2002 (11) TMI 253 - AT - Income Tax

Summary

Issues Involved:
1. Liability for deduction of tax at source under Section 194C.
2. Penalty under Section 221(1) for non-deduction of tax at source.
3. Levy of penal interest under Section 201(1A).

Detailed Analysis:

1. Liability for Deduction of Tax at Source under Section 194C:

The primary issue was whether ITC Ltd. (the assessee) was liable to deduct tax at source on payments made to PILCOM under Section 194C of the Income Tax Act, 1961. ITC entered into an agreement with PILCOM for sponsoring the 1996 World Cup Cricket Tournament, making payments in both British pounds and Indian rupees. Initially, the Revenue authorities issued a No Objection Certificate (NOC) allowing ITC to make these payments without any tax deduction at source. However, later communications from the Chief CIT-II, Kolkata, contradicted this, advising ITC to deduct tax at 2% for payments in Indian rupees and 10% for payments in British pounds. ITC complied with this advice and deposited the tax accordingly.

2. Penalty under Section 221(1) for Non-Deduction of Tax at Source:

The Assessing Officer (TDS) imposed a penalty of Rs. 1 crore under Section 221(1) for ITC's failure to deduct tax at source in July and November 1995. However, the CIT(A) deleted this penalty, acknowledging that ITC had genuine doubts about its liability due to conflicting advice from different Revenue officers. The Tribunal upheld the CIT(A)'s decision, noting that penalty under Section 221(1) is not applicable for non-deduction of tax at source when the assessee had acted bona fide and transparently. The Tribunal emphasized that penalty proceedings are quasi-criminal and require the demonstration of bona fide conduct by the assessee, which ITC had successfully shown.

3. Levy of Penal Interest under Section 201(1A):

The Tribunal examined whether ITC was liable to pay interest under Section 201(1A) for delayed deduction and deposit of tax at source. It concluded that the liability for interest under Section 201(1A) arises only if there is an established liability for deduction of tax at source under Section 201(1). The Tribunal found that ITC had acted based on the advice from the Chief CIT and had no obligation to deduct tax at source until this advice was changed on 9th February 1996. ITC deposited the tax within a week of receiving the new advice, indicating no delay in compliance. Additionally, since PILCOM was a tax-exempt entity, the levy of interest under Section 201(1A) did not apply. The Tribunal canceled the demand for interest under Section 201(1A), rendering the Revenue's appeal on the rate of tax deduction and other related issues redundant.

Conclusion:

The Tribunal allowed ITC's appeal (ITA No 103/Cal/2001) and dismissed the Revenue's appeals (ITA Nos 237 and 238/Cal/2001). The Tribunal upheld the cancellation of the penalty under Section 221(1) and ruled that the levy of interest under Section 201(1A) was unsustainable in law.