No penalty on deductor if deductee did not provide TAN

[CA DEV KUMAR KOTHARI]

Un-necessary litigation by revenue where Tax deductor (A PSU- GAIL) is not at fault in not mentioning PAN of payees / tax deductee, also learning from the case.

Relevant links and references:

Section 139A(5A), 139A(5B), 272B,  273B of Income-tax act, 1961 (ITA) read with section and Form 16A.

Commissioner of Income-tax v. Gail (India) Ltd. [2013 (8) TMI 599 - ALLAHABAD HIGH COURT ]  

Hindustan Steels Ltd. v. State of Orissa [1969 (8) TMI 31 - SUPREME Court]

PAN- it is in interest of recipient of income/ tax deductee to inform correct TAX to tax deductor.:

The requirement of obtaining and mentioning Permanent Account Number (PAN) is well known and it needs no elaborate discussions for the readers of this article.

Any party who obtain any payment or income must in his own interest inform his correct address and PAN to the party who deduct tax from payment made or income credited. If PAN is correctly informed to the tax deductor, he will write the same in all relevant documents like Tax Deduction Certificate, TDS return, and other information and returns as may be applicable. If TAN is correctly given, the amount of TDS will be credited and shown in account of tax deductee and can be viewed in various online reports about TDS credited in his account. The amount of TDS claimed and amount of TDS shown on related websites of Income Tax Department will be easily reconciled. The tax deductee will also be in a position to cross tally his receipts (after TDS) , tax deducted and this will provide suitable yardstick, check and balance for reconciliation of income , TDS and proper computation of income etc. In case some TDS is shown by deductor say in second year, whereas tax deductee has accounted for income in first year, he can reconcile his income of two years with reference to TDS credit and reports and his returned income. In case of need he can file revised return.

Finding correct PAN in TDS reports is one step towards satisfaction of revenue authorities. In case PAN is not furnished, and TDS return shows payment without PAN of payee, there is every possibility or issuance of notice by I.T Department to deductee for an elaborate enquiry and assessment. If an income is received as per TDS report, and that income is not shown by deductee in his return, there will be a prima facie case of concealment of income or furnishing of inaccurate particulars of income.    

Therefore, it is always in interest of tax deductee or recipient of income to inform to the tax deductor his PAN correctly and also to keep a track of TDS deposited and shown credited in his TDS statements which are available on website and can also be seen in my account after log in through https://incometaxindiaefiling.gov.in/e-Filing/UserLogin/LoginHome.html, .

Tax deductor depends of tax deductee/ payee of income for his PAN:

For information of TAN a person who deduct tax is dependent on other person to whom he makes payment and from which he deduct tax. If the payee does not inform his TAN, he will not be in a position to mention his TAN in related documents and returns. In such cases, the payer can only mention name and address of payee in related documents. If payee does not inform TAN, how tax deductor can mention his TAN? If is impossible.

Case of a public sector company:

GAIL (India) Ltd. is a public sector company which is under the control of Ministry of Petroleum and Gas, Government of India. As [per report with BSE Government hold .. % stake in this company as on …

In the course of its business GAIL had made payment to many contractors who did not provide their Permanent Account Number (PAN) to GAIL. Therefore, GAIL could not furnish PAN of payees. For this alleged default, AO initiated penalty proceedings and levied penalty on GAIL.

GAIL has been deducting and also depositing income tax at source as per the provisions of Section 194-C and 194-J of the Act on all the payments made to contractors/professionals during the financial year 2002-03.

The annual return of TDS as per the provisions of Section 203 of the Act, was also filed in the prescribed 'Form-26-C' and TDS certificates were issued to contractors/professionals.

Explaining the reasons for not furnishing PAN before The Additional Commissioner, submitted that that non mentioning of PAN in Form 16-A issued to certain contractors was neither intentional nor violative of the provisions, the contractor did not make it available at the time of issue of TDS certificates within the time prescribed, there is no legal obligation on the deductors to obtain PAN of the deductee either before or after deduction of tax at source and it is obligatory upon the deductee under section 139(5A) and if the payee has not informed their PAN to the deductor, the provisions of Section 139-A is not attracted and penalty under Section 272B cannot be imposed in view of the law laid down by Hon'ble Supreme Court in the case of Hindustan Steels Ltd. v. State of Orissa [1969 (8) TMI 31 - SUPREME Court], the penalty will not ordinarily be imposed unless the parties obliged either acted deliberately in defiance of law or was guilty of conduct contumacious or dishonest or acted in conscious disregard of its obligation which circumstances do not exist in the present case and Section 272B does not provide for penalty one default deductee wise under the Act. However, the Additional Commissioner rejected the explanations submitted by the respondent-assessee and imposed penalty.

