SWASTIK ENGINEERING WORKS Vs. COMMISSIONER OF INCOME TAX

JUDGEMENT

(1.) THESE two references raise a very interesting question of law relating to the interpretation of s. 221, Sub S. (1), of the IT Act, 1961. The question is whether, on a proper construction of S. 221, sub s. (1), penalty is attracted when an assessee makes default in payment of the instalment of advance tax required to be paid by him by virtue of an order made under S. 210. To appreciate how the question arises, it is necessary to state a few facts giving rise to the references.

(2.) THE assessee is a partnership firm carrying on business at Rajkot and it is being assessed as a registered firm. By an order in writing under S. 210 Sub S. (1), the ITO having jurisdiction over the case of assessee, required the assessee to pay advance tax on the basis of the assessment for the assessment year 1963 64 which was the last completed assessment at the time and pursuant to this order, a notice of demand dt. 23rd Aug., 1964, was issued by the ITO under S. 156 specifying three instalments in which advance tax should be paid by the assessee, one on 1st Sept., 1964, the other on 1st Dec., 1964, and the third on 1st March, 1965. The assessee paid a sum of Rs. 327 on 5th Sept., 1964, in respect of the first instalment. However, soon thereafter, an order of provisional assessment was made by the ITO under S. 141 making provisional assessment of the tax payable by the assessee for the asst. year 1964 65 on the basis of returned income of Rs. 79,000. In view of the provisional assessment made for the asst. year 1964 65, the ITO made an amended order under S. 210, Sub S. (3), requiring the assessee to pay advance tax computed on the basis of the total income in respect of which provisional assessment was made and a revised notice of demand was accordingly issued by the ITO on 8th Oct., 1964, under S. 156 calling upon the assessee to pay a sum of Rs. 4,584 as advance tax in two equal instalments, one on 1st Dec., 1964, and the other on 1st March, 1965. The assessee paid only a sum of Rs. 386 in respect of the first instalment and made default in payment of the balance, but we are not concerned in these references with the default made in payment of the first instalment. So far as the second instalment was concerned, it fell due for payment on 1st March, 1965, but the assessee failed to make any payment in respect of it and the ITO, therefore, issued a notice dt. 10th March, 1965, calling upon the assessee to show cause why penalty should not be imposed on it under S. 221 sub s. (1). The assessee stated in reply that the amount of advance tax remaining outstanding would be paid on or before 26th March, 1965, but this promise was in vain as no payment was made. The ITO, therefore, ultimately passed an order dt. 31st March, 1965, levying penalty of Rs. 968 on the assessee under S. 221, Sub S. (1), r/w S. 218. Despite this order of penalty made by the ITO, the assessee continued in default so far as payment of the second instalment was concerned and this continued default led to the issue of the second notice dt. 7th April, 1965, by the ITO. By this notice the ITO called upon the assessee to show cause why penalty should not be levied upon it for continued default in payment of the second instalment and on the assessee continuing in default the ITO passed a second order of penalty dt. 20th April, 1965, levying a penalty of Rs. 968 on the assessee under S. 221, Sub S. (1), r/w S. 218. The assessee preferred appeals against both orders of penalty to the AAC but the orders of penalty were confirmed by the AAC with only slight reduction in the amounts of penalty from Rs. 968 to Rs. 500. The assessee thereupon carried the matter in further appeals to the Tribunal. There were two contentions urged on behalf of the assessee before the Tribunal. One contention applicable to both orders of penalty was that S. 221, Sub S. (1), did not empower the ITO to impose penalty in a case where the assessee was in default in payment of an instalment of advance tax; S. 221 Sub S. (1) had application only to default in payment of "tax" and advance tax was not "tax" within the meaning of that provision. The other contention was and this contention was related solely to the second order of penalty that no penalty for default in payment of instalment of advance tax could be levied after the end of the financial year in which the advance tax was payable by the assessee, or in other words, default in payment of instalment of advance tax could not be regarded as a continuing default after the close of the financial year so as to permit levy of penalty subsequent to 31st March of relevant financial year. Both these contentions were negatived by the Tribunal and in a well reasoned order, the Tribunal took the view that advance tax was nothing but tax payable in advance and default in payment of the instalment of advance tax was default in payment of tax within the meaning of S. 221 and Sub S. (1), and penalty under section, 221 Sub S. (1), could, therefore, be validly imposed if the assessee made default in payment of instalment of advance tax and this default would be continuing default even after the close of the financial year, so long as the liability for payment of such instalment of advance tax remained undischarged. The Tribunal, in this view of the matter, confirmed the order of penalty as modified by the AAC. The assessee thereupon applied for a reference in each of the two appeals and on the applications so made, the Tribunal referred the following three questions of law in IT Ref. No. 12 of 1969 :

(3.) WE have already referred to S. 190 which reiterates the proposition that tax on income of the previous year shall be payable by deduction at source or by advance payment and provides that it shall be so payable in accordance with the provisions of Chapter XVII. Chapter XVII is headed "Collection and Recovery of Tax". Section A of the Chapter deals generally with deduction at source and advance payment. Section B contains a groups of sections from ss. 192 to 206A dealing with deduction at source. It is not necessary to refer to all these sections because we are not strictly concerned with them. It would be sufficient to make reference to S. 192, Sub S. (1), which says that any person responsible for paying any income chargeable under the head "Salaries" shall, at the time of payment, deduct income tax on the amount payable at the average rate of income tax computed on the basis of the rates in force for the financial year in which the payment is made, on the estimated income of the assessee under this head for that financial year. This provision emphasizes that what is to be deducted is "income tax on the amount payable" and since it would not be known at this stage what would be total income of the assessee chargeable to tax and what would be the rate at which it would be so chargeable, the legislature has provided an artificial basis, namely, that "income tax on the amount payable" shall be calculated at the average rate of income tax computed on the basis of the rates in force for the financial year in which the payment is made, on the estimated income of the assessee under the head "Salary" for that financial year. The consequence of failure to deduct or, after deduction, to pay, are laid down in S. 201 and reading sub S. (1) of that section with the proviso, it is clear that failure to deduct tax at the source or failure to pay tax to the Central Government after deducting it at the source would attract penalty under S. 221, Sub S. (1). We then proceed to consider Section G of Chapter XVII which deals with advance payment of tax. Sec. 207 which is the first in this group of sections is rather material and it reads as follows :