Discretionary penalty for tax default requires judicial assessment of reasonable cause, not automatic levy on mere non-payment.

Penalty for default in payment of tax under section 221(1) is discretionary and must be exercised judicially on all relevant circumstances, not imposed automatically on mere proof of default. The settled principle is that penalty is ordinarily unwarranted unless the conduct shows deliberate defiance of law, contumacious behaviour, conscious disregard of obligation, or absence of reasonable cause. On the facts, the Tribunal accepted that the assessee had bona fide and sufficient reasons for non-payment, including the disputed nature of the tax liability and pleaded financial difficulty. That factual finding supported deletion of the penalty, and no referable question of law arose.

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Issues: Whether, on the facts and circumstances, the Tribunal was justified in deleting the penalty under section 221(1) of the Income-tax Act, 1961 on the ground that there was ultimately no tax liability and sufficient cause existed for the default.

Analysis: The provision authorising penalty for default in payment of tax confers a discretion on the authority, and that discretion must be exercised judicially on a consideration of all relevant circumstances. Even before the insertion of the second proviso to section 221(1), the scheme of the section did not contemplate an automatic penalty merely upon proof of default. The accepted legal position is that penalty is not ordinarily imposed unless the default reflects deliberate defiance of law, contumacious conduct, conscious disregard of obligation, or is otherwise unsupported by reasonable cause. The Tribunal found, on the facts, that the assessee had a bona fide and sufficient reason for not paying the demand in time, including the contentious nature of the tax liability and the financial difficulty pleaded before the department. That finding was one on facts and within the Tribunal's jurisdiction.

Conclusion: The Tribunal was justified in deleting the penalty and no referable question of law arose.

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