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Penalty For Belated Returns
by K.B. Jindal, M.A., LL.B., I.R.S. (Retd.), Advocate

Cite as : (1973) 1 SCC (Jour) 15

In a recent judgment, in CIT, West Bengal-I, Calcutta, v. Messrs. Vegetable Products Limited1 the Supreme Court has held that the penalty under Section 271(1)(a)(i) at 2% for every month of delay should be calculated on the basis of the net tax payable as per notice of demand issued under Section 156, and not on the basis of the tax determined on "regular assessment" under Section 143. The counsel for the department tried to impress on Their Lordships that "the effectiveness of the section may be taken away by the assessee paying the tax due by him a day before the demand notice is served on him". This was an argument ab inconvenienti which can never be a decisive argument.

In turning down this argument Their Lordships held:

"There is no doubt that the acceptance of the interpretation sought to be placed on Section 271(1)(a) by the assessee would lead to some inconvenient result, but the duty of the court is to read the section, understand its language and give effect to the same. If the language is plain, the fact that the consequence of giving effect to it may lead to some absurd result is not a factor to be taken into account in interpreting a provision. It is for the legislature to step in and remove the absurdity."

Obviously the argument of the counsel for the department did not carry and conviction with Their Lordships, because it was based on a wrong premise. It is not easily intelligible how an assessee can pay "the tax due by him a day before the demand notice is served on him". There are only four modes of payment of payment recognised by the Income Tax Act:

(1) Tax deducted-at-source, where the tax is paid not by the assessee; but by the person making payment to the assessee.

(2) Tax-paid-in-advance. This is in relation to an Assessment Year yet to follow and is paid in advance as per demand of the Income Tax Officer or as per estimate of the assessee.

(3) Tax paid by the assessee on a provisional demand made by the Income Tax Officer on the basis of the return. This is now replaced by self-assessment to be made by the assessee himself on the basis of his return.

(4) Tax demanded by the Income tax Officer on "regular assessment".

Items (1) to (3) are all paid in advance and before the regular assessment is completed. There are dates and time-limits for making each of the first three payments. No assessee can pay tax at his ipse dixit, at any time when he likes. Even a tax on self-assessment (last of the series) has to be paid within one month of the submission of the return. Therefore, there can be no case of an "assessee paying the tax due by him a day before the demand notice is served on him". This amply demonstrates the fallacy of the argument of the counsel for the department.

There is another argument which could have carried some conviction with Their Lordships; but escaped the notice of the counsel. It is a well-known legal maxim that "It is the duty of the judges to make such construction of a statute as shall suppress the mischief and advance the remedy".2 Unfortunately, the counsel for the department failed to draw a distinction between advance tax and tax deducted at source on the one hand, and tax paid on provisional (now self) assessment on the other. The first two are paid in advance of the date when the return is due, while the last is paid after the return is filed and the default in question is already committed.

To give an assessee credit for tax paid on provisional (now self) assessment would be to defeat the very purpose of Section 271(1)(a)(i), namely to "suppress the mischief" of late filing of returns. Penalty is fixed at a percentage of tax due for every month of delay. The rationale behind this mode of penalty is to make good to the Revenue the loss caused by delayed returns and delayed assessments, thereby withholding Government dues for a period longer than absolutely necessary. So far as tax-deducted at source and advance tax are concerned, they are paid much in advance and, therefore, it cannot be said of them that Government dues were delayed or wrongfully withheld; but such is not the case with provisional or self-assessment. This can never be made unless the return is filed. The assessee can delay the payment of tax on provisional or self-assessment by delaying the filing of return as much as he likes. To give an assessee credit for tax paid on provisional/self-assessment when computing penalty under Section 271(1)(a)(i) would place a premium on 'delay' and would defeat the very purpose of Section 271(1)(a)(i), namely to punish delays in submission of returns. The mischief of belated returns can never be suppressed if assessees are allowed credit for tax paid on provisional/self-assessment. They can merrily delay the return as much as they like and make self-assessment when they like; because they very well know that the Income Tax Officer would be helpless in imposing any penalty on them, so long as the tax is paid on self-assessment, howsoever, late it may be. The difference between the assessed income and the returned income is narrowing day by day as tax consciousness is rising among the assessees; and if penalty is limited to this small difference it would be a mockery of the penal provisions.

A golden mean had been struck long ago by the Central Board of Direct Taxes in its Circular No. 17 (XLV-18)-D of 1965, dated June 26, 1965. Without causing any undue hardship to the assessee, the circular also safeguards the interest of Revenue. The Circular does give credit to the assessee for tax paid in advance or for tax deducted at source; but the Circular stops at that and does not seek to give further credit for tax paid on provisional/self-assessment. This, I think, is a very reasonable and equitable interpretation of Section 271(1)(a)(i). It will, therefore, now, be necessary to give statutory recognition to the instructions contained in the Circular. It is expedient to amend Section 271(1)(a)(i) in the light of the above remarks, as under:

Add, after the word 'tax', where it occurs for the second time in Section 271(1)(a)(i)—

"as determined on regular assessment, reduced by any tax already paid under Chapters XVII-B and XVII-C."

  1. (1973) 1 SCC 442: 1973 SCC (Tax) 282. Return to Text
  2. Maxwell on "Interpretation of Statutes", Page 68. Return to Text
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