2001 (4) TMI 34 - HC - Income Tax

Penalty under section 271C not automatic; assessing officer must consider reasonable cause and assessee's honest belief

HC held that penalty under section 271C is not automatic and requires the assessing officer to first consider whether the failure to deduct TDS was ... Penalty for failure to deduct tax at source - Reasonable cause under section 273B - Burden of proof on the assessee to establish reasonable cause - Non obstante clause effect - Levy of penalty under section 271C not automatic - Liability to deduct tax at source under section 192Reasonable cause under section 273B - Burden of proof on the assessee to establish reasonable cause - Levy of penalty under section 271C not automatic - Validity of the Commissioner's order in relation to consideration of the plea of reasonable cause under section 273B before upholding penalty under section 271C. - HELD THAT: - Section 273B, introduced with a non obstante clause, provides that notwithstanding specified penalty provisions including section 271C no penalty shall be imposable if the person proves reasonable cause for the failure. A non obstante clause gives the subsequent enactment overriding effect so that absence of reasonable cause is the sine qua non for application of the penal provision. Levy of penalty under section 271C is therefore not automatic; the initial burden lies on the assessee to establish reasonable cause. The officer must then consider whether the explanation amounts to reasonable cause - a standard of probable cause or honest belief founded upon reasonable grounds, such that an ordinarily prudent person placed in the same position would have acted similarly. The Commissioner's failure to consider the petitioner's plea of reasonable cause vitiates his order; the Commissioner's conclusion was rendered non-maintainable for want of such consideration.The impugned order is set aside to the extent that the Commissioner's order did not consider the plea of reasonable cause; the matter must be reconsidered with that plea kept in view.Liability to deduct tax at source under section 192 - Penalty for failure to deduct tax at source - Whether the petitioner was liable to deduct tax at source under section 192 in respect of the expatriate employee and whether that question stands finally decided. - HELD THAT: - The Court noted that the Commissioner's conclusion on liability under section 192 was part of the factual and legal matrix relevant to imposition of penalty, but declined to express any opinion on the merits. Given the Commissioner's failure to address reasonable cause, the question of liability to deduct under section 192 requires fresh examination in the course of reassessing reasonable cause. The Court directed that the Commissioner may re-examine the liability issue while considering the existence of reasonable cause, without this Court expressing any view on the substantive merits.Liability under section 192 is not finally adjudicated by this Court and is remitted to the Commissioner for fresh consideration along with the reasonable-cause plea.Final Conclusion: The Commissioner's order dated November 3, 2000, upholding penalty under section 271C is set aside because the plea of reasonable cause under section 273B was not considered; the question of liability to deduct under section 192 is remitted to the Commissioner for fresh consideration in the light of the assessee's reasonable-cause defence. Issues Involved: Application u/s 226 and 227 of the Constitution of India questioning penalty imposed u/s 271C of the Income-tax Act, 1961.Factual Aspect: Petitioner's TDS return found improper deduction for an expatriate employee leading to penalty u/s 271C. Petitioner argued against deeming provision in section 9(1)(ii) and non-resident company payment.Legal Standpoints: Petitioner argued Commissioner failed to consider reasonable cause u/r 273B. Revenue contended penalty warranted if conditions not met, reasonable cause linked to liability to deduct tax at source.Analysis of Legal Provisions: Sections 271C and 273B discussed. Section 273B provides for no penalty if reasonable cause proven, emphasizing the importance of reasonable cause in penalty imposition.Judgment: Court found petitioner's stand on reasonable cause valid. Commissioner's failure to consider reasonable cause vitiated the order. Commissioner's conclusion on liability u/s 192 to deduct tax at source to be re-examined. Impugned order set aside, writ petition allowed without costs.