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Reliance Industries Ltd. Versus Commissioner of Income-tax-Mumbai

2015 (7) TMI 812 - BOMBAY HIGH COURT

Levy of penalty u/s. 221 - failure to pay tax deducted at source within the prescribed time - Whether the interpretation placed by the Tribunal upon Sections 221 and 201 of the Income Tax is correct confirming the levy of penalty upon the appellant to the extent of 5% of the TDS? - Held that:- Section 201(1) of the Act itself provides that where there is failure of an assessee to deduct tax and pay to the revenue, such an assessee is deemed to be in default. The failure to deposit in time is acc .....

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elf not wipe away the liability to penalty under Section 221 of the Act. The submission on behalf of the appellant that penalty under Section 221 of the Act would be payable only when the same is in addition to the arrears of payment of tax deducted also stands negatived by the Explanation added to Section 221(1) of the Act. This Explanation clarifies that an assessee shall continue to be liable to penalty even if the tax has been paid before levy of penalty.

The proviso under Section .....

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the Central Government.

It must be borne in mind that the assessee continues to be in default in case the tax has not been deposited with revenue within the time prescribed under the Act. Tax deposited thereafter but before penalty proceedings are initiated would not cleanse the assessee from being in default. The penalty is imposed upon the assessee under Section 221 of the Act for the default in not having paid the tax deducted at source within the time provided under the Act. This .....

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pril 1962 besides being clarificatory would also take into account a partial deposit with revenue of the tax deducted at source within the ambit of Section 201(1) of the Act. The Calcutta High Court's decision in CIT v. S.K. Tekriwal [2012 (12) TMI 873 - CALCUTTA HIGH COURT] being relied upon by the petitioner does not in our view assist the petitioner as it holds that although an assessee would be defaulter for nonpayment of tax deducted at source, yet payments made cannot be disallowed under S .....

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in law in upholding the levy of penalty u/s. 221 of the I.T. Act, 1961, for failure to pay tax deducted at source within the prescribed time - Decided against assessee. - IT REFERENCE NO. 13 OF 2000 & IT APPEAL NOS. 1021 & 1022 OF 2000 - Dated:- 20-7-2015 - M.S. SANKLECHA AND N.M. JAMDAR, JJ. For The Appellant : J.D. Mistri, Senior Advocate Nitesh Joshi and P.C. Tripathi For The Respondent : Suresh Kumar, Advocate JUDGMENT M.S. Sanklecha, J. - This Court by an order dated 22 January 2002 had dir .....

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eking our opinion on the following question of law: "Whether on the facts and circumstances of the case, the Tribunal was right in law in upholding the levy of penalty u/s. 221 of the I.T. Act, 1961, for failure to pay tax deducted at source within the prescribed time?" 3. The two appeals under Section 260A of the Act arise from common order dated 16 March 2000 of the Tribunal for the Assessment Years 1987-88 and 1988-89. Both appeals were admitted on 22 January 2002 on the following s .....

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source in accordance with Section 201 of the Act. It is further stated that the question of law as admitted arise from facts which are substantially similar. 5. In the above view, for the purposes of considering the question arising for our consideration, we will refer to the facts as set out in Income Tax Appeal No. 1021/2000 for the Assessment Year 1987-88. 6. At all times relevant, the applicant/appellant (appellant) had Manufacturing facilities and offices situated at different/diverse place .....

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les had at the relevant time to be paid into the treasury with one week of deduction. 7. During the financial year ending 31 December 1986 i.e. previous year relevant to Assessment Year 1987-88, the appellant while making payment to its shareholders, debenture holders, contractors and employees did deduct the tax out of amounts payable to them. However there was a delay on the part of the appellant in paying over the deducted tax in accordance with the Act to the revenue. Although there was a de .....

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Section 221 of the Act should not be imposed. The basis of the notice was that though tax at source had been deducted on payment of salaries, dividend, interest, etc. the same was not deposited with the revenue in the prescribed time. Consequently the appellant was liable for penalty under Section 221 of the Act. 9. By letter dated 27 August 1990, the appellant responded to the show cause notice. The appellant pointed out that the delay in depositing the tax was essentially on account of financi .....

