Penalty under section 221 of the Income Tax Act, 1961 for default in making payment of Tax

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)]