The Supreme Court has held that a delayed deposit of Foreign Travel Tax cannot be equated with a complete failure to pay the tax for imposing a penalty under Section 38(3) of the Finance Act, 1979. The Court further ruled that the imposition of a penalty for breach of a statutory obligation is not automatic merely because the provision uses the word “shall”.
The bench of Justice J.B. Pardiwala and Justice Ujjal Bhuyan set aside a penalty of ₹71,29,140 imposed on Saudi Arabian Airlines in connection with six instances of delayed deposit of Foreign Travel Tax collected from passengers.
The Court also invoked the principle of reformatio in peius—prohibition against altering a decision to an appellant’s disadvantage—and declared that a litigant cannot be placed in a worse position merely because it exercised the statutory right of appeal.
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The Bench directed the authorities to refund any amount paid towards the penalty with interest at 9% per annum within three months. It also ordered the discharge of the bank guarantee furnished by the airline.
Saudi Arabian Airlines operates flights to and from India. Under the Finance Act, 1979 and the Foreign Travel Tax Rules, 1979, the airline was required to collect Foreign Travel Tax from passengers embarking on international journeys and deposit the amount in the Government treasury within the prescribed period.
The dispute ultimately concerned six instances of delayed payment. In five cases, the delays ranged from one day to 11 days, while in one case the delay was 63 days.
For August 1994, the delay was three days; for July 1995, December 1996 and November 1997, the delay was one day each; and for April 1996, the delay was 11 days. The 63-day delay related to the tax collected for December 1995.
In five of the six cases, the airline had purchased demand drafts from the concerned banks before the due dates. However, the drafts could not be deposited in the Government treasury within time. The airline explained that the delay occurred because of security restrictions.
Regarding the 63-day delay, the airline stated that the employee entrusted with depositing the demand draft had proceeded on emergency leave.
Fourteen show-cause notices were issued to the airline regarding alleged short-payment and delayed payment of Foreign Travel Tax, interest liability and delayed filing of monthly returns.
The adjudicating authority imposed a penalty of ₹12,000 for the six cases of delayed payment. Separate penalties were also imposed for short-payment of tax and delayed submission of monthly returns.
The airline challenged the order before the appellate authority. On November 24, 1999, the matter was remanded to the adjudicating authority for fresh consideration after giving the airline an opportunity to produce evidence.
On remand, the Deputy Commissioner of Customs passed a fresh order on August 8, 2001 and increased the penalty for the six delayed payments from ₹12,000 to ₹71,29,140 under Section 38(3) of the Finance Act.
The Commissioner of Customs (Appeals) upheld the enhanced penalty. The appellate authority held that payment beyond the prescribed time amounted to failure to pay the tax and that the penalty under Section 38(3) was attracted automatically.
The appellate authority acknowledged that the airline’s explanations for the delay might be genuine. It nevertheless held that neither the adjudicating authority nor the appellate authority had discretion to impose a penalty lower than the minimum prescribed under Section 38(3).
The Central Government’s revisional authority substantially affirmed this reasoning. It took the view that once delay was established, the statutory minimum penalty became compulsory.
Saudi Arabian Airlines subsequently approached the Bombay High Court. It challenged the penalty orders and also sought a declaration that Section 38(3), as amended by the Finance Act, 1994, was unconstitutional and violative of Article 14 of the Constitution.
The High Court dismissed the writ petition on August 9, 2010. It held that delayed payment was equivalent to failure to pay the tax. According to the High Court, once the prescribed period for depositing the tax had expired, it was immaterial that the tax was subsequently paid.
The High Court further held that the penalty concerned breach of a civil obligation and, therefore, proof of criminal intention or mens rea was not required.
It also rejected the airline’s objection to the substantial enhancement of the penalty after remand. The High Court reasoned that the remand was not limited in scope and that the adjudicating authority was entitled to impose the penalty prescribed by the statute.
The airline then approached the Supreme Court.
The Supreme Court examined the language of Section 38(3), which applies where a carrier “fails to pay” Foreign Travel Tax to the credit of the Central Government. The provision permits a penalty ranging from one-fifth to three times the amount of tax not paid.
The Bench identified two crucial expressions in the provision: “fails to pay the foreign travel tax” and “the amount of the tax not so paid”.
Reading the expressions together, the Court concluded that Section 38(3) contemplated a situation involving non-payment of the tax, not a case where payment was made after a delay.
“Failure to pay” would mean non-payment and could not be equated with delay in making payment, the Court observed. If the legislature intended Section 38(3) to cover delayed payments, it could have used different language.
The Court emphasised that taxing and fiscal statutes must be interpreted strictly. A meaning not expressed by the legislature cannot be added through an expansive interpretation.
