R.N. Misra, J.
1. This is a reference made by the Income-tax Appellate Tribunal under Section 256(1) of the Income-tax Act of 1961 (hereinafter referred to as 'the Act'), of the following question at the instance of the revenue:
'Whether, on the facts and circumstances of the case, the penalty imposed by the Income-tax Officer on the assessee under Section 221(1) of the Act was validly imposed ?'
2. The assessee was served with notices of demand for four assessment years, being assessment years 1962-63 to 1965-66, demanding the amounts specified in the respective demand notices on December 7, 1965. The total demand for these four years was Rs. 17,680. The assessee received the demands on the same day, but omitted to satisfy the demands within 35 days of the service of the demand notices. He also did not ask for any extension of time. He filed appeals against the demands, but did not apply to the Income-tax Officer for stay of collection of the demands. A notice was issued on Februarys, 1966, by the Income-tax Officer asking the assessee to show cause on February 17, 1966, as to why the penalty may not be levied for non-payment of the tax demands. The assessee omitted to appear that day, but came before the Income-tax Officer on March 21, 1966, and alleged that the advance tax paid by him had not been adjusted while computing the tax amount in respect of each of the years in question.The Income-tax Officer issued a consolidated challan to the assessee for payment of Rs. 8,000 on March 21, 1966. On that very day the assessee paid the amount. On the following day, that is, March 22, 1966, the Income-tax Officer imposed penalties on the assessee to the tune of Rs. 9,000 for the various years. The assessee appealed against the levy of penalty and the Appellate Assistant Commissioner while holding that the assessee was liable for penalty, reduced the same by Rs. 5,500. A total penalty of Rs. 3,500 was thus sustained in first appeal. The assessee carried further appeals to the Tribunal and contended that on the date when penalties were levied, there was no outstanding demand against him ; the assessee had a co-operating attitude with the department; the assessing officer did not consider the claim of refund due to the assessee ; did not adjust the advance tax paid by him and, therefore, imposition of penalty was improper, arbitrary and illegal.
3. The Tribunal found that the assessee had paid advance tax to the tune of Rs. 12,164, which was bound to be adjusted against the demand raised for the four years amounting to Rs. 17,680. By 21st March, 1966, the assessee had paid a total amount of Rs. 20,174 as against the total demand of Rs. 17,680. The Tribunal, therefore, directed the assessing officer to verify the correctness of the stand of the assessee that by the date of penalty he had not only satisfied the demand raised against him, but had made some extra payment and in case the assessee's stand was correct, no penalty should at all be levied and in case there was a part of the demand outstanding on March 22, 1966, suitable penalty on the line adopted by the Appellate Assistant Commissioner may be imposed.
4. According to the revenue, (1) the assessee was already a defaulter having not paid the tax demanded from him within 35 days from the service of notices of demand under Section 156 of the Act. Even if by the date penalty came to be imposed he had satisfied the entire demand outstanding against him, the past default could not be automatically condoned and it was still open to the Income-tax Officer to penalise the assessee for the past default; (2) under the provisions of Section 221(1) of the Income-tax Act it was obligatory for the Income-tax Officer to levy penalty though he has discretion in regard to the quantum of penalty to be levied ; and (3) the Tribunal has gone wrong in holding that the assessee was not liable to any penalty at all.
