Gaurav Sondhi Manbir Sondhi Vs. Income-tax Officer - Court Judgment

Excerpt:
1. this is an appeal directed against the imposition of penalty under section 140a(3) of the income-tax act, in a sum of rs. 5,760.2. the ito levied a penalty of rs. 5,760 on the ground that the assessee failed to make the payment of tax under self-assessment under section 140a(1) of the income-tax act. the assessee filed a return of income on 19-7-1982 showing an income of rs. 36,300 on which the tax payable worked out to rs. 9,290 which was not paid by the assessee.before the ito, the assessee pleaded that the assessee filed an appeal against the assessment and after giving effect of the appellate order, the income came down to below taxable limit and consequently there was no liability to pay the tax at all and, therefore, the question of paying self-assessment tax under section 140a(1) did not arise. he, therefore, pleaded for the dropping of the proceedings. this explanation was rejected by the ito on the ground that for the purpose of section 140a(3) what was relevant to see was whether any tax liability arose on the income returned and not what the effect would be after the appeal was decided. since on the date when the return was filed, there was a liability to pay tax of rs. 9,290 and as that was not paid, the assessee was liable to penalty under section 140a(3). he, therefore, imposed a penalty of rs. 5,760 aggrieved by which the assessee preferred an appeal to the appellate assistant commissioner who also confirmed it for the very same reason.3. it is now brought to our notice at the time of hearing of this appeal by way of written arguments that the assessee made a mistake in filing the return of income. the assessee was deriving income from interest on fixed deposits. in respect of one f.d.r. no. 31/77 dated 3-1-1977, it has disclosed the income for 62 months for the period from 3-1-1977 to 3-3-1982 of a sum of rs. 31,167 as against showing only the income relatable to the year under appeal, namely rs. 3,206. as against showing the correct income of rs. 3,206 in the f.d. rs, the assessee had under a mistake disclosed a much higher income of rs. 31,167. had he shown the correct income, there was no liability to pay any self-assessment tax. it was because of mistake committed by the assessee in showing much higher income which was not taxable, the liability to pay the self-assessment tax under section 140a arose. this mistake was shown to the aac and aac accepted the assessee's claim and directed to adopt only rs. 3,206 as income from the f.d.r., subject to deduction under section 80l of rs. 3,000. since the assessee committed a mistake in disclosing the income correctly and since there was no liability to tax at all, there was no question of paying any self-assessment tax more particularly if the object of enacting section 140a was kept in view which was only to collect the tax due from the assessee along with the return of income. on this plea, it was submitted that the penalty levied ought to have been cancelled.4. the departmental representative objected to the cancellation of penalty on the ground that under the provisions of section 140a, there was a liability subsisting on the date when the return was filed and, therefore, failure to deposit the tax as required under section 140a attracted the imposition of penalty. penalty imposed being reasonable, should not be interfered with.5. we are unable to agree with the contention advanced on behalf of the revenue and sustain the imposition of this penalty. section 140a lays down provisions of self-assessment on payment of tax or self-assessment along with the furnishing of the return. it says: (1) where any tax is payable on the basis of any return required to be furnished under section 139 or section 148, after taking into account the amount of tax, if any, already paid under any provision of this act, (the assessee shall be liable to pay such tax ... before furnishing the return and the return shall be accompanied by proof of payment of such tax....then sub-section (3) provided that if there is a failure on the part of the assessee to pay the tax, the ito may direct to levy a penalty at a prescribed rate, after giving the assessee a reasonable opportunity of being heard.6. now what we have to see is what is meant by the expression "where any tax is payable on the basis of any return". the crucial words are "any tax is payable" and "on the basis of any return". the purpose of enacting self-assessment under section 140a was to force the assessees to make self-assessment and to pay the taxes along with the return of income in order to see that the tax due to the government is not delayed but is collected as expeditiously as possible. in other words, the whole object is to avoid delays in the collection of taxes which was the bane before enactment of section 140a. before section 140a was inserted by the finance act, 1964 with effect from 1-4-1964 assessees were filing returns of income showing substantial income but were not paying any taxes due thereon and the taxes were being paid only after the assessments were made after long delays and that too after protracted litigations. in this process the taxes due to the