Mere Delay In Tax Deposit Cannot Be Equated With Non-Payment: Supreme Court Quashes Penalty On Saudi Arabian Airlines

"The legislature has carefully used the expression ‘fails to pay the foreign travel tax’ to imply non-payment of FTT. If the legislative intent would have been to cover delayed payment of tax, then the legislature would have used a different expression" Supreme Court has ruled that a mere delay in the deposit of Foreign Travel Tax (FTT) does not automatically attract penal consequences under Section 38(3) of the Finance Act, 1979.

In a significant judgment, a bench comprising Justice J.B. Pardiwala and Justice Ujjal Bhuyan held that "failure to pay" as contemplated by the statute cannot be equated with a "delay in making payment." The Court emphasized that the power to impose a penalty is a discretionary adjudicatory process and is not a mandatory, automatic result of breaching a timeline.

Statutory Interpretation Of 'Failure To Pay'

The Court observed that Section 38(3) of the Finance Act, 1979, was intended to address instances of absolute non-payment. By examining the legislative scheme, the bench clarified that "failure to pay" is distinct from "delayed payment." Importing the principle that taxation statutes must be interpreted based on plain language, the Court held that the authorities cannot expand the scope of a penal provision to cover minor, unintentional delays that do not constitute a willful defiance of statutory obligations.

Penalty Not An Automatic Consequence Of Breach

The Court reiterated that the use of the word 'shall' in a statute does not render every provision mandatory. Whether a provision is mandatory or discretionary must be discerned from the context and the overall statutory scheme. The bench noted that the adjudicatory process under Rule 12 of the Foreign Travel Tax Rules, 1979, which mandates a show-cause notice and an opportunity for a personal hearing, would be rendered "nugatory" if the imposition of a penalty were considered an automatic, foregone conclusion upon the breach of a timeline.

"After all, the power to impose penalty includes power not to impose penalty," the Court observed. The bench held that even where a minimum penalty is prescribed, an authority is justified in refusing to impose it if the breach is technical or venial, or if it flows from a bona fide belief. The Court pointed out that the authorities below had failed to exercise their discretion to condone delays, instead treating the breach as a strict liability offense requiring mandatory penalties.

Case Law On Quasi-Criminal Nature Of Penalties

Drawing upon the precedent of Hindustan Steel Ltd. Vs. State of Orissa, the Court affirmed that an order imposing a penalty for the failure to carry out a statutory obligation is a quasi-criminal proceeding. Such penalties should not be imposed unless the party has acted deliberately in defiance of the law or with a conscious disregard of its obligations. The bench further relied on US Technologies International Private Limited to support its finding that mere belated remittance does not invite the same penal severity as absolute non-payment.

"It is not only a procedural guarantee but is also a principle of equity that a person should not be placed in a worse position as a result of filing an appeal"

Doctrine Of 'No Reformatio In Peius' Affirmed

Addressing the appellant's grievance regarding the massive enhancement of the penalty amount upon remand, the Court invoked the Latin maxim reformatio in peius. The bench held that a litigant should never be placed in a worse position for having exercised their legal right to appeal. The Court set aside the enhancement of the penalty from Rs. 12,000 to over Rs. 71 Lakhs, noting that the appellate and revisional authorities had acted in "grave error" by ignoring principles of fair procedure and natural justice.

Final Directions And Relief To Appellant

Finding that the six instances of delay in the present case were not cases of absolute non-payment, the Court quashed the orders of the lower authorities. The respondents were directed to refund the penalty amounts paid by the airline within three months, with interest at 9 percent per annum. Furthermore, all bank guarantees furnished by the appellant in relation to the penalty proceedings were ordered to be discharged, with the Court ruling that the penalty imposed was wholly unsustainable.

Date of Decision: 01 September 2026