2011 (7) TMI 666 - HC - Income Tax

Bonafide faliure for non deduction of tax on payments made to non members by Co-operative banks- AO Levied penalty-CIT(A) cancelled the order - Tribunal affirmed CIT(A) - Revenue further appealed - Held that - In view of Income Tax Vs. Eli Lilly & Company (India) Pvt Ltd. & Ors (2009 -TMI - 32752 - SUPREME COURT)- 273B states that notwithstanding anything contained in section 271 - no penalty shall be imposed on the person or the assessee for failure to deduct tax at source if such person or the assessee proves that there was a reasonable cause for the said failure. Therefore, the liability to levy of penalty can be fastened only on the person who do not have good and sufficient reason for not deducting tax at source. Only those persons will be liable to penalty who do not have good and sufficient reason for not deducting the tax. Thus appeal stands dismissed.

Summary

Issues:
1. Penalty under Section 271C imposed by Assessing Authority.
2. Ignorance of law as a reasonable cause for non-deduction of tax at source.
3. Interpretation of Section 273-B in relation to penalty imposition.
4. Application of Section 194A(3) exemption to Co-operative Banks for TDS.

Issue 1: Penalty under Section 271C:
The case involves an appeal by the Revenue against the Tribunal's decision rejecting an appeal filed by the Revenue challenging the deletion of penalty under Section 271C imposed by the Assessing Authority. The Assessing Authority levied a penalty of Rs.1,41,162-00 on the Co-operative Bank for failure to deduct tax at source on interest payments for the assessment year 2001-02.

Issue 2: Ignorance of law as a reasonable cause:
The Co-operative Bank argued that the non-deduction of tax was due to a bonafide mistake as they believed they were not liable to deduct tax at source for both members and non-members. The Bank contended that upon realizing the mistake during a survey, they promptly paid the tax with interest. The Commissioner of Income Tax (Appeals) accepted this explanation as a reasonable cause for non-deduction, leading to the deletion of the penalty.

Issue 3: Interpretation of Section 273-B:
The legal argument centered on the interpretation of Section 273-B, which provides that no penalty shall be imposed if the assessee proves reasonable cause for non-compliance with TDS provisions. The Court referred to a Supreme Court judgment emphasizing that the liability to levy a penalty under Section 271C can only be imposed on those without a good and sufficient reason for not deducting tax at source. The burden of proof lies on the assessee to show a reasonable cause for non-compliance.

Issue 4: Application of Section 194A(3) exemption:
The Co-operative Bank relied on Section 194A(3) which exempts Co-operative Societies from deducting tax at source on interest payments to members and other Co-operative Societies. The Bank argued that their failure to deduct tax from non-members was a bonafide mistake due to a misinterpretation of this provision. The Court upheld the Tribunal and Appellate Commissioner's decision that the Bank's explanation constituted a reasonable cause, thereby justifying the deletion of the penalty.

In conclusion, the Court dismissed the Revenue's appeal, affirming that the Co-operative Bank's bonafide mistake, prompt payment of tax upon discovery, and compliance with Section 273-B requirements justified the deletion of the penalty under Section 271C.