Balasubrahmanyan, J. - (1.)FOR the assessment year 1965-66, the assessee in this case, Mysore Fertiliser Company, owed tax of Rs. 1,42,402. Giving credit to the advance tax of Rs. 52,250, the liability left a balance of Rs. 90,251 to which must be added interest of Rs. 23,138. This liability arose on self-assessment. The assessee did not, however, pay the self-assessed tax, under s. 140A(1) of the I.T. Act, 1961, for the said assessment year. The ITO thereupon issued a show-cause notice, calling upon the assessee to show cause why a penalty should not be imposed under s. 140A(3) of the Act. It would appear that the assessee did not file any explanation in reply. The officer accordingly proceeded under the Section and levied a penalty of Rs. 4,800, even though, according to the officer, the maximum penalty leviable in the case would have been Rs. 47,525. This levy of penalty was cancelled by the AAC on the score that a Division Bench ruling of this court in A. M. Sali Maricar v. ITO [1973] 90 ITR 116, had struck down s. 140A as ultra vires the Constitution. Although the AAC relied on the above ruling, he also went into the merits of the levy of penalty. He held that, in the circumstances explained by the assessee, the penalty ought not to have been levied. The AAC pointed out that the assessee was, at the material time, passing through financial difficulties, and that was the reason why the self-assessment tax was not paid within time. On the basis of these reasonings, the AAC set aside the penalty of Rs. 4,800.
(2.)THE Department took the matter in appeal before the Tribunal. THE Tribunal, however, agreed with the findings of the AAC on merits and dismissed the departmental appeal. Before the Tribunal, the assessee produced accounts which it had with a limited company. It was in favour of that company that the firm had turned over its entire business as a going concern. THE mutual accounts showed that, from time to time, the firm had been effecting drawings of money from the limited company. THE accounts also showed a progressive increase in the debit balance against the assessee. THE Tribunal further found that there was lack of liquid resources in the hands of the assessee at the material time. THEse circumstances, according to the Tribunal, were responsible for non-payment on the part of the assessee-firm of the self assessment tax within time.
This reference comes before us at the instance of the Department on the basis of questions of law propounded by this court under s. 256(2) of the I.T. Act, 1961. Before the Tribunal, at an earlier stage, and also before this court, the Department suggested as many as three questions of law. But the following two questions alone have been directed to be referred by order of this court :

"1. Whether, on the facts and in the circumstances of the case, there is material to support the finding of the Tribunal that the financial position of the assessee-firm was not such as to enable it to pay the tax on self-assessment within 30 days from the date of filing of the said return ?

2. Whether, on the facts and in the circumstances of the case, there is material to support the conclusion of the Tribunal that there was a reasonable cause for the assessee's failure to pay the tax on self-assessment under section 140A(3) of the Income-tax Act, 1961, within the prescribed time ?"

The two questions seemingly are addressed only to the validity of the findings of the Tribunal. In truth, they cover a wider field than a mere review of the factual inferences of the Tribunal. The frame of the questions do enable us to consider the applicability of s. 140A(3) of the Act on a proper construction of its provisions.

Mr. Jayaraman, learned standing counsel for the Department, submitted that the Tribunal was in error in going into what it regarded as the merits of the penalty order and in entertaining the explanation of the assessee for non-payment of the tax in justification for avoiding the penalty. According to the learned standing counsel, the penalty under s. 140A(3) has to be levied by the ITO wherever the assessee fails to pay the tax in accordance with the self-assessment provisions contained in s. 140A(1) of the Act, that is to say, within 30 days of the furnishing of the return of the income. The provisions of s. 140A(3), as they stood at the material time, were as under :

"If any assessee fails to pay the tax or any part thereof in accordance with the provisions of sub-section (1), he shall, unless a regular assessment under section 143 or section 144 has been made before the expiry of the thirty days referred to in that sub-section, be liable by way of penalty, to pay such amount as the Income-tax Officer may direct, and in the case of a continuing failure, such further amount or amounts as the Income-tax Officer, may from time to time, direct, so, however, that the total amount of penalty does not exceed fifty per cent. of the amount of such tax or part, as the case may be :

Provided that before levying any such penalty, the assessee shall be given a reasonable opportunity of being heard."

The learned counsel for the Department stressed the use of the expression "shall" in the enacting part of s. 140A(3) and submitted that where there is a default in the payment of the tax within the time-limit, penalty must follow almost as a matter of course in every case.

(3.)WE do not accept this contention as well founded even on the language of the enacting part of s. 140A(3). Although the enacting part of the provision used the word "shall", a reading of the entire provision shows that the penalty is neither imperative nor automatic. The section only provides that in default of payment of self-assessed tax promptly the assessee shall be liable, by way of penalty, to pay "such amount as the Income-tax Officer may direct". The words last quoted from the provision really show that the ITO has discretion. According to learned standing counsel, even if these words imply a discretion in the ITO, that discretion is only as respects the quantum of penalty. WE do not agree. It seems to us that on a true construction of the relevant words, the discretion not only appertains to the quantum of penalty, but also operates on the question whether any penalty at all is leviable in the given case.
This construction of the enacting part is only underlined by what follows in the proviso to that provision. This proviso enjoins the ITO to grant to the assessee a reasonable opportunity of being heard as a precondition to come to a decision on the question of penalty. According to the Department's learned counsel, even this opportunity of hearing the assessee, has reference only to the quantum of penalty and it does not extend to question the very liability to penalty. Here again, we do not accept the construction sought to be placed by the learned counsel for more than one reason. If on the language of the enacting part the ITO has a discretion either to levy penalty or not to levy penalty and has a further discretion to levy such sum as he may direct as penalty, then the opportunity afforded to the assessee of being heard should also extend to the entire field of discretionary power granted to the ITO under the enacting provision. If the proviso is read in the way it is sought to be understood by the Department and the assessee is to be given no opportunity at all to address any contention against the levy of penalty as a whole, the opportunity of being heard itself would be a mere eye-wash. We believe that while enacting the proviso Parliament seriously intended that the opportunity given to the assessee must be a real opportunity and not a fanciful one or an opportunity merely for the fun of it.

Our attention has been drawn to three reported cases of three High Courts wherein s. 140A(3) has been the subject of judicial interpretation : CIT v. Wesman Engineering Co. (P) Ltd. [1976] 104 ITR 605, of the Calcutta High Court, Bhauram Jodhraj Properties (P.) Ltd. v. CIT [1977] 108 ITR 305, of the Gauhati High Court and CIT v. R. B. L. Banarsi Dass and Co. (P.) Ltd. [1977] 108 ITR 554, of the Punjab and Haryana High Court. All the three High Courts may be said to be uniformly of the view that before the penalty is to be levied, the ITO has to hear the assessees' explanation on the question whether the case is really one for a penalty at all. The learned judges rejected the contention addressed by the Department to the effect that penalty under s. 140A(3) is an automatic penalty Respectfully following the views expressed in the above three decisions, we must reject the contention put forward by the Department's counsel before us. We hold that the penalty cannot be levied without hearing the assessee's explanation and if the assessee's explanation for the default is reasonable, then the ITO would have no jurisdiction to levy penalty at all. The practical result of the construction we have placed on s. 140A(3) is that it is open to an assessee to plead not only that there is no default in cases where there is none, but also that the default, if any, is not willful or deliberate default.