2015 (8) TMI 603 - AT - Income Tax

Penalty under section 221(1) read with section 140A(3) - assessee companies had not paid either any advance tax or even self assessment tax before filing their returns of income nor even after issue of intimations under section 143(1) resulting into raising of demand - Held that - Similar penalties imposed by the Assessing Officer and confirmed by the learned CIT(A) in the cases of other group companies 2014 (12) TMI 431 - ITAT HYDERABAD involving materially the same facts have been sustained by the Tribunal to the extent of 5% of the admitted tax liability as concluding that on perusal of the penalty here does not reveal the basis on which AO has quantified the penalty. However, considering the fact that assessee has discharged the tax liability along with interest, in our view, liberal approach needs to be taken. More so, when section 221(1) itself empowers AO to increase penalty case of continuing default. Therefore, imposition of penalty at such a high figure at the first instance, in our view, is not justified. Accordingly, we direct AO to confine the penalty u/s 221(1) of the Act to 5% of the admitted tax liability in each case - Decided partly in favour of assessee.

Issues Involved:
1. Imposition of penalty under section 221(1) read with section 140A(3) of the Income Tax Act, 1961.
2. Determination of whether the assessees had "good and sufficient reasons" for non-payment of tax.
3. Evaluation of the quantum of penalty imposed by the Assessing Officer (AO).

Detailed Analysis:

Issue 1: Imposition of Penalty under Section 221(1) read with Section 140A(3)
The seven appeals filed by the assessees, all companies belonging to a group established by Sri Ramalinga Raju, involved the imposition of penalties under section 221(1) read with section 140A(3) of the Income Tax Act, 1961. The assessees had declared profits from land sales as long-term and short-term capital gains in their returns for the assessment year 2008-09 but had not paid any advance tax or self-assessment tax before filing their returns. Even after the issuance of intimations under section 143(1), no tax was paid by the assessees. The AO issued show-cause notices and, after not finding the assessees' explanations satisfactory, imposed penalties ranging from Rs. 20,00,000 to Rs. 50,00,000 on each company.

Issue 2: Determination of "Good and Sufficient Reasons" for Non-Payment of Tax
The assessees argued that there was no willful default or intent to evade taxes and cited liquidity issues and the attachment of properties as reasons for their inability to pay taxes. The AO rejected these explanations, noting that the companies had derived income during the financial year 2007-08 but had not honored any advance tax installments or paid self-assessment tax while filing returns. The AO emphasized that the companies had sufficient liquidity and current assets to clear tax dues before their properties were attached in January 2009. The AO concluded that the defaults were without good and sufficient reasons, justifying the imposition of penalties under section 221(1).

Issue 3: Evaluation of Quantum of Penalty Imposed by the AO
The penalties imposed by the AO were challenged by the assessees before the Commissioner of Income Tax (Appeals) [CIT(A)], who upheld the penalties, rejecting the assessees' claims of financial stringency and subsequent events affecting their liquidity. The CIT(A) noted that the companies were aware of their tax liabilities from the development agreement entered in December 2005 and had sufficient funds during the financial year 2007-08 but chose not to pay taxes.

Upon further appeal to the Tribunal, it was observed that similar penalties in other group companies' cases had been sustained to the extent of 5% of the admitted tax liability. The Tribunal noted that while the assessees had defaulted in paying self-assessment tax, the quantum of penalty should be reasonable. The Tribunal directed the AO to confine the penalties to 5% of the admitted tax liability in each case, considering the assessees had eventually discharged their tax liabilities along with interest.

Conclusion:
The Tribunal partly allowed the appeals, sustaining the penalties under section 221(1) read with section 140A(3) to the extent of 5% of the admitted tax liability for each of the seven assessees, aligning with its earlier decision in similar cases. The penalties were thus reduced, considering the eventual payment of tax and interest by the assessees.

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