2013 (6) TMI 498 - AT - Income Tax

Penalty u/s 271C - Non deduction of TDS u/s 194C - CIT(A) deleted the levy on the basis of claim of the assessee that there was no agreement between the parties and the appellant was of bonafide belief that he is not bound to deduct the tax at source because as per his knowledge and belief tax u/s 194C is always deductible when payment is made by specified person to resident contractor, treating it as squarely covered under the mandate of section 273B - whether bonafide belief of the assessee that he is not bound to deduct the tax at source be treated as reasonable cause ? - Held that - In the case of the assessee i.e Uttarakhand Educational Department there was bona fide belief under which the assessee operated that it was not required to deduct TDS. The explanation of the assessee that it believed that it had no choice but to transfer the funds received in its account and that it had no control over the executing agency to detain its payments has rightly been held as a reasonable cause as the bona fide belief is borne out from the fact that as soon as the said fact was pointed out to the assessee, the position was corrected. Accordingly department s ground is dismissed.

Summary

Issues:
Appeal against cancellation of penalty order u/s 271C for failure to deduct tax at source - Interpretation of "reasonable cause" under section 273B of the Income Tax Act.

Detailed Analysis:

Issue 1: Cancellation of Penalty Order u/s 271C
The Revenue appealed against the cancellation of the penalty order u/s 271C by the CIT(A), arguing that the appellant had erred in law by accepting the claim of the assessee that there was no agreement between the parties, leading to a bonafide belief that tax deduction at source was not required. The Revenue contended that the CIT(A) failed to consider that in a separate case, the CIT(A) himself had acknowledged a contractual relation between payer and payee. The Revenue further argued that the bonafide belief of the assessee could not be considered a "reasonable cause" as per section 273B of the Act. The Tribunal noted the absence of the respondent during the hearing and proceeded ex-parte.

Issue 2: Failure to Deduct Tax at Source
The case involved the failure of the assessee to deduct tax at source from contract payments made during the financial years 2006-07 and 2007-08. The ACIT(TDS) initiated penalty proceedings u/s 271C, emphasizing the obligation of the assessee to deduct tax under section 194C of the Act. The assessee argued that the payments were directly transferred to a Government Agency, which had its own TAN & PAN, and contended that the agency was responsible for tax compliance. However, the ACIT(TDS) imposed a penalty, stating that the liability to deduct tax was on the payer as per the Act.

Issue 3: Interpretation of "Reasonable Cause"
In the appeal before the CIT(A), the assessee reiterated its position, emphasizing the lack of control over the executing agency and the belief that tax deduction was not required under section 194C. The CIT(A) considered section 273B and relevant case laws, concluding that the assessee's bonafide belief constituted a "reasonable cause" for not deducting tax at source. The Tribunal upheld the CIT(A)'s decision, noting the genuine belief of the assessee and the corrective actions taken upon realizing the error.

In conclusion, the Tribunal dismissed the Revenue's appeal, affirming the CIT(A)'s decision to cancel the penalty order based on the assessee's reasonable cause for not deducting tax at source. The judgment highlighted the importance of bona fide belief and compliance with tax provisions, ultimately supporting the assessee's position in this case.