1. This and the other five (M.C.C. Nos. 148 and 150 to 153 all of 1976) are petitions under Section 66(2) of the Indian I.T. Act, 1922, read with Section 256(2) of the I.T. Act, 1961. All these cases involve identical question and this order will govern the disposal of the other five petitions as well. The various petitions pertain to the respective years of assessment.

1. M.C.C. No. 149 of 1976 assessment year 1942-43

2. ,, 153 of 1976 ,, ,, 1943-44

3. ,, 151 of 1976 ,, ,, 1944-45

4. ,, 150 of 1976 ,, ,, 1945-46

5. ,, 148 of 1976 ,, ,, 1946-47

6. ,, 152 of 1976 ,, ,, 1947-48

2. The ITO by his order assessed the non-applicant in the status of an unregistered firm as non-resident and as large sums were due to be paid by the non-applicant and the same were not paid within the time limit allowed by notice under Section 156 of the I.T. Act, 1961 (hereinafter referred to as "the Act") the ITO issued a notice under Section 221(1) of the said Act to M/s. Kalyanmal Mills Ltd., Indore, which is one of the partners of the non-

applicant. However, the said mills did not care to reply in spite of opportunities. The ITO, therefore, held that the non-applicant was a defaulter and was liable to penalty under Section 221 of the Act. Consequently, penalty was imposed under that section.

3. The non-applicant preferred an appeal against this order before the AAC and the AAC on consideration of all the contentions advanced and facts found upheld the imposition of penalty but reduced it from 10 to 5 per cent. of the demand. The non-applicant thereafter preferred an appeal before the Tribunal and the Tribunal found that it was a non-resident firm and that the tax was levied on the basis that the sale proceeds were received in British India and that the firm had also requested the authorities to keep the collection in abeyance on the ground that the partner mills was in financial difficulties. The Tribunal also considered the fact that in an appeal against the assessment itself it held that the sale proceeds did not attract the provisions of Section 41(a) (sic) of the Indian I.T. Act, 1922, and there was thus no tax liability. On these facts, the Tribunal set aside the order of imposition of penalty and allowed the appeal filed by the non-applicant.

4. Aggrieved by this order the present petitioner submitted an application before the Tribunal requesting the Tribunal to refer the following question of law :

"Whether, on the facts and in the circumstances of the case, the Tribunal was justified in deleting the penalty of Rs. 14,670 sustained by the AAC on the ground that there is ultimately no tax liability against the assessee ?"

5. The Tribunal by its order dated April 18, 1972, refused to make a reference to this court on the ground that no question of law arises out of its order. It appears, therefore, that the present petitions have been filed by the petitioner under Section 256(2) of the Act for direction to the Tribunal to state the case and refer the question.

6. Learned counsel appearing for the petitioner contended that the Tribunal felt that as ultimately on appeal the Tribunal found that there was no liability to pay tax it took the view that for non-payment of tax in time there was sufficient reason as according to the Tribunal the liability to pay tax was a matter depending on a controversial question. This, according to learned counsel, was not justified as the second proviso to Section 221(1) of the Act which has been inserted by the Taxation Laws (Amendment) Act, 1970, was not in existence when this case arose and he, therefore, contended that a question of law arises where the Tribunal should be directed to state a case. The Tribunal on examination of facts found that the liability to pay tax was itself a contentious issue and because of that and because of the economic condition of the non-applicant, prayer was made to the departmental authorities to keep the demand in abeyance. This, in the opinion of the Tribunal, was good and sufficient reason and this finding about good and sufficient reason in the opinion of the Tribunal was a question of fact and, therefore, no reference was made.

7. Learned counsellor the non-applicant contended that although the second proviso which has been inserted by the Taxation Laws (Amendment) Act, 1970, has clarified the position that before levy of penalty the ITO must find that the default was not for any good or sufficient reason and then alone penalty could be imposed, but even without this proviso the language of the section itself indicates that penalty could only be imposed if the authority came to the conclusion that there was a default without any justification. It was, therefore, contended that even without this proviso the ITO, or exercising the appellate jurisdiction the Tribunal, could hold that there was sufficient reason for the assessee not to pay tax in time : and having accepted the reasons stated by the assessee the Tribunal could hold that this was a sufficient reason for non-payment of tax and the Tribunal was within its jurisdiction to say that no penalty could be imposed in such a case. It was also contended that whether a set of facts afforded a reasonable cause to the assessee for non-payment of tax is always a question of fact and the Tribunal could not be directed in this petition to make a reference to this court on this question.

