Bhargava, J. -
(1.)THESE two references have been submitted by the Addl. Commissioner of Income-tax, Rajasthan, Jaipur, under Section 256(1) of the I.T. Act, 1961 (hereinafter referred to as the "Act"), for the opinion of this court on the following question I
"Whether, on the facts and in -the circumstances of the case, the Tribunal was right in holding that penalty under Section 271(1)(a) could not be imposed for the assessment years 1964-65 and 1965-66 ?"
(2.)THE assessee had filed returns of his income for the assessment years 1964-65 and 1965-66 on March 22, 1966. All the assessments were completed on March 26, 1966. As the returns were not filed within the time prescribed under Section 139(1), the ITO initiated action under Section 271(1)(a) for both the assessment years and levied penalties of Rs. 76,198 and Rs. 24,264 for the two years. On appeal by the assessee, the AAC set aside the orders of the ITO as the AAC found that the assessee had already paid to the Department the sums much in excess of the taxes for these two years long before the filing of the return and, secondly, the assessee had reasonable cause for not filing the returns within time. THE ITO preferred an appeal before the Income-tax Appellate Tribunal. THE accountant member and the judicial member wrote two separate and differing orders and, as such, the difference of opinion between the two members gave rise to a reference to the President of the Income-tax Appellate Tribunal under Section 255(4) of the Act and the following question was referred to him :
"Whether, on the facts and in the circumstances of the case, the penalties under Section 271(1)(a) have been rightly levied for the assessment years 1964-65 and 1965-66 ?"
The appeal was heard by a third member who agreed with the conclusion of the accountant member that penalties were not leviable for the two assessment years. Therefore, the appeals filed by the Department were rejected. The Department then preferred an application under Section 256(1) which was allowed and the above question has been referred to the High Court for its opinion. Notices were issued to the assessee, but nobody appeared. It appears that Sohan Lal Dugar died on or about October 14, 1968, and his wife, Smt. Suwat Kanwar Dugar, had been substituted as the only legal heir of the deceased, Sohan Lal Dugar. The returns for the assessment years 1964-65 and 1965-66 were filed before the ITO on March 22, 1966. The ITO finalised both the assessments by his order dated March 26, 1966, and further directed initiation of proceedings under Section 274 read with Section 271 of the Act. A reply to the said notice was filed on March 22, 1966. The authorised representative submitted that the asses-see had no objection for the levy of the penalty as per the settlement. Some time in 1962, a raid was carried out by the Forward Markets Commission on the appellant's business premises as also at the residence when all the records and cash of the appellant were taken over. These proceedings were initiated some time in 1964, and a consent order was passed on October 10, 1964, by the Addl. CPM, Calcutta, and the whole matter and the seized books were made over to the Income-tax Department. Therefore, the Income-tax Department got a sum of Rs. 5,69,000 in their possession. Thereafter, there was a settlement between the assessee and the Department that all the dues, regarding taxes and penalties for the assessment years 1961-62 to 1965-66, be recovered from this seized amount and that no demand will be made from the assessee.
We have carefully considered the arguments made by the counsel for the Revenue and have also looked into the record of the case. To appreciate the question of law referred to this court, it will be better if Section 271 as originally enacted is reproduced hereunder :
"271. Failure to furnish returns, comply with notices, concealment o] income, etc.--(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-
(a) has without reasonable cause failed to furnish the return of total income which he was required to furnish under Sub-section (1) of Section 139 or by notice given under Sub-section (2) of Section 139 or Section 148 or has without reasonable cause failed to furnish it within the time allowed and in the manner required by Sub-section (1) of Section 139 or by such notice, as the case may be, or
(b) has without reasonable cause failed to comply with a notice under Sub-section (1) of Section 142 or Sub-section (2) of Section 143, or
(c) has concealed the particulars of his income or deliberately furnished inaccurate particulars of such income ;
he may direct that such person shall pay by way of penalty,--
(i) in the cases referred to in Clause (a), in addition to the amount of the tax, if any, payable by him, a sum equal to two per cent. of the tax for every month during which the default continued, but not exceeding in the aggregate fifty per cent. of the tax ;
(ii) in the cases referred to in Clause (b), in addition to any tax payable by him, a sum which shall not be less than ten per cent. but which shall not exceed fifty per cent. of the amount of the tax, if any, which would have been avoided if the income returned by such person had been accepted as the correct income ;
(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......
