RANGANATHAN J. - This reference has been made by the Appellate Tribunal in pursuance of the order passed by this court on 6th May, 1974, in I.T.C. No. 35/71. The reference relates to the imposition of a penalty on the assessed-company for the assessment year 1965-66. The question which has been referred is in the following terms:
'Whether the Tribunal was right in law for the reasons stated by it in cancelling the penalty levied on the assessed under section 221 of the Income-tax Act, 1961 ?'
The facts relevant for the determination of the question are as follows:
As already stated the reference arises out of the assessment of M/s. Raunaq & Co., for the assessment year 1965-66. It appears that the assessed-company had made a voluntary disclosure under s. 24 of the Finance Act of 1965 and its total income for the assessment year 1965-66 was determined on the basis of such disclosure. The assessment culminated in a demand of Rs. 1,32,021 by way of tax and a notice of demand in respect of this amount was served on July 6, 1966, and was payable within a few days thereof as provided in the statute. The assessed did not pay the tax as demanded and so the ITO imposed a penalty under s. 221 by his order dated August 9, 1968, the amount of penalty being Rs. 10,746.
The assessed filed an appeal to the AAC, who examined the circumstances on account of which the assessed pleaded inability to pay the tax as demanded. He concluded on the basis of the facts set out by him in detail in the order that there was sufficient proof that the financial position of the appellant was not such as to enable it to make a payment of the entire demand within the time allowed by the ITO and that, thereforee, it had sufficient cause for not making the payment. He, thereforee, cancelled the penalty.
The ITO preferred an appeal to the Appellate Tribunal. The Tribunal set out the fact and circumstance of the case on great detail and af ter referring to the contentions urged on behalf of both the parties agreed with the view taken by the AAC. The conclusion of the Tribunal is set out in para. 7 of its order dated September 26, 1970, which may be here extracted:
'We have considered the submissions of both the sides. In our view the Appellate Assistant Commissioner took a realistic and rational view while deleting the levy of penalty. Penalty had been levied on 9-8-1968, but before that the matter had been referred to the Tax Recovery Officer for realisation of demand and the assessed had made arrangements to pay the demand. It was also stated that by this time the entire demand had been liquidated. Thus natural justice requires that when the matter had already been referred to one authority for realisation of demand and that when the authority was taking proper steps for the realisation of the demand, then the Income-tax Officer should not have, in the circumstances of the case, levied penalty though he had authority to levy a penalty. The mere fact that the Income-tax Officer has authority would not entitle him to levy penalty when he found that the assessed had no means to pay the tax and when the assessed had been making arrangement for payment of tax with the Tax Recovery Officer. We have to look into totality of the circumstances of the case.'
The Commissioner moved the Tribunal for a reference of certain question of law to this court but was not successful. Thereafter he made an application under s. 256(2) of the Act and it is an a result of the order of this court in that application that the present reference comes up before us. In the order dated May 6, 1974, the court observed:
'In short, it appears to us that the reasons given by the Tribunal are only two, namely:-
(i) that when steps were being taken for the recovery of the tax through the Tax Recovery Officer, no penalty under section 221 of the Act can be levied, and
(ii) that the inability of the assessed to pay the tax would be a valid ground for not levying the penalty.
We do not wish to express our opinion at this stage whether the Tribunal was right in law in cancelling the penalty on these two grounds. But we are certainly of the view that the cancellation of the penalty by the Tribunal on these grounds is not in the nature of a pure finding of fact. To say the least, it is a mixed question of fact and law.'
On behalf of the assessed reliance was placed on the decision of the Supreme Court in the case Hindustan Steel Ltd. v. State of Orissa : 83ITR26(SC) and the decision of the Allahabad High Court in Om Prakash Agarwal v. ITO : 66ITR175(All) . In the light of these decisions this court observed that two questions arose for consideration, namely, (1) whether the observations of the Supreme Court in the case of Hindustan Steel Ltd. : 83ITR26(SC) , were of a general nature applicable also to penalties levied under the Act; and (2) whether these observations also apply to penalty levied under s. 221 of the Act which, unlike the penalties livable under the other provisions of the Act, is one of the modes of recovery of tax.
