TMI Blog1981 (9) TMI 50X X X X Extracts X X X X X X X X Extracts X X X X ..... e for the two assessment years should, in compliance with these notices, have been submitted by the assessee on or before July 12, 1960, and July 18, 1961, respectively. It, however, appears that, for the assessment year 1960-61, the audit of the accounts of the firm, Volga Restaurant, was completed on December 22, 1962, and its return of income filed only on December 24, 1962, and that for the assessment year 1961-62, the firm filed its return of income only on November 5, 1965. Consequently, the assessee filed his returns for the two assessment years in question on January 10, 1963 and November 5, 1965, respectively. The ITO completed the assessment for the year 1960-61 on March 10, 1965. The share income from Volga Restaurant was assessed at Rs. 1,65,848 on the basis of the assessment of the firm. After setting off the assessee's share of loss of Rs. 3,853 from Volga Caterers, the total income was determined at Rs. 1,61,995. For the assessment year 1961-62, the assessment was completed by the ITO on March 21, 1966. As already stated, the only income of the assessee was the share income from Volga Restaurant and this was taken at Rs. 94,007 on the basis of the firm's assessment ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... turns by its partners should be attributed to a reasonable cause, for, if a contrary view were held, the penalty leviable on the registered firm and on its partners would be far in excess of the penalty leviable on an unregistered firm and its partners for the same default and this could not have been the intention of the Legislature. He also pointed out that, having regard to the statutory obligation on an assessee to satisfy himself that the return filed by him is correct and complete in all respects, he could not safely file the same before his share income was intimated to him by the firm. He, therefore, cancelled the penalties for the two years in question. Aggrieved by the order of the AAC, the ITO preferred appeals to the Income-tax Appellate Tribunal. On behalf of the appellant, it was pointed out before the Tribunal that the assessee was a major partner in Volga Restaurant, the other two partners being his close relatives, and that, therefore, the assessee himself had the controlling interest in the firm and was also responsible for the filing of the returns of the firm belatedly. The assessee, it was contended, could not plead his own default, in not filing the return o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he assessment year 1960-61 ? 2. Whether, on the facts and in the circumstances of the case, the Tribunal was justified in upholding the order of penalty under section 271(1)(a) of the Income-tax Act, 1961, for the assessment year 1961-62 ? " Shri G. C. Sharma, learned counsel appearing for the assessee, contended that, under the I.T. Act, a firm and its partners enjoyed a very peculiar position. Though they were separate and independent assessees, their assessments were mutually interconnected. The partner's total income depended on that of the firm because his share income determined on the basis of the firm's assessment was includible therein. No partner of a firm can file a valid return (whether he has other income or not) unless the books of account of the firm are finalised and its results, including his share of profits become known to him. Hence, when there is a delay in the accounts of the firm being finalised, for one reason or another, the partner is under a genuine handicap in filing his return till the firm finalises the accounts and files its return. There is, therefore a reasonable cause for the delay on his part in filing his return of income till then. Learned c ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... cover to postpone his return of income and the consequent payment of tax on other substantial items of income earned by him. Finally, learned counsel submitted that the imposition of the penalty is not automatic but should be based on some contumacious conduct or wilful disregard of the statutory obligations on his part (vide Hindustan Steel Ltd. v. State of Orissa [1972] 83 ITR 26 (SC)). Even assuming that, on account of some bona fide mistake or misapprehension, the assessee thought that he was at liberty to postpone the filing of the return until the firm's books had been completed, a penalty would not be imposable. On the other hand, Mr. K. K. Wadhera, learned counsel for the Department, submitted that the question whether there is reasonable cause or not for the delay in the filing of the returns is a pure finding of fact. He cited a large number of decisions in support of his contention. He urged that the issue of double jeopardy is an irrelevant consideration in the context of the I.T. Act and that it would not be correct to import that concept, pertaining to the domain of criminal offences, into the present context which is governed by the explicit language of s. 271(1)(a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... defaults by two different assessees and there can be, no valid objection to two different penalties being imposed. An apparent harshness of the result should not stand in the way of giving effect to this clear position because it was the intention of the legislature, when it inserted a provision that the penalty imposable on a registered firm should be on the same basis as an unregistered firm, that no advantage should be taken by the registered firm in the matter of levy of penalty of the lower rates of tax applicable to it and the concessional treatment accorded to it by the statute. There is an apparent