Shakaldev Mishra Vs Deputy /ACIT (ITAT Kolkata)

After the Amendment effected on 1st April, 1989, penalty under section 140A(3) is not imposable on non-payment of taxes on the returned income because that would be compensated by way of interest charged upon the assessee. The Tribunal has made reference to the CBDT Circular bearing No. 549 of 31.10.1989 particularly paragraph no. 4.17 and 4.18. Relying upon the coordinate bench decision in Heddle Knowledge Pvt. Ltd. vs. ITO, the penalty under section 140A(3) has been deleted.

In a significant ruling, the Income Tax Appellate Tribunal (ITAT) Kolkata has held that penalties for non-payment of taxes on returned income, as specified under Section 140A(3) of the Income Tax Act, cannot be imposed for assessment years after 1989-90. The decision was made in the case of Shakaldev Mishra Vs Deputy/Assistant Commissioner of Income Tax, regarding the assessment year 2014-15.

The appellant, Shakaldev Mishra, had filed an appeal against a penalty of ₹1,67,844 imposed by the Assessing Officer (AO) under Section 221(1) read with Section 140A(3) for non-payment of taxes on the returned income. This penalty had been upheld by the Commissioner of Income Tax (Appeals), National Faceless Appeal Centre (NFAC), Delhi.

Case Background

In his appeal before the ITAT, the appellant argued that the penalty was wrongly levied as the law no longer permitted such penalties post-AY 1989-90. Mishra’s counsel pointed to the precedent set by the ITAT Mumbai in the Heddle Knowledge Private Limited vs. ITO case (ITA No. 7509/MUM/2011), which dealt with a similar situation. The Mumbai tribunal had ruled that penalties under Section 140A(3) were no longer applicable after the amendment to the Income Tax Act.

The key point of contention was whether the penalties for failure to pay self-assessed taxes on returned income, as mandated under Section 140A(3), were enforceable post-AY 1989-90. The AO had imposed the penalty under the assumption that Mishra’s failure to pay self-assessed taxes made him an “assessee in default.”

Legal Framework

Before delving into the tribunal’s decision, it is important to understand the relevant legal provisions. Section 140A(3), as it existed prior to 1989, allowed the AO to impose penalties on taxpayers for failing to pay taxes on their self-assessed income. However, this provision was amended by the Direct Tax Laws (Amendment) Act of 1987, and the amendment took effect from April 1, 1989.

According to the amended law, non-payment of self-assessed taxes would no longer attract a penalty, but rather, taxpayers would be liable for interest on the unpaid amount. The penalty provision was deemed unnecessary due to the mandatory interest charges that were introduced.

The amendment was clarified by the Central Board of Direct Taxes (CBDT) in its Circular No. 549 dated October 31, 1989. The circular explicitly stated that the penalty for non-payment of self-assessed taxes had been removed because the increased interest rates would sufficiently cover the government’s revenue requirements.

ITAT’s Decision

In its judgment, the ITAT Kolkata relied heavily on the Mumbai ITAT’s ruling in Heddle Knowledge Private Limited vs. ITO. The tribunal examined the legal provisions in place both before and after the amendment of Section 140A(3) and noted that the imposition of penalties for non-payment of self-assessed taxes was no longer permissible after AY 1989-90.

The tribunal pointed out that the amended Section 140A(3) did not authorize penalties for non-payment of self-assessed taxes. Instead, taxpayers who failed to pay their taxes were deemed to be “in default” only for the purpose of recovering the unpaid amount, along with the interest. The tribunal further noted that there had been no corresponding amendment to Section 221(1) of the Income Tax Act, which governs penalties for tax defaults, following the changes to Section 140A(3).

In essence, the tribunal concluded that while the AO had treated Mishra as an “assessee in default,” the law did not support the imposition of a penalty for non-payment of self-assessed taxes. The tribunal overturned the penalty and directed the AO to delete the penalty of ₹1,67,844.

Precedents Cited

The tribunal also referred to previous rulings, including the Heddle Knowledge Private Limited vs. ITO case, to support its decision. The key takeaway from these precedents was that after April 1, 1989, non-payment of self-assessed taxes would only result in the accrual of interest, not penalties.

The tribunal emphasized that the legislative intent behind the amendment was clear: the government did not want to impose both penalties and interest on taxpayers for the same default. The imposition of interest under Section 234B of the Income Tax Act was considered sufficient to cover the revenue shortfall.

Conclusion

The ITAT Kolkata’s ruling in Shakaldev Mishra Vs Deputy/Assistant Commissioner of Income Tax reaffirms the legal position that penalties under Section 140A(3) for non-payment of self-assessed taxes cannot be imposed for assessment years post-1989-90. The decision provides clarity for taxpayers who may face similar penalties and emphasizes the importance of understanding the post-1989 amendment to the Income Tax Act.

This ruling is expected to have a wider impact on cases where taxpayers are penalized for non-payment of self-assessed taxes, reinforcing the principle that post-1989, such defaults should only attract interest, not penalties.

