Assessee must pay penalty despite filing return late; court clarifies interest vs. penalty.

The court held that filing a voluntary return under section 139(4) does not absolve the assessee from penalty under section 271(1)(a) for failing to file the return within the specified time. The court clarified that penal interest is for delay, while the penalty is for the failure to file on time. Additionally, the Income-tax Officer does not have discretion to levy a penalty at a rate lower than 2% of the tax per month of default, as the word "may" in the statute does not grant such discretion. The court ruled against the assessee on both issues and ordered the assessee to bear the costs of the reference.

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Issues Involved:
1. Whether penalty is leviable under section 271(1)(a) when the assessee filed a voluntary return of income within the time prescribed under section 139(4) of the Act.
2. Whether the Income-tax Officer can levy the penalty under section 271(1)(a) at a lesser rate than 2% of the tax.

Issue-wise Detailed Analysis:

Issue 1: Penalty Leviability under Section 271(1)(a) for Voluntary Return Filed under Section 139(4)

The court examined whether the voluntary filing of a return under section 139(4) absolves the assessee from the liability to pay a penalty under section 271(1)(a). The assessee argued that filing a return within the time allowed by section 139(4) should only attract penal interest and not a penalty. The department contended that filing under section 139(4) does not exempt the assessee from penalties under section 271(1)(a).

The court noted that under section 139(1), every person with taxable income must file a return within the specified time, or within an extended time if granted by the Income-tax Officer. Failure to comply with section 139(1) or 139(2) without reasonable cause attracts a penalty under section 271(1)(a). The court emphasized that section 271(1)(a) is applicable for defaults under section 139, and both sections operate in different fields. The court rejected the argument that section 139 is a special provision that should prevail over the general provision of section 271(1)(a). The court concluded that the filing of a return under section 139(4) does not absolve the assessee from the penalty for the default committed under section 139(1) or 139(2).

The court upheld that the penalty is for the failure to file the return within the time allowed, and penal interest is levied as compensation for the delay. Therefore, the court answered question No. 1 in the affirmative and against the assessee.

Issue 2: Discretion of Income-tax Officer in Levying Penalty at a Lesser Rate

The second issue was whether the Income-tax Officer has the discretion to levy a penalty at a rate lesser than 2% of the tax for every month of default. The assessee argued that the word "may" in section 271(1) implies discretion, allowing the Officer to impose a lesser penalty. The court examined the language of section 271(1)(a) and compared it with other sections where both minimum and maximum penalties are specified.

The court referred to the interpretation of the word "may" in penal statutes, indicating that it often carries a compulsory force. The court concluded that the word "may" in section 271(1)(a) does not grant discretion regarding the quantum of penalty but rather pertains to the existence of circumstances justifying the imposition of a penalty. The court stated that the Income-tax Officer must levy a penalty at 2% of the tax for every month of default, subject to a maximum of 50% of the tax, once it is determined that the failure to file the return was without reasonable cause.

The court supported its view by referencing Commissioner of Income-tax v. Venichand Maganlal, affirming that the Officer has no option but to levy the penalty at the specified rate. Hence, question No. 2 was answered in the negative and against the assessee.

The court concluded that the assessee is liable for the costs of the reference, with an advocate's fee set at Rs. 250.

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