2013 (8) TMI 135 - AT - Income Tax

Levy of penalty u/s 271(1)(c) - payment of fee for technical services to non-resident without deduction of TDS thus disallowance u/s 40(a)(i) - technical default of delay in payment - Penalty upheld by CIT(A) - Held that - The facts as stated by the CIT(A), rather than being adverse to the assessee favour it. This is as it is clear that the assessee was of the clear view that tax was not deductible on the said payment. Accordingly, neither any tax stood deducted, nor paid to the credit of the Central Government. It is only subsequently, on being so pointed out by the tax auditor, that the said default came to light, and the assessee realized his mistake in having not deposited the tax on the impugned sum. The matter stands duly reported by the tax auditor in his report u/s.44AB, and which accompanies and forms part of the assessee s return of income. How could, therefore, it be said that the assessee has not disclosed the correct particulars of its income. Further, following the advice of its tax advisor, tax has also been deposited to the account of the Government on 20.11.2003, prior to the filing of the return for the relevant year on 27.11.2003. No doubt, it does not explain the basis of the claim for the current year; the provision itself providing for the contingency and consequence of delayed payment, deferring the claim to the year of actual payment the fact remains that the deduction becomes exigible for the subsequent year. The assessee would be entitled to claim the deduction for the immediately succeeding year, and which it has ostensibly not. In terms of the provision itself, therefore, it becomes a case of satisfaction of the principal condition for deduction, i.e., the payment of TDS, though subsequently. It is this that prompted us to state of the provision as having been substantially complied with. It would decidedly be a different matter if the provision made no such exception, as in that case there would be no question of the principal condition of the payment having been met and, thus, of the assessee being substantially compliant. This, therefore, serves as a valid explanation under Explanation (1B) to section 271(1)(c). In favour of assessee.

Summary

Issues:
1. Appeal against the Order by the Commissioner of Income Tax (Appeals) partly allowing the levy of penalty u/s.271(1)(c) for A.Y. 2003-04.
2. Disallowance of fees for technical services (FTS) under section 40(a)(ia) on account of non-payment of TDS.
3. Bona fides of the assessee in claiming deduction and subsequent payment of TDS.
4. Interpretation of provisions under section 40(a)(i) regarding disallowance of specific sums payable to non-residents.

Detailed Analysis:
1. The appeal was directed against the order of the Commissioner of Income Tax (Appeals) for the assessment year 2003-04, concerning the levy of penalty u/s.271(1)(c). The appellant contested the disallowance of fees for technical services (FTS) under section 40(a)(ia) due to non-payment of TDS. The appellant argued that the TDS was paid before the due date of filing the return, citing a retrospective amendment by the Finance Act, 2010. The Revenue contended that the appellant's case lacked bona fides and that the penalty was rightly confirmed by the Commissioner of Income Tax (Appeals).

2. The Tribunal noted that the disallowance was under section 40(a)(i) for payment to a non-resident, not section 40(a)(ia). The appellant's counsel's argument regarding the deposit of TDS before the return filing date was deemed irrelevant as per the provisions. The Tribunal emphasized that the appellant's explanation for the default leading to disallowance was crucial. It was observed that the appellant rectified the mistake upon the tax auditor's report and deposited the TDS before the return filing date, indicating bona fides. The Tribunal highlighted the importance of furnishing a reasonable explanation for default to avoid penalty under section 271(1)(c).

3. The Tribunal acknowledged precedents where penalty was upheld due to lack of basis for legal claims. However, in this case, the subsequent deposit of TDS was considered a mitigating factor, demonstrating substantial compliance with the provision. The Tribunal emphasized that the appellant's conduct, though not explained in a certain manner, did not warrant penalty as the primary facts were disclosed during assessment proceedings. The Tribunal concluded that the penalty under section 271(1)(c) for non-deduction of tax on FTS payment was not justified, and the appellant's appeal was allowed.

In conclusion, the judgment analyzed the issues surrounding the disallowance of fees for technical services and the interpretation of provisions under section 40(a)(i) in detail, emphasizing the importance of bona fides and reasonable explanations in penalty proceedings under section 271(1)(c) of the Income Tax Act, 1961.