2020 (3) TMI 1110 - AT - Income Tax

Penalty imposed u/s 221(1) r.w.s. 140A(3) - non-payment of self-assessment tax - Return of Income as filed u/s 139(1) itself was declared an invalid Return - scope of Sec.140A(3) - HELD THAT - We find that the issue in dispute in the present appeal before us is squarely covered by the aforesaid order of Co-ordinate Bench of ITAT, Mumabi in the case of Heddle Knowledge Pvt. Ltd. vs. ITO 2018 (3) TMI 208 - ITAT MUMBAI held that the fact that the amended Sec. 140A(3) w.e.f. 01.04.1989 does not envisage any penalty for non-payment of self-assessment tax, the Assessing Officer was not justified in levying the impugned penalty by making recourse to Sec. 221(1) of the Act. Sec. 221 of the Act remains unchanged, both during the pre and post amended Sec. 140A(3) of the Act and even in the pre-amended situation, penalty u/s 221 of the Act was not attracted for default in payment of self-assessment tax, which was expressly covered in pre 01.04.1989 prevailing Sec. 140A(3). Thus, without there being any requisite corresponding amendment to Sec. 221 of the Act in consonance with the amendments carried out in Sec. 140A(3) of the Act w.e.f. 01.04.1989, the Assessing Officer erred in levying the impugned penalty. Thus, on this aspect, we hereby set-aside the order of CIT(A) and direct the Assessing Officer to delete the penalty imposed u/s 140A(3) r.w.s. 221(1) of the Act. - Decided in favour of assessee

Issues Involved:
1. Validity of penalty imposed under Section 221(1) of the Income Tax Act.
2. Absence of demand notice under Section 156.
3. Financial constraints and inability to pay.
4. Incorrect amount in the recovery notice under Section 221(1).
5. Adjustment of tax liability against a refund due to an associate entity.
6. Applicability of amended Section 140A(3) and its impact on penalty under Section 221(1).

Detailed Analysis:

1. Validity of Penalty under Section 221(1):
The primary issue revolves around whether the penalty imposed under Section 221(1) is valid, given that the return of income for the assessment year 2014-15 was declared defective and non-est under Section 139(9) by the CPC Cell. The Tribunal found that the penalty under Section 221(1) was not sustainable because the return was treated as invalid, and consequently, there was no valid demand notice under Section 156. The Tribunal relied on the decision in the case of "Heddle Knowledge Pvt. Ltd. vs. ITO," where it was held that the amended Section 140A(3) does not envisage any penalty for non-payment of self-assessment tax, and the Assessing Officer was not justified in levying the penalty by making recourse to Section 221(1).

2. Absence of Demand Notice under Section 156:
The assessee argued that no valid demand notice under Section 156 was issued, which is a mandatory condition for the imposition of penalty. The Tribunal upheld this argument, noting that without a valid demand notice, the penalty under Section 221(1) could not be sustained. The Tribunal cited the Supreme Court's decision in "Sri Mohan Wahi vs. Commissioner of Income Tax," which emphasized the necessity of a valid demand notice for any tax or penalty to be payable.

3. Financial Constraints and Inability to Pay:
The assessee contended that the penalty was unjustified due to financial constraints and the inability to make the payment. The Tribunal, however, found that the assessee had not proved that the default was for good and sufficient reason, as required under the proviso to Section 221(1). The Tribunal noted that the assessee had received substantial rental income and other income during the year, which negated the argument of financial incapacity.

4. Incorrect Amount in Recovery Notice:
The recovery notice under Section 221(1) referred to an incorrect amount of ?22,14,320, whereas the assessee had already paid ?10,00,000 on 23.06.2016 and the remaining amount by 21.07.2016. The Tribunal found that the penalty was still computed correctly on the amount of ?22,14,320, as the default is determined as of the date of filing the return of income.

5. Adjustment of Tax Liability Against Refund:
The assessee requested that the unpaid tax be adjusted against a refund due to an associate entity. The Tribunal held that there is no provision to adjust the refund of one PAN against the demand in the case of another PAN. Refund adjustment is only possible against the demand outstanding in the case of the assessee itself.

6. Applicability of Amended Section 140A(3):
The Tribunal noted that the amended Section 140A(3), effective from 01.04.1989, does not envisage any penalty for non-payment of self-assessment tax. The Tribunal relied on the decision in "Heddle Knowledge Pvt. Ltd. vs. ITO," which clarified that the default in payment of self-assessment tax would not attract penalty under Section 221(1) post-amendment. The Tribunal emphasized that the intention of the legislature was to charge mandatory interest for such defaults, not to impose penalties.

Conclusion:
The Tribunal decided in favor of the assessee, setting aside the orders of the CIT(A) and the Assessing Officer, and canceling the penalty amounting to ?8,85,730. The appeal filed by the assessee was allowed for statistical purposes. The decision was pronounced in the open Court on 17/03/2020.

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