Penalty under Income-tax Act even if tax paid post default. Officer discretion key. Tribunal to reevaluate penalty.

The High Court of Madras ruled that a penalty can be imposed under section 221 of the Income-tax Act, 1961, even if the tax was paid after the default occurred but before the penalty order was issued. The Court emphasized that the liability to penalty is established upon default, regardless of when the tax is paid, and that the officer has discretion in deciding whether to levy a penalty. The Court directed the Tribunal to reconsider the appeal regarding the penalty imposed, without addressing the applicability of section 221 to a default in payment of advance tax.

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Issues involved: Interpretation of section 221 of the Income-tax Act, 1961 regarding the imposition of penalty when tax is not paid on the due date.

Summary:
The High Court of Madras addressed a reference made by the Income-tax Appellate Tribunal regarding the imposition of penalty under section 221 of the Income-tax Act, 1961. The case involved an assessee who failed to pay the second instalment of advance tax on the due date and subsequently paid it after receiving a notice for penalty. The Income-tax Officer imposed a penalty, which was later set aside by the Appellate Assistant Commissioner and upheld by the Tribunal. The main question was whether a penalty can be levied if the tax was paid before the penalty order was issued.

The Court analyzed the relevant sections of the Act, particularly section 221(1) which states that an assessee in default incurs a liability to penalty. The Court held that once a default in payment occurs, the liability to penalty is established, regardless of when the tax is paid. The Court rejected the argument that penalty can only be levied if tax arrears exist on the date of the penalty order.

The Court emphasized that the liability to penalty does not absolve the assessee from paying the tax arrears and interest, but adds an additional obligation. It clarified that the officer has discretion in deciding whether to levy a penalty based on the circumstances of each case. The Court referred to previous judgments to support its interpretation of section 221(1) and concluded that penalty can be levied even if the tax liability has been satisfied after the default occurred.

The Court answered the reference in the negative, stating that penalty can be imposed even if the tax was paid before the penalty notice. It directed the Tribunal to reconsider the appeal regarding the penalty imposed. The Court clarified that it did not address the applicability of section 221 to a default in payment of advance tax, as it was not the subject of the reference.

The Court appreciated the assistance of the advocate who provided arguments in the case.

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