THE issue before the Bench is - Whether the proviso to section 272A(2) inserted by the Finance Act, 1998 which was introduced with the intention to obviate the unintended consequences of section 272A by scaling down the quantum of penalty to the amount of tax deductible or collectible at source and is remedial in nature, and the proviso is be treated as retrospective in operation. And the answer goes to favour the assessee.
Facts of the case
Assessee was required to deduct tax at source from interest payable/paid to certain creditors and in case the creditors were not liable to pay any income tax, the assessee was required to obtain declarations in Form No.15H which were liable to be submitted within the time limit mentioned in Section 197A(2). Assessee failed to furnish the declarations in time in the office of the CIT. Accordingly, penalty proceedings were initiated. Assessee contended that the provisions of section 272A(2)(f) were not applicable as the obligation to file copy of the statement in Form No.15H was introduced by the Finance Act, 1992 with effect from 1.6.1992 by amending section 197A of the Act and accordingly, till 1.6.1992, the Act did not require Form No.15H to be filed in the office of the CIT. There was no loss of revenue to the department and the
default, if any, was only a technical default for which no penalty should be levied. CIT imposed penalty u/s 272A(2)(f).
Before ITAT, the assessee contended that no penalty could be levied u/s 272A(2)(f) as there was no such obligation up till 1.6.1992. The assessee was ignorant of the provisions and that for ignorance of law, no penalty was leviable. Moreover, there was no loss to the revenue for the assessee's failure to file Form No.15H with the CIT. In relation to AY 1994-95, in view of the amendment, the assessee was under an obligation to file the prescribed form u/s 197A. In case the same was not filed and penalty were to be levied, then the same should not exceed the amount of tax deductible because of the proviso to section 272A(2) of the Act which had been held to be retrospective in operation.
ITAT held that the assessee was a habitual defaulter. Though the assessee had obtained Form No.15H, yet he never bothered to furnish the same before the CIT. Rule 29C(5) did make a provision for filing of Form No.15H even prior to 1.6.1992, but the breach of the said rule would not be liable for penalty. Thus held that no penalty u/s 272A(2)(f) could be levied for delay till 1.6.1992 because there was no statutory obligation to file the prescribed form under section 197A. However as far as assessment year 1994-95, penalty should be levied because ignorance of law is certainly no excuse for a default committed and confirmed penalty for the said assessment year but directed that the penalty should be calculated in accordance with the proviso to section 272A wherein it is stipulated that the penalty levied should not exceed the tax deductible as the said proviso was held to be retrospective.
Revenue contended that the proviso to section 272A of the Act has been inserted by the Finance Act, 1991 with effect from 1.10.1991. The benefit of the proviso was given only to defaults u/s 206 and 206C. The legislature despite being aware of the nature of the default u/s 197A did not extend the benefit of the proviso to section 197A and when the same was made applicable by the Finance Act, 1998, it was made effective from 1.4.1999. Thus, it was never intended to make it retrospectively applicable. The normal rule of construction is that the substantive provision in a statute would have prospective effect and not retrospective effect. Section 272A of the Act is a substantive provision and when the legislature has given a particular benefit from a particular date the same has to be taken as it is unless provided expressly or by necessary implication. In the circumstances, the law as it existed on the date of default would be applicable.
Assessee contended that default committed by the assessee was of not submitting Form No.15-H submitted by persons in whose case no tax was required to be deducted u/s 194 or 194EE within the prescribed period. There was no loss of revenue to the Government. Under the proviso to sub-section (2) of section 272A, for failures in relation to returns u/s 206 and 206C shall not exceed the amount of tax deductible or collectible, as the case may be. However, by Finance (No.2) Act, 1998, with effect from 1.4.1999, the words ‘a declaration mentioned in section 197A, a certificate as required by section 203 and’ came to be inserted in the proviso to sub-section (2) of section 272A, thereby making the same applicable to declarations u/s 197A of the Act also. The proviso to section 272A is a remedial one as for a default of a few thousand rupees penalty u/s 272A runs into lakhs of rupees which could never be the intention of the legislature. The insertion of section 197A in the proviso to section 272A makes it clear that the intention of the legislature was to levy penalty but not beyond a point. Hence, as a remedial and curative measure, the proviso was amended to obviate the hardship caused by reason of levy of excessive penalty.
