Commissioner Of Income-Tax vs Sulphur Refinery Pvt. Ltd.

DR. B. P. SARAF J.-By this reference under section 256(1) of the income-tax Act, 1961, the Income-tax Appellate Tribunal ("The Tribunal") has referred the following question of law to this court for opinion at the instance of the Revenue :

"Whether, having regard to the facts and circumstances of the same, the provisions of section 209A(4) were applicable in the instant case, so as to attract the provisions of section 273(2)(c) of the Income-tax Act, 1961 ?"

The controversy in this reference pertains to the assessment year 197980. The material facts giving rise to this controversy, briefly stated, are as follows :

In the assessment of the assessee-company for the assessment year 1979-80, the Income-tax Officer noticed that on June 14, 1978, the assessee-company had filed a statement in Form No. 28A showing loss of Rs. 3,199 while its income was assessed at Rs. 3,01,540. The Income-tax Officer, therefore, initiated proceedings for levy of penalty under section 273(2)(c) of the Income-tax Act, 1961 ("the Act"). A notice under section 274 of the Act was served on the assessee calling upon it to show cause why penalty should not be levied under section 273(2)(c) of the Act. In response to this notice, the assessee showed cause vide its letter dated February 11, 1980, wherein it was stated that the assessee had accumulated losses and unabsorbed allowances amounting to Rs. 28,897 and that on the date of submission of the statement in Form No. 28A, it had expected to make a profit of Rs. 25,698 only during the previous year relevant to the assessment year under consideration. It was contended that revised estimate under section 209A(4) of the Act was not submitted because the accounts could not be audited and the correct income could not be ascertained. The Income-tax Officer rejected the above explanation of the assessee and levied a penalty of Rs. 15,760 under section 273(2)(c) of the Act. While doing so, the Income-tax Officer observed that it was the statutory liability of the assessee under section 209A(4) of the Act to file a revised estimate of total income if its current income was likely to exceed the sum specified in section 208(2) of the Act. He, therefore, levied a penalty of Rs. 15,760 computed at the minimum rate of 10 per cent. The assessee appealed to the Commissioner of Income-tax (Appeals). Before the Commissioner (Appeals), it was contended by the assessee that the Income-tax Officer should have accepted the explanation of the assessee that the estimate filed on June 14, 1978, was under the bona fide belief that the company would not make any profit during the relevant previous year and no further statement of advance tax could he filed as the accountant was frequently indisposed and the correct profit of the year could not be ascertained up to December 15, 1978. In support of this contention, the assessee relied upon the decision of the Supreme Court in Hindustan Steel Ltd. v. State of Orissa [19721 83 ITR 26. The Commissioner (Appeals) accepted the contention of the assessee and observed that the estimate was bona fide in the facts and circumstances set out by the assessee. He recorded a clear finding of fact that the failure to revise the estimate was due to circumstances beyond the control of the assessee and that there was nothing on record to show that the statement filed on June 14, 1978, was an untrue estimate to the knowledge of the assessee. He, therefore, held that the assessee-company had filed statement of advance tax showing loss of Rs. 3,199 under a bona fide belief that its income would not be liable to tax and since the revised statement could not be filed due to circumstances beyond the

control of the assessee, it could not be said that there was a conscious disregard of the statutory obligation on the part of the assessee. The Commissioner (Appeals), therefore, cancelled the penalty of Rs. 15,760 levied by the Income-tax Officer under section 273(2)(c) of the Act. While doing so, the Commissioner (Appeals) relied upon the decision of the Supreme Court in Hindustan Steel Ltd. v. State of Orissa [19721 83 ITR 26. Against the above order of the Commissioner (Appeals) the Revenue appealed to the Tribunal. The Tribunal dismissed the appeal of the Revenue as it was of the opinion that the Revenue failed to discharge the onus cast on it to justify the levy of penalty. Hence, this reference at the instance of the Revenue.

We have heard Mr. Milind Sathe, learned counsel for the Revenue, who submits that mens rea or contumacious or guilty mind is not an essential ingredient of the offence under section 273(2)(c) of the Act. According to learned counsel, in the facts and circumstances of this case, the Tribunal was not justified in upholding the deletion of the penalty levied under section 273(2)(c) of the Act.

We have carefully considered the above submissions of Mr. Sathe. Section 273 of the Act provides for levy of penalty for furnishing of false estimate of advance tax or failure to pay advance tax. Sub-section (2) thereof, which is relevant for the present purpose, as it stood at the material time, reads as follows :

"S. 273. False estimate of, orfailure to pay, advance tax.-

(2) If the Assessing Officer, in the course of any proceedings in connection with the regular assessment for the assessment year commencing on the 1st day of April, 1970, or any subsequent assessment year, is satisfied that any assessee-. . .

