In CIT v. M/s. Oryx Finance and Investment Pvt. Ltd, a division bench of the Bombay High Court held that the phraseology “tax in arrears” as envisaged in Sec.221 of the Act would not include interest component. The bench, while dismissing the departmental appeal, held that the Assessing Officer, under the above provision, can impose penalty for default in making the payment of tax, but the same shall not exceed the amount of tax in arrears. However, such tax in arrears would not include the interest payable under Section 220(2) of the Act.
Assessee, in the instant case, failed to pay tax determined for the relevant assessment year within the stipulated time. The Assessing Officer, consequently made demand of Rs.1,64,90,573. He also imposed a penalty of Rs.1,19,30,677 under Section 221(1) of the Income Tax Act for default by Assessee in the payment of demand.
First appellate authority, however, deleted the penalty order holding that interest component has to be excluded while levying penalty under Section 221(1) and since the penalty levied exceeded the tax component, it set aside the order levying penalty. On departmental appeal, the ITAT also confirmed the findings of the first appellate authority
Aggrieved by the above orders, the department approached the High Court contending 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.
The division bench observed that the definition of the term “Tax” u/Sec.2(43) means income tax, super tax and/or the fringe benefit tax, as the case may be chargeable under the provisions of the Act. Under this definition, tax does not take within its fold the interest component.
The bench said that “It is the elementary rule of interpretation that when the language of a statute is clear and unambiguous, the Courts are to interpret the same in its literal sense and not to give a meaning that would cause violence to the provisions of the statute. Each word in the statute should be assign the meaning as per the context.”
“The provision imposing penalty will have to be strictly construed. The statute being fiscal and the provisions of Section 221 dealing with imposition of penalty naturally shall have to be strictly construed. Strict construction is a construction in which application of a provision used is limited by words used, so that anything which is not clearly included within the scope of the language is treated as excluded,” it added.
Dismissing the appeal, the bench said that for the purpose of section 221, the aspect of default in payment of tax and the amount of interest payable are treated as distinct and separate components.
“Second proviso to Section 221 and explanation would also be relevant. The second proviso to Section 221(1) states that, if the Assessee proves to the satisfaction of the Assessing Officer that the default was for good and sufficient reason, no penalty shall be levied under the said section. Sub-Section 2 further says that, whereas result of final order, the amount of tax with respect to the default in the payment of which penalty was levied has been wholly reduced, the penalty levied shall be cancelled and the amount of penalty paid shall be refunded. This would suggest that the payment of penalty is directly commensurate with the default in payment of tax and not of interest.”
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