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The Supreme Court in M/s. Saudi Arabian Airlines v. Union of India & Ors. has delivered an important ruling on the distinction between non-payment of tax and delayed payment of tax while examining penalty proceedings relating to Foreign Travel Tax (“FTT”) under the Finance Act, 1979.
The dispute concerned six instances in which Saudi Arabian Airlines deposited FTT after the prescribed period. In five instances, the delay ranged from one to eleven days, while in one instance there was a delay of 63 days. Significantly, in five cases the demand drafts had already been purchased before the respective due dates but were deposited later. The adjudicating authority, in de novo proceedings, imposed a penalty of Rs. 71,29,140 under Section 38(3), substantially higher than the Rs. 12,000 penalty originally imposed.
Delayed Payment Is Not “Failure to Pay”
The principal question before the Supreme Court was whether delayed deposit of FTT could be treated as a “failure to pay” so as to attract Section 38(3) of the Finance Act.
Examining the expressions “fails to pay the foreign travel tax” and “amount of the tax not so paid”, the Court held that Section 38(3) contemplates a situation of non-payment of FTT. The expression “failure to pay” cannot be expanded to include a case where tax has actually been paid, though belatedly.
The Court therefore held that delayed payment of FTT cannot be equated with non-payment of FTT. A case involving delay in deposit falls within the statutory framework of Section 38(4) read with Rules 4 and 9 of the Foreign Travel Tax Rules, 1979, rather than Section 38(3).
Payment Before Show Cause Notice Is Material
The Supreme Court further explained the distinction by observing that where payment is made before issuance of the show cause notice, it would ordinarily represent delayed payment rather than non-payment. Conversely, where the tax remains unpaid and is deposited only after the initiation of proceedings, the character of the default may be different.
The ruling reinforces the principle that penal provisions in fiscal statutes must be applied according to their precise language and cannot be extended through interpretation to situations not expressly covered by the legislature.
Penalty Is Not Automatic
Another significant principle laid down by the Court is that imposition of penalty is not automatic merely because a statutory timeline has been breached.
Rules 4 and 9 themselves permit the competent authority, upon sufficient cause being shown, to allow additional time for deposit of FTT or filing of returns. Further, Rule 12 requires a show cause notice, an opportunity to make a representation and a reasonable opportunity of hearing before penalty can be imposed.
According to the Supreme Court, such an adjudicatory mechanism would become meaningless if penalty were treated as an automatic consequence of every breach. The power to impose a penalty necessarily includes the discretion not to impose it where the circumstances do not warrant penal action.
Appellant Cannot Be Made Worse Off for Filing an Appeal
The Court also addressed the dramatic enhancement of penalty from Rs. 12,000 to Rs. 71,29,140 after the appellant challenged the original order.
Referring to the principle of reformatio in peius, the Supreme Court reiterated that a litigant should not ordinarily be placed in a worse position merely because it exercised a statutory appellate remedy. The principle forms part of fair procedure and natural justice.
The Court noted that an appellant cannot be worse off merely by reason of filing an appeal and found that the authorities and the High Court had erred on this aspect as well.
Supreme Court’s Decision
The Supreme Court held that the penalty imposed for the six instances of delayed deposit of Foreign Travel Tax could not be sustained. It accordingly set aside the Bombay High Court judgment dated 9 August 2010 and the relevant revisional, appellate and de novo adjudication orders insofar as they related to the penalty.
The Court directed that any amount paid towards the penalty must be refunded with interest at 9% per annum within three months from the judgment. The bank guarantee furnished by the appellant was also ordered to stand discharged. The appeal was allowed without any order as to costs.
The judgment is significant for tax and regulatory proceedings because it distinguishes delay from complete failure to comply, emphasises strict construction of fiscal penalty provisions and confirms that the existence of a statutory penalty does not necessarily make its imposition automatic.