Kerala High Court
Commissioner Of Income-Tax vs Chembara Peak Estates Ltd. on 25 August, 1989
Equivalent citations: [1990]183ITR471(KER)
Author: K.S. Paripoornan
Bench: K.S. Paripoornan
JUDGMENT K.A. Nayar, J.
1. The question arising for consideration in this income-tax referred case is whether paucity of funds is a good and, sufficient reason for not imposing penalty under Section 221(1) of the Income-tax Act, 1961. The assessee failed to pay the advance tax which fell due on December 15, 1977, for the assessment year 1978-79. In reply to a notice issued by the Income-tax Officer, the assessee explained that the default was on account of its unfavourable financial position which became worse because of the extra wages that had to be paid as a result of the conciliation settlement dated August 11, 1977. But the assessee informed the Income-tax Officer that it had already made arrangements for the payment of the demand. Nevertheless, the Income-tax Officer imposed a penalty of Rs. 16,990 under Section 221(1) of the Income-tax Act, 1961.
2. On appeal, the Commissioner of Income-tax (Appeals) cancelled the penalty. The Department went in appeal before the Tribunal and the Tribunal upheld the order of the Commissioner of Income-tax (Appeals), It is thereafter that the Commissioner of Income-tax got the following question of law arising out of the order of the Tribunal dated October 1, 1981, in I. T. A No. 35 (Coch) of 1980, referred to this court:
"Whether, on the facts and in the circumstances of the case, the Tribunal was justified in deleting the penalty levied under Section 221(1) of the Income-tax Act, 1961 ?"
We heard counsel.
3. Under Section 210 read with Section 211 of the Act, the second instalment of advance tax had to be paid by the assessee on December 15, 1977, for the assessment year 1978-79. For default in payment, penalty will be attracted by virtue "of Section 221. The relevant portion of Section 221 reads as under :
"221. Penalty payable when tax in default--(1) When an assessee is in default or is deemed to be in default in making a payment of tax, he shall, in addition to the amount of the arrears and the amount of interest payable under Sub-section (2) of Section 220, be liable, by way of penalty, to pay such amount as the Income-tax Officer may direct, and in the case of a continuing default, such further amount or amounts as the Income-tax Officer may, from time to time, direct, so however, that the total amount of penalty does not exceed the amount of tax in arrears :
Provided that before levying any such penalty, the assessee shall be given a reasonable opportunity of being heard :
Provided further that where the Income-tax Officer is satisfied that the default was for good and sufficient reasons, no penalty shall be levied under this section." (rest omitted)
4. This section provides for imposition of penalty for defaults in payment of tax including advance tax under Section 210. But the liability to pay penalty does not arise merely upon proof of default. In Hindustan Steel Ltd. v. State of Orissa [1972] 83 ITR 26, the Supreme Court held that (headnote) :
"Penalty will not ordinarily be imposed unless the party obliged either acted deliberately in defiance of law or was guilty of conduct contumacious or dishonest, or acted in conscious disregard of its obligation. Penalty will not also be imposed merely because it is lawful to do so. Whether penalty should be imposed for failure to perform a statutory obligation is a matter of discretion of the authority to be exercised judicially and on a consideration of all the relevant circumstances. Even if a minimum penalty is prescribed, the authority competent to impose the penalty will be justified in refusing to impose penalty, when there is a technical or venial breach of the provisions of the Act or where the breach flows from a bona fide belief that the offender is not liable to act in the manner prescribed by the statute."
5. Section 221 requires a reasonable opportunity to be given to the asses-see of being heard before imposing any penalty. It is further provided that where the Income-tax Officer is satisfied that the default was for good and sufficient reasons, no penalty shall be levied. Thus, the imposition of penalty is not an automatic consequence of the default. The expression "may direct" in Section 221 also indicates that the imposition of penalty is not mandatory but the same is discretionary. The discretion, of course, will have to be exercised judiciously according to well-known principles. In CIT v. Raunaq and Co. P. Ltd. [1983] 140 ITR 407 (Delhi), the Tribunal cancelled the penalty levied under Section 221 for the assessment year 1965-66 taking into account the fact that the assessee could not pay the tax because of its financial difficulties which prevented the assessee from paving the whole amount in a lump sum. The Delhi High Court held in that case thus (at p. 410) : .