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elay in depositing the tax with the revenue. Thus it was submitted that no penalty under Section 221 of the Act be imposed. 10. The Deputy Commissioner of Income Tax by an order dated 31 August 1990, titled as an order under Section 221 read with Section 201 of the Act disposed of the show cause notice dated 24 July 1990. By the above order the Deputy Commissioner of Income Tax condoned the delay in certain cases, while imposing a penalty ₹ 76.79 Lacs on the appellant under Section 221 of .....

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1986- 87 wherein on identical fact situation, on interpretation of Section 221 of the Act, it was held that no penalty is imposable. The CIT(A) held that for imposition of penalty, it is necessary that an assessee should be continuously in default i.e. even on the date the proceedings for imposition of penalty is commenced/initiated. This on the basis of the opening words in Section 221 of the Act viz. "when an assessee is in default or is deemed to be in default". The CIT(A) in his or .....

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held that once an assessee becomes a defaulter, penalty is imposable by placing reliance upon the decision of the Patana High Court in CIT v. Sriram Agarwal (1976) 161 ITR 302. Thus negating the stand of the CIT(A) that one has to be defaulter at the time of initiation of penalty proceeding. It also records that for the earlier two Assessment Years also the appellant was a defaulter but lenient view was taken and nominal penalty was imposed. Thus keeping in mind the repeat breach, the penalty i .....

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,000 1987-88 76,79,118 38,38,059 1988-89 84,63,403 42,31,701 13. Mr. Mistry, the learned Senior Counsel for the appellant in the reference and in two appeals in support submits as under: (a) Impugned order and proceedings leading to penalty under Section 221 of the Act are without jurisdiction as the condition precedent for the exercise of the same is that an assessee is in default or is deemed to be in default in making a payment of tax is not satisfied. This being in default or being deemed to .....

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ident from the fact that it is an appellable order under Section 246 of the Act. Further reliance is placed upon the decision of the Madras High Court in Mettur Chemicals v. IAC 150 ITR 341. Consolidated order under Sections 201 and 221 of the Act as is this case is bad in law; (c) Section 221 of the Act is invokable only when there were arrears of tax deducted at source to be paid after a notice of demand is raised. This is evident from the use of the words "in addition to the amount of th .....

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s "in accordance with the Act" as found in Section 201(1) and (1A) of the Act is with a purpose. This distinction was deliberately made by parliament to provide that in case of the class of assessees who are obliged to deduct tax on behalf of others, penalty is imposable only if there failure to deduct and pay the tax to the revenue without any time limit. Therefore once paid even beyond the prescribed time provided under the Act, no penalty under Section 221 of the Act is imposable. A .....

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edings under Section 221 of the Act where the amount of tax deducted has already been paid to the revenue. In the alternative, it is submitted that the explanation below Section 221(1) of the Act would apply only in cases where demand is raised for payment of tax remaining unpaid at the time of initiation of penalty proceedings. In the present case, the applicant/appellant has paid the tax alongwith interest thereon much before notice to impose penalty under Section 221 of the Act was issued; (f .....

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in case of default for good and sufficient reasons, no penalty can be imposed. It is the appellant's submission that delay in payment of the tax deducted at source into the revenue was due to its diverse locations, lack of computerization and financial stringency. These were all good and sufficient reasons warranting non imposition of penalty; and (h) If two interpretations are possible and one view in favour of the assessee has been adopted by the CIT(A) in his order, then even if another i .....

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eposited the tax in time. In these circumstances, issuing notice and passing a separate order under Section 201 of the Act was not necessary. In fact the common order passed under Section 201 and 221 of the Act serves the purpose as the order under Section 201 of the Act proceeded on an admitted position and was merely a formality. So far as the right to file an appeal under Section 246 of the Act is concerned, it was always open to the Assessee to file appeals from this order under both section .....

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of the Act. The interpretation put on Section 221 of the Act by the Revenue also stands settled in its favour in view of the explanation thereto; (c) The proviso to Section 201(1) of the Act has no application in the present facts. This is so as the proviso applies only in case of a person who has failed to deduct and pay tax i.e. both the conditions must be satisfied. In the present case, the appellant has undisputedly deducted the tax and deposited the same with the revenue beyond the period p .....

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ment Years 1985-86, 1986-87, 1987-88 and 1988-89 is reasonable. For the first two years it was ₹ 1 lakh and 1.50 lakh while for subsequent two years it was higher bearing in mind that appellant is a persistent defaulter having defaulted in Assessment Years 1985-86 and 1986-87; and (f) The various contentions raised by the applicant/appellant before this Court should not be considered s they had not filed any cross objection from the order of CIT(A) to the Tribunal. 15. Before considering t .....

