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PETITIONER: M/S CONSOLIDATED COFFEE LTD.

       Vs.

RESPONDENT: THE AGRICULTURAL INCOME-TAX OFFICER, MADIKERI & ORS.

DATE OF JUDGMENT:       14/11/2000

BENCH: D.P.Mohapatro,

JUDGMENT:

L.....I.........T.......T.......T.......T.......T.......T..J       J U D G M E N T

     Bharucha, J.

     C.A.  Nos.  98-102 of 2000

     The  judgment  and order under appeal was passed by  a Division  Bench  of  the  High Court of  Karnataka  on  writ appeals.

     Briefly  stated,  these are the facts:  These  appeals relate  to  the Assessment Years 1981-82 to 1985-86.   After the  Agricultural  Income-Tax  Officer   had  completed  its assessments  for  these  years under the provisions  of  the Karnataka  Agricultural  Income-Tax Act, 1957, the  assessee filed   appeals   before     the   Assistant   Commissioner, Agricultural Income-Tax.  On the assessees applications for stay, the Assistant Commissioner passed orders on 24th June, 1989 staying the recovery of the tax assessed subject to the payment  of  a  stated amount and the furnishing of  a  bank guarantee.   The conditions of the stay orders were complied with.    The  appeals  were   thereafter  dismissed  by  the Assistant Commissioner, on 19th March, 1990.  Thereupon, the bank  guarantee was invoked and the balance of the amount of tax realized by the taxation authorities.

     On 7th June, 1996, the Agricultural Income Tax Officer issued  to the assessee a notice under Section 42(1) of  the said  Act proposing to levy penalty in the aggregate sum  of Rs.   7,65,578 for not complying with the demands to pay tax between  March,  1989 and 26th March, 1990.  The  demand  of penalty was thereafter confirmed.  The assessee filed a writ petition  in  the High Court at Karnataka for  quashing  the notice  proposing  to levy penalty and the order  dated  6th March,  1997 passed thereon.  The principal contention  that was  raised  on behalf of the assessee was that  no  penalty could  be  levied for the period during which the orders  of stay  were in operation because for that period the assessee could  not  be said to be in default.  Relying upon  earlier judgments  of  the  High  Court, the  learned  Single  Judge answered  against  the assessee the question that  he  posed thus:   Whether the stay of the recovery as ordered by  the Appellate   Authority  could  grant  an  immunity   to   the petitioner  against  the  levy  of   penalty  for  the  said intervening  period  after the orders were vacated  and  the appeals  dismissed.  The assessee carried the order of  the

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learned  Single  Judge before a Division Bench of  the  High Court.   The order that is impugned before us was passed  on those   writ  appeals.   The   Division  Bench  held:   The provision  of  section  42 of the Act  only  quantifies  the default  for  which  the  provisions have  been  made  under section  41  and as such for the period the amount  remained unpaid  because of stay granted by the Appellate  Authority, the appellants are liable for payment of penalty.

     Sections 41 and 42 of the said Act read thus:

     41.   Tax  when payable(1) Any amount  specified  as payable  in a notice of demand under section 31 or an  order under  section  32, section 32A, section 34 or  section  35, shall  be  paid  within the time, at the place  and  to  the person mentioned in a notice or order or if a time is not so mentioned,  then,  on or before the first day of the  second month  following  the date of the service of the  notice  or order  and any assessee failing so to pay shall be deemed to be in default.

     (2)  If  an assessee makes an application  within  the time  mentioned  in the notice of demand in section 31,  for being  allowed  to  pay  the   tax  due,  the   Agricultural Income-Tax  Officer  may  in  his discretion,  by  order  in writing,  allow  the  assessee  to   pay  the  tax  due,  in instalments  not exceeding four in number at such  intervals as  the said Officer may fix in his discretion or extend the time  for  the  payment  of  the entire  tax  due  for  such reasonable  period as he may fix, if the assessee undertakes in  writing  to  pay  interest at the rate  charged  by  the Scheduled Banks for unsecured loans.

     Provided  that if, on being allowed to pay the tax due by  instalments, the assessee defaults in the payment of any one  instalment,  he  shall be deemed to be a  defaulter  in respect of the total remaining amount of tax due.

     42.   Mode  and  time of recovery.    (1)  Where  any assessee  is in default in making payment of the tax or  any other  amount  due under This Act,--- (i) the whole  of  the amount  outstanding  on  the date of  default  shall  become immediately  due and shall be a charge on the properties  of the  person  or persons liable to pay the tax or  any  other amount due under this Act, and

     (ii)  the  person or persons liable to pay the tax  or any  other  amount  due under this Act shall pay  a  penalty equal to --

     (a)  one  and one half per cent of the  tax  remaining unpaid  for each month for the first three months after  the expiry  of  the  time  specified under  sub-section  (1)  or allowed under sub-section (2), of section 41;  and

     (b)  two  and one half per cent of such tax  for  each month subsequent to the first three months as aforesaid.@@       JJJJJJJJJJJJJJJJJJJJJJJJJJJJJJJJJJJJJJJJJJJJJJJJJJ

     Explanation.--  For  the purposes of clause  (ii)  the penalty   payable,   for  a  part  of  a  month   shall   be proportionately determined.

