By TIOL News Service

MUMBAI, JULY 10, 2017: THE ISSUE BEFORE THE COURT IS - Whether penalty imposed for default in making payment of tax, shall exceed the amount of tax in arrears. NO is the verdict.

Facts of the case:

The assessee company had filed its return which was processed u/s 143(1). Consequent to the same, the AO raised demand for Rs.1,64,90,573/- and penalty of Rs.1,19,30,677/- was imposed u/s 221(1) for default by Assessee in the payment of demand. On appeal, the CIT(A) deleted the penalty by holding that interest component had to be excluded while levying penalty u/s 221(1) and since the penalty levied exceeded the tax component, he set aside the order levying penalty. On further appeal, the ITAT held that while levying penalty u/s 221(1), interest component was not to be considered and remitted the matter to the AO with the direction to quantify the amount of penalty in accordance with provisions of Section 221(1).

On appeal, the HC held that,

++ reading Section 221 makes it clear that the aspect of default in payment of tax and the amount of interest payable are treated as distinct and separate components. The section specifically states that when an Assessee is in default or is deemed to be in default in making payment of tax, he shall in addition to the amount of arrears and the amount of interest payable u/s 220(2), be liable, to pay penalty, however the amount of penalty does not exceed the amount of tax in arrears. The terminology “default in making a payment of tax and amount of interest payable” are considered to be separate for imposition of penalty and penalty is to be levied on account of default in making a payment of tax. However, the total amount of penalty shall not exceed the amount of tax in arrears. The said penalty for non payment of the tax is in addition to the levy of interest u/s 220(2). Under no principle of interpretation, the arrears of tax as laid down in the said Section would include the amount of interest payable u/s 220(2). The amount of penalty will have to be restricted on the arrears of tax, which would not include the interest component charged u/s 220(2) of the Act.

++ the Apex Court in the case of Harshad Shantilal Mehta vs. Custodian and others observed that the definition of tax u/s 2(43) does not include penalty or interest. Tax, penalty and interest are different concepts under Income Tax Act. The provisions for imposition of penalty and interest are distinct from provisions for imposition of tax. The Apex Court agreed with the reasoning and the conclusion drawn by the Special Court that neither penalty nor interest can be considered as tax u/s 11(2)(a) of the Special Court (Trial of Offences relating to transactions in Securities) Act, 1992. The said section dealt with the priorities for distribution and liability specified under Clause 'A' i.e. All Revenues, Taxes, Cesses and rates due from persons notified. In view of the aforesaid discussion and on reading the provisions of Section 221 conjointly with the definition of “tax” as detailed u/s 2(43), the irresistible conclusion that can be drawn is that the phraseology “tax in arrears” as envisaged in Sec.221 of the Act would not take within its realm the interest component. It would be abundantly clear that the AO can impose penalty for default in making the payment of tax, but the same shall not exceed the amount of tax in arrears. Tax in arrears would not include the interest payable u/s 220(2) of the Act.

(See 2017-TIOL-1271-HC-MUM-IT)