Penalty at the rate of Rs.10,000/- for each 350 defaults committed by GAIL amounting to Rs. 35 lacs was imposed by the Additional Commissioner of Income Tax Range-I, Agra on the ground that the respondent-assessee has not mentioned Permanent Account Number in Form-16-A issued to 350 contractors.

GAIL preferred appeal before the CIT(A), Agra. The CIT (Appeals ), Agra upheld the levy of penalty on the ground that there was no reasonable cause for failure to obtain and quote PAN of the deductees. However, the matter was remanded to the A.O. to identify the defaults committed prior to the introduction of Section 272B w.e.f. 1.6.2002 and reduce the penalty imposed in respect of such default.

Thereafter the amount of penalty determined was Rs.34,30,000/- which was levied under Section 272B of the ITA by holding that there was no reasonable cause preventing the assessee to obtain and quote PAN of the deductees as provided u/s 139-A(5B) of the Act.

GAIL filed an appeal before the Income Tax Appellate Tribunal. The Tribunal allowed the appeal and vacated demand of penalty by the impugned order dated 23.4.2009.

Revenue being dissatisfied with order of Tribunal filed appeal against the order of the ITAT dated 23.4.2009.

The High Court found that the Appellate Tribunal has discussed in detailing the facts and circumstances of the case and the relevant provisions of the Act. Tribunal has recorded the following findings in paragraph-3 of the impugned order (highlights added by author):-

     "There is no dispute with regard to the fact that the appellant had deducted tax at source in all these cases and had also deposited the same, in time, in the government treasury. It also filed annual returns of TDS as per provisions of section 203 of the Act in Form No.26C, in time, and also issued requisite TDS certificates to the deductees. But it is a fact that in 350 cases, to whom payments were made and on account of which tax at source was deducted, but in Form No.16A, issued to these persons, their PAN was not mentioned. The arguments of the learned AR, to ward off the impugned penalty, are that the assessee honestly tried to follow the tax laws in this connection by deducting the tax at source and also deposited the tax in time with the government department. The appellant does not stand to gain by committing breach of the statutory provisions of the Act and is bound to deduct tax within time and to comply with other provisions of section 192 to 195 of the Act. It was further submitted that after deduction of tax, the appellant is liable to deposit the same under section 200 and to issue TDS certificates under section 203 and submit the return under section 206 of the Act, failing which, it would become liable for contravention of these sections. The further submission of the learned AR, to show reasonable cause for not mentioning PAN, is that many of these payees did not even possess PAN and that despite asking, they did not provide their PAN and as such, this is only a technical error by not mentioning the same in Form 16A. We are in agreement with the learned AR to this extent and not in agreement with the ld. DR because such a technical view of a particular provision of law cannot be taken particularly when the assessee has complied with all the requirements, as are envisaged in section 192 to 195 of the Act. By not mentioning PAN in Form No.16A, the appellant is not going to be benefited in any manner and that it is very difficult in the given circumstances to obtain PAN of the payees. Under section 272B(1) of the Act, it is the discretion of the AO to levy a penalty in case any person fails to comply with the provisions of section 139A of the Act. The use of word "may" in this section clearly suggest that the levy of penalty is not mandatory and admits reasonable excuse for its exoneration. It is true that in some of the cases where TDS certificates were issued prior to 01.06.02, the ld. CIT(A) has accepted the contention of the appellant and has reduced the penalty amount to Rs.34.30 lacs from Rs.35 lacs. There is no dispute that the appellant has violated the provisions of section 139A(5B) of the Act, but to our mind, the appellant has fully complied with all the other provisions of the Act, as stated above and there is no loss of Revenue to the department due to the conduct of the appellant as it has neither issued wrong certificates nor has mentioned any wrong particulars in TDS certificates. The conduct of the assessee in not providing PAN was not contumacious or fraudulent and the default in question was neither intentional nor willful. The default is purely a technical one. The appellant is a Public Limited Company and in these circumstances, the decision of Hon'ble Supreme Court rendered in the case of Hindustan Steels Ltd. v. State of Orissa [1969 (8) TMI 31 - SUPREME Court]

comes to rescue because in that case, it has been held that 'when there is a venial or technical breach of the provisions of the Act or where the breach flows from a bonafide belief that the offender is not liable to act in the manner prescribed by the statute, the imposition of penalty would not be justified. 'Since the assessee is bound to deduct tax at source and to deposit the same in time and the payees may not in the circumstances, comply with the directions of the appellant, but if the assessee fails to deduct TDS, to deposit the same in the Government Treasury, to file the annual returns etc., various complex penalties are attracted. So given the peculiar circumstances, non mentioning of PAN in Form 16A, simpliciter, would not render the assessee exigible for this penalty. Consequently, by holding that only for pedantic reasons, i.e., non-mentioning of PAN without any purpose, would remove the assessee from the purview of penalty under section 272B of the Act. Consequently, we order to delete the entire penalty and allow the appeal of the assessee."

