Penalty u/s 221(1)-Interest component has to be excluded while levying Penalty. “tax in arrears” not include interest -Bombay HC

Penalty u/s 221(1)-Interest component has to be excluded while levying Penalty. The term “tax in arrears” does not include interest component-Bombay HC

Penalty u/s 221(1)-Interest component

ABCAUS Case Law Citation:
ABCAUS 1288 (2017) (07) HC

The Question framed by the Appellant Revenue:

(1) Whether on facts and in the circumstances of the case and in   law,   the   ITAT   is   justified   in   holding   the   penalty u/s.221(1)  is to  be imposed  in respect  of  only the  tax excluding   interest   u/s.234A,   234B   &   234C   without appreciating that section 221(1) does not contain any such condition that the penalty imposed under the said section should be a percentage of only the tax excluding the interest

(2) Whether on facts and in the circumstances of the case and in  law,  the  ITAT  is  justified  in  deleting  penalty  imposed in respect   of   arrears   of   interest   u/s.234A,   234B   &   234C without  appreciating  that Section  221(1), the   Assessing Officer  is  empowered  to  impose  any  amount  of penalty so, however  that  the  total  amount  of penalty  does not exceed the amount of tax in arrears and thus the term used in the said  section  is  tax  in  arrears and not ‘tax’, as erroneously held by the Hon’ble Tribunal.

(3)Whether on facts and in the circumstances of the case and in  law,  the  ITAT  is  justified  in  deleting  the  penalty  levied u/s 221(1) in respect of arrears of interest u/s.234A, 234B &   234C,   without   appreciating   that,   as  held  by Hon’ble Supreme Court in the case of CIT vs. Anjum Ghaswala & Others  and  in  the  case  of  Karanvir  Singh Gosssal  vs. CIT and   Another,   interest   u/s.234A,   234B   &   234C   is mandatory in  nature   and  therefore   by   the ratio  of  the above cited decisions interest is an integral part of tax.

Date/Month of Pronouncement: July, 2017

Important Case Laws Cited/relied upon:
Commissioner of Income Tax vs. Anjum M.H. Ghaswala & Ors. (2001) 252 ITR 0001

Harshad   Shantilal   Mehta   vs. Custodian   and   others,   reported   in   (1998)   231   ITR   871
Commissioner of Income Tax vs. P.B. Hathiramani, reported in (1994) 207 ITR 483.
Shreeniwas and Sons vs. ITO, referred in (1974) 96 ITR 562.  Calcutta High Court
Commissioner of Income Tax vs. Anjum M.H. Ghaswala, referred in (2001) 252 ITR 0001

Grounds raised by the appellant assessee:

Brief Facts of the Case:
The Income Tax Return of the Respondent­ Assessee was processed  under  Section  143(1)  of  the  Income Tax Act (“the Act”) raising demand for Rs.1,64,90,573/­and penalty of Rs.1,19,30,677/­ was also imposed by the Assessing Officer under Section 221(1) of the Income Tax Act for default by Assessee in the payment of demand.

Aggrieved, the assessee company filed Appeal before the Commissioner of Income­Tax (Appeals) [“CIT(A)”]. The CIT(A)  deleted   the   penalty   imposed   by   the Assessing Officer holding  that  interest  component  has  to be excluded while levying penalty under Section 221(1) and since the penalty levied  exceeded the tax component, it set­aside the order levying penalty.

Aggrieved thereby, the Department filed a appeal before the Income Tax   Appellate   Tribunal (ÍTAT’), which held that while levying penalty under Section 221(1) of the Act, interest  component  is  not  to  be  considered  and remitted the matter to the Assessing Officer with the direction to quantify the amount of penalty  in  accordance with provisions  of  Section 221(1) of the Act. The Department has assailed the said order in the present appeal.

Contentions of the Petitioner Revenue:
It was contended that the terminology “tax in arrears” would include the interest component also.  The  payment  of  interest under Section 234(A), 234(B) and 234(C)  is  mandatory  and  the  same  would  form part of the arrears of tax. The Department relied on a judgment  of  the Apex Court .  No  powers  are  given  for  waiver of the interest.

It was contended that since interest forms part of amount chargeable under Section 156 of the Act,  the  penalty under Section 221(1) is also imposable.

Contention of the Respondent Assessee:
It was submitted that tax, interest and penalty are separate components. The term “tax” does not include penalty or interest.The assessee also relied on the judgment of the Supreme Court along with  judgment of the Division Bench of the Bombay High Court.

Observations made by the High Court:
The Hon’ble High Court observed that the   moot   question   for   consideration   in   the   present appeal was whether the phraseology “amount of tax in arrears” as envisaged in  Section  221  of  the  Act  would  in  addition to the tax include within its fold the interest component also.

