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January, 10th 2015

                                  Judgment reserved on November 21, 2014
                                 Judgment delivered on December 22, 2014
+                            ITA No. 654/2014

COMMISSIONER OF INCOME TAX-VIII             ..... Appellant
            Through:      Mr.Balbir Singh, Senior Standing


NARESH KUMAR JAGGI                                       ..... Respondent
            Through:                    None


1.      The challenge in this appeal by the revenue under Section 260A of

the Income Tax Act, 1961 (`Act' in short) is to the order dated March 31,

2014 passed by the Income Tax Appellate Tribunal, Delhi Bench

(`Tribunal', in short), whereby the Tribunal, in cross appeals filed by the

appellant-revenue and the respondent-assessee, upheld the order of the

Commissioner of Income Tax (Appeals), restricting the penalty imposed

under Section 140A (3) to 25%.

2.      The relevant facts of the case are, the respondent-assessee filed

return of income for the Assessment Year 2009-10 on 03.11.2010

ITA No. 654/2014                                         Page 1 of 11
declaring an income of Rs. 6,23,36,790/-, on which tax at

Rs.1,26,46,875/- was due and payable after reducing the advance tax

paid of Rs. 14,60,000/-. The respondent-assessee had not paid this

admitted tax liability under Section 140A of the Act. The return was

processed under Section 143(1) of the Act. The intimation under Section

143(1) of the Act was served upon the assessee on 02.01.2011 and the

assessee was required to make the payment by 01.02.2011. The assessee

did not make the payment of outstanding demand by the said date.

Accordingly, a show cause notice under Section 140A(3) of the Act was

served upon the assessee by the Assessing Officer vide a letter dated

November 22, 2011. In the reply to the show cause notice, it was the

stand of the assessee that the admitted tax of Rs. 1,41,06875/- for the

Assessment Year 2009-10 stands paid by him inasmuch as

Rs.14,00,000/- was paid as advance tax and the balance amount of Rs.

1,26,46,875/- was paid in the month of April, 2011 and in support of the

same, he attached necessary challans. He requested that he should not be

treated as in default and the action under Section 140A(3) of the Act be

not initiated. The Assessing officer was of the view that nothing has

come from the reply of the assessee to overcome the default committed

under Section 140A(3) of the Act. According to him, the assessee had

not shown and established a reasonable cause for non payment of the
ITA No. 654/2014                                       Page 2 of 11
admitted tax liability. The Assessing Officer referred to six judgments

of the different High Courts and the Supreme Court and was of the view

that in the absence of any reasonable cause for non payment of the

admitted tax liability, penalty should be imposed. He imposed penalty at

100% of the admitted tax liability i.e. Rs.12646875/- or an amount equal

to the unpaid tax liability.

3.      The respondent assessee filed an appeal before the Commissioner

of Income Tax (Appeals), who was of the following view:

             "I have considered the arguments of the AO and rival
             submissions made in this regard. The contention of
             appellant has no forces. A plain reading of the Sec.
             140A(3) states:-
             91(3) if any assessee fails to pay the whole or any
             part of such tax or interest or both in accordance with
             the provisions of sub-section (1), he shall, without
             prejudice to any other consequences which he may
             incur, be deemed to be an assessee in default in
             respect of the tax or interest or both remaining
             unpaid, and all the provisions of this Act shall apply
             The intention of the legislative is clear on above
             provisions contained in the Act. The provisions are
             made to ensure strict compliance of the law. This is
             evident from the word "shall" used in treating the
             assessee in default. Any other interpretation will
ITA No. 654/2014                                           Page 3 of 11
             defeat the very purpose of the provision. Where the
             Assessing Officer initiated proceedings for levy or
             penalty by treating the assessee as assessee in default
             and the assessee challenged levy of penalty under
             section 221 on the ground that no notice of demand
             under section 156 was served by the Assessing
             Officer, it was held that liability to pay self
             assessment tax arises on the basis of the return
             furnished by the assessee and the failure to pay tax or
             interest or both on the income admitted in the return,
             renders the assessee to be in default. Hence, there
             was no need to issue notice of demand.(Safari
             Mercantile Pvt. Ltd. Vs. CIT(2008) 21 SOT 531
             (Mum). In view of the above I am of the considered
             opinion that once the default is committed the
             appellant became the assessee is default and cannot
             take shelter under any reason or circumstances. It is
             quite a vague reason that the appellant was facing
             financial crisis and that too without any proof and
             evidence. Even though the tax and interest have been
             paid subsequently that will not cure the defect of the
             assessee in default u/S 140A(3). During the appellant
             proceedings the appellant stated that he had informed
             the assessing officer about their financial crisis and
             inability to pay tax vide letter dated 27/08/2010 and
             13/10/2010. The appellant had also requested to
             grant installments for payment of tax. Since the

