2016 (2) TMI 195 - AT - Income Tax

Penalty u/s 271C - non deduction of tds u/s 194A by the banks including the assessee bank with respect to interest paid to NOIDA - Held that - In the present case it is apparent that belief of the assessee was reasonable to not to deduct tax at source which is also based upon the notification issued by CBDT u/s 194A(3)(iii)(f) of the Act as well as several judicial precedents. In our view, it cannot be said that Hon‟ble Allahabad High Court has laid down any law with respect to deduction of tax at source on interest payment made by the assessee to Noida. In view of the above facts and circumstances we are of the view that the assessee cannot be subjected to penalty u/s 271C of the Act because there is no failure on part of the assessee to deduct tax at sources u/s 194A of the act in view of the decision of ITAT on this issue for the same years holding that there is no requirement of deduction of tax at source at all u/s 194A of the Act in view of notification dated 22.10.1990. There was a reasonable cause for holding a belief regarding non deduction of tax at source on payment of interest made to Noida which is supported by a notification issued as well as several orders of the coordinate benches holding that interest payment made to Development authorities are exempt for deduction of tax u/s 194A(3)(iii)(f) of the Act. - Decided in favour of assessee

Issues Involved:
1. Penalty under Section 271C for non-deduction of TDS under Section 194A.
2. Applicability of Section 194A to interest payments made to NOIDA.
3. Validity of ITAT's previous order and its binding nature.
4. Reasonable cause for non-deduction of TDS under Section 273B.

Detailed Analysis:

1. Penalty under Section 271C for non-deduction of TDS under Section 194A:
The assessee, a bank, faced penalties under Section 271C for failing to deduct tax at source on interest payments to NOIDA. The Assessing Officer (AO) had levied penalties for the Assessment Years 2005-06 to 2011-12, which were confirmed by the Commissioner of Income-tax (Appeals) (CIT(A)). The penalties were based on the AO's view that the bank should have deducted tax under Section 194A of the Income Tax Act.

2. Applicability of Section 194A to interest payments made to NOIDA:
The core issue was whether the bank was required to deduct tax at source on interest payments to NOIDA under Section 194A. The ITAT had previously ruled that such interest payments were exempt under Section 194A(3)(iii)(f), which includes institutions notified by the Central Government. NOIDA, being a corporation established by the UP Industrial Area Development Act, 1976, was considered exempt from TDS under this provision.

3. Validity of ITAT's previous order and its binding nature:
The CIT(A) had disregarded the ITAT's previous order, considering it null and void, and instead followed the Allahabad High Court's judgment, which did not specifically address the TDS issue but only the status of NOIDA as a local authority under Section 10(20). The ITAT clarified that its previous order was valid and binding, having considered the Allahabad High Court's decision. The ITAT emphasized that lower authorities must respect the orders of higher authorities.

4. Reasonable cause for non-deduction of TDS under Section 273B:
The ITAT examined whether there was a "reasonable cause" for the bank's failure to deduct TDS, as provided under Section 273B. The ITAT found that the bank's belief that NOIDA was exempt from TDS was reasonable, supported by a CBDT notification and several judicial precedents. The ITAT cited various cases where similar payments to development authorities were held exempt from TDS, reinforcing the bank's stance.

Conclusion:
The ITAT concluded that the penalty under Section 271C could not be sustained due to the following reasons:
- The ITAT had already ruled that no TDS was required on interest payments to NOIDA.
- The bank had a reasonable cause for its belief, supported by a CBDT notification and judicial precedents.
- The CIT(A)'s dismissal of the ITAT's previous order was erroneous.

The ITAT reversed the CIT(A)'s order and canceled the penalties for the respective years. The appeals of the assessee were allowed, and the ITAT advised lower authorities to respect higher authorities' orders.

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