Section 221(1) of the Income-tax Act, 1961 deals with the penalty
where payment of tax is in default. As per section 221(1), if a taxpayer is treated as an assessee in
default, then he shall be liable to pay penalty of such an amount as the
Assessing Officer may impose. However, penalty cannot exceed the amount of tax
in arrears. Thus, penalty under section 221(1) is a general penalty and can be
levied in all the cases in which the taxpayer is treated as an assessee in
default.
History and
background
The section is on the same lines as Section 46(1) and
46(1A) of the Income-tax Act 1922. The section provides for levy of penalty for
non-payment of tax. Where the assessee has defaulted in payment of tax or is
deemed to be in default, the assessing officer is entitled to levy penalty in
addition to the interest payable under subsection 2 of section 220 of the
Income-tax Act 1961. Though the section is on the same lines as the law under
the Income-tax Act, 1922 there are some major differences between the old
provision and the new section (which has been amended many times over the
years). The difference have been brought out hereunder and therefore all the
old judgments may not be applicable to the current section 221 in the current
form.
Text of Section 221
Penalty payable when tax in default
221. [1][(1) When an assessee is in default or is deemed to be
in default in making a payment of tax, he shall, in addition to the amount of
the arrears and the amount of interest payable under sub-section (2) of section
220, be liable, by way of penalty, to pay such amount as the [2][Assessing] Officer may direct, and in the case of a
continuing default, such further amount or amounts as the [2][Assessing] Officer may, from time to time, direct, so,
however, that the total amount of penalty does not exceed the amount of tax in
arrears :
Provided that before levying any such penalty, the assessee
shall be given a reasonable opportunity of being heard
[3][Provided further
that where the assessee proves to the satisfaction of the [2][Assessing] Officer that the default was for good and sufficient
reasons, no penalty shall be levied under this section.]]
[4][Explanation. - For the removal of doubt, it is hereby
declared that an assessee shall not cease to be liable to any penalty under
this sub-section merely by reason of the fact that before the levy of such
penalty he has paid the tax.]
(2) Where as a
result of any final order the amount of tax, with respect to the default in the
payment of which the penalty was levied, has been wholly reduced, the penalty
levied shall be cancelled and the amount of penalty paid shall be refunded.
KEY NOTE
1. Substituted by the Taxation Laws (Amendment)
Act, 1970, with effect from 01.04.1970.
2. Substituted for “Income-tax” by the Direct
Tax Laws (Amendment) Act, 1987, with effect from 01.04.1988.
3. Substituted by the Taxation Laws (Amendment
& Miscellaneous Provisions) Act, 1986, with effect from 10.09.1986.
4. Inserted by the Taxation Laws (Amendment)
Act, 1975, with effect from 01.10.1975.
Though the section is for levy of penalty, the said section
is placed under Chapter of XVI–D Collection and Recovery and not under Chapter
XXI – Penalties Imposable. This arrangement is indicative of the fact that it
is to be used as a deterrent to non-payment of taxes or delay in payment of
taxes.
Assesse in
Default
If the amount specified in the notice of demand under
section 156 is not paid within 30 days or such time as is extended by Assessing
Officer.
Default in
payment of tax
The section refers to the default in payment of tax. The
term tax is defined under section 2(43) of the Act. The said definition
includes income tax, super tax and fringe benefit tax, but does not include
interest or penalty. Thus, penalty under this sections is to be restricted to
the tax default and does not include the interest under sections 234A, 234B,
234C, 220(2) or penalty.
ITAT was
justified in holding the penalty under section 221(1) is to be imposed in
respect of only the tax excluding interest under section 234A, 234B & 234C without
appreciating that section 221(1) does not contain any such condition that the
penalty imposed under the said section should be a percentage of only the tax
excluding the interest
It was held that on reading the
provisions of Section 221 conjointly with the definition of “tax” as detailed
under Section 2(43), the irresistible conclusion that can be drawn is that the
phraseology “tax in arrears” as envisaged in Section 221 of the Act would not
take within its realm the interest component. It would be abundantly clear that
the Assessing Officer 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 under Section 220(2) of the Act. In the
result, the substantial question of law are answered against the Appellant. The
Appeal stands dismissed. However, no order as to costs. – [CIT v. P. S. Hathiramani (1994) 207 ITR 483 : (1993) 68 Taxman 449 (Bom)]
Penalty under
section 221 – Tax in default – Penalty can be imposed on arrears of tax
excluding interest under section 220(2)
Dismissing the appeal of the revenue, the Court held
that on reading the provisions of section 221 conjointly with the definition of
“tax” as detailed under section 2(43) of the Act, the irresistible conclusion
that could be drawn was that the phraseology “tax in arrears” as envisaged in
section 221 of the Act would not take within its realm the interest component.
