2015 (7) TMI 812 - HC - Income Tax

Levy of penalty u/s. 221 - failure to pay tax deducted at source within the prescribed time - Whether the interpretation placed by the Tribunal upon Sections 221 and 201 of the Income Tax is correct confirming the levy of penalty upon the appellant to the extent of 5% of the TDS? - Held that - Section 201(1) of the Act itself provides that where there is failure of an assessee to deduct tax and pay to the revenue, such an assessee is deemed to be in default. The failure to deposit in time is accepted/admitted position. There is no dispute about the questions. Thus the appellant is deemed to be in default. Therefore, it cannot be said that the penalty proceedings are without jurisdiction under Section 221 of the Act. The Parliament has specifically provided for the words in addition to the amount of arrears alongwith the amount of interest payable be liable for penalty only with a view of qualifying that payment of the amount of arrears and the interest payable would by itself not wipe away the liability to penalty under Section 221 of the Act. The submission on behalf of the appellant that penalty under Section 221 of the Act would be payable only when the same is in addition to the arrears of payment of tax deducted also stands negatived by the Explanation added to Section 221(1) of the Act. This Explanation clarifies that an assessee shall continue to be liable to penalty even if the tax has been paid before levy of penalty. The proviso under Section 201 would have no application to the facts of the present case. The legislature did not provide for the words by or under this Act in the proviso as in the absence of deducting tax, the occasion to deposit it within time as provided in the Rules would not apply. This is so as the time begins to run from the date of the deducting of tax as is evident also from Section 200 of the Act which provides that any person deducting any sum shall pay it within the prescribed time, the sum so deducted to the Central Government. It must be borne in mind that the assessee continues to be in default in case the tax has not been deposited with revenue within the time prescribed under the Act. Tax deposited thereafter but before penalty proceedings are initiated would not cleanse the assessee from being in default. The penalty is imposed upon the assessee under Section 221 of the Act for the default in not having paid the tax deducted at source within the time provided under the Act. This default is not wiped away by the assessee depositing the tax after the prescribed time. It is in the above circumstances, that the reliance of the petitioners upon the decision of the Apex Court in Sri Hohan Wahi v. CIT 2001 (3) TMI 4 - SUPREME Court seems inappropriate. Thus we find no merit in the appellant s above submission that no penalty can be imposed as there was no default at the time when penalty proceedings were initiated. The retrospective amendment with effect from 1 April 1962 besides being clarificatory would also take into account a partial deposit with revenue of the tax deducted at source within the ambit of Section 201(1) of the Act. The Calcutta High Court s decision in CIT v. S.K. Tekriwal 2012 (12) TMI 873 - CALCUTTA HIGH COURT being relied upon by the petitioner does not in our view assist the petitioner as it holds that although an assessee would be defaulter for nonpayment of tax deducted at source, yet payments made cannot be disallowed under Section 40(a)(1a) of the Act. This is where partial payment of tax deducted has been made to the revenue. Tribunal has rendered a finding of fact that the reason set out by the appellant for failure to deposit the tax within time is not a good and sufficient cause. At the hearing, the appellant had not been able to show that the above finding of the Tribunal is in any manner perverse and/or arbitrary.Accordingly, the imposition of penalty cannot be found fault with. Tribunal was right in law in upholding the levy of penalty u/s. 221 of the I.T. Act, 1961, for failure to pay tax deducted at source within the prescribed time - Decided against assessee.

Issues Involved:
1. Imposition of penalty under Section 221 of the Income Tax Act for failure to deposit tax deducted at source.
2. Interpretation of Sections 221 and 201 of the Income Tax Act.
3. Jurisdiction and procedural requirements for imposing penalty under Section 221.
4. Validity of consolidated orders under Sections 201 and 221.
5. Applicability of the proviso to Section 201(1) regarding "good and sufficient reasons" for non-payment.
6. Impact of retrospective amendments to Section 201(1).
7. Consideration of "good and sufficient reasons" for delay in payment.
8. Evaluation of the Tribunal's reduction of penalty to 5% of the TDS amount.

Detailed Analysis:

1. Imposition of Penalty under Section 221:
The primary issue was whether the Tribunal was correct in upholding the penalty under Section 221 for not depositing tax deducted at source within the prescribed time. The appellant had deducted the tax but delayed its deposit. The Tribunal reduced the penalty imposed by the Assessing Officer from 10% to 5% of the delayed tax amount, considering the appellant's repeated defaults.

2. Interpretation of Sections 221 and 201:
The appellant argued that penalty proceedings under Section 221 could only be initiated after a declaration of default under Section 201 through a speaking order. The Tribunal, however, held that the appellant's admitted delay in depositing the tax made a separate declaration under Section 201 unnecessary. The court affirmed this view, stating that the penalty could be imposed without a separate order under Section 201 when the default was undisputed.

3. Jurisdiction and Procedural Requirements:
The appellant contended that the penalty proceedings were without jurisdiction as there was no prior order under Section 201. The court rejected this, noting that the appellant's admission of default negated the need for a separate order. The court also clarified that a consolidated order under Sections 201 and 221 was legally valid and did not affect the appellant's right to appeal.

4. Validity of Consolidated Orders:
The appellant challenged the validity of consolidated orders under Sections 201 and 221, arguing that it deprived them of raising distinct defenses in penalty proceedings. The court found no merit in this argument, emphasizing that the appellant had the opportunity to present all defenses during the penalty proceedings.

5. Applicability of Proviso to Section 201(1):
The appellant argued that the proviso to Section 201(1), which exempts penalties for non-payment due to "good and sufficient reasons," should apply. The court held that this proviso did not apply to cases where tax was deducted but deposited late. The court distinguished between assessees who fail to deduct tax and those who deduct but delay payment, with the latter being subject to stricter penalties.

6. Impact of Retrospective Amendments:
The appellant contended that the retrospective amendment to Section 201(1) by the Finance Act, 2002, which included partial non-payment of tax, should not apply to their case. The court disagreed, stating that the amendment was clarificatory and applicable to the appellant's situation, reinforcing the liability for penalties even for partial non-payment.

7. Consideration of "Good and Sufficient Reasons":
The appellant cited financial hardship, diverse locations, and lack of computerization as reasons for the delay. The court found these reasons insufficient, emphasizing the unconditional obligation to deposit deducted tax. The court noted that the Tribunal had found no evidence of financial difficulty and that operational challenges did not justify non-compliance with tax obligations.

8. Evaluation of Tribunal's Reduction of Penalty:
The appellant argued that the Tribunal's reduction of the penalty to 5% was unreasonable. The court upheld the Tribunal's decision, noting that the reduction was based on the appellant's repeated defaults and the need for a deterrent penalty. The court found the reduced penalty to be reasonable and proportionate.

Conclusion:
The court answered all questions in favor of the respondent-revenue, affirming the Tribunal's interpretation of Sections 221 and 201, the imposition of penalty, and the reduction of the penalty to 5%. The appeals were dismissed, and the reference was answered against the appellant-assessee.

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