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PETITIONER: THE COMMSSIONER OF INCOME TAX, MADRAS AND ANOTHER

       Vs.

RESPONDENT: S.V. ANGIDI CHETTIAR

DATE OF JUDGMENT: 09/01/1962

BENCH: SHAH, J.C. BENCH: SHAH, J.C. SINHA, BHUVNESHWAR P.(CJ) KAPUR, J.L. HIDAYATULLAH, M. MUDHOLKAR, J.R.

CITATION:  1962 AIR  970            1962 SCR  Supl. (2) 640  CITATOR INFO :  D          1966 SC1295  (15)  E          1968 SC  46  (7,8)  R          1969 SC1352  (7)  R          1973 SC  22  (8)

ACT:      Income Tax-Penalty  on concealed income-Power to impose  penalty  on  a  registered  firm  after dissolution-Condition   for    the   exercise   of jurisdiction by  Income-tax Officer-Indian  Income tax Act, 1922 (11 of 1922), ss. 28, 44.

HEADNOTE:      A registered  firm concealed  particulars  of income while  submitting its returns for the years 1947-48,  1949-50   and  1950-51.  The  Income-tax Officer imposed  penalty under  s.28  (1)  of  the Indian Income-tax  Act, 1922.  The High  Court was moved for  a writ  of certiorari,  submitting that the Income-tax  Officer could  not impose  penalty under the  said section as he had information that the registered  firm was  dissolved on  April  13, 1951, by  agreement, and  in any  event on  May 5, 1953, by  the death  of one  of the  partners. The High Court  issued the  writ and quashed the order imposing penalty. ^      Held, that  the principle  laid down in C. A. Abrahams case  [1961] 2  S.C.R. 765,  is  as  much applicable  to   a  registered   firm  as   to  an unregistered firm. There is nothing in s.44 of the Act or  the context in which it occurs to indicate that it does not apply to registered firm.      Held, further,  that the  penalty  provisions under s.  28 would  in the  event of  the  default contemplated by  cls. (a) (b) or (c) be applicable in the  course of assessment of a registered firm. If the  registered firm is exposed to liability of paying penalty because it has committed any of the

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defaults contemplated  by cls.  (a), (b) or (c) by virtue of  s.44  the  assessment  proceedings  are liable to be continued against the registered firm even after  dissolution as  if  it  has  not  been dissolved.      The power  to  impose  penalty  under  s.  28 depends upon  the satisfaction  of the  Income-tax Officer in  the course  of proceedings  under  the Act. It cannot be exercised if he is not satisfied about the existence of conditions specified in cl. (a),  (b)   or  (c)  before  the  proceedings  are concluded. The  proceedings for  levy  of  penalty has, however,  not to  be commenced by the Income- tax Officer,  before completion  of the assessment proceedings by him. Satisfaction before the con- 641 clusion of  the proceeding  under the  Act and not the issue  of notice of intimation of any step for imposing penalty  is a  condition for the exercise of the jurisdiction.      C. A.  Abrham v.  Income  Officer,  Kottayam, [1961] 2 S. C. R. 765 applied.      Mareddev Krishna Reddy v. Income-tax Officer, Tenali [1957]  31  I.  T.  R.  678  and  Khushiram Murarilal v.  Commissioner of Income-tax, Central, Calcutta, [1954] 25 I. T. R. 572, approved.