government were being withheld and with that money the assessees were even carrying on business at the cost of the exchequer. to avoid this unhealthy practice and to ensure early and expeditious collection of taxes on the admitted incomes, this procedure of self-assessment was introduced whereby the tax due on the basis of the return must be paid along with the return and the return shall be accompanied by the proof of payment of such tax. failure to comply with this provision was no doubt made punishable. what is, therefore, to be seen is whether there was any tax due by an assessee at all on the basis of any return. if as a consequence of a mistake committed by an assessee, higher income was shown or non-taxable incomes were shown or claims due to the assessee were not made which are very apparent on the face of the record like carry forward and set off of depreciation or business losses etc., it does not mean that the return filed was a proper return on the basis of which tax was payable. the profit and loss account of an assessee may show income but if that income was set off against the predetermined carry forward of losses either of business or of depreciation/the income so shown may become a negative figure on which no tax was payable. if by mistake, the assessee files a return showing only that income without claiming the benefit of set off of losses, can it be said that any tax was payable by the assessee? if no tax was payable by the assessee and if the mistake was discovered by the assessee later, can it be said that the assessee committed a default in the payment of self assessment tax therefore, what is to be seen is whether a proper return was filed by the assessee admitting income taxable under the act and not a return showing incomes under mistaken impressions, which are not taxable under the act at all. when there was no tax payable at all by the assessee or when the incomes shown by the assessee were below taxable limit, it cannot be said that the assessee had a liability for paying any tax much less self-assessment tax and to levy penalty for any alleged default in not depositing the tax would be the very anti-thesis of the object of self-assessment tax. therefore, when the legislature used the words "tax payable" on the basis of any return, it only means tax payable on the basis of a correct return and not an incorrect return. this is a well recognised principle of interpretation of statutes. punishments can be imposed only if the circumstances of the case fall clearly within the words of the enactment. this is based upon the principle of construction of words "in bonam partem". the leading case of this principle of 'in bonam partem' was decided in r.v. iiulme [1870] l.r. 5 q.b. 177. in this case the statute provided : a statute provided that "where any witness shall answer every question relating to the matters aforesaid," commissioners appointed to inquire into corrupt election practices should issue him with a certificate which would entitle him to certain immunities. the case turned on the meaning of the words, "shall answer every question", "docs that mean," asked blackburn j. (at pp. 384, 385), "if he shall give an answer in fact, though it may be false to his knowledge; though it may be palpably false to the knowledge of every person who stands by; though it may be a matter of ridicule and turning the whole commission and inquiry into contempt, can it be intended that if the witness gives an answer which is transparently false, he should get the immunity?" it was held that it was not so intended. "whenever the legislature in this act requires a person to answer question the meaning is that he shall answer them truly, to the best of his knowledge and belief." only then would be entitled to the statutory certificate. this principle, that where an act refers to a thing being done, it is to be taken as referring to the thing being lawfully done, has been applied in several recent cases.we are of the opinion that this principle can justly be applied to the interpretation of the words "on the basis of any return" to mean on the basis of any valid return in the sense disclosing correct income. since in this case, it was agreed that the income disclosed from interest on fixed deposit was highly inflated and did not relate to the year under appeal but related to several other years and since it is correct in law only to take the income relatable to this year and if by taking that income alone, there was no liability to pay tax at all, the question of paying self-assessment tax on the basis of such a wrong return does not simply arise and to levy a penalty for not paying the tax not due on the basis of a wrong return was itself unjust and unfair and is not required by law nor can it be said that the law requires payment of taxes in such circumstances. we are, therefore, of the opinion that the authorities below were not justified in confirming the levy of tax when there was no liability to tax at all. merely on the basis of highly technical interpretation of section 140a of the income-tax act, without having regard to the pith and substance and the care and object of section 140a. we, therefore, cancel the penalty and allow the appeal.

