1979 (12) TMI 43 - HC - Income Tax

Court Upholds Tribunal's Decision to Reduce Unregistered Firm's Penalty, Considering Annuity Deposit u/s 271(2.

The Tribunal reduced the penalty imposed on the assessee, an unregistered firm, by considering the annuity deposit in the penalty computation under ... Annuity Deposit, Registered Firm, Unregistered Firm - Whether, in determining the quantum of penalty leviable under section 271(2) of the Income-tax Act, 1961, in the assessee's case the annuity deposit that was payable by the unregistered firm for the assessment year 1966-67 should be taken into consideration? - Assessee appeal allowed. Issues Involved:1. Determination of quantum of penalty under section 271(2) of the Income-tax Act, 1961.2. Consideration of annuity deposit payable by an unregistered firm in penalty computation.Issue-wise Detailed Analysis:1. Determination of Quantum of Penalty under Section 271(2) of the Income-tax Act, 1961:The primary issue is whether, in determining the quantum of penalty leviable under section 271(2) of the Income-tax Act, 1961, the annuity deposit that was payable by the unregistered firm should be taken into consideration. The court considered two assessment years, 1965-66 and 1966-67, with identical questions except for the year.The assessee, a firm operating transport vehicles, filed returns for the respective years, which were significantly lower than the income assessed by the Income Tax Officer (ITO). Penalty proceedings were initiated under section 271(1)(c), and the matter was referred to the Inspecting Assistant Commissioner (IAC) under section 274(2). After settlements with the department, the income was accepted, and the minimum penalty was agreed upon.The IAC levied penalties, rejecting the assessee's contention that under section 271(2), it should be treated as an unregistered firm and the annuity deposit payable should be deducted from the total income assessed. The Tribunal, on appeal, reduced the penalty, considering the annuity deposit for quantifying the penalty. The Commissioner challenged this order.2. Consideration of Annuity Deposit Payable by an Unregistered Firm in Penalty Computation:Section 271(2) of the Income-tax Act provides that if a person liable to penalty is a registered firm or an unregistered firm assessed under section 183(b), the penalty imposable shall be the same amount as would be imposable if the firm were an unregistered firm. The Act classifies firms into registered and unregistered, with different tax liabilities. Registered firms pay tax at a smaller rate, while unregistered firms pay tax on the total income.Section 183(b) allows the ITO to treat a firm as registered even if it hasn't applied for registration to avoid higher tax rates. Section 271(2) ensures registered firms do not escape the proper penalty amount by treating them as unregistered firms for penalty purposes. The computation of tax due and the appropriate penalty must be based on the firm being unregistered.The court noted a curious feature of section 271(2): an unregistered firm treated as registered under section 183(b) reverts to being unregistered for penalty purposes, creating a legal fiction. The penalty computation must consider this imaginary state of affairs.Chapter XXII-A, introduced by the Finance Act of 1964, required certain assessees, including unregistered firms, to make annuity deposits. Section 280A described the categories liable, and section 280C required deposits based on adjusted total income. Section 280-O allowed these deposits as deductions in computing total income, irrespective of actual payment.The court considered whether the assessee, which made no actual annuity deposit, was eligible for deduction for penalty computation. The provision's language, 'required to be made,' envisages deduction of the amount payable by statute, even if unpaid. The actual payment was not the statutory criterion.The amendment to section 280-O, allowing deduction only for amounts actually paid, did not affect registered firms treated as unregistered for penalty purposes. The registered firm would still be eligible for the deduction required under Chapter XXII-A.The Gujarat High Court in CIT v. Gujarat Automobiles and the Karnataka High Court in Addl. CIT v. Khanchand Thakurdas held that the annuity deposit required to be made must be deducted for penalty computation, irrespective of actual payment.The court rejected the revenue's argument that the statutory fiction should be confined to its limits, excluding annuity deposit deduction. Full effect must be given to provisions applicable to unregistered firms, including sections 280A, 280C, and 280-O, for tax computation and penalty levy.The court referenced P. Subramaniam & Bros. v. CIT, affirming that section 271(2) requires tax assessment as if the firm were unregistered, and penalty computation based on that assessment.Conclusion:The court answered the questions referred for both years in the affirmative, in favor of the assessee, allowing the deduction of the annuity deposit for penalty computation. The assessee was entitled to costs, with counsel's fee set at Rs. 500.