N. Kumar, J.
1. At the instance of the assessee, the Tribunal, Bangalore Bench, Bangalore, has referred the following questions of law for our opinion under Section 256(1) of the IT Act, 1961:
1. Whether the Tribunal is right in law in holding that penalty under Section 140A(3) for non-payment of tax on admitted income is leviable after holding that the assessee was prevented by reasonable cause for non-payment of the said tax ?
2. Whether the Tribunal was right in holding that no leniency for assessees having reasonable cause for non-payment of self-assessment can be showed under law ?
2. The relevant assessment year is 1983-84. The assessee filed a return of income declaring a total income of Rs. 1,94,530. The assessee paid an advance tax on due dates. However, the balance of Rs. 51,531 had not been paid within one month of filing of the return of income as required under Section 140A of the Act. The AO issued a show-cause notice on 27th March, 1986 and on 29th Dec, 1987 to which there was no response. Therefore, the AO held that the assessee had no explanation to offer and proceeded to levy penalty of Rs. 12,360 under Section 140A(3) of the Act. In appeal, the CIT(A) confirmed the levy of penalty. The assessee preferred a second appeal to the Tribunal. Before the Tribunal, a copy of the explanation offered in response to the penalty under Section 140A(3) and a copy of the petition for waiver of penalty under Section 220(2A) before the CBDT were filed on behalf of the assessee. In the waiver petition, it was contended that the assessee delayed the payment due to financial crisis that was existing at that time on account of cyclone in Andhra Pradesh and drought situation in certain areas of Karnataka where the business of the assessee was concentrated. The tax on self assessment has been paid. However, it was noticed that a sum of Rs. 1,02,500 had to be included voluntarily as a credit note to that effect was received after paying tax under Section 140A. Since the impact of inclusion of the credit note amount resulted in further payment of tax amounting to Rs. 51,533, it could not be paid immediately. It was also stated that there had been a steep fall in the sales in Andhra Pradesh due to severe cyclone devastating agricultural crops which resulted in poor recoveries from the consumers of the area. They pleaded that there was no deliberate or wilful intention on the part of the assessee for denying payment of defective tax.
3. The Tribunal after going through the reasons given in the waiver petition and also hearing the assessees learned Counsel held that there was reasonable cause on the part of the assessee in delaying the payment of advance tax amounting to Rs. 51,533. But, however, on the ground that Section 140A(3) did not show any leniency for the assessee having reasonable cause for the delay in payment of the advance tax, the imposition of levy of penalty under Section 140A(3) was upheld. At the instance of the assessee, as stated earlier, the aforesaid questions of law are referred for our opinion.
4. he learned Counsel for the assessee submitted that it is mandatory on the part of the assessee to pay tax before furnishing the return and on failure to pay such tax, the imposition of penalty is not automatic. The assessee is entitled to a reasonable opportunity of being heard before the penalty is imposed and if he is able to show sufficient cause to the authority then, the authority has the discretion not to impose the penalty.
5. Per contra, Sri M.V. Seshachala, learned Counsel appearing for the Revenue submitted that having regard to the language employed in Section 140A, the payment of tax before furnishing the return is mandatory and failure to do so results in imposition of penalty and there is no discretion left in the authorities in the matter of imposition of penalty.
6. In order to appreciate the rival contentions, it is necessary to look at Section 140A which reads as under:
140A. Self-assessment(1) Where any tax is payable on the basis of any return required to be furnished under Section 139 or Section 148, after taking into account the amount of tax, if any, already paid under any provision of this Act, the assessee shall be liable to pay such tax before furnishing the return and the return shall be accompanied by proof of payment of such tax
(2)After a regular assessment under Section 143 or Section 144 has been made any amount paid under Sub-section (1) shall be deemed to have been paid towards such regular assessment.
(3)If any assessee fails to pay the tax or any part thereof in accordance with the provisions of Sub-section (1), the AO may direct that a sum equal to two per cent of such tax or part, thereof, as the case may be, shall be recovered from him by way of penalty for every month during which the default continues:
Provided that before levying any such penalty, the assessee shall be given a ?reasonable opportunity of being heard.
