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Issues involved: Reference made by Income-tax Appellate Tribunal u/s 256(1) of the I.T. Act, 1961 regarding cancellation of penalty u/s 140A(3) for failure to pay tax on time.
Summary: The case involved the assessee, M/s. Vrajlal Manilal & Co., who failed to pay the full tax amount as required by s. 140A(1) of the Income-tax Act, 1961. A penalty of Rs. 2,000 was levied under s. 140A(3) for this non-compliance. The Tribunal cancelled the penalty based on the belief that s. 140A(3) was unconstitutional and void, following a decision by the Madras High Court in a similar case. The High Court examined whether the Tribunal had the jurisdiction to consider the constitutional validity of s. 140A(3). It was noted that while authorities under the I.T. Act usually cannot question the validity of provisions, if a High Court declares a provision unconstitutional, the Tribunal must adhere to that ruling. In this case, the Madras High Court had deemed s. 140A(3) unconstitutional, which the Tribunal followed. However, the High Court was not bound by this ruling and had to independently assess the legal position. The High Court disagreed with the Madras High Court's reasoning that s. 140A(3) infringed on the fundamental right to hold property. It was argued that the penalty provision allowed for discretion by the Income-tax Officer (ITO) and was not confiscatory. The penalty served as an additional tax to ensure timely payment, and the ITO could choose not to impose it in certain cases. The High Court held that s. 140A(3) was not unconstitutional, aligning with the views of the Andhra Pradesh and Calcutta High Courts. In conclusion, the High Court determined that the Tribunal was not correct in law in cancelling the penalty under s. 140A(3). The decision was based on the understanding that the penalty provision was valid and served the purpose of ensuring tax compliance.
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