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Income‑tax Reference No. 11 of 1961, decided on 16th August 1962.

Advance tax

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---‑Instalments‑Whether four instalments manda tory‑Whether notice should be issued before June 15‑Whether opportunity to pay in four instalments should be given‑Penalty Income‑tax Act, 1922, Ss. 18‑A(1), (2), (9)(a) & 28.

It is not obligatory on the part of the Income‑tax Officer to serve a notice demanding the payment of advance tax under section 18‑A(1) of the Indian Income‑tax Act, 1922, before the 15th day of June of the relevant financial year and to afford an opportunity to the assessee to make the advance payment of tax in four instalments. The provisions relating to quarterly pay ment of advance tax are not mandatory but are directory only and it is open to the Income‑tax Officer, where the circumstances of the case require, to demand payment of advance tax in instal ments lesser in number than four.

Where the Income‑tax Officer served a notice on the assessees under section 18‑A(1) of the Indian Income tax Act, 1922, on November 21, 1956, for the payment of advance tax in two equal instalments on December 15, 1956, and March 15, 1957, none of the assessees paid the tax but exercised the option under section 18‑A(2) and filed an estimate of income below Rs. 6,700 according to which no advance tax was payable, but in due course the assessees filed regular returns disclosing an income of Rs. 20,568 each and the Income‑tax Officer imposed penalties on them under section 28 read with section 18‑A(9)(a) :

Held, (i) that the notice under section 18‑A(I) which requires the advance tax to be paid in two instalments was a valid notice ;

(ii) that the imposition of penalties was valid.

The order made under section 18‑A(1) of the Indian Income tax Act, 1922, and the notice of demand prescribed by rule 20(a) of the Indian Income‑tax Rules, 1922, are part of the same transaction ; they are not separate and distinct with a timelag between the two.

No show‑cause notice is required to be issued under section 18‑A(1) of the Act.

STATEMENT OF CASE

By these applications which are consolidated for the sake of convenience and as also they arise out of the common order, the respective assessees require the Appellate Tribunal to refer to the High Court certain questions of law which are alleged to arise out of the order of the Tribunal, which was a common order, in I. T. As. Nos. 8426 to 8428 of 1958‑59. Inasmuch as, in our opinion a question of law does arise out of the aforesaid order, we hereby draw up a statement of the case and refer it to the High Court of Maharashtra at Bombay under section 66 (1) of the Indian Income‑tax Act, 1922.

2. Three appeals were filed before the Tribunal. One was by the firm (I. T. A. No. 8426 of 1958‑59) and two others by the two assessees being partners (I. T. A. No. 8428 of 1958‑59 and I.T.A. No. 8427 of 1958‑59). Since in all these appeals the contentions were common and based on common facts the Tribunal disposed of all the appeals by a common order as stated above. Only the two assessee partners have sought a reference to the High Court under section 66(1) of the Indian Income‑tax Act as above.

3. By an order under section 18‑A(1) made on November 21, 1956, and served separately on the two assessee on Nov ember 22, 1956, the Income‑tax Officer called upon the assessee, Abdul Kassam, to pay an advance tax of Rs. 4,473, in two equal instalments on December 15, 1955, and March 15, 1957, and the assessee, Abdul Halim, to pay an advance tax of Rs. 4,521 in similar instalments and on the same dates for the assessment year 1957‑58. Each of the assessees, however, chose not to pay the tax as demanded, but exercised the option of filing an estimate under section 18‑A(2) each on December 5, 1957, whereby the tax payable was declared as "nil", In due course the assessee, Abdul Kassam, filed a regular return of his income on September 11, 1957, declaring an income of Rs. 20,568 and, similarly, the assessee, Abdul Halim, filed a regular return of his income on August 5, 1957, declaring an income also of the same amount of Rs. 20,568. As the tax payable on the basis of the income so returned was a positive figure and of a large amount, whereas the respective assessee had earlier estimated their liability towards advance tax as "nil" the Income‑tax Officer issued a show‑cause notice under section 28(3) of the Act which was served on them separately on November 29, 1957. The assessee duly showed cause, but the Income‑tax Officer was not satisfied with the explanation and he imposed a penalty of Rs. 784 on the assessee, Abdul Kassam, and of Rs. 798 on the assessee, Abdul Halim. Both the assessees went in appeal to the ‑Appellate Assistant Commissioner and the Appellate Assistant Commissioner accepted both the pleas of the assessees which had failed before the Income‑tax Officer. The first plea was that the order under section 18‑A(1) itself being illegal the estimate filed under section 18‑A(2) in substi tution thereof could not attract penalty. The second plea was that having regard to the fact that the books of accounts were not closed when the respective estimates under section 18‑A(2) were filed, the assessees could not be said to have furnished the estimate which they knew or had reason to believe to be untrue. The Department then came up in appeal to the Tribunal for the restoration of the Income‑tax Officer's order. The Tribunal accepted the appeals and restored the penalty.

