The airline collected Foreign Travel Tax from passengers and deposited it under the Finance Act, 1979 and the Foreign Travel Tax Rules. Six late deposits were identified between 1994 and 1997, ranging from one day to 63 days; in five of them, demand drafts had been bought before the due date but deposited late.
After a remand, a de novo order of 8 August 2001 imposed a penalty of Rs 71,29,140 for the six late deposits, upheld in appeal and revision. The Bombay High Court dismissed the airline’s writ petition on 9 August 2010, treating Section 38(3) as a mandatory minimum penalty and delay as non-payment.
The Key Question Before the Court
Does delayed deposit of Foreign Travel Tax amount to “failure to pay” attracting penalty under Section 38(3), and is such penalty automatic?
Delay, Default and Discretion
The Court read Sections 35 to 38 and the Rules together and held that “failure to pay” in Section 38(3) means non-payment, not delay; delay is dealt with under Section 38(4) read with the Rules, and Rule 4 even lets the Collector condone delay. It relied on U.S. Technologies International, (2023) 04 SC CK 0037 (belated remittance does not attract the penalty provision) and on Hindustan Steel, (1969) 08 SC CK 0007 for the principle that penalty is discretionary, observing that it cannot be a thumb rule that any breach of a timeline makes penalty automatic.
Applying the principle against reformatio in peius (citing, among others, Nagarajan v. State of Tamil Nadu, (2025) 06 SC CK 0067), the Court held that the airline could not be left worse off for having appealed against the original, much smaller penalty. Since penalty was not imposable on the facts, it found it unnecessary to resolve the claimed conflict between Section 38(3) and the Rs 5,000 cap in Rule 11.
What the Court Actually Held
- The penalty for late deposit in the six instances was set aside, and the High Court, revisional, appellate and de novo orders were quashed to that extent.
- “Failure to pay” cannot be equated with “delay in making payment”.
- Any amount paid towards that penalty must be refunded with 9% annual interest within three months.
- The bank guarantee furnished by the airline stands discharged.
Why This Judgment Matters
- It limits mandatory-sounding penalty provisions where the tax was in fact paid, though late.
- It reaffirms that penalty involves adjudicatory discretion, not automatic imposition.
- It applies the bar on making an appellant worse off to tax proceedings.
What Should Advocates Take Away From the Judgment?
For Tax Practitioners
- Distinguish late payment from non-payment when a penalty provision speaks of failure to pay.
- Look for condonation powers in the rules that signal discretion.
For Collecting Agents
- Document reasons for any delay in remittance.
- Challenge enhanced penalties imposed after your own appeal leads to a remand.
Key Takeaways
- Late payment is not failure to pay under Section 38(3).
- Penalty is not automatic merely because “shall” is used.
- An appellant cannot be made worse off by appealing.
- Refund with 9% interest was ordered.
Frequently Asked Questions
No. It found penalty not imposable at all on these facts, so it did not decide that question.
The operative directions address the penalty for late deposit in the six instances; the judgment does not expressly deal with the other heads in its operative paragraph.
The appeal was filed in 2013 against a 2010 High Court judgment and was decided in September 2026.
Conclusion
The judgment reads penalty provisions with their statutory context and refuses to punish a taxpayer who paid in full, if a little late, as though it had not paid at all.
Practical takeaway: Where a penalty clause targets “failure to pay”, argue that delayed but complete payment falls outside it, especially when the scheme provides separately for delay.
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