Introduction
The question of whether a delayed remittance of statutory tax collected by an entity can be treated as absolute non-payment to trigger harsh penal provisions has long created friction between taxpayers and revenue authorities. This issue becomes particularly crucial when fiscal statutes prescribe strict penalties for failure to pay taxes, leading authorities to routinely argue that any procedural delay automatically attracts mandatory penalties irrespective of bona fide reasons.
In M/s. Saudi Arabian Airlines v. Union of India & Ors. (Civil Appeal No. 1052 of 2013), the Hon’ble Supreme Court of India delivered a landmark judgment clarifying the distinction between delayed payment and non-payment, the non-automatic nature of penal proceedings, and the fundamental principle preventing an appellant from being placed in a worse position upon filing an appeal.
Factual matrix
The appellant, M/s. Saudi Arabian Airlines, carries on the business of transporting passengers internationally and holds a license to operate flights to and from India. Under Chapter V of the Finance Act, 1979 and the Foreign Travel Tax Rules, 1979 (“1979 Rules”), the airline collects Foreign Travel Tax (“FTT”) from passengers embarking on international journeys and deposits the same to the Government Exchequer.
During adjudicatory proceedings, the department identified 6 instances of delay in depositing the collected FTT:
- In 5 instances July 1995, December 1996, November 1997, August 1994, and April 1996, the delay ranged from 1 to 11 days . In each of these 5 cases, the demand drafts were purchased through concerned banks prior to the statutory due dates, but actual deposit into the treasury was delayed due to security restrictions.
- In 1 instance, there was a delay of 63 days in depositing the demand draft because the employee entrusted with the task was on emergency leave.
The initial adjudicating authority issued show cause notices and passed an Order-in-Original dated 14.06.1999, confirming short payment and interest, while imposing a consolidated penalty of Rs. 12,000 for the 6 instances of late payment of FTT under Section 38(3) of the Finance Act, 1979.
Aggrieved by the order, the airline preferred an appeal before the Commissioner of Customs (Appeals), who vide order dated 24.11.1999, remanded the matter back to the adjudicating authority for de novo consideration.
Upon remand, the Deputy Commissioner of Customs passed a de novo Order-in-Original dated August 8, 2001, confirming short payment and interest, but drastically enhanced the penalty under Section 38(3) to Rs. 71,29,140 for the same 6 instances of delayed deposit.
The airline challenged this enhanced penalty across hierarchy. However, the Appellate Authority vide order dated 09.01.2003, the Revisional Authority vide order dated 29.10.2004, and the Bombay High Court vide judgment dated 09.08.2010 in Writ Petition No. 3269 of 2004 all dismissed the airline’s pleas.
The Hon’ble High Court held that delayed payment is equivalent to non-payment under Section 38(3), that penalty for breach of civil obligation is automatic without requiring mens rea, and that enhancement on a general remand was legally permissible. The appellant challenged the order dated 09.08.2010 before the Hon’ble Supreme Court.
Issues
- Whether delay in depositing Foreign Travel Tax (FTT) into the treasury can be equated with “failure to pay tax” or “non-payment” under Section 38(3) of the Finance Act, 1979?
- Whether the imposition of penalty under Section 38 of the Finance Act, 1979 for default or delay in payment is automatic or subject to adjudicatory discretion?
- Whether an adjudicating authority on remand can enhance penalty and place an appellant in a worse position than prior to filing the appeal?
Delayed payment cannot be equated with failure to pay under Section 38(3)
The Hon’ble Supreme Court examined the statutory architecture of Section 38 of the Finance Act, 1979. Section 38(3) prescribes a heavy penalty (ranging from one-fifth up to three times the tax) where a carrier “fails to pay the foreign travel tax” to the credit of the Central Government.
Analyzing the key expressions “fails to pay the foreign travel tax” and “the amount of the tax not so paid”, the Hon’ble Court observed that Section 38(3) strictly governs cases of absolute non-payment or total failure to pay tax. “Failure to pay” means non-payment and cannot be expanded through judicial interpretation to cover “delay in making payment”.
The Hon’ble Court placed reliance on its coordinate bench decision in U.S. Technologies International Pvt. Ltd. v. CIT (2023) 8 SCC 24, where it was settled that belated remittance of Tax Deducted at Source (TDS) after deduction cannot be treated as a “failure to deduct” under Section 271-C of the Income Tax Act, 1961.