Judgment:
1. This is an appeal directed against the imposition of penalty under Section 140A(3) of the Income-tax Act, in a sum of Rs. 5,760.

2. The ITO levied a penalty of Rs. 5,760 on the ground that the assessee failed to make the payment of tax under self-assessment under Section 140A(1) of the Income-tax Act. The assessee filed a return of income on 19-7-1982 showing an income of Rs. 36,300 on which the tax payable worked out to Rs. 9,290 which was not paid by the assessee.

Before the ITO, the assessee pleaded that the assessee filed an appeal against the assessment and after giving effect of the appellate order, the income came down to below taxable limit and consequently there was no liability to pay the tax at all and, therefore, the question of paying self-assessment tax under Section 140A(1) did not arise. He, therefore, pleaded for the dropping of the proceedings. This explanation was rejected by the ITO on the ground that for the purpose of Section 140A(3) what was relevant to see was whether any tax liability arose on the income returned and not what the effect would be after the appeal was decided. Since on the date when the return was filed, there was a liability to pay tax of Rs. 9,290 and as that was not paid, the assessee was liable to penalty under Section 140A(3). He, therefore, imposed a penalty of Rs. 5,760 aggrieved by which the assessee preferred an appeal to the Appellate Assistant Commissioner who also confirmed it for the very same reason.

3. It is now brought to our notice at the time of hearing of this appeal by way of written arguments that the assessee made a mistake in filing the return of income. The assessee was deriving income from interest on fixed deposits. In respect of one F.D.R. No. 31/77 dated 3-1-1977, it has disclosed the income for 62 months for the period from 3-1-1977 to 3-3-1982 of a sum of Rs. 31,167 as against showing only the income relatable to the year under appeal, namely Rs. 3,206. As against showing the correct income of Rs. 3,206 in the F.D. Rs, the assessee had under a mistake disclosed a much higher income of Rs. 31,167. Had he shown the correct income, there was no liability to pay any self-assessment tax. It was because of mistake committed by the assessee in showing much higher income which was not taxable, the liability to pay the self-assessment tax under Section 140A arose. This mistake was shown to the AAC and AAC accepted the assessee's claim and directed to adopt only Rs. 3,206 as income from the F.D.R., subject to deduction under Section 80L of Rs. 3,000. Since the assessee committed a mistake in disclosing the income correctly and since there was no liability to tax at all, there was no question of paying any self-assessment tax more particularly if the object of enacting Section 140A was kept in view which was only to collect the tax due from the assessee along with the return of income. On this plea, it was submitted that the penalty levied ought to have been cancelled.

4. The Departmental Representative objected to the cancellation of penalty on the ground that under the provisions of Section 140A, there was a liability subsisting on the date when the return was filed and, therefore, failure to deposit the tax as required under Section 140A attracted the imposition of penalty. Penalty imposed being reasonable, should not be interfered with.

5. We are unable to agree with the contention advanced on behalf of the revenue and sustain the imposition of this penalty. Section 140A lays down provisions of self-assessment on payment of tax or self-assessment along with the furnishing of the return. It says: (1) Where any tax is payable on the basis of any return required to be furnished under Section 139 or Section 148, after taking into account the amount of tax, if any, already paid under any provision of this Act, (the assessee shall be liable to pay such tax ...

before furnishing the return and the return shall be accompanied by proof of payment of such tax....

Then Sub-section (3) provided that if there is a failure on the part of the assessee to pay the tax, the ITO may direct to levy a penalty at a prescribed rate, after giving the assessee a reasonable opportunity of being heard.