It accordingly held that Section 38(3) would not cover a carrier charged only with delayed payment of Foreign Travel Tax.
The Supreme Court drew a further distinction based on when the tax was deposited.
It held that if a carrier deposits the tax after receiving a show-cause notice, the subsequent payment cannot convert the original default into a mere case of delayed payment. Such a situation may be treated as non-payment for the purpose of the relevant proceedings.
Conversely, where the tax is deposited before the issuance of a show-cause notice, the case would be one of delayed payment and not non-payment.
Since Saudi Arabian Airlines had deposited the tax before the show-cause notices were issued, the Court held that the case involved delayed payment and did not fall within Section 38(3).
The Bench held that delayed deposit of Foreign Travel Tax would instead fall within Section 38(4), read with Rules 4 and 9 of the Foreign Travel Tax Rules, 1979.
Rule 4 required a carrier to deposit tax collected during a month within 30 days. Its proviso, however, permitted the Collector of Customs to grant additional time when sufficient cause was shown, having regard to the accounting system adopted by the carrier.
Similarly, Rule 9 prescribed the period for filing monthly returns but authorised the Collector of Customs to extend the time.
The Court consequently held that these timelines were not inflexible. The statutory scheme expressly conferred discretion on the Collector of Customs to condone a delay.
If the delay was condoned, there would be no breach on account of delayed deposit and consequently no occasion to impose a penalty, the Bench explained.
Rejecting the findings of the authorities and the High Court, the Supreme Court held that the imposition of a penalty under Section 38 was not automatic.
The Court clarified that the absence of a requirement to prove mens rea and the automatic imposition of a penalty were two entirely different concepts.
Certain statutory violations may attract civil penalties without proof of guilty intention. That, however, does not mean that a penalty must inevitably be imposed in every case once a technical breach is established.
The Court observed that the statutory framework contemplated the issuance of a show-cause notice, a written representation against the proposed grounds and a reasonable opportunity of personal hearing. Treating the penalty as a foregone conclusion would render the entire adjudicatory process meaningless.
“The power to impose penalty includes power not to impose penalty,” the Bench declared.
The presence of the word “shall” in a penalty provision would also not, by itself, make the penalty mandatory. Whether a provision is mandatory or discretionary must be determined from its context and the overall statutory scheme.
Even where a minimum penalty is prescribed, the issue of imposing that minimum would arise only after the competent authority first concludes that the circumstances warrant a penalty.
Applying these principles, the Supreme Court found that the appellate authority, revisional authority and Bombay High Court had committed a grave error in sustaining the penalty.
The Bench noted that in five instances the demand drafts had been obtained before the respective due dates and the delays ranged only between one and 11 days. The airline attributed these delays to security restrictions.
The 63-day delay was explained on the ground that the employee responsible for depositing the draft was on emergency leave.
Significantly, the appellate authority had recorded that the airline’s explanations might be genuine. The Supreme Court held that if the explanations were genuine, the authorities should have considered condoning the delay under Rule 4.
The authorities had instead proceeded on the erroneous assumption that any breach of the prescribed timeline automatically attracted a penalty under Section 38(3).
The Court gave three principal reasons for setting aside the penalty: the case fell under Section 38(4), rather than Section 38(3); the authorities overlooked the power to condone delay under Rule 4; and penalty under Section 38 was not automatic.
On the facts of the case, the Bench concluded that no penalty was imposable on the airline.
The Supreme Court separately criticised the increase of the penalty from ₹12,000 in the original order to ₹71,29,140 following the airline’s appeal and remand.
Had the airline not challenged the original order, its penalty liability for the six delayed payments would have remained ₹12,000. By exercising its statutory right of appeal, it was exposed to a penalty exceeding ₹71 lakh.
The Court invoked the doctrine of reformatio in peius, a principle under which a person should not be placed in a worse position because they used a remedy available under law.
The Bench said the prohibition against reformatio in peius was part of fair procedure and natural justice. It was not merely a procedural guarantee but also a principle of equity.
Referring to earlier judicial decisions, the Court reaffirmed that no appellant can be made worse off merely by filing an appeal.
It therefore held that the appellate authority, revisional authority and High Court had erred in approving the “abnormal enhancement” of the penalty after remand.
The Supreme Court quashed the Bombay High Court’s judgment dated August 9, 2010, the revisional order dated October 29, 2004, the appellate order dated January 9, 2003 and the fresh adjudication order dated August 8, 2001, insofar as they related to the penalty for the six delayed deposits.
The Bench directed that any amount paid by Saudi Arabian Airlines towards the penalty must be refunded with interest at 9% per annum within three months from the date of the judgment.
It also ordered that the bank guarantee furnished by the airline would stand discharged.
The appeal was allowed without any order as to costs.
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