Imposition of penalty under section 271C of IT Act
Where the assessee was prohibited by reasonable cause for not deducting the TDS, the penalty imposed under section 271C was liable to be quashed.
ITAT, DELHI BENCH `H' NEW DELHI
Sahara India Fianncial Corpn. Ltd. v. Addl. CIT
ITA NOS. 97 TO 100/DEL/2006
MARCH 20, 2009
RELEVANT EXTRACTS:
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============================================================================= Where the assessee was prohibited by reasonable cause for not deducting the TDS, the penalty imposed under section 271C was liable to be quashed.
ITAT, DELHI BENCH `H' NEW DELHI
Sahara India Fianncial Corpn. Ltd. v. Addl. CIT
ITA NOS. 97 TO 100/DEL/2006
MARCH 20, 2009
RELEVANT EXTRACTS:
** ** ** ** ** ** ** ** ** ** ** **
3. We have duly considered the rival contentions and gone through the records carefully. Learned Assessing Officer as well as learned CIT(Appeals) have given much emphasis on the point whether assessee has committed a default within the meaning of sec. 194-A by not deducting the TDS when interest was credited to the interest provision account, In their opinions, assessee was following mercantile system of accounting, therefore, on an accrual basis, it should have been deducted the TDS when interest was transferred to such interest provision account. The stand of the assessee on the other hand was that even if it is assumed that assessee has committed a default then also there was a reasonable cause for not deducting the TDS at that point of time. As far as quantification of the tax and its payment on such interest income is concerned, there is no dispute that tax was determined on actual payment of interest and paid to the government exchequer. The ITAT in the case of M/s. Sahara India Mutual Benefit Co. Ltd(supra) has examined this aspect in detail and found that the assessee was prohibited by reasonable cause for not deducting the TDS, more so, according to the ITAT, there was no default on the part of the assessee, relevant observations of the order of the ITAT are as under:
"We have duly considered the submissions of the learned counsel to the effect that unless the payment forms income of the payee, it cannot be said that income has accrued to the payee. As mentioned earlier, Chapter XVII is a mode of recovery/collection of taxes. Deducting tax at source is one of the modes for recovery/collection of taxes. In some cases, the tax has to be deducted at source irrespective of the fact whether paid amount was the income of the payee whereas in other cases, the taxes have to be deducted at source for paying the amount as income. Both the circumstances may be explained by following examples."
27, Section 192 of the Act provides that any person responsible for paying any income chargeable under the head "salary" shall, at the time of payment, deduct income tax on the amount payable. This section has used the words "for paying any income chargeable under the head "salaries". But sec. 194 which is applicable to the dividends provides that the Principal Officer of the company which has made the prescribed arrangement for the declaration and payment of dividends within India shall, before making any payment, deduct from the amount such dividend, income tax at the rates in force. Similarly, certain sections provided for the deduction of tax at source at the time of actual payment whereas some sections have provided for deduction of tax at source if the amount is credited to the accounts of the payees. For example, in respect of payment of salary, the tax is to be deducted at source at the time of payment the sections 193, 194-A, 194-C provided for deduction of tax at source when the accounts of the payee is credited, In respect of payments covered u/s. 193, 194-A,194-C, the Explanations have also been added providing that if an amount is credited to an assessee's account or interest payable accounts or any similar accounts, it will be deemed that the account of the payee has been credited.
28. Section 194-A includes all these concepts namely, an income by way of interest was being paid credited and also the Explanation attached to this section. If the provisions of sec. 194-A are read carefully, it is clear that this section only speaks that the payment should be in the nature of income of the payee. In other words, if such income was beyond the scope of income then no tax has to be deducted at source. But if such income was an income though below taxable limit, the provisions of this section will still be applicable Thus, the use of the word "income" in this section has been made to indicate that the payment should form part of the income of the payee, may be such income was exempt under any provisions of law or the same was below taxable limit Thus, much significance cannot be attached to the arguments of the learned counsel in this regard.
29. Section 194A provided for deduction of tax at source at the time of credit of such income to the account of the payee or at the time of payment whichever is earlier. Admittedly, in the instant case, the tax has been deducted at source at the time of actual payment. The reading of the Explanation to sec. 194A makes it clear that the moment the income by way of interest is credited to any account, the liability of the assessee to deduct the tax will arise. The learned counsel's argument against such proposition bears no force and is to be dismissed.
