiana. This fact having come to the notice of the revenue, during the course of assessment proceedings, the assessee was served with a show-cause notice under Section 271D to which the assessee replied that Kulwant Rai and Sons is a Hindu undivided family and the loan was given to the respondent assessee-firm by the said HUF through Shri Madan Lal.
Sh. Madan Lal, the assessee claims, being senior-most member of the HUF, was acting as karta and hence in that capacity was custodian of the surplus funds of the said HUF - Kulwant Rai & Sons. The HUF is said to have deposited Rs. 60,000 with the consent and concurrence of the members of the HUF. It is also claimed on behalf of the assessee that Kulwant Rai & Sons is represented through its karta Madan Lal who is a partner in the respondent assessee-firm also. It is further claimed that the said Shri Madan Lal along with other partners of the respondent assessee-firm became partner in his individual capacity but representing his HUF.3. The revenue being not satisfied with the stand of the assessee, held that the HUF is a single entity and the version of the assessee that each coparcener invested Rs. 15,000 from his share of HLIF's funds is not correct as there is no partition in the HUF. It further held that the entire money is that of HUF and not independently of the coparceners. Yet further that there is only a single deposit of Rs. 60,000 in the books of aceount of the respondent assessee-firm in the name of Kulwant Rai & Sons HUF. Other stand of the assessee that Sh.
Madan Lai is acting karta of HUF Kulwant Rai & Sons and also a partner in the respondent assessee-firm and, therefore, the deposit by the karta of the HUF is a deposit by the partner himself also stood negatived. Strict reliance was placed on Section 269SS and penalty imposed under Section 271D of the Act.
4. On appeal by the assessee, the ld. first appellate authority relying on the order-sheet entries dated 5-9-1990 and 17-9-1990 held that penalty merits to be quashed and she did so for the reasoning that order-sheet entry of 17-9-1990, inter alia, reads "case adj.
25-9-1990". She further held that there is no entry regarding the presence or absence of the party on 25-9-1990 and relying upon the contention of the assessee that because of agitation on account of Mandal Commission report, the office did not function, hence the assessee could not plead his case, the ld. first appellate authority held that in the absence of adequate opportunity, penalty has to be quashed. On merits she held that "penalty cannot be sustained since requirement of Section 269SS is that no person shall take or accept from any other person ...". She further held that "in this case, admittedly the deposit is by the karta of a HUF. The karta is a partner in the firm and where the deposit has been made out of his own fund or out of the funds of bigger or smaller HUF, vis-a-vis, the firm; the deposit has been received from the partner who is not any other person as far as the firm is concerned". She, for the above reasoning, held that provisions of Section 269SS was not violated.
5. For the revenue it has been argued that the word 'person' has to be read under Section 269SS in the context of Section 2(31) of the Act and in terms of Section 40(b); emphasising the contention Ms. Neeta Bansal pointedly brought to our notice Section 2(31) which defines 'person' to include an individual, a Hindu undivided family, a company, a firm, an association of persons or body of individuals, whether incorporated or not, a local authority and every artificial juridical person, not falling within any of the preceding sub-clauses. She as such emphasised and contended that under S269SS, a partner as an individual has a distinct 'personage' than that of a Hindu undivided family and a firm, hence supporting the reasoning in the penalty order she contended that the learned first appellate authority has misconceived the position on facts and in law. Yet further she has contended that even if loan is taken or a deposit is made by a partner, though she has not admitted the averment of the assessee that it was a deposit by a partner, she contended that qua the respondent assessee-firm and the depositor, there has to be held as relationship of a 'person' with 'other person'.
6. On the first issue about there being no opportunity to the assessee visa-vis reliance of the ld. first appellate authority on the order-sheet entries, she contended that a procedural irregularity does not merit quashing of the penalty order since it only amounted to supervening and curable irregularity and the ld. first appellate authority should have sent back the matter so that the officer imposing the penalty could have taken the proceedings from that loose end - Guduthur Bros. v. ITO [1960] 40 ITR 2 98 (SC) is relied upon for this proposition. She further emphasised that contravention /violation of a procedure is an irregularity while if it is of mandate then it is an illegality. In short, she supported the penalty order and assailed the order of the ld. first appellate authority, which order, according to her, cannot be sustained either on facts or in law.
