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The DCIT, Circle 3(1) Hyderabad. Vs. M/s. Sheetal Refineries Ltd., Gagan Pahad, Ranga Reddy
September, 05th 2014


                     Assessment Year 2010-2011

The DCIT, Circle 3(1)         vs.   M/s. Sheetal Refineries Ltd.,
Hyderabad.                          Gagan Pahad, Ranga Reddy
                                    Dist. PAN AAECS-3658-M
(Appellant)                         (Respondent)

                     Assessment Year 2010-2011

M/s. Sheetal Refineries
Ltd., Gagan Pahad,            vs.   The DCIT, Circle 3(1)
Ranga Reddy Dist.                   Hyderabad.
(Appellant)                         (Respondent)

                  For Revenue : Mr. Solgy Jose T Kottaram
                  For Assessee : Mr. Arun Kumar Malani

              Date of Hearing : 21.08.2014
      Date of Pronouncement : 03.09.2014



               These are cross-appeals against the order of the
CIT(A), Guntur dated 31.12.2013, on the issue of levy of penalty
under section 221(1) of the I.T. Act, 1961.
                                          ITA.No.568 & 691/Hyd/2014
                                M/s. Sheetal Refineries Ltd., Hyderabad

2.             Briefly stated, assessee company filed its return of
income for A.Y. 2010-2011 on 13.10.2010 declaring total income
of Rs.9,27,62,643 under normal provisions and income at
Rs.8,12,69,520 as per provisions of section 115JB. The tax
liability   as    per   the   assessee's   own    computation     was
Rs.3,45,21,923 after claiming TDS of Rs.5,38,443 and advance tax
of Rs.20,00,000 and the balance tax payable was worked out to
Rs.3,19,89,480. Assessee did not pay self-assessment tax but filed
return of income on due date. Since there is failure on the part of
the assessee to pay self-assessment tax, A.O. issued notice under
section 221(1) and levied penalty of Rs.79,97,970 being 25% of the
tax payable.

3.             Assessee contended before the Ld. CIT(A) that non-
payment of self-assessment tax was beyond the control of the
assessee as the at the relevant point of time assessee's factory was
closed by A.P. Pollution Control Board w.e.f. 11/2009 and
therefore, assessee had no business activity at a later part of the
year as well as till the filing of the return. Further, as a result of
action by the Pollution Control Board, new plant was being
constructed at different place, also took away much part of liquid
resources. It was however submitted that company was declared
sick and filed reference under section 15(1) of Sick Industrial
Companies (Special Provisions) Act, 1985 before the BIFR, which
registered the case vide No.13/2013. As a result of the closure of
the company and also due to large expansion interest burden has
increased which created financial stress on the company. Due to
the above factors and also due to fixed expenditure like salaries
etc., the company could not make self-assessment tax but these
were made good immediately by issuing cheques to the A.O. in the
month of March, 2011. It was also brought to the notice of the Ld.
                                           ITA.No.568 & 691/Hyd/2014
                                 M/s. Sheetal Refineries Ltd., Hyderabad

CIT(A) that even though the cheques were issued with a different
dates in the month of March they were cleared by the A.O. one in
the month of March and balance three cheques in the month of
June and assessee is not responsible for delay in realising the
taxes. Further, it was submitted that assessee had bonafide
reasons for not payment of taxes and as there was good and
sufficient reason penalty under section 221(1) is not warranted.

4.            Ld.   CIT(A)    while       partly   accepting   assessee's
contention, restricted the penalty to 10% of the tax due. His order
vide paras 7 and 8 are as under :

     "7.      I have perused the order levying penalty u/s. 221(1) as
     well as the submissions made by the appellant. The levy of
     penalty u/s. 221(1) is not mechanical and automatic. The
     proviso to section 221(1) states that "where the assessee proves
     to the satisfaction of the (Assessing) Officer that the default was
     for good and sufficient reasons, no penalty shall be levied under
     this section. Further, even where the Assessing Officer decides
     to levy penalty, the amount of penalty should be based on the
     conduct of the assessee and all attendant circumstances.
     Various judicial pronouncements held that the imposition of
     penalty is not mandatory but is discretionary. The discretion, of
     course, will have to be exercised judiciously according to well
     known principles. Where the assessee has established that it
     was in a tight position financially, the Tribunal was held
     justified in cancelling the penalty. [CIT vs.Chernbara Peak
     Estates Ltd. (1990) 183 ITR 471 (Ka); CIT v Jaipur Electro Pvt.
     Ltd. (1990) 183 ITR 476 (Raj.); CIT v Bhikaji Ramchandra (1990)
     183 ITR 478 (Bom)]. The levy of penalty u/s.221 is not a mode
     of recovery of tax. It is a punitive action to be taken to deter a
     willful defaulter from failing to pay his tax dues. It is also not a
     levy in the nature of cost for delayed payment. Every assessee,
     including the appellant, is liable for interest on delayed payment
     of taxes into the Government exchequer. In the instant case, the
     appellant has paid almost Rs.25 lakhs of interest for delayed
     payment of taxes in respect of the present assessment year.
     Further, the records made available during appellate
     proceedings show that substantial part of the taxes were paid
     by the appellant during February & March, 2011.
                                          ITA.No.568 & 691/Hyd/2014
                                M/s. Sheetal Refineries Ltd., Hyderabad

