Patna High Court
Commissioner Of Income-Tax vs Sriram Agrawal on 21 April, 1986
Equivalent citations: 1987(35)BLJR28, [1986]161ITR302(PATNA)
JUDGMENT Uday Sinha, J.
1. This is a reference under Section 256(1) of the Income-tax Act, 1961 (hereinafter called "the Act"). The question referred to us for our opinion is :
"Whether, on the facts and in the circumstances of the case, the Tribunal was justified in law in cancelling the penalty imposed under Section 221 for failure to pay tax on the basis of the estimate filed under Section 212(3A) after the tax had been paid on the basis of the regular return ?"
In this reference, we are concerned with the assessment year 1971-72.
2. The facts, in brief, are that the assessee filed estimate in terms of Section 212(3A) of the Act. In accordance with that estimate, advance tax of Rs. 12,100 became payable on March 15, 1971. The advance tax was, however, not paid. On February 16, 1972, the assessee filed regular return and on the basis thereof paid tax of Rs. 18,417. On December 16, 1972, the Income-tax Officer called upon the assessee to show-cause in terms of Section 221 of the Act why penalty be not imposed for non-payment of the balance demand of Rs. 10,438. After cause had been shown, by order dated February 3, 1973, the Income-tax Officer imposed a penalty of Rs. 1,500 for non-payment of the advance tax payable as per his own estimate.
3. The Appellate Assistant Commissioner on appeal confirmed the order of the Income-tax Officer. The Tribunal, however, cancelled the imposition of penalty. The question is, if the demand or obligation of the assessee under the law had not been carried out, would he be said to be in default and would penalty be leviable ?
4. It is not in controversy that the advance tax of Rs. 12,100 was payable by March 15, 1971. It is undisputed that it was not paid by that date. It is also beyond the controversy that the entire tax due was paid by the assessee on February 16, 1972, when he filed a regular return. On these facts, it is undisputed that the assessee was not in default in carrying out his legal obligations under Section 212(3A). Section 221 provides that when an assessee is in default in making payment of tax, he shall be liable by way of penalty to pay such amount as the Income-tax Officer may direct. This penalty is to be in addition to the amount of arrears and the amount of interest payable by the assessee under Sub-section (2) of Section 220 of the Act. It is not disputed that in terms of Section 212, the law casts an obligation upon the assessee to pay advance tax along with the estimate. If that was the obligation, it is axiomatic that the assessee defaulted in carrying out his statutory obligation. He thus became a defaulter in terms of Section 221 of the Act. The wordings of Section 221 are absolutely explicit. Once he has become a defaulter, the penalty must be imposed. The fact that he paid the tax at a later time will not cure the defect. His act may be condoned, but he would remain a defaulter all the same. It appears that there were some controversies about the content of the words "when an assessee is in default". Parliament, therefore, came forth with an Explanation in 1975 by Section 53 of the Taxation Laws (Amendment) Act, 1975. The Explanation was introduced to put the meaning of "when an assessee is in default" beyond controversy. The Explanation reads thus :
"Explanation,--For the removal of doubt, it is hereby declared that an assessee shall not cease to be liable to any penalty under this sub-section merely by reason of the fact that before the levy of such penalty he has paid the tax."
This Explanation is a complete answer to the situation before us. In this case also, the assessee had not paid his tax within the due time, but had paid his entire dues before the penalty could be imposed. The Explanation squarely applies to the case before us. In terms of the Explanation, there can be no doubt that the assessee was a defaulter in terms of Section 221 of the Act.
5. It was urged that the Explanation not being in existence when the Tribunal disposed of the assessee's appeal, the question of obligation in terms of the Explanation does not arise and, therefore, the Tribunal's order cannot be assailed. It is true that the Tribunal did not have the benefit of the Explanation. But in the case as it stands now before us, there is no escape from the Explanation. Question is what Is the effect of the Explanation. It is well known that a declaratory statute takes effect retrospectively. The meaning given in the declaratory statute or the Explanation must be deemed to be the meaning of the original enactment. In Sutherland on Statutory Construction, 3rd edition, volume 2, it is stated as follows :
"The English cases suggest that declaratory statutes were enacted to affirm old customs which had either fallen into disuse or had become disputable and were enacted merely to clarify the state of the common law and affirm it as it was." (Paragraph 2902 at page 218).
At paragraph 2904, it is stated as follows :
"Statutes declaratory of the common law are interpreted co-extensively with the common law and no change in meaning is presumed to have been intended by the enactment."
At paragraph 2905, it has been stated that :
"Declaratory statutes because they do not change the common law should apply retroactively for they do not change the past state of the law... They were not applied retroactively when rights were vested or litigation settled... In all other cases, their retroactive effect remained unquestioned."
