Bombay HC: Before levying penalty on NSE for shorter collection of STT, hearing opportunity is must

Issue: Whether Tribunal erred in deleting the penalty levied under Section 105(a) of the Securities Transaction Tax (STT) falling under Chapter VII of Finance (No.2 ) Act, 2004 in view of the failure of the assessee to discharge its statutory liability to collect the STT at prescribed rates under section 100(4) of the Securities Transaction Tax (STT) falling under Chapter VII of Finance (No.2) Act, 2004?

Facts of the case :Appeal has been preferred by the Revenue under section 260A of the Income-tax Act, 1961 (briefly “the Act” hereinafter) against the order dated 4th April, 2016 passed by the Income Tax Appellate Tribunal, Mumbai Bench “B”, Mumbai (briefly “the Tribunal” hereinafter) in Security Tax Appeal No. 01/Mum/2013 for the financial year 2006-07.

Interpretation of law : Ordinarily once the court holds that the respondent is not liable for the short deduction of STT, the penalty imposed thereon would not survive as in such a case the respondent cannot be construed to be an assessee in default. As per Section 105 any assessee who fails to collect the whole or any part of the STT as required under section 100 or having collected the STT fails to pay such tax to the credit of the Central Government in accordance with sub-section (3) of Section 100, he shall be liable to pay penalty in addition to interest. However, as per Section 108, notwithstanding anything contained in the provisions of Section 105 or Section 106 or Section 107, no penalty shall be imposable for any failure referred to in the said provisions if the assessee proves that there was reasonable cause for the said failure and as per the proviso no order imposing a penalty shall be made unless the assessee had been given a reasonable opportunity of being heard. If Section 105 is read in isolation, it would appear that failure to pay the tax by the assessee i.e., either failure to collect the STT or failure to deposit the STT so collected to the credit of the Central Government would automatically lead to imposition of penalty. This is so because of the use of the word “shall” in that section. However, Section 108 starts with a non-obstante clause by use of the expression “notwithstanding”. It is further clarified that Section 108 would have effect notwithstanding anything contained in Section 105 or the other two sections mentioned therein. In other words, Section 108 would have overriding effect over Section 105. 

Conclusion : A conjoint reading of sections 105 and 108 Securities Transaction Tax (STT) would make it clear that imposition of penalty is to be proceeded separately as a separate proceeding. Merely because in assessment order, Assessing Officer comes to a conclusion that assessee had failed to collect Securities Transaction Tax (STT) or had failed to pay such STT to credit of Central Government, it would not ipso-facto lead to imposition of penalty. Once such a conclusion is reached, assessee is required to be provided reasonable opportunity of hearing and during hearing if assessee can prove that there was reasonable cause for such failure, no penalty shall be imposed.

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