6. Now what we have to see is what is meant by the expression "Where any tax is payable on the basis of any return". The crucial words are "any tax is payable" and "on the basis of any return". The purpose of enacting self-assessment under Section 140A was to force the assessees to make self-assessment and to pay the taxes along with the return of income in order to see that the tax due to the Government is not delayed but is collected as expeditiously as possible. In other words, the whole object is to avoid delays in the collection of taxes which was the bane before enactment of Section 140A. Before Section 140A was inserted by the Finance Act, 1964 with effect from 1-4-1964 assessees were filing returns of income showing substantial income but were not paying any taxes due thereon and the taxes were being paid only after the assessments were made after long delays and that too after protracted litigations. In this process the taxes due to the Government were being withheld and with that money the assessees were even carrying on business at the cost of the exchequer. To avoid this unhealthy practice and to ensure early and expeditious collection of taxes on the admitted incomes, this procedure of self-assessment was introduced whereby the tax due on the basis of the return must be paid along with the return and the return shall be accompanied by the proof of payment of such tax. Failure to comply with this provision was no doubt made punishable. What is, therefore, to be seen is whether there was any tax due by an assessee at all on the basis of any return. If as a consequence of a mistake committed by an assessee, higher income was shown or non-taxable incomes were shown or claims due to the assessee were not made which are very apparent on the face of the record like carry forward and set off of depreciation or business losses etc., it does not mean that the return filed was a proper return on the basis of which tax was payable. The profit and loss account of an assessee may show income but if that income was set off against the predetermined carry forward of losses either of business or of depreciation/the income so shown may become a negative figure on which no tax was payable. If by mistake, the assessee files a return showing only that income without claiming the benefit of set off of losses, can it be said that any tax was payable by the assessee? If no tax was payable by the assessee and if the mistake was discovered by the assessee later, can it be said that the assessee committed a default in the payment of self assessment tax Therefore, what is to be seen is whether a proper return was filed by the assessee admitting income taxable under the Act and not a return showing incomes under mistaken impressions, which are not taxable under the Act at all. When there was no tax payable at all by the assessee or when the incomes shown by the assessee were below taxable limit, it cannot be said that the assessee had a liability for paying any tax much less self-assessment tax and to levy penalty for any alleged default in not depositing the tax would be the very anti-thesis of the object of self-assessment tax. Therefore, when the Legislature used the words "tax payable" on the basis of any return, it only means tax payable on the basis of a correct return and not an incorrect return. This is a well recognised principle of Interpretation of Statutes. Punishments can be imposed only if the circumstances of the case fall clearly within the words of the enactment. This is based upon the principle of construction of words "in bonam partem". The leading case of this principle of 'in bonam partem' was decided in R.v. IIulme [1870] L.R. 5 Q.B. 177. In this case the Statute provided : A statute provided that "Where any witness shall answer every question relating to the matters aforesaid," Commissioners appointed to inquire into corrupt election practices should issue him with a certificate which would entitle him to certain immunities. The case turned on the meaning of the words, "shall answer every question", "Docs that mean," asked Blackburn J. (at pp. 384, 385), "if he shall give an answer in fact, though it may be false to his knowledge; though it may be palpably false to the knowledge of every person who stands by; though it may be a matter of ridicule and turning the whole commission and inquiry into contempt, can it be intended that if the witness gives an answer which is transparently false, he should get the immunity?" It was held that it was not so intended.

"Whenever the legislature in this Act requires a person to answer question the meaning is that he shall answer them truly, to the best of his knowledge and belief." Only then would be entitled to the statutory certificate.

This principle, that where an Act refers to a thing being done, it is to be taken as referring to the thing being lawfully done, has been applied in several recent cases.

We are of the opinion that this principle can justly be applied to the interpretation of the words "on the basis of any return" to mean on the basis of any valid return in the sense disclosing correct income. Since in this case, it was agreed that the income disclosed from interest on fixed deposit was highly inflated and did not relate to the year under appeal but related to several other years and since it is correct in law only to take the income relatable to this year and if by taking that income alone, there was no liability to pay tax at all, the question of paying self-assessment tax on the basis of such a wrong return does not simply arise and to levy a penalty for not paying the tax not due on the basis of a wrong return was itself unjust and unfair and is not required by law nor can it be said that the law requires payment of taxes in such circumstances. We are, therefore, of the opinion that the authorities below were not justified in confirming the levy of tax when there was no liability to tax at all. Merely on the basis of highly technical interpretation of Section 140A of the Income-tax Act, without having regard to the pith and substance and the care and object of Section 140A. We, therefore, cancel the penalty and allow the appeal.