(c) has without reasonable cause failed to furnish an estimate of the advance tax payable by him in accordance with the provisions of subsection (4) of section 209A or sub-section (3A) of section 212, he may direct that such person shall, in addition to the amount of tax, if any, payable by him, pay by way of penalty a sum-. . .

(iii) which, in the case referred to in clause (c), shall not be less than ten per cent., but shall not exceed one and a half times the amount by which-

(a) where the assessee has sent a statement under clause (a), or an estimate under clause (b), of sub-section (1) of section 209A, or an estimate in lieu of a statement under sub-section (2) of that section, the tax payable in accordance with such statement or estimate ; or

(b) where the assessee was required to pay advance tax in accordance with the notice issued to him under section 210, the tax payable under such notice,

falls short of seventy-five per cent. of the assessed tax as defined in subsection (5) of section 215 . . "

Sub-section (4) of section 209A, at the material time, read as follows "S. 209A. Computation and payment of advance ta.r by a,,~,~essee.--.

(4) In the case of any assessee who is liable to pay advance tax under sub-section (1) or sub-section (2) or, as the case may be, sub-section (3), if, by reason of the current income being likely to be greater than the income on which the advance tax so payable by him has been computed or for any other reason, the amount of advance tax computed in the manner laid down in section 209 on the current income (which shall be estimated by the assessee) exceeds the amount of advance tax so payable by him by more than 33-1/3 per cent. of the latter amount, he shall, on or before the date on which the last instalment of advance tax is payable by him, send to the Income-tax Officer an estimate of-

(i) the current income, and

(ii) the advance tax payable by him on the current income calculated in the manner laid down in section 209,

and shall pay such amount of advance tax as accords with his estimate on such of the dates applicable in his case under section 211 as have not expired, by instalments which may be revised according to sub-section

It is clear from a plain reading of section 273(2)(c) of the Act that penalty can be imposed under the said provision if the Income-tax Officer is satisfied that the assessee has "without reasonable cause" failed to furnish the estimate of advance tax payable by him in accordance with the provisions of sub-section (4) of section 209A of the Act. The satisfaction of the Income-tax Officer in regard to the failure of the assessee to furnish an estimate of the advance tax payable by him in accordance with the provisions of section 209A(4) of the Act "without reasonable cause" is thus the condition precedent for imposition of the penalty under this clause. In the instant case, both the Commissioner (Appeals) and the Tribunal have recorded a finding that there was reasonable cause for the failure of the assessee to submit the estimate under sub^section (4) of section 209A. This finding, obviously is a finding of fact which is not the subject-matter of challenge before us in this reference. What is sought to be contended on behalf of the Revenue is that penalty under section 273(2)(c) is more or less automatic once there is non-compliance of the provisions of section 209A(4) of the Act. This contention of the Revenue, in our opinion, is untenable for reasons more than one. First, though section 273(2)(c) provides for levy of penalty for failure to furnish an estimate of advance tax under sub-section (4) of section 209A of the Act, liability to pay penalty does not arise merely on the proof of failure to furnish the estimate because the law is well settled that penalty should not be imposed for failure to carry out a statutory obligation merely because it is lawful to do so. No penalty can be imposed if the assessee was acting under honest and genuine belief in a particular manner. As held by the Supreme Court in Hindiistan Steel Ltd. v. State o ' f Orissa [1972] 83 ITR 26, the 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 cannot 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 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. In the instant case, it is clear that the assessee did not furnish the estimate of advance tax under section 209A(4) of the Act because it was under the honest and genuine belief that it was not required to do so as its income would not exceed the particular amount. No penalty can be levied in such a case, if this belief of the assessee later turns out to be wrong. Secondly, penalty can be levied under section 273(2)(c) of the Act only if an assessee fails to furnish "without reasonable cause" the estimate of advance tax payable by him in accordance with the provisions of sub-section (4) of section 209A of the Act Penalty is thus leviable only if thr failure is "without reasonable cause". The Income-tax 011Lcer irius,, therefore, be satisfied, before imposing the penalty under section 275('2)(c) of the Act, that the assessee had "without reasonable cause" failed to furnish the entimate of advance tax. This satisfaction must be based on the materials on record. It is only after the arrives at a finding that the failure to furnish the estimate was "without reasonable cause" that he can impose penalty.

