2023 (12) TMI 580 - AT - Income Tax

Penalty u/s 271C - Non deduction of TDS u/s 195 - payment made for supply of software to two USA companies on which no tax was deductible but Id. AO, by treating it as payment for Royalty, made addition under sec. 40(a)(i) - penalty has been levied after 4 years - as argued payer has no PE and no agency agreement, so the sum paid is not chargeable to tax in India - assessee admitted that they have not deducted TDS under bonafide belief - HELD THAT - Before levying penalty, the concerned officer is required to find out that even if there was any failure to deduct tax at source, the same was without reasonable cause. The initial burden is on the assessee to show that there exists reasonable cause which was the reason for the failure. Thereafter, the officer has to consider whether the explanation offered by the assessee or other person as regards the reason for failure, was on account of reasonable cause or not. Reasonable cause as applied to human action, is that which would constrain a person of average intelligence and ordinary prudence. The cause shown has to be considered and only if it is found to be frivolous, without substance or foundation, would the prescribed consequences follow. Thus in the substance of this case after the decision of ITAT, the disallowance was sustained but at the same time the assessee was allowed deduction of that income and therefore, the effect was tax neutral. Therefore, the reasonable cause for the assessee not to deduct the TDS which although was added in the income of the assessee u/s 40(a)(i) - Since the effect was revenue neutral assessee has not disputed the levy or addition further in the Hon ble High Court. Based on this fact, we are of the view that the assessee was having reasonable cause for not deducting the tax and ultimately the revenue has chosen it to income of the assessee by adding the same in the income of the assessee u/s. 40(a)(i). As noted that there is no deliberate inaction on the part of the assessee. Therefore, in view of decision in the case of CIT vs. Bank of Nova Scotia 2016 (1) TMI 583 - SUPREME COURT wherein the Hon ble Apex Court hold that the assessee has deliberately not avoided TDS and there is no contumacious conduct on the part of the assessee. Therefore, considering that aspect of the fact in this case. The bench feels that in this case levy of penalty is not correct as the assessee has reasonable cause for such failure and the revenue has already disregarded and disallowed the claim of the assessee on account of non deduction of tax. We hold that the levy of penalty is deleted on the ground that there was bona fide and reasonable cause in not deducting TDS. Decided in favour of assessee.

Summary

Issues Involved:
1. Justification of penalty under Section 271C of the Income Tax Act.
2. Limitation period for initiating and levying penalty.
3. Bona fide belief and reasonable cause for non-deduction of TDS.

Summary of Judgment:

Issue 1: Justification of Penalty under Section 271C
The assessee challenged the levy of penalty of Rs. 11,46,838/- under Section 271C of the Income Tax Act, arguing that no penalty was initiated in the order dated 29.03.2014 under Section 143(3) and that the assessee had a bona fide belief that no tax was deductible on payments to foreign suppliers without a permanent establishment in India. The CIT(A) dismissed the appeal, stating that the penalty proceedings under Section 271C are independent of the quantum appeal and are governed by Section 275(1)(c), making the cited court cases inapplicable. The assessee's dual stand on similar transactions further established a clear default in TDS deduction.

Issue 2: Limitation Period for Initiating and Levying Penalty
The assessee argued that the penalty was initiated after six years, which is beyond the reasonable period of four years as held in various judicial pronouncements. The CIT(A) dismissed this ground, stating that the limitation period for penalties under Section 271C is guided by Section 275(1)(c), which does not prescribe a specific time limit. The Tribunal agreed with this interpretation, noting that the penalty order was passed within the limitation period prescribed under Section 275(1)(c).

Issue 3: Bona Fide Belief and Reasonable Cause for Non-Deduction of TDS
The assessee contended that it had a bona fide belief that no tax was deductible based on various judicial pronouncements and the DTAA between India and the USA. The Tribunal noted that the levy of penalty under Section 271C is not automatic and requires the absence of reasonable cause. The Tribunal found that the assessee had a reasonable cause for not deducting TDS, as the revenue-neutral effect of the disallowance was sustained by the ITAT. The Tribunal held that there was no deliberate inaction or contumacious conduct on the part of the assessee, and thus, the penalty was deleted.

Conclusion:
The appeal of the assessee was allowed, and the penalty under Section 271C was deleted based on the reasonable cause and bona fide belief for non-deduction of TDS. The other grounds raised by the assessee were considered academic and treated as infructuous.