4. The first submission on behalf of the assessee before the Tribunal was the same as before the Appellate Assistant Commissioner. The Tribunal did not accept the argument that an order under section 18‑A(1) must be made on or before the 15th June of any year. On the interpretation of section 18‑A(1) of the Income‑tax Act, the Tribunal held that the order under section 18‑A(1) could be made at any time on or after the 1st of April of any year. It particularly relied for this interpretation on the provision contained in clause (b) of section 18‑A(1) whereby if the notice of demand in pursuance of the order made under section 18‑A(1) was served on any one of the four instalment dates of 15th June, 15th September, 15th December and 15th March of any year, the tax shall be paid in one or more intalments on the remaining dates. The Tribunal father held that the order under section 18‑A(1) could not be said to be operative or effective until the notice of demand in pursuance thereto was served on assessee. If therefore, the law enjoined the payment of tax in less than four instalments, if such an order was served after any one of the four instalment dates, then the law must have permitted the making of an order under sec tion 18‑A(1) even after the 15th June of any year. The Tribunal has dealt with this contention in paragraph 7 of its common order. A copy of the said order of the Tribunal is Annexure "A" hereto and forms part of the case.

5. As regards the other plea of the assessee, the Tribu nal negatived the contention for reasons mentioned in paragraphs 5 and 6 of its common order above. Briefly, the Tribunal held that the assessee could not take shelter behind the plea that the books of accounts were not closed when the estimate was filed because it was implicit in an estimate that accuracy based on closed books of accounts was not to be imagined or contemplated. It further held that once the assessee had filed a return of income which, prima facie, put the estimate filed under section 18‑A(2) within the four corners of section 28‑A(9)(b) of the Act, it was for the assessee to prove that it was not so. The Tribunal had also regard to the fact that having filed the estimate the assessee had not chosen to revise this estimate under the proviso to section 18‑A(2) which required the assessee to send such a revised estimate at any time on or before the 15th of March and to make up the deficiency of tax paid on the basis of an earlier estimate. The finding that the assessees had furnished under subsection (2) of section 18‑A an estimate of the tax payable by them which they knew or had reason to believe to be untrue is based on the materials and facts so indicated in the Tribunal's common order above. This is purely a finding of fact.

6. The only questions of law that, in our opinion, arise are :

"(1) Whether the order made by the Income‑tax Officer under section 18‑A(1) of the Income‑tax Act and the notice of demand served in pursuance thereto on November 21, 1956, was valid

(2) Whether on the facts and in the circumstances of the case the imposition of the penalty on the applicant under section 28 read with section 18‑A(9)(a) of the Act was valid in law "

7. The draft statement of the case was placed on the table. Parties agree that all facts have been correctly stated and no material facts are omitted. The assessee, however, objects to the finding as set out in paragraph 5 of the case.

8. At the request of the assessee, the order of the Income‑tax Officer and the order of the Appellate Assistant Commissioner are annexed as Annexures "B" and "C" respectively.

