2007 (6) TMI 297 - AT - Income Tax

ITAT Upholds Penalties for Failure to Deduct Tax on Discounting Charges

The ITAT confirmed penalties under section 271C for the assessee's failure to deduct tax at source on discounting charges, considering them as interest ... Deduction of tax at source Issues Involved:1. Confirming of penalty under section 271C of the Act for failure to deduct tax at source on discounting charges incurred.Issue-wise Detailed Analysis:1. Confirming of Penalty under Section 271C:Facts and Background:A survey under section 133A was conducted at the business premises of the assessee, revealing that the assessee had been debiting 'financial charges' under the head 'Discounting charges' for financial years 1999-2000 and 2000-01. The amounts debited were Rs. 45,96,349 and Rs. 49,40,715 respectively. The Assessing Officer (AO) observed that these payments were in the nature of interest and attracted the provisions of section 194A, which mandates tax deduction at source (TDS). The director of the assessee-company admitted this during the survey but later claimed ignorance and no intention to evade tax.Penalty Proceedings:During the penalty proceedings, the assessee argued that it believed the payments were 'discounting charges' and not 'interest,' thus not covered under section 194A. The AO disagreed, stating that the financial charges paid were indeed in the nature of interest under section 2(28A) and that the assessee's failure to deduct TDS was intentional. The AO imposed penalties of Rs. 6,65,091 and Rs. 10,44,582 for the respective financial years.Appeal to CIT(A):The assessee contended that it should not be treated as an assessee in default since the deductees had already paid the taxes on their income, including the discounting charges. The CIT(A) rejected this argument, emphasizing that the deductor's responsibility to deduct tax at source cannot be absolved by the deductee's payment of tax. The CIT(A) upheld the AO's decision, including the classification of discounting charges as interest under section 2(28A), referencing the decision of the Madras High Court in Viswapriya Financial Services & Securities Ltd. v. CIT.Reasonable Cause and Mens Rea:The CIT(A) noted that the initial burden to prove reasonable cause for non-deduction of tax lies with the assessee, which the assessee failed to discharge. The CIT(A) also referenced the Supreme Court's decision in Gujarat Travancore Agency v. CIT, which states that the element of mens rea is not required for imposing penalties under such provisions.Arguments before ITAT:The assessee reiterated that it believed no tax was deductible on discounting charges and that there was no mens rea or deliberate intention to avoid tax. The assessee also argued that since the deductees had paid the taxes, the revenue had not suffered any loss. The assessee cited various judicial decisions to support its case, but the ITAT found these cases distinguishable on facts.ITAT's Findings:The ITAT noted that the transactions were essentially short-term loans, and the financial charges were in the nature of interest. The ITAT upheld the AO's and CIT(A)'s findings that the assessee's classification of these charges as discounting charges was an attempt to avoid TDS obligations. The ITAT also rejected the argument of reasonable cause, stating that ignorance of law is not an excuse, and the assessee had not provided any material to substantiate its claim of bona fide belief.Conclusion:The ITAT concluded that the assessee's failure to deduct tax at source was deliberate and without reasonable cause. The penalties under section 271C were confirmed for both financial years, and the appeals by the assessee were dismissed.