Delay in depositing tax is not failure to pay: Supreme Court quashes ₹71 lakh penalty on Saudi Arabian Airlines

The Supreme Court on Tuesday held that a delay by an airline in depositing Foreign Travel Tax (FTT) collected from international passengers cannot be treated as a complete failure to pay the tax so as to attract the heavy penalty prescribed under Section 38(3) of the Finance Act, 1979. [M/s Saudi Arabian Airlines v. Union of India and Others].A Bench of Justices JB Pardiwala and Ujjal Bhuyan made the observation while setting aside a ₹71.29 lakh penalty imposed on Saudi Arabian Airlines for six delayed FTT deposits made between 1994 and 1997.The Court allowed the airline’s appeal after finding that tax deposited before the issuance of the show-cause notices amounted to delayed payment rather than non-payment.“Delayed payment of FTT into the Government treasury cannot be equated with non-payment of FTT into the Government treasury,” the Court held.The Court also held that the imposition of a penalty was not automatic merely because the statutory deadline had been breached. The authority concerned was required to examine the explanation offered for the delay and decide whether a penalty was warranted.“It cannot be said as a thumb rule that the moment there is a breach of the timeline, imposition of penalty is automatic,” the Court added..Under the Finance Act, 1979 and the Foreign Travel Tax Rules, 1979, airlines were required to collect FTT from passengers travelling abroad and deposit it with the Central government within 30 days from the end of the month in which it was collected.Saudi Arabian Airlines deposited the tax after the deadline on six occasions between 1994 and 1997. Three payments were delayed by one day, while the others were delayed by three, 11 and 63 days.In five instances, the airline had purchased the demand drafts before their due dates but could not deposit them due to security restrictions. It attributed the 63-day delay to the emergency leave of the employee responsible for making the deposit.The adjudicating authority initially imposed a penalty of ₹12,000 for the six delayed payments. After the airline appealed and the matter was remanded for fresh consideration, the penalty was increased to ₹71.29 lakh under Section 38(3) of the Finance Act.The appellate and revisional authorities upheld the enhanced penalty.In 2010, the Bombay High Court also refused to interfere. It found that delayed payment amounted to failure to pay the tax and that the authorities could not impose a penalty below the statutory minimum.The airline then approached the Supreme Court..The Court found that Section 38(3) applied to non-payment and not to tax deposited belatedly before the issuance of a show-cause notice.“Any payment made prior to issuance of show cause notice would be construed to be a case of delayed payment,” the Court observed.The Court explained that non-payment attracted Section 38(3) whereas delayed payment fell under Section 38(4), read with the Foreign Travel Tax Rules. It further noted that Rule 4 allowed the Collector of Customs to extend the 30-day period when sufficient cause was shown.Since the appellate authority had acknowledged that the airline’s explanations might be genuine, the authorities should have considered condoning the delay, the Court said..The Bench also rejected the finding that a penalty followed automatically whenever the statutory timeline was breached. It said that the customs officer was required to consider the explanation offered and decide whether a penalty was warranted.“After all, the power to impose penalty includes power not to impose penalty,” the Court said..The top court also disapproved of the increase in the penalty from ₹12,000 to ₹71.29 lakh after the airline appealed. Applying the principle of reformatio in peius, the Court said,“No appellant by filing an appeal can be worse off than what he was before filing the appeal.”The Court, therefore, quashed the ₹71.29 lakh penalty and the orders upholding it. It directed the government to refund any amount paid towards the penalty with interest at 9 percent per annum, within three months. .[Read Judgment]