9. The assessee objects to question No.1 as framed above. We see no reason to alter it as the question brings out adequately the point at issue. The assessee further requires the Tribunal to refer a question as to :

"Whether there was any material to show that the assessee had filed an estimate of income which he knew or had reason to believe to be untrue "

The material on which the finding of the Tribunal is arrived at is given in the order of the Tribunal and the question being one of appreciation of the evidence and as such it is a pure finding of fact.

Y. P. Trivedi with U. T. Shah and S. J. Mehta for the Assessees.

G. N. Joshi with R. J. Joshi for the Commissioner.

JUDGEMENT

TAMBE, J.

‑This is a consolidated reference under subsec tion (1) of section 66 of the Indian Income‑tax Act arising out of an order made under section 18‑A(1) and a notice of demand issued in pursuance of the order under section 29 of the Indian Income‑tax Act to two partners, Abdul Kassam and Abdul Halim Valimahomed. We are here concerned with the assessment year 1957‑58, the relevant previous year being one ended on 2nd November 1956. On 21st November 1956, the Income‑tax Officer made an order under section 18‑A(1) calling upon the partner, Abdul Kassam, to pay an advance tax of Rs. 4,473 to two equal instalments on December 15, 1956, and March 15, 1957. The Income‑tax Officer also similarly made an order under section 18‑A(1) calling upon the other partner, Abdul Halim Valimahomed, to pay advance tax of Rs. 4,521 in similar two instalments on December 15, 1956, and March 15, 1957. This notice along with the notice of demand under section 29 of the Act were served on both the partners on November 22, 1956. None of the assessees, however, paid any tax but exercised option under section 18‑A(2) of filing an estimate. According to them, their share of income earned by them fell below Rs. 6,700 and, therefore, no tax in advance was payable by them. Both the partners accordingly filed estimates raising the aforesaid conten tions on December 5, 1957, whereunder they declared the tax payable by them as "nil". In due course both the partners filed regular returns‑Abdul Kassam filed return of his share of income on September 11, 1957, while Abdul Halim filed it on August 5, 1957. Whereunder each one of them declared their income as amounting to Rs. 20,568. The Income‑tax Officer finding that tax was payable by both these partners on their income and find ing that they had filed an estimate as tax payable "nil", issued a notice under subsection (3) of section 28 calling upon them to show cause why no penalty should be imposed on them. Both the partners showed cause. Two contentions were raised by both these partners before the Income‑tax Officer. The first was that the order under section 18‑A(1) was itself illegal inasmuch as it did not afford an opportunity of paying the advance tax in tour instalments as contemplated by section 18‑A(1). In other words, the contention raised before the Income‑tax Officer was that a valid order under sub section (1) of section 18‑A could only be made before 15th of June and not thereafter. The order in the instant case having been made on 21st November 1956, was bad in law and, consequently, no penal consequence was attracted by reason of the failure on the part of the partners to file a proper estimate. The second contention raised was that, on the date the partners filed the estimates, the accounts of the year ending November 2, 1956, were not closed and, therefore, it could not be said that each of the partners had filed an estimate, which he knew or had reason to believe to be untrue. In rejecting the first contention, the Income‑tax Officer placed reliance on the provisions of section 18‑A(1)(b). As regards the second contention, the Income‑tax Officer held that the estimate was filed after the completion of the year and the assessee knew that it was not a correct return. At any rate, his failure to file a revised estimate by the 15th of March 1957, clearly showed that the assessees knew that the estimates filed by them were not correct. In this view of the matter, the Income‑tax Officer imposed a penalty of Rs 784 on the assessee, Abdul Kassam, and Rs. 798 on the assessee, Abdul Halim. Against these orders both the partners preferred appeals before the Appellate Assistant Commissioner and the Appellate Assistant Commissioner accepted both these contentions raised by the partners and allowed their appeals. In accepting the contentions of these partners, the Appellate Assistant Commissioner, after referring to the provision of clause (b) of section 18‑A(1), observed :