7. On his part, Shri D.S. Gupta, the ld. Advocate, strongly relied on the order of the Id. first appellate authority and contended that Section 271D has to be read along with Section 274(1) and this he contended to bring home the point that no order imposing a penalty shall be made unless the assessee has been heard or has been afforded a reasonable opportunity of being heard, i.e., he on his part, supported the finding of the learned first appellate authority that since there has been no opportunity of being heard to the assessee, the order was illegal and could not be sustained in law. He has further contended that Section 271D was brought on the statute book with effect from 1-4-1989 by Direct Tax Laws (Amendment) Act, 1987 and since the assessment year involved is 1989-90, the provision of law being a new, the assessee could not have known that, hence the bona fides and deletion of penalty by the ld. first appellate authority be upheld. Yet further he relied on Section 2(23) which defines 'firm', 'partner' and 'partnership'. This he emphasised for the purpose that the meaning of the above three has to be taken as assigned to these words in the Indian Partnership Act, 1932. He as such contended that a partner and a firm are the same entity since persons joining hands for a common purpose and economic ends, individually are called partners and collectively a firm. Within the meaning of Section 269SS, Shri Gupta contended that there is no difference between a partner and the firm, hence there was no violation. Concludingly he relied upon the bona fide belief of the assessee as also denial of justice in terms of no opportunity and violation of natural justice at the penalty stage to the assessee.
8. Finally the parties relied on the decisions reportecl in Dulichand Laxminarayan v. CIT [1956] 29 ITR 535 (SC), CIT v. Kalu Babu Lal Chand [1959] 37 ITR 123 (SC), CIT v. R.M. Chidambaram Pillai [l977] 106 ITR 292 (SC), Malabar Fisheries Co. v. CIT [1979] 120 ITR 49 (SC) and Juggilal Kamlapat Bankers v. WTO [1984] 145 ITR 485 (SC).
9. The issue is from a virgin field since Section 271D was inserted by the Direct Tax Laws (Amendment) Act, 1987w.e.f. 1-4-1989. The said section deals with the topic 'penalty for failure to comply with the provisions of Section 269SS'. It reads as under: Section 27 ID. If a person takes or accepts any loan or deposit in contravention of the provisions of Section 269SS, he shall be liable to pay, by way of penalty, a sum equal to the amount of the loan or deposit so taken or accepted.
Section 269SS deals with the topic "Mode of taking or accepting certain loans and deposits". It was inserted by the Finance Act, 1984 w.e.f.
1-4-1984. In relation to assessment year under appeal, it reads as under: Section 269SS. No person shall, after the 30th day of June, 1984, take or accept from any other person (hereafter in this section referred to as the deposit or), any loan or deposit otherwise than by an account payee cheque or account payee bank draft if, -- (a) the amount of such loan or deposit or the aggregate amount of such loan and deposit; or (b) on the date of taking or accepting such loan or deposit, any loan or deposit taken or accepted earlier by such person from the depositor is remaining unpaid (whether repayment has fallen due or not), the amount or the aggregate amount remaining unpaid; or (c) the amount or the aggregate amount referred to in clause (a) together with the amount or the aggregate amount referred to in clause (b), Provided that the provisions of this section shall not apply to any loan or deposit taken or accepted from, or any loan or deposit taken or accepted by,- (b) any banking company; post office savings bank or co-operative bank; (c) any corporation established by a Central, State or Provincial Act; (d) any Government company as defined in Section 617 of the Companies Act, 1956 (1 of 1956); (e) such other institution, association or body or class of institutions, associations or bodies which the Central Government may, for reasons to be recorded in writing, notify in this behalf in the Official Gazette: Provided further that the provisions of this section shall not apply to any loan or deposit where the person from whom the loan or deposit is taken or accepted and the person by whom the loan or deposit is taken or accepted are both having agricultural income and neither of them has any income chargeable to tax under this Act.
(i) 'banking company' means a company to which the Banking Regulation Act, 1949 (10 of 1949) applies and includes any bank or banking institution referred to in Section 51 of that Act; (ii) 'Co-operative bank' shall have the meaning assigned to it in Part V of the Banking Regulation Act, 1949 (10 of 1949); 10. The issue that warrants discussion and adjudication at this forum is the interpretation of the words, "any other person". Whether or not a partner is "other person" vis-a-vis taking or accepting of a loan/deposit by the firm from him is at issue.
