The Supreme Court has today (01.09.2026) held that mere delay in depositing Foreign Travel Tax (FTT) collected from passengers cannot be equated with failure to pay the tax, and hence, does not attract the penalty prescribed under Section 38(3) of the Finance Act, 1979. The Court also held that imposition of penalty under the provision is not automatic merely because there has been a breach of the statutory timeline.

A bench of Justice JB Pardiwala and Justice Ujjal Bhuyan set aside the penalty imposed on Saudi Arabian Airlines by the customs authorities, the revisional authority under the Ministry of Finance. It has allowed an appeal against a 2010 judgment delivered by the Bombay High Court.

The airline (appellant) was authorised to collect FTT from passengers on international journeys, under Section 35 of the Finance Act, 1979. It had delayed depositing the tax into the government treasury six times between 1994 and 1997. In five of these cases, demand drafts had already been purchased before the due dates, but could not be deposited on time; which the airline attributed to security restrictions. The other delay was attributed to the concerned employee being on emergency leave.

The appellant was issued show cause notices and the adjudicating authority initially imposed a penalty of Rs 12,000 under Section 38(3) of the Finance Act. On appeal, the matter was remanded for fresh adjudication, following which the penalty was enhanced to Rs 71,29,140. This enhanced penalty was upheld by the appellate authority, the revisional authority, and the Bombay High Court, which held that penalty under Section 38(3) was attracted automatically irrespective of intent.

Thereafter, an appeal was filed before the Supreme Court.

The Supreme Court framed the core questions as whether penalty under Section 38(3) could be imposed in absence of any wilful default, whether the penalty ought to have been computed under Section 38(4) instead, and whether unintentional delay in payment could be treated as equivalent to non-payment of tax.

Appearing for the appellant, Senior Advocate PV Dinesh contended that Section 38(3) applies only where there is absolute non-payment of tax, and that belated payment made before issuance of a show cause notice cannot be equated with failure to pay. He also submitted that Section 38(4) introduced by the 1994 amendment specifically governs breaches of the Rules, including delayed deposit, and prescribes a far lower penalty. To argue the point, reliance was placed on the Court's earlier ruling in US Technologies International Pvt Ltd v Commissioner of Income Tax, which had drawn a similar distinction between failure to deduct and delay in depositing tax deducted at source.

Appearing for the Union, Senior Advocate Arijit Prasad contended that Section 38(3) creates a strict liability clause, and that the expression 'fails to pay' is wide enough to cover delayed payment. He argued that the proceedings were governed by Rule 12 of the Foreign Travel Tax Rules, 1979 which prescribes no limitation period, and not Rule 7, which applies only to recovery of unpaid tax. He relied on Mathuram Agrawal v State of Madhya Pradesh, RS Joshi v Ajit Mills Ltd., and Gujarat Travancore Agency v. CIT, among others, to argue that penalty for breach of a fiscal statute does not require proof of mens rea.

Considering the contentions, the bench held that Section 38(3) and Section 38(4), both inserted by the 1994 amendment, operate in distinct fields. The Court reasoned that the expression 'fails to pay the foreign travel tax' in Section 38(3) signifies non-payment, not delayed payment, observing that had the legislature intended to cover delayed payment, it would have used different phraseology. The bench further held that a case of delayed deposit as opposed to non-deposit falls within Section 38(4), read with Rules 4 and 9 of the 1979 Rules, which carries a comparatively modest penalty range.

The bench also rejected the contention that penalty follows automatically upon breach of the statutory timeline. Referring to the three-judge bench decision in Hindustan Steel Ltd. v State of Orissa, the Court reiterated that even where a minimum penalty is prescribed, the competent authority retains discretion to decline imposing it in cases of technical or venial breach. It also noted that Rule 4 itself empowers the Collector of Customs to condone delay in deposit of tax on sufficient cause being shown, and that this discretion had been overlooked by the authorities below.

The judgment states that automatic imposition of penalty and exclusion of mens rea are two different things, and that whether penalty is mandatory depends on the statutory scheme and the adjudicatory process, including the safeguards under Rule 12 requiring show cause notice and hearing before penalty can be imposed.

The Court also took strong exception to the manner in which the penalty was enhanced from Rs. 12,000 to over Rs. 71 lakh after the airline's own appeal led to a remand. Invoking the doctrine of reformatio in peius, the principle that an appellant should not be placed in a worse position for having exercised a remedy available in law, the bench relied on the Bombay High Court's ruling in Jyoti Plastic Works Pvt. Ltd. v Union of India (authored by Justice Ujjal Bhuyan himself) and the recent decision in Nagarajan v. State of Tamil Nadu, holding that an appellant cannot be worse off than before filing the appeal.

Holding that no penalty was imposable on the airline, the Court set aside the judgment of the Bombay High Court, the revisional order, the appellate order, and the de novo order-in-original, to the extent they imposed penalty for the six instances of delayed FTT deposit. It also directed that any amount already paid towards the penalty be refunded with 9% interest per annum within three months, and ordered discharge of the bank guarantee furnished by the airline.

In the light of above, the appeal was allowed.

Case: M/s Saudi Arabian Airlines v Union of India & Ors

Citation : 2026 LiveLaw (SC) 880

Appearance:

For the Appellant(s), Mr. P.V. Dinesh, Senior Advocate, appeared along with Mr. Shankh Sengupta, Mr. Samsuddha Majumdar, Mr. Kartikey Kulshrestha, Mr. Sujoy Sur, Mr. Soham Banerjee, Mr. Shreyash Sharma and Ms. Anna Oommen, Advocates. Mr. Syed Jafar Alam,Advocate-on-Record, also appeared for the Appellant(s).

For the Respondent(s), Mr. N. Venkataraman,Additional Solicitor General, appeared along with Mr. Gurmeet Singh Makker, Advocate-on-Record, and Mr. B. Sunita Rao, Mr. Arijit Prasad, Mr. Udai Khanna, Mr. Sarthak Karol and Ms. Neelakshi Bhaduria, Advocates.

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