The Hon’ble High Court observed that the definition   of   the   “Tax”   u/S. 2(43)   read   in   its entirety suggests that the “tax” means income­tax, super­tax and/or the fringe benefit tax, as the case may be chargeable under the provisions  of the Act. The definition of tax does not take within its fold the interest component. The definition of “interest” as envisaged under Section 2(28­A) of the Act would not be relevant in the present matter. As the said definition is restricted to the interest payable in respect of any moneys borrowed or debt incurred.

The Hon’ble High Court observed that it is the elementary rule of interpretation that when the language of a statute is clear and unambiguous, the Courts are to interpret the same in its literal sense and not to give a meaning that would cause violence to the provisions of the statute. Each word in the statute should be assign the meaning as per the context.

The provision imposing penalty will have to be strictly construed. The statute being fiscal and the provisions of Section 221 dealing with imposition of penalty naturally shall have to be strictly construed. Strict construction is a construction in which application of a provision used is limited by words used, so that anything which is not clearly included within the scope of the language is treated as excluded.

The Hon’ble High Court opined that a reading of section 221 in its entirety  makes it abundantly clear that the aspect of default in payment of tax and the amount of interest payable are treated as distinct and separate components. The section categorically and specifically states that when an Assessee is in default or is deemed to be in default in making payment of tax, he shall in addition to the amount of arrears and the amount of interest payable   under   Sub­ Section   2   of   Section   220,   be   liable,   to   pay penalty, however the amount of penalty does not exceed the amount of tax in arrears. The terminology “default in making a payment of tax and amount of interest payable” are considered to be separate for imposition   of  penalty   and   penalty   is   to   be   levied   on account   of default in making a payment of tax. However, the total amount of penalty  shall not exceed  the  amount  of tax  in arrears.  The said penalty for non payment of the tax is in addition to the levy of interest under Sub­Section 2 of Section 220. Under no principle of interpretation, the arrears of tax as laid down in the said Section would include the amount of interest payable under Sub­ Section 2 of Section 220. The amount of penalty will have to be restricted on the arrears   of   tax,   which   would   not   include   the   interest   component charged under Section 220(2) of the Act.

The Hon’ble High Court observed that in this regard a reference can be had to Section  156   viz.  notice of demand. In Section  156 also tax, interest, penalty, fine are separately referred to. Even a notice of demand issued under Section 156 in ‘Form No.7’ specifies tax and interest as separate components.

The Hon’ble High Court observed that in this regard, second proviso to Section 221 and explanation would also be relevant. The second proviso to Section 221(1) states that, if the Assessee proves to the satisfaction of the Assessing Officer that the default was for good and sufficient reason, no penalty shall be levied   under   the   said   section.   Sub­ Section   2   further   says   that, whereas result of final order, the amount of tax with respect to the default in the payment of which penalty was levied has been wholly reduced, the penalty levied shall be cancelled and the amount of penalty paid shall be refunded. This would suggest that the payment of penalty is directly commensurate with the default in payment of ax and not of interest.

The Hon’ble High Court observed that the Apex Court observed that the definition of tax under Section 2(43) does not include penalty or interest. Tax, penalty and interest are different concepts under Income Tax Act. The provisions for imposition of penalty and interest are distinct from provisions for imposition of tax. The Apex Court agreed with the reasoning and the conclusion   drawn   by   the   Special   Court   that   neither   penalty   nor interest   can  be  considered  as  tax under Section 11(2)(a) of the Special Court (Trial of Offences relating to transactions in Securities) Act, 1992. The said section dealt with the priorities for distribution and liability specified under Clause ‘A’   i.e. All Revenues, Taxes, Cesses   and   rates   due   from   persons   notified.   Even   in   case   of P.B. Hathiramani, the Division Bench of the Court relied on the judgment of the Calcutta High Court wherein it is held that under Section  221, penalty can be imposed only  when the Assessee is in default in making   payment   of   the  tax. Since   the   expression   tax   has   been defined in Section 2(43) of the Act, there would be no scope for any argument that interest is additional tax.

Finally, the Hon’ble High Court concluded that the   phraseology   “tax   in   arrears”  as envisaged in Sec. 221 of the Act would not take within its realm the interest component. It would be abundantly clear that the Assessing Officer can impose penalty for default in making the payment of tax, but the same shall not exceed the amount of tax in arrears. Tax in arrears would not include the interest payable under Section 220(2) of the Act.

The substantial question of law were answered against the Appellant. The Appeal was dismissed.

Penalty u/s 221(1)-Interest component

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