In the instant case, there is a categorical finding of the Commissioner (Appeals) and the Tribunal that non-filing of the estimate under sub-section (4) of reasonable cause for not furnishing the same (sic). It was on the basis of this finding that the penalty was cancelled by the Cominis sioner (Appeals) and the Tribunal. This finding is, primarily and essentially, a finding of fact which ordinarily is final and binding. Moreover, in this reference, there is no challenge to this finding of fact. That being so, the Tribunal was justified in holding that section 273(2)(c) of the Act was not attracted in the facts and circumstances of the present case.

We are supported in our above opinion by the decision of this court in Hind Products P. Ltd. v. CIT [19801 121 ITR 903. In that case also the controversy was in regard to levy of penalty for furnishing untrue estimate of advance tax under section 18A(2) of the Indian Income-tax Act, 1922 (corresponding to section 273(2)(c) of the 1961 Act). This court exan-lined the question when an estimate can be said to be untrue and observed (page 909) :

"Having regard to these provisions, unless an Incometax Officer is satisfied that the assessec, who had furnished a return under section 18A(2), knew or had reason to believe that the estimate which he had filed was untrue, no penalty could be levied against him. In the. Instant case, the estimate was filed on June 14, 1960. The assessee had produced before the Income-tax Officer a copy of the trial balance on which it was apparent that as on 31st May, 1960, there was a loss. It is true that when an estimate is required to be filed section 18A(2), that estimate must necessarily show the estimated income for the year in question. Estimated income may or may not be the same as the ultimate returned income shown by the assessee. just as it is possible, that in a given case, the returned income may be more, it may also be that in a given case, the returned income may be less than the estimate. The very word 'estimate' implies the concept of approximation and it can never be accurate. Therefore, merely because at the. end of the year, an assessce, is shown to have earned an income which is more than that shown in the estimate filed under section 18A(2), that fact alone will not by itself indicate that the estimate was known to be untrue or that the assessee had filed an estimate having reason to believe that it was untrue. It is not possible to ascertain the vicissitudes which a businessman might experience in the Cou'r8C, of his business, and a common sense approach will, therefore, have to be adopted in judging whether the estimate filed by an assessee can be said to be such that he had knowingly submitted an untrue estimate of his expected income during the year in question. While furnishing such an estimate, it will be perfectly reasonable for an assessee to take into account the normal trend of his business up to the time when he is required to file an estimate. If at the point of time when he is called upon to file an estimate the assessee has been incurring continu ous losses, then unless there is material to show that he had reason to believe that in the months to come he was sure to make profits, an estimate filed on the basis of the trial balance showing a loss cannot be said to be untrue. Similarly, unless there is material to show that the assessee could reasonably have anticipated that there would be profits in the remaining part of the year, it cannot be said that the assessee had any reason to believe that the estimate which he had filed was untrue. 71p provision in section 18A(9) is a penal provision and it contemplates a deliberate conduct of filing an untrue estimate by the assessee. An incorrect or inaccurate view of the trend of the business in thefuture will not necessarily make the estimate with, regard to income an untrue one. If the relevant material on the basis of which the estimate has been prepared is placed on record and if on the basis of that material it would be reasonably possible to conclude that the assessee could not be normally said to be expecting to make profits in the months to follow, an estimate showing that he was not liable to pay any advance tax, could not be said to become untrue merely because by reason of some circumstances subsequent to the date of the filing of the estimate, the assessee has earned profits."

The legal position was summed up in the following words (page 910)

"A penal provision must always be construed very strictly and unless the conduct of the assessee falls squarely within the four corners of the penal provision, the penalty provision could not be made applicable to his case. Mether a person had kno wingly filed afalse estim.ate or he had reason to believe that the estimate is untrue is a question which has to be determined on the material appearing in each case. But once lite assessee had produced on record the material on which he has based his estimate, then the burden will be on, the Revenue to show as to why afillding must be iecorded in its favour that the estimate was untrue or that the assessee had reason to believe that the estimate was untrue. (emphasis supplied) It is important to point out that the time with reference to which the knowledge of the assessee or his belief that the estimate was being filed correctly is the point of time when the return is filed. Subsequent events may not have much to do with the knowledge of the asses see at the time of filing of the estimate unless it is possible to say that the subsequent events which resulted in profits were such that they could be reasonably foreseen by the assessee."

In the light of the foregoing discussion, we are of the clear opinion that in the facts and circumstances of this case, no penalty is leviable under section 273(2)(c) for non-furnishing of estimate of advance tax tinder section 209A(4) of the Act, We, therefore, answer the question referred to us in the negative, i.e., in favour of the assessee and against the Revenue.

This reference is disposed of accordingly with no order as to costs.