Supreme Court Says Delay In Tax Deposit Not 'Failure To Pay', Quashes Penalty On Saudi Airlines

On 1 September, the Supreme Court held that the penalty under Section 38(3) of the Finance Act, 1979 for “failure to pay” Foreign Travel Tax cannot be imposed merely because the tax was deposited after the prescribed deadline.

A Bench of Justices J.B. Pardiwala and Ujjal Bhuyan allowed an appeal filed by Saudi Arabian Airlines against a Bombay High Court judgment which upheld a penalty imposed on the airline for delayed deposit of Foreign Travel Tax (FTT). The judges held:

“Failure to pay would mean non-payment. 'Failure to pay' would not mean and cannot be equated with 'delay in making payment'.”

The dispute arose after Saudi Arabian Airlines delayed depositing FTT collected from passengers on six occasions. In three instances, the delay was only one day, while the other delays were three days, eleven days and sixty-three days. In five of the six instances, the airline had purchased the demand drafts before the due date but deposited them later.

Initially, the authorities imposed a penalty of Rs. 12,000 for the six instances of delayed payment. However, after the matter was remanded for fresh consideration, the adjudicating authority increased the penalty to Rs. 71,29,140 under Section 38(3).

The authorities proceeded on the basis that depositing the tax after the prescribed time automatically attracted penalty under Section 38(3). The Bombay High Court also upheld this view by treating delayed payment as equivalent to failure to pay the tax.

The Supreme Court rejected this interpretation. It held that the expression “fails to pay the foreign travel tax” in Section 38(3) refers to non-payment of tax and cannot cover a case where the tax has actually been paid, although after some delay.

It noted that Section 38(3) uses two significant expressions, “fails to pay the foreign travel tax” and “the amount of the tax not so paid”. Reading the two expressions together, it held that the provision deals with non-payment and not merely delayed payment.

The Bench observed that if Parliament intended Section 38(3) to cover delayed payment as well, it could have expressly used words to that effect. It said that courts cannot import meanings beyond the language used by the legislature while interpreting a taxing statute.

It also relied on its decision in U.S. Technologies International Private Limited v. Commissioner of Income Tax, where it held that mere belated remittance of tax deducted at source could not attract penalty under Section 271C of the Income Tax Act when the provision dealt with failure to deduct tax.

Further, the judges disapproved the steep enhancement of the penalty from Rs. 12,000 to Rs. 71.29 lakh after the airline challenged the original order. Referring to the principle of reformatio in peius, they observed that a litigant should not be placed in a worse position merely because it exercised its right to appeal. They said the principle forms part of fair procedure and natural justice.

Accordingly, the Supreme Court set aside the penalty imposed for the six instances of delayed deposit of FTT and quashed the Bombay High Court judgment and the orders of the authorities to that extent.

It directed that any amount paid by Saudi Arabian Airlines towards the penalty be refunded with 9% interest per annum within three months. It also directed that the bank guarantee furnished by the airline stand discharged.

For the Appellant Saudi Arabian Airlines: Mr. P.V. Dinesh, Senior Advocate.

For the Respondents/Union of India: Mr. Arijit Prasad, Senior Advocate.