"From the above it is clear that the Income‑tax Officer can demand payment under section 18‑A within a shorter period and in lesser instalments provided the notice of demand was issued under section 29 in pursuance of an order under clause (a) of section 18‑A(1). As mentioned above, in this particular case the notice of demand was issued for the first time on November 21, 1956, and the Income‑tax Officer has not adduced before me any evidence that there was direction for the issue of the notice of demand in question prior to it. Hence the issue of the notice of demand under section 29 in this case was not in pursuance of the order under clause (a) of subsection (1) of section 18‑A."

Feeling aggrieved by the order of the Appellate Assistant Commissioner, the Department filed appeals before the Income‑tax Appellate Tribunal. These appeals were accepted by the Tribunal. The Tribunal reversed the orders of the Appellate Assistant Commissioner and has restored those of the Income‑tax Officer. In their application under subsection (1) of section 66 both these partners prayed that questions on both these points should be referred to this Court. The Tribunal, however, did not accept the prayer of the assessee to refer the question as to whether there was any material to show that the assessee had filed an estimate of income, which he knew or had reason to believe it to be untrue. According to the Tribunal its finding on that aspect of the case was a finding of fact. The Tribunal, however, has referred we following two questions arising out of the contentions raised by the partners as regards the validity of the orders made under section 18‑A(1) of the Act :

"(1) Whether the order made by the Income‑tax Officer under section l8‑A(1) of the Income‑tax Act and the notice of demand served in pursuance thereto on November 21, 1956, was valid

(2) Whether on the facts and in the circumstances of the case the imposition of the penalty on the applicant under sec tion 28 read with section 18‑A(9)(a) of the Act was valid in law "

In order to appreciate the contentions raised by counsels for the parties, it would be convenient to refer to the relevant provisions of section 18‑A, on which the arguments‑ advanced before us are based.

"18‑A. Advance payment of tax.‑(1)(a) In the case of income other than income chargeable under the head Salaries', the Income‑tax Officer may, on or after the 1st day of April in any financial year, by order in writing, require an assessee to pay quarterly to the credit of the Central Government on the 15th day of June, 15th day of September, 15th day of December and 15th day of March in that year, respectively, an amount equal to one‑quarter of the Income‑tax and super‑tax payable on so much of such income as is included in his total income of the latest previous year in respect of which he has been assessed, if that total income exceeded the maximum amount not chargeable to tax in his case by two thousand five hundred rupees. Such income‑tax and super‑tax shall be calculated at the rates in force for the financial year in which he is required to pay the tax, and shall bear to the total amount of income‑tax and super‑tax so calculated on the said total income the same proportion as the amount of such in clusions bears to his total income . . . .

Provided that, where the previous year of the assessee in respect of any source of income ends after the 31st day of December and before the 30th day of April the order in writing issued by the Income‑tax Officer requiring the payment of income‑tax and super‑tax on that source of income shall substitute for the four quarterly payments hereinbefore specifi ed, three payments of equal amount to be made on the 15th day of September, the 15th day of December and the 15th day of March respectively . . . . .

Provided further that, if after the making of an order by the Income tax Officer and before the 15th day of February of the financial year an assessment of the assessee or of the registered firm of which he is a partner is completed in respect of a previous year, later than that referred to in the order of the Income‑tax Officer, the Income‑tax Officer may make an amended order requiring the assessee to pay in one instalment on the specified date, or in equal instalments on the specified dates if more than one, falling after the date of the amended order, the tax computed on the revised basis are reduced by the amount, if any, paid in accordance with the original order ; but if the amount already paid exceeds the tax determined on the revised basis, the excess shall be refunded.

(b) If the notice of demand issued under section 29 in pursuance of the order under clause (a) of this subsection is served after any of the dates on which the instalments specified therein are payable, the tax shall be payable in equal instalments on each of such of those dates as fall after the date of the service of the notice of demand, or in one sum on the 15th day of March if the notice is served after the 15th day of December."

