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Petitioner: ADDITIONAL COMMISSIONER OF INCOME-TAX, GUJARAT VS Respondent: I.M. PATEL & CO.
Court Name: Gujarat High Court Judge(s): B. J. Divan, P. D. Desai, B. K Mehta Title: ADDITIONAL COMMISSIONER OF INCOME-TAX, GUJARAT vs I.M. PATEL & CO. Case No.: Income-tax Reference No,24 of 1973 Date of Judgment:1976-05-03 Reported As: 1994 PTD 210 Result: Reference answered
JUDGMENT
JUDGMENT ' B.J. DIVAN, C.J.--- In this case by an order of reference, dated September 4, 1974, the following question has been referred to this Full Bench. "When by a taxation statute, sanction of penalty is provided in order to enforce compliance with a particular provision of the Act and the section providing for penalty requires that the non- performance of obligation without reasonable cause shall attract that particular penalty, (i) is absence of reasonable cause an ingredient of the offence for which the penalty is provided; and (ii) has the taxing authority to prove absence of reasonable cause or has the party in default to prove the presence of reasonable cause?" ' The order of reference makes it clear that it was in the context of section 271(1)(a) of the Income- tax Act, 1961, that this question arose before the Division Bench and, therefore, in order to answer correctly the question that has been canvassed before us, we reframe the question as follows:- "When section 271(1)(a) of the Income-tax Act, 1961, provides for sanction of penalty in order to enforce compliance with a particular provision of the Act and the section requires that non- performance of the obligation without reasonable cause shall attract that particular penalty, (i) is reasonable cause an ingredient of the offence for which the penalty is provided; and (ii) has the taxing authority to prove absence of reasonable cause or has the party in default to prove the presence of reasonable cause?" ' The matter was referred to the Full Bench because the Division Bench found itself unable to agree with the view taken by J.B. Mehta and T.U. Mehta, JJ., in Morvi Cotton Merchants Industrial Corporation Ltd. v. State of Gujarat, since reported in (1975) 36 STC 347 (Guj.) and in Special Application No,1059 of 1972 decided by the same Bench on July 18, 1974 Motilal Jotiram Patel v. Sales
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Tax Officer (1975) TLR 1589 (Guj.) In those two cases the Division Bench consisting of J.B. Mehta and T.U. Mehta, JJ., had taken the view that in provisions similar to section 271(1)(a) of the Income Tax Act, 1961, in the Sales Tax Act, where also the words "without reasonable cause" have been set out in the section providing for penalty, the burden is on the revenue to prove absence of reasonable cause. The Division Bench felt that since those decisions had a direct bearing on the point arising in the instant case, since the Division Bench was unable to agree with that view the particular question set out above was referred to this larger Bench. ' It is not necessary to refer to the facts of the particular case before us because it is only as a point of law arising on a construction of the statute that the matter comes before us as a Full Bench. ' Section 271(1)(a) of the Income-tax Act, 1961, is in these terms: "271. Failure to furnish returns, comply with notices, concealment of income els---(1) If the Income- tax Officer or the Appellate Assistant Commissioner 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 total income which he was required to furnish under subsection (1) of section 139 or by notice given under subsection (2) of section 139 or section 148 or has without reasonable cause failed to furnish it within the time allowed and in the manner required by subsection (1) of section 139 or by such notice, as the case may be--he may direct that such person shall pay by way of penalty,- (i) in the cases referred to in clause (a), in addition to the amount of the tax, if any, payable by him, a sum equal to two per cent. Of the tax for every month during which the default continued, but not exceeding in the aggregate fifty per cent, of the assessed tax." ' It may be pointed out that section 271 is one of the sections included in Chapter XXI and that Chapter deals with penalties imposable under Chapter XXII which consists of section 275-A to section 280 and deals with offences and prosecutions. Under section 271(1)(a) failure without reasonable cause to furnish the return of total income attracts penalty. Under sub-clause (b) of section 271(1) failure without reasonable cause to comply with a notice under subsection (1) of section 142 or subsection (2) of section 143 attracts penalty. Under section 276 of the Act, if a person fails without reasonable cause or excuse to produce, or cause to be produced, on or before the date, mentioned in any notice under subsection (1) of section 142, such accounts and documents as are referred to in the notice; and under clause (b) to furnish in due time any of the returns of statements mentioned in section 133, subsection (2) of section 139, section 206, section 285 or section 286, he is liable to be punished with fine which may extend to ten