Discretionary penalty and pre-notice compliance can defeat tax penalty where default is cured with interest before detection

Penalty under the Uttar Pradesh Value Added Tax Act is discretionary where the provision uses permissive language, so the assessing authority must consider the facts, the nature of the default, and the assessee's conduct before imposing it. Where the assessee had already paid the defaulted TDS and interest before the notice was issued, and the revenue had not detected the lapse earlier, the basis for penal action was removed. On those facts, penalty was not justified and the challenge succeeded.

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Issues: (i) Whether penalty under Section 34(8) of the Uttar Pradesh Value Added Tax Act, 2008 is mandatory. (ii) Whether penalty could still be imposed when the assessee had already cleared the default in payment of TDS together with interest before issuance of notice.

Issue (i): Whether penalty under Section 34(8) of the Uttar Pradesh Value Added Tax Act, 2008 is mandatory.

Analysis: The provision uses the word "may" when empowering the assessing authority to impose penalty, while the later part uses "shall" only for the consequence of compliance once a penalty order is passed. The use of both expressions in the same sub-section indicates that imposition of penalty is discretionary and not automatic. The authority must apply its mind to the facts, the nature of default, and the conduct of the assessee before deciding whether penalty is warranted.

Conclusion: Penalty under Section 34(8) of the Uttar Pradesh Value Added Tax Act, 2008 is not mandatory but discretionary.

Issue (ii): Whether penalty could still be imposed when the assessee had already cleared the default in payment of TDS together with interest before issuance of notice.

Analysis: The assessee had deposited the defaulted TDS amount and interest long before the penalty notice was issued, and the revenue had not discovered the default before such voluntary rectification. In such circumstances, the loss to the revenue stood made good and no further legal justification survived for penal action. The earlier consistent view accepted that where the default is cured with interest before detection, penalty need not follow as a matter of course.

Conclusion: Penalty was not justified on the facts since the default had been cured with interest before notice.

Final Conclusion: The revisions succeeded because the penalty provisions were held to be discretionary and the completed pre-notice compliance by the assessee removed the basis for penalty.

Ratio Decidendi: A penalty provision framed in discretionary language is not automatically attracted on every default, and where the assessee voluntarily cures the default with interest before the revenue issues notice or otherwise detects the lapse, penalty need not be sustained.

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