2005 (9) TMI 541 - AT - Income Tax

Summary

Issues Involved:
1. Sustenance of penalty under section 271C of the Income-tax Act, 1961.
2. Non-deduction of TDS by the assessee.
3. Bona fide belief regarding non-applicability of TDS provisions due to DTAA.
4. Department's failure to respond to the assessee's queries.
5. Reasonable cause for non-deduction of TDS.

Issue-wise Detailed Analysis:

1. Sustenance of Penalty under Section 271C:
The primary issue in this case is the sustenance of a penalty amounting to Rs. 1,65,78,889 imposed by the Additional Commissioner of Income-tax (Addl. CIT) under section 271C of the Income-tax Act, 1961. The penalty was imposed due to the assessee's failure to deduct TDS on various payments, including rent, salary, and contractual payments.

2. Non-deduction of TDS by the Assessee:
A survey operation under section 133A of the Income-tax Act, 1961, revealed that the assessee, operating between India and Russia, had not been deducting TDS as required by Chapter XVII of the Income-tax Act. The assessee had not filed any return of TDS in previous years and, in response to a notice from the Assessing Officer, filed a return in Form No. 26J for rental payments on 29-7-1999. The Assessing Officer passed an order under section 201(1A) and required the assessee to file proof of payment of taxes.

3. Bona Fide Belief Regarding Non-applicability of TDS Provisions Due to DTAA:
The assessee argued that it was under a bona fide and reasonable belief that TDS provisions were not applicable due to the Double Taxation Avoidance Agreement (DTAA) between India and Russia. The assessee cited a no-objection certificate issued by the CIT dated 20th July 1994, which stated that Aeroflot Airlines was exempt from payment of income-tax in India as per the DTAA.

4. Department's Failure to Respond to the Assessee's Queries:
The assessee contended that it had sought specific instructions from the Department regarding its TDS liability through letters dated 22nd May 1995 and 23rd March 1996. However, the Department did not provide any instructions, leading the assessee to believe that it was not required to deduct TDS.

5. Reasonable Cause for Non-deduction of TDS:
The Tribunal found that the assessee had a reasonable cause for not deducting TDS. The Tribunal noted that the revenue had never required the assessee to deduct tax on rentals paid by it. The assessee's belief was based on the DTAA and the no-objection certificate. The Tribunal also observed that the assessee had sought instructions from the Department but did not receive any. The Tribunal cited several cases, including Mitsui & Co. Ltd., Marubeni Corpn., and Itochu Corpn., where similar bona fide beliefs and reasonable causes were accepted.

Conclusion:
The Tribunal concluded that the assessee had established a reasonable cause for not deducting TDS and that the penalty under section 271C was not justified. The Tribunal set aside the findings of the CIT(A) and canceled the penalty imposed by the Assessing Officer. The appeal was allowed in favor of the assessee.