2016 (5) TMI 69 - AT - Income Tax

Penalty under section 271C - failure to deduct tax - Held that - In the present case, we find that the assessee has not been treated as an assessee-in-default as per section 201 of the Act and is, therefore, neither liable to deduct nor pay any tax as per Chapter XVII-B. In such circumstances, we find that the question of levy of penalty under section 271C does not arise. In view of the same we find no merit in the contention of the learned Departmental representative that the assessee had no reasonable cause for not deducting tax at source. Further, we hold that in lieu of the provisions of section 273B which states that no penalty shall be leviable in cases where reasonable cause for the default committed has been demonstrated, the penalty levied under section 271C is liable to be deleted. - Decided in favour of assessee

Summary

Issues Involved:
1. Levy of penalty under section 271C of the Income-tax Act, 1961.
2. Whether the penalty is barred by limitation.

Issue-wise Detailed Analysis:

1. Levy of Penalty under Section 271C:

The assessee, a company engaged in power generation, transmission, and distribution, failed to deduct tax at source on payments made to Power Grid Corporation of India Ltd. (PGCIL). A TDS inspection revealed this non-compliance, leading to the imposition of penalties under section 271C for the financial years 2006-07 to 2009-10. The Commissioner of Income-tax (Appeals) upheld these penalties, rejecting the assessee's contention that they had reasonable cause for not deducting tax at source and that they were not treated as an assessee-in-default under section 201.

The Tribunal examined whether the penalty under section 271C was justified. According to section 271C, a penalty is imposed for failing to deduct tax as required by Chapter XVII-B, quantified as the amount of tax not deducted. Section 201, part of Chapter XVII-B, states that if the recipient of income has paid the tax, the payer shall not be treated as an assessee-in-default.

In this case, PGCIL had paid the taxes on the income received, and the assessee was not treated as an assessee-in-default under section 201. The Tribunal noted that since the assessee was not liable to deduct or pay any tax under Chapter XVII-B, the question of penalty under section 271C did not arise. This view was supported by the Income-tax Appellate Tribunal Hyderabad in the case of Asst. CIT v. Good Health Plan Ltd., where penalty under section 271C was deleted as the assessee was not held to be an assessee-in-default.

Moreover, the Tribunal found that the assessee had a bona fide belief that further tax deduction would result in double taxation, as PGCIL had already collected due taxes. The Delhi High Court in Woodward Governor India P. Ltd. v. CIT explained "reasonable cause" as an honest belief founded on reasonable grounds. The Tribunal held that the assessee had demonstrated reasonable cause for not deducting tax at source, thus invoking the provisions of section 273B, which states that no penalty shall be imposed if reasonable cause is shown.

In conclusion, the Tribunal deleted the penalty levied under section 271C, finding that the assessee was not in default concerning the amount of tax and had reasonable cause for the non-deduction of TDS.

2. Penalty Barred by Limitation:

The assessee argued that the penalty was barred by limitation. However, since the Tribunal deleted the penalty under section 271C, this ground became academic and was not adjudicated.

Outcome:

The Tribunal partly allowed the appeals, deleting the penalties under section 271C and dismissing the ground related to the penalty being barred by limitation as academic. The order was pronounced on December 10, 2015.