rupees for every day during which the default continues. It may be noticed that under section 276 the words are without reasonable cause. Under section 271-A which was inserted in the Act by the Taxation Laws (Amendment) Act, 1975, any person failing without reasonable cause to keep and maintain such books of account and other documents as required by section 44-AA or the rules made thereunder in respect of any previous year or to retain such books of account and other documents for the period specified in the said rules, is liable to pay by way of penalty, a sum which shall not be less than ten per cent. But which shall ..Ot exceed fifty per cent, of the amount of the tax, if any, which would have been leviable. Under section 272-A, subsection (2) which was also introduced by the Taxation Laws (Amendment) Act, 1975, penalty has been provided for failure without reasonable cause or excuse to furnish the return in due course of time as mentioned in section 133, section 206, section 285, section 285-B or section 286. Similarly the words "without reasonable cause" are used in section 272-B for failure without reasonable cause to comply with the provisions of section 139-A. Under section 273, clause (b), failure to furnish an estimate of the advance tax payable by an assessee in accordance with the provisions of subsection (3) of section 212 attracts penalty. Similarly again under clause (c) of section 273, failure without reasonable cause to furnish an estimate of the advance tax payable by him in accordance with the provisions of subsection (3-A)
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of section 212 also attract penalty. Under Chapter XXII dealing with offences and prosecutions the words used are "without reasonable cause or excuse" in respect of different offences set out in sections 276, 276-A, and 276-B whereas the element of "wilfully" is introduced as regards the failure to furnish the return under subsection (1) of section 139 in section 276-C. Similarly under section 276-CC, the element of wilfulness has also been brought in with reference to the offence mentioned therein. Same element of wilfulness is to be found prescribed in section 276-D. The reason why we are pointing out these different provisions is to emphasize that in certain provisions of the Income-tax Act dealing with penalty, the failure without reasonable cause to do one thing or the other attracts penalty. In other one of some provisions the penalty is attracted when the failure is without reasonable cause or excuse and as regards offences and prosecutions, the words used are, "without reasonable cause or excuse" and "wilfully". ' The learned Advocate-General appearing on behalf of the assessee has contended that in the same statute, that is, in the Income-tax Act, the words "without reasonable cause" or "without reasonable cause or excuse" are occurring in sections dealing with penalty as well as in sections dealing with penal offences. He further contended that since Chapter XXII deals with offences and prosecutions where the accused concerned has to be tried in a regular Court of law and if found guilty, is liable to be punished even with imprisonment in certain cases the words "without reasonable cause" or "without reasonable cause or excuse" occurring in one or tit other sections of Chapter XXII must be interpreted as constituting an ingredient of the offence in question. He further contended that penalties imposable under Chapter XXI are imposed in quasi-criminal proceedings and, therefore, the words "without reasonable cause" occurring in section 271(1)(a) must also be held to constitute an ingredient of this particular wrongful action which is sought to be penalised by section 271(1)(a). His main contention is that the same words should be given the same meaning and should be interpreted in the same manner in the different sections of the same Act unless the subject or context otherwise requires. Before we can decide this contention of the learned Advocate-General, it is necessary to ascertain the exact nature of the penalty proceedings under section 271(1)(a) and other similar provisions. ' In C.A. Abraham v. Income-tax Officer (1961) 41 ITR 425 (SC) the Supreme Court had observed that penalty was an additional tax and that the penalty imposed under the Income-tax Act was merely an additional tax imposed in certain circumstances on account of the assessee's conduct. These observations in CA.. Abraham's case (1961) 41 ITR 425 (SC) were explained by the Supreme Court in Commissioner of Income-tax v. Anwar All (1970) 76 ITR 696 (SC). At page 700, Grover, J., delivering the judgment of the Supreme Court observed. ' The first point which falls for determination is whether the imposition of penalty is in the nature of a penal provision. The determination of the question of burden of proof will depend largely on the penalty proceedings being penal in nature or being merely meant for imposition of an addition tax, the liability to pay such tax having been designated as penalty under section 28. One line of argument which has prevailed particularly with the Allahabad High Court in Lal Chand Gopal Das's case (1963) 48 ITR 324 (All.) is that there was no essential difference between tax and penalty because the liability for payment of both was imposed as a part of the machinery of assessment and the penalty was merely an additional tax imposed in certain circumstances on account of the assessee's conduct. The justification of this view was founded on certain observations in CA. Abraham v. Income-tax Officer (1961) 41 ITR 425 (SC). It is true that penalty proceedings under section 28 of the Act of 1922 equivalent to section 271 of the Act of 1961, are included in the expression assessm ent and the true nature of penalty has been held to be additional tax. But one of the principal objects in enacting section 28 is to provide a deterrent against recurrence of default on the part of the assessee. The section is penal in the sense that its consequences are intended to be an effective deterrent which will put a step to practices which the legislature
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considers to be against the public interest. It is significant that in CA. Abraham's case (1961) 41 ITR 425 (SC) the Court was not called upon to determine whether penalty proceedings were penal or of quasi-penal nature and the observations made with regard to penalty being an additional tax were made in a different context and for a different purpose. It appears to have been taken as settled by now in the sales tax law that an order imposing penalty is the result of quasi-criminal proceedings (Hindustan Steel Ltd. v. State of Orissa (1972) 83 ITR 26; (1970) 26 STC 211 (SC). In England also it has never been doubted that such proceedings are penal in character (Fattorini (Thomas) Lancashire) Ltd. v. Inland Revenue Commissioner (1942) AC 643; (1943) 11 ITR (Suppl.) 50 (HL)". ' In Hindustan Steel Ltd. v. State of Orissa (1972) 83 ITR 26; (1970) 26 STC 211 (SC) the Supreme Court was concerned with certain provisions of the Orissa Sales Tax Act providing for penalty under certain circumstances and Shah, Acting, C.J. Delivering the judgment of the Supreme Court, observed, at page 29 of the report: "Under the Act penalty may be imposed for failure to register as a dealer: section 9(1) read with section 25(1)(a) of the Act. But the liability to pay penalty does not arise merely upon proof of default in registering as a dealer. An order imposing penalty for failure to carry out a statutory obligation is the result of a quasi-criminal proceeding, and penalty will not ordinarily be imposed unless the party obliged either acted deliberately in defiance of law or was guilty of conduct, contumacious or dishonest, or acted in conscious disregard of its obligation. Penalty will not also be imposed merely because it is lawful to do so. Whether penalty should be imposed for failure to perform a statutory obligation is a matter of discretion of the authority to be exercised judicially and on a consideration of all the relevant circumstances. Even if a minimum penalty is prescribed, the authority competent to impose the penalty will be justified in refusing to impose penalty, when there is a technical or venial breach of the provisions of the Act or where the breach flows from a bona fide belief that the offender is not liable to act in the manner prescribed by the statute." ' It must be noted that at page 28 of the report, the questions referred by the Sales Tax Tribunal to the High Court of Orissa have been set out and question (f) is: "Whether the Tribunal is right in holding that penalties under section 12(5) of the Act had been rightly levied and whether in view of the serious dispute of liability it cannot be said there was sufficient cause for not applying for registration? ' and question (3) which the Supreme Court formulated for itself was: "Whether imposition of penalties for failure to register as a dealer was justified?" ' Section 9 (1) of the Orissa Sales Tax Act, 1947, provided: "No dealer shall, while being liable under section 4 to pay tax under this Act, carry on business as a dealer unless he has been registered under this Act and possesses a registration certificate." ' Section 12(5) provided: "If upon information which has come into his possession, the Commissioner is satisfied that any dealer has been liable to pay tax under this Act in respect of any period and has nevertheless, without sufficient cause, failed to apply for registration, the Commissioner shall, after giving the dealer a reasonable opportunity of being heard, assess, to the best of his judgment, the amount of tax, if any, due from the dealer in respect of such period and all subsequent periods and the Commissioner may direct that the dealer shall pay, by way of penalty, in addition to the amount so assessed, a sum not exceeding one and a half times that amount." ' Section 25(1)(a) provided: "Whoever (a) carries on business as a dealer in contravention of subsection (1) of section 9--shall be publishable with imprisonment of either description which may extend to six months or with fine not exceeding one thousand rupees or with both, and when the offence is a continuing one, with a daily fine not exceeding fifty rupees during the period of the continuance of the offence."
