Discretionary block assessment penalty: bona fide reasonable cause and pre-assessment tax payment defeated levy under section 158BFA(2).

Penalty under section 158BFA(2) was treated as discretionary, because the statutory wording uses "may" for levy and "shall" only for quantification, leaving scope to consider facts and reasonable cause. The provision was also read as not imposing an express time limit for payment of tax with the block return. Where the assessee's explanation of lack of funds was unrebutted, the tax was paid before assessment, and no deliberate default or non-cooperation was established, the penalty could not be sustained. The article concludes that mechanical levy is inappropriate when bona fide cause is shown and the statutory conditions are not strictly triggered.

---

---

Issues: (i) Whether penalty under section 158BFA(2) of the Income-tax Act, 1961 is mandatory or discretionary. (ii) Whether penalty could be sustained for non-payment of tax or non-furnishing of proof of payment along with the block return, when reasonable cause was shown and the tax was paid before assessment.

Issue (i): Whether penalty under section 158BFA(2) of the Income-tax Act, 1961 is mandatory or discretionary.

Analysis: The provision uses the word "may" for levy of penalty and "shall" for the quantum of penalty. The statutory language was read as conferring discretion on the Assessing Officer and the Commissioner (Appeals), and not as creating an absolute obligation to levy penalty in every case. The hearing requirement under sub-section (3)(a) was treated as reflecting the need to consider the facts and circumstances and any reasonable cause shown by the assessee.

Conclusion: Penalty under section 158BFA(2) is discretionary, not mandatory.

Issue (ii): Whether penalty could be sustained for non-payment of tax or non-furnishing of proof of payment along with the block return, when reasonable cause was shown and the tax was paid before assessment.

Analysis: The first proviso to section 158BFA(2) was treated as requiring cumulative satisfaction of its conditions, but the provision was read as not prescribing any time limit for payment of tax on the basis of the return. The return had been filed before the amendment to section 140A(1) by the Finance Act, 1999, and the block-return regime under section 158BC was treated as not containing an express requirement that proof of payment must accompany the return in the manner urged by the Revenue. The assessee's explanation of lack of funds was neither disproved nor shown to be false, and the Revenue did not establish deliberate default or absence of cooperation.

Conclusion: The penalty was not sustainable on the facts and was liable to be deleted.

Final Conclusion: The statutory penalty was set aside, and the assessee obtained complete relief in the appeals.

Ratio Decidendi: Where a penalty provision is couched in discretionary terms and the assessee shows a bona fide and unrebutted reasonable cause, penalty should not be imposed mechanically; absent an express statutory time limit, payment made before assessment can satisfy the underlying tax-payment condition.

---