Commissioner of Income-Tax, Delhi vs S. Teja Singh

Rewritten Version Notice: This is a rewritten version of the original judgment.

Court: Supreme Court of India

Case Number: Civil Appeal No. 122 of 1957

Decision Date: 5 November 1958

Coram: P.B. Gajendragadkar, A.K. Sarkar, Venkatramana Aiyar

In the matter titled Commissioner of Income‑Tax, Delhi versus S. Teja Singh, the Supreme Court of India delivered its judgment on 5 November 1958. The case was heard by a bench comprising Justice T. L. Venkatarama, Justice P. B. Gajendragadkar and Justice A. K. Sarkar. The petitioner was the Commissioner of Income‑Tax, Delhi and the respondent was S. Teja Singh. The decision is reported in the 1959 volume of the All India Reporter at page 352 and in the Supreme Court Reporter Supplement (1) at page 394, with subsequent citations appearing in various law reports. The legal issue concerned the application of provisions of the Indian Income‑Tax Act, 1922 (XI of 1922), specifically sections 18A(3), 18A(9), 22, 23 and 28, relating to a new assessee’s failure to send an estimate of tax and the competency of the income‑tax officer to levy a penalty.

The headnote notes that the respondent had not been assessed to income‑tax before the assessment year 1948‑49. On 4 July 1949, he voluntarily filed returns showing an income of Rs 4,494 for the assessment year 1948‑49 and Rs 31,646 for the assessment year 1949‑50, but he did not send an estimate of tax on his income as required by section 18A(3). The income‑tax officer then acted under section 28 read with section 18A(9) and imposed a penalty for both assessment years. The Appellate Tribunal held that the penalty order was ultra vires because, in its view, section 28 applied only when a person failed to furnish a return after receiving a notice under section 22 or 34, and no notice could be issued for the estimate required by section 18A(3). The Punjab High Court, on reference, adopted the Tribunal’s view.

However, the Supreme Court held that the “legal fiction” contained in section 18A(9) deeming a failure to comply with section 18A(3) as a failure to furnish the return of total income brings the provisions of section 28 into play. Accordingly, the Court concluded that the income‑tax authorities were competent to levy a penalty under section 28 read with section 18A(9)(b) where an assessee fails to comply with the estimate requirement in section 18A(3). The judgment set out the relevant provisions of the 1922 Act. The civil appellate jurisdiction for this case was Civil Appeal No. 122 of 1957, an appeal from the order dated 4 November 1954 of the Punjab High Court (Circuit Bench) at Delhi in Civil Reference No. 15 of 1953. Counsel for the appellant included R. Ganapathy Iyer, R. H. Dhebar and D. Gupta, while counsel for the respondent included P. M. Mukhi and Gopal Singh representing Udhai Bhan Choudhry.

The counsel for the intervenor, Dalmia Jain Aviation Ltd., which is now known as Asia Udyog Ltd., was represented by P. M. Mukhi and Ganpat Rai. The judgment dated 5 November 1958 was delivered by Justice Venkatarama Aiyar. The matter before the Court was an appeal against a decision of the Punjab High Court rendered in a reference made under section 66(1) of the Indian Income‑tax Act, 1922, hereafter referred to as the Act. According to the factual background, the respondent had never been subjected to an income‑tax assessment before the assessment year 1948‑49. On 4 July 1949, the respondent voluntarily filed returns stating a total income of Rs 4,494 for the accounting year 1947‑48, which was the preceding year for the assessment year 1948‑49, and a total income of Rs 31,646 for the accounting year 1948‑49, which was the preceding year for the assessment year 1949‑50. Subsequently, by orders issued on 25 August 1949, the Income‑tax Officer assessed the income for the assessment year 1948‑49 at Rs 6,277 and for the assessment year 1949‑50 at Rs 36,281. The correctness of these assessment orders was not contested in the appeal. The issue that required determination was the validity of an order dated 9 October 1950, which the Income‑tax Officer had issued under section 28 read with sections 18A(3) and 18A(9) of the Act. For the purpose of this appeal, the Court set out the relevant statutory provisions. Section 18A(3) provides that any person who has not previously been assessed, and whose total income for the previous year is likely to exceed six thousand rupees, must, before the fifteenth day of March of each financial year, forward to the Income‑tax Officer an estimate of the tax payable on the portion of his income to which section 18 does not apply, calculated as prescribed in sub‑section (1). The person must also pay the estimated amount on the dates specified in that sub‑section, in instalments that may be revised in accordance with the proviso to sub‑section (2). Section 18A(9) states that if, during regular assessment proceedings, the Income‑tax Officer is satisfied that an assessee either (a) has furnished estimates under sub‑section (2) or (3) that he knew or had reason to believe were false, or (b) has, without reasonable cause, failed to comply with the provisions of sub‑section (3), then the assessee shall be deemed, in case (a), to have deliberately provided inaccurate income particulars, and in case (b), to have failed to file the return of his total income. In either situation, the provisions of section 28 shall apply accordingly. The statute also contains a proviso that limits the quantum of penalty that may be imposed.

