In a significant ruling on the scope of Section 38(3) of the Finance Act, 1979, the Supreme Court draws a clear line between non-payment and delayed payment of Foreign Travel Tax (FTT), holding that belated deposit of tax attracts Section 38(4) and not the strict liability penalty under Section 38(3). The Court held that the expression “fails to pay the foreign travel tax” in Section 38(3) of the Finance Act means non-payment of tax and does not cover delayed payment of tax, and hence, Section 38(3) is not attracted in cases of mere delay in depositing FTT into the Government treasury.
The Apex Court also held that on mere belated remittance of tax, no penalty is leviable under the strict liability provision, and that delayed payment must be dealt with under Section 38(4) read with the relevant Rules. The Court further held that imposition of penalty is not automatic upon breach of the statutory timelines, and that the adjudicating authority retains discretion to decide whether penalty should be imposed at all. Applying the principle of “no reformatio in peius”, the Court held that an appellant cannot be placed in a worse position merely because he chose to exercise his right of appeal.
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A Two-Judge Bench comprising Justice Ujjal Bhuyan and Justice J.B. Padriwala examined the statutory scheme under Chapter V of the Finance Act, 1979, particularly Sections 35, 35A, and 38, along with the 1979 Rules. The Court noted that Section 38(3) uses the expression “fails to pay the foreign travel tax,” which connotes non-payment and cannot be equated with mere delay in payment. The Court observed that delayed payment of FTT falls within the scope of Section 38(4) of the Finance Act, which deals with breach of any rule made under Chapter V, including Rules 4 and 9 of the 1979 Rules relating to timelines for deposit of tax and filing of returns.
The Court further observed that Rule 4 and Rule 9 contain provisos enabling the Collector of Customs to condone delay on sufficient cause being shown, and that Rule 12 mandates issuance of a show cause notice and grant of a hearing before any penalty is imposed. The Court also noted that the use of the word “shall” in a statutory provision does not automatically render imposition of penalty mandatory, and that the power to impose penalty includes the power not to impose penalty.
Briefly, Saudi Arabian Airlines, which operates flights between India and abroad, was required to collect Foreign Travel Tax (FTT) from passengers embarking on international journeys and deposit the same into the Government treasury within 30 days from the end of each month, in accordance with the Finance Act, 1979 and the Foreign Travel Tax Rules, 1979. The airline delayed depositing the FTT in six instances. Five instances involved delays ranging from 1 day to 11 days (where demand drafts had been purchased from banks before the due date but deposited late due to security restrictions), and one instance involved a delay of 63 days (because the concerned employee was on emergency leave). The adjudicating authority imposed a penalty of Rs. 71.29 lakhs under Section 38(3) of the Finance Act for delayed payment, which was upheld by the appellate authority, the revisional authority, and the Bombay High Court.
