Penalty under IT Act for AY 2006-07 cancelled by ITAT due to unjustified imposition, lack of hearing, and pending appeal.

The ITAT dismissed the Revenue's appeal against the CIT(A)'s order canceling the penalty imposed under section 221(1) of the IT Act for the assessment year 2006-07. The ITAT found that the penalty was unjustified due to the Assessing Officer's failure to provide a hearing, the good reasons for the default, and the pending appeal that could impact the demand amount. The decision emphasized the valid reasons for non-levy of the penalty.

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Issues:
- Appeal against the order of CIT(A) under section 221(1) of the IT Act for assessment year 2006-07.

Detailed Analysis:

1. Issue of Penalty Imposition under Section 221(1) of the IT Act:
- The Revenue appealed against the CIT(A)'s order regarding the imposition of penalty under section 221(1) of the IT Act. The main contention was whether the CIT(A) was justified in allowing the appeal of the assessee despite the provision in the Explanation to section 221 that an assessee remains liable for penalties even after paying taxes before penalty imposition.

2. Facts of the Case:
- The case involved a cooperative society of farmers running a sugar mill under the State Federation of Cooperative Sugar Mill. The assessment for the year 2006-07 resulted in a demand of Rs. 1,60,84,670, with adjustments made against refunds due. The Assessing Officer issued a notice for the remaining demand, leading to penalty imposition under section 221(1) of the IT Act.

3. Arguments Before CIT(A):
- The assessee argued before the CIT(A) that the penalty was imposed without proper notice and that the application for stay of demand was pending. The assessee also highlighted that the default was due to good reasons and that the penalty was unjustified.

4. Legal Provisions and Interpretation:
- Section 221(1) of the IT Act allows for penalties for default in tax payment, with provisions for a reasonable hearing before penalty imposition. The second proviso states that if the defaulter proves good reasons for the default, no penalty should be levied. The Explanation clarifies that paying taxes before penalty imposition does not absolve the assessee of penalty liability.

5. Decision and Rationale:
- The ITAT found that the Assessing Officer failed to provide a hearing before imposing the penalty, contrary to the legal requirement. The assessee's plea that the default was for good reasons and the pending appeal that could reduce the demand were considered valid. The ITAT upheld the CIT(A)'s decision to cancel the penalty, emphasizing that the penalty was not levied due to tax payment but due to sufficient reasons for non-levy.

6. Conclusion:
- The Revenue's appeal was dismissed as the ITAT found no justification for the penalty imposition under section 221(1) of the IT Act. The decision was based on the failure to provide a hearing, the good reasons for the default, and the pending appeal that could impact the demand amount. The ITAT upheld the CIT(A)'s decision to cancel the penalty, emphasizing the valid reasons for non-levy.

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