Calcutta H.C : Whether, on the facts and in the circumstances of the case, the Tribunal was right in law in holding that this is not a fit case for levy of penalty under s. 271(1)(a) of the IT Act, 1961, and, in that view, cancelling the penalty levied by the ITO under s. 271(1)(a) of the IT Act, 1961 ?

Counsel Appeared

A.C. Moitra, for the Revenue : Dr. D. Pal, for the Assessee

AJIT K. SENGUPTA, J.:

In this reference, under s. 256(2) of the IT Act, 1961, the following questions of law for the asst. yr. 1967-68, have been referred in this Court :

” 1. Whether, on the facts and in the circumstances of the case, the Tribunal was right in law in holding that this is not a fit case for levy of penalty under s. 271(1)(a) of the IT Act, 1961, and, in that view, cancelling the penalty levied by the ITO under s. 271(1)(a) of the IT Act, 1961 ?

2. Whether, on the facts and in the circumstances of the case and, in view of the fact that notice under s. 139(2) has been served on the assessee, the Tribunal misdirected itself in law in holding that the assessee had no obligation to file the return inasmuch as it bona fide believed that its total income will be less than the maximum not chargeable to tax?”

The facts shortly stated are that the return of income of the assessee for the assessment year under reference was due under s. 139(1) of the Act, on or before September 30, 1967. The assessee did not file any return by the due date. A notice under s. 139(2) was served upon the assessee on July 27, 1967, asking it to file the return within 30 days of the date of service of the notice. The assessee filed the return on June 17, 1969, declaring a loss of Rs. 29,008. The assessment was, however, made on an income of Rs. 2,15,415. After the revision made by the CIT under s. 264 of the Act, the total income was determined at Rs. 1,19,319. A notice under s. 274 r/w s. 271 was issued to the assessee on February 5, 1968, asking the assessee to show cause why penalty under s. 271(1)(a) should not be levied on it.

Before the ITO, the only contention raised by the assessee was that even though it did not apply for extension of time, the return filed by it under s. 139(4) should be deemed to have been filed within time and, therefore, no penalty should be levied. The ITO held as follows : “I have carefully considered the facts of the case. What is material in this context is whether the assessee was prevented by sufficient cause from filing the return within the time allowed by ss. 139(1) and 139(2). The assessee had not shown any cause to justify or which prevented him from filing the return. I am satisfied that the assessee was not prevented by sufficient cause from filing the return within the time allowed by ss. 139(1) and 139(2) and thereby rendered itself liable to penalty under s. 271(1)(a).” He, therefore, imposed penalty for nine months’ delay.

4. The matter was taken up before the AAC. On appeal, several contentions were raised by the assessee. One of such contentions was that since interest was levied under s. 139(1)(iii), no penalty could be imposed. This contention was rejected by the AAC in view of the decision of the Andhra Pradesh High Court in T. Venkata Krishnaiah and Co. vs. CIT (1974) 93 ITR 297 (AP). The AAC held that the assessee, though it had taxable income, failed to file its return of income within the time allowed under s. 139(1) and in the notice under s. 139(2) without any reasonable cause and, therefore, the penalty was rightly levied. He, however, directed the ITO to recompute the penalty on the basis of the total income of the assessee that might be arrived at after giving effect to any relief if granted by the CIT on the assessee’s petition under s. 264 of the Act.

5. On further appeal by the assessee before the Tribunal, the Tribunal recorded as follows : “The Revenue relied upon the orders of the authorities below for the levy of penalty whereas the assessee’s counsel stated that, on the facts of the case, no penalty should be levied as, on the basis of the accounts, the assessee suffered loss.”

6. The Tribunal came to the following conclusion: “It is not necessary for us to pass an elaborate order. There is no suggestion that there was a mala fide intention of the assessee when its income was finally assessed at Rs. 1,19,319. On the basis of the accounts, the assessee had suffered loss. The assessee could not anticipate that its income would be assessed at such a figure. There is a direct authority, in favour of the assessee on this point, of the Allahabad High Court in the case of CIT vs. N. Khan and Brothers (1973) 92 ITR 338 (All). In that case, the assessee did not file a voluntary return when there was a net loss of Rs. 9,214. The return was not accepted and the income was assessed at Rs. 64,922 which included a sum of Rs. 40,000 as income from undisclosed sources, being the aggregate of three cash credits. Their Lordships of the Allahabad High Court stated that it is true that, under s. 139(1), a duty is cast upon every person to file a voluntary return if his income exceeds the maximum amount which is not chargeable to income-tax. The learned judge of the High Court stated that the question arises as to which income is contemplated by this provision, the income which the assessee believes to be his income or income which is finally assessed by the ITO. Having found that, when a person is required to file a voluntary return and no assessment has yet been made against him, in such circumstances, he is guided by what he himself believes to be his income. Thus, their Lordships held that when a person considers an income to be his income which is not chargeable to income-tax, he is not required to file a voluntary return if the income finally assessed, is more than the maximum amount which is not chargeable to income-tax. In this case, there is no suggestion by the Revenue that the belief of the assessee was not a bona fide one. Thus, when there is nothing to hold that the assessee could anticipate that its income would be pitched up to a higher figure, we cannot hold that the assessee had no reasonable cause for not submitting the return in time in terms of s. 139(1) of the Act, because the obligation to file the return under s. 139(1) arises only when the income exceeds the maximum amount which is not chargeable to tax on the basis of the return. Hence, we are of the opinion that this is not a fit case for levy of penalty under s. 271(1)(a) of the Act. Hence, we cancel the levy of penalty. “

