2016 (4) TMI 1097 - AT - Income Tax

Assessee prevails as Tribunal overturns penalty for failure to deduct tax on foreign payments

Smt. Aishwarya Rai Bachchan Versus Addl. Commissioner of Income Tax Range–2, Mumbai

Smt. Aishwarya Rai Bachchan Versus Addl. Commissioner of Income Tax Range–2, Mumbai - TMI Issues:Imposition of penalty under section 271C for failure to deduct tax at source under section 195.Analysis:The appeal was against the penalty imposed for not deducting tax under section 195 for remitting an amount to a non-resident. The Assessing Officer held the assessee as an assessee in default under section 201(1) and imposed a penalty. The assessee argued that the payment was for services rendered outside India and thus not subject to section 195. The Assessing Officer disagreed, stating the payment was for website design services and fell under 'fees for technical services.' The penalty under section 271C was imposed as the assessee failed to deduct tax at source despite admitting liability. The Commissioner (Appeals) upheld the penalty, leading to the appeal.The Authorized Representative argued that the penalty under section 271C requires a reasonable cause for failure to deduct tax at source. The Chartered Accountant advised against deduction based on DTAA provisions, leading the assessee to believe no tax was required. The Authorized Representative contended that the penalty was unjustified due to the reasonable cause. Additionally, the penalty order was challenged on grounds of limitation.The Tribunal noted that while the assessee accepted liability for tax deduction under section 195, it does not automatically lead to penalty under section 271C. The imposition of penalty is subject to the condition of reasonable cause under section 273B. The Tribunal found that the Chartered Accountant's certificate provided a valid reason for the assessee's failure to deduct tax at source. The Tribunal emphasized that the failure was due to a reasonable cause, as the assessee relied on professional advice and the complex nature of tax deduction for non-resident payments. The penalty under section 271C was deemed unjustified and was deleted.The Tribunal refrained from adjudicating on the limitation issue as the penalty was deleted based on the reasonable cause. Consequently, the appeal was allowed, and the penalty under section 271C was removed.This detailed analysis showcases the legal intricacies involved in the judgment, focusing on the imposition of penalty for failure to deduct tax at source under section 195 and the subsequent considerations regarding reasonable cause and professional advice in tax compliance.