2010 (2) TMI 692 - HC - Income Tax

Penalty u/s 271C(1)(a) - TDS on amount in addition to salary and perks - taxes were paid by the respondent-company and explaining the reasons for not deducting the tax at source that it was not liable to deduct the tax sought for closure of the proceedings - Assessing Officer has failed to consider the cause shown by the assessee in his order - Decided in favour of the assessee by way of remand

Summary

Issues:
Appeals pertaining to different assessment years; Failure to deduct tax at source; Proceedings under section 271C(1)(a) and 272A(2)(c) initiated against the assessee; Relief granted by the Income-tax Appellate Tribunal; Questions of law framed for consideration.

Analysis:
The appeals before the Karnataka High Court involved the same assessee for various assessment years. The Revenue challenged the order passed by the Income-tax Appellate Tribunal regarding the failure to deduct tax at source by the assessee. The respondent-company, incorporated in Japan, had deputed its employees to work in an Indian company, and issues arose regarding tax deductions on payments made by the respondent in Japan. The Assessing Officer initiated proceedings under section 271C(1)(a) against the Indian company for not deducting tax at source, later extending the proceedings to the respondent/assessee. The respondent contended that it was not aware of the requirement to deduct tax at source initially but later paid the taxes upon realizing the legal obligation. The Tribunal granted relief to the assessee, leading to appeals by the Revenue.

The main contention of the Revenue was that the Tribunal erred in granting relief to the assessee, arguing that the Assessing Officer was justified in initiating penalty proceedings under sections 271C(1)(a) and 272A(2)(c). The Revenue claimed that the cause shown by the respondent was not properly considered. Conversely, the respondent argued that the payments made in Japan were not salary and thus not subject to tax deduction at source. The respondent, being a foreign company, believed it was not required to deduct tax initially but paid upon understanding the legal position. The respondent requested the court to dismiss the appeals.

The High Court observed that the Assessing Officer and the Commissioner of Income-tax (Appeals) failed to adequately consider the cause shown by the assessee. The Tribunal, while granting relief, did not thoroughly assess the cause shown by the assessee, leading to a need for reconsideration of the case. Citing a Supreme Court judgment, the High Court emphasized the importance of proving a reasonable cause for failure to deduct tax at source. As the cause shown by the assessee was not properly considered by the authorities, the matter was remanded to the Assessing Officer for a fresh review, allowing the respondent to submit additional replies or causes. The High Court directed the Assessing Officer to reconsider the case in light of the cause shown by the assessee and the substantial questions of law framed by the court.

In conclusion, the High Court disposed of the appeals by remanding the matter to the Assessing Officer for a reevaluation, emphasizing the need to consider the cause shown by the assessee in detail and in accordance with the law and the court's directions.