1. Penalty imposed under Section 28(1)(c) of the Income-tax Act for concealment of income — Dispute over whether penalty is maintainable after dissolution of a registered firm. (Para 1 , 2 )
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1962 Supreme(SC) 13
SUPREME COURT OF INDIA
18th January, 1962
B.P. SINHA, C.J.I., J.L. KAPUR, M. HIDAYATULLAH, J.C. SHAH AND J.R. MUDHOLKAR, JJ.
Commissioner of Income Tax, Madras and other. (In all the appeals) Appellants
Versus
S. V. Angidi, Chettiar (in all the appeals) Respondent.
Civil Appeals Nos. 6 to 8 of 1961.
Advocates appeared
Mr. K. N. Rajagopal Sastri, Senior, Advocate (Mr. P. D. Menon, Advocate, with him), for Appellants; (In all appeals); Mr. V. S. Venkataram and K. P. Bhat, Advocates, for Respondent (In all appeals).
Advocates:
K.N.RAJAGOPAL SASTRI, K.P.BHATT, P.D.MENON, V.S.Venkataraman
K.N.RAJAGOPAL SASTRI, K.P.BHATT, P.D.MENON, V.S.Venkataraman
A registered firm is a "person" liable for penalties under Section 28 of the Income-tax Act, regardless of whether it is directly liable for tax under Section 23(5). Such penalties can be imposed even after the firm's dissolution, as assessment proceedings continue under Section 44.
Headnote:(A) Income-tax Act, 1922 - Sections 28(1)(c), 44, 23(5) and 2(a) - General Clauses Act - Section 3(42) - Imposition of penalty on a dissolved registered firm - Power of the Income-tax Officer to impose penalty under Section 28 in the course of assessment of a firm even if the firm stood dissolved by the death of a partner at the date of the order - Section 44 provides machinery for assessing tax liability of a firm that has discontinued its business, and the liability of partners to assessment includes the procedure for declaration and imposition of tax liability and the machinery for enforcement thereof. (Paras 3 and 4)
(B) Registered Firm - Liability for penalty - A firm is a body of individuals and falls within the definition of "person" under the Act and the General Clauses Act - Liability to pay penalty under Section 28 is not contingent upon the person being liable to pay tax - The scheme under Section 23(5) where tax is levied on partners individually rather than the registered firm does not exempt the firm from penal liability for concealment of income. (Paras 5, 6, 7 and 8)
(C) Jurisdiction to impose penalty - Power depends upon the satisfaction of the Income-tax Officer in the course of proceedings under the Act - Satisfaction before the conclusion of the proceeding is a condition for the exercise of jurisdiction; the actual initiation of penalty steps need not occur before the completion of assessment proceedings. (Para 10)
Facts of the case:
A registered firm concealed particulars of its income in its returns. The Income-tax Officer imposed penalties for three assessment years. The firm contended that the penalties were invalid because the firm had been dissolved by agreement and subsequently by the death of a partner before the penalty orders were passed. The High Court set aside the penalty orders on the ground that no penalty could be imposed after the dissolution of the firm.
Findings of Court:
The High Court erred in holding that penalty could not be imposed upon the firm after its dissolution. The assessment proceedings, including penalty proceedings, can be continued against a dissolved firm as if it had not been dissolved.
Issues: Whether the Income-tax Officer has the power to impose a penalty under Section 28(1)(c) on a registered firm after its dissolution and whether the lack of direct tax liability of a registered firm under Section 23(5) precludes the imposition of a penalty.
Ratio Decidendi: The court held that Section 44 makes the provisions of the Act applicable to discontinued firms, allowing penalty proceedings to continue post-dissolution. Furthermore, a registered firm is a "person" liable for penalty under Section 28; the requirement that a person be liable to pay tax is not a condition precedent for the imposition of a penalty.
Result: Appeals allowed.
Legal Category Hierarchy
Table of Contents
2. Whether penalty under Section 28 is maintainable after firm dissolution and whether registered firms are liable for penalty despite tax being payable by partners under Section 23(5). (Para 2 , 4 , 5 , 10 )
3. Liability to pay tax is not a condition precedent for penalty; Section 44 allows assessment proceedings, including penalties, to continue against a dissolved firm. (Para 3 , 4 , 6 , 7 , 8 , 10 )
4. A registered firm is a person liable for penalty under Section 28, and such liability persists notwithstanding the dissolution of the firm under Section 44. (Para 3 , 4 , 6 , 8 , 9 )