"We are of the opinion that the question for decision in this case was ultimately a question of fact. It is no doubt true that Section 221 enables the Income-tax Officer to impose a penalty where an assessee is in default in making a payment of tax. But it appears to us that the imposition of a penalty cannot be an automatic consequence of a default by way of non-payment of tax. In our opinion the decision of the Supreme Court in the case of Hindustan Steel Ltd. [1972] 83 ITR 26, has direct relevance to this issue and it has in fact been held in a large number of decision's even under the Income-tax Act that the principles of this decision would apply to the imposition of a penalty under the Income-tax Act also."
6. It was also held that the existence of good and sufficient reasons may be a ground to persuade the Income-tax Officer not to impose a penalty under Section 221. In fact, the second proviso clearly says that no penalty shall be levied where the Income-tax Officer is satisfied that the default was for good and sufficient reasons. Paucity of funds and financial stringency have been considered good and sufficient reasons for explaining inability to pay the tax demanded in CIT v. Bhikaji Ramchandra [1989] 183 ITR 478 (Bom) (Appx.) (infra) ; CIT v. Mysore Fertiliser Co. [1984] 145 ITR 91 (Mad) ; Addl. CIT v. Free Wheels India Ltd. [1982] 137 ITR 378 (Delhi) ; CIT v. Jaipur Electro P. Ltd. [1990] 183 ITR 476 (Raj) (Appx. 1) (infra) ; Nachimuthu Industrial Association v. CIT [1980] 123 ITR 611 (Mad). In Bhauram Jodhraj Properties (P.) Ltd. v. CIT [1977] 108 ITR 305 (Gauhati), the plea that there was shortage of liquid cash because the assessee had invested the same in heavy construction work was not accepted by the Income-tax Officer as sufficient ground. Similarly, in Juggilal Kamlapat Cotton Spg. and Wvg. Mills Co. Ltd. v. CST [1979] Tax LR 1773, the Allahabad High Court also held that diversion of sales tax realised to a sister concern will not constitute a reasonable ground. Therefore, whether the facts of a given case will constitute good and sufficient reason for not imposing a penalty is a question of fact.
7. In the case in question, the Commissioner of Income-tax (Appeals) held that there was a reasonable cause for the default in the payment of the advance tax instalment The Commissioner of Income-tax (Appeals) accepted the contention of the assessee that it had to meet heavy liabilities during the period, viz., agricultural income-tax of Rs. 18,90,000 from September, 1977, to March, 1978, bonus payments of Rs. 4,50,000 for 1976-77 on November 17, 1977, and arrears of wages of Rs. 5,50,000 on September 29, 1977. The Tribunal adverted to this fact and held that the assessee has been able to establish that it was in a tight position financially and that it did not have the funds necessary to meet its liabilities. Therefore, in the light of the decision of the Madras High Court in Nachimuthu Industrial Association v. CIT [1980] 123 ITR 611, the Tribunal held that the paucity of funds could be considered to be a reasonable cause taking into account the other circumstances as well.
8. It was held in a recent judgment of this court in T. R. C. Nos. 32 and 33 of of 1989 that the crucial words "good and sufficient reasons" should receive a reasonable view, which will effectuate and render meaningful the levy, assessment and recovery or collection of tax assessed or due under the Act. The said words should receive such an interpretation which will render it possible to achieve effective, speedy and proper implementation of the provisions of the Act and, in particular, appropriate measures to safeguard the interests of the Revenue.
9. The Tribunal, on a consideration of the entire aspects of the case, found that the assessee has established that it was in a tight position financially. When the Tribunal found that want of sufficient liquid funds is reasonable cause, it cannot be regarded that the finding is based entirely on an unreasonable view of facts. The Tribunal entered a finding of fact relating to financial stringency of the assessee and accepting the same as good and sufficient reason, cancelled the levy. We cannot say that the Tribunal, in so doing, committed an error in cancelling the penalty.
10. In the circumstances, we answer the question referred to us in the affirmative, that is, in favour of the assessee and against the Revenue.
11. A copy of this judgment under the seal of the High Court and the signature of the Registrar shall be forwarded to the Income-tax Appellate Tribunal, Cochin Bench.