By TIOL News Service

NEW DELHI, MAR 06, 2018: THE issues is - Whether financial crunch is a valid ground for default in making payment of tax and no penaly is warranted. YES IS THE ANSWER.

Facts of the case:

The assessee company had filed its return declaring nil income after claiming exemption u/s 80IC to the tune of Rs. 16,78,26,746/-. However, income u/s 115JB was declared at Rs. 19,60,90,859/- on which the total tax payable was computed at Rs. 3,68,17,046/-. The assessee company did not make any payment of tax u/s 210 and after claiming credit of Rs. 66,5 5,415/- on account of TDS, TCS, advance tax and self assessment tax, the total admitted tax liability was shown as payable at Rs. 3,01,61,630/-. The return was processed u/s 143(1), however, the assessee did not make any payment against the demand raised by the Department. Therefore, the assessee was issued a show cause notice u/s 140A(3) to which the assessee responded that the company had undertaken capital expenditure in plant and machinery; there was delay in getting term loan and working capital limits from banks; the market of the stainless steel industry had worsened over the last several months and price realization from sales was much below the costs. It was also submitted that due to tight financial position, the company could not pay self assessment tax in time and further the problems of the company had further been aggravated by sudden cloud burst because of which there was flood in the factory and lot of damage had been caused to plant and machinery as well as the material, forcing the company to shut down the factory. The AO was however of the opinion that assessee had failed to make payment of the admitted tax liability and thus proceeded to impose penalty @100%. On appeal, the CIT(A) confirmed the imposition of penalty but curtailed it to Rs. 10 lakh only.

Tribunal held that,

++ it is seen that the assessee had submitted a reasonable cause of financial crunch for its inability to pay the self assessment tax within time. It is also seen that the assessee company has since approached the BIFR for being declared a sick company and its registration with the BIFR has also been effected. It is found that the CIT(A) has, although, confirmed the penalty while curtailing it to Rs. 10 lakh only, he has also agreed with the assessee’s submission that the assessee was definitely in financial difficulty. The CIT(A) has mentioned that he agrees that the assessee has been able to explain to a large extent the cause for default in payment of self assessment tax. The CIT(A) has also noted that the assessee was definitely in financial difficulty due to various reasons and the flash floods at the factory premises and damage to plant and machinery has put a strain on the liquidity position of the assessee. It was also observed that the assessee had also paid all the tax arrears along with up-to-date interest before the levy of penalty. The CIT(A) also noted that the AO had been passing orders, providing time for making payment of taxes and also varying the tax demand by passing order u/s 154 and therefore, in view of all the factors, there was no sufficient ground for levying penalty for such a large sum;

++ it is however strange that on the one hand, the CIT(A) accepts that the assessee had severe financial crunch which it was able to substantiate both before the AO as well as the CIT(A), but even then, the CIT(A) deemed it fit to sustain a part of the penalty. This does not appear to be correct as per law. The Madras High Court in the case of Nachimuthu Industrial Association vs. CIT - 123 ITR 611 (Madras) has held that although the main part of section 221 enables the AO to levy penalty, still under the second proviso he need not levy penalty or cannot levy penalty if default was for good and sufficient reason. The Madras High Court observed that paucity of funds also has to be taken into account. Similarly, ITAT Delhi Bench in the case of ACIT vs Rakesh Kumar Garg in ITA No. 5198/Del/2013, held that financial constraint and liquidity crunch faced by the assessee at the time of filing the return is a good and sufficient reason to prove and explain default by the assessee in making payment of tax at the time of filing of return and no penalty can be levied u/s 221 in such a case. Therefore, looking into the facts of the case and also keeping in mind the reasonable cause given by the assessee being severe financial/liquidity crunch, which has been duly acknowledged and accepted by the CIT(A) in the impugned order, no penalty is leviable on the facts and circumstances of the case.

(See 2018-TIOL-334-ITAT-DEL)