FULL TEXT OF THE CESTAT KOLKATA ORDER

The assessee is in appeal before the Tribunal against the order of ld. Commissioner of Income Tax (Appeals), National Faceless Appeal Centre (NFAC), Delhi dated 10th June, 2022 passed for assessment year 2014-15.

2. The assessee has taken eight grounds of appeal, but his grievances revolve around a single issue, namely ld. CIT(Appeals) has erred in confirming the penalty of Rs.1,67,844/-, which was levied by the ld. Assessing Officer under section 221(1) read with section 140A(3). This penalty was levied for the reason that the assessee has not paid the taxes on self-assessed income. In other words, the assessee failed to pay the tax on the returned income filed by him.

3. The ld. Counsel for the assessee has submitted that this issue is squarely covered in favour of the assessee by the judgment of ITAT, Mumbai dated 19th January, 2018 in the case of Heddle Knowledge Private Limited -vs.- ITO (ITA No. 7509/MUM/2011). We find that ITAT, Mumbai has dealt with an identical appeal, wherein penalty was imposed with the aid of section 140A(3) of the Income Tax Act. The ITAT thereafter made reference to the CBDT Circular bearing No. 549 of 31.10.1989 and held that this penalty is not imposable. For the facility of reference, we are taking note of the complete order of the ITAT, which is very brief and which examine the issue lucidly. The order reads as under:-

“2. In this appeal, the solitary dispute is with regard to the penalty imposed u/s 221(1) r. w. s. 140A(3) of the Act of Rs.25,98,646/-. In brief, the relevant facts are that the appellant- assessee filed a return of income for Assessment Year 2009-10 on 30.09.2009 declaring an income of Rs.9,93,58,270/-, which was not accompanied by self- assessment tax payable at Rs.2,59,89,461/-. The Assessing Officer issued a communication to the assessee dated 18.01.2010 requiring the assessee to produce the proof of payment of self- assessment tax alongwith the interest thereon. In response, assessee vide letter dated 08.02.2010 sought more time to clear the liability of payment of self- assessment tax. Subsequently, on 11.02.2010, the Assessing Officer show-caused the assessee as to why the penalty u/s 221 r.w.s. 140A( 3) of the Act should not be imposed for the failure of the assessee to pay the self- assessment tax within the stipulated time. The orders of the authorities below reveal that the defence of the assessee was primarily the plea of financial stringency and also the fact that the tax was ultimately deposited on 02.03.2010 before the penalty was imposed by the Assessing Officer vide order dated 08.03.2010. The Assessing Officer as well as the CIT(A) did not find the reasons advanced by the assessee to be satisfactory to mitigate the levy of penalty. As per the Assessing Officer, the provisions of Sec. 140A( 3) r.w.s 221 of the Act did not provide any discretion to the Assessing Officer not to levy the penalty. Considering that the assessee had defaulted in payment of self- assessment tax within the stipulated period and was thus liable to be treated as “assessee in default” as per the provisions of Sec. 140A( 3) r. w.s. 221( 1) of the Act, he imposed the penalty @ 10% of the delayed self-assessment tax of Rs.2, 59, 89,461/-, thereby resulting in a penalty of Rs.25,98,946/-. The said penalty has further been affirmed by the CIT( A) also.

3. Against the aforesaid background, the plea raised by the assessee before us is quite different from what has been raised before the lower authorities. At the time of hearing, the learned representative has given a new twist to the controversy by pointing out that the provisions of Sec. 140A( 3) of the Act, as it stood for the year under consideration, did not envisage levy of penalty for the delay in deposit of self- assessment tax. In order to appreciate the point sought to be raised by the learned representative, the following discussion is relevant.

4. Sec. 140A( 3) of the Act, as it stands for the year under consideration, reads as under :-

“140A(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 accordingly.”

5. Our attention has been drawn to the erstwhile Sec. 140A(3) of the Act which was operative upto 31.03.1989 and was amended by the Direct Tax Laws (Amendment) Act, 1987, and the erstwhile provision read as under :-

“(3) If any assessee fails to pay the tax or any part thereof in accordance with the provisions of sub-section (1), the Assessing Officer may direct that a sum equal to two per cent of such tax or part thereof, as the case may be, shall be recovered from him by way of penalty for every month during which the default continues; Provided that before levying any such penalty, the assessee shall be given a reasonable opportunity of being heard.”

Quite clearly, in terms of the provisions of Sec. 140A(3) of the Act as existing till 31.03.1989, the Assessing Officer was empowered to levy penalty in cases where assessee had failed to pay the self- assessment tax, and such penalty was leviable for every month during which the default continued of a sum equal to 2% of such tax or part thereof. At the time of introduction of the new section by the Direct Tax Laws (Amendment) Act, 1987 w.e.f. 01.14.1989, the Explanatory notes issued by CBDT vide Circular no. 549 of 31.10.1989 contained the following, which seeks to explain the import of the substitution of new section. The relevant paragraphs of the Circular dated 31.10.1989 (supra) are reproduced as under:-

“Para 4.17: The old provisions of subsection (3) of the section provided for levy of penalty for non- payment of self- assessment tax, since the rate of mandatory interest for failure to pay the tax has now been increased, it is not necessary to retain this provision any more. The amending Act has accordingly omitted the said sub section (3).

