The Karnataka High Court has quashed the penalty for non-deduction of TDS on professional advice.The court found that the regular assessee’s application for an advance decision was not handled by the Chairman of the Advance decision Authority for personal reasons and ordered that comply with TDS are unchallengeable since all of them are undeniably good grounds to leave it unchanged.
The bench of Justice Krishna S Dixit and Justice G Basavaraja has observed that the non-deduction of tax was due to the bona fide belief formed based on the legal opinion obtained at the hands of M/s.Singhania & Co., a Law Firm of repute; and the opinion of a Chartered Accountant’s Firm namely Lovelock & Lewis.
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The respondent/assessee, Jindal Tractebel Power Co. Ltd., failed to deduct TDS on the funds owed to M/s. Raython Ebaseo Overseas Ltd., a likely foreign entity (USA), under the terms of the offshore equipment supply and services contract. It did this based on expert opinion that as no income is considered to accrue or arise in India as a result of the relevant offshore contract, no tax must be withheld through TDS.
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Order under section 201(1) of the Act was passed by the ACIT (TDS) for the two Assessment Years on the ground that the Assessee failed to deduct and pay taxes on time in respect of payments made to REOL on account of the contract in question. Interest under section.201(A) was also levied for the said default. The DCIT (TDS) initiated penalty proceedings under section.271(C) for failure to deduct tax.
Disregarding the explanation offered by the respondent herein, penalty came to be levied under section.271(C) for the subject years and that was confirmed on appeal. However, the ITAT agreed with the explanation offered by the respondent and granted relief to it observing that the non-deduction of TDS was not tainted with mala fide; there is reasonable cause shown for not deducting.
The Revenue justified the said order of the CIT(A) before the Tribunal contending that initially TDS having been deducted was remitted and only subsequently deduction has not been done; there is absolutely no justification whatsoever for not effecting deduction; the explanation offered by the entity does not constitute a reasonable cause in terms of Sec.273(B) of the Act and therefore penalty ought to have been sustained in terms of Sec.271(C) of the Act. This having not being acceded to by the Tribunal, the Revenue is in appeal before us.
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The Joint Commissioner can impose penalty in a sum equal to the amount of tax not deducted or paid. Sec.273B which begins with a non obstante clause as amended by Act 46 of 1986 w.e.f. 10.09.1986 provides that no penalty is imposable for any failure to deduct or pay tax deducted, if the Assessee proves that there was a reasonable cause for that.
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The effect of this section is to cast the initial burden on the assessee to prove that he had a reasonable cause for the failure referred to in the various sections; thereafter, the officer has to consider whether the explanation offered by the assessee or other person as regards the reason for failure was on account of a reasonable cause, and non-consideration of assessee’s explanation would vitiate the order.
Before the Tribunal, the department defended the CIT(A) ruling by arguing that TDS had already been deducted and had been remitted, and that only a further deduction had not been made. There isn’t a single rationale for not influencing deduction. The penalty should have been imposed in accordance with Section 271(C) of the Income Tax Act since the entity’s explanation does not qualify as a reasonable cause under Section 273(B) of the Act. The department’s argument was rejected by the ITAT.
The appeal by the department questioning the order of ITAT to the extent of levy of penalty under section.271C of the Income Tax Act, 1961, was set aside.
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The court found that the regular assessee’s September 11, 1997, application for an advance decision was not handled by the Chairman of the Advance decision Authority for personal reasons. The possible advantage for the respondent of not deducting the tax at source is another factor to take into account. Orders that comply with TDS are unchallengeable since all of them are undeniably good grounds to leave it unchanged.
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