7. The aforesaid provision has been the subject-matter of interpretation by various High Courts,
(a) The Andhra Pradesh High Court in the case of Addl. CIT v. Sarvaraya Textiles Ltd. interpreting the aforesaid section held as under:
The failure to pay the tax or any part thereof makes an assessee liable to pay penalty. This liability of the assessee to pay penalty, on account of his failure to pay the tax either in its entirety or in part, would empower the ITO to require the assessee ‘to pay by way of penalty such amount as the ITO may direct’. The expression used here is ‘may direct’, whereas the term used with respect to the assessee’s liability in the earlier part of this section is ‘shall’. Though, invariably, the assessee is liable to the infliction of penalty, the ITO was still given discretion to direct the assessee to pay such amount as he may decide. The limitation with regard to the maximum penalty is 50 per cent of the amount of tax or part thereof.
The ITO may direct the assessee to pay nil amount or a token amount of Re. 1. Where the ITO has to give reasonable opportunity to the assessee of being heard and if he, after hearing the assessee, is satisfied that there is reasonable, just and sufficient cause for the assessee for his failure to pay the entire amount within the time permissible under Section 140A(1), he can certainly exercise, in appropriate cases, his discretion and direct him not to pay any amount in. respect of penalty. In other words, he is empowered, in his discretion in appropriate cases, to exonerate the assessee from the liability to pay any amount towards penalty, if he is satisfied, on the consideration of the facts and circumstances, that there was sufficient or reasonable cause for the assessee for his inability to pay the entire amount or part thereof, within the time permissible to him under law. If really the ITO is bound in law without any discretion to levy penalty in every case where there is a failure of the assessee to pay the tax or part thereof as required under Sub-section (1) to Section 140A, the proviso, whereunder the assessee is entitled for a reasonable opportunity of being heard, would be redundant. The entire provision must be read harmoniously and reasonably. That apart, this being a taxing provision and a penal provision, the Court has to give effect to a plausible interpretation which is in favour of the citizen, where two plausible views are permissible. Otherwise, this will lead to anomaly and hardship to the assessee. The very intendment of this particular self-assessment provision is to make the assessees pay the entire amount of tax based on the return filed by him within a particular time. This requirement is also clothed with a liability to penalty and this provision has been introduced for the first time in the year 1964. This provision must be construed fairly, reasonably and harmoniously. If so construed, we have no doubt in our mind that the ITO is invested with this power of discretion to be used judiciously and equitably depending upon the facts and circumstances of each case.
(b) The Delhi High Court in the case of Addl. CIT v. Free Wheel India Ltd. (1982) 28 CTR (Del) 85 . (1982) 137 ITR 378 (Del) has held as under:
the language of Section 140A itself clearly shows that a penalty is not an automatic consequence of a default and that before a penalty is imposed a reasonable opportunity must be provided to the assessee to show cause why the penalty should not be imposed. This clearly implies that it is open to the assessee to show that the default in the payment was in such circumstances as do not invite the penalty and that there was a reasonable cause for the non-payment of the tax as required by the section. We have no doubt that the view taken by the Tribunal on this aspect of the matter is clearly correct and we may point out that this is also the consensus of judicial opinion.
(c) The Madras High Court in the case of CIT v. Mysore Fertiliser Co has held as under:
Although the enacting part of the provision used the word ‘shall’, a reading of the entire provision shows that the penalty is neither imperative nor automatic. The section only provides that in default of payment of self-assessed tax promptly the assessee shall be liable, by way of penalty, to pay ‘such amount as the ITO may direct’. The words last quoted from the provision really show that the ITO has a discretion. According to learned standing counsel, even if these words imply a discretion in the ITO, that discretion is only as respects the quantum of penalty. We do not agree. It seems to us that on a true construction of the relevant words, the discretion not only appertains to the quantum of penalty, but also operates on the question whether any penalty at all is leviable in the given case
We hold that the penalty cannot be levied without hearing the assessee’s explanation and if the assessee’s explanation for the default is reasonable, then the ITO would have no jurisdiction to levy penalty at all. The practical result of the construction we have placed on Section 140A(3) is that it is open to an assessee to plead not only that there is no default in cases where there is none, but also that the default, if any, is not wilful or deliberate default.
