2015 (11) TMI 630 - AT - Income Tax

Penalty levied under section 271C - assessee had not deducted tax at source under section 194A on interest payment - Held that - As per the provisions of section 194A(3)(iii)(f) no tax is to be deducted at source on income by way of interest which are credited or paid to such other institutions, association or body which the Central Government may notify in this behalf in the special gazette. For the purpose of section 194A(3)(iii)(f) Notification No. S. O. 3489 dated October 22, 1970, lists a number of undertakings which includes any undertaking or body including a society registered under the Societies Registration Act 1860, financed wholly by the Government PEC University is claiming exemption under section 10(23C)(iiiab) of the Act. Section 10(23C)(iiiab), grants exemption from tax to incomes of educational institutions which are wholly or substantially financed by the Government. Undisputedly therefore PEC University is wholly or substantially financed by the Government. Therefore even as per the provisions of section 194A(3)(iii)(f) no tax was required to be deducted at source on the interest paid to it by the assessee. Since both as per the provisions of section 197A and section 194A(3)(iii)(f) the impugned payment was not to be subjected to tax deduction at source. No penalty under section 271C was therefore leviable. - Decided against revenue.

Summary

Issues:
Deletion of penalty under section 271C of the Income-tax Act 1961.

Analysis:
The appeal was filed by the Revenue against the deletion of penalty under section 271C of the Income-tax Act 1961. The issue revolved around the failure of the assessee to deduct tax at source under section 194A on interest payment during the impugned assessment year. The Assessing Officer levied a penalty of &8377; 19,70,098, equal to the amount of tax not deducted by the assessee. However, the penalty was deleted by the Commissioner of Income-tax (Appeals) based on the argument that the interest payment was made to an institution exempt under section 10(23C)(iiiab) and thus not subject to tax deduction at source under section 194A. The appellant contended that the institution was not wholly financed by the Government, challenging the benefit claimed under the notification. The Tribunal analyzed the provisions of section 271C, section 194A, and the relevant notifications to determine the applicability of tax deduction at source on the interest payment.

The Tribunal found that the payee, PEC University of Technology, was exempt under section 10(23C)(iiiab) and therefore eligible to receive payments without tax deduction at source. The notification referred in Circular No. 4 of 2002 listed various institutions exempt from tax deduction at source under section 197A. The Tribunal highlighted that PEC University fell under the category of institutions exempt from tax deduction at source. Additionally, the provisions of section 194A(3)(iii)(f) also supported the exemption from tax deduction at source for the interest payment made to such institutions. The Tribunal emphasized that since the institution was wholly or substantially financed by the Government, no tax deduction at source was required on the interest payment.

Furthermore, the Tribunal cited a previous judgment by the Chandigarh Bench of the Tribunal in a similar case, where the view supporting the exemption from tax deduction at source was affirmed. Based on the analysis of the provisions, notifications, and previous judgments, the Tribunal concluded that the order of the Commissioner of Income-tax (Appeals) was appropriate. Consequently, the appeal of the Revenue was dismissed, confirming the deletion of the penalty under section 271C of the Income-tax Act 1961.

In summary, the judgment addressed the issue of penalty deletion under section 271C concerning the failure to deduct tax at source on interest payment. The Tribunal examined the relevant provisions of the Income-tax Act, notifications, and previous judgments to determine the eligibility of the payee institution for exemption from tax deduction at source. The decision upheld the deletion of the penalty based on the institution's exemption under section 10(23C)(iiiab) and the provisions of section 194A and section 197A, ultimately dismissing the Revenue's appeal.