The Court then proceeded to quote the text of section 28 of the Act, which outlines the circumstances under which a penalty may be levied for failure to file a return, failure to comply with notices, or for concealment or deliberate inaccuracy of income particulars. The provision authorises the Income‑tax Officer to direct the assessment of a penalty not exceeding one and a half times the tax amount in cases of non‑filement of returns, and to impose appropriate penalties in the other enumerated circumstances. This statutory framework formed the basis for evaluating the legality of the October 1950 order issued under the combined operation of sections 28, 18A(3) and 18A(9).

Section 28(1) of the Act provides that when the Income‑tax Officer, in the course of any proceedings under the Act, is satisfied that a person has acted without reasonable cause in certain specified ways, the Officer may direct that person to pay a penalty. The provision lists three categories of default. The first category, clause (a), covers a person who, despite a notice issued under sub‑section (1) or sub‑section (2) of section 22 or under section 34, fails without reasonable cause to file the required return of total income, or who fails to file it within the time allowed or in the manner prescribed by such notice. The second category, clause (b), concerns a person who, without reasonable cause, fails to comply with a notice issued under sub‑section (4) of section 22 or under sub‑section (2) of section 23. The third category, clause (c), refers to a person who conceals the particulars of his income or deliberately furnishes inaccurate particulars of such income. When any of these situations is established, the Officer may order the person to pay, in addition to any income‑tax and super‑tax that may be payable, a sum not exceeding one and a half times the amount of such tax. In the case of clause (a), the penalty is assessed in addition to the tax and super‑tax actually payable; in the cases of clauses (b) and (c), the penalty is measured by one and a half times the amount of tax and super‑tax that would have been avoided if the income as returned had been accepted as correct.

The Income‑tax Officer concluded that the respondent had failed to submit an estimate of tax on his income as required by section 18A(3). Accordingly, the Officer held that the respondent was liable to be proceeded against under section 28 and imposed a penalty of Rs 40 for the assessment year 1948‑49 and Rs 1,000 for the assessment year 1949‑50. On appeal, the Appellate Assistant Commissioner upheld the penalty for 1948‑49 but set aside the penalty for 1949‑50, reasoning that because the respondent had been assessed for 1948‑49, he ceased to be a “new assessee” for the year 1949‑50; consequently, section 18A(3) was no longer applicable to him. The Income‑tax Officer challenged the cancellation of the 1949‑50 penalty before the Appellate Tribunal. The Tribunal rejected the Assistant Commissioner’s view that the respondent was no longer a new assessee within the meaning of section 18A(3). However, the Tribunal held that the Income‑tax Officer’s order imposing a penalty under section 28 was ultra vires, because section 28 applies only when a person fails to file a return after being required to do so by a notice under section 22 or section 34, and such notices cannot be issued in connection with the estimate of tax required by section 18A(3). The Tribunal therefore dismissed the appeal. The Tribunal then referred to the High Court the question of whether, on a proper construction of section 18A(9)(b) read with section 28 of the Indian Income‑tax Act, a penalty may be imposed for a total failure to comply with the provisions of section 18A(3).