Mr. Trivedi appearing for the assessee contended than clause (a) of subsection (l) of section 18‑A directs the Income‑tax Officer to make an order requiring the assessee to pay advance tax in four instalments mentioned therein. It, therefore, necessarily follows that it is not open to the Income‑tax Officer to make an order calling upon the assessee to pay tax in advance in instalements lesser than four. In support of his arguments Mr. Trivedi further placed reliance on the first proviso, which speaks of grant of three instalments in a case where the previous year of the assessee in respect of any source of income ends after the 31st day of December and before the 30th day of April. It is his argument that if it was open to the Income‑tax Officer to call upon an assessee to pay tax in advance by instalements lesser in number than four, then there was no occasion for enacting this proviso.

Lastly, Mr. Trivedi contends that clause (b) of subsection (1) of section 18‑A would have application only to such cases where the order in pursuance of which a notice demanding advance payment of tax has been served before the 15th day of June. On the other hand, it is the contention of Mr. Joshi that it is not obligatory on the Income‑tax Officer to make an order under clause (a) of subsection (1) of section 18‑A calling upon the assessee to pay tax in advance in four instalments. According to him, it is open to the Income‑tax Officer to demand advance payment of tax in instalments lesser in number than four as the circumstances of the case would demand, and in support of his argument Mr. Joshi placed reliance on the word "may" occurring in clause (a) of subsection (1) of section 18‑A.

In our opinion, reading the aforesaid provisions together, the contention raised by Mr. Joshi is well founded. Clause (a) of subsection (1) of section 18‑A speaks of payment of tax in advance by an assessee. In other words, it speaks of payment of tax by an assessee in respect of his income of any year prior to the stage of completion of a regular assessment in respect of the income of that year. The liability of the assessee to pay the tax in advance under this clause or, in other words, the power of the Income‑tax Officer to demand advance payment of tax arises on fulfilment of two conditions : firstly, there must be a completed assessment in respect of the assessee's total income of some earlier year and, secondly, that assessment must disclose that the total chargeable income of the assessee exceeds by Rs. 2,500 the maximum amount of non‑taxable income. The amount of tax the payment of which the Income‑tax Officer can ask, has to be based on the aforesaid amount of income ascertained in a complet ed assessment at certain rates as mentioned is clause (a). These being the contents of clause (a) of subsection (1) of section 18‑A, it is difficult to accept the argument of Mr. Trivedi that the order under this clause must be made after the 1st of April and not later than the 15tn day of June. As already stated, the power to make an order under this clause arises only when there is a completed assessment in respect of income of any earlier years, which exceeds a certain limit. Having regard to the procedure adopted in the case of assessment, it cannot b conceived that in every case, where there is a liability on the part of the assessee to pay tax in advance, there would be a completed order of assessment in respect of any earlier year between the two dates, 1st of April and the 15th of June. These being the circumstances under which "The Income‑tax Officer may, on or after the 1st day of April in any financial year, by order in writing; require an assessee to pay quarterly to the credit of the Central Government on the 15th day of June, 15th day of September, 15th day of December and 15th day of March in that year, respectively, an amount equal to one‑quarter of the income‑tax and super‑tax payable on so much of such income as is included in his total income of the latest previous year in respect of which he has been assessed .." In our opinion it is open to the Income‑tax Officer to demand payment of tax in advance in instalments lesser in number than four. The provisions relating to quarterly payment thereof in four instalments are not mandatory but are only directory as the use of the word "may" and the absence of the words "but before the 15th of June" after the words "on or after 1st of April" would indicate.

