Court cancels penalty for non-payment of tax, emphasizes valid reasons to avoid penalties

The High Court upheld the decision of the Appellate Assistant Commissioner and Tribunal to cancel the penalty imposed on the assessee-company under section 221 of the Income-tax Act for the assessment year 1965-66. The Court emphasized that the penalty should not have been levied as the assessee was making arrangements to pay the tax demanded, and the Tax Recovery Officer had granted instalments due to financial difficulties. The Court ruled in favor of the assessee, stating that the penalty imposition was not automatic and could be avoided with valid reasons for non-payment of tax.

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Issues involved: Imposition of penalty on the assessee-company under section 221 of the Income-tax Act, 1961 for the assessment year 1965-66.

Summary:
The reference was made by the Appellate Tribunal regarding the imposition of a penalty on the assessee-company for the assessment year 1965-66. The assessee had made a voluntary disclosure under section 24 of the Finance Act of 1965, leading to a demand of Rs. 1,32,021 by way of tax. The penalty of Rs. 10,746 was imposed under section 221 by the Income Tax Officer (ITO) as the tax was not paid as demanded. The Appellate Assistant Commissioner (AAC) later cancelled the penalty after considering the financial position of the appellant. The Tribunal upheld the AAC's decision, emphasizing that the ITO should not have levied the penalty considering the circumstances where the demand was being realized through the Tax Recovery Officer and the assessee was making arrangements to pay the tax. The High Court observed that the imposition of a penalty under section 221 is not automatic and may be avoided if good and sufficient reasons for non-payment of tax are shown. The Court concluded that the Tribunal's decision to cancel the penalty was justified based on the facts and circumstances of the case.

The Court further clarified that the Tribunal did not intend to establish a general proposition that no penalty could be imposed once steps were taken for tax recovery. The Tribunal's decision was based on the specific facts of the case, where the TRO had granted instalments to the assessee for tax payment due to financial difficulties. The Court held that the Tribunal's conclusion that no penalty was imposable in the circumstances was correct, and the penalty imposed on the assessee was rightfully cancelled. The question referred was answered in favor of the assessee, who was awarded costs amounting to Counsel's fee Rs. 350.

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