2009 (3) TMI 636 - AT - Income Tax

Penalty under Income-tax Act quashed due to reasonable cause for delayed TDS deduction

The penalty imposed under section 271C of the Income-tax Act, 1961 was challenged in four appeals by the assessee. The issue revolved around the timing of ... Penalty - For failure to deduct tax at source Issues Involved:1. Confirmation of penalty imposed u/s 271C of the Income-tax Act, 1961.Summary:Issue 1: Confirmation of penalty imposed u/s 271C of the Income-tax Act, 1961The present four appeals are directed at the instance of the assessee against the common order of learned CIT (Appeals) dated 26-9-2005 passed for assessment years 1996-97 to 1999-2000. The common issue involved in all the appeals relates to confirmation of penalty imposed u/s 271C of the Income-tax Act, 1961. The learned counsel for the assessee submitted that the assessee-company, a residuary non-banking company, was following the mercantile system of accounting and created an interest provision account in its books. Due to non-computerization and the volume of business, it was not possible to credit interest to individual deposit accounts. The assessee deducted TDS on actual payment of interest and deposited it with the Government. No order u/s 201 was passed, indicating no dispute on quantification and payment of TDS. The Assessing Officer imposed the penalty u/s 271C on the ground that TDS should have been deducted when interest accrued and was credited to the interest provision account. The assessee argued that there was a reasonable cause for not deducting TDS at that point, and the issue was covered in favor of the assessee by the ITAT decision in the case of Sahara India Mutual Benefit Co. Ltd. v. Jt. CIT.The ITAT examined whether the assessee committed a default u/s 194A by not deducting TDS when interest was credited to the interest provision account. The ITAT found that the assessee had a reasonable cause for not deducting TDS at that time. The ITAT noted that the tax was deducted at the time of actual payment and paid to the Government. The ITAT also observed that the penalty u/s 271C is subject to the provisions of section 273B, which provides that no penalty shall be imposable if there was a reasonable cause for the failure. The ITAT concluded that the assessee had a bona fide belief that TDS was not required to be deducted at the time of crediting interest to the provision account, and thus, no penalty u/s 271C was warranted.In view of the above facts and circumstances, the penalty imposed by the learned Addl. CIT is quashed. Accordingly, the penalty imposed u/s 271C is deleted, and all four appeals filed by the assessee are allowed.In the result, all four appeals filed by the assessee are allowed.