8. In regard to the imposition of a penalty under Section 140A(3), the following observations of the Minister of Finance in the Lok Sabha in his reply to the debate on clause by clause consideration of the Finance Bill, 1964, have to be carefully borne in mind:
the amount of penalty is only the maximum that has been mentioned. The idea is, in cases where a man has assessed himself, he should remit the money along with the assessment. A time of one month is given…. I can certainly assure Hon’ble Members that while the intention is that the money should be paid along with the assessment, the penalty of 50 per cent is not something which is obligatory. It only gives the extent to which it can be imposed. I certainly agree to issue instructions to see that this should not be imposed unless other conditions are all adverse so far as collection is concerned, and some time should be given…. I can give the assurance that instructions will be issued to officers that wherever it is justifiable, no penalty should be imposed.
9. In the light, of the language employed in Section 140A and the aforesaid judgments, it is clear that though Section 140A uses the word “shall”, the entire provision must be read harmoniously and reasonably. This being a taxing provision and a penal provision, the Court has to give effect to a plausible interpretation which is in favour of the citizen, where two plausible views are permissible. Otherwise, it will lead to anomaly and hardship to the assesses. So construed, Sub-section (3) of Section 140A provides a reasonable opportunity of being heard to the assessee which is being mandatory. Once the law mandates that opportunity is to be given to the assessee to explain the default, if the explanation offered by the assessee is found to be satisfactory, then the question of imposing penalty would not arise. In other words, an amount of discretion is vested with the authority to impose or not to impose the penalty based on the explanation offered by the assessee. He is empowered in his discretion in appropriate cases to exonerate the assessee from the liability to pay any amount towards penalty if he is satisfied, on consideration of the fact and circumstances, that there was sufficient or reasonable cause for the assessee for his inability to pay the entire amount or part thereof within the time stipulated under law. To hold it otherwise, would render the proviso to Sub-section (3) of Section 140A redundant. Therefore, the penalty is not an automatic consequence of a default and the penalty will follow only in the event of the assessee failing to show a reasonable cause for non-payment of the tax as required by this section.
10. A reading of the Sub-section (3) of Section 140A makes it clear that if any assessee fails to pay the tax, the ITO may direct that a sum equal to two per cent of such tax or part thereof, as the case may be, shall be recovered from him by way of penalty for every month during which the default continues. Therefore, a power is conferred on the ITO to impose penalty for delayed payment of tax. However, proviso to the said Sub-section makes it clear that before levying such penalty, there is an obligation imposed on the assessing authority to hear the assessee with regard to the imposition of penalty. It also makes it clear that a wide discretion is conferred on the assessing authority either to levy or not to levy the penalty and even if he decides to levy penalty, it could be in a portion and not the entire 2 per cent of the tax payable, If in a given case, the assessee shows sufficient cause for non-payment of the tax within the time stipulated, it is open to the assessing authority to waive the levy of penalty.
11. In the instant case, as the Tribunal has on the basis of the cause shown held that the assessee had a sufficient reasonable cause for not paying the tax within the time prescribed, the said finding recorded by the Tribunal has already been accepted by the Revenue and the same is not challenged before this Court, As noticed by us earlier, the Tribunal has refused to exercise its discretion in favour of the assessee only on the ground that it has no power to waive the penalty. In our view, the said approach of the Tribunal is contrary to Sub-section (3) of the Act.
12. In the light of what is stated above, the questions referred for our opinion and decision are answered in the affirmative i.e., in favour of the assessee and against the Revenue. Accordingly, the reference is disposed of.