1990 PLP 1121 (PTD)

S.S. SODHI, J.‑‑The matter here pertains to the liability of the partners of a firm for payment of penalty under section 271(I)(iii) of the Income‑tax Act, 1961, in respect of the amount received by way of refund of sales tax paid by the firm. The relevant assessment year here is 1968‑69. To give the factual background, in 1958, the firm, Behari Lai Piarey Lai, consisted of three partners, namely, Piarey Lai and his two sons, Lachhman Dass and Sat Parkash. Piarey Lai died on February 18, 1960, whereupon a fresh partnership deed was executed on February 22, 1960, with effect from February 18, 1960, bringing in Piarey Lai's widow, Basanti Devi, as a partner. Basanti Devi, in turn, died on March 22, 1962, and on her death, the partnership was reconstituted with Onkar, son of Kishan Chand, being taken in as a partner. This Onkar later went out of the partnership when the firm was again reconstituted leaving Lachhman Dass and Sat Parkash as its partners and this is how the firm was constituted during the relevant assessment year 1968‑69. The firm, Behari Lai Piarey Lai, had as sales tax liability of Rs. 8,261 which it discharged during the assessment years 1961‑62 and 1962‑63. On September 7, 1967, a sum of Rs.4,498 rounded off to Rs. 4,500 was received as refund of sales tax by the firm. This amount, when received, was credited in equal shares to the account of the two partners, namely, Lachhman Dass and Sat Parkash. It was not, however shown in the return either of the firm or of the two partners. On October 14, 1903, the said amount of refund of Rs. 4,500 was treated by the Income‑tax Officer as deemed income of the firm under section 41(1) of the Act as also Rs. 2,250 each, in the hands of the two partners and the assessment was finalised accordingly. Penalty proceedings were then initiated against the firm and the two partners. On September 21, 1970, the Inspecting Assistant Commissioner imposed a penalty of Rs. 4,500 on the firm and Rs. 2,250 each on the partners. This penalty was, however, deleted by the Tribunal against both the firm and the two partners, by its order of January 30, 1971, holding that no penalty provisions were applicable to "deemed income." The matter thereafter came up for reference to this Court, where it was held in C.I.T. v. Behari Lai Pyare Lai (1977) 107 ITR 587, that an amount which is deemed to be income under section 41(1) of the Act, would be an income for the non‑disclosure of which penalty could be levied under section 271(1)(c) of the Act. When the case went back to the Tribunal for decision on merits, the Tribunal, by its order of October 9, 1971, deleted the penalty against the firm and, by a separate order on the same day, also against the two partners. A reference was then sought by the Revenue which was allowed in the case of the firm, but declined in respect of the partners. In the reference with regard to the firm, this Court in C.I.T. v. Behari Lai Pyare Lai (1983) 141 ITR 32, upheld the order of the Tribunal deleting the penalty against the firm. As regards the reference declined in respect of the partners, the Revenue came up to this Court in Income‑tax Cases Nos. 91 and 98 of 1976. This Court granted the mandamus prayed for and this is what has led to the present reference, as also the connected Reference No. 86 of 1984 (C.I.T. v. Lachhman Dass). The question of law referred being: "Whether, on the facts and in the circumstances of the case, the Appellate Tribunal was right in law in deleting the penalty of Rs. 2,250 imposed upon the assessee by the Inspecting Assistant Commissioner under section 271(1)(iii) of the Income‑tax Act, 1961?" The question posed has clearly to be answered in the affirmative, in favour of the assessee and against the Revenue. Keeping in view the definition of "person" as given in section 2(31) of the Act, it will be seen that it includes a firm too which means that a firm will succeed a firm while its partners in their individual capacity are separate and distinct assessees. In the present case, deductions in respect of liability for sales tax were allowed to the firm. By virtue of section 41(1) of the Act, therefore, the amount would be deemed income in the hands of the assessee that got the deductions which, in this case, was the firm. This being so, it is not permissible under section 41(1) of the Act to add the amount in question, that is, that received as refund by the erstwhile partners of the firm in their individual capacity. No penalty could, therefore, be imposed upon them in respect of the said amount. The Tribunal was thus correct in deleting the penalty imposed upon these partners. The reference is answered accordingly. There will, however, be no order as to costs. Z.S./736/T ????????????????????????????????????????????????????????????????? Reference answered accordingly.