Applying this proposition, the Hon’ble Court held that delayed payment made prior to the issuance of a show cause notice constitutes “delayed payment” under Section 38(4) read with Rules 4 and 9 of the 1979 Rules (which provide penalties for rule breaches ranging from Rs. 500 to Rs. 50,000), rather than total non-payment under Section 38(3).
Imposition of penalty is not mandatory merely because the statute uses 'shall'
The Revenue contended that Section 38 creates a strict civil liability where penalties apply automatically upon procedural breach regardless of intent or bona fides. The Hon’ble Supreme Court rejected this oversimplification, drawing a sharp distinction between the exclusion of mens rea and the automatic imposition of penalty.
The Hon’ble Court held that even where a statute uses the word “shall” or excludes mens rea for strict statutory offences, penalty is not mandatory or automatic. The presence of a statutory adjudicatory mechanism under Rule 12 of the 1979 Rules mandating written show cause notices, written representations, and personal hearing demonstrates that adjudicating officers possess judicial discretion whether to impose penalty or not.
Moreover, Rule 4 and Rule 9 of the 1979 Rules contain express provisos empowering the Collector of Customs to condone delays in depositing tax or filing returns upon sufficient cause being shown. Where delay is condoned, or where a technical/venial breach flows from genuine grounds, no penalty is warranted. Reaffirming the three-Judge Bench ruling in Hindustan Steel Ltd. v. State of Orissa (1972) 83 ITR 26, the Court held that the power to impose penalty inherently includes the power not to impose penalty.
Principle of 'No Reformatio in Peius': An appellant cannot be placed in a worse position by appealing
Addressing the enhancement of penalty from Rs. 12,000 in the original order to Rs. 71,29,140 in the de novo order, the Hon’ble Supreme Court severely criticized the lower authorities and the Hon’ble High Court.
The Hon’ble Court invoked the Latin maxim reformatio in peius (a change towards the worse) and held that the principle of no reformatio in peius or prohibition of reformatio in peius ensures that exercising a legal remedy of appeal does not aggravate the appellant’s situation. This rule is an essential component of fair procedure, natural justice, and equity.
Citing its decisions in Jyoti Plastic Works Pvt. Ltd. v. Union of India (2020 SCC OnLine Bom 2276), Jawal Neco Ltd. v. Commissioner of Customs (2015 (322) E.L.T. 561), and Nagarajan v. State of Tamil Nadu ((2025) 8 SCC 331), the Hon’ble Supreme Court reiterated that no litigant can be made worse off purely because they chose to approach an appellate forum.
Holding
The Supreme Court allowed Civil Appeal No. 1052 of 2013 and held that:
Late deposit of Foreign Travel Tax across the 6 instances did not fall under Section 38(3) of the Finance Act, 1979. Given the genuine reasons shown by the airline (purchase of bank drafts prior to due dates in 5 instances and emergency leave of staff in 1 instance), no penalty was imposable.
- The judgment dated 09.08.2010 of the Bombay High Court, the Revisional order dated 29.10.2004, the Appellate order dated 09.01.2003, and the de novo Order-in-Original dated 08.08.2001 were set aside and quashed qua the imposition of penalty.
- The Revenue was directed to refund any penalty amount paid by the airline, along with interest at the rate of 9% per annum within 3 months, and the bank guarantee furnished by the appellant was ordered to be discharged.
AMLEGALS Remarks
The Hon’ble Supreme Court’s ruling in Saudi Arabian Airlines provides much-needed legal clarity on administrative penalty proceedings under Indian revenue statutes. It firmly establishes that executive authorities cannot equate procedural delays in tax deposit with outright tax evasion or non-payment to trigger draconian penal clauses.
Second, the judgment dismantles the Revenue’s persistent assumption that penal provisions operate automatically upon default, reinforcing that natural justice provisions and SCN mechanics vest adjudicators with explicit discretion to withhold penalty for venial breaches.
Finally, by upholding no reformatio in peius, the Supreme Court guarantees that taxpayers can seek appellate remedies without fear of arbitrary retaliation or enhanced penalties on remand
For any queries or feedback, feel free to connect with Dhwani.tandon@amlegals.com