2017 (2) TMI 279 - HC - Income Tax

Penalty under section 271C - failure to deduct tax at source - Held that - As decided in each of the expatriate employees have paid directly the taxes due on the foreign salary by way of advance tax/self-assessment tax. The tax deductor-assessee was under a genuine and bona fide belief that it was not under any obligation to deduct tax at source from the home salary paid by the foreign company/HO and, consequently, we are of the view that in none of the 104 cases penalty was leviable under section 271C as the respondent in each case has discharged its burden of showing reasonable cause for failure to deduct tax at source. No penalty proceedings under section 271C shall be taken in any of these cases as the issue involved was a nascent issue. See Commissioner of Income-tax, New Delhi Versus Eli Lilly & Company (India) Pvt. Ltd. 2009 (3) TMI 33 - SUPREME COURT - Decided in favour of assessee.

Summary

Issues:
Challenge to order under section 264 of Income-tax Act 1961 regarding penalty under section 271C.

Analysis:
The writ petitioner contested an order made by the Commissioner of Income-tax under section 264 of the Income-tax Act 1961, upholding the Assessing Officer's decision that there was no reasonable cause in the case to avoid levying a penalty under section 271C. The Assessing Officer had previously ruled that the petitioner was to be treated as one deducted under section 201(1) for the assessment year 1999-2000. However, this decision was overturned in favor of the assessee by the court in a previous case. The Revenue then appealed this decision, leading to the matter being decided by the Supreme Court in another case. The Supreme Court expressed a clear opinion on the levy of penalty under section 271C, emphasizing that the penalty should only be imposed on those who do not have a good and sufficient reason for failing to deduct tax at source. The burden of proof lies with the person to show a reasonable cause for the failure. In this case, the Supreme Court found that the non-deduction of tax at source was due to a nascent issue regarding the aggregation of income chargeable under 'Salaries' and the failure to claim deductions under section 40(a)(iii) in the computation of business income. Additionally, some expatriate employees had paid taxes directly on their foreign salary. Therefore, the Supreme Court concluded that in none of the 104 cases was a penalty under section 271C justifiable as each respondent had shown a reasonable cause for the failure to deduct tax at source.

Continuing, the Supreme Court decided that no penalty proceedings under section 271C should be taken in any of the cases due to the issue being a nascent one. Consequently, the penalty proceedings under section 271C were quashed. As a result of this development, the petition succeeded, leading to the quashing of the impugned order of the Commissioner of Income-tax and the penalty imposed by the Assessing Officer under section 271C. The writ petition was allowed in accordance with the above terms.