11. The Random House Dictionary of the English Language defines the word 'other' as under: Other - adj. 1. additional or further: he and one other person. 2.
different or distinct from the one or ones mentioned or implied: in some other city. 3. different in nature or kind: I would not have him other than he is. 4. being the remaining one of two or more: the other hand. 5. (used with plural nouns) being the remaining ones of a number: the other men. 6. former: sailing ships of other days. 7.
every other, every alternate. 8. the other day (night, evening, etc.), a day (night, evening, etc.) or two ago; lately: That thunderstorm the other night frightened the baby No. 9 the other one: Each praised the other - pron. 10. Usually, others, other persons or things: others in the medical profession; others who follow his example. 11. some person or thing else: Surely some friend or other will help me - adv. 12. otherwise; differently (usually fol. by than): we cannot collect the rent other than by suing the tenant....
Oxford Universal Dictionary defines the word 'other' in the following terms: Other-adj. 1. alternative, additional, being the remaining one or set of two or more, has no other income; try the other shoe; my other friends. 2. not the same, wouldn't want her to be other than she is. - n. & pronoun the other person or thing, whereas the others? - adv. otherwise, other ranks, soldiers other than commissioned officers, the other day or week etc. a few days or weeks etc. ago, the other world, life after death.
12. First coming to the reasoning of the learned first appellate authority that since the assessee was not allowed adequate opportunity to argue his case, the penalty merits to be quashed and which she did.
We will set aside this aspect of the case since we do not concur with her reasoning inasmuch as a procedural irregularity results in a supervening irregularity which is curable and does not merit the order to be annulled - Guduthur Bros'. case [supra) is on the point. There, the ITO having issued a notice to the assessee under Section 28(1)(a) of the Income-tax Act to show cause why penalty should not be imposed for failure to file a return in time, the ITO proceeded to impose penalty without affording a hearing. The AAC set aside the order imposing penalty as defective and directed refund of any penalty that might have been imposed. On receipt of AAC's order, the ITO issued further notice calling upon the assessee to appear before him so that they might give an opportunity of being heard. The Hon'ble Supreme Court of India in this case of Guduthur Bros. (supra), held that as the AAC pointed out only to an illegality which vitiated the proceedings after they were lawfully initiated, the notice issued under Section 28(1)(a) did not cease to be operative and it was open to the ITO to take up the matter at the point at which the illegality supervened and to correct his proceedings. The Hon'ble Supreme Court further held in that case that the notice under Section 28(1)(a) having remained still to be disposed of, the proceedings started after the order passed by the AAC could be described as during the course of assessment proceedings because the action would relate back to the time when first notice was issued. The Hon'ble Court further held that the ITO had jurisdiction to continue the proceedings from the" stage at which the illegality had occurred.
13. The facts of the case with which I am presently seized of can be said to be identical since in this case also the DCIT had started the proceedings validly in law but due to there being curfew and closure of office, the assessee was not given further hearing though assessee was heard partly on first two occasions.
14. In view of the ratio of the decision of Hon'ble Supreme Court, referred to above, I decide this issue in favour of the revenue and do further hold that penalty order could not be quashed on this ground alone.
15. In the case of Kalu Balm Lai Chand (supra), the karta of a Hindu undivided family was a managing director of a company. Shares held in the company by the karta of the HUF were acquired with the funds of the family. The company was financed by the family and the issue before the Hon'ble Supreme Court was as to the managing director's remunerations - whether income of the family. The Hon'ble Supreme Court held that the managing director's remuneration was, as between the managing director and the HUF, the income of the family and should be assessed in its hands. The ratio of the decision does not help the assessee who has strongly relied upon since the issue before the Hon'ble Supreme Court was different in its entirety.
16. Coming to R.M. Chidambaram Pillais case (supra) their Lordships, on the facts of that case, held that the firm is not a legal person even though it has some attributes of personality. In Income-tax Law, a firm is a unit of assessment by special provisions but is not a full person.
Since a contract of employment requires two distinct persons, viz., the employer and the employee, there cannot be a contract of service, in strict law, between a firm and one of its partners. Payment of salary to a partner represents a special share of the profits. Hence, salary paid to a partner retains the same character of the income of the firm.
