ORDER
NATHU RAM, A. M. :
These appeals have been preferred by the assessee against the order of the CIT(A) sustaining penalties levied under s. 271(1)(c), 271(1)(a) and 273(1)(b) for the asst. yr. 1987-88. Since the facts are common these appeals have been heard together and the same are being decided by this consolidated order for the sake of convenience.
2. We first take up the appeal against upholding the penalty of Rs. 12,24,720 levied under s. 271(1)(c) in ITA No. 625/Ahd/92. The facts in brief are that the assessee filed a return declaring a loss at Rs. 3,20,770 on 31st July, 1987 for the year under consideration. The assessee firm carried on business of dyeing and printing of grey cloth on job work basis. During the year the assessee had received job charges of Rs. 2,10,86,830 net as against last year job charges of Rs. 1,05,89,957. The assessee firm had not given rate difference to any parties in earlier years but in the current year though the assessee carried out job work for 106 parties gave rate difference of Rs. 24,90,941 to the following sister concerns :-
Rs.
1.
Jaylaxmi Enterprises
10,87,170
2.
Balkrishna Silk Mills
8,11,750
3.
Ambaji Silk Mills
6,89,021
The Assessing Officer(AO) found that the aforesaid parties had not credited in their books of accounts the said amount of rate difference received from the assessee during the year whereas the assessee in its books of accounts passed debit entries at the close of the year regarding rate difference to sister concerns. The assessee failed to explain the basis for such rate difference given to sister concerns nor the assessee could satisfactorily explain as to why such rate difference was given during the current year when no such rate difference was given in the earlier year and why the recipients made no entries in their books of accounts when they also followed the same accounting year. The AO, therefore, held that the claim was not genuine and the assessee reduced its income to the extent of Rs. 24,90,941 in the guise of rate difference. The AO accordingly disallowed the claim. 3. On appeal the first appellate authority confirmed the action of the AO.
4. On second appeal the Tribunal in its order dt. 2nd July, 1992 in ITA Nos. 782 and 4782/Ahd/1991 of the asst. yrs. 1987-88 and 1988-89 confirmed the order of the first appellate authority with the following observations :
“We have considered the submissions of both the side carefully and are of the opinion that the facts for asst. yr. 1987-88 and 1988-89 stand on a different footing in respect of a crucial factor. It was observed by the CIT(A) that no such rate difference was claimed in asst. yr. 1986-87. Thus, the question came up for the first time for asst. yr. 1987-88 and it continued only till asst. yr. 1988-89, when the assessee discontinued its practice of allowing rate difference to the three sister concerns and instead adjusted the rate of payment of the job work itself. The decision to allow rate difference for asst. yr. 1987-88 for the full year and for the asst. yr. 1988-89 upto April, 1987 was taken in April, 1987. It is for this reason that the entries in the books for asst. yr. 1987-88 were made at the end of the year and the corresponding entries in the books of the three concerns were made in asst. yr. 1988-89 on cash accounting basis. We are of the opinion that as far as asst. yr. 1987-88 is concerned, the liability for the rate difference, even if any, did not arise during the year at all but arose subsequently in asst. yr. 1988-89 without going into the merits of the liability, we, therefore hold that as far as asst. yr. 1987-88 is concerned, the rate difference of Rs. 24,90,941 is not deductible. We confirm the disallowance and the order of the CIT(A), though for different reasons.”
The Tribunal while considering similar disallowance of rate difference of Rs. 11,23,494 for the asst. yr. 1988-89 observed that the crux of the issue is whether the net rate paid to the three sister concerns, i.e., the gross rate as reduced by the rate difference upto April, 1987 and the reduced rate thereafter was excessive or unreasonable compared to the fair market value of the services which could be ascertained by comparison with the rate of payments made to other parties and since this aspect was not dealt with by the lower authorities the addition made in the asst. yr. 1988-89 was set aside with a direction to the AO to examine the net rate of payments to three sister concerns with respect to the provisions of s. 40A(2) in particular.
4.1 The Tribunal also admitted an additional ground at the time of hearing to the effect that the amount of commission of Rs. 24,90,941 if disallowed in the asst. yr. 1987-88 ought to be allowed in the asst. yr. 1988-89. The Tribunal on the facts and in the circumstances directed that if the AO comes to the conclusion that any part of the rate difference relating to asst. yr. 1987-88 is deductible then deduction for the same should be allowed in the asst. yr. 1988-89. The AO while giving effect to the Tribunal order on the basis of the evidence brought on record by the assessee to prove that the rate difference is allowable, allowed the said amount of Rs. 24,90,941 on account of rate difference for the asst. yr. 1987-88 from the income of the asst. yr. 1988-89 in his order dt. 10th Feb., 1993 a copy of which has been filed before us.
