2001 (10) TMI 258 - AT - Income Tax

Summary

Issues Involved:
1. Liability to deduct surcharge on interest paid on bonds.
2. Failure to deduct surcharge and subsequent interest and penalties.
3. Bona fide belief and reasonable cause for non-deduction.
4. Calculation and imposition of interest under Section 201(1A).
5. Imposition of penalty under Section 271C.

Detailed Analysis:

1. Liability to Deduct Surcharge on Interest Paid on Bonds:
The assessee, an autonomous body engaged in electricity generation and distribution, issued interest-bearing bonds. The bonds were subscribed by financial institutions, government corporations, and public sector banks. The assessee was required to deduct tax at source on interest paid under Section 193 of the IT Act, including a surcharge introduced by the Finance Act, 1989.

2. Failure to Deduct Surcharge and Subsequent Interest and Penalties:
The assessee failed to deduct the prescribed surcharge on interest. This was noticed by the Revenue authorities in March 1993. The AO treated the assessee as a defaulter and levied interest under Section 201(1A) and penalties under Section 271C for the assessment years 1991-92 and 1992-93.

3. Bona Fide Belief and Reasonable Cause for Non-Deduction:
The assessee contended that the non-deduction was due to a bona fide mistake, arguing that the payees had already paid tax on the interest, including the surcharge. The CIT(A) found that the assessee had a bona fide belief that it was not required to deduct the surcharge and that there was no intention to withhold the tax. The CIT(A) cancelled the penalties under Section 271C, citing the Supreme Court's ruling in Motilal Padampat Sugar Mills Co. Ltd. vs. State of U.P., which stated that there is no presumption that every person knows the law.

4. Calculation and Imposition of Interest under Section 201(1A):
The CIT(A) allowed relief on interest charged under Section 201(1A), stating that interest should only be charged up to the date the payees deposited their tax. The AO's calculation of interest on the entire amount, including amounts not collected, was found to be incorrect. The CIT(A) directed the AO to verify the facts and charge interest only up to the end of the financial year, provided the payees had paid their taxes.

5. Imposition of Penalty under Section 271C:
The CIT(A) cancelled the penalties imposed under Section 271C, noting that the failure to deduct surcharge was unintentional and that the assessee took steps to rectify the situation once it was brought to their attention. The CIT(A) emphasized that penalties should not be imposed for technical or venial breaches or where the breach flows from a bona fide belief.

Conclusion:
The Tribunal upheld the CIT(A)'s decision to cancel the penalties under Section 271C, agreeing that the assessee had a bona fide belief and that the failure to deduct surcharge was not intentional. However, the Tribunal modified the CIT(A)'s directions regarding interest under Section 201(1A), stating that interest should be charged only until the date the tax was actually paid by the payees. The Tribunal directed the AO to verify the actual dates of payment and compute the interest accordingly. The appeals of the Revenue under Section 271C were dismissed, and the other appeals were allowed for statistical purposes.