2016 (6) TMI 842 - AT - Income Tax

Penalty u/s.271C - liability to deduct tax at source u/s 194A(1) of the Income Tax Act, 1961 on payments made to non-banking financial institutions as the payments include component of interest - Held that - We find that the assessee made payments towards hire purchase installments and not made separate payments towards interest. Therefore, the financial charges on hire purchase are not in the nature of interest. The payment made by the assessee on account of hire purchase transaction and payment of finance charges/hire charges cannot be construed as interest so as to deduct TDS u/s 194A of the IT Act. Accordingly, to that extent,section 40(a)(ia) is not applicable. Thus we do not find any infirmity in the order of the CIT(A) in cancelling the penalty levied by the AO u/s 271C and therefore, the same is hereby upheld dismissing the grounds raised by the revenue on this issue. See Commissioner of Income-tax Versus MG. Brothers Finance Ltd 2014 (1) TMI 1590 - ANDHRA PRADESH HIGH COURT - Decided in favour of assessee

Summary

Issues:
1. Imposition of penalty u/s 271C for failure to deduct tax at source on payments made to non-banking financial institutions.
2. Applicability of penalty provisions under section 271C of the Income Tax Act.

Analysis:

Issue 1: Imposition of penalty u/s 271C for failure to deduct tax at source on payments made to non-banking financial institutions:
The case involved the appeal by the Revenue against the order of the Commissioner of Income-tax (Appeals) concerning the imposition of penalties under sections 201(1) and 201(1A) for the assessment year 2010-11. The Assessing Officer (AO) initiated penalty proceedings under section 271C of the Income Tax Act due to the assessee's failure to comply with TDS provisions on payments made to certain companies. The AO imposed a penalty of ?13,02,576 for non-deduction of tax at source on the payments made. The AO held that the explanation provided by the assessee was not acceptable, leading to the imposition of the penalty.

Issue 2: Applicability of penalty provisions under section 271C of the Income Tax Act:
The assessee appealed to the Commissioner of Income-tax (Appeals) (CIT(A)), who relied on previous decisions of the ITAT, Hyderabad, and the High Court to cancel the penalty imposed by the AO under section 271C. The CIT(A) referred to the decision in the case of ACIT Vs. M/s R. Balarami Reddy & Co. and the decision of the Hon’ble AP High Court in the case of CIT Vs. MG Brothers Finance Ltd. to support the cancellation of the penalty. The ITAT upheld the decision of the CIT(A) based on the interpretation of hire purchase transactions and finance charges, concluding that the penalty under section 271C was not applicable in this case.

In conclusion, the ITAT dismissed the Revenue's appeal, upholding the decision of the CIT(A) to cancel the penalty under section 271C. The ITAT's decision was based on the interpretation of hire purchase transactions and finance charges as not constituting interest for TDS purposes, in line with previous judicial decisions. The ITAT's detailed analysis and reliance on legal precedents supported the dismissal of the Revenue's appeal in this matter.