2003 (3) TMI 286 - AT - Income Tax

Summary

Issues Involved:
1. Whether the appellant acted honestly in not deducting tax at source on payments made to the hotel for accommodation of its crew members.
2. Whether the demand raised against the appellant on account of short deduction of tax will stand deleted if the payments made by the appellant to the hotel have been included by the hotel in its income disclosed to the department and advance tax has been paid thereon.
3. Whether the non-deduction of tax at source on payments made by the appellant to the hotel was under a bona fide belief and whether the interest charged u/s 201(1A) of the Income-tax Act should be deleted.

Summary of Judgment:

Issue 1: Non-Deduction of Tax at Source
The learned CIT(A) held that the appellant acted honestly in not deducting tax at source on payments made to the hotel for accommodation of its crew members. The assessee argued that the payments were not in the nature of rent as defined u/s 194-I of the Income-tax Act and relied on the Supreme Court judgment in the case of Shri R.N. Kapoor. The assessee also contended that there was confusion regarding the applicability of section 194-I, further supported by a clarificatory circular issued by the Board. The Tribunal agreed with the CIT(A) that there was a bona fide belief and sufficient cause for non-deduction of TDS, especially since this was the first year of the provision's applicability and subsequent compliance was observed.

Issue 2: Deletion of Demand Based on Hotel's Income Disclosure
The CIT(A) decided that the demand raised against the appellant on account of short deduction of tax would stand deleted if the payments made by the appellant to the hotel were included by the hotel in its income disclosed to the department and advance tax was paid thereon. The Tribunal disagreed with this reasoning, stating that the obligation to deduct TDS and the liability to pay advance tax are separate and independent. The Tribunal held that compliance with section 194-I is mandatory and cannot be circumvented by the recipient's payment of advance tax. Therefore, the CIT(A)'s observation on this ground was erroneous, and the revenue's appeal on this ground was allowed.

Issue 3: Bona Fide Belief and Deletion of Interest u/s 201(1A)
The CIT(A) deleted the interest charged u/s 201(1A) of the Income-tax Act, holding that the non-deduction of tax at source was under a bona fide belief. The Tribunal upheld this decision, noting that the initial year of the provision's applicability and the subsequent issuance of clarificatory circulars indicated genuine doubt and confusion. The Tribunal found that the assessee's subsequent compliance further supported the bona fide belief and sufficient cause for non-deduction of TDS in the relevant year.

Conclusion:
The appeals of the revenue were partly allowed. The Tribunal upheld the CIT(A)'s decision on the bona fide belief and sufficient cause for non-deduction of TDS (Issue 1 and 3) but reversed the CIT(A)'s decision on the deletion of demand based on the hotel's income disclosure (Issue 2).