Craies on Statute Law, 6th Edition, at page 394, has the following to state in regard to explanatory and declaratory Acts. According to it, they are retrospective.
"Explanatory and declaratory Acts retrospective.
Where a statute is passed for the purpose of supplying an obvious omission in a former statute, or, as Parke J. (afterwards Baron Parke) said in R. v. Dursley [1832] 3 B & Ad. 465, 469 'to "explain" a former statute', the subsequent statute has relation back to the time when the prior Act was passed. Thus, in Att.-Gen. v. Pougett [1816] 2 Price 381, 392, it appeared that by the Customs Act of 1873 (53 Geo. 3, c. 33) a duty was imposed upon hides of 9s. 4d., but the Actomitted to state that it was to be 9s. 4d. per cwt., and to remedy this omission, another Customs Act (53 Geo. 3, c. 105) was passed later in the same year. Between the passing of these two Acts some hides were exported, and it was contended that they were not liable to pay the duty of 9s. 4d. per cwt., but Thomson C.B., in giving judgment for the Attorney-General, said : 'The duty in this instance was in fact imposed by the first Act, but the gross mistake of the omission of the weight for which the sum expressed was to have been payable occasioned the amendment made by the subsequent Act, but that had reference to the former statute as soon as it was passed, and they must be taken together as if they were one and the same Act'."
6. And for this court, it was firmly laid down in Central Bank of India v. Their Workmen, AIR 1960 SC 12. At paragraph 29, the Supreme Court had the following to say ([1959] 17 FJR 57 at p. 82) :
"What is a declaratory Act ? The following observations (in Craies on Statute Law, fifth edition, pp. 56-57) are apposite :
'For modern purposes, a declaratory Act may be defined as an Act to remove doubts existing as to the common law, or the meaning or effect of any statute. Such Acts are usually held to be retrospective. The usual reason for passing a declaratory Act is to set aside what Parliament deems to have been a judicial error, whether in the statement of the common law or in the interpretation of statutes. Usually, if not invariably, such an Act contains a preamble, and also the word "declared" as well as the word "enacted".' "
The Explanation to Section 221 was meant to clear any doubt, if there was any, in regard to the meaning and content of Section 221 of the Act. It is obvious thus that the content of the words "when an assessee is in default" must be held to be the same as mentioned in the Explanation from the day Section 221(1) was enacted, namely, 1961. Clearly, therefore, the assessee was in default at the relevant time by not paying the demand by March 15, 1971. The fact that the taxes had been paid in terms of regular assessment before the levy of penalty was of no consequence. He would still be liable to pay the penalty in terms of Section 221 and its Explanation.
7. I should like to make it absolutely clear that even de hors the Explanation, Section 212(3A) fixes the time when a person is a defaulter, i.e., when he has not acted in terms of Section 212(3A). The conclusion is, therefore, inescapable that the assessee had defaulted in payment of advance tax.
8. Learned counsel for the assessee submitted that the Central Board of Direct Taxes (CBDT) had issued Circular No. 18-D(XLV-14) of 1963 dated 15-7-1963 in regard to levy of penalty under Section 221 which reads as follows :
"429. Levy of penalty under Section 221--Clarification regarding, Attention is invited to Board's Circular No. 2-D of 1950, dated 1st March, 1950, in which Income-tax Officers were informed that in cases where the tax due had been paid up before the imposition of a penalty under Section 46(1) of the Indian Income-tax Act, 1922, the imposition of penalty would not be proper. Sub-section (1) of Section 221 of the new Act which corresponds to Section 46(1) of the old Act goes a step further and requires the Income-tax Officer to give the assessee an opportunity of being heard before levying any such penalty. A question has been raised whether, where an assessee who was in default, pays up the tax due before he is given a hearing by the Income-tax Officer under the proviso to the above sub-section, it would be proper to levy a penalty on the ground that even though there are no arrears on the date of hearing before the Income-tax Officer, a default had actually been committed on the due date. The Board have decided that no penalty should be levied if at the time of appearance before the Income-tax Officer in connection with the hearing given under the the proviso to Sub-section (1) of Section 221, the assessee proves that the tax has already been paid."
In terms of the above circular, it was contended that in view of the decision of the Central Board of Direct Taxes that no penalty should be levied, if at the time of the appearance before the Income-tax Officer in connection with the hearing given under the proviso to Sub-section (1) of Section 221, the assessee proves that the tax had already been paid, the assessee was entitled to rely upon the circular and the Revenue was not entitled to levy penalty on that score.