JUDGMENT:      CIVIL APPELLATE  JURISDICTION : Civil Appeals Nos. 6 to 8 of 1961.      Appeals from the judgment and order dated May 3, 1957  of the Madras High Court in Writ Petition Nos. 943 to 945 of 1955.      K. N.  Rajagopala Sastri and P. D. Menon, for the appellants.      V.  S.   Venkataram  and   K.  P.  Bhat,  for respondents.      1962. January  18.-The Judgment  of the Court was delivered by      SHAH,  J.-These   are  three   appeals   with certificates of  fitness granted by the High Court of Madras  against orders  passed in Petitions for the issue  of writs  of certiorari  setting  aside orders imposing  penalty upon  the firm of Messrs. S. V.  Veerappan Chettiar  &  Co.  passed  by  the Income-tax Officer under s. 28(1)(c) of the Indian Income-tax Act.      Four persons  carried on business in cloth at Virudhunagar in  the  name  and  style  of  S.  V. Veerappan Chettiar  & Co.  -hereinafter called the firm. The  firm was  registered under  Art. 26A of the  Indian   Income-tax  Act,   1922,   for   the assessment years 1947-48, 1949-50 and 1950-51. The firm  concealed   particulars  of  its  income  in submitting  its   returns,  and   the   Income-tax Officer, Virudhunagar  in the course of assessment proceedings directed, by order dated May 20, 1954, payment of  penalty of  Rs. 20,000/-  for the year 1947-48, Rs. 10,000/-for the 642 year 1949-50  and Rs. 5,000/-for the year 1950-51. Against the  orders imposing  penalty, one  of the partners of  the firm  moved the  Commissioner  of

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Income-tax,  Madras   in  revision   but   without success. Thereafter,  petitions under  Art. 226 of the Constitution  for issue of writs of certiorari or other  appropriate writs  calling  for  records relating to  the orders dated May 20, 1954, passed by  the   Income-tax  Officer,   Virudhunagar,  in respect of  the three  assessment orders  and  the record relating  to the  order of the Commissioner and for  quashing the penalty orders were filed by two partners  of the  firm in  the High  Court  at Madras. It  was submitted  by the petitioners that by agreement  between the  partners the firm stood dissolved on  April 13,  1951, and  intimation  in that behalf  was given  to the Income-tax Officer, and that  in any event the firm stood dissolved on May 5, 1953, when one of the partners died and the Income-tax Officer  could not,  in exercise of the power  under  s.  28(1)  make  an  order  imposing penalty after  dissolution of  the firm.  The High Court accepted  the plea  of the  petitioners  and directed that the orders of the Income-tax Officer dated May  20, 1954, and the further action of the Commissioner thereon declining to revise the order of the Income-tax Officer in each of the petitions be set  aside. Against  the orders  passed by  the High Court the Commissioner appeals to this Court.      This Court in a recent judgment-C. A. Abraham v. Income-tax  Officer, Kottayam (1)-held that the Income-tax Officer  had power  under s.  28 of the Income-tax Act  to impose penalty in the course of assessment of a firm even if the firm stood at the date of the order dissolved by the death of one of its partners.  In so  holding, this Court observed that s. 44 of the Income-tax Act sets up machinery for assessing  tax liability  of a  firm which has discontinued its  business and that the expression "assessment" in the different sections of 643 Chapter IV  of the  Income-tax Act  was  not  used merely in  the sense of computation of income, and when s.  44 declared  that the partners or members of the  firm shall be jointly and severally liable to assessment,  it referred  to the  liability  to computation of  income under  s.23 as  well as the application of  the procedure  for declaration and imposition of  tax liability and the machinery for enforcement thereof.      Counsel   for    the   appellants,   however, contended that  C. A. Abraham’s case was one of an unregistered firm  and the  principle of that case has no  application where the firm is a registered firm. But  s. 44  makes the  provisions of Chapter IV, so  far as  may be,  applicable to  assessment when any  business, profession or vocation carried on by  a firm  has been discontinued : the section declares liability  of all  discontinued firms and not merely of unregistered firms. There is nothing in s.  44 or  the context  in which  it  occur  to indicate that  it does  not  apply  to  registered firms. This Court in C. A. Abraham’s case approved the decision  of the  Andhra Pradesh High Court in Mareddy  Krishna   Reddy  v.  Income-tax  Officer, Tenali, (1) which was a case of a registered firm, which was dissolved before imposition of penalty.      Counsel then  argued that  in any  event,  no