30. However, it is settled law that penalty u/s. 271-C is subject to the provisions of sec. 273-B of the Act. This section reads as under:
"Notwithstanding anything contained in the provisions of clause (b) of sub-section (1) of sec. 271, section 271-A, Section 271,–AA, section 271-B, section 271,-BA, section 271-BB, section 271-C, section 271-D, section 271-E, section 271F, section 271-G, clause (c) or clause (d) of sub-section (1) or subsection (2) of section 272-A, sub-section (1) of section 272AA or section 272-B sub-section (1) of sec. 272-BB or sub-section (1) of sec. 272-BB or clause (b) of sub-section (1) or clause (b) or clause (c) of sub-section (2) of sec. 273, no penalty shall be imposable on the person or the assessee, as the case may be, for any failure referred to in the said provisions if he proves that there was reasonable cause for the said failure."
31. We have, therefore, examined whether there was any reasonable cause with the assessee to feel that the tax was not to be deducted at source as the interest payable by the assessee had not accrued to the payee.
32. Admittedly, but for the Explanation there is no violation of the provisions of sec. 194-A because the assessee has not credited the account of the payees and the tax has been deducted source at the time of actual payment The Explanation which was added to the section is a deeming provision. It says that if the income by way of interest is credited to any account in the books of account, such crediting shall be deemed to be credit of such income to the account of the payee. Whether the deeming provisions could exceed the main provision is always debatable. Moreover, whether the provision of sec. 194A will be applicable even in a case where the payment has not become due to the payee was also an equally debatable issue. As mentioned earlier, as per various deposit schemes, the payee has right to receive the interest only on maturity of the scheme. The right to receive the interest does not vest in the payee prior to the maturity. Even if the payee does not have right to receive any income by way of interest and if the assessee transfers the amount to a separate account whether the provisions of sec. 194-A will be applicable was also a highly debatable issue. The amount which was being transferred to a separate account has not partaken the character of income in the hands of the payee. The assessee could always take such explanation and such explanation has to be treated as bona fide. This claim is fortified by the conduct of the Department. As mentioned earlier, the assessee has claimed the deduction of interest on such deposits in assessment year 1995-96 on yearly basis and the same was also allowed by the A.O. But the learned CIT, by invoking the provisions of sec. 263, observed that as the payees do not have any vested right of receiving the interest, the assessee cannot suo moto transfer the amount of interest to a separate account and claim deduction of the same. The learned CIT held such liability to be a contingent liability and set aside the order of the A.O. Subsequently, in the assessment year 1996-97 also, the AO. himself has treated the interest liability claimed on yearly basis attributable to assessment year 1996-97 as contingent liability. It is another issue that on appeal the learned CIT(Appeals) has allowed such deduction. Needless to say that if the liability was contingent whether the provisions of sec. 194A will be applicable was a contentious issue. The reason is obvious. Section 194A enjoins upon a person to tax at source who is responsible for paying to a resident any income by way of interest". If the liability was contingent then there was no responsibility of the assessee to make the payment. Similarly, the provisions are applicable to "any person who is responsible for paying to a resident any income by way of interest". But if the interest is not due to the payee and the right to receive the interest is not vested in the payee whether such interest could be the income of the payee was also a debatable issue. On this ground also the explanation furnished by the assessee was bona fide.
33. Moreover, it is not a case of non-deduction of tax at source or non-payment of tax deducted. The tax has been deducted and the same has been paid also. It is also not a case of short deduction of tax or short payment of tax. The dispute was only limited to the time when the tax was to be deducted at source. The assessee felt that unless the order u/s.201(l) was passed holding the assessee in default, no penalty u/s. 271-C was warranted. Admittedly, because the tax was deducted at source and the same was paid, no order u/s 201(1) was passed As there was delay in payment of tax after deduction, the interest u/s. 201(1A) was levied which was also paid by the assessee.
34. We have also perused the provisions of sec. 271-C of the Act. It reads as under:
"(1) if any person fails to
(a) deduct the whole or any part of the tax as required by or under the provisions of Chapter XVII-B;
or
(b) pay the whole or any part of the tax as required by or under:-
(i) sub-section (2) of section 115-O or (ii) second proviso to section 194-B, then, such person shall be liable to pay, by way of penalty, a sum equal to the amount of tax which such person failed to deduct or pay as aforesaid, (2) Any penalty imposable under sub-section (1) shall be imposed by the Joint Commissioner."
35. The section postulates a condition for levying of penalty u/s.271-C, i.e. if the assessee has failed to deduct the whole or any part of the tax as required by or under the provisions of Chapter XVII- B. The assessee can always have a bona fide belief that as the taxes have been deducted at source, there was no default on the part of the assessee and, no penalty u/s. 271-C was warranted.
