2010 (10) TMI 856 - HC - Income Tax

Penalty u/s 140 - failure to deposit the entire amount of advance tax - as per assessee default in making payment was on account of financial stringency due to destruction of equipments and material during riots - Held that - Tribunal in the assessee s case relating to earlier two assessment years thought it appropriate to give benefit on account of difficulties faced by the assessee because of riots and fire on 1.11.1984. As certain breathing period should be reasonably allowed to the assessee on account of unprecedented and unfortunate incidents on account of which it suffered extensive damage and huge losses. Therefore, it is appropriate to allow relief from 25.2.85 to 31.10.1985, It cannot be disputed that under Section 140-A(3) of the Act, levy of penalty is not mandatory. There is no minimum penalty provided. On the facts and circumstances, if the Tribunal having regard to the hardship to the assessee, has waived penalty for a limited period, the view so taken cannot be held to be erroneous - in favour of the assessee.

Summary

Issues:
1. Interpretation of Section 140-A(3) of the Income Tax Act, 1961 regarding penalty imposition.
2. Consideration of financial hardship as a valid defense for non-payment of advance tax.
3. Assessment of penalty relief based on the circumstances of riots and fire damage.

Analysis:
1. The primary issue in this case was the interpretation of Section 140-A(3) of the Income Tax Act, 1961, concerning the imposition of penalties for non-payment of advance tax. The Income Tax Appellate Tribunal referred a question of law to the High Court regarding the correctness of quashing the penalty for a specific period and sustaining it for another period under this section.

2. The assessee, engaged in the business of manufacturing soft drinks, faced penalty proceedings for failure to deposit the entire amount of advance tax. The Assessing Officer initiated penalty proceedings, but the assessee explained the default by citing financial stringency due to equipment and material destruction during riots in November 1984. The CIT(A) accepted this explanation for a certain period, and further appeals were made by both the revenue and the assessee.

3. The Tribunal, after considering the circumstances of the riots and fire damage, granted relief by waiving the penalty for a specific period. The Tribunal's decision was based on the unprecedented and unfortunate incidents that caused extensive damage and losses to the assessee's business. The Tribunal emphasized the need to allow a breathing period to the assessee due to the hardships faced.

4. The High Court, in its judgment, analyzed the Tribunal's findings and upheld the decision to grant relief from penalty for the mentioned period. The Court emphasized that under Section 140-A(3) of the Act, the levy of penalty is not mandatory, and there is no minimum penalty provided. Considering the hardships faced by the assessee, the Court concluded that the Tribunal's decision to waive the penalty for a limited period was appropriate and not erroneous.

5. In conclusion, the High Court answered the question of law against the revenue and in favor of the assessee, disposing of the reference. The judgment highlighted the importance of considering exceptional circumstances such as riots and fire damage when assessing penalties under the Income Tax Act, emphasizing the need for a reasonable breathing period for affected taxpayers.