Reliance Industries Ltd vs. CIT (Bombay High Court)

The assessee deducted the tax at the time of making the payment of salaries, dividend, interest as also on payment made to contractors. However, it delayed depositing the amounts of tax deducted with the revenue. The quantum of tax deducted was deposited with the revenue alongwith the interest by the assessee on its own before any notice determining the amount or declaring the assessee to be in default was made by the revenue. The AO levied penalty u/s. 221 of the I.T. Act, 1961, for failure to pay tax deducted at source within the prescribed time. This was reversed by the CIT(A) but confirmed by the ITAT. On appeal by the assessee HELD dismissing the appeal:

(i) The contention that before an order levying penalty u/s 221 is passed, there should be an order u/s 201 holding the assessee to be in default is not acceptable. The fact that an appeal is provided under Section 246(i) of the Act from an order passed under Section 201 of the Act would not by itself require the passing of separate order under Section 201 of the Act prior to passing of an order under Section 221 of the Act. There is no bar in passing an order under Section 201 read with 221 of the Act simultaneously. The assessee’s right of appeal is not affected by reason of the Assessing Officer passing a common order under Section 201 read with Section 221 of the Act. The assessee is still entitled to file appeal from orders passed under Sections 201 and 221 of the Act under Section 246(i) and (l) of the Act respectively. The requirement of a written order treating a person to be an assessee in default may not be necessary when it is admitted position between the parties that the assessee is in default.

(ii) The contention 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 is not acceptable. 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 aforesaid submission on behalf of the assessee 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.

(iii) The contention that in view of the proviso to Section 201(1) of the Act, invocation of Section 221 of the Act is barred where the Assessing Officer is satisfied that failure to deduct and pay tax was without good and sufficient reasons is also not acceptable. The words “failed to deduct and pay tax” of the proviso is contrasted with the words “fails to pay the tax as required by or under this Act” found in Section 201(1) as well as 201(1A) of the Act. In view of this difference in language, it is submitted that the proviso would have no application where an assessee has paid the tax even if the same is paid beyond the period provided under the Act. This contention is not acceptable because the proviso applies only in case of a person who has failed to satisfy both the condition therein i.e. fails to deduct and also fails to pay the tax. This interpretation is also supported by the words found in subsection (1) of Section 201 of the Act which provides “…. principal officer of the company does not deduct or after deducting fails to pay the tax as required by or under this Act”. In this case, the tax has been deducted but there is a failure in depositing the tax with the revenue. Parliament treats a person who has deducted the tax and fails to pay it to revenue as a class different from a person who has not deducted the tax and also not deposited the tax with revenue. This is for the reason that in the first class of cases the assessee concerned after deducting the tax, keep the money so deducted which belongs to another person for its own use. In the second class of cases, the assessee concerned does not take any advantage as he pays the entire amount to the payee without deducting any tax and does not enrich itself at the cost of the government. Therefore, although penalty is also imposable in the second class of cases, yet in view of the proviso to Section 201(1) of the Act, it is open to such assessee to satisfy the Assessing Officer that as they have good and sufficient reasons no penalty is imposable. It is in the above view that in the first class of assessees the Parliament has provided for prosecution under Section 276B of the Act for failing the pay the tax deducted at source. Therefore the first class of assessee to which the assessee belongs would be liable for prosecution. Thus the proviso would only apply in respect of the second class of assessee i.e. such class of assessee who have not deducted the tax and consequently failed to pay the tax. Therefore, 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.

(iv) The contention that the Explanation below Section 221 of the Act which clarifies that penalty will continue to be imposable even if the assessee has paid the tax before the levy of penalty would not apply to the present facts is also not acceptable. The contention that penalty would be imposable under Section 221 of the Act only if the assessee is in default at the time of initiation of penalty proceedings and not in acase where the amounts deducted have been deposited long before the notice for penalty under Section 221 of the Act was issued is not acceptable. The construction sought to be put on Section 221(1) of the Act commencing with the words “where an assessee is in default or is deemed to be in default” cannot stand in the face of the explanation which clarifies that merely because the tax has been paid/deposited before the levy of penalty, would also take in all acts, from the imposition of the charge upto/till the entire process of raising demand and collecting the same. The construction sought to be put on the explanation does not allow full amplitude to the words ‘levy’. Besides purposive interpretation also supports the above view as otherwise the construction as suggested by the assessee would enable an assessee to deduct tax at source from the payment being made and not deposit it with the revenue within time prescribed. Therefore utilize the amount in effect till such time just before the notice under Section 221 of the Act is issued.

(v) 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 assesee 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.

(vi) The contention that on facts, no penalty ought to have been imposed upon the assessee as there was good and sufficient reasons viz. financial hardship, diverse locations and lack of computerization is also not acceptable. The obligation to deduct and pay tax upon the assessee is unconditional under the Act. It is the responsibility of the assessee to deduct taxes and to pay to the revenue within the period provided under the Act. Financial stringency would not justify deducting tax from the amount paid to the payee and not paying it to the revenue. Otherwise it would amount to using somebody else’s money for the purposes of one’s business. In such circumstances, the question of financial stringency hardly gives rise to a good and sufficient reason for not depositing tax which was an amount otherwise payable to the payee or on behalf of the payee to the revenue. Moreover, the assessee has not produced any evidence to show that it was in financial difficulty. Similarly diverse locations and lack of computerization are hardly any reasons to justify the failure to pay under the Act. The assessee is entitled to do business in as many locations as it desires but that would not by itself justify not paying taxes which are due to the revenue. The obligation to pay taxes is absolute.

(vii) The contention that no penalty ought to have been imposed upon it in view of the fact that the CIT(A) had held while interpreting Section 221 of the Act that no penalty is imposable and that the interpretation by CIT(A) is a plausible one is also not acceptable because the interpretation put by the CIT(A) on Section 221 of the Act is in face of the explanation which provides that penalty would be imposable even if the tax has been paid before the levy of penalty. The explanation was ignored on the ground that it is confusing. The CIT(A) further construed the word “is” present in Section 221 of the Act which provides that when assessee is in default or deemed to be in default would only mean that the default should be continuous and also continuing when the penalty proceedings are initiated. Consequently the submission is not acceptable as it is not a case where there were two possible views of interpreting Section 221 of the Act. This is particularly so in view of explanation provided thereto.