Funds shortage due to project expansion was sufficient cause not to impose penalty u/s 221(1) for self assessment tax non payment before filing ITR

In a recent judgment, ITAT Chennai has held that paucity of funds due to project expansion was a sufficient case not to levy penalty u/s 221(1) for non payment of self assessment tax before filing return of income. 

Case Law Details:
ITA No. 611/Mds/2014  Assessment Year : 2010-11
M/s. Indus Valley Housing vs. The Assistant Commissioner of Income-tax
Date of Judgment/Order: 22/04/2016

Important judgments Referred:
CIT v. Munni Lal & Company (298 ITR 250) Rajasthan High Court

CIT v. Chembara Peak Estates Ltd. (183 ITR 471) Kerala High Court
Mettur Chemicals & Industrial Corporation Ltd. v. Inspecting Asst. Commissioner (150 ITR 341) Madras High Court
Nachimuthu Industrial Association Vs. Commissioner of Income Tax (123 ITR 611) Madras High Court
Culcutta Land Acquisition Anathnalh v. MST Kittji AIR 1987 SC 1353.
C.I.TVs. P.S.Hathir Ramani 207 ITR 483 Bombay High Court
Hindustan Steel Ltd. Vs State of Orissa reported in 83 ITR 26(SC)

Brief Facts of the Case:
The assessee filed its return for the assessment year 2010-11. However, at the time of filing of the return the whole tax had not been paid and the tax payable was Rs. 4,78,48,702/-. The return was processed on 26/07/2012 and a demand was raised. Meantime, a survey was conducted u/s 133A at the business premises of the assessee on 5.12.2012. At the time of survey, one of the partners of the firm admitted incomes for AYs 2009-10 and 2010-11. As the assessee failed to pay the demand raised, notice u/s.221(1) was issued.  However, the notice remained unreponded and the AO levied penalty @ 10% of self-assessment tax payable.

Against penalty, the assessee approached CIT(Appeals).who observed that it was a fit case for not only levy of penalty but also for enhancing it. Accordingly, he confirmed the penalty and enhanced the penalty at 25% of self assessment tax payable.

Aggrieved, the assessee went in appeal before ITAT

Contentions of the Assessee:
1. The notice dated 5.12.2012 issued by the AO to the assessee on 8.12.2012 mentioned the wrong assessment year and hence there was no proper notice.
2.  The assessee had not received earlier notice dated 26.9.2012 and there was violation of natural justice in levying the penalty.
3. Without passing an order that the assessee was in default, penalty cannot be levied
4. the assessee was facing financial crisis during the period due to expansion of the project.
5. the assessee had paid self-assessment tax latest by 20/12/2012 and interest by 04/01/2013 in instalments.
6.  the default was not without good and sufficient reason.

The ITAT observed that  the following facts deserve consideration for deletion of penalty u/s.221(1):

(a) paucity of funds have been held to be a relevant circumstance.
(b) if the assessee was habitual defaulter with adverse tainted  history of committing defaults

(c) substantial justice has to be preferred over technical considerations.
(d) “Tax” and “interest” are different in character. penalty u/s 221 can be imposed only for default in making payment of tax.
(e) it has been held the penalty will not ordinarily be imposed unless the party either acted deliberately or dishonest.

Important excerpts from ITAT Judgment:

Further, in the case of Hindustan Steel Ltd. Vs State of Orissa reported in 83 ITR 26(SC) wherein held that an order imposing penalty for failure to carry out a statutory obligation is the result of a quasi-criminal proceeding, and 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; and that penalty will not also be imposed merely because it is lawful to do so. The Learned Assessing Officer as the Learned Commissioner of Income Tax(A) while passing the penalty order, they have not gone into any of the above aspects of the matter, though they were put before the authorities below in detail as noted by the Learned Commissioner of Income Tax(A) in his order.

The explanation given by the assessee that paucity of fund to make payment of self assessment tax on the reason that the assessee was in the expansion of the project, which requires a huge amount and survival and continuation of business is far most important and if the assessee miss the opportunity, assessee could not have earned that of income declared by the assessee so as to pay tax thereon. In such circumstances we find that the levy of penalty in this case is not proper. 

Thus reading of Sec.221 of the Act shows that the Explanation wherein as “may” not “shall” which is subjective of the fact that imposition of penalty is neither automatic nor mandatory. The discretion is left with the A.O to decide whether to impose penalty or not, by considering the explanation of the assessee. This fact is evident from the provisions of section itself that mandatory opportunity of being heard has to be given to the assessee before imposition of penalty. Thereafter, the A.O considering the explanation of assessee have discretion to impose penalty. As seen from the discussion in earlier para, assessee explained the reasons. In our opinion, there exists good and sufficient reason not levy penalty.

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