2015 (7) TMI 955 - HC - Income Tax

Penalty levied under Sec.271C - Non deduction of TDS on interest paid thus violation of Section 194A - Whether in the light of the specific exemption provided in section 194A (3)(iv) to such income credited or paid by a firm to a partner of the firm, the assessee is reasonably entitled to entertain the belief that payment of interest by the partners to the firm is similar or similarly placed? - ITAT deleted penalty levy - Held that - While Section 194A provided for deduction of tax on interest, by virtue of the provisions contained in sub section (3), only such income credited or paid by a firm to a partner of the firm is exempted from deduction. The language of the provision does not leave scope for any ambiguity on the liability of a partner to deduct tax on interest paid by him to the firm and there is absolutely no warrant for a belief to the contrary. That being the legal position, we do not know how the assessees, who admittedly are persons having the services of experienced chartered accountants at their disposal, could entertain a belief that they were not liable to deduct tax at source on the interest paid to the firm. This, therefore, means that the alleged belief of the assessees is certainly not one a reasonable person would have entertained nor such persons would have acted in the same way given the totality of circumstances. Therefore, we cannot accept the plea that the belief allegedly entertained by the assessees was a bonafide one or could be accepted as a reasonable cause as provided under Section 273B. In effect, the defence put forward by the assessees is one of ignorance of law. Ignorance of law, it is trite, is no excuse in law and if that be so, ignorance of law cannot also be a reasonable cause as contemplated under Section 273B. As contended by assessee it may be true that penalty levied under section 201 read with Section 221 has been set aside by the Tribunal accepting the plea of good and sufficient reasons urged by the assessees. However, the object of these provisions being different from section 194A read with Section 271C, such an order passed by the Tribunal cannot come to the rescue of the assessees. In any case, principles of res-judicata and estoppel are alien to tax jurisprudence and therefore, this contention also cannot improve the case of the assessees. One another reason which has weighed with the Tribunal is that the firm had declared the interest received in its return and that since the firm had returned loss and was not liable to any tax, no loss was caused to the revenue. In our view, even if the findings are factually correct, statutory provisions do not recognize this as a defence in a proceeding under Section 271C. Thus the orders of the Tribunal are unsustainable - Decided in favour of revenue.

Summary

Issues:
1. Challenge to the order of the Income Tax Appellate Tribunal by the Revenue.
2. Penalty levied under Section 271C for failure to deduct tax at source.
3. Interpretation of the term "reasonable cause" under Section 273B of the Income Tax Act.

Issue 1: Challenge to the Tribunal's Order
The Revenue challenged the common order passed by the Income Tax Appellate Tribunal, Cochin Bench in ITA Nos. 385/Coch/2011 and 391/Coch/2011. The Tribunal had set aside the penalty levied under Section 271C and allowed the appeals of the respondents, who were partners of a firm that had drawn funds and paid interest without deducting tax at source.

Issue 2: Penalty under Section 271C
The penalty under Section 271C is imposed when a person fails to deduct tax as required under Chapter XVII-B of the Income Tax Act. However, Section 273B provides an opportunity to escape penalty by proving a reasonable cause for the failure. The term "reasonable cause" is not defined in the Act but requires proof that the failure was beyond the control of the assessee. Various court judgments have interpreted "reasonable cause" to mean a cause preventing a person of average intelligence and prudence from complying with the law.

Issue 3: Interpretation of "Reasonable Cause"
The respondents claimed they were not aware of their liability to deduct tax at source on interest paid to the firm. However, the court found this belief to be unreasonable, as the law clearly mandated tax deduction. Ignorance of the law was not accepted as a reasonable cause, as established in previous court decisions. The court also rejected the argument that the exclusion of individuals under Section 194A applied to the respondents, as the facts required to support this claim were not established.

In conclusion, the court held that the Tribunal's order was unsustainable, setting it aside and allowing the appeals in favor of the Revenue. The court emphasized that the only escape from penalty under Section 271C is by proving a "reasonable cause" as provided in Section 273B, and other factors such as the firm's tax liability or declaration of income were irrelevant in this context.