Introduction
The Income Tax Appellate Tribunal (ITAT), Mumbai Bench “G”, in the case of Sugandha Madhukar Shetty v. Deputy Commissioner of Income Tax (ITA No. 8007/MUM/2025, Assessment Year 2013-14), delivered a significant ruling on the levy of penalty under section 140A(3) read with section 221(1) of the Income-tax Act, 1961. The core issue was whether a penalty could be imposed for delayed payment of self-assessment tax after the legislative amendments introduced by the Direct Tax Laws (Amendment) Act, 1987, with effect from 1 April 1989. The Tribunal, relying on its own Coordinate Bench decisions in Heddle Knowledge Private Limited v. ITO and First Global Stockbroking Private Limited, held that the penalty under the said provisions was no longer sustainable. The judgment provides crucial clarity on the scope of the amended section 140A(3) and its interplay with section 221(1), reinforcing that only mandatory interest, and not penalty, is leviable for defaults in self-assessment tax payment.
Facts
The assessee, an individual, filed her return of income for A.Y. 2013-14 on 31 March 2015, declaring total income of ₹26,21,48,820. The assessment under section 143(3) was completed on 29 December 2015, accepting the returned income. However, the assessee had disclosed net tax payable of ₹5,39,70,100 along with total tax and interest aggregating ₹7,94,30,348. This self-assessment tax was not paid before filing the return. Consequently, the Assessing Officer (AO) initiated penalty proceedings under section 140A(3) read with section 221(1) and issued a show-cause notice. In response, the assessee explained that the delay was due to severe liquidity constraints and that the interest component had already been discharged prior to the notice. Despite these submissions, the AO levied a penalty of ₹53,97,010, being 10% of the self-assessment tax, vide order dated 27 June 2016.
Aggrieved, the assessee appealed before the Commissioner of Income Tax (Appeals) [CIT(A)] – National Faceless Appeal Centre, Delhi. The CIT(A) upheld the penalty, observing that the assessee failed to pay the self-assessment tax and interest, and that the case laws relied upon by the assessee were distinguishable. The CIT(A) concluded that the AO’s action was reasonable and justified. The assessee then appealed to the ITAT, raising multiple grounds challenging the penalty levy, including the non-applicability of penalty post-amendment, absence of wilful default, and violation of natural justice.
Reasoning
The ITAT, after hearing both parties and perusing the record, framed the short question: whether penalty under section 140A(3) read with section 221(1) for delayed payment of self-assessment tax can be sustained when the assessee had already discharged the interest liability attributable to such delay. The Tribunal noted that this issue was no longer res integra and was squarely covered in favour of the assessee by a series of Coordinate Bench decisions.
Legislative History and Amendment Analysis
The Tribunal meticulously examined the legislative history of section 140A(3). Prior to the amendment by the Direct Tax Laws (Amendment) Act, 1987, w.e.f. 1 April 1989, the provision allowed for levy of penalty at the rate of 2% for every month of default. However, the amendment replaced this penalty mechanism with a mandatory interest regime under sections 234A, 234B, and 234C. The amended section 140A(3) only treats the assessee as an “assessee in default” for the purpose of recovery of arrears of self-assessment tax, and not for levy of penalty. The Tribunal placed reliance on CBDT Circular No. 549, which clarified that the power to treat the assessee as a defaulter under the amended provision is limited to taking coercive recovery action, not to imposing penalty.
Interplay with Section 221(1)
The Revenue had invoked section 221(1) in conjunction with section 140A(3). However, the ITAT observed that there was no corresponding amendment to section 221(1) after 1987. The provision under section 221(1) empowers penalty for default in payment of tax, but when invoked for self-assessment tax post-amendment, it must be read harmoniously with the amended section 140A(3). Since the legislative intent was to substitute penalty with interest, the AO could not rely on section 221(1) to levy a separate penalty. The Tribunal noted that in First Global Stockbroking Private Limited (ITA Nos. 1786, 1951 & 1950/Mum/2024), the Coordinate Bench held that after the amendment, no penalty under section 140A(3) read with section 221(1) can be imposed for non-payment or delayed payment of self-assessment tax.
Binding Precedents
The ITAT followed the ratio in Heddle Knowledge Private Limited v. ITO [2018] 90 taxmann.com 376 (Mum. ITAT), wherein it was held that penalty under section 140A(3) stood annulled after the amendment, and the scope of treating the assessee as defaulter only empowers tax authorities to take recovery action. Similarly, in Dy. CIT v. Karanja Terminal & Logistics Pvt. Ltd. (taxmann.com 34 (Mum.)) and Dy. CIT v. Kamala Mills Ltd. (ITA No. 7775/7776/7777/Mum/2004), the Tribunal consistently held that penalty cannot be levied under the amended regime. The assessee also argued that the proviso to section 221(1) stipulates that if the assessee proves good and sufficient cause for default, no penalty should be levied. The assessee had demonstrated that the delay was due to bona fide financial difficulties and that interest had been paid. Therefore, even on merits, the penalty was not justified.
Rejection of CIT(A)’s Findings
The CIT(A) had dismissed the assessee’s appeal without meaningfully dealing with the binding decisions of the Tribunal. The ITAT found that the CIT(A) erred in treating the facts as distinguishable. The key aspect was not the quantum of tax or the period of delay, but the legal position post-amendment. The CIT(A) failed to appreciate that the provision for penalty under section 140A(3) itself stood replaced and that no penalty could be sustained under the old framework. The ITAT set aside the CIT(A)’s order, holding that it violated principles of natural justice by ignoring the assessee’s detailed submissions and the settled legal position.
Conclusion
The ITAT allowed the appeal and cancelled the penalty of ₹53,97,010 levied under section 140A(3) read with section 221(1) for A.Y. 2013-14. The Tribunal reiterated that post the Direct Tax Laws (Amendment) Act, 1987, self-assessment tax defaults attract only mandatory interest under sections 234A, 234B, and 234C, and not penalty. The amended section 140A(3) merely enables recovery action but does not authorize penalty. Since the Revenue failed to establish any wilful default or contumacious conduct, and the assessee had already discharged the interest liability, the penalty was unsustainable. This judgment provides authoritative guidance for taxpayers and tax authorities on the correct interpretation of section 140A(3) and its interplay with section 221(1).
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