2025 (3) TMI 1044 - AT - Income Tax

Levy of penalty u/s 221(1) - assessee has not paid an outstanding tax demand - assessee submitted that he had no money to make the payment of the entire amount of tax liability - HELD THAT - AO did not consider the good and sufficient reasons available with the assessee to make the payment of the due tax arrears at the time of filing the return of income and levied a penalty at 100% of the tax in arrears. We find that as per the Explanation to section 221(1) of the Act the assessee shall not cease to be liable to any penalty merely by reason of the fact that before the levy of such penalty he has paid the tax. Therefore in view of the express provisions of section 221(1) of the Act we do not find any merits in the submissions of AR that till the levy of penalty u/s 221(1) the assessee has made partial payment of tax on various occasions which were not considered by the AO. During the hearing apart from reiterating the submissions made before the lower authorities AR did not bring any material on record to show that the exercise of discretion by the AO to levy a penalty at 100% of the amount of tax in arrears is not as per the provisions of the Act. Further in light of the income declared by the assessee in his return of income for subsequent years as noted in the foregoing paragraphs we do not find that the assessee has good and sufficient reasons for the default in making the payment of tax in arrears. CIT(A) has already granted partial relief to the assessee by reducing the penalty by the amount of interest we do not find any basis for quashing the remaining penalty upheld by the CIT(A) u/s 221(1) of the Act. Accordingly the impugned order passed by the learned CIT(A) is upheld and the grounds raised by the assessee are dismissed.

ISSUES PRESENTED and CONSIDERED

The core legal questions considered in this judgment include:

1. Whether the penalty imposed under section 221(1) of the Income Tax Act, 1961, by the Assessing Officer (AO) was justified given the assessee's claim of financial difficulty.

2. Whether the AO properly exercised discretion in imposing a penalty equivalent to the entire outstanding tax demand despite the assessee's partial payments and claims of reasonable cause for non-payment.

3. Whether the Commissioner of Income Tax (Appeals) [CIT(A)] erred in sustaining the penalty without adequately considering the assessee's financial condition and partial payments made before the penalty order.

ISSUE-WISE DETAILED ANALYSIS

1. Justification of Penalty under Section 221(1) of the Act

Relevant legal framework and precedents: Section 221(1) of the Income Tax Act allows the AO to levy a penalty when an assessee is in default or is deemed to be in default in making a payment of tax. The penalty can be up to the amount of tax in arrears.

Court's interpretation and reasoning: The Tribunal noted that the AO had determined the penalty based on the assessee's failure to pay the outstanding tax demand despite having sufficient income in subsequent years. The AO concluded that the assessee had the financial means to pay the tax but chose not to do so.

Key evidence and findings: The Tribunal considered the income declared by the assessee in subsequent years, which indicated that the assessee had sufficient income to meet the tax liabilities. The assessee's argument of financial difficulty was not substantiated with adequate evidence.

Application of law to facts: The Tribunal applied the provisions of section 221(1) and found that the AO had not erred in imposing the penalty, given the assessee's failure to provide sufficient reasons for non-payment of the tax arrears.

Treatment of competing arguments: The assessee argued financial hardship and partial payments as reasons for non-payment. However, the Tribunal found that these were insufficient to justify non-payment, especially in light of the income reported in subsequent years.

Conclusions: The Tribunal upheld the penalty, concluding that the AO had appropriately exercised discretion under section 221(1) and the assessee did not provide compelling reasons for the default.

2. Exercise of Discretion by AO in Imposing Penalty

Relevant legal framework and precedents: The AO has the discretion to impose a penalty up to the amount of tax in arrears. The exercise of this discretion must be reasonable and consider the facts and circumstances of each case.

Court's interpretation and reasoning: The Tribunal noted that the AO imposed a penalty equivalent to the outstanding tax demand, which was within the statutory limits. The AO's decision was based on the assessee's financial records, which did not support the claim of financial hardship.

Key evidence and findings: The Tribunal reviewed the income details from the assessment years following the year under consideration, which showed significant income that could have been used to clear the tax arrears.

Application of law to facts: The Tribunal found that the AO's decision to impose the penalty at 100% of the tax in arrears was justified, given the lack of evidence from the assessee to support claims of financial difficulty and the demonstrated ability to pay.

Treatment of competing arguments: The assessee's argument for reduced penalty based on financial difficulty and partial payments was not supported by the evidence, leading the Tribunal to uphold the AO's decision.

Conclusions: The Tribunal concluded that the AO had not abused discretion, and the penalty imposed was reasonable under the circumstances.

SIGNIFICANT HOLDINGS

Verbatim quotes of crucial legal reasoning: The Tribunal emphasized that "the assessee shall not cease to be liable to any penalty merely by reason of the fact that before the levy of such penalty he has paid the tax," as per the Explanation to section 221(1) of the Act.

Core principles established: The Tribunal reinforced that penalties under section 221(1) can be levied up to the amount of tax in arrears, and the discretion exercised by the AO must be based on the facts and circumstances, including the assessee's financial ability to pay.

Final determinations on each issue: The Tribunal upheld the penalty imposed by the AO and sustained by the CIT(A), dismissing the assessee's appeal. The Tribunal found no merit in the arguments presented by the assessee regarding financial difficulty and partial payments.

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