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penalty under  s. 28  can  be  imposed  against  a registered   firm    either   before    or   after dissolution, even  if the defaults set out in cls. (a), (b) or (c) are proved.      This, counsel  submits, is  the result of the scheme of the Act under s. 23(5) for assessment of tax liability  of a registered firm. This plea was not set  up in  the  petition,  and  there  is  no reference to  it in the judgment of the High Court and even  in the  statement of  the case  filed in this Court there is no trace of it. On that ground alone the  plea raised  by the appellant is liable to be rejected. Even if the appellant is permitted to raise the contention there 644 is, in our judgment, no force in it. Section 28(1) of the  Act (in  so far as it is material to these appeals) provides :           "If the  Income-tax Officer  x         x      x       x       x      x 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  by   notice  given  under  sub-           section  (1)   or  sub-section   (2)  of           section 22  or section 34 or has without           reasonable cause  failed to  furnish  it           within  the  time  allowed  and  in  the           manner required by such notice, or                (b) has  without  reasonable  cause           failed to  comply with  a  notice  under           subsection (4)  of section  22  or  sub-           section (2) of section 23, or                (c) has  concealed the  particulars           of his  income or deliberately furnished           inaccurate particulars of such income,      he or  it may  direct that such persons shall      by way of penalty, in the case referred to in      clause (a),  in addition to the amount of the      income-tax and  super-tax, if any, payable by      him, a sum not exceeding one and a half times      that amount,  and in the cases referred to in      clauses (b)  and (c), in addition to any tax-      payable by him, a sum not exceeding one and a      half times  the amount  of the income-tax and      super-tax, if  any,  which  would  have  been      avoided if  the income  as returned  by  such      person  had  been  accepted  as  the  correct      income". The expression  "person" is  defined in s. 2(a) of the Act as including "a Hindu undivided family and a local  authority".  That  evidently  is  not  an exhaustive definition and recourse 645 is permissible  to the  General Clauses  Act which says in  s. 3(42)  that a  "person" includes  "any company or  association  or  body  of  individuals whether incorporated or not." A firm is manifestly a body  of individuals  and would  therefore  fall within the  definition of  "person",  and  may  be exposed to  an order for payment of penalty in the circumstances set  out in cls. (a), (b) and (c) of s.  28   of  the  Income-tax  Act.  That  a  firm,

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registered or  unregistered, may  be liable to pay penalty has  been further clarified by proviso (d) which declares  the quantum  of penalty payable by firms, registered as well as unregistered. Counsel for the  appellant however contends that even if a firm be regarded as a person within the meaning of the operative  part  of  s.  28  and  the  proviso thereof, because  of an obvious defect in drafting no liability for payment of penalty can be imposed upon a  registered firm  and in  support  of  that contention he  relies upon  the last clause of the 1st sub-section  which provides  for imposition of penalty "in  addition to  any tax payable by him". Counsel submits that only the person liable to pay tax, may  if  found  guilty  of  wrongful  conduct specified in  cls. (a),  (b) and (c) be ordered to pay penalty,  and by  the scheme  adopted  by  the Legislature  for   imposing  tax   liability  upon registered firms  under  s.  23(5)  tax  is  never payable by  a registered  firm. Counsel  says that when the Legislature by Act 40 of 1940 enacted cl. (d) of  the proviso,  only the  quantum  of  penal liability of  a registered  firm was  declared but the liability  could not still be enforced because by the  substantive provision,  it depended solely upon the existence of an enforceable obligation of the firm,  and so  long as  an obligation  was not imposed upon  the firm  to pay  tax by an adequate amendment of  s.  23  (5),  the  liability  though quantified was  unenforceable. It  is  urged  that there were  two defects  in s.28(1), as originally drafted : (1) that the penalty could be 646 imposed only  upon a  person who was liable to pay income-tax or  super-tax, and (2) that the penalty which may be imposed was a multiple of the income- tax and  super-tax if  any, which  would have been avoided if  the income  as returned by such person would have  been accepted  as the  correct income, and by  the enactment  of cl.  (d) to the proviso, the second  defect was  removed, but not first. In support of  this argument,  counsel relied upon s. 23(5) as  it stood, before it was amended by s. 14 of the  Finance, Act  of 1956. The clause provided that where  an assessee  is a  firm and  the total income of  the firm has been assessed under sub-s. (1), sub-s. (3) or sub-s. (4), as the case may be, the  sum   payable  by   the  firm  shall  not  be determined but the total income of each partner of the firm,  including  therein  his  share  of  its income, profits  or gains  of  the  previous  year shall be  assessed and  the sum  payable by him on the basis  of such assessment shall be determined. Under this  scheme the  income of  the  registered firm was  to be  computed but tax was not assessed on the  total income  of the registered firm : the income was  distributed according  to the terms of the  agreement   amongst  the   partners  of   the registered firm,  and added to the separate income of the partners and tax was levied on the partners individually. Relying  upon this scheme of levying tax, it  was urged  by counsel  for the respondent that as  the registered firm was not liable to pay tax it could not be rendered liable to pay penalty under s. 28 (1) (c).

