2010 (5) TMI 653 - AT - Income Tax

TDS - penalty under section 271(1)(c) on the disallowance - assessee had made payment of royalty, advertisement and publicity, audit fee and recruitment expenses on which tax at source has not been deducted - auditors of the assessee had itself quantified these payments as inadmissible under section 40(a)(ia) of the Income-tax Act - books of account were finalised on October 29, 2005 and these liabilities were provided for, tax has been deducted in October, 2005 and paid in November, 2005. These should have been added to this year s taxable income and allowed in the next year s taxable income - Assessing Officer disallowed the payment for the current year and remarked that the amount will be allowed in the next assessment year Held that - if the contention of the Revenue is accepted then in case of every return where the claim is not accepted by the Assessing Officer for any reason, the assessee, will invite the penalty under section 271(1)(c). This is clearly not the intendment of the Legislature, orders set aside and delete the levy of penalty, appeal filed by the assessee is allowed.

Summary

Issues:
1. Levy of penalty under section 271(1)(c) on disallowance of Rs. 7,15,276.

Analysis:
The appeal was against the Commissioner of Income-tax (Appeals)'s decision upholding the penalty under section 271(1)(c) on the disallowance of Rs. 7,15,276 for the assessment year 2005-06. The Assessing Officer disallowed the employees' share of provident fund not deposited on time and certain payments on which tax at source was not deducted. The Assessing Officer initiated penalty proceedings under section 271(1)(c) based on these disallowances. The auditors identified the payments as inadmissible under section 40(a)(ia) of the Income-tax Act, but the assessee claimed that the tax was deducted and paid in the subsequent year. The Assessing Officer disallowed the payments for the current year, stating they would be allowed in the next assessment year. Consequently, a penalty of Rs. 3,83,000 was levied.

Upon appeal, the Commissioner deleted the penalty for the provident fund delay but confirmed it for the disallowed expenditure. The Commissioner relied on a Supreme Court decision in Union of India v. Dharamendra Textile Processors. The Tribunal noted that the assessee's case did not involve concealment or furnishing of inaccurate particulars. The Tribunal cited Hindustan Steel Ltd. v. State of Orissa to emphasize that penalties are not imposed for technical breaches or bona fide beliefs of non-liability. The Tribunal concluded that the penalty was not justified as there was no deliberate defiance of law or dishonest conduct.

The Tribunal also distinguished the Dharamendra Textile case, emphasizing that it did not apply to the present situation. Referring to CIT v. Atul Mohan Bindal, the Tribunal clarified that penalties under section 271(1)(c) are not automatic when a claim is not accepted by the Assessing Officer. The Tribunal highlighted that mens rea was not a requirement for penalties under this section. Considering the legal precedents and the circumstances, the Tribunal set aside the lower authorities' decisions and deleted the penalty of Rs. 7,15,276.

In conclusion, the Tribunal allowed the appeal filed by the assessee, emphasizing that penalties under section 271(1)(c) should not be imposed in cases where there is no deliberate defiance of the law or dishonest conduct, especially when the non-compliance arises from a bona fide belief or technical breach.