2019 (7) TMI 601 - AT - Income Tax

Tribunal overturns penalty for non-deduction of tax citing reasonable cause and conflicting judicial opinions.

The Tribunal allowed the appeals of the assessee, deleting the penalty levied under section 271C. It held that the appellant had a reasonable cause for ... Reasonable cause - penalty under section 271C - tax deduction at source under section 194H - conflicting judicial decisionsReasonable cause - penalty under section 271C - tax deduction at source under section 194H - conflicting judicial decisions - Whether penalty under section 271C can be levied for failure to deduct tax at source under section 194H where there existed divergent judicial views on the characterisation of the payments (discount alleged as commission) giving rise to a reasonable cause for non-deduction. - HELD THAT: - The Tribunal found that the question whether the discounted supply to prepaid distributors attracted TDS under section 194H was debatable, with different Tribunals and High Courts taking divergent views. Because the controversy was genuinely contestable and the assessee had relied on earlier favourable Tribunal decisions (later reversed by a High Court) and other judicial authorities supporting its position, the assessee established a reasonable cause for non-deduction. In such circumstances, penalty under section 271C could not be imposed. The Tribunal applied the statutory principle that proof of reasonable cause precludes levy of penalty for failure to deduct TDS, and followed the assessee's own earlier Tribunal decision on identical facts. [Paras 10, 11]Penalty levied under section 271C for non-deduction under section 194H deleted on account of reasonable cause arising from conflicting judicial decisions.Limitation - Whether grounds alleging that the penalty order was time-barred under section 275 were pressed for assessment years 2003-04 and 2004-05. - HELD THAT: - At the hearing the assessee's authorised representative did not press grounds 1 and 2 (limitation) for assessment years 2003-04 and 2004-05. Consequently those grounds were dismissed as not pressed. [Paras 3]Grounds alleging the penalty order was barred by limitation for A.Y. 2003-04 and 2004-05 dismissed as not pressed.Final Conclusion: Appeals allowed: penalty under section 271C deleted for the assessment years in dispute on the basis that the assessee had reasonable cause for non-deduction of TDS under section 194H owing to conflicting judicial decisions; limitation grounds for A.Y. 2003-04 and 2004-05 were not pressed and dismissed. Issues Involved:1. Barred by limitation u/s 275 of the Act.2. Levying of penalty u/s 271C for failure to deduct tax at source u/s 194H.3. Reasonable cause for non-deduction of TDS under section 273B.Issue-wise Detailed Analysis:1. Barred by limitation u/s 275 of the Act:The appellant contended that the penalty orders passed u/s 271C were barred by limitation under section 275 of the Income Tax Act, 1961. The Commissioner of Income-tax (Appeals) [CIT(A)] did not annul the penalty orders despite the appellant's claim that they were time-barred. However, during the hearing, the appellant did not press this ground for the assessment years 2003-04 and 2004-05, leading to the dismissal of this ground for those years.2. Levying of penalty u/s 271C for failure to deduct tax at source u/s 194H:The appellant argued that the CIT(A) erred in upholding the penalty levied by the TDS Officer under section 271C for failure to deduct tax at source under section 194H on the 'discount' given to distributors, which the department alleged as 'commission.' The appellant maintained that they acted under an honest and bona fide belief that tax was not deductible under section 194H. This belief was initially upheld by the Tribunal before being reversed by the High Court. The appellant cited section 273B, which provides that no penalty shall be imposed if there is a 'reasonable cause' for the failure. The appellant also pointed out that the mechanism to deduct TDS fails in the absence of 'payment' or 'credit,' thereby providing a reasonable cause for non-deduction of TDS under section 194H.3. Reasonable cause for non-deduction of TDS under section 273B:The appellant argued that the relationship between the assessee and the distributor was on a principal-to-principal basis, and not principal-agent, thus section 194H would not apply. This view was initially affirmed by the Tribunal and later reversed by the High Court. The appellant also contended that in the absence of payment or credit by the appellant, section 194H does not apply as the mechanism to deduct TDS fails. The appellant relied on several case laws to support their argument, including:- M. S. Hameed Vs. Director of State Lotteries (249 ITR 186) (Ker.)- CIT Vs. Qatar Airways (332 ITR 253) (Bom.)- Piramal Healthcare Ltd. Vs. ACIT (21 taxmann.com 225) (Trib-Mumbai)- SRL Ranbaxy Ltd. Vs. ACIT (2011) (50 SOT 173) (TDel)The Tribunal noted that the issue of penalty u/s 271C is debatable as different courts have taken diverse views. The Tribunal concluded that the appellant had a reasonable cause for non-deduction of tax at source on the discount allowed to the prepaid distributor, given the conflicting judicial opinions. Consequently, the Tribunal held that the action of non-deduction of tax would not attract penalty u/s 271C, following the precedent set in the appellant's own case for earlier assessment years.Conclusion:The appeals of the assessee were allowed, and the penalty levied under section 271C was deleted. The Tribunal emphasized that the issue was debatable and the appellant had a reasonable cause for non-deduction of tax at source, thereby not attracting the penalty provisions of section 271C. The order was pronounced in the Open Court on 10th July 2019.