After hearing both the parties, the Hon’ble High Court held that,
Assessee was required to deduct tax at source from interest payable/paid to certain creditors and in case the creditors were not liable to pay any income tax, the assessee was required to obtain declarations in Form No.15H which were liable to be submitted within the time limit mentioned in Section 197A(2). Assessee failed to furnish the declarations in time in the office of the CIT. Accordingly, penalty proceedings were initiated. Assessee contended that the provisions of section 272A(2)(f) were not applicable as the obligation to file copy of the statement in Form No.15H was introduced by the Finance Act, 1992 with effect from 1.6.1992 by amending section 197A of the Act and accordingly, till 1.6.1992, the Act did not require Form No.15H to be filed in the office of the CIT. There was no loss of revenue to the department and the
default, if any, was only a technical default for which no penalty should be levied. CIT imposed penalty u/s 272A(2)(f).
Before ITAT, the assessee contended that no penalty could be levied u/s 272A(2)(f) as there was no such obligation up till 1.6.1992. The assessee was ignorant of the provisions and that for ignorance of law, no penalty was leviable. Moreover, there was no loss to the revenue for the assessee's failure to file Form No.15H with the CIT. In relation to AY 1994-95, in view of the amendment, the assessee was under an obligation to file the prescribed form u/s 197A. In case the same was not filed and penalty were to be levied, then the same should not exceed the amount of tax deductible because of the proviso to section 272A(2) of the Act which had been held to be retrospective in operation.
ITAT held that the assessee was a habitual defaulter. Though the assessee had obtained Form No.15H, yet he never bothered to furnish the same before the CIT. Rule 29C(5) did make a provision for filing of Form No.15H even prior to 1.6.1992, but the breach of the said rule would not be liable for penalty. Thus held that no penalty u/s 272A(2)(f) could be levied for delay till 1.6.1992 because there was no statutory obligation to file the prescribed form under section 197A. However as far as assessment year 1994-95, penalty should be levied because ignorance of law is certainly no excuse for a default committed and confirmed penalty for the said assessment year but directed that the penalty should be calculated in accordance with the proviso to section 272A wherein it is stipulated that the penalty levied should not exceed the tax deductible as the said proviso was held to be retrospective.
Revenue contended that the proviso to section 272A of the Act has been inserted by the Finance Act, 1991 with effect from 1.10.1991. The benefit of the proviso was given only to defaults u/s 206 and 206C. The legislature despite being aware of the nature of the default u/s 197A did not extend the benefit of the proviso to section 197A and when the same was made applicable by the Finance Act, 1998, it was made effective from 1.4.1999. Thus, it was never intended to make it retrospectively applicable. The normal rule of construction is that the substantive provision in a statute would have prospective effect and not retrospective effect. Section 272A of the Act is a substantive provision and when the legislature has given a particular benefit from a particular date the same has to be taken as it is unless provided expressly or by necessary implication. In the circumstances, the law as it existed on the date of default would be applicable.
Assessee contended that default committed by the assessee was of not submitting Form No.15-H submitted by persons in whose case no tax was required to be deducted u/s 194 or 194EE within the prescribed period. There was no loss of revenue to the Government. Under the proviso to sub-section (2) of section 272A, for failures in relation to returns u/s 206 and 206C shall not exceed the amount of tax deductible or collectible, as the case may be. However, by Finance (No.2) Act, 1998, with effect from 1.4.1999, the words ‘a declaration mentioned in section 197A, a certificate as required by section 203 and’ came to be inserted in the proviso to sub-section (2) of section 272A, thereby making the same applicable to declarations u/s 197A of the Act also. The proviso to section 272A is a remedial one as for a default of a few thousand rupees penalty u/s 272A runs into lakhs of rupees which could never be the intention of the legislature. The insertion of section 197A in the proviso to section 272A makes it clear that the intention of the legislature was to levy penalty but not beyond a point. Hence, as a remedial and curative measure, the proviso was amended to obviate the hardship caused by reason of levy of excessive penalty.