5. Mr. B. K. Mohanty, appearing for the assessee, contends that the assessee had paid the bulk of the demand by way of advance tax even by the time demands were raised under Section 156 of the Act. It was obligatory on the part of the assessing officer to adjust the advance tax and raise demand only for the excess amount. The demands as raised were, therefore, not in accordance with law. While thecontention of the revenue is correct that in a case of failure to satisfy the demand within 35 days after it is raised the assessee is in default and incurs the liability to be penalised, the provisions of the statute necessarily postulate raising of a valid demand. The demand in the present case not being valid and in accordance with law could not give rise to liability of penalty on the footing that the assessee became a defaulter within the meaning of Section 220 of the Act. He next contends that when the assessee appeared before the assessing officer on the 21st of March, 1966, and pointed out the mistakes in the demands raised, it was obligatory on the part of the assessing officer to revise the demands and issue fresh demands against the assessee. The assessee could incur the liability of penalty within the meaning of Section 221(1) of the Act by being a defaulter under Section 220 thereof only after the passing of 35 days from the raising of such new demand. It is his further stand that when the assessing officer in realisation of his own mistake agreed to issue a challan for Rs. 8,000 on the 21st of March, 1966, possibly taking into account the interest that may be due on the amount not paid by then, the default, if any, was indeed condoned and after the assessee had paid the amount that day no penalty could have been levied. Thus, in the facts and circumstances of this case, according to Mr. Mohanty for the assessee, the Tribunal is right in holding that no penalty was leviable when the assessee was not in default on the date of imposition of penalty.
6. Apart from these reasonings, Mr. Mohanty, seeks to place reliance upon a decision of the Allahabad High Court in the case of Srimati Kusum Kumari v. Union of India,  85 I.T.R. 19 (All.).. There the learned judges of that court have held that the Income-tax Officer had no jurisdiction to levy penalty under Section 221(1) of the Act as powers had not been conferred upon him under the provisions of that section. It was only by the Taxation Laws (Amendment) Act, 1970, that the section was suitably amended to confer jurisdiction on the Income-tax Officer to levy penalty. According to Mr. Mohanty, therefore, on the date when penalty was levied in this case, power did not inhere in the Income-tax Officer to levy penalty against the assessee.
7. It would be necessary to deal with some of the statutory provisions to answer the question referred to us. Section 208 provides the condition of liability to pay advance taxes and, under Section 211, advance tax is payable in instalments as provided therein during the accounting period. Under the scheme of the Act, the assessee indicates in his return the amount of advance tax paid by him and under Section 219 of the Act:
'Any sum, other than a penalty or interest, paid by or recovered from an assessee as advance tax in pursuance of this Chapter shall be treated as a payment of tax in respect of the income of the period whichwould be the previous year for an assessment for the assessment year next following the financial year in which it was payable, and credit therefor shall be given to the assessee in the regular assessment.'
8. Thus, when a notice of demand is issued under Section 156 of the Act, credit has to be given in terms of Section 219 thereof and demand is required to be raised only in respect of the excess amount of tax over and above what had been paid by way of advance tax. The demands raised in the present case, therefore, were not in accordance with law, inasmuch as, while raising such demands, the provision of Section 219 of the Act was overlooked and the assessee was called upon to pay amounts which were not due from him.
9. There is no dispute at all at the Bar that if a valid demand, has been raised and a notice of demand is served under Section 156 of the Act and the assessee fails to satisfy the same within 35 days of the service of the notice of demand as provided under Section 220(1) of the Act, the assessee is a defaulter in terms of Sub-section (4) of Section 220 of the Act and, in respect of such an assessee, penalty is leviable under Section 221(1) of the Act. After giving a reasonable opportunity to the assessee of being heard, penalty can be levied. We have no doubt in our minds that unless there is a condonation of the past default, even when the demand has been already satisfied, penalty is leviable on the basis of the past default. The decision in the case of Commissioner of Income-tax v. Vegetable Products Ltd.,  80 I.T.R. 14 (Cal.).relied upon by Mr. Mohanty for the assessee in support of his contention that no penalty is payable unless on the date of imposition of penalty payment is due, cannot be accepted. That was a case of penalty under Section 271(1)(a) of the Act. In a very different setting and dealing with the provisions of Section 271(1) of the Act, their Lordships decided that in calculating the penalty leviable under Section 271(1)(i) of the Act, the amount paid by the assessee under the provisional assessment under Section 23B of the 1922 Act is to be deducted from the amount of tax determined under Section 23(3) in order to determine the amount of tax on which computation of penalty was to be based. We have no doubt in our minds that in regard to past liability penalty is leviable even after the liability has been satisfied because satisfaction of the demand at a subsequent date does not wipe out the liability created under the statute for the past default and it cannot be laid down as a proposition of law that there must be an existing default in order that an appropriate authority may have jurisdiction under the Act to impose penalty for any default.
