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Claris Life Sciences Limited vs. DCIT (ITAT Ahmedabad) (Special Bench)
October, 09th 2017

S. 140A/ 221(1): Law explained on whether an assessee who defaults on paying self assessment tax u/s 140A while filing the return of income is liable for penalty u/s 221(1) if he files a revised return of income and pays the tax thereon at the time of filing the revised return of income

The Special Bench had to consider the following important question of law:

“Whether an assessee is liable to penalty under section 221(1) of the Act in a case in which though the assessee has not paid the self assessment tax under section 140A, while filing the return of income, but revises the income, by filing revised return of income, and pays the tax on the revised return of income at the time of filing the revised return of income?”

HELD by the Special Bench:

(i) As a plain reading of the above statutory provisions would show, the lapse, referred to in section 140A(1), is the failure “to pay such (admitted) tax together with interest payable under any provision of this Act for any delay in furnishing the return or any default or delay in payment of advance tax, before furnishing the return” and the lapses punishable under section 221(1) are the lapses in respect of “default in making a payment of tax”. The default triggering the penal liability under section 221(1) is the default in making payment of tax, and that the default in payment is tax is with reference to the filing of the income tax return. Viewed thus, default is committed at the point of time when a return of income is filed without making payment of the admitted tax liability. Clearly, therefore, the assessee committed a default in not paying the admitted tax liability when it filed the original income tax return, without payment of admitted tax liability, on 30th September 2008. To this extent, there is no dispute or ambiguity at all.The question then arises as to what is the impact of filing a revised income tax return. To the extent it pertains to the assessment proceedings, undoubtedly inasmuch as it is the validly revised return is the starting point for the assessment of income, the original income tax return ceases to be relevant. However, that substitution of income tax return is only for the purposes of assessment of income. All the judicial precedents cited at the bar is on these lines. The questions which have come up for consideration in the context of all these judicial precedents is assessment of income and the related claims, in the income tax returns, on that aspect of the matter. The common thread in the cases of Beco Engineering (supra), Niranjan Lal Ram Chhandra (supra), Shri Soemshwaar Sahkari Karkhana (supra), Arun Textiles (supra) and Mahendra Mills (supra), is that in all these cases, there were variations between the claims made in the original income tax return vis-à-vis the revised returns of income and the question before Hon’ble Courts above was as to which set of claims, made in the original return or made in revised returns, should be considered by the Assessing Officer. There is an unanimity in all these decisions that the claims made in revised return alone could be considered by the Assessing Officer but neither we have any quarrel with this proposition nor is that aspect at all relevant in deciding the issue before us. The claims made in an income tax return is one thing and all the actions connected with the original income tax return becoming a legal nullity quite another thing. The basic character and traits of these two set of things are materially different, and just because revised return substitutes the original income tax return for the purposes of adjudication on claims made in the income tax return does not mean that revised income tax return also substitutes original income tax return for all legal purposes, including penal consequences in respect of defaults committed in respect of the original income tax return. That will be a wholly superfluous approach, if adopted. The observations made by Their Lordships in this context cannot be viewed on standalone basis as a complete exposition of law on the question which did not even come up for consideration before Their Lordships. We may, in this regard, refer to the following oft quoted observations made by Hon’ble Supreme Court in the case of CIT vs Sun Engineering Works Pvt Ltd [(1992) 198 ITR 297 (SC)]:

“……….Such an interpretation would be reading that judgment totally out of context in which the questions arose for decision in that case. It is neither desirable nor permissible to pick out a word or a sentence from the judgment of this Court, divorced from the context of the question under consideration and treat it to be the complete ‘law’ declared by this Court. The judgment must be read as a whole and the observations from the judgment have to be considered in the light of the questions which were before this Court. A decision of this Court takes its colour from the questions involved in the case in which it is rendered and while applying the decision to a latter case, the Courts must carefully try to ascertain the true principle laid down by the decision of this Court and not to pick out words or sentences from the judgment, divorced from the context of the questions under consideration by this Court, to support their reasonings. In H.H. Maharajadhiraja Madhav Rao Jiwaji Rao Scindia Bahadur v. Union of India [1971] 3 SCR 9 this Court cautioned: “It is not proper to regard a word, a clause or a sentence occurring in a judgment of the Supreme Court, divorced from its context, as containing a full exposition of the law on a question when the question did not even fall to be answered in that judgment.”