The reference submitted by the appellant raised the question whether, under Section 28(1) read in conjunction with Section 18A(9) of the Income‑Tax Act, 1922, the tax authorities were empowered to levy a penalty where a person had entirely failed to comply with the requirements of Section 18A(3). The matter was considered by the Bench consisting of Chief Justice Bhandari and Justice Falshaw, who affirmed the view expressed by the Appellate Tribunal. The Tribunal had held that the procedural requirements concerning notice, as stipulated in Sections 22(1) or 22(2), must be satisfied even when a penalty action is sought under Section 28 for a failure to obey Section 18A(3). Because those notice conditions had not been fulfilled, the Tribunal concluded that the order imposing the penalty was invalid. After receiving a certificate pursuant to Section 66A(2) of the Act, the appellant brought the present appeal before this Court. The sole issue for determination is whether, according to Section 28(1) together with Section 18A(9), the tax authorities may impose a penalty on a person who has not complied with Section 18A(3). The lower court judges had answered this in the negative, relying almost exclusively on the language of Section 28, which they interpreted as not covering a failure to satisfy Section 18A(3). Section 28(1) authorises penalties in three distinct categories, identified as clauses (a), (b) and (c). Clause (b) pertains to a failure to produce documents, accounts or other evidence that the assessee was required to furnish under Section 22(4) or Section 23(2), and it is irrelevant to the present question. The remaining clauses, (a) and (c), are expressed in plain terms: clause (a) deals with the failure to file a return, while clause (c) addresses the filing of a false return. The learned judges observed that if an estimate of tax is submitted under Section 18A(3) and that estimate is deliberately inaccurate, such conduct would fall within the ambit of Section 28(1)(c) read with Section 18A(9)(a), thereby attracting a penalty. However, they held that when an assessee simply fails to furnish any estimate as required by Section 18A(3), the penalty provision of Section 28(1) does not apply. Their reasoning was that sub‑clause (1) of Section 28 is triggered only where a person fails to file a return after having been required to do so by a notice issued under Section 22(1), 22(2) or 34, or where the person fails to comply with the time‑frame or manner prescribed in such notice. Since no notice can be issued under those sections for the purpose of obtaining an estimate under Section 18A(3), the condition is absent. The judges articulated this view by stating, “In the first place, a person who fails to send an estimate under Section 18A(3) cannot be said to have failed to furnish the return of his total income which he was required to furnish in response to a notice issued under Section 22 or Section 34; secondly, the said person cannot be said to have failed to…”

The Court observed that the earlier reasoning was erroneous because it ignored the legal fiction created by section 18A(9)(b) of the Act. That provision states that when an assessee fails to comply with section 18A(3), “shall be deemed to have failed to furnish the return of his total income and the provisions of section 28, so far as may be, shall apply accordingly.” In effect, the failure to send an estimate of tax under section 18A(3) is treated as a failure to file a return of income under section 22. The Court emphasized that this fiction implies that the estimate required by section 18A(3) is distinct from the return required by section 22, and that understanding this distinction is essential for appreciating the full impact of the statutory fiction. By deeming the omission of an estimate as a failure to furnish a return, the statute pulls the estimate onto the same footing as a return for the purposes of applying the penalties in section 28. Consequently, the Court highlighted that the fiction does not merely equate the two documents but treats the omission of the estimate as a default in filing a return, thereby triggering the provisions of section 28.

To clarify the distinction, the Court explained that under section 3 of the Act, tax is payable on the income of the previous year, and a statement of that income can be furnished only after that year ends. Section 22 dictates when such a statement—referred to as a “return”—must be filed in the assessment year, with subsections (1) and (2) providing for notices and specifying the time limit for compliance. In contrast, section 18A(3) requires the assessee to send an estimate of tax on the income of the accounting year before the 15th day of March of that same year. This estimate is not called a return because it is prepared before the year ends and therefore can only be an estimate. The assessee must still file a return of income for the accounting year under section 22, and sections 18A(4) and (5) provide for the adjustment of any advance tax paid under the estimate against the final tax liability computed under section 23. Thus, there is a clear separation between a return of income, which can be filed only in the assessment year, and an estimate of tax, which must be submitted in the year of account. It is against this backdrop that the legal fiction in section 18A(9)(b)—that failure to send an estimate is deemed to be a failure to furnish a return—must be applied.

In this matter, the respondent argued that the operation of section 18A(9)(b) was limited to placing the estimate required by section 18A(3) on the same level as the return required by section 22 for the purposes of section 28, and that this construction did not remove the other conditions set out in section 28 on which an action and a penalty could be imposed, one of those conditions being the issuance of a notice under section 22(1) or section 22(2). The Court, however, observed that section 18A(9)(b) does more than simply declare that an estimate filed under section 18A(3) shall be treated as a return. The provision expressly provides that the failure to file an estimate in accordance with section 18A(3) shall be deemed to be a failure to make a return. Such a deemed failure cannot exist unless a notice under section 22(1) or section 22(2) has first been issued and the taxpayer has subsequently defaulted in complying with that notice. Consequently, the legal fiction created by section 18A(9)(b) necessarily includes the fiction that a notice under section 22 was served and remained unheeded. The Court noted that it is a well‑settled principle of interpretation that, when construing a legal fiction, one must assume all the factual circumstances on which the fiction can operate. In support of this approach, the Court quoted Lord Asquith’s observations in East End Dwellings Co. Ltd. v. Finsbury Borough Council, stating that when one is required to treat an imagined state of affairs as real, one must also imagine the consequences and incidents that would inevitably follow if that imagined state were in fact real. Applying this principle, the Court held that the fiction in section 18A(9)(b) meaning that the failure to file an estimate is to be deemed a failure to file a return obliges the conclusion that all the factual ingredients necessary for a failure to file a return – namely, the issuance of the required notice under section 22 – must be deemed to exist. Thus, on the basis of this fiction, section 28 would apply in its ordinary terms. The respondent also raised an argument based on the use of the definite article “the” preceding the word “return” in section 18A(9)(b), contending that it referred only to the specific return to be furnished under section 22 and therefore required a prior notice under that section before any action under section 28 could be taken. The Court, having already accepted that the fiction in section 18A(9)(b) includes the deemed issuance of a notice, found that this additional argument did not merit further consideration.

