2014 (9) TMI 1171 - AT - Income Tax

Penalty u/s 271C - disallowance under section 40(a)(ia) - assessee paid interest to non banking financial institution and did not deduct tax - bonafide belief - Held that - Assessing Officer made disallowance under section 40(a)(ia) and other additions were also made in the assessment order which are accepted by the assessee and the demand raised as per assessment order has been paid. Therefore these circumstances would clearly reveal that the assessee has reasonable cause for failure to comply with the provisions of section. Therefore in view it being a beginning of the assessee for failure to deduct tax and then the assessee in future has starting deducting TDS would suggest that the penalty may not be imposed in the aforesaid case. Considering the above discussion we are of the view that the levy of penalty in the facts and circumstances of the case is not warranted. We accordingly set aside the orders of the authorities below and cancel the penalty. - Decided in favour of assessee.

Summary

Issues:
Penalty under section 271C of the Income Tax Act for failure to deduct TDS on payments made to non-banking financial institution.

Analysis:
The appeal was filed against the order confirming the penalty under section 271C of the Income Tax Act for the assessment year 2008-09. The assessee argued that he was under a bonafide belief that TDS was not required to be deducted on payments made to non-banking financial institutions, citing a Supreme Court decision. However, the CIT (Appeals) found the contention unsubstantiated and dismissed the appeal.

Upon hearing both parties, it was noted that the assessee had already been penalized for the failure to deduct TDS at the time of assessment. The assessee admitted the mistake, paid the taxes, and started deducting TDS in the future. The counsel argued that the failure to deduct TDS was due to a bonafide belief that no TDS was required on payments to non-banking financial institutions. Section 273B of the Income Tax Act allows for no penalty if reasonable cause is proven for the failure. It was observed that the assessee had a reasonable cause for the failure as evidenced by the circumstances and actions taken post-realization of the mistake. The Tribunal concluded that the penalty was not warranted in this case and accordingly canceled the penalty.

In conclusion, the Tribunal allowed the appeal filed by the assessee, setting aside the orders of the lower authorities and canceling the penalty imposed under section 271C of the Income Tax Act.