2016 (8) TMI 169 - HC - Income Tax

Penalty u/s 271C - non deduction of tds - bonafide mistake - Held that - A perusal of the impugned orders of the CIT(A) and the ITAT in the penalty proceedings reveals that neither of the said authorities considered the issue whether in fact there was reasonable cause for the Appellant to not have deducted TDS under Section 194-I of the Act. The ITAT on its part appears to have relied on the order passed by it on 12th July 2002 in the quantum proceedings, where it commented on the lack of bona fide plea/reasonable cause for the Appellant to deduct TDS under Section 194-C of the Act. This part of the order of the ITAT was in fact commented upon by this Court in its order dated 21st May 2004 while declining to frame a question of law in the appeal filed by the Assessee. The Court, however, clarified that the observations of the ITAT relating to bona fide belief/reasonable cause was of no consequence. The Court is unable to agree with the submission of Mr. Singh that the Assessee could not plead ignorance of law in view of the CBDT Circulars dated 8th August and 22nd August 1995. The CBDT s circulars were at best the opinion of the CBDT and to the extent they were adverse to the Appellant, they were not binding on the Appellant. However, they were binding on the Revenue. As far as the Appellant was concerned, it was entitled to challenge the CBDT s circulars which did not support its case. In fact that is what the Appellant did in the present case. It questioned the order of the AO under Section 201(1) and 201(1A) of the Act before the CIT(A), then before the ITAT and ultimately this Court. Therefore, it cannot be said that there was a deliberate failure on the part of the Appellant to deduct the TDS under Section 194-I of the Act. The facts remains that at the stage when the TDS had to be deducted the question whether TDS had to be deducted under Section 194-C or 194-I of the Act was not a settled one. This explains why the CBDT itself had to issue circulars clarifying the position. Even this Court was persuaded to again frame a question on the issue in its order dated 5th September 2005. For all of the above reasons, the Court is inclined to accept the plea of the Appellant that since the issue whether the TDS was to be deducted from warehouse charges under Section 194-C or 194-I of the Act was a debatable one, there was a reasonable cause for the failure of the Appellant to deduct TDS under Section 194-I of the Act at the time such deduction had to be made. - Decided in favour of the Appellant and against the Revenue.

Summary

Issues Involved:

1. Whether the ITAT was justified in holding that the penalty was rightly levied upon the assessee under Section 271-C of the Income Tax Act, 1961.
2. Whether the Appellant was justified in deducting TDS under Section 194-C rather than Section 194-I of the Income Tax Act.
3. Whether there was a reasonable cause for the failure to deduct TDS under Section 194-I of the Income Tax Act.

Detailed Analysis:

Issue 1: Justification of Penalty under Section 271-C

The appeal by Hindustan Coca Cola Beverages Pvt. Ltd. challenged the order of the ITAT, which upheld the penalty under Section 271-C for the failure to deduct TDS under Section 194-I. The court noted that the penalty under Section 271-C is attracted where a person fails to deduct the whole or any part of the tax as required by the provisions of the Act. The Appellant had deducted TDS under Section 194-C at 2% instead of the required 20% under Section 194-I, leading to a significant shortfall. Therefore, the penalty under Section 271-C was deemed applicable.

Issue 2: Justification for Deducting TDS under Section 194-C

The Appellant argued that it bona fide believed that TDS was deductible under Section 194-C. However, the court observed that this issue had already been settled in the quantum proceedings, where it was conclusively established that TDS ought to have been deducted under Section 194-I. The Appellant had accepted the finality of this decision, and therefore, it was not open to re-agitate this issue in the penalty proceedings.

Issue 3: Reasonable Cause for Failure to Deduct TDS under Section 194-I

The court re-framed the question to focus on whether the Appellant had shown reasonable cause for the failure to deduct TDS under Section 194-I, as per Section 273-B. The Appellant contended that the issue of whether TDS was to be deducted under Section 194-C or 194-I was debatable and referred to various CBDT circulars and judicial decisions to support its case. The court acknowledged that at the time of deduction, the issue was indeed debatable and not settled. Therefore, it accepted the plea that there was a reasonable cause for the Appellant's failure to deduct TDS under Section 194-I.

Conclusion:

The court concluded that the Appellant had shown reasonable cause for the failure to deduct TDS under Section 194-I due to the debatable nature of the issue at the relevant time. Consequently, the penalty imposed under Section 271-C was set aside, and the orders of the CIT(A) and ITAT upholding the penalty were also set aside. The appeal was allowed in favor of the Appellant.