Against the above order of Tribunal, the revenue preferred appeal on the following questions of law:

(i)		"Whether on the facts and in the circumstances of the case, the Tribunal is justified in law in deleting the penalty of Rs.34,30,000/-levied U/s 272-B of the Act by ignoring that there was no reasonable cause preventing the assessee to obtain and quote PAN of the deductees as provided u/s 139-A(5B) of the Act.
(ii)		Whether on the facts and in the circumstances of the case, the Tribunal is justified in law in relying upon a decision of the Hon'ble Supreme Court in the case of Hindustan Steels Ltd. v. State of Orissa [1969 (8) TMI 31 - SUPREME Court] despite the same having no applicability in the facts of the present case."

High Court order:

The High Court held as under:

The High Court confirmed the order of Trbiunal by answering questions in favor of assessee and against revenue. ON perusal of the provisions the Court held that penalty u/s 272B is not automatic and is discretionary. On consideration of conduct of assessee in deducting tax, depositing tax deducted timely, filing return etc. and other facts Court confirmed order of ITAT.

Observations of the High Court and order is analyzed below:

             About provisions:

               …. A bare reading of the provision itself makes it clear that the penalty under section 272-B will not ordinarily be imposed unless the assessee has

1. acted deliberately in defiance of law or
2. was guilty of conduct which is contumacious, dishonest or
3. acted in conscious disregard to its obligation.

The penalty under section 272B cannot be imposed merely because it is lawful to do so.

Penalty can be imposed for failure to perform statutory obligation.

The imposition of penalty for failure to perform a statutory obligation is a matter of discretion of the authority to be exercised judicially, after considering the explanation of reasonable cause submitted by the assessee and on a consideration of all the relevant circumstances.

About judgment of the Supreme Court:

         In view of analysis of provisions made by the Court the Court held that law laid down by the Hon'ble Supreme Court in the case of Hindustan Steels Ltd. v. State of Orissa [1969 (8) TMI 31 - SUPREME Court]is applicable to the provisions of Section 272-B read with Section 273B of the Act. Thus, the submission of the learned counsel for the appellant revenue that the law laid down by the Hon'ble Supreme Court in the case of Hindustan Steels Ltd. (supra) is not applicable, was rejected by the Court.

             The findings recorded by the ITAT regarding no revenue loss and mere technical breach, clearly satisfies the test of reasonable cause under section 273B of the Act. In the present case the levy of penalty under Section 272-B of the Act by the assessing authority was fully unjustified.

The ITAT has elaborately dealt with the factual and legal aspect of the case and that the findings recorded by the ITAT on reasonable cause are findings of fact.

Order of the ITAT dated 23.4.2009 passed in Income Tax Appeal No. 40/Agr./2008 for the assessment year 2003-04 does not suffer from any error of law or facts. Accordingly, the order of the ITAT is upheld.

In the result, both the questions of law were answered in affirmative, i.e., in favour of the assessee and against the revenue. The appeal was dismissed.

However, the honorable Court did not pass any order as to cost.

A fit case of order as to cost:

Considering the nature of litigation, which appears to be un-necessary, and also fact that there was no loss to revenue, and to prevent such un-necessary litigation, in view of author this was a fit case of awarding cost in favor of assessee. Furthermore, this also shows need of more logical decision making about filing of appeal. It is unfortunate that revenue authorities and counsels take decisions in very casual and hasty manner and indulge into un-necessary litigation. Let us hope that revenue does not indulge into further litigation by filing appeal before the Supreme court.

Learning and suggestions for tax deductor / assesses:

For better compliance and also to have a full data base of suppliers and service providers it is important to obtain all necessary details and documents just like in case of know your customers (KYC) process carried by banks a business house can apply process of Know Your Supplier/ service providers/ other payees (Know Your Payees)

All persons to whom payments are made must be registered as supplier/ contractor/ other service provider and all details and documents like full name, description, address, identity card of person or principal officers as the case may be, PAN, TAN, CIN and directors DIN in case of companies, Xerox certified copies of all documents should be obtained. Unless any party provides such details he may be denied business opportunities or payment to insist upon him the importance of all these documents.