1999 (6) TMI 46 - AT - Income Tax

Summary

Issues:
Penalty under section 271C of the IT Act for non-deduction of tax at source.

Analysis:
The case involved two appeals against the CIT(A)'s order imposing penalties under section 271C of the IT Act for non-deduction of tax at source. The assessee, a Senior Accounts Officer, failed to deduct the prescribed amount of tax from payments made to M/s Indian Railway Construction Co. (IRCON) for the financial years 1989-90, 1990-91, and 1991-92. The ITO issued a show-cause notice under section 271C, and despite the assessee's explanation that IRCON was not a contractor but working on behalf of the project, penalties were imposed. The Dy. CIT upheld the penalties, emphasizing that IRCON was acting as a contractor, as evident from their tax deductions for sub-contractors. The CIT(A) also confirmed the penalties, stating that IRCON was indeed a contractor for a specific project, making the assessee liable for tax deduction under section 194C.

In the subsequent appeal, the assessee argued a bona fide belief that the agreement with IRCON was not a contractor agreement, thus no tax deduction was made. The assessee highlighted the absence of prior defaults and immediate tax deduction upon notification. The Departmental Representative contended that the failure to deduct tax lacked a reasonable cause, citing legal precedents. The Tribunal noted that section 271C allows penalties unless a reasonable cause is proven, which is a factual determination based on all circumstances. The burden of proof lies with the assessee, and explanations must be objectively considered by authorities. In this case, the Tribunal found the assessee's belief in the nature of the agreement with IRCON as genuine, leading to a lack of reasonable cause for tax deduction failure.

The Tribunal emphasized that penalty proceedings are quasi-criminal and discretion should be exercised judiciously. Citing legal principles, the Tribunal concluded that the failure to deduct tax at source from payments to IRCON was not without reasonable cause. Consequently, the penalties imposed by lower authorities were set aside, and the appeals were allowed.