Tax deduction at source for disguised interest payments: reasonable cause defence failed and penalty was upheld

Amounts described as discounting charges were treated as interest arising from short-term loan arrangements, bringing them within the tax deduction obligation for interest payments. The assessee failed to prove reasonable cause under section 273B, as the transaction was found to be camouflaged and the Director had admitted during survey that the payments were in the nature of interest. Bona fide belief or ignorance of law was rejected, non-deduction was not excused by the payees having paid tax, and proof of mens rea was held unnecessary for penalty under section 271C; the penalty was upheld.

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Issues: Whether the assessee had shown reasonable cause for failure to deduct tax at source on amounts described as discounting charges, so as to escape penalty under section 271C.

Analysis: The amounts paid to financiers were found to arise from short-term loan arrangements and not from genuine bill discounting. The charges were therefore held to be interest within the meaning of section 2(28A) and liable for deduction of tax under section 194A. The assessee did not discharge the burden under section 273B of proving reasonable cause. The plea of bona fide belief or ignorance of law was rejected, since the transaction had been camouflaged and the Director had admitted during survey that the payments were in the nature of interest. The fact that the payees had paid tax did not absolve the assessee of its statutory obligation to deduct tax at source, and proof of mens rea was not necessary for penalty under section 271C.

Conclusion: Penalty under section 271C was upheld, and the assessee's defence of reasonable cause failed.

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