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' It is, therefore, clear that the reference to section 25(1)(a) at page 29 of the report is, really speaking, to section 12(5) of the Orissa Sales Tax Act because the Supreme Court in the passage which we have extracted above was not dealing with the question of an offence but with the question of penalty to be imposed and the question (f) referred by the Sales Tax Tribunal to the High Court of Orissa and question (3) formulated by the Supreme Court in Hindustan Steel Mills Ltd.'s case (1972) 83 ITR 26; (1970) 26 STC 211 (SC) was considering the question of imposition of penalty and not the question of punishment under section 25(1)(a). We are emphasizing this aspect of the obviously wrong reference to section 25(1)(a) at page 29 of the report because we find that in a Full Bench case, Commissioner of Income-tax v. Gangaram Chapalia (1976) 103 ITR 613 (Orissa) (FB) the High Court of Orissa has considered this reference to section 25(1)(a) on page 621 of the report. ' In Khemka & Co. Agencies (Pvt.) Ltd. v. State of Maharashtra (1975) 35 STC 571 (SC) the Supreme Court was considering the question of penalty under the Sales Tax Act and Ray, C.J., who alongwith Khanna and Beg, JJ., delivered the majority decision, observed(page 581). "The Income Tax Act, 1961, imposes penalty under sections 270 and 271. These sections in the Income-tax Act provide for imposition of penalty on contumacious or fraudulent assessees. Penalty is in addition to income-tax, if any, determined as payable by the assessee. Tax and penalty like tax and interest are distinct and different concepts under the Indian Income-tax Act. The word 'assessm ent' could cover penalty proceedings if it is used to denote the whole procedure for imposing liability on the taxpayer as happened in Abraham's case (1961) 41 ITR 425 (SC). Penalty is within assessm ent proceedings just as tax is within assessment proceedings when the relevant Act by substantive charging provision levies tax as well as penalty. ' Penalty is not merely sanction. It is not merely adjunct to assessment. It is not merely consequential to assessm ent. It is not merely machinery. Penalty is in addition to tax and is a liability under the Act, Reference may be made to section 28 of the Indian Income-tax Act, 1922, where penalty is provided for concealment of income. Penalty is in addition to the amount-of income. This Court in Jain Brothers v. Union of India (1970) 77 ITR 107 (SC) said that penalty is not a continuation of assessm ent proceedings and that penalty partakes of the character of additional tax." ' In Khemka & Company's case (1975) 35 STC 571 (SC) Beg, J., one of the three learned Judges delivering the majority decision, observed at page 594:-- "On a consideration of the provisions mentioned above, it seems to me to be clear that whatever may be the objects of levying a penalty, its imposition gives rise to a substantive liability which can be viewed either as an additional tax or as a fine for the infringement of the law. The machinery or procedure for its realization comes into operation after its imposition. In any case it is an imposition of a pecuniary liability which is comparable to a punishment for the commission of an offence. It is a well-settled canon of construction of statutes that neither a pecuniary liability can be imposed nor an offence created by mere implication. It may be debatable whether a particular procedural provision creates a substantive right or liability. But I do not think that the imposition of pecuniary liability, which takes the form of a penalty or fine for a breach of a legal obligation can be relegated to the region of mere procedure and machinery for the realization of tax. It is more than that. Such liabilities must be created by clear, unambiguous, and express enactment. The language used should leave no serious doubts about its effect so that the persons who are to be subjected to such a liability for the infringement of law are not left in a state of uncertainty as to what their duties or liabilities are. This is an essential requirement of a good Government of laws. It is implied in the Constitutional mandate found in Article 265 of our Constitution. `No tax shall be levied or collected except by authority of law'."