The Assessing Officer could impose penalty for default in making the payment of
tax, but it should not exceed the amount of tax in arrears. Tax in arrears
would not include the interest payable under section 220(2) of the Act. – [CIT v. Oryx Finance and Investment (P) Ltd.
(2017) 395 ITR 745 : 83 taxmann.com 194 (Bom)]
The tax authorities shall give the taxpayer a reasonable
opportunity of being heard. No penalty is levied if the taxpayer proves to the
satisfaction of the tax authorities that the default was for good and
sufficient reason.
KEY NOTE
An assessee shall not cease to be liable to any penalty
under section 221(1) merely by reason of the fact that he paid the tax before
the levy of such penalty.
Nature of default
Failure to pay tax demand or self-assessment tax under
section 140A and interest payable under section 220(2) within prescribed time.
Authorities
empowered to impose penalty
Only the Assessing Officer is empowered to impose
penalty under section 221
Quantum of
penalty
MINIMUM
PENALTY
Such
amount as the Assessing Officer may impose.
MAXIMUM
PENALTY
Tax in
arrears.
Assessing Officer could not levy penalty under section
221 for non-payment of self-assessment tax by assessee
Where
Assessing Officer passed penalty order under section 221(1) on account of
assessee's failure to pay self-assessment tax within stipulated period, in view
of fact that amended section 140A(3) with effect from 01.04.1989 does not
envisage any penalty for non-payment of self-assessment tax, impugned penalty
order was to be set aside. – [Heddle
Knowledge (P) Ltd. v. ITO (2018) 195 TTJ 536 : 69 ITD 304 : 195 TTJ 536 : 90 taxmann.com 376 (ITAT Mumbai)]
Penalty under
section 221(1) for default in payment of demand cannot exceed tax amount
On reading the provisions of section 221 conjointly with
the definition of “tax” as detailed under section 2(43), the irresistible
conclusion that can be drawn is that the phraseology “tax in arrears” as
envisaged in section 221 of the Act would not take within its realm the
interest component. It would be abundantly clear that the assessing officer 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 under section 220(2) of the Act. - [CIT v. Oryx Finance and Investment
(P) Ltd. - Date of Judgement :
01.07.2015 (Bom)]
Failure on part
of the agent - Good and sufficient reasons
Assessee had directed his banker to deposit all three
instalments and same could not be done by banker in time and therefore, it had
good and sufficient reasons not to deduct tax at source. – [Baljindra Singh v. ITO, Suratgarh (2009) 179 Taxman 28 (ITAT Jodhpur)]
Non-Availability
of books - Good and sufficient reasons
Delay in deduction and deposit of tax due to
non-availability at books of account as these were seized by Department and
therefore, it had good and sufficient reasons not to deduct tax at source. - [Tony Electronics Ltd. v. ACIT (1997) 63 ITD
41 (ITAT Delhi)]
What constitutes
“Good & Sufficient Cause”?
The words ‘good and sufficient reasons’ should be in a
way to achieve effective, speedy and proper implementation of the provisions of
the Act. ‘good and sufficient reason’ depends on the facts. – [CIT v. Chembara Peak Estates Ltd. (1989) 47
Taxman 166 (Ker); Nachimuthu Industrial Association v. CIT (1980) 123 ITR 611
(Mad)]
Penalty cannot
be levied for non payment of interest
Since ‘tax’ and ‘interest’ are different in character.
The definition of ‘tax’ in section 2(43) does not cover interest. – [Shreeniwas & Sons v. ITO (1974) 96 ITR
562 (Cal)]
Penalty cannot
be levied for nonpayment of penalty
Since the definition of ‘tax’ does not include ‘penalty’
– [Kunhalaumma v. ITO (1968) 68 ITR 840
(Ker)]
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