Scope of Reasonable Cause For Not Levying Penalty Under Section 221 For Non-Payment of TDS.
Penalty under section 221 is levied when there is a default in payment of tax. Under sub-section (1) of section 221, the assessing officer is empowered to impose a penalty where an assessee is in default or is deemed to be in default in payment of tax. The said penalty is leviable in addition to the amount of the arrears and the amount of interest payable under section 220(2). Further, in the case of continuing default, the assessing officer may direct to pay further amount or amounts by way of penalty, so, however, that the total amount of penalty does not exceed the amount of tax in arrears. However, such a penalty is discretionary and can be waived of where reasonable cause exist for such default.
Here an attempt is made to explain and examine what constitutes the reasonable cause for not levying a penalty under section 221.
Depends upon the facts of each case
The exercise of discretion u/s 221 is not to be arbitrary but is dependent on the facts and circumstances of the case
No penalty where the reasonable cause is proved
According to the second proviso to section 221(1), the penalty cannot be levied where the assessee proves to the satisfaction of the assessing officer that the default was for good and sufficient reason.
Penalty leviable even if the tax paid before levy of penalty
Penalty under section 221 will be exigible even in a case where the tax is paid after the due date but before the levy of penalty.
Impact of the outcome of final order regarding default in payment of tax
According to sub-section (2) of section 221 whereas 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 canceled and the amount of penalty paid shall be refunded.
Financial crises for not levying penalties under section 221
The assessing officer passed an order under section 201 treating the assessee as the assessee in default as it had not remitted the amount collected by way of TDS to the government account during the relevant assessment year. The assessee did not file any appeal against the order under section 201 and remitted tax deducted at the source along with interest.
The assessing officer also initiated penalty proceedings under section 221.
The assessee said that it was facing severe financial hardship and the same constitutes a good and sufficient reason for not levying a penalty under section 221.
It is true that a mere default is not sufficient for the levy of penalty, but in the instant case, the assessee used the TDS amount to meet various business commitments. Further, it was continuously making defaults on payment of TDS to the government account, which is very serious in nature.
One can understand the financial difficulties the assessee was facing if it was in defaulter for a short period. But in this case, the assessee’s conduct was that it continuously defaulted the payment of the TDS amount to the government account.
The only reason the assessee mentioned for non-payment of TDS was financial difficulties, which under these circumstances, did not appear to be sufficient. Accordingly, the penalty was confirmed.
No waiver of penalty on grounds of payment of self-assessment tax
Penalty under section 221(1) cannot be waived merely on the ground that self-assessment tax is paid before such levy of penalty. There existed good and sufficient reasons to mitigate said default.