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' It is thus clear in view of these decisions in Khemka & Company's case (1975) 35 STC 571 (SC), Hindustan Steel Ltd.'s case (1972) 83 ITR 26 (SC) and Anwar Ali's (1970) 76 ITR 696 (SC) that the penalty which can be imposed under section 271(1) of the Act is to be imposed on contumacious or fraudulent assessees. It is a quasi-criminal proceeding as has been held in Anwar Ali's case (1970) 76 ITR 696 (SC) and the section is penal in the sense that its consequences are intended to be an effective deterrent which will put a stop to practices which the legislature considers to be against the public interest. In view of these clear pronouncements of the Supreme Court, there is no doubt whatsoever that though penalty contemplated by section 271(1)(a) and other sections in Chapter XXI of the Income Tax Act, 1961, can be imposed by Income-tax officers as distinguished from regular criminal Courts, the penalty proceedings before the income-tax authorities are quasi- criminal proceedings and they provide for offences which can be dealt with by the departmental authorities. ' The question then arises, whether the words "without reasonable cause" occurring in section 271(1) (a) are an ingredient of the offence or an exception to the offence of failing to file one or the other type of returns contemplated in section 271(1)(a). It was contended by Mr. Kaji on behalf of the revenue that the substance of the default is the failure to file the return within the time specified and that this is the only ingredient to be established by the revenue. According to him the phrase "without reasonable cause" is an exception and not a part of the ingredients of the offence. The learned Advocate-General, on the other hand, has contended that since section 271(1)(a) provides penalty for an offence although it is a penalty imposable by the Income-tax authorities, the ingredients of the offence are that there should be failure without reasonable cause to furnish one or the other of the returns specified in section 271(1)(a) and only after all the ingredients are established can be penalty be imposed. ' In Nimmo v. Alexander Cowan & Sons Ltd. (1968) AC 107 (HL) the House of Lords was concerned with the interpretation of section 29, subsection (1) of the Factories Act, 1961 which provided: "There shall, so far as is reasonably practicable, be provided and maintained safe means of access to every place at which any person has at any time to work, and every such place shall, so far as reasonably practicable, be made and kept safe for any person working there." ' The question was whether the words "so far as is reasonably practicable" constituted an ingredient of section 29, subsection (1). It is obvious that the determination of the question, whether these words constituted an ingredient or not, would shift the burden, both legal as well as evidentiary, from one side to the other. The House of Lords held by majority that in that particular section the onus of pleading and proving that it was not reasonably practicable to keep the place safe lay on the employers and accordingly the workman's case was properly pleaded and disclosed a cause of action. It must be pointed out that the House of Lords was not considering in that case the question of any criminal-ability. The main question was, whether in the complaint preferred by the workman who had suffered an injury while unloading bales from a railway on a siding at a factory, he had to aver in his pleading that his place of work was not kept safe as required under section 29(1) but he did not aver that it was reasonably practicable to make it safe. On an interpretation of section 29(1), the majority of the House of Lords held that onus of pleading and proving that it was not reasonably practicable to keep the place safe lay on the employers and accordingly the workman's case was properly pleaded and disclosed a cause of action. Lord Reid and Lord Wilberforce both held in their dissenting opinions that the words "so far as is reasonably practicable" constituted an ingredient of the cause of action. Lord Reid observed (page 118): "And I do not think that the question whether this was reasonably practicable is a matter peculiarly within the knowledge of the defender -- an expert witness for the pursuer should be just as well able to deal with this as the defender."
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' The majority view on the other hand was that the expressions of opinion in England have been consistently to the effect that in cases under sections in somewhat similar terms of section 29(1), the onus is upon the employer to establish that the precautions desiderated were not reasonably practicable. And the majority of the Law Lords held that the means of achieving the end were more likely to be within the knowledge of the employer than that of the employees and hence it was in the fitness of things that the onus should be cast upon the employer and the factor that it was reasonably practicable to keep the place safe was not an ingredient of this particular cause of action. It seems that before our learned brothers, J.B. Mehta and T.U. Mehta, JJ., in Morvi Cotton Merchants' Industrial Corporation Ltd. v. State of Gujarat (1975) 36 STC 347…
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