     8.       In the case of the appellant, it is clear that from Asst.
     Year 2010-11 itself, the affairs of the company had been
     severely affected and a downward financial spiral had started.
     On the one hand, there was stoppage of production while on the
     other hand, capacity expansion and shifting of factory had led
     to extremely high financial burden. The ultimate proof of the
     financial crisis facing the company was the fact that within a
     couple of years, it was declared sick and its reference ujs.15(1)
     of the Sick Industrial Companies (Special Provisions) Act, 1985
     has been registered by BIFR. I am in agreement with the
     Assessing Officer that the appellant company was liable to pay
     taxes, which were due on the income that the company had
     generated. The taxes payable are in respect of profits earned by
     the appellant and the first charge shall always be of the
     Revenue in respect of such taxes. The submissions made by the
     appellant indicate that to keep the business cycle running, all
     funds were diverted towards setting up the new Unit at
     Nandigama. The funds diverted included those, which should
     have gone towards payment of taxes on profits earned. Hence,
     the failure of the appellant to pay taxes in time should lead to
     some punitive action. However, the punitive action should be in
     line with all attendant circumstances. Keeping in view the
     financial crisis faced by the company, which had its origins in
     the relevant previous year, I am of the opinion that the penalty
     levied u/s. 221(1) on the appellant company for delayed
     payment of self assessment tax should be restricted to 10% of
     the total taxes payable i.e., Rs.31,98,950/-. The appellant
     company thus gets relief of Rs.47,98,420/-."

5.           Revenue is aggrieved on the deletion of penalty to an
extent of Rs.47,98,420 whereas, assessee is aggrieved on the
confirmation of penalty to an extent of 31,98,950.

6.           We have heard the Ld. Counsel who reiterated the
submissions made before the Ld. CIT(A) and learned D.R. who
relied on the orders of the A.O. As seen from the submissions
before the Ld. CIT(A) as well as from the order of the Ld. CIT(A),
there is no dispute with reference to the fact that assessee's
company was stopped by Pollution Control Board and assessee
                                         ITA.No.568 & 691/Hyd/2014
                               M/s. Sheetal Refineries Ltd., Hyderabad

had to construct a new plant at Nandigama. Further, in spite of
financial crunch assessee has declared large amount of profits and
the taxes due were also admitted. Due to severe cash crunch,
assessee could not discharge tax liability immediately. However,
the same was discharged as stated by the assessee before the Ld.
CIT(A). Penalty under section 221(1) is not automatic and
mandatory. The proviso to section 221(1) states that where
assessee proves to the satisfaction of the A.O. default for good and
sufficient reasons, no penalty shall be levied under this section. In
fact, this aspect was examined by the Ld. CIT(A) and came to the
conclusion that there are good and sufficient reasons for the
assessee not to discharge the self-assessment tax at the particular
point of time due to financial crunch. However, he restricted the
penalty to 10% instead of deleting the whole of the amount. We are
of the opinion that assessee had made out a good case in its
support and the facts do indicate that there are good and
sufficient reasons for assessee's delay in payment of taxes.
Relying on the various case law which are extracted by the Ld.
CIT(A) in para-7 of the order, it can be concluded that penalty
under section 221(1) is not a mode of recovery of taxes and this
punitive action can be taken in case of willful default. Assessee is
not a willful defaulter and it has sufficient reasons to not to
discharge the tax liability at the time of filing return, but within
period of 7 months discharged entire admitted tax. In fact the
cheques issued in the month of March, 2011 were encashed by
the A.O.    in the months of March and June,2011. In these
circumstances, we are of the opinion that assessee cannot be
considered as willful defaulter. Since it has bonafide reasons, we
are of the opinion that penalty under section 221(1) is not
attracted on the facts of the case. Therefore, we delete the penalty
partly confirmed by the Ld. CIT(A). Accordingly, assessee `s appeal
                                         ITA.No.568 & 691/Hyd/2014
                               M/s. Sheetal Refineries Ltd., Hyderabad

is allowed and consequently Revenue appeal has to be dismissed
as there is no merit in Revenue contentions.

7.           In the result, appeal of the Revenue is dismissed and
appeal of the assessee is allowed.

      Order pronounced in the open Court on 03.09.2014.

  Sd/-                                  Sd/-
 (SAKTIJIT DEY)                        (B.RAMAKOTAIAH)

Hyderabad, Dated 03rd September, 2014


Copy to

1.      Dy. Commissioner of Income Tax, Circle 3 (1), 7th Floor,
        B-Block, I.T. Towers, Hyderabad.
2.      M/s. Sheetal Refineries Ltd., 7-4-135/1, Gagan Pahad,
        Ranga Reddy District.
3.      CIT(A), Guntur + 1 copy.
4.      CIT-III, Hyderabad
5.      D.R. "B" Bench, ITAT, Hyderabad.
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