In this case the Court observed that, under section 22, a notice must have been issued either pursuant to subsection 1 or subsection 2 before any action could be taken under section 28. The Court held that, because the fiction created by section 18‑A(9)(b) is expressly intended to treat the failure to send an estimate under section 18‑A(3) as equivalent to the failure to furnish a return under section 22, it necessarily assumes that the requisite notice under section 22(1) or 22(2) had been issued; consequently, that contention required no further examination. The respondent later argued that a fiscal statute, particularly one that imposes a penalty, must be construed strictly and that, where the language of the enactment is not sufficiently explicit to reach the subject, the revenue claim should fail. To support this position, the respondent relied on observations from Vestey’s Executors v. Inland Revenue Commissioners, which stated that Parliament may fall short of its purpose in attempting to keep pace with tax avoidance, that this misfortune harms honest taxpayers and disappoints the Inland Revenue, and that courts will not expand the terms of taxing Acts to compensate for legislative gaps; otherwise, courts would be over‑stretching statutory language to tax persons they disapprove of. The Court noted that such observations would be appropriate only if the language of the enactment left any doubt about legislative intent. However, the Court found that section 18‑A(9)(b) plainly declares its object – to bring the position of a person who fails to send an estimate under section 18‑A(3) into alignment with that of a person who fails to furnish a return under section 22 – and that this objective is achieved through the enacted fiction. Applying the principles from East End Dwellings Co. Ltd. v. Finsbury Borough Council, the Court held that the true effect of the fiction is to import the issuance of a notice under section 22, thereby satisfying the conditions prescribed in section 28 and allowing a penalty to be imposed for non‑compliance with section 18‑A(3) without any need to stretch the language. The Court then turned to an aspect of the question that strongly reinforced this conclusion. It observed that, if the construction advocated by the respondent were adopted, section 18‑A(9)(b) would become wholly nugatory, because sections 22(1) and 22(2) could not in any way apply to the advance estimates required by section 18‑A(3). Accepting that construction would mean that, although the legislature enacted section 18‑A(9)(b) expressly to equate the failure to send estimates with the failure to file returns, the provision would fail to achieve its intended purpose, an outcome the Court deemed unacceptable.

In considering the operation of section 28, the Court observed that the provision clearly failed to achieve the purpose for which it was enacted. The Court held that any interpretation leading to such a result must be avoided wherever possible, invoking the maxim “ut res magis valeat quam pereat.” The Court referred to the authority in Curtis v. Stovin [1889] 22 Q.B.D. 513 and, in particular, to the observations of Fry, L.J., at page 519, which stated that the only alternative construction would cause the plain intention of the legislature to be defeated by a minor imperfection in the language of the section. Fry warned that adopting that construction would amount to construing the Act in a manner that defeats its object rather than carrying its object into effect. The Court also cited the treatises of Craies on Statute Law (page 90) and Maxwell on The Interpretation of Statutes, Tenth Edition (pages 236‑237) for the same principle. Further, the Court recalled Lord Dunedin’s remark in Whitney v. Commissioners of Inland Revenue [1925] 10 Tax Cas. 88, 110 that a statute is intended to be workable and that a court’s interpretation should seek to secure that object unless a crucial omission or an explicit direction renders the objective unattainable. Applying these principles, the Court concluded that the Income‑Tax authorities were competent to impose a penalty under section 28 read together with section 18‑A(9)(b) where there had been a failure to comply with section 18‑A(3). Accordingly, the Court set aside the order of the lower court, answered the reference in the affirmative, granted the appellant his costs in this Court and the lower Court, and allowed the appeal.