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Issues Involved:
1. Whether the imposition of penalty u/s 140A(3) of the Income-tax Act, 1961, was obligatory. 2. Whether the assessee had reasonable cause for the default in payment of self-assessment tax. 3. Whether the Tribunal was correct in canceling the penalty imposed on the assessee. Summary: 1. Imposition of Penalty u/s 140A(3): The court examined whether the imposition of penalty u/s 140A(3) was obligatory. It was held that the language of s. 140A itself shows that a penalty is not an automatic consequence of a default. Before imposing a penalty, a reasonable opportunity must be provided to the assessee to show cause why the penalty should not be imposed. This implies that it is open to the assessee to show that the default in payment was due to circumstances that do not invite the penalty and that there was a reasonable cause for the non-payment of the tax as required by the section. The court agreed with the Tribunal's view that the imposition of penalty is discretionary and not mandatory. 2. Reasonable Cause for Default: The court considered whether the assessee had a reasonable cause for the default in payment of self-assessment tax. The Tribunal had a difference of opinion between the judicial member and the accountant member. The judicial member believed that the assessee had no reasonable cause for the default, attributing the financial difficulties to imprudent investments. Conversely, the accountant member and the Vice-President found that the financial stringency was genuine and not due to any mala fide intention to avoid tax payments. The Vice-President noted that the financial difficulties arose because of the diversion of funds by the holding company, Globe Motors Ltd., and that the assessee was a helpless spectator to the ruination of its finances. The court upheld the Tribunal's majority view that the financial condition of the assessee was genuinely strained and that the default was not collusive or intended to defraud the Revenue. 3. Tribunal's Decision to Cancel Penalty: The court addressed whether the Tribunal was correct in canceling the penalty imposed on the assessee. It was concluded that the Tribunal's decision was based on a factual assessment of the financial condition of the assessee and the circumstances leading to the default. The court emphasized that the Tribunal's finding that the financial stringency was not due to any collusion or mala fide intention was a conclusion of fact, which should not be interfered with. The court also noted that the Central Board of Direct Taxes (CBDT) had taken a lenient view of the circumstances and granted the assessee time to pay the taxes, indicating that the non-payment was due to reasons beyond the assessee's control. Conclusion: The court answered the question referred to it in the affirmative, holding that the Tribunal was legally correct in canceling the penalty of Rs. 40,000 imposed on the assessee u/s 140A(3) of the Income-tax Act, 1961. The Commissioner was directed to pay the costs of the reference, with counsel's fee fixed at Rs. 350.
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