36. Even assuming that there was a minor default of non-deducting the tax at source at the time when the amount was transferred to interest payable account, though there was no liability of the assessee to transfer this amount to such account, the default was venial in nature. While relying on the ratio laid down by the Hon'ble Supreme Court in the case of Hindustan Steels Ltd. reported in 83 ITR 26, the assessee could always claim bona fide and there is nothing unreasonable in such claim.
37. Looking to these facts, we are of the considered opinion that the assessee had reasonable cause in not adhering to the provisions of sec. 194A read with sec. 271-C of the Act and the assessee's explanation being bona fide, was covered by section 273-B of the Act, Under these circumstances, no penalty u/s. 271-C of the Act was warranted. We, therefore, cancel the penalty u/s. 271-C sustained by the learned CIT(Appeals) for all the years".
4. In view of the above facts and circumstances of the case, the penalty imposed by the learned CIT is liable to be quashed Accordingly, we delete the penalty imposed under sec. 271-C and allow all the four appeals filed by the assessee.
. "We have duly considered the submissions of the learned counsel to the effect that unless the payment forms income of the payee, it cannot be said that income has accrued to the payee. As mentioned earlier, Chapter XVII is a mode of recovery/collection of taxes. Deducting tax at source is one of the modes for recovery/collection of taxes. In some cases, the tax has to be deducted at source irrespective of the fact whether paid amount was the income of the payee whereas in other cases, the taxes have to be deducted at source for paying the amount as income. Both the circumstances may be explained by following examples."
27, Section 192 of the Act provides that any person responsible for paying any income chargeable under the head "salary" shall, at the time of payment, deduct income tax on the amount payable. This section has used the words "for paying any income chargeable under the head "salaries". But sec. 194 which is applicable to the dividends provides that the Principal Officer of the company which has made the prescribed arrangement for the declaration and payment of dividends within India shall, before making any payment, deduct from the amount such dividend, income tax at the rates in force. Similarly, certain sections provided for the deduction of tax at source at the time of actual payment whereas some sections have provided for deduction of tax at source if the amount is credited to the accounts of the payees. For example, in respect of payment of salary, the tax is to be deducted at source at the time of payment the sections 193, 194-A, 194-C provided for deduction of tax at source when the accounts of the payee is credited, In respect of payments covered u/s. 193, 194-A,194-C, the Explanations have also been added providing that if an amount is credited to an assessee's account or interest payable accounts or any similar accounts, it will be deemed that the account of the payee has been credited.
28. Section 194-A includes all these concepts namely, an income by way of interest was being paid credited and also the Explanation attached to this section. If the provisions of sec. 194-A are read carefully, it is clear that this section only speaks that the payment should be in the nature of income of the payee. In other words, if such income was beyond the scope of income then no tax has to be deducted at source. But if such income was an income though below taxable limit, the provisions of this section will still be applicable Thus, the use of the word "income" in this section has been made to indicate that the payment should form part of the income of the payee, may be such income was exempt under any provisions of law or the same was below taxable limit Thus, much significance cannot be attached to the arguments of the learned counsel in this regard.
29. Section 194A provided for deduction of tax at source at the time of credit of such income to the account of the payee or at the time of payment whichever is earlier. Admittedly, in the instant case, the tax has been deducted at source at the time of actual payment. The reading of the Explanation to sec. 194A makes it clear that the moment the income by way of interest is credited to any account, the liability of the assessee to deduct the tax will arise. The learned counsel's argument against such proposition bears no force and is to be dismissed.
30. However, it is settled law that penalty u/s. 271-C is subject to the provisions of sec. 273-B of the Act. This section reads as under:
"Notwithstanding anything contained in the provisions of clause (b) of sub-section (1) of sec. 271, section 271-A, Section 271,–AA, section 271-B, section 271,-BA, section 271-BB, section 271-C, section 271-D, section 271-E, section 271F, section 271-G, clause (c) or clause (d) of sub-section (1) or subsection (2) of section 272-A, sub-section (1) of section 272AA or section 272-B sub-section (1) of sec. 272-BB or sub-section (1) of sec. 272-BB or clause (b) of sub-section (1) or clause (b) or clause (c) of sub-section (2) of sec. 273, no penalty shall be imposable on the person or the assessee, as the case may be, for any failure referred to in the said provisions if he proves that there was reasonable cause for the said failure."
31. We have, therefore, examined whether there was any reasonable cause with the assessee to feel that the tax was not to be deducted at source as the interest payable by the assessee had not accrued to the payee.