Provisions of clause (b) render further support to the construction, which we have placed on clause (a). It provides that, if the notice of demand is served on the assessee after any of the dates on which the instalements specified therein were payable, then the amount mentioned in the notice would be payable in equal instalments as may still remain due. The clause goes further and provides that even if the notice is served on the 15th day of December i.e., after the date of the third instalment mentioned in clause (a), the entire amount of tax would be payable in one lump sum by the 15th of March. 7 he argument of Mr. Trivedi is that to enable the Income‑tax Officer to avail of this clause, it must be shown that there was an order validly made under clause (a) of section 18‑A (1) prior to 15th April. Now, this argument presupposes that an order under clause (a) and a notice of demand under clause (b) are two separate and distinct things, there being a time‑lag between the two. This, however, does, not appear to be the correct position when one looks to the relevant rules. Section 59 of the Act empowers the Central Board of Revenue to make rules for carrying out the purpose of this Act. Subsection (5) of section 59 provides :

"Rules made under this section shall be published in the official Gazette, and shall thereupon have effect as if enacted in this Act."

In exercise of the powers conferred by section 59 of the Act, rules have been framed by the Central Board of Revenue and they have been duly published. Rule 20(a) provides for notice of demand to be issued under section 29 in pursuance of the order made under subsection (1) of section 18‑A and also prescribes the form of the notice as well as the form of the order under section 18‑A(1). It shows that the order made under subsection (1) of section 18‑A and the notice of demand are part of the same transaction. Mr. Joshi appearing for the revenue stated before us that the forms printed in accordance with rule 20(a) show that on one side of the paper there is a form of the notice of demand and on the other side of the paper is that of an order made under section 18‑A, and this paper is served on an assessee under clause (b) of subsection (1) of section 18‑A. Mr. Trivedi has not refuted this position. Now, these rules, by virtue of subsection (5) of section 59, have effect as if enacted in the Act. It follows that the Legislature clearly contemplated cases where the assessee will have to pay tax in advance in instalments lesser in number than four. There might even be cases where the advance payment of tax would have to be made by an assessee in one instalment, i.e., where the notice of demand has been served on an assessee after the 15th day of December.

The other argument advanced by Mr. Trivedi is that once an order is made under section 18‑A(l) assessee knows about his jeopardy that he will have to pay tax in advance ; once the assessee knows his jeopardy before the 15th of June then it is immaterial when actually notice of demand is served on him and in that case he may be required to make advance payment of tax in instalments lesser than four or even in one instalment.

This argument is hardly tenable. No show‑cause notice is required to be issued under subsection (1) of section 18‑A of the Act. On the other hand, the order that is made by the Income‑tax Officer is made behind the assessee's back. It is founded on a completed assessment of any earlier year. The assessee knows about this order for the first time only when notice of demand is served on him, and clause (b) contemplates that if the notice of demand is served on him after the date of instalments mentioned in clause (a) then the assessee is required to pay the amount of tax in equal instalments as the instalments may still be due or even in one instalment.

We also find it difficult to accept Mr. Trivedi's argument that the provisions of the first proviso clearly indicate that it is obligatory on the Income‑tax Officer to afford an opportunity to the assessee to make the advance payment of tax in four instalments. Now, under clause (a), the Income‑tax Officer is empowered to call upon the assessee to pay tax in advance in four instalments payable on 15th June, 15th September, 15th December and 15th March. There are some assessees whose accounting year ends after the 31st of December and before the 30th of April. In such cases also the Income‑tax Officer could have, by making an order before 15th of June called upon the assessee to pay tax in advance in four instalments. That would, to a certain extent, result in hardship to the assessees. For instance, an assessee having an accounting year commencing on 30th of April may be required to pay instalment of advance payment of tax on 15th June i.e., hardly within a period of a month and a half. That would undoubtedly be a hardship because an assessee would be required to pay the tax in advance before he had even an opportunity of earning any income within a period of a month and a half and it is for this reason and to avoid hardship that the provisions of the first proviso have been made. The intention appears to be that the assessee should at least have four and a half months' period to earn income before he is called upon to pay the instalment of tax in advance.

For reasons stated, we answer both the questions in the negative. Assessee shall pay the costs of the Department.

Questions answered in the negative.

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