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2014 (10) TMI 170 - AT - Income TaxLevy of penalty u/s 271C Non-deduction of TDS on interest payment to partnership firm Levy of interest u/s 201(1) and 201(1A) - Revenue was of the view that the assessee had to deduct tax u/s 194A in respect of interest paid to the partnership firm in which the assessee is a partner - Held that - following the decision in Thomas Muthoot Versus Joint Commissioner of Income-tax (TDS), Trivandrum 2013 (12) TMI 298 - ITAT COCHIN - the assesees being individuals, have paid interest to the partnership firm, in which they are partners - the partner and firms re not two legal entities and further in view of the exemption provided in sec.194A in respect of interest credited or paid by a partnership firm to its partners, the assessees were under the belief that they are not liable to deduct tax at source - the assessees cannot be altogether be discounted with as untenable, since the issue that the TDS provisions shall not apply to the payment made by a partner to the partnership firm is a debatable one. The belief entertained by the assessees that they were not liable to deduct tax at source on the interest paid by them to the partnership firm in which they are partners, can be considered as a reasonable cause in view of the legal position existing between a partner and the partnership firm - the partners and partnership firm are not two different legal entities, though they are two different taxable entities - the partnership firm, which received interest from the assessees have duly included the same in its return of income filed before the department and the said partnership firm was not liable to pay any tax, since it declared loss - no loss is caused to the revenue - the explanation offered by the assessee fits in the category of reasonable cause in terms of sec.273B of the Act thus, the order of the CIT(A) is set aside and the AO is directed to delete the penalty levied u/s 271C of the Act in the hands of both the assessees Decided in favour of assessee.
Issues Involved:
1. Levy of interest under Section 201(1) & 201(1A) for non-deduction of tax at source. 2. Levy of penalty under Section 271C for non-deduction of tax at source on interest payments to a partnership firm. Issue-wise Detailed Analysis: 1. Levy of Interest under Section 201(1) & 201(1A): The primary issue in ITA No. 164/Coch/2013 concerns the levy of interest under Sections 201(1) & 201(1A) for the assessment year 2009-10 due to the assessee's failure to deduct tax while making interest payments to partnership firms. The assessee argued that since the recipient of the income had already paid the tax and surcharge, he should not be considered in default. Additionally, the assessee contended that the income of the recipient did not exceed Rs. 1 crore, thus negating the need to deduct tax on surcharge. The department countered that partners and partnership firms are separate assessable units under the Income-tax Act. Hence, any interest payment by an individual partner to the firm mandates tax deduction under Section 194A. The Tribunal clarified that Section 194A exempts individuals and HUFs from tax deduction except when their gross receipts exceed the limits prescribed under Section 44AB. Since the assessee's gross receipts exceeded this limit, he was required to deduct tax. The Tribunal also noted that the question of reasonable cause for non-deduction of tax should be evaluated under Section 273B at the time of penalty imposition, not for interest levy. The Tribunal found that the CIT(A) erred in distinguishing the Tribunal's previous order regarding non-deduction of tax on surcharge. The Tribunal remitted the issue back to the assessing officer to verify if the recipient had paid the taxes, including surcharge, and to decide accordingly after providing the assessee a reasonable opportunity for a hearing. 2. Levy of Penalty under Section 271C:The remaining appeals pertain to the levy of penalty under Section 271C for non-deduction of tax on interest payments by the assessees to their partnership firms. The assessees argued that they were under a bona fide impression that tax deduction was not required. They cited a previous Tribunal decision in similar circumstances where the penalty was deleted, as the partners believed that the payment by the partners to the firm was also exempted under Section 194A(3)(iv). The department maintained that the exemption under the Income-tax Act applies only to payments by the firm to the partner, not vice versa. Therefore, there was no reasonable cause for not deducting tax. The Tribunal referred to a previous decision in the assessees' own case, where it was held that the belief that tax deduction was not required constituted a "reasonable cause" under Section 273B. The Tribunal emphasized that the partner and the firm are not two separate legal entities, though they are separate taxable entities. Additionally, since the partnership firm had declared the interest paid as income and ended up with a loss, no revenue loss occurred. In light of these considerations, the Tribunal found the explanation offered by the assessees as a "reasonable cause" under Section 273B. Consequently, the Tribunal set aside the CIT(A)'s orders and directed the deletion of the penalty levied under Section 271C in all appeals. Conclusion:All the appeals filed by the assessees were allowed. The Tribunal remitted the issue of non-deduction of tax back to the assessing officer for reconsideration and deleted the penalties levied under Section 271C, citing reasonable cause for the assessees' failure to deduct tax. Order pronounced in the open court on this 24th September, 2014.
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