ITA No. 654/2014                                           Page 4 of 11
             appellant had paid the entire amount of tax before
             issuance of show cause the intention to pay cannot be
             doubted and therefore does not deserve the maximum
             penalty. However, the appellant cannot escape from
             the liability to pay penalty as the intention of the
             legislature regarding payment of tax is to pay as you
             earn. The appellant should have arranged for
             payment of tax as the income was earned. It is quite a
             vague reason that the appellant was facing financial
             crisis and that too without any proof and evidence. In
             my opinion the appellant is definitely an assessee in
             default and is liable to pay penalty. Since the
             intention of the appellant was not to evade tax and the
             entire tax has been paid also, the imposition of
             maximum penalty is not justified. In view of the
             above, I restrict the quantum of the penalty to the
             25% of the amount levied by the AO, i.e. 25% of the
             tax liability of the appellant. Thus the penalty is
             reduced to Rs. 31,61,720/-".

4.       The appellant-revenue as well as the respondent-assessee filed

cross appeals challenging the order of the Commissioner of Income Tax

(Appeals) dated 31.08.2012 before the Tribunal. The Tribunal held as


                   "9. We have heard both the sides, considered the
            material on record as well as submissions made before

ITA No. 654/2014                                           Page 5 of 11
            the lower authorities and reiterated before this Bench
            in the light of the precedents relied upon by Ld.
            Counsel for the assessee. It is not in dispute that the
            assessee has earned substantial income in the year
            under consideration but he did not pay the due tax
            within the stipulated time after service of demand
            notice. Neither any reasonable cause has been shown
            nor substantiated and Ld. CIT(A) appears to have
            given relief of 75% of the amount of penalty imposed
            by the A.O. while taking a very lenient view.
            Considering the entirety of facts, circumstances of the
            case and material on record in the light of the
            precedents relied upon, we are of the view that relief
            already granted by Ld. CIT(A) is sufficient. As such,
            the action of Ld. CIT(A) is confirmed and resultantly,
            appeal of the assessee as well as of the Department are

5.      Mr.Balbir Singh, Senior Standing Counsel for the appellant-

revenue would submit that there has been a clear default on the part of

the assessee as he had not paid the amount due within the specified

period and the penalty was rightly imposed by the Assessing Officer. He

would state that no reasonable cause was shown by the assessee in not

depositing the admitted amount due as tax. He would justify the order of

the Assessing Officer in imposing penalty @ 100% of the tax due.

ITA No. 654/2014                                          Page 6 of 11
6.      Having heard the learned Senior Standing Counsel for the

revenue, we note, the respondent-assessee had stated, in his reply before

the Commissioner of Income Tax (Appeals), that he had paid the

admitted tax by 28.04.2011 before the issuance of the show cause notice

by the Assessing Officer on 22.11.2011. In addition the assessee was

liable to pay interest for the delayed payment. The delay in payment of

tax as stated and argued by the assessee was due to the financial hardship

or constraint due to huge losses suffered in share investments. In support,

the assessee had filed the details of the bank statements and other

relevant details before the Assessing Officer to explain his financial

hardship, which it was stated was beyond his control. For the said

reasons, the assessee was not in a position to pay the admitted tax within

time. Though, the CIT (Appeals) and the Tribunal have not accepted the

plea of financial hardship, the said authorities primarily were of the

opinion that there was no intention on the part of the assessee to avoid or

intentionally delay payment of taxes. The assessee had paid the entire tax

but belatedly. He had also paid interest. This belated payment was made

voluntarily and without resort to any coercive steps. Payment was made

in April 2011, whereas the Assessing Officer waited and issued notice

only in November 2011. The CIT (Appeals) and the Tribunal reduced

the penalty to 25% of the amount levied by the Assessing Officer. We
ITA No. 654/2014                                         Page 7 of 11
have not examined the question of financial hardship, as the assessee is

not in appeal. The only aspect which falls for our consideration is

whether the CIT (Appeals), so also the Tribunal were justified in

restricting the penalty imposed under Section 140A(3) of the Act to


7.      Suffice to state, it is a case of `proportionality'. The Supreme

Court in the case of Coimbatore District Central Cooperative Bank vs.