     (2)  Any tax assessed or any amount due under this Act from any assessee or any other person may, without prejudice

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to any other mode of collection, be recovered--

     (a) as if it were an arrear of land revenue;  or

     (aa)  by  attachment  and  sale  or  by  sale  without attachment  of  any property of such assessee or  any  other person  by  such  authority,  in  such  manner,  as  may  be prescribed;

     (b)  notwithstanding anything contained in the Code of Criminal  Procedure,  1973, (Central Act 2 of 1974),  on  an application  to any Magistrate, by such Magistrate, as if it were a fine imposed by him:  Provided that where an assessee or  other person who has appealed or applied for revision of any order made under this Act and has complied with an order made by the appellate or the revising authority in regard to       the payment of tax or other amount, no proceedings for recovery  under  this  sub-section  shall be  taken  or  for revision.   continued  until the disposal of such appeal  or application  (3) The High Court may either suo-motu or on an application made by the Commissioner or any person aggrieved by  the  order  revise an order made by a  Magistrate  under clause (b) of sub-section (2).

     The  argument  on behalf of the taxing authorities  is that  the  stay order only prevented them from  effecting  a recovery  of  the  tax due from the assessee;   it  did  not preclude  the assessee from paying the tax.  Therefore,  the assessees  obligation to pay the tax remained unaffected by the  stay order and it continued to be in default.  It  was, therefore,  liable  to make payment of the penalty  demanded under Section 42.

     It   may   immediately  be   noted  that  Section   41 contemplates  the payment of interest when an assessee seeks time  for payment of the tax due.  A provision in regard  to interest  is  also  to be found in Section 61  of  the  Act. There  is,  therefore, no good reason for assuming,  as  the High  Court  appears  to  have done, that  what  Section  42 contemplated  was in reality the payment of interest and not penalty.   Interest is compensatory;  penalty is penal, that is, punishing in character.  Section 42 requires the payment of  penalty by an assessee who has not paid tax in time  and the quantum of the penalty increases with the delay.

     Section  42  speaks  of an assessee in  default.   The question,  therefore, is:  can an assessee be said to be  in default  during  the  period for which an order of  stay  of recovery  of the tax due from him is operating ?  The answer is  indicated  in  the proviso to  sub-section  (2)  itself. Sub-section  (2)  empowers  the collection of  tax  from  an assessee  in default as if it were an arrear of land revenue and  as if it were a fine imposed by a Magistrate under  the Code  of Criminal Procedure.  The proviso says that where an assessee  or  other  person  has  appealed  or  applied  for revision  of  any  order  made under the said  Act  and  has complied with an order made by the appellate or the revising authority  in  regard to the payment of tax, no  proceedings for  recovery  under sub-section (2) may be continued  until the  disposal  of  the appeal or revision.  Thus,  there  is recognition  that during the period the stay is in operation recovery  of  the  tax  cannot be effected.   It  cannot  be effected because the order of stay has placed the demand for

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the  tax  in  abeyance.   During the  period  of  the  stay, therefore, the assessee is not in default.

     As  has  been  pointed out by this  court  in  Kanoria Chemicals  and Industries Ltd.  vs.  U.P.  State Electricity Board  (1997)  5  SCC 772, an order of stay may be  made  in different  ways but the effect thereof is the same,  namely, that  for the period during which an order of stay operates, the  order  that is stayed does not exist in the eye of  the law.   Once  the stay is vacated, the order is  resuscitated and  may  then  be  executed.    For  the  period  of  stay, therefore,  the assessee cannot be said to be in default  of the  orders stayed and, therefore, no penalty in that behalf can be imposed.

     Our  attention was invited by learned counsel for  the taxing  authorities  to the judgment in the case of  Kanoria Chemicals and Industries Ltd., just referred to, as relevant to  a case of penalty.  That was a case that related to late payment  surcharge/interest on an amount due.  The  question was  whether such late payment surcharge/interest was  penal in  nature  and, therefore, could not be  recovered,  having regard  to  the  stay  of recovery  thereof  granted  by  an appropriate  authority.   This  Court  did  not  accept  the argument  that  it was penal but, having regard to the  fact that the rate of late payment surcharge seemed penal and the facts  and  circumstances  of  the   case,  it  reduced  the assessees  obligation in respect thereof.  We cannot, based upon  the  aforesaid  judgment  or  otherwise,  accept   the submission  of  learned counsel for the  taxing  authorities that  the penalty contemplated by Section 42 is analogous to a   late  payment  surcharge/interest.    A   late   payment surcharge/interest is necessarily compensatory in character. A penalty is a punishment.

     In  the premises, we hold that the assessee was not in default  for the period 24th June, 1989 onwards and that  it cannot be subjected to penalty under Section 42 in regard to that  period.  The demand in that behalf is set aside.   The appeal  is allowed to the aforesaid extent.  No order as  to costs.

     C.A.  No.  3051 of 2000

     The  facts  are  similar  to   those  in  C.A.    Nos. 98-102/2000 just decided except that, in this case, the stay order  was passed by the High Court.  For the period  during which that stay order was in operation the assessee was not, for  the reasons set out above, in default and the demand of penalty  under Section 42 for that period is set aside.  The appeal  is allowed to the aforesaid extent.  No order as  to costs.