2013 (12) TMI 298 - AT - Income Tax

Penalty u/s 271C reasonable cause - The assessees are partners in a firm Both the assessees has paid interest to firm without deducting tax at source - Held that - The assessee s belief that they were not liable to deduct tax at source on the interest paid by them can be considered as a reasonable cause in view of the legal position existing between a partner and the partnership firm - The partners and partnership firm are not two different legal entities, though they are two different taxable entities - The partnership firm have duly included the same in its return of income filed before the department and the said partnership firm was not liable to pay any tax, since it declared loss Following case of Muthoot Financiers 2005 (10) TMI 224 - ITAT COCHIN - The penalty should be avoided, if there is no loss to Revenue Decided in favour of assessees.

Summary

Issues:
Penalty under section 271C for failure to deduct tax at source on interest paid to a partnership firm by individual partners.

Analysis:
The appeals were against penalty orders under section 271C imposed on two individual partners of a firm for not deducting tax at source on interest paid to the firm. The partners believed they were not required to deduct tax as the firm and partners are not distinct entities. The first appellate authority upheld the penalty, stating that the partners and the firm are different 'Person' under the Income Tax Act. The partners argued that Circular no. 6P dated 06-09-1968 and legal precedents support their belief. They also mentioned that similar penalties on sister concerns were later canceled, indicating a reasonable cause for their actions.

The Tribunal noted that the partners did not deduct tax at source on interest paid to the firm, as they believed it was not required based on the legal position that the firm and partners are not separate entities. The Tribunal considered the partners' belief as a reasonable cause under section 273B of the Act. It was highlighted that the firm had included the interest in its income tax return and ended up with a loss, causing no loss to the revenue. The Tribunal referred to legal interpretations of 'reasonable cause' and previous judgments to support its decision to set aside the penalty imposed by the first appellate authority.

Ultimately, the Tribunal allowed the appeals, directing the assessing officer to delete the penalty levied under section 271C in the hands of both partners. The decision was based on the partners' reasonable cause for not deducting tax at source on interest paid to the partnership firm, considering the legal relationship between partners and the firm and the absence of revenue loss due to the firm's financial situation.