Judgment:
These appeals by the Revenue are consolidated and disposed of by a combined order for the sake of convenience as they relate to the same assessee and they were heard together and the contentions are common for both the appeals. These appeals pertain to asst. yrs. 1983-84 and 1984-85 and arise out of the separate but similar orders of the CIT(A)-IV, Ahmedabad, dt. 27th Dec. 1988 wherein he has cancelled the penalties levied by the ITO under S. 271(1)(a) of the IT Act, 1961 for these years. The Revenue is on common grounds to urge that the learned CIT(A) has erred in law and on facts in deleting the penalty levied under S. 271(1)(a) on the ground that the income is exempt under S.10(22) of the IT Act, 1961 which was allowed exemption under S. 11 of the IT Act, 1961. Therefore, it is prayed that the order of the learned CIT(A) may be set aside and that of the ITO restored.
The facts as seen from the record are that the assessee has been assessed as AOP (Trust) for the asst. yrs. 1983-84 and 1984-85 and it followed calendar year as the accounting year. For asst. yr. 1983-84 the assessee filed return on 30th Aug., 1984 showing net deficit of Rs. 1,52,245. The assessment order shows that against gross income of Rs. 6,55,755 the expenditure incurred for the objects of the trust amounted to Rs. 6,42,448 leaving a surplus of Rs. 13,307. After allowing accumulation within 25 per cent limit of gross income in terms of S.11(1) the ITO allowed accumulation to the extent of Rs. 1,65,552 resulting in net deficit of Rs. 1,52,245. In other words the surplus of Rs. 13,307 remaining before accumulation is less than the permissible limit of 25 per cent of the gross income. The total income ultimately determined by the ITO is nil.
3. Coming to the asst. yr. 1984-85 the return was filed on 6th Nov., 1985 declaring net deficit of Rs. 22,296. The assessment order reveals that the gross income was Rs. 7,38,170 and the application of income from the objects of the trust was Rs. 7,16,466 leaving a surplus of Rs. 21,704. After setting off capital expenditure of Rs. 44,200 the net deficit was worked out at Rs. 22,296 ultimately the total income determined was nil for the asst. yr. 1984-85.
4. Consequent to the assessments made, the ITO finalised penalty proceedings under S. 271(1)(a). During the course of proceedings the ITO observed the due process of law and obtained the written submission of the assessee. The defence of the assessee was that he had applied for extension of time in Form No. 6 four times seeking extension of time upto 30th June, 1984 and accordingly filed the return of income on 30th June, 1984 for the asst. yr. 1983-84. The further defence taken by the assessee was that being a trust there was no statutory obligation to submit the return.
5. The ITO held that explanation offered by the assessee was not satisfactory because mere filing of applications for extension of time did not ipso facto entitle the assessee to presume that the extension of time had been granted. He further stated that the assessee is a habitual defaulter for other years also. Holding that there was no reasonable cause for the delay in filing the return of income within the time allowed under S. 139(1) the ITO imposed penalty of Rs. 13,314 under S. 271(1)(a) of the IT Act, 1961 calculated at the rate of 1 per cent of the total income without giving effect to the provisions of S.11 and 12 for the period during which the default of late submission continued.
6. For the asst. yr. 1984-85 under similar circumstances for similar reasons the ITO imposed penalty of Rs. 14,762. The assessee appealed to the CIT(A). The CIT(A) cancelled penalty levied on several grounds.
Firstly, he observed that the assessee is an educational institution and its income is totally exempted under S. 10(22) and this fact has been accepted by the Department. Therefore, the assessee was not under any legal obligation to file the return of income under S. 139(1). It is only as a matter of abundant caution the assessee continued to file the return of income year after year to get its records straight. This reveals that the conduct of the assessee was neither contumacious nor dishonest. Therefore, he would cancel the penalty on this ground alone.
Further, he relied on the judgment of the Gujarat High Court in the case of CIT vs. Gordhandas Jethabhai (1983) 142 ITR 84 (Guj) wherein it has been held that the ITO is duty-bound to intimate the assessee as to whether the extension of time sought for by the assessee is granted or not. If within a reasonable time it is not intimated to the assessee the assessee would be entitled to presume that the extension sought for has been granted by the ITO. Applying the ratio to the facts of the assessees case he held that the delay in filing the return up to 30th June, 1984 has to be treated as for reasonable cause since the applications were filed requesting extension of time which were not rejected by the ITO. However, the small delay of 2 months beyond this date was considerably for reasonable cause since the accounts of the assessee were not audited till such time.
7. For the asst. yr. 1984-85 following the reasons given by him in penalty proceedings for the asst. yr. 1983-84, he cancelled the penalty. Hence the appeals by the Revenue before the Tribunal.
8. At the time of hearing, the learned Departmental Representative been duly heard and he has supported the penalties levied by the ITO.According to him the CIT(A) was not justified in cancelling the penalty on the ground that the income of the assessee is exempted under S.10(22) because that was not a fact but the income was exempt under S.11 of the IT Act only. On merits he argued that the assessee has applied for extention of time only upto 30th June, 1984 for the asst.
yr. 1983-84 and upto 31st July, 1985 for the asst. yr. 1984-85 and not thereafter.
9. The learned counsel for the assessee, on the other hand strongly supported the orders of the CIT(A). According to him the decision of the AAC holding that the assessee is an educational institution and its income is exempt under S. 10(22) of the IT Act for the asst. yr.