Their Lordships, inter alia, referred to the famous decision in the case of Addanki Narayanappa v. Bhaskara Krishnappa AIR 1966 SC 1300.
The case of Dulichand Laxminarayan (supra) was also referred to.
17. In the case of Dulichand Laxminarayan (supra), their Lordships of the Hon'ble Supreme Court held that a firm is not a "person"and as such is not entitled to enter into a partnership with another firm or Hindu undivided family or individual. In this case, an individual, a joint Hindu family and three firms purported to enter into a partnership. The deed was signed by five individuals, viz., by the individual partner, by the karta of the joint family and by one partner each of the three firms. Registration was sought for by the assessee under Section 26A of the Indian Income-tax Act, 1922. The application for the purpose was also signed by the same five individuals. The Hon'ble Supreme Court held, "that no question could arise of the registration under Section 26A of the Indian Income-tax Act of a partnership purporting to be one between three firms, a Hindu undivided family business and an individual". The Hon'ble Supreme Court further held that even assuming that a valid partnership was constituted, as all the members of the three firms had not personally signed the application, it was not in proper form under Rule 2 of the Income-tax rules.
18. In Malabar Fisheries Co.'s case (supra), their Lordships of the Hon'ble Supreme Court have held that a partnership firm under the Indian Partnership Act, 1932, is not a distinct legal entity apart from the partners constituting it and equally in law the firm as such has no separate rights of its own in the partnership assets and when one talks of the firm's property or the firm's assets all that is meant is property or assets in which all partners have a joint or common interest.
19. The facts in the above case were that a firm consisting of four partners carried on six different businesses. During the accounting period relevant to the assessment years 1960-61 to 1963-64, it installed various items of machinery in respect of which development rebate was allowed to it under Section 33. The firm was dissolved on March 31, 1963, and under the deed of dissolution one of the firm's businesses was taken over by one of the partners and the remaining five by two of the other partners, and the fourth partner received a sum of Rs. 3,81,082 in lieu of his share in the assets of the firm and the question before their Lordships was as to whether the rebate allowed to the firm could be withdrawn on the ground that there was a sale or transfer of the machinery within the meaning of Section 34(3)(b), read with Section 2(47). Their Lordships answered the question in favour of the assessee holding that Section 34(3)(b) was not applicable to the case and the development rebate allowed to the firm could not be withdrawn.
20. Next comes the famous case of Sunil Siddharihbhai v. CIT [1985] 156 1TR 509 (SC). In this case, the Hon'ble Supreme Court has held that where a partner of a firm makes over capital assets which are held by him to a firm as his contribution towards capital, there is a transfer of a capital asset within the terms of Section 45 of the Income-tax Act, 1961, because an exclusive interest of the partner in personal assets is reduced, on their entry into the firm, into a share interest.
On page 516 of this report, their Lordships approved their own decision in Malabar Fisheries Co.'s case (supra). Their Lordships observed that they have no hesitation in accepting the general proposition, that a partnership firm is not a separate legal entity and that the assets owned by the partnership are, collectively owned by the partners.
21. In this case, the firm is constituted of four partners, viz., S/Sh.
Madan Lai, Rajinder Paul, Yash Paul and Sohan Lal. All the four are sons of one Shri Kulwant Rai. The partnership came into being w.e.f.
1-4-1983. All the four persons who joined in the business as partnership to constitute the assessee-firm are kartas of their respective joint Hindu families. In short, the partners though are individuals as partners represent their HUFs, i.e., they are partners in their representative capacities. There is another HUF - a bigger one, by the name and style of Kulwant Rai & Sons, Shri Kulwant Rai, the oldest male member of the family being incapacitated, Shri Madan Lal is claimed to be the karta of bigger HUF also, i.e., he is also the karta of Kulwant Rai and Sons.
