1983 (11) TMI 108 - AT - Income Tax

Summary

Issues:
1. Stay of demand and penalty under section 221
2. Justification for levying penalty under section 221
3. Financial circumstances of the assessee
4. Interpretation of the explanation to section 221
5. Purpose of levying penalty under section 221
6. Criteria for levying penalty under section 221

Analysis:

1. The assessee-company's income was fixed at Rs. 25,75,219 with a net demand of Rs. 10,02,321 payable by a certain date. The assessee requested a stay of the demand pending a decision by the CIT (A). The ITO rejected the request for a challan to pay the undisputed tax of Rs. 4,07,452, leading to the collection of the entire amount by the ITO. Subsequently, a penalty under section 221 was levied for non-payment of the outstanding amount, which was later reduced by the CIT (A) and further appealed before the Tribunal.

2. The assessee argued that there was no justification for levying the penalty under section 221, emphasizing their poor financial circumstances and confidence in the disputed claim. The penalty was deemed harsh, especially considering the payment of undisputed tax was prevented by the ITO, adding to the financial burden on the assessee.

3. The department contended that the assessee's financial difficulties were not proven, as the entire demand was collected through recovery proceedings, indicating an obstructive stance by the assessee. The legal objection raised by the assessee regarding the penalty was dismissed, citing the explanation to section 221.

4. The Tribunal analyzed the purpose and interpretation of the explanation to section 221, highlighting that the section aims to coerce obstructive assessees to pay normal tax. The Tribunal opined that the explanation should not grant unrestrained power to the ITO to levy penalties, especially when the assessee faces financial challenges in meeting tax demands.

5. Considering the financial difficulties of the assessee and the disputed nature of the tax demand, the Tribunal found no justification for levying the penalty. The Tribunal emphasized that the purpose of section 221 is to collect tax from recalcitrant assessees, not to burden financially strained entities with additional penalties.

6. The Tribunal concluded that the explanation to section 221 should not apply automatically to cases of delayed tax payment, especially when the assessee has paid the tax demanded. The penalty was deemed unjustified and canceled, with directions for the refund of the penalty amount. The appeal was allowed in favor of the assessee.