2008 (3) TMI 385 - AT - Income Tax

Summary

Issues Involved:
1. Failure to deduct tax at source u/s 194A.
2. Bona fide belief and reasonable cause for non-deduction.
3. Impact of tax already paid by the deductee.
4. Applicability of penalty u/s 271C.

Summary:

1. Failure to Deduct Tax at Source u/s 194A:
The assessee was penalized for not deducting tax at source on interest payments to Larsen & Toubro Ltd. (L&T) during financial years 2001-02 to 2005-06. The AO raised a demand u/s 201(1) and initiated penalty proceedings u/s 271C, asserting that the assessee failed to deduct tax on interest payments, which were debited in the P&L account and claimed as deductions.

2. Bona Fide Belief and Reasonable Cause for Non-Deduction:
The assessee claimed a bona fide belief that tax was not deductible, supported by a legal opinion from M/s C.C. Chokshi & Co. The CIT(A) rejected this explanation, stating the advice was obtained by L&T, not the assessee, and thus lacked merit. However, the Tribunal found this reasoning unjustified, emphasizing that the nature of the advice, not the recipient, was crucial. The Tribunal cited the Supreme Court's decision in T. Ashok Pai vs. CIT, highlighting that acting on legal advice constitutes a reasonable cause.

3. Impact of Tax Already Paid by the Deductee:
The Tribunal noted that the primary tax liability was discharged by L&T, making the vicarious liability of the assessee non-existent. Referring to the Supreme Court's decision in Hindustan Coca Cola Beverage (P) Ltd. vs. CIT, it was established that no demand u/s 201(1) should be enforced if the tax due has been paid by the deductee. However, this does not absolve the deductor from penalty u/s 271C.

4. Applicability of Penalty u/s 271C:
The Tribunal concluded that the assessee's failure to deduct tax was based on a bona fide belief and legal advice, constituting a reasonable cause. Additionally, the issue of whether the discount availed by the assessee was in the nature of interest u/s 194A was deemed debatable. Consequently, the penalty u/s 271C was not justified.

Conclusion:
The Tribunal deleted the penalty levied u/s 271C for all the years under consideration, allowing the appeals filed by the assessee.