2004 (5) TMI 53 - HC - Income Tax

Penalty imposed under section 271C - failure to deduct the tax at source on payment made to employees outside India. Tribunal was of opinion that there was a reasonable cause for not deducting the tax at source on account of emoluments paid to the expatriate employees outside India and hence no penalty under section 271C is exigible by the alleged default - the action of the authorities in not levying the penalty/dropping proceedings cannot be said to be unreasonable. Considering the limited jurisdiction as well as limited scope for interference in a writ petition, we do not find any justification to interfere with orders holding that penalty was not leviable Revenue s appeal is dismissed

Summary

Issues:
- Whether the Tribunal was right in law in cancelling the penalty imposed under section 271C of the Income-tax Act, 1961?

Analysis:
The High Court of Delhi dealt with the issue of cancelling the penalty imposed under section 271C of the Income-tax Act, 1961. The case involved a company incorporated in Japan with a liaison office in Delhi that had deputed Japanese employees to work in India. The company paid remuneration to these employees based on its global compensation policies but failed to reflect these payments in the Indian return or deduct taxes at the source. The Assessing Officer imposed a penalty under section 271C for this failure. However, the Tribunal, after examining the evidence and standards of cooperation, concluded that the company had cooperated with the tax department and had a reasonable cause for not deducting tax at source. The Tribunal held that no penalty was exigible under section 271C due to a reasonable cause for non-compliance.

In determining whether the appeals raised a substantial question of law, the High Court referred to the case of Azadi Bachao Andolan v. Union of India. The court emphasized that what constitutes "reasonable cause" for not deducting tax at source is a question of fact and depends on the circumstances of each case. The court highlighted that reasonable cause should prevent a person of average intelligence and ordinary prudence from acting negligently or in bad faith. The court held that the Tribunal's decision on the existence of a reasonable cause was a question of fact and no substantial question of law arose from it.

The High Court further cited the case of Woodward Governor India (P.) Ltd. v. CIT to reiterate the concept of "reasonable cause." The court concluded that the issue of whether there was a reasonable cause for the assessee not to deduct tax at source was a question of fact determined by the Tribunal. Therefore, the High Court dismissed all the appeals, emphasizing that no substantial question of law arose from the Tribunal's decision on the existence of a reasonable cause for non-compliance with tax deduction at the source requirements.