9. Learned senior standing counsel contended that the circular, if given effect to, cuts at the very root of the principle of realisation of advance/ payment of advance tax. The Income-tax Act postulates that where an individual's annual income is above a certain level, he is required to file an estimate of income and to pay advance tax accordingly. The last instalment, according to the assessee's own estimate, had to be paid by the 15th March of the relevant accounting year. The effect of the circular would be that an assessee need not pay advance tax at all. This would be nullifying the entire law contained in Sections 207 to 219 of the Act in regard to payment of advance tax. It is well established that rules--statutory or otherwise, are executive in nature and cannot override the provisions of the statute. The rules or circulars may explain or fill up the gap, but surely they cannot run counter to the will of Parliament contained in the statute and put the provisions of the Act on the shelves. Judged by those standards, the circular mentioned above was clearly issued against the provisions of the Income-tax Act in regard to the payment of advance tax. Thus contended senior standing counsel for the Revenue.
10. Learned counsel for the assessee, on the other hand, relied upon the case of Navnit Lal C. Javeri v. K. K. Sen, AAC [1965] 56 ITR 198 (SC), where Gajendragadkar C.J., observed as follows (at p. 203) :
"It is clear that a circular of the kind which was issued by the Board would be binding on all officers and persons employed In the execution of the Act under Section 5(8) of the Act. This circular pointed out to all the officers that it was likely that some of the companies might have advanced loans to their shareholders as a result of genuine transactions of loans, and the idea was not to affect such transactions and not to bring them within the mischief of the provision. The officers were, therefore, asked to intimate to all the companies that if the loans were repaid before the 30th June 1955, in a genuine manner, they would not be taken into account in determining the tax liability of the shareholders to whom they may have been advanced. In other words, past transactions which would normally have attracted the stringent provisions of Section 12(1B) as it was introduced in 1955, were substantially granted exemption from the operation of the said provisions by making it clear to all the companies and their shareholders that if the past loans were genuinely refunded to the companies, they would not be taken into account under Section 12(1B). Section 12(1B) would, therefore, normally apply to loans granted by the companies to their respective shareholders with full notice of the provisions prescribed by it."
The above observations were quoted with approval in Ellerman Lines Ltd, v. CIT [1971] 82 ITR 913 (SC), where Hegde J., after quoting from the above observations of Gajendragadkar C.J., laid down in paragraph 19 in unmistakable terms that direction given in the circulars in the earlier case clearly deviated from the provisions of the Act, yet the Supreme Court held that the circular is binding on the Income-tax Officers. Again in K. P. Varghese v. ITO [1981] 131 ITR 597 (SC), Bhagwati J. (as he then was), again observed as below (at pp. 612 and 613) :
"The two circulars of the Central Board of Direct Taxes to which we have just referred are legally binding on the Revenue and this binding character attaches to the two circulars even if they be found not in accordance with the correct interpretation of Sub-section (2) and they depart or deviate from such construction. It is now well-settled as a result of two decisions of this court, one in Navnitlal C. Javeri v. K. K. Sen, AAC [1965] 56 ITR 198 (SC) and the other in Ellerman Lines Ltd. v. CIT [1971] 82 ITR 913 (SC) that circulars issued by the Central Board of Direct Taxes under Section 119 of the Act are binding on all officers and persons employed in the execution of the Act even if they deviate from the provisions of the Act."
The observations in State Bank of Travancore v. CIT [1986] 158 ITR 102 (SC) made by Sabyasachi Mukharji J. to the effect that the circulars being executive in character cannot alter the provisions of the Act run counter to the observations of Gajendragadkar C.J. in the case of Navnitlal C. Javeri [1965] 56 ITR 198 (SC). The latter being judgment of five judges and the former of three judges, I am bound to follow the case of Navnitlal C. Javeri [1965] 56 ITR 198 (SC), It is thus obvious that in terms of the circular of the Central Board of Direct Taxes quoted above, no penalty could have been levied. The assessee was certainly in default, but the Central Board of Direct Taxes Circular being binding on the officers employed in execution of the Act under Section 5(8), they were bound to give effect to the circular. I am, therefore, of the view that the Tribunal was justified in cancelling the penalty imposed under Section 221 for failure to pay tax on the basis of estimate filed under Section 212(3A) after the tax had been paid on the basis of regular return.
11. For the reasons stated above, the question referred to us is answered in the affirmative in favour of the assessee and against the Revenue. There shall be no order as to costs.
12. Let a copy of this judgment be transmitted to the Income-tax Appellate Tribunal in terms of Section 260 of the Income-tax Act, 1961.
Nazir Ahmed J.
13. I agree.