2005 (9) TMI 281 - AT - Income Tax

Summary

Issues Involved:
1. Levy of penalty under section 271C of the Income-tax Act, 1961 for short deduction of tax at source on gratuity payments.

Issue-wise Detailed Analysis:

1. Levy of Penalty under Section 271C:

Background and Facts:
The assessee, a Government Company operating a Steel Plant, faced penalties for short deduction of tax at source on gratuity payments to its employees for the assessment years 1997-98 and 1998-99. The Revenue Authorities held that the assessee-company incorrectly considered the exemption limit for gratuity under section 10(10)(ii) of the Income-tax Act, 1961, leading to a shortfall in tax deduction.

Assessing Officer's Findings:
The Assessing Officer (A.O.) concluded that the assessee-company should have deducted tax considering the exemption limit for gratuity at Rs. 1,00,000 under section 10(10)(ii) instead of Rs. 2,50,000. The A.O. deemed the short deduction as deliberate and imposed penalties of Rs. 1,40,08,400 for 1997-98 and Rs. 59,03,445 for 1998-99.

Commissioner of Income-tax (Appeals) Findings:
The Commissioner of Income-tax (Appeals) upheld the A.O.'s findings, stating that the short deduction was deliberate and with mala fide intention to dodge the revenue.

Assessee's Arguments:
The assessee argued that the obligation for tax deduction at source is under section 192, which allows for tax deduction on estimated income from salaries. The assessee considered the gratuity exemption limit as Rs. 2,50,000 based on the Central Government notification dated 1-2-1996. The assessee contended that the penalty proceedings are independent, and there was no short deduction of tax at source. The assessee relied on various judicial precedents to support the argument that the penalty under section 271C was not justified.

Tribunal's Analysis:
The Tribunal examined the facts and the relevant provisions of the Income-tax Act and the Payment of Gratuity Act, 1972. It noted that the Central Board of Direct Taxes (CBDT) Circular No. 138 clarified that gratuity received under section 4(5) of the Payment of Gratuity Act falls under section 10(10)(iii) of the Income-tax Act, with an exemption limit of Rs. 2,50,000. The Tribunal found that the assessee's treatment of gratuity exemption was correct and there was no default in tax deduction at source.

Conclusion:
The Tribunal concluded that the penalty under section 271C was unjustified as the assessee acted in good faith, considering the bona fide belief that the gratuity exemption limit was Rs. 2,50,000. The Tribunal also noted the lack of evidence for mala fide intention on the part of the assessee. Consequently, the penalties imposed by the A.O. and upheld by the Commissioner of Income-tax (Appeals) were deleted.

Result:
The appeals filed by the assessee were allowed, and the penalties imposed under section 271C were deleted.