2014 (2) TMI 1219 - AT - Income Tax

Appeal allowed, penalty canceled under Income Tax Act. Assessee showed good reasons with no mala fide intent.

The ITAT allowed the appeal, canceling the penalty imposed under section 221(1) of the Income Tax Act. The ITAT found that the assessee demonstrated good ... Levy of penalty under section 221(1) - good and sufficient reason / reasonable cause for default - effect of Explanation and second proviso to subsection (2) of section 221 - payment of tax with interest before initiation of penal action - substantial justice over technical considerationsLevy of penalty under section 221(1) - good and sufficient reason / reasonable cause for default - payment of tax with interest before initiation of penal action - Whether the penalty levied under section 221(1) should be sustained in view of the assessee's explanation and subsequent payment of tax and interest. - HELD THAT: - The Tribunal found the material facts undisputed: the assessee sold property and advanced the sale proceeds to group concerns; those funds became unavailable because of attachment in third party accounts, leaving the assessee unable to meet government dues. The assessee, not being a habitual defaulter and having arranged loans from associates to clear the assessed tax and interest by December 2009 (i.e., before the Department initiated penal proceedings), demonstrated bona fide intention to discharge the liability. The Tribunal observed that non-payment of advance tax may attract interest but the determinative fact is ultimate payment of tax due; the Explanation creates liability even if tax is paid, but the subsequent insertion of the second proviso to subsection (2) - which cancels penalty where tax is finally reduced - shows legislative tempering of strictness and an intent to be reasonable. Applying the principle favouring substantial justice over mere technicality (as in Collector, Land Acquisition v. MST Katiji), the Tribunal held that the default arose from genuine and unforeseen circumstances and not mala fide conduct, and that sustaining a technical penalty would be unjust.Penalty levied under section 221(1) set aside and AO directed to cancel the penalty.Final Conclusion: The appeal is allowed: the penalty of Rs. 20,20,710 imposed under section 221(1) is cancelled and the Assessing Officer is directed to withdraw the penalty. Issues:Levy and sustaining of penalty under section 221(1) of the Income Tax Act, 1961.Detailed Analysis:Issue 1: Levy and sustaining of penalty under section 221(1)The appeal was filed against the order of CIT(A) regarding the levy of a penalty of Rs. 20,20,710 under section 221(1) of the Income Tax Act, 1961. The assessee, a company, failed to pay the total tax liability of Rs. 80,82,840 by the due date, but cleared it by December 31, 2009. The Assessing Officer (AO) imposed the penalty after the assessee did not comply with the show cause notice. The CIT(A) upheld the penalty, stating that if the intention of the appellant was clear, they could have arranged money earlier. The assessee argued that the funds were advanced to group associates, got attached by the Income Tax Department, and were used to clear statutory dues. The AR contended that the assessee's financial position was never bad, and the default was due to unforeseen circumstances. The DR supported the revenue authorities, alleging that the assessee intentionally avoided paying tax dues. The ITAT examined the circumstances, emphasizing that the assessee cleared the dues before the department intervened, showing a bona fide intention. The ITAT referred to legal provisions and concluded that the penalty should be cancelled, as the assessee demonstrated good and sufficient reasons for the default without any mala fide intent. The ITAT set aside the CIT(A) order and directed the AO to cancel the penalty, citing the importance of substantial justice over technical considerations.In conclusion, the ITAT allowed the appeal filed by the assessee, canceling the penalty levied under section 221(1) of the Income Tax Act.