8. Section 221(1) of the Act runs :

"221. (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, by way of penalty, to pay such amount as the Income-tax Officer may direct, and in the case of a continuing default, such further amount or amounts as the Income-tax Officer may, from time to time, direct, so, however, that the total amount of penalty does not exceed the amount of tax in arrears :

Provided that before levying any such penalty, the assessee shall be given a reasonable opportunity of being heard :

Provided further that where the Income-tax Officer is satisfied that the default was for good and sufficient reasons, no penalty shall be levied under this section...... "

9. Before the amendment, the second proviso was not in the provision. It is not disputed that this proviso has been added by the Taxation Laws (Amendment) Act, 1970. The scheme of the provision indicates that when as assessee is found to be in default in payment of tax the ITO is authorised to impose penalty and for continuing default he is further authorised to impose penalty, the limits for which have been provided in this section. It could not be doubted that where the law authorises an authority to impose penalty, the penalty could not be imposed without examining as to whether there was a deliberate defiance of law or a conscious disregard of the obligations. Penalty could not simply be imposed merely because there is disobedience of law. When it is left to the discretion of the authority it is always expected that the discretion will be exercised judicially on consideration of the relevant circumstances. In Hindusthan Steel Ltd. v. State of Orissa [1972] 83 ITR 26, their Lordships of the Supreme Court observed (p. 29):

But the liability to pay penalty does not arise merely upon proof of default in registering as a dealer. An order imposing penalty for failure to carry out a statutory obligation is the result of a quasi-criminal proceeding, and penalty will not ordinarily be imposed unless the party obliged, either acted deliberately in defiance of law or was guilty of conduct contumacious or dishonest, or acted in conscious disregard of its obligation. Penalty will not also be imposed merely because it is lawful to do so. Whether penalty should be imposed for failure to perform a statutory obligation is a matter of discretion of the authority to be exercised judicially and on a consideration of all the relevant circumstances. Even if a minimum penalty is prescribed, the authority competent to impose the penalty will be justified in refusing to impose penalty, when there is a technical or venial breach of the provisions of the Act or where the breach flows from a bona fide belief that the offender is not liable to act in the manner prescribed by the statute.

10. While making these observations, Shah, Actg. C. J. (as he then was), was considering the scope of Sections 9(1) and 25(1)(a) of the Orissa Sales Tax Act. But the principles laid down in this decision clearly deal with the liability to penalty which would be imposed by an authority exercising discretion.

11. The question as to whether without the insertion of the second proviso in Section 221(1) of the Act, the cause shown by the assessee could be considered by the authorities under Section 221, has come up for consideration before the Kerala High Court in the decision in E.K. Varghese v. ITO [1974] 96 ITR 577 and their Lordships after quoting the passage from the above-noted Supreme Court decision observed (p. 584):

"I think there is sufficient guidance in this decision to justify the view that mere failure to carry out the statutory obligation need not necessarily visit the consequence of imposition of penalty. Something more must be shown and that is whether there is dishonest conduct on the part of the defaulter who is said to have committed the breach. The Supreme Court has spoken earlier on several occasions on this question. Reference may be made to the decisions in Ravula Hariprasada Rao v. State, AIR 1951 SC 204, and in State Of Maharashtra v. Mayer Hans George . [1965] 35 Comp Cas 557; AIR 1965 SC 722."

12. Their Lordships further considering the various decisions ultimately held (p. 585):

Section 221, as it stands amended by the Taxation Laws (Amendment) Act, 1970, has a proviso which restricts the power of the Income-tax Officer to impose penalty under the section unless he is satisfied that the default was for good and sufficient reasons. It is easy to see in the light of the proviso that Parliament did not intend to create an absolute offence under Section 221(1). At the relevant time there was no proviso in the section as it stood. If the incorporation of the proviso was only intended to put the matter beyond doubt, then, of course, the fact that the section was in different form earlier may not be very material. I see no intention expressed nor do I read any implied intention in Section 221(1) as it stood prior to the amendment which may be sufficient to hold that the normal rule that mens rea must read as an ingredient of the offence is to be ruled out in this case. I am, therefore, of the view that the amendment did not really effect any change in the law. In order to justify the imposition of a penalty under Section 221, the Income-tax Officer should not only find that there is default but should also consider the question whether there was good and sufficient reason for the default and only if he finds that there were none, he could proceed to impose the penalty. In other words, the situation prior to the amendment of 1970 was the same as that after such amendment.

13. It is, therefore, clear that even without the amendment, i.e., the insertion of the second proviso, Section 221(1), as it stood, allowed this discretion to the authorities to consider whether there were sufficient reasons for committing default before the penalty could be imposed and the Tribunal having accepted the reasons stated by the non-applicant-assessee and having held that there were good and sufficient reasons for non-payment of tax in the case in hand, it could not be said that the Tribunal went beyond its jurisdiction.

14. It could not be disputed that if the Tribunal had jurisdiction to consider the reasons and come to the conclusion, the conclusion arrived at by the Tribunal that there were sufficient reasons and no penalty could be imposed is a question of fact; and the Tribunal having found on facts that there were sufficient reasons for not imposing penalty against the non-applicant it could not be said that any question of law arises for which a direction could be issued to the Tribunal to state a case. We, therefore, see no reason to allow this petition. The petition is accordingly dismissed. In the circumstances of the case, parties are directed to bear their own costs.