Judgment :- 1. The question arising for consideration in this Income-tax Referred Case is whether paucity of fund is a good and sufficient reason for not imposing penalty under S.221(1) of the Income-tax Act, 1961. The assessee failed to pay the advance tax which fell due on 15-12-1977 for the assessment year 1978-79. In reply to a notice issued by the income-tax Officer the assessee explained the default as on account of its unfavourable financial position which became worse because of the extra wages that have to be paid as a result of the conciliation settlement dated 11-8-1977. But the assessee informed the Income-tax Officer that it had already made arrangements for the payment of 111 demand. Nevertheless the Income-tax Officer imposed a penalty of Rs.16,990/- under S.221(1) of the Income-tax Act, 1961. 2. On appeal, CIT (Appeals) cancelled the penalty order. The department went in appeal before the Tribunal and the Tribunal upheld the order of the CIT (Appeals). It is, thereafter, the Commissioner of Income-tax got the following question of law arising out of the order of the Tribunal dated 1-10-1981 in I.T.A. No.35(Coch)/80, referred to this Court: "Whether, on the facts and in the circumstances of the case, the Tribunal was justified in deleting the penalty levied under S.221(1) of the Income-tax Act?" 3. We heard Counsel. 4. Under S.210 read with S.211 of the Act the second instalment of advance tax had to be paid by the assessee on 15-12-1977 for the assessment year 1978-79. For default in payment penalty will be attracted by virtue of S.221. Relevant portion of S.221 reads as under: "221. We heard Counsel. 4. Under S.210 read with S.211 of the Act the second instalment of advance tax had to be paid by the assessee on 15-12-1977 for the assessment year 1978-79. For default in payment penalty will be attracted by virtue of S.221. Relevant portion of S.221 reads as under: "221. Penalty payable when tax In default - (1) When an assessee is in default or is deemed to be in default in making a payment of tax, he shall, in addition to the amount of the arrears and the amount of interest payable under sub-section (2) of S.220, be liable, by way of penalty, to pay such amount as the Income-tax Officer may direct, and in the case of a continuing default, 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 the amount of tax in arrears: Provided that before levying any such penalty, the assessee shall be given a reasonable opportunity of being heard: Provided further that where the Income-tax Officer is satisfied that the default was for good and sufficient reasons, no penalty shall be levied under this section. (rest omitted) This section provides for imposition of penalty for defaults in payment of tax including advance tax under S.210. But the liability to pay penalty does not arise merely upon proof of default. In Hindustan Steel Ltd. v. State of Orissa - (1972) 83 ITR 26, the Supreme Court held that - "Penalty will not ordinarily be imposed unless the party obliged, either acted deliberately in defiance of law or was guilty of conduct contumacious or dishonest, or acted in conscious disregard of its obligation. Penalty will not also be imposed merely because it is lawful to do so. Whether penalty should be imposed for failure to perform statutory obligation is a matter of discretion of the authority to be exercised judicially and on a consideration of all the relevant circumstances. Penalty will not also be imposed merely because it is lawful to do so. Whether penalty should be imposed for failure to perform statutory obligation is a matter of discretion of the authority to be exercised judicially and on a consideration of all the relevant circumstances. Even if a minimum penalty is prescribed, the authority competent to impose the penalty will be justified in refusing to impose penalty, when there is a technical or venial breach of the provisions of the Act or where the breach flows from a bonafide belief that the offender is not liable to act in the manner prescribed by the statute." S.221 requires a reasonable opportunity to be given to the assessee of being heard before imposing any penalty. It is further provided that where the Income-tax Officer is satisfied that the default was for good and sufficient reasons, no penalty shall be levied. Thus the imposition of penalty is not an automatic consequence of the default. The expression "may direct" in S.221 also indicates that the imposition of penalty is not mandatory but the same is discretionary. The discretion, of course, will have to be exercised judiciously according to well known principles. In CIT v. Raunaq & Co. P. Ltd. (1983) 140 ITR 407 the Tribunal cancelled the penalty levied under S.221 for the assessment year 1965-66 taking into account that the assessee could not pay the tax because of its financial difficulties which prevented the assessee from paying the whole amount in a lump sum. The Delhi