At the hearing, it was contended on behalf of the CIT that the Tribunal was not justified in holding that no penalty was imposable in this case as the assessee has suffered loss and filed a loss return. It is also contended that the Tribunal only considered the default under s. 139(1), but failed to take note of the default committed under s. 139(2).

It is contended by Dr. Pal that the assessee had acted bona fide in not filing the return under s. 139(1) as it had suffered loss according to its accounts. He further contended that before the Tribunal, no contention was raised about non-compliance with the notice under s. 139(2) and, accordingly, the second question which has been referred to this Court cannot be decided in this reference and the matter should be remanded to the Tribunal for fresh disposal, if at all, in the event the Court is inclined to hold that there was non-compliance with the notice issued under s. 139(2). Dr. Pal has also contended that since interest was charged, no penalty could be levied in view of the judgment of the Supreme Court in CIT vs. M. Chandra Sekhar (1985) 151 ITR 433 (SC).

Dr. Pal has relied on the decision of the Bombay High Court in CIT vs. Allied Silk Mills (1982) 26 CTR (Bom) 132:(1983) 140 ITR 428 (Bom). In that case, pursuant to the notice under s. 22(2) of the Indian IT Act, 1922, calling upon the assessee-firm to file its return in respect of the asst. yr. 1961-62, the assessee did not file its return within the time specified by the said notice. He filed the return after a delay of one year and 11 days. In the said return, the assessee-firm showed its income below the minimum taxable income for firms. Thereafter, penalty proceedings were initiated for delay in filing the return under s. 22(2) of the Indian IT Act. Ultimately, the matter came up before the Bombay High Court on reference. There, the Bombay High Court observed as follows (at p. 433) : “In this case, admittedly, the income disclosed by the assessee-firm in its return, namely, Rs. 21,219, was below the limit of the taxable income for the firm. The only question that would, therefore, survive for consideration would be whether such disclosure of income by the assessee could be considered to be bona fide. The question whether such disclosure was bona fide or not was a question of fact and was primarily for the Tribunal to decide.”

Dr. Pal contends that the Tribunal has found that the assessee acted bona fide and, accordingly, this fact having not been disputed by the Revenue, there cannot be any ground for interference by this Court.

10. We shall first dispose of the objection taken by Dr. Pal that the issue involved in the second question relating to the non-compliance with the notice under s. 139(2) and imposition of penalty in consequence thereof, does not arise out of the order of the Tribunal. The Tribunal, in rejecting the reference application on the second question in this reference which was the fourth question in the reference application under s. 256(1), observed as follows :

“No arguments were also canvassed by the Department before the Tribunal with regard to question No. 4 in the assessee’s appeal and thus the question as framed by the applicant does not arise out of the order of the Tribunal.”

11. In our view, the Tribunal was not justified in stating that no argument was canvassed on the question of levy of penalty for default under s. 139(2) of the Act. We have already set out the findings of the ITO and the AAC. They proceeded to consider the default of the assessee not only under s. 139(1), but under s. 139(2) as well. Apart from mentioning in the appellate order that “the Revenue relied upon the orders of the authority below for the levy of penalty”, no further argument was recorded by the Tribunal. When the orders of the lower authority specifically recorded the grounds on which the penalty was levied and sustained and when the Revenue relied on those orders in support of its contention as recorded by the Tribunal, it must be held that the Revenue must have raised this contention and supported the reasonings and conclusion of the lower authorities before the Tribunal. That is presumably the reason why the Tribunal, in para. 5 of the appellate order, stated that “it was not necessary to pass an elaborate order”. We have already extracted the material part of the order of the Tribunal. We, therefore, reject the contention of Dr. Pal that the second question does not arise out of the order of the Tribunal. We shall now deal with the merits of the contentions.