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    Section 28, as it was originally enacted, was somewhat  obscure.  The  penalty  which  could  be imposed in  cases referred  to in cls. (b) and (c) was to be a sum not exceeding one and a half times the amount  of  the  tax  which  would  have  been avoided if  the income  as returned by such person had been  accepted as  the correct income. But the Legislature did  not give  any indication  whether the 647 penalty was  related to  the tax  avoided  by  the partners of  the firm,  or  by  the  firm  on  the footing  that   it  was   to  be  regarded  as  an unregistered firm.  By s.  23(5),  income-tax  not being  made   payable  by  the  firm  but  by  the individual  partners  of  a  registered  firm  the legislative intention  was not  clearly expressed. The Legislature  to rectify  the defect  fixed  an artificial basis for computing the penalty payable by a  registered firm  : it  provided that  in the cases referred  to in cls. (b) and (c), the amount of the  income-tax and  super-tax which would have been avoided  if the  income as  returned had been accepted as  the correct income, shall be taken to be the  difference between  the amount  of the tax which would  have been  payable by an unregistered firm, on  an income  equal  to  the  firm’s  total income. But  the provision  relating to imposition of liability  to pay  penalty by  registered firms was clearly  expressed. The  assumption  that  the expression "any tax" used in s. 28 (1) is intended to indicate that there must be come tax payable by the assessee  before penalty  could be  imposed is wholly unwarranted. The futility of the assumption is exhibited  by the terms of cl. (b). Penalty may be imposed  for failure  to comply with the notice under sub-s.  (4) of  s. 22 or sub-s. (2) of s. 23 even if  the assessee has no assessable income. To the imposition  on of  a penalty  liability to pay tax by  the person  against whom  the  penalty  is sought to  be imposed is therefore not a condition precedent.      The  Calcutta   High   Court   in   Khushiram Murarilal v.  Commissioner of  Income-tax, Central Calcutta (1)  was called  upon to  deal  with  the submission made  before us  in this  case. In that case the  question which fell to be determined was whether imposition  of a  penalty on  a registered firm under s. 28 (1) (b) of the Income Tax Act was justified in  law. It  was urged  in that  case on behalf of the 648 assessee-a registered firm-that inasmuch as under, s. 28  (1) (b)  a person can be made liable to pay penalty, in  addition to  the amount of income-tax and super-tax,  if any,  payable by  him in  cases falling under  cls. (b)  and  (c),  no  order  for payment of  penalty can  be against  a  registered firm, because  under the  Income Tax Act no tax is made  payable   by   the   firm.   Chief   Justice Chakravartti, speaking  for the  Court,  observed, "....................... even  when  construed  by its  own  language  the  concluding  paragraph  of section 28  (1)  cannot  be  said  to  make  it  a condition precedent  that a  person must be liable

