JUDGMENT
C.S.P. Singh, J.
1. The Income-tax Appellate Tribunal, Allahabad Bench, Allahabad, has referred the following question for our opinion :
“Whether for purposes of imposing penalty under Section 271(1)(c), the Tribunal was right in holding that the income shown in the return should, be taken into consideration ignoring the share of income from various other firms, which the assessee had disclosed in the return without indicating the figures of profit or loss ? ”
2. The assessee is an HUF and derives income from various sources including share income from firms. In the assessment year 1964-65 with which we are concerned in the present reference, it filed a return in which it disclosed the extent of its interest in two firms, M/s. Hanuman Dass Kasari Prasad, Kanpur, and M/s. Mahabir Yarn & Co., Kanpur. There was a note in the relevant column of the return to the effect that the accounts of these firms were not finalized. It appears that as the accounts of these firms were not ready, and the assessee did not know the extent of the profit that it would receive in respect of its share in these firms, it did not include any specified amount as income from these firms. During the course of
assess-merit, the ITO was apprised of the income that the assessee received from these two firms. It also came to his knowledge that the assessee was also a partner in another firm, viz., M/s. Anand Yarn & Co., and that its income from that firm had been determined at Rs. 2,130. A notice under Section 271(1)(c) was issued to the assessee for showing cause as to why penalty should not be imposed for concealing its income. The IAC, New Delhi, after examining the matter, imposed a penalty of Rs. 17,000. The said amount being calculated at fifty per cent. of that tax, which in his view the assessee had avoided. The tax avoided was worked out by the IAC by taking into account the assessed income of the assessee and deducting therefrom the income returned. The matter was then taken up on appeal to the Tribunal. The Tribunal reduced the percentage of penalty from fifty per cent. to twenty per cent. but upheld the method of calculation thereof.
3. Counsel for the assessee conceded that there was concealment on the part of the assessee in respect of the income received from M/s. Anand Yarn & Co. to the tune of Rs. 2,130. He, however, contended that the quantum of penalty had to be worked out after including therein the income received from the two other firms, the interest in which the assessee had already disclosed in his return, and the penalty, if any, was leviable in respect of the income received from M/s. Anand Yarn & Co.
4. We have to refer to Section 271(1)(c)(iii) as it stood at the relevant point of time for the purposes of testing the correctness of this contention :
” 271. (1) If the Income-tax Officer or the Appellate Assistant Commissioner, in the course, of any proceedings under this Act, is satisfied that any person–……
(c) has concealed the particulars of his income or furnished inaccurate particulars of such income,
he may direct that such person shall pay by way of penalty,–………
(iii) in the cases referred to in Clause (c), in addition to any tax payable by him, a sum which shall not be less than twenty per cent. but which shall not exceed one and a half times the amount of the tax, if any, which would have been avoided if the income as returned by such person had been accepted as the correct income……”
5. On a reading of Clause (iii) of this section it appears that in cases of concealment, the assessee becomes liable to penalty to the extent of an amount between twenty per cent. to one and a half times the amount of tax which would be avoided by him in case the income as returned by him had been accepted as the correct income. Now it cannot be disputed that the words ” income as returned ” means the income as disclosed by an assessee or shown in the return filed by him. This position has been put beyond the pale of controversy by the decision of the Supreme Court in the case of Mansukhlal and Brothers v. CIT [1969] 73 ITR 546 to which counsel for the
department drew our attention. We may also point out at this stage that where the accounts of a firm in which an assessee is a partner have not been made up by the time the assessee files a return, he may in the return stop short of disclosing the specific amount of profit from the firm, and disclose only the extent of his share in the firms : See Bibi Gurdarshan Kaur v. CIT [1964] 51 ITR 1 (Punj).
6. The reason for such a return being filed and entertained by the department is not far to seek. Accounts of firms take considerably longer time in finalisation than the accounts of an individual assessee. Thus, the I.T. Act, does not require an assessee to wait for filing his return till such time that the accounts of the firm in which he is a partner are made up. Section 155(1) of the I.T. Act, 1961, and Section 35 of the Indian I.T. Act, 1922, realising this, took ample care by making provision for rectification of a partner’s assessment on the assessment of the firm in which the assessee was a partner, being finalised. The position then is that an assessee can file a return showing the income which he has actually received, and in respect of income which he may receive on being a partner in firms whose accounts have not been finalised, it is sufficient for him to include, in the relevant part of the return, the interest which he has in those firms. The question arises as to whether in such a. situation penalty can be imposed on an assessee on the ground that there is variance in the amount of income disclosed by him in the return, and the income finally assessed, and further as to the amount on which the penalty is to be calculated. We may come back again to the relevant words used in Section 271(1)(c). The relevant words for answering this controversy are ” which would have been avoided if the income as returned by such person had been accepted as the correct income “.
7. Now, in the present case the assessee had shown his interest in two firms, but had not disclosed the exact amount of income which he had received from them. The reason being that the accounts of these two firms were not complete. The extent of the assessee’s interest in these two firms having already been disclosed in the return, the ITO would surely have added the income received from these two firms while making the assessment. In the presence of this information he would never have accepted the income as disclosed in the return. On the addition of income from these two firms the assessee would not be able to avoid tax on the income from these two firms. So far as income from M/s. Anand Yarn & Co. is concerned, since the assessee had not disclosed the extent of his share in that firm, and neither had given any other information it would have been possible for the assessee to avoid tax on that income, in case the return as filed by him had been accepted. Since, under Section 271(1)(c)(iii) the penalty
is imposed on the amount of tax which the assessee would have avoided, in case his return had been accepted, the penalty in the present case was exigible only on the amount of tax which the assessee avoided on his
income from M/s. Anand Yarn & Co., which amounted to Rs. 2,130.
8. Counsel for the department urged that for a correct interpretation of Section 271(1)(c)(iii), the subsequent amendment made in Clause (iii) by the Finance Act, 1968, may also be looked into. His contention is that under Clause (iii), as it stood, once there was a variance in the returned income, and the assessed income, penalty become leviable on the difference. It was contended that this created undue hardship, with the result that the Legislature amended Clause (iii), and made penalty leviable only on the amount of income of which particulars had been concealed or inadequate particulars furnished. We may assume that the amendment was made to alleviate the hardship that was being experienced by assessees, but so far as the present case is concerned that the use of the words had been accepted in Clause (iii) as it stood at the relevant point of time, is a sure pointer to the conclusion that in cases like the one which we have in the hand, penalty cannot be imposed in respect of the share income from firms, where the assessee has disclosed in his return his interest in those firms.
9. We may also point out that in case the wide interpretation canvassed for by the counsel for department is accepted, all assessees, who are partners in firms, and who file their returns before the accounts, of the firms are made up, may be caught in the net of Clause (iii). Such an interpretation would run counter to the intention of the Legislature as envisaged in Section 155(1) of. the Act, which specifically talks of rectification on completed assessment of partners, on the assessment or reassessment of the firm.
10. We, accordingly, answer the question in the negative, in favour of the assessee, and against the department. We may indicate that this will in no way affect the liability of the assessee for penalty in respect of his income from M/s. Anand Yarn & Co. The assessee is entitled to its costs, which are assessed at Rs. 250.
