Case: Jain Bros. &amp; Others Vs. The Union Of India &amp; Others

2. Appellant No. 1 which carries on business in Delhi was registered as a firm under Section 26A of the Indian Income-tax Act, 1922. Appellants 2 to 5 are its partners. On May 26, 1960, a notice under Section 22 (2) of that Act was served on the firm calling upon it to submit a return of its income for the assessment year 1960-61 (accounting year ending October 31, 1959). The return had to be filed within 35 days of the service of the notice. It was not filed. Further notices were served on two occasions. It filed a return on November 18, 1961, showing income of Rs. 3,55,566. The Income-tax Officer completed the assessment on November 23, 1964, computing the total income of the firm at Rs. 4,75,368. In view of the amendment made by the Finance Act of 1956 in Section 23 (5) of the Act of 1922 the tax payable by the firm as also the amount to be included in the income of each partner was determined. On the same date i.e., November 23, 1964, the Income-tax Officer issued a notice under Section 271 read with Section 274 of the Income-tax Act 1961 calling upon the firm to show cause why an order imposing a penalty should not be passed on account of its failure to furnish the return within time. After considering the explanation submitted by the assessee the Income-tax Officer made an order on November 19, 1966 under Cl. (a) of Section 271 (1) of the Act of 1961 imposing a penalty of Rs. 1,03,434 for non-compliance with the notice under Section 22 (2) of the 1922 Act. The appellants took the matter in appeal before the Appellate Assistant Commissioner challenging the imposition of penalty. Although those proceedings were still pending a writ petition was filed on August 26, 1966 in the High Court challenging, inter alia, the validity and the constitutionality of Section 23 (5) of the Act of 1922 and Section 297 (2) (g) and Section 271 (2) of the Act of 1961 respectively. The High Court did not accede to any of the contentions of the present appellants and the petition was dismissed.

Court's reasoning:
It is well settled that in fiscal enactments the legislature has a larger discretion in the matter of classification so long as there is no departure from the rule that persons included in class are not singled out for special treatment. It is not possible to say that while applying the penalty provisions contained in the Act of 1961 to cases of persons whose assessments are completed after first April 1962 any class has been singled out for special treatment.It is obvious that for the imposition of penalty it is not the assessment year or the date of the filing of the return which is important but it is the satisfaction of the income-tax authorities that a default has been committed by the assessee which would attract the provisions relating to penalty.Whatever the stage at which the satisfaction is reached, the scheme of Sections 274 (1) and 275 of the Act of 1961 is that the order imposing penalty must be made after the completion of the assessment.The crucial date, therefore, for purposes of penalty is the date of such completion.It is equally difficult to understand the argument that because it rests with the Income-tax Officer to complete the assessment by a particular date it will depend on his fiat whether the penalty should be imposed under the Act of 1922 or under the Act of 1961. There is no presumption that officers or authorities who are entrusted with responsible duties under the taxation laws would not discharge them properly and in a bona fide manner.If in a particular case any mala fide action is taken that can always be challenged by an assessee in appropriate proceedings but the mere possibility that some officer may intentionally delay the disposal of a case can hardly be a ground for striking down clause (g) as discriminatory under Article 14.We are clearly of the view, in concurrence with the decision in Gopi Chand Sarjuprasad v. Union of India, 73 ITR 263   = (AIR 1969 MP 220  ) and Income-tax Officer A-Ward, Agra v. Firm Madan Mohan Danna Mal, (1968) 70 ITR 293 (All)   that no discrimination was practised in enacting that clause which would attract the application of Article 14.The classification made is based on intelligible differentia having reasonable relation to the object intended to be achieved. The object essentially was to prevent the evasion of tax.We are further unable to agree that the language of Section 271 does not warrant the taking of proceedings under that Section when a default has been committed by failure to comply with a notice issued under Section 22 (2) of the Act of 1922. It is true that clause (a) of sub-section (1) of Section 271 mentions the corresponding provisions of the Act of 1961 but that will not make the part relating to payment of penalty inapplicable once it is held that Section 297 (2) (g) governs the case. Both Sections 271 (1) and 297 (2) (g) have to be read together and in harmony and so read the only conclusion possible is that for the imposition of a penalty in respect of any assessment for the year ending on March 31, 1962 or any earlier year which is completed after first day of April 1962 the proceedings have to be initiated and the penalty imposed in accordance with the provisions of Section 271 of the Act of 1961.Thus the assessee would be liable to a penalty as provided by Section 271 (1) for the default mentioned in S. 28 (1) of the Act of 1922 if his case falls within the terms of Section 297 (2) (g).We may usefully refer to this Courts decision in Third Income-tax Officer Mangalore v. Damodar Bhat, 71 ITR 806   = (AIR 1969 SC 408  ) with reference to Section 297 (2) (j) of the Act of 1961. According to it in a case falling within that Section in a proceeding for recovery of tax and penalty imposed under the Act of 1922 it is not required that all the Sections of the new Act relating to recovery or collection should be literally applied but only such of the Sections will apply as are appropriate in the particular case and subject, if necessary, to suitable modifications. In other words, the procedure of the new Act will apply to cases contemplated by Section 297 (2) (j) of the new Act mutatis mutandis.Similarly the provisions of Section 271 of the Act of 1961 will apply mutatis mutandis to proceedings relating to penalty initiated in accordance with Section 297 (2) (g) of that Act.Lastly the challenge to Section 271 (2) of the Act of 1961 on the ground of contravention of Article 14 may be considered.According to that provision when the person liable to penalty is a registered firm then notwithstanding anything contained in the other provisions of the Act of 1961 the penalty imposable under sub-section (1) shall be the same amount as would be imposable on that firm if that firm were an unregistered firm.It is pointed out that in the case of assessees other than registered firms the maximum penalty imposable under Section 271(1) (i) cannot exceed in aggregate 50 per cent of the tax payable by the assessee; whereas in the case of a registered firm the maximum penalty is not made to depend upon the tax assessed on or payable by such firm. On the contrary the registered firm will have to pay the same penalty as an unregistered firm which may far exceed the maximum limit of 50 per cent prescribed by the above provision. This, according to the appellants, constitutes discrimination under Article 14 of the Constitution. Now a firm when registered is treated as a separate entity liable to tax. After 1956 it has to pay tax at a special reduced rate. If a firm got itself registered the partners were entitled to certain benefits and advantages.It was, however, open to the legislature to say that once a registered firm committed a default attracting penalty it should be deemed or considered to be an unregistered firm for the purpose of its imposition. No question of discrimination under Article 14 can arise in such a situation. We fully share the view of the High Court that there was nothing to prevent the legislature from giving the benefit of a reduced rate to a registered firm for the purpose of tax but withhold the same when it committed a default and became liable to imposition of penalty.