(ii) We may also, in this context, refer to the words of guidance by Hon’ble Supreme Court in Mumbai Kamgar Sabha vs. Abdulbahi Faizullbhai AIR 1976 SC 1455 wherein their Lordships have, in their inimitable and felicitous words observed thus,

“It is trite, going by anglophonic principles that a ruling of a superior Court is binding law. It is not of scriptural sanctity but of ratio-wise luminosity within the edifice of facts where the judicial lamp plays the legal flame. Beyond those walls and de hors the milieu we cannot impart eternal vernal value to the decisions, exalting the precedents into a prison house of bigotry, regardless of the varying circumstances and myriad developments. Realism dictates that a judgment has to be read, subject to the facts directly presented for consideration and not affecting the matters which may lurk in the dark“.

(iii) It is, therefore, indeed duty of every subordinate judicial forum to apply the ruling of the superior Courts in such a manner so as to enforce the true legal principles emerging from the same, by putting the words and expression used in the ruling in the right perspective and by taking a holistic legal view of the matter. Such an exercise is not to be viewed as diluting the law laid down in a ruling, but as a cerebral judicial exercise and a call of duty in judicial offices. We have highest respects for the rulings by the higher judicial forums, but it would indeed be inappropriate to use the words and expressions employed in these ruling, in isolation, as complete exposition of law and as a blind man’s walking stick, rather than luminosity of judicial knowledge with the benefit of which we have to perform our duties of office. Let us, in the light of our this understanding about the manner in which observations made by the Hon’ble Courts above are to be construed by the lower tiers of judicial hierarchy, come back to the core issue requiring our adjudication.

(iv) We have noted that all the observations made by Hon’ble Courts above, on which vehement reliance has been placed by the learned senior counsel, are the observations made in the context of computation of taxable income of the assesses. That context is materially different vis-à-vis the context that we are dealing with i.e. imposition of penalty under section 221(1) for not paying admitted tax liability, under section 140A, at the time of filing an income tax return. The question before us is whether by paying the admitted tax liability at the time of filing revised income return, the lapse committed in not paying the admitted tax liability at the time of filing the original income tax return gets obliterated or wiped out so that the consequences of earlier lapse must not be visited with penal consequences. The answer has to be emphatically in negative. What has been stated in the context of computation or assessment of income does not really hold good in respect of lapse committed at the time of filing of the original income tax return- which is required to be visited with penal consequences under section 221(1). The assessee has undoubtedly committed the default in not making payment of admitted tax liability under section 140A(1) at the point of time when this income tax return was filed, and it is this default in respect of which penalty is imposable under section 221(1). As Section 221(1) itself states in so many words, the 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”. Subsequent payment of tax, whether with or without revision of income tax return, is thus of no help to the assessee so far as penal consequences under section 221(1) are concerned. The law is clear and unambiguous. As regards learned counsel’s submissions regarding event based triggers for penal consequences and time based triggers for penal consequences, even if we accept that penalty under section 221(1) r.w.s. 140A(1) requires an event based trigger, rather than a time based trigger, nothing really turns on this plea of the assessee since the event triggering the penal consequences under section 221(1) r.w.s. 140A(1) is non-payment of admitted tax liability at the time of filing original income tax return on 30.9.2008 and subsequent revision of income tax return with due payment of admitted tax liability, for the detailed reasons set out above, does not obliterate the default at the time of filing original return of income. The payment of admitted tax liability, while filing revised return of income under section 139(5), does not affect the lapse committed at the time of filing the original return of income, even though claims made in such original income tax return stand supplanted by the claims made in the revised income tax return.

Our conclusions:

(v) In view of the above discussions, as also bearing in mind entirety of the case, in our considered view, the assessee is, in principle, covered by the scope of the penalty under section 221(1) of the Act in a case in which the though the assessee has not paid the admitted tax liability under section 140A, while filing the original return of income, the assessee subsequently pays the tax on the revised return of income, at the time of filing the revised return of income. We, therefore, answer the question referred to the special bench in affirmative and against the assessee. However, whether the penalty under section 221(1) r.w.s. 140A(1) is actually leviable on the facts of a particular case or not will depend on the facts of that case and depending on, inter alia, the factual finding as to whether or not the default of the assessee was for good and sufficient reasons- something with which we are not really concerned at this stage due to inherently limited scope of the question before the special bench.

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