(1.)THIS is a reference at the instance of the assessee under section 256(1) of the Income-tax Act, 1961. The question of law referred for our opinion are :
"(1) Whether, on the facts and in the circumstances of the case, the notice dated October 7, 1964, issued under section 274(1) with section 271(1)(a) by the Income-tax Officer to the assessee, and the penalty proceeding as well as the order in pursuance there of are valid in law ?
(2) Whether, on the facts and in the circumstances of the case, the penalty leviable within the meaning of section 271(1)(a)(i) shall be with reference to the gross tax as reduced by the advance tax and self-assessment-tax under section 140A and remaining due and payable due and payable, at the date of final assessment ?"
(2.)THE assessee by notice dated March 6, 1964, issued under section 139(2) of the Income-tax Act, 1961 (hereinafter referred to as "the Act") was required to file his return of income for the assessment year 1964-65, on or before the 15th of October, 1964. On October 13, 1964, the assessee asked for time for filing the return up to October 31, 1964. On the said application no order was passed by the Income-tax Officer. On October 17, 1964, the assessee was served with a notice issued by the Income-tax Officer under section 274 read with section 271(1)(a). THE assessee filed his return only on February 6, 1965, showing an income of Rs. 57,697. THE assessee had paid by way of advance tax a sum of Rs. 15,430; with his return he paid a sum of Rs. 3,627 under section 140A of the Act. By the assessment order made on March 3, 1965, the tax on the total income of the assessee was determined at Rs 23,539 13. After adjusting the advance tax and the tax paid under section 140A, a notice of demand was issued to the assessee claiming the balance sum of Rs. 4,482 13. THE assessee submitted his explanation for not filing the return on the due date. THE Income-tax Officer was not satisfied with the said explanation and he proceeded to levy penalty which he levied at 2 per cent for the default period of three months on the whole of the tax of Rs. 23,539 13 and the penalty levied was Rs. 1,412 34.
Aggrived by the said order of penalty, the assessee preferred an appeal to the Appellate Assistant Commissioner of Income-tax, Bangalore. Before the said appellate authority, the assessee contended that the notice dated October 17, 1964, under section 271(a) had been issued before the due date for filing the return and therefore was invalid. He further contended that the assessee was prevented by reasonable cause in filing his return within the due date and that in any event the penalty amount should have been calculated on the balance amount of the tax payable, viz., Rs. 4,482 13 and not on the entire tax of Rs. 23, 539 13. The Appellate Assistant Commissioner rejected the first two grounds urged by the assessee, but he agreed with the assessee's contention that the penalty ought to have been calculated with reference to the balance tax payable, viz, Rs. 4,482 13. In the course of his order, the Appellate Assistant Commissioner observed :
"The Income-tax Officer however is prepared now to agree that on the basis of executive instruction, the word 'tax' should mean the tax as demanded on the income assessed less the tax deducted at source and/or the tax paid in advance."
The Income-tax Officer appealed to the Income-tax Appellate Tribunal, Madras Bench, against the order of the Appellate Assistant Commissioner. The assessee preferred cross-objections contending that the order of penalty imposed on him was made on the basis of an illegal notice. The Appellate Tribunal dismissed the cross-objections of the assessee and restored the order of the Income-tax Officer. According to the Appellate Tribunal, the penalty had to be computed on the basis of the total amount of tax determined on the total assessable income of the assessee. Aggrieved by the said order, the assessee sought a reference to this court under section 256(1) of the Act and the Tribunal has referred the above question of law for our opinion.
(3.)SIR A. R. Srinivasa Rao, the learned counsel for the assessee, submitted that he does not press the first question of law and restricted his arguments to the second question. According to the learned counsel for the assessee, the penalty under section 271(1)(a)(i) has to be computed not on the amount of tax assessed but on the balance amount of tax payable as per the demand notice under section 156. He further contended that the Central board of Direct Taxes, New Delhi, had issued a circular to the department to the effect that the net amount of tax payable by the assessee for the purposes of section 271(1)(a) is to be arrived at excluding the tax deducted at source as well as the advance tax actually paid by the assessee under sections 207 to 219 of the Act, and that the said direction is binding on the department by virtue of section 119 of the Act. The learned counsel argued that the Income-tax Officer conceded before the Appellate Assistant Commissioner who has referred to the circular issued by the Central Board of Direct Taxes that the penalty had to be computed on the net amount of tax payable after giving deduction to the advance tax paid.
The Circular issued by the Central Board of Direct Taxes under section 119 of the Act reads thus :
"Circular No. 17(XLV-18) of 1965.
F. No. 58/35/64-IT'(INV) dated 26-6-65 from CBDT.
2. On a representation made by the Gujarat Chamber of Commerce, the matter has been reconsidered by the Board in consultation with the Ministry of Law. Under section 271(1)(a)(i) of the Income-tax Act 1961, the penalty is to be 2% of the tax, if any, payable by the assessee. Section 219 of the Income-tax Act, 1961, makes it clear that any sum other than penalty or interest, paid by or recovered from the assessee as advance tax in pursuance of Chapter XVII shall be treated as payment of tax respect of the income of the period which would be the previous year for an assessment for the assessment year next following the financial year in which it was payable and credit therefor shall be given to the assessee in the regular assessment." The two section read together make it perfectly clear that tax payble by an assesseee as referred to in section 271(1)(a) is the tax payable after giving credit the advance tax paid by him as contemplated under section 219.
3. It has, therefore, been decided that the net amount of tax payable by the assessee for the purpose of section 271(1) of the Act, is to be arrived at by excluding the tax deducted at source as well as the advance tax actually paid by the assessee under sections 207 to 219 of the Act..."