4.18: In order to vest the power of recovery of tax and interest due under this section on the basis of the return, amending Act 1987, has inserted a new sub section (3) in the section to provide that if any assessee has not paid self assessment tax and interest in full before filing the return, he shall be deemed to be an assessee in default in respect of such tax and interest.”

Quite clearly, if one is to read the earlier Sec. 140A(3) of the Act and the amended section w.e.f. 1.4.1989 alongwith the explanatory notes to the amendment conjointly, it is clear that the earlier provision prescribing for levy of penalty for default outlined in Sub- section (1) of Sec. 140A( 3) has yielded place to mandatory charging of interest for such default. The aforesaid legislative intent also gets strength by the fact that simultaneously the legislature prescribed for mandatory charging of interest u/s 234B of the Act for default in payment of self- assessment tax w.e.f. 01.04.1989 onwards.

6. However, a contrary position is taken by the Revenue to the effect that for having defaulted in payment of self- assessment tax within the stipulated period, assessee qualifies to be “ an assessee in default” as prescribed in the amended Sec. 140A( 3) of the Act and, therefore, if one is to read the same with Sec. 221(1) of the Act, the action of the Assessing Officer in imposing penalty is quite justified. In sum and substance, it is sought to be emphasised on the strength of Sec. 221( 1) of the Act that the penalty is leviable so long as the default is in the nature which renders the assessee as an “assessee in default” for payment of tax. Sec. 221( 1) of the Act prescribes for penalty when assessee is in default in making the payment of tax. On the face of it, the argument of the Revenue appears to be justified, so however, the same does not merit acceptance if one examines the issue in slight detail. Notably, the penalty envisaged Sec. 140A(3) in the unamended provision was on the statute alongwith the penalty envisaged u/s 221 of the Act. Once Sec. 140A( 3) of the Act has been amended w.e.f. 01.04.1989, as we have seen earlier, there is no amendment of Sec. 221 of the Act and it continues to remain the same. What we are trying to emphasise is if the plea of the Revenue is to be accepted, based on the amendment to Sec. 140A(3) of the Act, it would mean that prior to 01.04.1989 the same default invited penal provisions under two sections, namely, Sec. 140A(3) as well as Sec. 221( 1) of the Act, which would appear to be peculiar and unintended. Furthermore, the intention of the legislature at the time of insertion of the amended Sec. 140A(3) makes it clear that the old provisions of Sec. 140A(3) prescribing for levy of penalty for non- payment of self-assessment tax was no longer found necessary because the said default would henceforth invite mandatory charging of interest. Ostensibly, the legislature did not envisage that consequent to the amendment, the default in payment of self-assessment tax would hitherto be covered by the scope of Sec. 221( 1) of the Act. The emphasis of the Revenue is to point out that the non-payment of self- assessment tax renders the assessee “in default” in the amended provision which further prescribes that “all the provisions of this Act shall apply accordingly” and, therefore, the default is hitherto (from 01.04.1989) covered by Sec. 221( 1) of the Act. In our view, the consequence of the aforesaid two expressions contained in Sec. 140A(3) are also not of the type sought to be understood by the Revenue, and rather the assessee is to be treated as an “assessee in default” for the limited purpose of enabling the Assessing Officer to make recovery of the amount of tax and interest due and not for levy of penalty, an aspect which has been specifically done away in the new provision. Therefore, considered in the aforesaid light, in our view, the fact that the amended Sec. 140A( 3) w.e.f. 01.04.1989 does not envisage any penalty for non- payment of self- assessment tax, the Assessing Officer was not justified in levying the impugned penalty by making recourse to Sec. 221( 1) of the Act. Before parting, we may again emphasise that Sec. 221 of the Act remains unchanged, both during the pre and post amended Sec. 140A(3) of the Act and even in the pre- amended situation, penalty u/s 221 of the Act was not attracted for default in payment of self- assessment tax, which was expressly covered in pre 01. 04.1989 prevailing Sec. 140A(3). Thus, without there being any requisite corresponding amendment to Sec. 221 of the Act in consonance with the amendments carried out in Sec. 140A( 3) of the Act w.e.f. 01.04.1989, the Assessing Officer erred in levying the impugned penalty. Thus, on this aspect, we hereby set- aside the order of CIT(A) and direct the Assessing Officer to delete the penalty imposed u/s 140A( 3) r. w. s. 221( 1) of the Act.

7. In the result, appeal of the assessee is allowed, as above”.

4. This order is fully applicable in the present case. The emphasis of the Tribunal was that after the Amendment effected on 1st April, 1989, penalty under section 140A(3) is not imposable on non-payment of taxes on the returned income because that would be compensated by way of interest charged upon the assessee. The Tribunal has made reference to the CBDT Circular bearing No. 549 of 31.10.1989 particularly paragraph no. 4.17 and 4.18. Thus, in view of the decision of the Coordinate Bench, this penalty is not sustainable. Accordingly, we allow the appeal of the assessee and delete the penalty.

5. In the result, the appeal of the assessee is allowed.

Order pronounced in the open Court on 25.09.2024.