2025 (2) TMI 241 - HC - Income Tax

Levy of penalty u/s.271C - Assessee failed to deduct and pay taxes on time in respect of payments made to REOL on account of the contract in question. Interest u/s.201(A) was also levied for the said default - Whether there is a reasonable cause for not deducting TDS? - CIT(A) and ITAT agreed with the explanation offered by the respondent and granted relief to it observing that the non-deduction of TDS was not tainted with mala fide there is reasonable cause shown for not deducting. HELD THAT - The respondent in its reply to the notice in question specifically stated that the non-deduction of tax for the subject period was due to the bona fide belief formed on the basis of the legal opinion obtained at the hands of M/s.Singhania Co. a Law Firm of repute; and the opinion of a Chartered Accountant s Firm namely Lovelock Lewis. This apart the regular Assessee had applied on 11.09.1997 seeking advance ruling and that the Chairman of the Advance Ruling Authority did not process the same for personal reasons. Added what benefit the respondent could derive by not deducting the tax at source is also a factor. All these certainly constitute a reasonable cause for not effecting TDS and therefore the impugned orders being consistent with the same are not vulnerable for challenge as rightly contended by learned Sr. Advocate appearing for the respondent. Decided in favour of assessee.

ISSUES PRESENTED and CONSIDERED

The primary issue considered in this case was whether the Income Tax Appellate Tribunal was correct in holding that the assessee's failure to deduct tax at source (TDS) and the belated transfer of the deducted TDS amount to the department was due to a reasonable cause, thereby justifying the non-imposition of penalty under Section 271C of the Income Tax Act, 1961. The court also considered whether the Tribunal's decision constituted a substantial question of law warranting appellate interference.

ISSUE-WISE DETAILED ANALYSIS

Relevant legal framework and precedents

The legal framework primarily involved Section 271C of the Income Tax Act, which imposes penalties for failure to deduct tax at source, and Section 273B, which provides that no penalty shall be imposed if the assessee proves a reasonable cause for such failure. The court referenced the Supreme Court decision in CIT vs. ELI LILLY & CO. (INDIA) (P) LTD., which clarified that the burden of proving reasonable cause lies with the assessee. Additionally, the court considered precedents from the Delhi High Court in WOODWARD GOVERNOR INDIA VS. CIT and the Madras High Court in COMMISSIONER OF INCOME-TAX v. VISWAPRIYA FINANCIAL SERVICES AND SECURITIES LIMITED, which reiterated that the determination of reasonable cause is a question of fact.

Court's interpretation and reasoning

The court interpreted the concept of a substantial question of law as one that affects the outcome of proceedings. It concluded that the Tribunal's decision did not involve such a question, as it was based on factual findings regarding the existence of a reasonable cause for the assessee's failure to deduct TDS. The court emphasized that the substantial question of law arises only when the findings are perverse, lack evidentiary basis, or suffer from procedural irregularity, none of which were applicable in this case.

Key evidence and findings

The Tribunal found that the assessee's failure to deduct TDS was based on a bona fide belief informed by legal opinions from reputable law and accounting firms. The court noted that the assessee had sought an advance ruling from the Authority for Advance Rulings, further supporting the genuineness of its belief. The court found these circumstances constituted a reasonable cause under Section 273B, thus negating the penalty under Section 271C.

Application of law to facts

The court applied the principle that reasonable cause is a factual determination, not a legal one. The Tribunal's acceptance of the assessee's explanation was based on valid evidence, including legal opinions and the pending advance ruling application, which demonstrated a bona fide belief in the non-requirement of TDS deduction.

Treatment of competing arguments

The Revenue argued that the Tribunal erred in finding a reasonable cause for the failure to deduct TDS, contending that the explanation offered did not meet the statutory requirements. However, the court rejected this argument, holding that the Tribunal's findings were based on substantial evidence and were not perverse or contrary to law.

Conclusions

The court concluded that the Tribunal's decision did not involve a substantial question of law and that the factual determination of reasonable cause was supported by evidence. Consequently, the appeal was dismissed.

SIGNIFICANT HOLDINGS

Preserve verbatim quotes of crucial legal reasoning

The court quoted the Supreme Court's observation in CIT vs. ELI LILLY & CO. (INDIA) (P) LTD.: "The liability to levy of penalty can be fastened only on the person who do not have good and sufficient reason for not deducting tax at source."

Core principles established

The court reaffirmed that the determination of reasonable cause under Section 273B is a question of fact, not law. It emphasized that substantial questions of law arise only when factual findings are perverse or lack evidentiary basis.

Final determinations on each issue

The court determined that the Tribunal correctly found a reasonable cause for the assessee's failure to deduct TDS, thereby justifying the non-imposition of penalties under Section 271C. The appeal was dismissed, and the Tribunal's decision was upheld.

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