(3) Notwithstanding anything contained in this section,--
(a) no penalty for failure to furnish the return of his total income under Sub-section (1) of Section 139 shall be imposed under Sub-section (1) on an assessee whose total income does not exceed the maximum amount not chargeable to tax in his case by one thousand five hundred rupees;
(b) where a person has failed to comply with a notice under Sub-section (2) of Section 139 or Section 148 and proves that he has no income liable to tax, the penalty imposable under Sub-section (1) shall not exceed twenty-five rupees."
The Calcutta High Court in CIT v. Vegetable Products Ltd.  80 ITR 14, after considering the case law has found that the words "the tax" in Clause (i) of Section 273(1) of the I.T. Act, 1961, are reasonably capable of being construed as "the tax payable"--as against the construction "the tax to which he has been assessed", and since this construction is favourable to the assessee, the court should lean towards it. Since in that case, the asses-see had paid the tax before the order was passed under Section 271(i), no tax was payable on the date the order was passed. The High Court held that penalty could not be imposed. This judgment of the Calcutta High Court was later on confirmed and upheld by the Supreme Court in CIT v. Vegetable Products Ltd.  88 ITR 192, in which their Lordships of the Supreme Court have explained the difference between "tax payable" and "tax assessed". The tax payable is the amount for which a demand notice is issued under Section 156 of the I.T. Act, 1961. In determining the tax payable, the tax already paid has to be deducted. Hence, the expression "the amount of tax, if any, payable by him" in the earlier part of Section 271(1)(a)(i) refers to the tax payable under a notice of demand. The words "the tax" in the latter part of the provision can only refer to "the tax, if any, payable" by the assessee mentioned in the earlier part of Section 271(1)(a)(i). The Supreme Court further held that even if the court finds that the language of a taxing provision is ambiguous or capable of more meanings than one, then the court has to adopt that interpretation which favours the assessee, more particularly so where the provision relates to the imposition of a penalty.
After this judgment of the Supreme Court, there was an amendment in Clause (i) of Section 271(1) by the Direct Taxes (Amendment) Act, 1974, and the word "tax" was replaced by the words "assessed tax" and this amendment has been made retrospective and the Amending Act further provides that it shall be deemed to have always been substituted. This Amendment came up for consideration before the Punjab and Haryana High Court in CIT v. Mangat Ram Kuthiala  111 ITR 823, as also by the Madras High Court in CIT v. Fomra Brothers  122 ITR 312. In view of the aforesaid amendment made in Clause (i) of Section 271(1), the law laid down by the Supreme Court in CIT v. Vegetable Products Ltd,  88 ITR 192, no longer holds the field and it cannot be said that penalty could not be imposed on the assessee for the reason that no tax was due or payable on February 21, 1968, the date on which the penalty was imposed. That, however, does not conclude the matter. The imposition of penalty, in order to be valid, must satisfy the requirement of Clause (a) of Sub-section (1) of Section 271 and it is, therefore, necessary to consider whether the assessee had failed to file the returns for the assessment years 1964-65 and 1965-66 without reasonable cause.
(3.)AS stated earlier, a raid was organised on the assessee's premises in July, 1962, by the Forward Markets Commission and all the documents as well as cash to the extent of Rs. 5,69,000 were seized and, later on, the amount was kept at the disposal of the Income-tax Department. Therefore, the assessee could not maintain any books of account. There was no mala fide intention on the part of the assessee to delay the filing of the return to avoid payment of tax, and the matter was under negotiation with the Department for the assessment years 1961-62 to 1965-66, and it was agreed between the parties that the tax may be deducted or adjusted from the amount of Rs. 5,69,000 already lying with the Department along with the penalties for filing the late return, if any, if they were found payable by the assessee.
In CIT v. Rawat Singh and Sons  120 ITR 65, this court has held that for imposition of penalty under Section 271(1)(a), it is necessary to show that the assessee either "deliberately acted in defiance of law" or "its conduct was contumacious or dishonest". In the facts and circumstances of the present case, it cannot be said that in not filing the returns for the assessment years 1964-65 and 1965-66, the assessee had either deliberately acted in defiance of law or his conduct was contumacious or dishonest. The requirement for imposition of penalty under Section 271(1)(a) cannot, therefore, be said to have been satisfied in the present case.
In this view of the matter, we are of the opinion that, on the facts and in the circumstances of the case, the Tribunal was right in holding that penalty under Section 271(1)(a) could not be imposed for the assessment years 1964-65 and 1965-66.