2010 (12) TMI 272 - AT - Income Tax

Non deduction of TDS - TDS on remuneration paid to directors - On the strength of letters given by the payees, the payer cannot be absolved from the liability to deduct the tax - If this is allowed to become the precedence then whenever payer is required to deduct the tax under the provisions of Chapter XVII-B, then the payer would easily get absolved from his statutory responsibility and the provisions relating to TDS would become otiose and tax will only be realized through advance-tax Section 209(1)(d) really provides that advance-tax would be paid out of tax payable in the Financial Year after reducing there from tax deductible and the tax collectible at source during Financial Year under any provisions of the Act -The words used in this provision is deductible or collectible, it does not use the word deducted or collected. In other words the tax deductible at source or collectible at source can be reduced by the assessee from the tax liability payable during F.Y. Thus if tax is not deducted or not collected by the payer then still assessee has a right to claim the deduction of the TDS deductible or collectible. Regarding penalty u/s 271C - Even though it is not disputed that levy of penalty is not automatic but where a cause is shown which results in making the entire provisions of deduction of tax redundant, and would create a precedence for enabling the payers not to deduct taxes cannot be said to be satisfactory. An explanation for default is highly individualistic should confine to the facts and circumstances of that case and should be seen as satisfactory only in the factual matrix of that case. It is an explanation in personem not an explanation in rem. Any explanation in rem like in the present case and which has very wide repercussion against statutory scheme cannot be accepted as satisfactory.

Issues Involved:
1. Levy of penalty under section 271C for non-deduction of tax on remuneration paid to directors.
2. Validity of the explanation provided by the assessee for non-deduction of tax.
3. Applicability of advance tax payments made by directors in lieu of TDS.
4. Reasonable cause for non-deduction of tax under section 192B.

Detailed Analysis:

1. Levy of Penalty under Section 271C for Non-Deduction of Tax on Remuneration Paid to Directors:
The primary issue in these appeals is the levy of penalty under section 271C for the non-deduction of tax on remuneration paid by the company to its directors for the assessment years 2003-04 and 2004-05. The Assessing Officer (AO) levied penalties of Rs. 5,12,400/- and Rs. 4,07,556/- respectively, which were confirmed by the Commissioner of Income Tax (Appeals) [CIT(A)].

2. Validity of the Explanation Provided by the Assessee for Non-Deduction of Tax:
The assessee argued that the directors had given declarations to the company stating they would pay advance tax on the remuneration received, and hence, TDS should not be deducted. The directors indeed paid the advance tax and filed their tax returns, leading the assessee to claim that there was no loss of revenue and thus no grounds for penalty under section 271C. The AO, however, rejected this explanation, stating that accepting such an explanation would render the TDS provisions under section 192B meaningless.

3. Applicability of Advance Tax Payments Made by Directors in Lieu of TDS:
The assessee contended that since the directors paid advance tax on the remuneration, the company should not be held liable for not deducting TDS. The CIT(A) disagreed, noting that the letters from the directors were merely declarations of intent to pay tax, not confirmations of tax payment. The CIT(A) emphasized that accepting such letters as a reasonable cause would undermine the provisions of Chapter XVII-B of the Act, which mandates the payer to deduct tax at source.

4. Reasonable Cause for Non-Deduction of Tax Under Section 192B:
The CIT(A) held that the letters from the directors did not constitute a reasonable cause for non-deduction of tax. The liability to deduct tax at source is cast upon the payer, and failure to do so without reasonable cause attracts penalty under section 271C. The CIT(A) stated that the subsequent payment of tax by the directors did not mitigate the default of the payer at the time of payment.

Tribunal's Decision:
The tribunal upheld the CIT(A)'s decision, stating that the payer cannot be absolved from the liability to deduct tax based on letters from the payees. Allowing such a practice would render the TDS provisions ineffective. The tribunal emphasized that the statute provides three methods for tax collection: advance tax, tax collection at source, and tax deduction at source. The payer's default is complete when payment is made without deducting tax, regardless of the payee's subsequent actions.

The tribunal also noted that the explanation provided by the assessee was not satisfactory as it would lead to a chaotic situation where payers could avoid deducting tax based on payees' letters. The tribunal concluded that the penalty under section 271C was correctly levied as the assessee failed to show a reasonable cause for non-deduction of tax.

Conclusion:
The appeals filed by the assessee were dismissed, and the penalties levied under section 271C for non-deduction of tax on remuneration paid to directors were upheld. The tribunal emphasized the importance of adhering to the statutory provisions for tax deduction at source and rejected the argument that advance tax payments by directors could substitute for TDS obligations.

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