1973-74 became final because the Revenue has not filed appeal before the Tribunal. Therefore, he justified the reason given by the CIT(A) for cancelling the penalty on that ground also. As regards merits he submitted that the assessee has filed several applications for extension of time one after another but the ITO did not intimate his decision on such applications and, therefore, the assessee was entiled to presume that the extension sought for was granted in terms of the judgment of Gujarat High Court in the case of CIT vs. Gordhandas Jethabhai (supra).
10. We have duly considered the submissions of the parties. At the outset we have to observe that the contention that the assessee is an educational institution and, therefore, its income is exempt under S.10(22) of the IT Act, 1961 is not tenable for the simple reason that the assessment proceedings went on the basis that the assessee is a trust for charitable/religious purposes and the income was exempt under S. 11 and 11(1) of the IT Act, 1961 as seen from the assessment order.
Therefore, we cannot countenance the plea taken by the counsel in this regard.
11. As regards merits of the case there is force in the contention of the learned counsel for the assessee because the assessee has applied for extension of time four times for the asst. yr. 1983-84, a fact which was not disputed or denied by the Department. Even for the asst.
yr. 1984-85 the assessee sought extension of time four times by filing application for extension of time. The assessee could not file return of income for these years within the extended time sought for, for the reasons that the books of accounts were under audit and only after the audit was completed the returns could be filed.
12. The authorities have not appreciated this contention of the assessee. However, the assessment orders reveal that the income returned for these years has been accepted in toto which would support the claim of the assessee that the returns were based on the audited accounts. The ITO has not determined income in excess of income shown in terms of S. 11(4). The ratio of the Gujarat High Court in the case of CIT vs. Gordhandas Jeethabhai (supra) would come to the rescue of the assessee because it is abundantly clear that the ITO has not intimated his decision on application for extension of time applied by the assessee from time to time and, therefore, the assessee would be entitled to presume that the extended time sought for has been granted.
As regards the delay beyond the extended time sought for the plea of audit of the accounts is acceptable as a reasonable cause because the returns were filed only after the accounts were audited. This is also necessary because it is charitable trust and the assessee is obliged under the law to do so. Therefore, we are satisfied that there was reasonable cause for delay in filing the returns for these two years and for this reason we uphold the orders of the CIT(A) cancelling the penalty levied for these years.
13. Incidentally it is noticed that the income determined by the ITO for these two years is at nil. Sec. 11 of the IT Act falls under Chapter III of the IT Act which enumerates incomes which do not form part of total income. Sec. 11(1) declares that subject to the provisions of Ss. 60 to 63 the following income shall not be included in the total income of the previous year of the person in receipt of the income. Clause (a) of S. 11(1) is material for our purpose which reads as under : "Clause (a). Income derived from property held under trust wholly for charitable or religious purposes to the extent to which such income is applied to such purposes in India; and, where any such income is accumulated or set apart for application to such purposes in India, to the extent to which the income so accumulated or set apart is not in excess of 25 per cent of the income from such property".
From the aforesaid provision it is clear that to the extent of income applied for the objects of the trust in India or where income is accumulated not exceeding 25 per cent of the income of the trust such income shall not be included in the total income of the previous year of the representative assessee. As stated already the surplus of Rs. 13,307 pertained to asst. yr. 1983-84 is less than the 25 per cent limit eligible for accumulation which has been allowed by the ITO. That is why the total income has been determined at nil. Similarly, for the asst. yr. 1984-85 the surplus is Rs. 21,704 and after setting off the capital expenditure the net deficit has been worked out at Rs. 22,206.
Therefore, the total income was determined at nil. In other words, in both these years there is only deficit and not positive income.
14. In this background we shall now consider the penal provisions under S. 271(1) applicable to the assessee. Clause (a) of S. 271(1) reads as under : "(a). In the case of a person referred to in sub-s. (4A) of S. 139, where the total income in respect of which he is assessable as the representative of the assessee does not exceed the maximum amount which is not chargeable to income-tax, a sum not exceeding 1 per cent of the total income computed under this Act without giving effect to the provision of S. 11 and 12, for each year or part thereof during which the default continued;" "(b). In any other case in addition to the amount of the tax, if any, payable by him, a sum equal to 2 per cent of the assessed tax for every month during which the default continued." At the outset it is to be stated that cl. (a) deals with a situation where the total income of a representative assessee does not exceed the maximum amount which is not chargeable to tax while cl. (b) deals with a case where the total income exceeds the maximum amount which is not chargeable to tax. As detailed above there is no positive total income for the asst. yrs. 1983-84 or 1984-85 so as to attract either cl. (a) or cl. (b). Clause (a) is based on the total income whereas cl. (b) is based on the tax payleel by the representative assessee. A close appreciation of cl. (a) would show that there should be positive income which is chargeable but it is below the taxable limit of income. In the absence of positive income the question of levy of tax does not arise.
Consequently, the question of levy of penalty with reference to gross total income as per statutory prescription also does not arise. Clause (b) concerns with a case where the positive income is more than the limit of income which is not chargeable and also charging tax which is not applicable here. Sec. 11(1)(a) contains a mandate and according to this mandate the income received by the representative assessee from property held under trust wholly for charitable or religious purposes to the extent of application of income or to the extent of accumulation of income shall not be included in the total income of the previous year of the representative assessee. Therefore, the conclusion that emerges is that in respect of such representative assessee what is includible in the total income is that which remains after application of income and accumulation of income and which should be the criteria for levy of penalty under the terms of cl. (a) or cl. (b) of S.271(1)(i). As shown earlier there is not even a positive figure of rupee one for these two years so as to attract the penal provisions under cl. (a) as was done by the ITO. Even from this angle penalties imposed by the ITO are not warranted in law.