10. Adverting to the facts of this case, there is substantial force in the contention of the assessee's counsel that when the error in the demands was pointed out to the Income-tax Officer on 21st of March, 1966, it wasobligatory on his part to correct the demands and only when there was a service of valid demand notices, the petitioner's liability to satisfy them by payment within the time allowed under Section 220(1) of the Act would have arisen. In issuing a challan for Rs. 8,000, the Income-tax Officer virtually rectified his own mistake. The Tribunal has looked at the matter from that point. Therefore, when the new demand was immediately satisfied by crediting the amount into the treasury that very day, there was no scope for raising the penalty against the assessee on the following day. We find great force in this contention.
11. In our view the Tribunal is right in holding that it was not obligatory on the part of the Income-tax Officer to levy penalty. Their Lordships of the Supreme Court in Hindustan Steel Ltd. v. State of Orissa,  25 S.T.C. 211, 214;  1 S.C.R. 753; A.I.R. 1970 S.C. 253.were dealing with levy of penalty under the provisions of the Orissa Sales Tax Act. There it has been stated :
'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.'
12. This view of their Lordships has again been approved by them in two subsequent decisions.
13. The next question for consideration is whether the Income-tax Officer had jurisdiction to levy penalty under Section 221(1) of the Act before that provision was suitably amended by the Taxation Laws (Amendment) Act, 1970, by mentioning the Income-tax Officer as the authority empowered to impose penalty. The decision of the Allahabad High Court already referred to directly supports the assessee's contention that the Income-tax Officer prior to the amendment could not be the proper authority to levy penalty. On the facts of the case, we have already come to our conclusion that levy of penalty was not proper. It is, therefore, not very much necessary for disposing of the reference to decide the question of jurisdiction of the Income-tax Officer. But we are not inclined to accept the law as indicated by the Allahabad High Court. The Income-tax Officer under the Act is ordinarily the machinery for raising demands--be it by way of tax, penalty or interest. Chapter XVII of the Act deals with collection and recovery of tax and that chapter has been divided into various heads. One of the subheads ('D') deals with collection and recovery. Section 220 makes provision for determining as to when an assessee shall be deemed to be in default. In fact, the provisions of Sections 220 and 221 are absolutely interconnected and one provides the basis while the other provides the consequences. It is well settled in law that in regard to the charging provision or levying provision of tax or penalty there should be a strict construction, but in regard to the machinery of assessment or collection, the provision need not be subjected to a rigorous construction. On the other hand, such construction has to be put which would make the machinery workable. (See Commissioner of Income-tax v. Mahaliram Ramjidas,  8 I.T.R. 442 (P.C.) and Drummond v. Collins,  6 T.C. 525 (H.L.)). We are, therefore, not prepared to agree with the Allahabad High Court that non-mention of the Income-tax Officer in Section 221(1) of the Act made any difference. It is true Parliament has brought in an amendment by inserting the 'Income-tax Officer' as the appropriate authority for levying penalty. That seems to have been more by way of abundant caution or to make the position clear and certain. According to us, even without mention of the 'Income-tax Officer' in Section 221(1) of the Act, he was really the appropriate authority to levy penalty. We would, therefore, not agree with Mr. Mohanty that the Income-tax Officer had no jurisdiction to levy the penalty in question.
14. Our answer to the question referred to above shall be that, in the facts and circumstances of the case, the penalty imposed by the Income-tax Officer on the assessee under Section 221(1) of the Act was not validly imposed. The assessee shall have his costs. Hearing fee, rupees one hundred.
K.B. Panda, J.
15. I agree.