1995 (1) TMI 62 - HC - Wealth-tax

Issues Involved:
1. Effect of an ad interim stay on the statutory liability to pay penalty.
2. Whether interim stay extinguishes liability or merely postpones recovery.
3. Interpretation of sections 41 and 42 of the Karnataka Agricultural Income-tax Act, 1957.
4. Automatic liability to pay penalty upon default.
5. Nature of penalty under section 42.
6. Impact of interim stay on the imposition of penalty.

Issue-wise Detailed Analysis:

1. Effect of an ad interim stay on the statutory liability to pay penalty:
The court examined whether an ad interim stay granted by a superior court affects the statutory liability of an assessee to pay a penalty in the event of default in tax payment. The court concluded that an interim stay against recovery does not extinguish the liability to pay; it only postpones the recovery process until the stay is vacated or discharged. The court stated, "The orders do nothing more than grant a temporary protection against the making of the recovery of the amount of tax determined or taking of further proceedings under the Act."

2. Whether interim stay extinguishes liability or merely postpones recovery:
The court clarified that an interim stay does not provide lasting immunity against being treated as a defaulter. It only postpones the recovery process. The court emphasized, "An order of stay against the recovery of tax does not extinguish the liability but simply casts a cloud and postpones the same as long as the order of stay remains operative."

3. Interpretation of sections 41 and 42 of the Karnataka Agricultural Income-tax Act, 1957:
Sections 41 and 42 were analyzed to determine their implications on tax recovery and penalty imposition. Section 41 mandates payment within a specified time, failing which the assessee is deemed in default. Section 42 imposes a penalty for default. The court noted, "The liability to pay the penalty is automatic once the assessee commits default in the payment of the amount of tax determined."

4. Automatic liability to pay penalty upon default:
The court affirmed that the liability to pay penalty under section 42 arises automatically upon default, regardless of any interim stay. The court referenced the Supreme Court's decision in Haji Lal Mohd. Biri Works v. State of U.P., which held that the liability to pay interest is created by statute and is unaffected by stay orders. The court stated, "There is nothing in the language of section 42 of the said Act which may prevent the imposition of the penalty because of the operation of an order of stay issued by a competent court."

5. Nature of penalty under section 42:
The penalty under section 42 is in the nature of compensatory interest for the delayed payment of tax. The court explained, "The penalty prescribed is in effect and substance a provision for payment of interest on the amount of tax withheld by the assessee."

6. Impact of interim stay on the imposition of penalty:
The court held that an interim stay does not prevent the imposition of penalty for the period of default. The court cited previous judgments, including Satischandra and Co. v. Dy. CCT and Sha Ghelabhai Devji and Co. v. Asst. CCT, which supported the view that stay orders do not extinguish liability but only postpone it. The court concluded, "The issue of an interim order of stay preventing recovery of the amount of tax determined against the assessee, does not disable the assessee concerned from making the payment of the amount so determined as a measure of abundant caution if he is otherwise keen to avoid the imposition of a liability by way of penalty."

Conclusion:
The writ petitions were dismissed, affirming that the liability to pay penalty under section 42 of the Karnataka Agricultural Income-tax Act arises automatically upon default, and an interim stay does not extinguish this liability but only postpones recovery. The court emphasized that the penalty is compensatory in nature, serving as interest for the delayed payment of tax.

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