2008 (10) TMI 306 - AT - Income Tax

Summary

Issues Involved:
1. Confirmation of penalty imposed under Section 221(1) of the Income Tax Act.
2. Consideration of facts, circumstances, explanations, and material on record.
3. Legal justification for the penalty imposed.
4. Reasonable cause for delay in payment and excessive penalty.

Detailed Analysis:

1. Confirmation of Penalty Imposed Under Section 221(1):
The primary issue was whether the penalty of Rs. 11,50,000 imposed by the Assessing Officer (AO) under Section 221(1) of the Income Tax Act was justified. The assessee argued that the penalty was levied with regard to interest only, which is not permissible under Section 221(1). The tribunal noted that Section 221(1) provides for penalty in case of default in payment of tax, not interest. The tribunal referred to the cases of Shreeniwas & Sons vs. ITO and CIT vs. P.S. Hathiramani, which held that penalty under Section 221(1) cannot be imposed for non-payment of interest. The tribunal concluded that the penalty imposed under Section 221(1) was not justified as it was related to interest and not tax.

2. Consideration of Facts, Circumstances, Explanations, and Material on Record:
The tribunal examined whether the facts and circumstances of the case, along with the explanations and material on record, were properly considered. The assessee contended that it was a new firm that started its business in mid-February 2004 and could not estimate its income, leading to a delay in payment. The tribunal acknowledged that the assessee had filed an application for waiver of interest, which was pending. The tribunal found that the AO and CIT(A) did not adequately consider these factors and explanations provided by the assessee.

3. Legal Justification for the Penalty Imposed:
The tribunal analyzed the legal justification for the penalty imposed. It referred to the Explanation to Section 140A, which states that any payment made shall first be adjusted towards interest payable, and the balance, if any, towards tax payable. The tribunal noted that the AO had imposed the penalty for non-payment of interest, which is not covered under Section 221(1). The tribunal emphasized that the penalty provisions under Section 221(1) are applicable only for default in payment of tax, not interest.

4. Reasonable Cause for Delay in Payment and Excessive Penalty:
The tribunal considered whether there was a reasonable cause for the delay in payment and whether the penalty imposed was excessive. The assessee argued that the delay was due to the business being started only 40 days before the year-end and a significant portion of the income not being recovered. The tribunal found these reasons to be valid and noted that the assessee's conduct did not indicate willful non-payment. Additionally, the tribunal observed that the penalty of 100% was excessive and not justified given the circumstances.

Conclusion:
The tribunal concluded that the penalty imposed under Section 221(1) was not justified as it was related to interest and not tax. The tribunal found that the AO and CIT(A) did not adequately consider the facts, circumstances, and explanations provided by the assessee. The tribunal also noted that the penalty provisions under Section 221(1) are applicable only for default in payment of tax, not interest. Furthermore, the tribunal found that there was a reasonable cause for the delay in payment and that the penalty imposed was excessive. Consequently, the tribunal deleted the penalty and allowed the appeal filed by the assessee.