5. Appeals allowed — High Court orders set aside — Petitions for writs of certiorari dismissed. (Para 11 , 12 )
6. Can a penalty be imposed on a firm after its dissolution?
Yes. Under Section 44 of the Income-tax Act, assessment proceedings, including the imposition of penalties under Section 28, can continue against a firm as if it had not been dissolved. (Para 3 , 4 , 9 )
7. Is a registered firm considered a person liable for penalty under Section 28?
Yes. A firm is a body of individuals and falls within the definition of person. Proviso (d) specifically clarifies the quantum of penalty payable by registered as well as unregistered firms. (Para 5 )
8. Is the liability to pay tax a condition precedent for the imposition of a penalty under Section 28?
No. The imposition of a penalty does not require the assessee to be liable for tax. For instance, penalties for failing to comply with notices can be imposed even if the assessee has no assessable income. (Para 6 , 7 )
9. How is the penalty calculated for a registered firm if tax is paid by partners under Section 23(5)?
The legislature established an artificial basis: the tax avoided is the difference between the tax payable by an unregistered firm on the total income and the tax actually paid. (Para 6 )
10. What constitutes sufficient evidence of the Income-tax Officer's satisfaction for imposing a penalty?
Satisfaction must exist before the conclusion of assessment proceedings. An endorsement on the assessment order indicating that action under Section 28 has been taken for concealment is sufficient evidence. (Para 10 )
Judgment
SHAH, J. : These are three appeals with certificates of fitness granted by the High Court of Madras against orders passed in Petitions for the issue of writs of certiorari setting aside orders imposing penalty upon the firm of Messrs. S. V. Veerappan Chetiar & Co. passed by the Income-tax Officer under S. 28(1) (c) of the Indian Income-tax Act.
2. Four persons carried on business in cloth at Virudhunagar, in the name and style of S. V. Veerappan Chettiar & Co. -hereinafter called the firm. The firm was registered under section 26A of the Income-tax Act, 1922 for the assessment years 1947-48, 1949-50 and 1950-51. The firm concealed particulars of its income in submitting its returns, and the Income-tax Officer, Virudhunagar, in the course of assessment proceedings directed, by order dated May 20, 1954, payment of penalty of Rs. 20,000/- for the year 1947-48., Rs. 10,000/- for the year 1949-50 and 5,000/- for the year 1950-51. Against the orders imposing penalty, one of the partners of the firm moved the Commissioner of Income-tax, Madras in revision but without success. Thereafter, petitions under Art. 226 of the Constitution for issue of writs of certiorari or other appropriate writs calling for records relating to the orders dated May 20, 1954 passed by the Income-tax Officer Virudhunagar in respect of the three assessment orders and the record relating to the order of the Commissioner and for quashing the penalty orders were fried by two partners of the firm in the High Court at Madras. It was submitted by the petitioners that by agreement between the partners the firm stood dissolved on April 13, 1951 and intimation in that behalf was given to the Income-tax Officer and that in any event the firm stood dissolved on May 5,1953 when one of the partners died and the Income-tax Officer could not, in exercise of the power under S. 28 (1) make an order imposing penalty after dissolution of the firm. The High Court accepted the plea of the petitioners and directed that the orders of the Income-tax Officer dated May 20, 1954 and the further action of the Commissioner thereon declining to revise the order of the Income-tax Officer in each of the petitions be set aside. Against the orders passed by the High Court the Commissioner appeals to this Court.
3. This Court in a recent Judgment - C. A. Abraham v. Income-tax Officer, Kottayam (1961) 41 ITR 425 held that the Income-tax Officer had power under S. 28 of the Income-tax Act to impose penalty in the course of assessment of a firm even if the firm stood at type date of the order dissolved by the death of one of its partners. In so holding this Court observed that S. 44 of the Income-tax Act sets up machinery for assessing tax liability of a firm which has discontinued its business and that the expression "assessment" in the different sections of Chapter IV of the Income-tax Act was not used merely in the sense of computation of income, and when S. 44 declared that the partners or members of the firm shall be jointly and severally liable to assessment, it referred to the liability to computation of income under S. 23 as well as the application of the procedure for declaration and imposition of tax liability and the machinery for enforcement, thereof.
4. counsel for the respondents, however, contended that C. A. Abraham s case 1961-41 ITR 425 was one of as unregistered firm and the principle of that case has no application where the firm is a registered firm. But S. 44 makes the provisions of chapter IV, so far as may be, applicable to assessment when any business, profession or vocation carried on by a firm has been discontinued: the section declares liability of all discontinued firms and not merely of unregistered firms. There is nothing in S. 44 or the context in which it occurs to indicate that it does not apply to registered firms. This Court in C. A. Abraham s case, 1961-41 ITR 425 approved the decision of the Andhra Pradesh High Court in Krishna Reddy v. Income-tax Offic
