Penalty under section 46(1) of the Indian Income-tax Act, 1922, and section 221(1) of the Income-tax Act, 1961, is discretionary and not automatically attracted in case of default in payment of income-tax.

1. This is a consolidated reference made by the Tribunal in compliance with the direction of this court under section 256(2) of the Income-tax Act, 1961, for answering certain questions of law said to arise out of the Tribunal's common order relating to the assessment years 1956-57, 1957-58 and 1958-59 in respect of the same assessee. These questions are as under :Regarding assessment year 1956-57 :

" (1) Whether the Tribunal was competent to entertain the assessee's appeal particularly when no appeal could lie to the Appellate Assistant Commissioner against the Income-tax Officer's order under section 46(1) due to non-payment of tax ?

(2) Whether, on the facts and in the circumstances of the case, the Tribunal was right in cancelling the penalty levied upon the assessee by the Income-tax Officer under section 46(1) of the Indian Income-tax Act, 1922 ?"
Regarding assessment year 1957-58:

"(1) Whether the Tribunal was competent to entertain the assessee's appeal particularly when no appeal could lie to the Appellate Assistant Commissioner against the Income-tax Officer's order under section 46(1) due to non-payment of tax ?

(2) Whether, on the facts and in the circumstances of the case, the Tribunal was right in cancelling the penalty levied upon the assessee by the Income-tax Officer under section 46(1) of the Indian Income-tax Act, 1922 ? "
Regarding assessment year 1958-59:

"Whether, on the facts and in the circumstances of the case, the Tribunal was right in cancelling the penalty levied by the Income-tax Officer under section 221(1) of the Income-tax Act, 1961 ? "

2. One of the questions relating to the cancellation of penalty is common for all the three assessment years while the other question relating to tenability of the appeal against the Income-tax Officer's order under section 46(1) of the Indian Income-tax Act, 1922, is a common question for two of these years only.

3. The material facts are these. The assessee was in arrears of income-tax to the tune of over Rs. 18,00,000 for several years from 1944-45 to 1961-62. In the recovery proceedings of tax dues, the assessee applied to the Tax Recovery Officer for permission to pay the outstanding tax dues in monthly instalments of Rs. 15,000. The Tax Recovery Officer granted it permission by order dated February 3, 1964. Admittedly, the Revenue was entitled to file a statutory appeal against the order of the Tax Recovery Officer but no such appeal was filed and a review application alone was filed which was rejected. Accordingly, the order of the Tax Recovery Officer became final between the parties. There is no dispute that the assessee has paid the entire tax dues in accordance with the directions contained in the order dated February 3, 1964, passed by the Tax Recovery Officer.

4. It is on these facts that the question of imposition of penalty on the assessee arose under section 46(1) of Indian Income-tax Act, 1922, and section 221(1) of the Income-tax Act, 1961, which are corresponding provisions, in respect of these three assessment years. It is clear from these provisions of section 46(1) of the 1922 Act and the corresponding provisions contained in section 221(1) of the 1961 Act that the imposition of penalty provided therein is within the discretion of the Income-tax Officer when the assessee is in default in making payment of income-tax. Obviously, the exercise of discretion is not to be arbitrary but is dependent on the facts and circumstances of the case. It is equally clear that penalty is not automatically attracted in case of default in payment of income-tax and the same has to be imposed if the facts and circumstances on which the discretion is to be exercised justify imposition of penalty.

5. The assessee contended that it was not in default in making payment of income-tax since the payment was made by it in accordance with the Tax Recovery Officer's order dated February 3, 1964, permitting payment in instalments. Alternatively, the assessee's case was t