High Court held in that case thus: "We are of opinion that the question for decision in this case was ultimately a question of fact. It is no doubt true that S.221 enables the ITO to impose a penalty where an assessee is in default in making a payment of tax. But it appears to us that the imposition of a penalty cannot be, an automatic consequence of a default by way of non-payment of tax. It is no doubt true that S.221 enables the ITO to impose a penalty where an assessee is in default in making a payment of tax. But it appears to us that the imposition of a penalty cannot be, an automatic consequence of a default by way of non-payment of tax. In our opinion the decision of the Supreme Court in the case of Hindustan Steel Ltd. (1973) 83 ITR 26, has direct relevance to this issue and it has in fact been held in a large number of decisions even under the I.T.A. Act that the principles of this decision would apply to the imposition of a penalty under the I.T. Act also." It was also held that the existence of good and sufficient reason may be a ground to persuade the ITO not to impose a penalty under S.221. In fact the second proviso clearly says that no penalty shall be levied where the ITO is satisfied that the default was for good and sufficient reasons. Paucity of funds and financial stringency have been considered good and sufficient reasons for explaining inability to pay the tax demanded in CIT v. Bhikaji Ramachandra (1982) 28 CTR (Bom.) 197, CIT v. Mysore Fertilizer Co. (1984) 145 ITR 91 (Mad.), Addl. CIT v. Free Wheels India Ltd. (1982) 137 ITR 378 (Del.); CIT v. Jaipur Electro Pv. Ltd. (1980) Taxation 56(1)-1(Raj.); Nachimathu Industrial Corporation v. CIT (1980) 123 ITR 611 (Mad.). In Bhauram Jodhraj Properties (P) Ltd. v. CIT (1977)108 ITR 305 the plea that there was shortage of liquid cash because the assessee invested the same in heavy construction work was not accepted by the Income-tax Officer as sufficient ground. Similarly in Juggilal Kamlapat Cotton Spng. & Wvg. Mills Co.Ltd. v. CIT (1979) Tax LR 1773, Allahabad High Court also held that diversion of sales tax realised, to sister concern will not constitute a reasonable ground. Therefore, whether the facts of a given case will constitute good and sufficient reason for not imposing a penalty is a question of fact. 5. In the case in question the CIT (Appeals) held that there was a reasonable cause for the default in the payment of the advance tax instalment. The CIT (Appeals) accepted the contention of the assessee that it had to meet heavy liabilities during the period viz. agricultural income-tax of Rs. 5. In the case in question the CIT (Appeals) held that there was a reasonable cause for the default in the payment of the advance tax instalment. The CIT (Appeals) accepted the contention of the assessee that it had to meet heavy liabilities during the period viz. agricultural income-tax of Rs. 18,90,000/- from September 1977 to March 1978, bonus payments of Rs. 4,50,000/- for 1976-77 on 17-11-1977 and arrears of wages of Rs.5,50,000/- on 29-9-77. The Tribunal advened to this fact and held that the assessee has been able to establish that it was in a tight position financially and that it did not have the funds necessary to meet its liabilities: Therefore, in the light of the decision of the Madras High Court in Nanchimuthu Industrial Association v.CIT (1980) 4 Taxman 181, the Tribunal held that the paucity of funds could be considered to be a reasonable cause taking into account the other circumstances as well. 6. It was held in a recent judgment of this Court in T.R.C. 32 & 33 of 1989 that the crucial words "good and sufficient reasons" should receive a reasonable view, which will effectuate and render meaningful the levy, assessment and recovery or collection of tax assessed or due under the Act. The said words should receive such an interpretation which will render it possible to achieve effective, speedy and proper implementation of the provisions of the Act and in particular appropriate measures to safeguard the interests of the Revenue. 7. The Tribunal on a consideration of the entire aspects of the case found that the assessee has established that it was in a tight position financially. When the tribunal found that want of sufficient liquid funds is reasonable cause, it cannot be regarded that the finding is based entirely on an unreasonable view of facts. The Tribunal entered a finding of fact relating to financial stringency of the assessee and accepting the same as good and sufficient reason, cancelled the levy. We cannot say that the Tribunal in so doing committed an error in cancelling the penalty. In the circumstances, we answer the question referred to us in the affirmative, that is, in favour of the assessee and against the revenue. A copy of this judgment under the seal of the High Court and signature of the Registrar shall be forwarded to the Income-tax Appellate Tribunal, Cochin Bench.