5. While disallowing the claim for rate difference of Rs. 24,90,941 for the asst. yr. 1987-88 the AO initiated penalty proceedings under s. 271(1)(c). The assessee failed to reply to the show cause notice given, The AO, therefore, relying upon the order of the first appellate authority sustaining the disallowance of Rs. 24,90,941 levied penalty of Rs. 12,24,720 under s. 271(1)(c) for concealing the particulars of income and for furnishing inaccurate particulars thereof.
6. On appeal the first appellate authority confirmed the penalty so levied. The assessee is now in appeal before us.
7. The learned counsel for the assessee has made a submission that the assessee firm had been carrying on business of dyeing and printing of grey cloth on job work basis. Such job work was done for three sister concerns alongwith several others during the year. He has further submitted that the assessee firm had done job work of more than 50% for the said three sister concerns during the year and apart from the said sister concerns the assessee had also paid commission of Rs. 2,46,307 to other parties for whom the job work was done during the year. As the assessee got substantial job works from sister concerns the commission was given to them at a little higher rate on business consideration. He further submitted that the said sister concerns were following cash system of accounting and as such the rate difference claimed by the assessee as deduction in the asst. yr. 1987-88 had been duly disclosed in the accounts of the sister concerns in the asst. yr. 1988-89 on cash basis and no adverse inference could be drawn on the system of accounting being followed by the sister concerns. He also made a submission that the rate difference may be lower in the case of other concerns but the net rate after allowing the rate difference was nearly the same as in the case of sister concerns. What was important was ultimately the net rate that they paid. He also made a submission that the question of rate difference was settled some time in April, 1987 both for asst. yr. 1987-88 and 1988-89 and since the accounting year for 1987-88 ended on Diwali 1986 the entries were naturally passed on the closing date. However, for the asst. yr. 1988-89 the necessary entries were made in April, 1987 for job work done till then. Thereafter the rate was revised downwards in the case of three sister concerns and there was no further rate difference paid to them, and it was for this reason the rate difference to the sister concerns for the asst. yr. 1988-89 was less than that of the asst. yr. 1987-88. The learned counsel has further made a submission that payment of rate difference is a general practice in this line and it was given on business consideration. The learned counsel has further pointed out that the AO treating the claim as genuine has allowed the same in the following asst. yr. 1988-89 in consequence of the order of the Tribunal. The learned counsel has therefore, pleaded that on given facts there is neither any concealment of income involved nor there is furnishing of any inaccurate particulars of income and the penalty levied is totally unjustified.
8. The learned Departmental Representative on the other hand relied upon the orders of the lower authorities.
9. We have considered the facts and submissions made. It is evident from the facts given that the assessee had paid commission on account of rate difference to the sister concerns as well as other parties for whom job work was done and as per the counsel of the assessee the net rate charged for job work after adjusting the commission paid both from the sister concerns and the other parties is almost the same. The Revenue has not brought on record any material to show that on payment of rate difference the net rate charged from sister concerns was lower than that charged from the other parties. The AO rather while giving effect to the Tribunal order allowed the claim for rate difference of Rs. 24,90,941 for the asst. yr. 1987-88 from the income of the asst. yr. 1988-89 after examining the issue afresh on the basis of the evidence brought on record and holding the same as allowable. This shows that the Revenue itself has treated the claim as genuine but since the question of rate difference was settled in April, 1987 i.e. after the close of the accounting year relevant to the asst. yr. 1987-88 it was not allowed in the asst. yr. 1987-88 but it was allowed on payment basis in the asst. yr. 1988-89. In this view of the matter we do not see any case fit for levy of penalty under s. 271(1)(c) and the penalty levied is directed to be cancelled. ITA No. 626/Ahd/92
10. This appeal of the assessee is directed against the order of the first appellate authority sustaining the penalty of Rs. 5,800 levied under s. 271(1)(a). The return in this case was due to be filed on or before 30th June, 1987. The assessee, however, filed the return on 31st July, 1987. The AO treated the assessee in default for a period of one complete month and levied the impugned penalty.
11. The first appellate authority confirmed the penalty so levied mainly for the reason that the assessee failed to reply to the show cause notice and no reasonable cause was given for delay before the AO.
