1. The only grievance projected in this appeal by the assessee is that the learned CIT(A) is not justified in confirming the penalty under Section 221 to the extent of Rs. 10 lakhs for delayed payment of taxes.
2. The assessee is a private limited company. It filed its return of income for the asst. yr. 1997-98 declaring a total income of Rs. 2,46,78,940. The income included capital gains arising from sale of the assessee's right in an immovable property. The assessee-company in order to increase its future income invested the surplus arising out of these short-term capital gains in purchasing the shares of Bramha Bazaz Hotels Ltd., a company under the same group which was promoting a Five Star Deluxe Hotel "Le Meridian". Because of this investment, the assessee did not have the funds to pay the taxes. The total tax liability was worked out at Rs. 1,20,40,939 which sum was payable by the assessee before the date of filing of return, i.e., 30th Nov., 1997.
However, the AO found that till July, 1999, the assessee had paid only a sum of Rs, 39,35,600 and the balance amount of Rs. 92,23,610 was still payable. As the assessee-company had not paid the taxes, the AO initiated penalty proceedings under Section 221 of the IT Act.
3. In response to the show-cause notice, the assessee-company replied as under: (a) that the assessee-company had invested its funds towards purchase of equity shares of Bramha Bazaz Hotel Ltd. and as such, the assessee did not have liquid funds to pay the taxes; (b) the CIT had earlier granted instruments for payment of taxes to the assessee-company, but the same had subsequently been cancelled; (c) now the assessee had approached the Chief CIT, Pune, praying for. instalments to pay the taxes.
4. In view of the above, the assessee-company pleaded before the AO to drop the penalty proceedings. The AO was, however, not satisfied with the assessee's explanation in this regard. The AO has mentioned in this connection in the penalty Order that the assessee had received sufficient funds from M/s Great Eastern Shipping Co. Ltd. on account of transfer of development rights. However, instead of paying the tax on the income earned, the assessee had diverted surplus funds for purchase of shares of an associate concern, viz. Bramha Bazaz Hotel Ltd. Therefore, according to the AO, the argument of financial stringency pleaded by the assessee for non-payment of taxes was not relevant as shortage of funds was self-created by the act of the assessee by diversion of funds to an associate concern. Rejecting the explanation of the assessee, the AO imposed a penalty of Rs. 20 lakhs under Section 221 of the Act.
5. The assessee appealed to the learned CIT(A) and detailed arguments were advanced which have been reproduced by the CIT(A) verbatim in paras 3 and 4 (pp. 5, 6, 7 and 8) of his order. After considering the same, he observed that it may be true that the assessee could not pay the taxes on account of the financial crunch faced by it; but the fact remains that such financial crunch was self-created on account of investment made by the assessee in the shares of Bramha Bazaz Hotels Ltd. He further held "In my opinion, priority has to be given to payment of revenue in case the Government of the country has to be allowed to function properly. Even if it was necessary for the appellant to invest funds in purchase of shares of an associate concern, even then, in my opinion, as a good citizen, the appellant should not have invested the entire money in the purchase of shares, but should have set aside part of the amount for payment of taxes and only invested the balance amount in purchase of shares." He therefore, held that levy of penalty under Section 221 was justified. He, however, reduced the quantum to Rs. 10 lakhs observing, "considering the fact that the appellant has subsequently paid the entire demand including substantial amount of interest under Sections 234B, 234C and 220, I feel that the penalty of Rs. 20 lakhs levied by the AO is on the higher side......... After all, the aim of the Revenue is not to kill the goose which lays the golden egg." Aggrieved by the order of the learned CIT(A), the assessee is in appeal before this Tribunal.
6. Dr. Sunil Pathak, the learned counsel for the assessee, submitted that the assessee was facing real financial crunch and was in no position to clear the substantial outstanding demand. All through the assessee had intention to pay the taxes and for this purpose, the assessee also approached the CIT who was kind enough to give instalments, but later on he withdrew the arrangement. Had the arrangement continued, the assessee would have paid the demand in instalments. He submitted that the assessee-cornpany does not have any income and he drew our attention to the balance-sheet of the assessee-company as on 31st March, 1997 (pp. 4 to 9 of the paper book), as on 31st March, 1998 (pages 10 to 15 of the paper book), as on 31st March, 1999 (pp. 16 to 21 of the paper book) and as on 31st March, 2000 (pp. 22 to 27 of the paper book) and submitted that from the perusal of the same, it would be seen that the assessee-company had no liquid assets to pay taxes. By the time the CIT(A) heard the appeal, the assessee had cleared all the demand and for that, the assessee-company had raised the following loans : (1) Advance from sister concern M/s Bramha Finance Corporation, who in turn has taken advances from friends, relatives and others He submitted that financial stringency is a reasonable cause and since the assessee was having financial crunch, levy of penalty is not justified. In support of his contentions, he relied upon the following decisions ; (3) Royal Calcutta Turf Club vs. Dy. CIT (2001) 71 TTJ (Cal) 269 : (2001) 76 ITD 237 (Cal).