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me of any other person in respect of which he is assessable, or of the loss sustained by him or by such other person, or of the amount of refund due to him or to such other person; (b) every person who is deemed to be an assessee under any provision of this Act; (c) every person who is deemed to be an assessee in default under any provision of this Act;" "Consequences of failure to deduct or pay. 201. (1) If any such person and in the cases referred to in section 194, the principal off .....

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he case may be, has [without good and sufficient reasons] failed to deduct and pay the tax. [(1A) Without prejudice to the provisions of sub-section (1), if any such person, principal officer or company as is referred to in that sub-section dose not deduct or after deducting fails to pay the tax as required by or under this Act, he or it shall be liable to pay simple interest at [fifteen] per cent per annum on the amount of such tax from the date on which such tax was deductible to the date on w .....

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tion 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 [Assessing] Officer may direct, and in the case of a continuing default, such further amount or amounts as the [Assessing] 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 reaso .....

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order the amount of tax, with respect to the default in the payment of which the penalty was levied, has been wholly reduced, the penalty levied shall be cancelled and the amount of penalty paid shall be refunded." 16. We have considered the rival submissions. The undisputed position between the parties for all the assessment years under consideration are as under: (a) The appellant has deducted the tax at the time of making the payment of salaries, dividend, interest as also on payment mad .....

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) of the Act, the appellant would be an assessee for the purposes of this Act as it was liable to pay tax/sum of money under the Act. 17. The primary submission on behalf of the appellant is that the proceedings for penalty under Section 221 of the Act for all the assessment years under consideration are without jurisdiction. It is contended that before any notice can be issued under Section 221 of the Act for imposition of penalty, the condition precedent is that the assessee should be in defau .....

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Act. 18. As against the above, it is contended by the revenue that in the present facts, the requirement of either a notice or a speaking order under Section 201 of the Act would not arise. Therefore an order passed under Section 221 of the Act would not be bad in law. The entire exercise of issuing a notice and passing an order, first under Section 201 and thereafter by a separate order under Section 221 of the Act would only be academic in these facts. This is so as it is an admitted position .....

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is because there is a dispute on the factual determination whether or not the assessee is in default or deemed to be in default and the extent of default. 19. The appellant before us is not disputing the position that they were late in depositing the tax deducted at source with the revenue. Therefore they were assessess in default. In these facts, giving of a notice and/or passing an order for determining that the assessee is in default or deemed to be in default would not arise. The fact that .....

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e Act. The appellant is still entitled to file appeal from orders passed under Sections 201 and 221 of the Act under Section 246(i) and (l) of the Act respectively. The grievance of the petitioner is that in view of there being a common order under Section 201 and 221 of the Act, an opportunity to raise fresh plea in penalty proceedings which may not be raised during quantum proceedings is lost. In support reliance is placed upon the decision of Allahabad High Court in Jaidayal Pyarelal v. CIT 1 .....

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background in as much as appellant therein was disputing adjustment of refund due to it against payment by its various collaborators on account of the statement made by them i.e. collaborators. In the present case there is no dispute that the assessee is in default. Moreover in terms of Section 221 of the Act, the only condition precedent to impose of penalty upon the assessee is that it should be in default or deemed to be in default. In the present facts this position is not disputed. Dehors, .....

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ve, the decisions of Delhi High Court in Modi Cement v. UOI 193 ITR 91 and of Rajasthan High Court in Rajasthan State Electricity Board v. DCIT 200 ITR 434 relied upon by the petitioner can have no application. Both the above decision were rendered in the context of Section 143(1A) of the Act. 21. It was next submitted on behalf of the appellant that penalty under Section 221 of the Act would be payable only when the same is in addition to the arrears of payment of tax deducted. This according t .....

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added to Section 221(1) of the Act. This Explanation clarifies that an assessee shall continue to be liable to penalty even if the tax has been paid before levy of penalty. 22. It was next contended that in view of the proviso to Section 201(1) of the Act, invocation of Section 221 of the Act is barred where the Assessing Officer is satisfied that failure to deduct and pay tax was without good and sufficient reasons. The words "failed to deduct and pay tax" of the proviso is contrasted .....