We are of opinion that the question for decision in this case was ultimately a question of fact. It is no doubt true that s. 221 enables the ITO to impose a penalty where an assessed is in default in making a payment of tax. But it appears to us that the imposition of a penalty cannot be an automatic consequence of a default by way of non-payment of tax. In out opinion, the decision of the Supreme Court in the case of Hindustan Steel Ltd.  83 ITR 26, has direct relevance to this issue and it has in fact been held in a large number of decisions even under the I.T. Act that the principles of this decision would apply to the imposition penalty under the I.T. Act also. But, that apart, the provisions of s. 221 themselves contain clear clues to show that mere non-payment of tax is not sufficient to attract a penalty. In the first place the first proviso says that before the levy of a penalty the assessed shall be given an opportunity of being heard and obviously where there is a non-payment, all that the assessed may be able to show is that there were good and sufficient reasons for the non-payment. It would, thereforee, appear that the existence of good and sufficient reasons may be a ground to persuade the ITO not to impose a penalty under s. 221. In fact the second proviso to the section which has been later introduced with effect from April 1, 1971, clearly provides that no penalty shall be levied where the ITO is satisfied that the default was for good and sufficient reasons. There are also judicial decisions in addition to the Allahabad High Courts decision in Om Prakash Agarwal v. ITO : 66ITR175(All) , referred to in the order dated May 6, 1974, to the effect that the mere non-payment of tax does not attract the penalty and that it good and sufficient reasons are shown a penalty need not be and may not be levied, vide Varghese v. CIT : 96ITR577(Ker) , Nachimuthu Industrial Association v. CIT : 123ITR611(Mad) , CIT v. Vijayanthimala  108 ITR 882 and Addl. CIT v. Kalyanmal Mills Tent Factory : 116ITR881(MP) . We decided on not think it is necessary to elaborate further on this aspect of the matter. We have also dealt with a similar issue in our judgment in Addl. CIT v. Free Wheels India Ltd.  137 ITR 378 (Delhi), where we have given reasons for coming to a like conclusion in the context of s. 140A(3) of the Act.
We are of opinion that once the question before us boils down to this that in a proper case it is open to ITO not to levy a penalty even though there may be a default in the payment of tax as per the notice of demand then it will only be a question of fact to be decided on the facts and circumstances of such case as to whether good and sufficient reasons existed in a particular case for the non-levy of penalty. In the present case both the AAC and the Appellate Tribunal which endorsed his view have held that there were sufficient materials on record to show that the assessed could to pay the tax because of its financial position which precluded it from paying the whole amount in one lump sum amount. These facts have been set out in great detail in the orders of the authorities and need not be repeated here. It is sufficient to point out that though the demand was raised some time in July, 1966, the ITO did not think of levying of penalty till August, 1968, and the assessed had pointed out before the AAC that this was because he had been satisfied that the assessed was really in difficulties in paying the amount as demanded. Secondaly, after the demand was raised and a certificate was sent to the TRO, the assessed explained its difficulties before the TRO and asked for permission to pay tax in Installments. There was a settlement between the TRO and the assessed by which the former permitted the assessed to pay the amount in monthly Installments of Rs. 13,500 with a provision of security was furnished and the tax was being paid in installments as directed by the TRO. Thirdly, subsequent to the order of penalty again. Thereupon the assessed moved the Commissioner and was able to secure orders from the Commissioner directing the ITO to stay his hands and not to levy a further penalty on the assessed. On a consideration of this sequence of events, the Appellate Tribunal and the AAC were satisfied that this was not a case where the assessed was deliberately failing to make the payment of tax but that this was a case where it could not pay the huge sum demanded from it in one lump sum and was paying it in monthly Installments as directed by the concerned officer. In our opinion, the conclusions of the Tribunal and the AAC in this regard were conclusions arrived at on the facts and circumstances and do not give rise to any question of law.
This court in the order dated May 6, 1974, has indicated that one of the reasons given by the Tribunal for cancelling the levy of penalty was that when steps were being taken for the recovery of tax through the TRO, no penalty under s. 221 of the Act can be levied. Of course, if this was intended by the Tribunal to be a statement of a legal proposition its correctness would be open to challenge and consideration as pointed out by this court in the order dated May 6, 1974. But on a careful perusal of the order of the Tribunal did not intend to lay down any general proposition to the above effect. The Tribunal in the first instance considered the facts and circumstances of the case and came to the conclusion that the AAC had taken a realistic and rational view in deleting the penalty. They only observed that having regard to the fact that the TRO to whom the realisation of demand had been entrusted had been satisfied with the financial difficulties of the assessed and on a consideration of the circumstances had have, in the circumstances of the case, levied a penalty. This indicates that this was a decision arrived at by the Tribunal on the facts and circumstances and it was not the intention of the Tribunal to lay down that once steps had been taken for recovery of tax, no penalty could be imposed by the ITO.
For the reasons stated above, we are of opinion that the conclusion of the Tribunal that no penalty was imposable in the circumstances of the case was justified on the facts and that the Tribunal was right in cancelling the penalty imposed on the assessed. The question referred to us is answered accordingly. The assessed will be entitled to its costs. Counsels fees Rs. 350.