After hearing both the parties, the Hon’ble High Court held that,
++ penalty for failure to file declaration in Form No.15-H came to be levied under section 272A with effect from 1.6.1992. It is a cardinal principle of construction that every statute is prima facie prospective unless it is expressly or by necessary implication made to have a retrospective operation. But the rule in general is applicable where the object of the statute is to affect vested rights or to impose new burdens or to impair existing obligations. Unless there are words in the statute sufficient to show the intention of the legislature to affect existing rights, it is deemed to be prospective only. In the facts of the present case, as on the date of the default failure to file declarations in Form No.15-H was not exigible to penalty. Penalty came to be levied in respect of such failure only with effect from 1.6.1992. There is nothing in the language of section 272A of the Act to indicate that it was the intention of the legislature to affect existing rights. Failure to file the declaration in Form No.15H prior to 1.6.1992 not being a default u/s 272A(2)(f), the Tribunal was, therefore, justified in holding that for assessment years 1991-92 & 1992-93 no penalty can be levied u/s 272A(2)(f) for delay upto 1.6.1992 because there was no statutory obligation to file the prescribed form u/s 197A;
++ any amendment of a substantive provision which is aimed at clarifying the existing position or removing any unintended consequences to make the provision workable has to be treated as retrospective, notwithstanding the fact that the amendment has been given effect prospectively. With a view to enabling persons with income below the taxable limit to receive the categories of income mentioned therein, without deduction of income-tax at source, the Finance Act, 1982 has inserted a new section 197A to provide that a person who is resident in India may receive such income without deduction of income-tax on his furnishing a declaration in writing in the prescribed form and verified in the prescribed manner to the person responsible for making the payment. The person responsible for making the payment is required to deliver or cause to be delivered to the CIT who exercises jurisdiction over him, one copy of the declaration on or before the 7 th day of the month in which the declaration is furnished. Rule 29C and Form No. 15F, 15G and 15H came to be inserted in the Rules by the Income-tax (Fifth Amendment) Rules, 1982, prescribing the forms for the purpose of section 197A of the Act and laying down the procedure for furnishing the declaration form. Section 272A of the Act makes provision for ‘Penalty for failure to answer questions, sign statements, furnish information, returns or statements, allow inspections, etc.’. Sub-section (2) of section 272A came to be substituted vide Direct Tax Laws Amendment Act, 1987 with effect from 1.4.1989;++ prior to its substitution, the said provision provided that if a person fails, - (f) to deliver or cause to be delivered in due time a copy of the declaration mentioned in section 197A, he shall pay, by way of penalty, a sum which may extend to 10 rupees for every day during which the failure continues. Upon substitution, sub-section (2) of section 272A of the Act inter alia provided that if any person fails, - (f) to deliver or cause to be delivered in due time a copy of the declaration mentioned in section 197A, he shall pay, by way of penalty, a sum which shall not be less than 100 rupees, but which may extend to 200 rupees for every day during which the failure continues. Vide Finance (No.2) Act, 1991, a proviso came to be inserted in section 272A with effect from 1.10.1991, which provided that the amount of penalty for failures in relation to returns u/s 206 or 206-C shall not exceed the amount of tax deductible or collectible, as the case may be, the scope and effect of. Subsequently, vide Finance (No.2) Act, 1998, the proviso to section 272A(2) came to be amended so as to provide that the maximum limit of penalty imposable for failures in relation to a declaration mentioned in section 197A and in relation to a certificate required by section 203 shall not exceed the amount of tax deductible. While clarifying the amendment whereby the proviso to section 272A of the Act was inserted for the first time, the Board has stated that representations have been received that the aforesaid provision creates hardship in cases where the amount of tax deductible for which the return under section 206 is furnished is very small and the return could not be furnished in time for various reasons;++ thus, it is clear that in view of the representations received by the Board and in view of the hardship caused to assessees as well as in view of the fact that the penalty levied is exorbitant as compared to the tax deducted at source, that the proviso came to be introduced providing for a maximum limit not exceeding the tax deductible at source. The proviso appears to be remedial in nature inasmuch as it could never be the intention of the legislature to levy a penalty so highly disproportionate to the default committed. It cannot be gainsaid that penalty should be commensurate with the default committed. There is no loss of revenue in case of failure to file declarations u/s 197A as the provision relates to cases where no tax is deductible. The intention of the legislature was to levy some penalty but not beyond a point. It could never have been the intention of the Legislature in a case where no loss of revenue is caused, to penalize the assessee to an extent exceeding the amount in respect of which there is a default. Thus, a strict literal construction leads to an absurd result not intended to be subserved by the object of the legislation, viz. in a case where no loss is caused to the revenue and the amount involved may be a small one, the penalty imposed may run into lakhs of rupees depending upon the length of delay in forwarding the declarations. The proviso has been introduced to obviate the unintended consequences of section 272A of the Act by scaling down the quantum of penalty to the amount of tax deductible or collectible at source. Once it is held that the proviso is remedial in nature, the proviso is required to be treated as retrospective in operation.
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