7. Shri K. Srinivasan, the learned Departmental Representative, strongly supported the order of the CIT(A). He submitted that Government taxes must have higher priority and at the time when the assessee-company transferred the development rights, it got a huge sum of Rs. 8.75 crores from M/s Great Eastern Shipping Co. Ltd. Instead of discharging its tax liability which was to the tune of Rs. 92,23,610, the assessee chose to invest in the shares of Bramha Bazaz Hotel Ltd. as associate company. He, therefore, emphasized that the paucity of funds created by the assessee was self-created and hence mala fide. He also tried to distinguish the judgment of the Delhi High Court in the case of Raunaq & Co. (P) Ltd. (supra) by stating that that was not a case where the assessee deliberately failed to make payment of taxes, but it was a case where it could not pay the huge sum demanded in one lump sum and was paying it in monthly instalments. According to the learned Departmental Representative in the present case, the assessee deliberately chose not to pay the taxes and defaulted in the matter of paying instalments.
8. We have considered the rival submissions and perused the facts on record. The whole purpose of giving an opportunity under Section 221 before penalty is imposed is to see whether the default committed by the assessee was for good and sufficient reasons. For levying penalty under Section 221, default must be wilful and not merely accidental.
The imposition of penalty under Section 221 is within the discretion of the AO. The expression "may direct" in Section 221 of the Act indicates that imposition of penalty is not mandatory, but the same is discretionary. However, the exercise of discretion is not to be arbitrary, but is dependent on the facts and circumstances of the case.
It is also clear from the provisions of Section 221 that penalty is not automatically attracted in case of default in the payment of advance tax/regular demand and the same is to be imposed if the facts and circumstances on which the discretion is to be exercised so justify.
From the facts of the case, it is evident that the assessee-company all through cooperated with the Department. As soon as the tax demand was conveyed to the assessee, the assessee approached the CIT and the learned CIT, after taking into consideration the facts and circumstances of the case, allowed the assessee-company to make the payment by instalments. This act of the CIT indicates that he had recognised the weak financial position of the assessee-company. Later on, of course, the CIT withdrew the arrangement, but had the arrangement been continued, the assessee would have paid the demand in instalments. All the same the assessee continued to make payments and when the matter came before the CIT(A) the entire demand had been clear. We do not agree with the observations of the authorities below that the paucity of funds created by the assessee was self-created and hence mala fide. It is the prerogative of the assessee to carry on its business affairs and the assessee was well within its rights to invest the sum of Rs. 8.75 crores received from M/s Great Eastern Shipping Co.
Ltd. in the way it thought prudent. The assessee accordingly made investment in the purchase of shares of Bramha Bazaz Hotels Ltd. and such investments do not yield quick results and some times all investments are also not prudent. The act of investment on the part of the assessee-company was a commercial act dictated by commercial expediency and accordingly, it will be wrong to state that the paucity of funds created by the assessee was self-created and in any case, such an act cannot be mala fide by any standard. We further have noted that the CIT(A) after taking into consideration the facts and circumstances of the case reduced the penalty to one-half and that shows that he was also convinced that the assessee-company was placed in mitigating circumstances. The assessee ultimately raised loans to the tune of Rs. 1,64,55,600 from its sister concerns as per details given in para 6 (supra) and liquidated the entire demand including substantial amount of interest under Sections 234B, 234C and 220. Under the circumstances, we find that the assessee-company's explanation was not frivolous but bona fide based on sound, legal, commercial and accounting reasoning.
The Hon'ble Supreme Court in the case of Food Corporation of India vs.
Kamdhenu Cattle Feed Industries JT "There is no unfettered discretion in public law. A public authority possesses powers only to use them for public good. This imposes the duty to act fairly and to adopt a procedure which is "fairplay in action". Due observance of this obligation as part of good administration raises a reasonable or legitimate expectation in every citizen to be treated fairly in his interaction with the state and its instrumentalities, which this element forming a necessary component of the decision-making process in all state action. To satisfy this requirement of non-arbitrariness is a station action, it is, therefore, necessary to consider and give due weight to the reasonable or legitimate expectations of the persons likely to be affected by the decision or also that unfairness in the exercise of the power may amount to an abuse or excess of power apart from affecting the bona fides of the decision in a given case. The decision so made would be exposed to challenge on the ground of arbitrariness. Rule of law does not completely eliminate discretion in the exercise of power, as it is unrealistic, but provides for control, of its exercise by judicial review." It is obvious that in the light of doctrine of "legitimate expectation" as propounded by the Hon'ble apex Court above, the orders of the authorities below are arbitrary and deserve to be cancelled. We accordingly cancel the penalty of Rs. 10,00,000 sustained by the learned CIT(A).