32. Admittedly, but for the Explanation there is no violation of the provisions of sec. 194-A because the assessee has not credited the account of the payees and the tax has been deducted source at the time of actual payment The Explanation which was added to the section is a deeming provision. It says that if the income by way of interest is credited to any account in the books of account, such crediting shall be deemed to be credit of such income to the account of the payee. Whether the deeming provisions could exceed the main provision is always debatable. Moreover, whether the provision of sec. 194A will be applicable even in a case where the payment has not become due to the payee was also an equally debatable issue. As mentioned earlier, as per various deposit schemes, the payee has right to receive the interest only on maturity of the scheme. The right to receive the interest does not vest in the payee prior to the maturity. Even if the payee does not have right to receive any income by way of interest and if the assessee transfers the amount to a separate account whether the provisions of sec. 194-A will be applicable was also a highly debatable issue. The amount which was being transferred to a separate account has not partaken the character of income in the hands of the payee. The assessee could always take such explanation and such explanation has to be treated as bona fide. This claim is fortified by the conduct of the Department. As mentioned earlier, the assessee has claimed the deduction of interest on such deposits in assessment year 1995-96 on yearly basis and the same was also allowed by the A.O. But the learned CIT, by invoking the provisions of sec. 263, observed that as the payees do not have any vested right of receiving the interest, the assessee cannot suo moto transfer the amount of interest to a separate account and claim deduction of the same. The learned CIT held such liability to be a contingent liability and set aside the order of the A.O. Subsequently, in the assessment year 1996-97 also, the AO. himself has treated the interest liability claimed on yearly basis attributable to assessment year 1996-97 as contingent liability. It is another issue that on appeal the learned CIT(Appeals) has allowed such deduction. Needless to say that if the liability was contingent whether the provisions of sec. 194A will be applicable was a contentious issue. The reason is obvious. Section 194A enjoins upon a person to tax at source who is responsible for paying to a resident any income by way of interest". If the liability was contingent then there was no responsibility of the assessee to make the payment. Similarly, the provisions are applicable to "any person who is responsible for paying to a resident any income by way of interest". But if the interest is not due to the payee and the right to receive the interest is not vested in the payee whether such interest could be the income of the payee was also a debatable issue. On this ground also the explanation furnished by the assessee was bona fide.
33. Moreover, it is not a case of non-deduction of tax at source or non-payment of tax deducted. The tax has been deducted and the same has been paid also. It is also not a case of short deduction of tax or short payment of tax. The dispute was only limited to the time when the tax was to be deducted at source. The assessee felt that unless the order u/s.201(l) was passed holding the assessee in default, no penalty u/s. 271-C was warranted. Admittedly, because the tax was deducted at source and the same was paid, no order u/s 201(1) was passed As there was delay in payment of tax after deduction, the interest u/s. 201(1A) was levied which was also paid by the assessee.
34. We have also perused the provisions of sec. 271-C of the Act. It reads as under:
"(1) if any person fails to
(a) deduct the whole or any part of the tax as required by or under the provisions of Chapter XVII-B;
or
(b) pay the whole or any part of the tax as required by or under:-
(i) sub-section (2) of section 115-O or (ii) second proviso to section 194-B, then, such person shall be liable to pay, by way of penalty, a sum equal to the amount of tax which such person failed to deduct or pay as aforesaid, (2) Any penalty imposable under sub-section (1) shall be imposed by the Joint Commissioner."
35. The section postulates a condition for levying of penalty u/s.271-C, i.e. if the assessee has failed to deduct the whole or any part of the tax as required by or under the provisions of Chapter XVII- B. The assessee can always have a bona fide belief that as the taxes have been deducted at source, there was no default on the part of the assessee and, no penalty u/s. 271-C was warranted.
36. Even assuming that there was a minor default of non-deducting the tax at source at the time when the amount was transferred to interest payable account, though there was no liability of the assessee to transfer this amount to such account, the default was venial in nature. While relying on the ratio laid down by the Hon'ble Supreme Court in the case of Hindustan Steels Ltd. reported in 83 ITR 26, the assessee could always claim bona fide and there is nothing unreasonable in such claim.
37. Looking to these facts, we are of the considered opinion that the assessee had reasonable cause in not adhering to the provisions of sec. 194A read with sec. 271-C of the Act and the assessee's explanation being bona fide, was covered by section 273-B of the Act, Under these circumstances, no penalty u/s. 271-C of the Act was warranted. We, therefore, cancel the penalty u/s. 271-C sustained by the learned CIT(Appeals) for all the years".
4. In view of the above facts and circumstances of the case, the penalty imposed by the learned CIT is liable to be quashed Accordingly, we delete the penalty imposed under sec. 271-C and allow all the four appeals filed by the assessee.
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