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to pay some income-tax or it may be also super-tax if he  is to  be made liable for a penalty. Clause (b) of  the proviso  to my  mind  emphasizes  that meaning of  the concluding paragraph of Section 28 (1) and  rests on  an assumption  that under  that provision a  person may  be chargeable  to penalty although he  may not  be chargeable  to tax."  The learned Chief Justice also observed, "......it was not really necessary for clause (d) of the proviso to enact specifically that a registered firm would be liable  to pay  a penalty despite the fact that it could  not be  charged and  was not,  in  fact, charged to  income-tax  or  super-tax.  The  whole argument of  Dr. Sen Gupta was that the concluding paragraph of  Section 28  (1) had left a gap which had been  attempted to  be filled up by clause (d) of the  proviso, but  the  attempt  had  not  been successful. In  my view  the gap which undoubtedly existed in  the concluding paragraph of section 28 (1) was  only an  absence of a provision regarding the quantum  of the  penalty that  could be levied from a registered firm because the quantum depends upon the amount of income-tax payable".      In our  view the  learned Chief  Justice  was right is  so enunciating  the law. Under s. 23 (5) of  the  Indian  Income-tax  Act,  before  it  was amended in  1956, in the case of a registered firm the  tax  payable  by  the  firm  itself  was  not required to be 649 determined but the total income of each partner of the  firm  including  therein  the  share  of  its income, profits and gains of the previous year was required to be assessed and the sum payable by him on  the   basis  of  such  assessment  was  to  be determined.  But  this  was  merely  a  method  of collection of tax due from the firm.      The penalty  provisions  under  s.  28  would therefore in the event of the default contemplated by cls.  (a), (b)  or (c)  be  applicable  in  the course of  assessment of  a registered  firm. If a registered firm  is exposed to liability of paying penalty,  by   committing  any   of  the  defaults contemplated by  cls. (a), (b) or (c) by virtue of s. 44, notwithstanding the dissolution of the firm the  assessment   proceedings  are  liable  to  be continued against  the registered  firm, as  if it has not been dissolved.      Counsel contended  that in any event, penalty for the  assessment  year  1949-50  could  not  be imposed upon  the assessee  firm because there was no  evidence   that  the  Income-tax  Officer  was satisfied  in   the  course   of  any   assessment proceedings under the Income-tax Act that the firm had concealed the particulars of its income or had deliberately furnished  inaccurate particulars  of the income. The power to impose penalty under s.28 depends upon   the  satisfaction of the Income-tax Officer in  the course  of proceedings  under  the Act: it cannot be exercised if he is not satisfied about the  existence of  conditions  specified  in cls. (a),  (b) or  (c) before  the proceedings are concluded. The  proceeding to  levy  penalty  has, however, not  to be  commenced by  the Income  Tax Officer before  the completion  of the  assessment

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proceedings    by    the    Income-tax    Officer. Satisfaction before  conclusion of  the proceeding under the  Act, and  not the  issue of a notice of initiation of  any step  for imposing penalty is a condition for  the exercise  of the  jurisdiction. There is  no  evidence  on  the  record  that  the Income-tax Officer 650 was not  satisfied in the course of the assessment proceeding that the firm had concealed its income. The assessment  order is  dated November 10, 1951, and there  is an  endorsement at  the foot  of the assessment order  by the  Income-tax Officer  that action under  s. 28 had been taken for concealment of income  indicating clearly  that the Income-tax Officer  was   satisfied  in  the  course  of  the assessment proceeding  that the firm had concealed its income.      In our  view, the  High Court was in error in holding that penalty could not be imposed under s. 28 (1)  (c) upon  the firm Messrs. S. V. Veerappan Chettiar & Co., after its dissolution.      The appeals will therefore be allowed and the orders passed  by the High Court will be set aside and  the   petitions  filed   by  the  respondents dismissed with  costs in  this Court  and the High Court. One hearing fee.                                   Appeals allowed.