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o deduct and also fails to pay the tax. This interpretation is also supported by the words found in sub-section (1) of Section 201 of the Act which provides ". . . . principal officer of the company does not deduct or after deducting fails to pay the tax as required by or under this Act". In this case, the tax has been deducted but there is a failure in depositing the tax with the revenue. The Parliament treats a person who has deducted the tax and fails to pay it to revenue as a class .....

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hough penalty is also imposable in the second class of cases, yet in view of the proviso to Section 201(1) of the Act, it is open to such assessee to satisfy the Assessing Officer that as they have good and sufficient reasons no penalty is imposable. It is in the above view that in the first class of assessees the Parliament has provided for prosecution under Section 276B of the Act for failing the pay the tax deducted at source. Therefore the first class of assessee to which the appellant belon .....

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provided in the Rules would not apply. This is so as the time begins to run from the date of the deducting of tax as is evident also from Section 200 of the Act which provides that any person deducting any sum shall pay it within the prescribed time, the sum so deducted to the Central Government. 24. It was next submitted on behalf of the appellant that the Explanation below Section 221 of the Act which clarifies that penalty will continue to be imposable even if the assessee has paid the tax be .....

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n sought to be put on Section 221(1) of the Act commencing with the words "where an assessee is in default or is deemed to be in default" cannot stand in the face of the explanation which clarifies that merely because the tax has been paid/deposited before the levy of penalty, would also take in all acts, from the imposition of the charge upto/till the entire process of raising demand and collecting the same. The construction sought to be put on the explanation does not allow full ampl .....

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has not been deposited with revenue within the time prescribed under the Act. Tax deposited thereafter but before penalty proceedings are initiated would not cleanse the assessee from being in default. The penalty is imposed upon the assessee under Section 221 of the Act for the default in not having paid the tax deducted at source within the time provided under the Act. This default is not wiped away by the assessee depositing the tax after the prescribed time. It is in the above circumstances .....

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nder the Estate Duty Act. The notice of demand, in the above case to the accountable person being bad and so held, penalty proceedings were also set aside. This decision also does not in our view support the petitioner's contention. Thus we find no merit in the appellant's above submission that no penalty can be imposed as there was no default at the time when penalty proceedings were initiated. 26. It was next urged on behalf of the appellant that Section 201(1) of the Act was amended b .....

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rt of the tax was deducted and paid to the revenue, then Section 201 of the Act would not be triggered. We do not find any merit in this submission. The amendment by the Finance Act, 2002 with the retrospective effect was clarificatory in nature. The words "does not deduct or after deducting fails to pay tax" in the preamended Section 201 of the Act would in its plain reading also cover a failure to part deducting and/or failure to make a part payment of the already deducted tax to the .....

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ake into account a partial deposit with revenue of the tax deducted at source within the ambit of Section 201(1) of the Act. The Calcutta High Court's decision in CIT v. S.K. Tekriwal 361 ITR 432 being relied upon by the petitioner does not in our view assist the petitioner as it holds that although an assessee would be defaulter for nonpayment of tax deducted at source, yet payments made cannot be disallowed under Section 40(a)(1a) of the Act. This is where partial payment of tax deducted h .....

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ustify deducting tax from the amount paid to the payee and not paying it to the revenue. Otherwise it would amount to using somebody else's money for the purposes of one's business. In such circumstances, the question of financial stringency, to our mind, hardly gives rise to a good and sufficient reason for not depositing tax which was an amount otherwise payable to the payee or on behalf of the payee to the revenue. Moreover, the impugned order dated 16 March 2000 records the fact that .....

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of Wealth Tax v. S.L. Hendra 191 ITR 565 where penalty was set aside under the Wealth Tax Act on payment of self assessment tax due to final stringency caused by the acquisition of property. This was found by the Tribunal to be a reasonable cause and on this fact the Court refused to interfere. In the present facts also the Tribunal has rendered a finding of fact that the reason set out by the appellant for failure to deposit the tax within time is not a good and sufficient cause. At the hearin .....

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ication to impose any penalty upon the appellant. On the other hand it was contended by the revenue that the interpretation put by the CIT(A) on Section 221 of the Act is in face of the explanation which provides that penalty would be imposable even if the tax has been paid before the levy of penalty. The explanation was ignored on the ground that it is confusing. The CIT(A) further construed the word "is" present in Section 221 of the Act which provides that when assessee is in defaul .....

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