plausibility about this argument, but we think, it is too broadly stated and is also based on an over simplification of the several difficulties that arise in such cases. To begin with, while it is true that a firm is a distinct taxable entity under the Act, the dichotomy between a firm and its partners is not complete and does not run through the entire scheme of the Act. It is mainly for purposes of convenience that the income of a firm is assessed at the point of first accrual to, or receipt by, the firm. However, the treatment given to the partners and the firm under the A ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... inally at a time when no tax was at all payable by registered firm but was continued even after 1956 in the same form. Section 271(2) is more succinctly expressed. The brief effect of both the provisions is that the penalty on a registered firm is to be calculated in the same manner as if the firm were an unregistered one. What is the reason for the legislature introducing such a provision ? One reason could be that the legislature proceeded on the basis that penalty could be levied only on the firm and not on the partners in such cases where there is delay, default or concealment of the types envisaged in s. 28(1)/271(1) on the part of the firm as such and that it enacted the provision because it did not want registered firms to escape the rigour of the penal provisions by reason of their tax rate being nil or minimal. We say this, for, were one to consider that the partners were also liable to penalty in such cases, such a provision would not at all have been necessary, for, the partners of a registered firm, who are the real persons taxable, would be called upon to pay penalties on the basis of their share income and no question would have arisen of the firm, as such, securing ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ils of the share income constitute one of the columns which has to be filled in when filing his return. It is highly doubtful whether a return, filed by him without including his share income or by purely estimating it, would be a valid return at all. It is, therefore, essential that the figures of his share income must be available to him before he can file a correct and complete return. If such figures are not available because of the delay in the completion of the firm's accounts the partner cannot be said to be without reasonable cause for delaying his return and this would be so whether there was reasonable cause for the delay in, the firm's completion of accounts or not. If such delay is attributable to a reasonable cause, a fortiori the partner's delay is also due to reasonable cause. To give an illustration, suppose a firm were to delay the filing of its return because the finalisation of its accounts is held up due to the serious illness of the munim or of the partner who is in charge of the accounts and the ITO accepts the position that the delay in the filing of the return is attributable to reasonable cause, then it would be inconsistent and inequitable to hold, in the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nd the sources of income of its partners. A distinction will at once be apparent between case in which the firm has a large income and the partner has no income other than his share income and one in which where the firm's income is small and the partner has substantial income from other sources too. To give a very simple illustration where a partner of an unregistered firm has no other income, he cannot be penalised at all for the entire income would be taxed in the hands of the firm and so far as he is concerned there is nothing taxable at all. Hence, if the firm has either delayed the return or concealed its income it will be subjected to the appropriate penalties but the partner would stand outside such proceedings as they will have no impact on his individual assessment. On the other hand, it is quite conceivable, that where a partner (even of an unregistered firm) has other income, the position is quite different. He may be able to postpone good amount of tax payable by him on his share income or other income by delaying the firm's return. The circumstance that the firm may be liable to a penalty is of no practical effect because the tax with reference to which the firm will ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... olve, from the Mysore, the Orissa and the Punjab and Haryana High Courts on the one hand and the Punjab and the Allahabad High Courts on the other (which are based on the facts of the cases before them), certain general principles universally applicable to all cases. It seems to us that a conclusion has to be reached in each case on a consideration of all the circumstances including the two grounds indicated above and that it would be unsafe and incorrect to enunciate any principle of general application to all situations. Confining ourselves for the time being to s. 271(1)(a) we think that the imposability of penalty on a partner should depend upon a consideration of the following circumstances: (a) whether he is a partner of a registered firm or unregistered firm ; (b) whether he has income other than the share income or not, and if so, the nature and extent of such income; (c) whether he is one of several partners to whom any contumacious conduct on the part of the firm could not be attributed or whether he is for all practical purposes the brain behind the firm or able to control its affairs, and so, responsible for its delays and defaults; (d) whether any penalty has been or c ..... X X X X Extracts X X X X X X X X Extracts X X X X
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