22. Now Shri Madan Lal is a partner as individual in a representative capacity representing his smaller HUF comprising of himself, his wife and children and at the same time he is the karta of the bigger HUF - Kulwant Rai & Sons also. Shri Madan Lal has given the loan of Rs. 60,000 in cash to the firm - assessee, who has accepted it. It is the claim of the assessee that the funds flow from the HUF funds of Kulwant Rai & Sons. The issue as such is whether, the said Shri Madan Lal, a partner of the assessee-firm, who is a partner as individual representing his smaller HUF but has paid loan of Rs. 60,000 in cash from the bigger HUF Kulwant Rai & Sons whom he also represents as karta - can be said to be an "other person", qua the assessee-firm within the meaning of Section 269SS of the Act? 23. The issue has got to be decided against the assessee and I do hold that Kulwant Rai and Sons, the bigger HUF, though represented by Madan Lal as karta, despite the fact that Madan Lal is a partner but representing his smaller HUF is an "other person" vis-a-vis deposit/loan given by Kulwant Rai and Sons to the respondent assessee-family within the meaning of Section 269SS of the Income-tax Act, 1961. The firm is not a separate legal entity under the general law; it is a collective name for a body of persons compendium of partners. Although assessable as an entity under the provisions of the Income-tax Act, 1961 as defined in Section 2(31) of the Act, yet the loan/deposit is not by the smaller HUF but the bigger one -Kulwant Rai & Sons and in this view of the matter, it has to be held that within the meaning of Section 271D of the Act, the assessee has taken/ accepted loan/deposit in contravention of the provisions of Section 269SS.24. Now comes the question of levy of penalty. Section 27ID already stands reproduced in the body of this order. Penalty provisions have been held by the Hon'ble Supreme Court of India as penal in character and quasi-judicial in nature. An order imposing penalty for failure to carry out a. statutory obligation is the result of a quasi-criminal proceeding and penalty will not ordinarily be imposed unless the party is obliged either acted deliberately in defiance of law or was guilty of conduct contumacious or dishonest or acted in conscious disregard of its obligation. Penalty will not also be imposed merely because it is lawful to do so. Whether penalty should be imposed for failure to perform a statutory obligat ion is a matter of discretion of the authority to be exercisedjudicially and on consideration of all the relevant circumstances. Even if a minimum penalty is prescribed, the authority competent to impose the penalty will be justified in refusing to impose penalty, when there is a technical or venial breach of the provisions of the Act or where the breach flows from a bona fide belief that the offender is not liable to act in the manner prescribed by the statute. This is how the Hon'ble Supreme Court of India has observed/held in the case of Hindustan Steel Ltd. v. State of Orissa [1972] 83 ITR 26.
(i) Whether the assessee acted in conscious disregard of its obligation; (ii) Whether the default is a technical and venial one; and (ii) Whether the breach flows from a bonafide belief about the assessee not being liable to act in the manner he has acted? 26. The assessee has three capacities, as a partner of the firm, as karta of the HUF which he represented as partner in the assessee-firm and further as acting karta of bigger HUF - Kulwant Rai and Sons. In a way, if the assessee-firm is not to be taken a separate legal entity under the general law - Indian Partnership Act, 1932, which it has to be taken as such in view of definitions of "firm", "partner" and "partnership" under clause (23) of Section 2 of the Income-tax Act, 1961. Therein, the meaning of the above three words have to be taken as assigned in the Indian Partnership Act, 1932.
27. In a way, then with three different capacities of the same person, it can safely be said that it is a deposit from self to self or else from one pocket to another. The conscious disregard of its obligation or else contravention of law as such cannot be attributed to the assessee.
28. The further inference that naturally follows is that the default can be said to be technical, i.e., venial breach of the provisions of the Act. The bona fides of the assessee can also be said to be there inasmuch as when we examine the facts of the case in the context of normal human behaviour as also in the context of normal knowledge of law, that too of the Income-tax Act, vis-a-vis a common person, it has to be held that the assessee-firm has bonafide belief that no offence was being committed. The levy of penalty is not automatic since the Hon'ble Supreme Court of India, in the case of Motilal Padampat Sugar Mills Co. Ltd. v. State of U .P. [ 1979] 118 ITR 326, has observed that there is no presumption that every person knows the law. It is often said that everyone is presumed to know the law, but that is not a correct statement; there is no such maxim known to the law.
29. Income-tax laws being what they have been said to be and talked of, real complex in nature and Section 27ID having been brought on the statute book by insertion of Direct Tax Laws (Amendment) Act, 1987, with effect from 1 -4-1989 and the assessment year involved in this appeal being 1989-90, within the meaning of this section and in terms of the ratio of the decision of the Hon'ble Supreme Court, referred to above, the facts of the assessee's case did not attract levy of penalty. I hold accordingly. The impugned order stands upheld and the revenue fails.