12. Sec. 139(1) of the Act provides that an assessee has to file a return within the time prescribed therein if his total income during the relevant previous year exceeded the maximum amount which is not chargeable to income- tax. In this case, the contention of the assessee was that as it had suffered loss and also ultimately filed a loss return and, accordingly, there is justification for not filing the return within the time specified under s. 139(1). The income contemplated under s. 139 (1) which imposes a duty on a person to file a voluntary return is the income which the assessee believes to be his income and not the income which is finally assessed. In such a case, if what the assessee considers to be his income is less than the maximum not chargeable to tax, he is not required to file a voluntary return. Even if, ultimately, his income is assessed at a figure which is taxable, he may not be liable for penalty under s. 271(1)(a). To that extent, the Tribunal is right in principle. The holding of a bona fide belief of an assessee that his income is less than the maximum not chargeable to tax is essentially a question of fact. Merely because the accounts disclosed a loss, it could not be a bona fide ground for not filing a return under section 139(1). According to accountancy principles, there may not be profit, but from the point of view of taxation, there may be profit having regard to the exclusion or inclusion of certain items of income and expenditure. In this case, the assessment was ultimately made on Rs. 1,19,319 which was accepted by the assessee as against the loss of Rs. 29,008. How the loss was arrived at and how the ultimate income came to be determined are relevant factors which indicate whether the assessee held the belief in good faith that no return was required to be filed voluntarily under s. 139(1). This fact cannot be lost sight of. In the instant case, however, the question of default under s. 139(1) is only academic having regard to the fact that, before the expiry of the period prescribed under s. 139(1), i.e., September 30, 1967, notice under s. 139(2) was served upon the assessee on July 27, 1967. Time to file the return under s. 139(2) expired before the end of August, 1967. The period of default under s. 139(1) comes to an end as soon as the notice under s. 139(2) is served. The fact that although the period prescribed by notice under s. 139(2) had expired, the time allowed for furnishing a voluntary return under s. 139(1) had not expired is not by itself a reasonable cause for not furnishing the return. The onus is on the assessee to show that he was prevented by sufficient cause in not complying with the statutory requirement of filing the return in time. The Tribunal was silent on the question whether the assessee had any reasonable cause for not filing the return.

13. In Allied Silk Mills case (supra), the Bombay High Court held that since the assessee had filed his return bona fide, showing nontaxable income, the question of imposition of any penalty would not arise. The assessee, in our view, ought to have filed a return even if it had suffered loss in response to the notice under s. 139(2). But that was not done. It is not a case where the assessee did not file any return at all. A return was filed before the assessment was made. No explanation has been given as to why the return could not be filed within the time specified under s. 139(2). The question is of reasonable delay in filing the return but no reasonable cause was shown. If the ground is that no return is liable to be filed because there is a loss, in that event, the filing of the return before the assessment is made would indicate that the assessee knew that it was required to file the return even if there is a loss for the purpose of determination and carry forward of the loss, if any.

14. In our view, simply because there is a loss according to the accounts, the assessee is not absolved of the obligation of filing a return in response to s. 139(2). The assessee has an obligation to comply with the direction contained in the notice under s. 139(2) even if it had suffered loss. It could have filed the return along with the balancesheet and profit and loss account showing the loss allegedly suffered. That was not done. If the assessee had no obligation to comply with the notice under s. 139(2), in that event, the assessee would be precluded from claiming carry forward of loss by filing a return beyond time. In this case, not only was the assessee’s negative income of Rs. 29,008 determined as a positive income of Rs. 2,15,415, but the assessee also made an application under s. 264 of the Act, before the CIT for revision and the total income was determined at Rs. 1,19,319 which was accepted by the assessee. In that view of the matter, it cannot be said that there could be any reasonable ground to sustain the plea that income would never exceed the taxable limit and there would be no assessable income. On the contrary, the plea taken before the AAC was that the assessee did not apply for extension of time because the return filed by it under s. 139(4) should have been treated as a return filed within time and, therefore, no penalty could be levied. The mere fact that an outer limit is fixed by s. 139(4) enabling an assessee to file a belated return and the fact of filing a return under s. 139(4) would not by itself affect the power of the ITO to impose penalty under s. 271(1) (a) particularly when the notice under s. 139(2) is not complied with.

15. In our view, once a notice under s. 139(2) is served on the assessee, there is an obligation to file the return in pursuance of such notice irrespective of the fact whether it has positive or negative income and the assessee must satisfy the ITO that there was a reasonable ground for delay in complying with the said notice.

16. Dr. Pal has contended that, in view of the decision of the Supreme Court in M. Chandra Sekhar’s case (supra), since, in this case, interest was charged, the delay in the filing of the return has been condoned. We are afraid that we cannot allow Dr. Pal to raise this contention for more than one reason. Firstly, there is no material before us to hold that interest was in fact charged. Secondly, this specific contention was raised before the AAC and he rejected that contention. No such contention was raised before the Tribunal. Even assuming such contention was raised, it must be deemed to have been rejected by the Tribunal. The assessee has not come against the said order of the Tribunal by way of reference.

17. For the reasons aforesaid, we answer the first question in the negative and in favour of the Revenue. The second question is answered in the affirmative and in favour of the Revenue.

There will be no order as to costs.

Leave is given to file vakalatnama within two weeks.

BHAGABATI PRASAD BANERJEE, J.:

I agree.

[Citation :182 ITR 222]