Coimbatore         District   Central   Cooperative    Bank       Employees's

Association & Anr. [2007] 4 SSC 669 on the aspect of `proportionality'

in paras No.18 and 34 has held as under:-

        "18. 'Proportionality' is a principle where the Court is
        concerned with the process, method or manner in which the
        decision-maker has ordered his priorities, reached a
        conclusion or arrived at a decision. The very essence of
        decision-making consists in the attribution of relative
        importance to the factors and considerations in the case. The
        doctrine of proportionality thus steps in focus true nature of
        exercise - the elaboration of a rule of permissible priorities.
        34. As observed by this Court in M.P. Gangadharan and Anr.
        v. State of Kerala, the constitutional requirement for judging
        the question of reasonableness and fairness on the part of the
        statutory authority must be considered having regard to the
        factual matrix in each case. It cannot be put in a straitjacket

ITA No. 654/2014                                            Page 8 of 11
        formula. It must be considered keeping in view the doctrine of
        flexibility. Before an action is struck down, the Court must be
        satisfied that a case has been made out for exercise of power
        of judicial review. The Court observed that we are not
        unmindful of the development of the law that from the
        doctrine of "Wednesbury unreasonableness", the Court is
        leaning towards the doctrine of "proportionality". But in a
        case of this nature, the doctrine of proportionality must also
        be applied having regard to the purport and object for which
        the Act was enacted.
8. In the case in hand, it is to be seen whether penalty of 25% restricted by the CIT (Appeals) and the Tribunal is justified or the penalty must be the one imposed by the Assessing Officer. We note, the CIT (Appeals) while restricting the penalty to 25% was of the view that there was no intention to evade tax. The conclusion of the CIT (Appeals) which is upheld by the Tribunal reducing the quantum of penalty is justified. Such a finding is keeping in view the fact that the assessee paid advance tax of Rs.14,00,000/-. After the return was processed under Section 143(1) of the Act, the intimation was sent to the assessee on 01.02.2011 calling upon him to make payment by 01.02.2011. The assessee deposited the tax due by April 28, 2011, which is much before the date of issuance of notice under Section 140A(3) of the Act by the Assessing Officer i.e. November 22, 2011. Further, we are of the view, ITA No. 654/2014 Page 9 of 11 when the authorities were justified in restricting the penalty to 25% based on cogent material and finding, more so when it is discretionary, as is clear from the reading of Section 221 of the Act which is reproduced below:- "Penalty payable when tax in default. 221. (1) When an assessee is in default or is deemed to be in default in making a payment of tax, he shall, in addition to the amount of the arrears and the amount of interest payable under sub-section (2) of section 220, be liable, by way of penalty, to pay such amount as the Assessing Officer may direct, and in the case of a continuing default, such further amount or amounts as the Assessing Officer may, from time to time, direct, so, however, that the total amount of penalty does not exceed the amount of tax in arrears : Provided that before levying any such penalty, the assessee shall be given a reasonable opportunity of being heard : Provided further that where the assessee proves to the satisfaction of the Assessing Officer that the default was for good and sufficient reasons, no penalty shall be levied under this section. Explanation.--For the removal of doubt, it is hereby declared that an assessee shall not cease to be liable to any penalty under this sub-section merely by reason of the ITA No. 654/2014 Page 10 of 11 fact that before the levy of such penalty he has paid the tax. (2) Where as a result of any final order the amount of tax, with respect to the default in the payment of which the penalty was levied, has been wholly reduced, the penalty levied shall be cancelled and the amount of penalty paid shall be refunded." 9. The discretion so exercised is within the mandate of law and based on good, valid and cogent ground. If at all, the Assessing Officer was rather harsh, and did not give due credence to several mitigating factors, including the payment made. Contumacious and maladroit conduct, though not relevant while deciding the question of reasonable cause, are relevant consideration when we examine the question of penalty. Revenue perhaps harbours the belief that maximum penalty must be imposed in all cases, which is not the legislative mandate. No substantial question of law arises for our consideration. The appeal is thus dismissed. (V.KAMESWAR RAO) JUDGE (SANJIV KHANNA) JUDGE DECEMBER 22, 2014 km ITA No. 654/2014 Page 11 of 11
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