B.N Srikrishna, J.:— This reference made under section 256(1) of the Income-tax Act, 1961, at the instance of the Revenue, in respect of the assessment years 1963–64, 1964–65 and 1968–69, refers the following question for the opinion of this court:
“Whether, on the facts and in the circumstances of the case, the Appellate Tribunal was correct in cancelling the pen???lties levied by the Income-tax Officer under section 221 for non-payment of penalties imposed under section 271(1)(c) for the assessment years 1963–64, 1964–65 and 1968–69?”
2. During the assessment years in question, the Inspecting Assistant Commissioner levied penalties of Rs. 7,000, Rs. 21,000 and Rs. 14,000 respectively, under section 271(1)(c) of the Act by orders made on December 31, 1973. The assessee appealed against these orders.
3. During the pendency of the assessee's appeals against the said penalty orders, the Income-tax Officer required the assessee to pay the outstanding amounts of penalty. By orders made on October 17, 1974, holding that the assessee had committed default in payment of the outstanding demands, he levied penalties of Rs. 1,000, Rs. 2,000 and Rs. 2,000, respectively, for the three assessment years in exercise of his power under section 221(1) of the Act. The assessee's appeals to the Appellate Assistant Commissioner failed. The Tribunal noticing that the expression “tax” has been separately defined in section 2(43) of the Act and also relying on a judgment of the Calcutta High Court in Shreeniwas and Sons v. ITO, [1974] 96 ITR 562, cancelled the penalties levied under section 221(1) of the Act. On the application of the Department, the aforesaid question has been referred by the Tribunal to this court.
4. Section 221(1) of the Act, as it stood at the material time, reads as under:
“(1) When an assessee is in default or is deemed to be in default in making a payment of tax, he shall, in addition to the amount of the arrears and the amount of interest payable under sub-section (2) of section 220, be liable to pay by way of penalty, an amount which, in the case of a continuing default, may be increased from time to time so, however, that the total amount of penalty does not exceed the amount of tax in arrears.”
5. A bare reading of this provision shows that penalty under section 221 is leviable only when the assessee is in default or is deemed to be in default in making a payment of “tax”. The expression “tax” has been defined in section 2(43) of the Act as under:
“2. In this Act, unless the context otherwise requires,—…
(43) ‘tax’ in relation to the assessment year commencing on the 1st day of April, 1965, and any subsequent assessment year means income-tax chargeable under the provisions of this Act and in relation to any other assessment year income-tax and super-tax chargeable under the provisions of this Act prior to the aforesaid date;”
6. Reading the two provisions together, it is clear that, unless the assessee is or is deemed to be in default in making a payment of “tax”, as defined in section 2(43) of the Act, which means that he is in default or in deemed default in payment of income-tax chargeable under the provisions of the Act or super-tax chargeable under the provisions of the Act, depending upon the assessment year in question, there could be no levy of penalty under section 221(1).
7. In the case of the assessee, it is not disputed that he was not in default or in deemed default in payment of the income-tax chargeable under the Act. The only ground on which the Income-tax Officer exercised his power under section 221(1) of the Act was that, despite an order made by him requiring the assessee to pay up the amounts of penalty levied under section 271(1)(c) of the Act, the assessee had failed, and, therefore, the assessee was in default in payment of tax. In our view, the Tribunal was fully justified in cancelling the penalties by reading the expression “tax” used in section 221 as defined in section 2(43) of the Act.
8. The Calcutta High Court in Shreeniwas and Sons v. ITO, [1974] 96 ITR 562 had to consider the same question under slightly different circumstances. The assessee therein had defaulted in payment of interest, which had been levied under section 220(2). Taking the view that this default was a default in payment of tax within the meaning of section 221, the Income-tax Officer levied penalty under section 221(1) of the Act. Emphasising the definition between the character of “tax” and “interest”, the Calcutta High Court pointed out that, under section 221, penalty can be imposed only when the assessee is in default in making payment of tax. Since the expression “tax” has been defined in section 2(43) of the Act, there would be no scope for any argument that “interest” is “additional tax”. The principle of this judgment would apply equally to the case of the assessee before us. In the case of the assessee, the contradistinction is between “tax” and “penalty”. In our view, therefore, there was no warrant for imposition of penalty under section 221(1) by the Income-tax Officer for a default or deemed default on the part of the assessee in payment of penalty levied against him under section 271(1)(c) of the Act.
9. In the result, the question referred for the opinion of this court is answered in the affirmative and in favour of the assessee. There shall, however, be no order as to costs.