12. It has been submitted by the learned counsel for the assessee that the assessee did make a reply before the AO to the show cause notice given. The assessee in its letter dt. 21st Jan, 1991 made a submission that an appeal has been preferred against the order of the CIT(A) before the Tribunal on quantum and requested the AO to keep the penalty proceedings pending till disposal of appeal by the Tribunal. The AO failed to consider the request so made. He has further submitted that return was due to be filed on or before 30th June, 1987 and it was filed on 31st July, 1987. As the return was filed on the last day of the calendar month July the default was not for one complete month and as such the lower authorities were not justified in levying penalty. In support he cited the decision of the Karnataka High Court in the case of D. V. Ashwathaiya & Bros. vs. ITO (1985) 155 ITR 422 (Kar) and Rajasthan High Court decision in the case of Anantrai Ramana vs. CWT (1986) 159 ITR 988 (Raj). He also made a submission that even otherwise the assessee firm did not have taxable income during the year under consideration as the assessee declared in the return filed a loss of Rs. 3,20,770. This was also a reasonable cause for the delay.
13. The learned Departmental Representative, on the other hand, relied upon the orders of the lower authorities and it was submitted that as per s. 271(1)(a) penalty is leviable at 2% of the assessed tax of every month of default and a month is reckoned of 30 days and not of 31 days. He, therefore, submitted that there being no reasonable cause shown and the default being for one complete month the penalty levied was justified.
14. We have considered the facts and rival submissions. The Honble Allahabad High Court in the case of CIT vs. Laxmiratan Cotton Mills Co. Ltd. (1974) 97 ITR 285 (All) reckoned the month as of 30 days whereas the Honble Karnataka High Court in the case cited supra agreeing with the view of the Honble Madras and Calcutta High Court in CIT vs. Kadri Mills (1977) 106 ITR 846 (Mad) and CIT vs. Brijlal Lohya & Mahavir Prasad Khemka (1980) 124 ITR 485 (Cal) respectively observed that the term month occurring in IT Act and Rules has not been defined and, therefore, the definition of that term if any found in the General Clauses Act has to be applied in ascertaining the meaning of that term occurring in the Act and the Rules. Sec. 3(35) of the General Clauses Act defines the term month as a month reckoned according to the British Calendar. The British Calendar for the month of July includes 31st July. The High Courts thus have conflicting view on the issue. As the view taken by the Honble Karnataka High Court is in favour of the assessee we respectfully following the same hold that the default in filing of the return was not of a complete month but less than a month and accordingly the penalty levied is not valid. We accordingly direct the lower authorities to cancel the penalty levied.
ITA No. 627/Ahd/92
15. This appeal of the assessee is directed against the order of the CIT(A) sustaining a penalty of Rs. 22,000 levied under s. 273(1)(b). The AO has noted that the assessee filed a return declaring loss of Rs. 3,20,770. The assessment was however made at a total income of Rs. 13,87,271, on which tax payable was at Rs. 3,18,945. As the assessee failed to file an estimate of advance tax a show cause notice was issued as to why penalty be not levied for failure to furnish statement of advance tax under s. 209A(1)(a) of the IT Act. As no reply was filed the assessee was held in default and the impugned penalty was levied.
16. The first appellate authority confirmed the penalty levied by the AO.
17. It has been submitted by the learned counsel for the assessee that the assessee did file a reply to the show cause notice in its letter dt. 21st Jan., 1991 wherein the AO was requested to keep the procedure pending till the disposal of quantum appeal by the Tribunal. The learned counsel has further submitted that since the assessee had not been previously assessed to tax there was no question of filing any statement of advance tax under s. 209A(1)(a) and there being no such obligation the penalty levied under s. 273(1)(b) is invalid. He has further made a submission that there being a loss during the year the assessee was also not obliged to file estimate of advance tax under s. 212. The learned counsel has therefore pleaded that penalty levied on given facts is not valid and the same deserves to be cancelled.
18. The learned Departmental Representative on the other hand relied upon the orders of the lower authorities.
19. On due consideration of the facts given we find force in the submissions made by the learned counsel for the assessee and we see no justification in levy of penalty under s. 273(1)(b). It is evident from the facts given that the assessee had not been previously assessed and as such the assessee was not under an obligation to file a statement of advance tax under s 273(1)(b). The position being so penalty under s. 273(1)(b) is not leviable. We accordingly vacate the order of the first appellate authority and direct the AO to cancel the penalty levied being invalid and unlawful.
20. In the result all the appeals of the assessee stand allowed.