2005 (2) TMI 453 - AT - Income Tax

ITAT Upholds Penalty Cancellation for Failure to Deduct Tax

The ITAT dismissed the Revenue's appeal and upheld the cancellation of the penalty imposed under section 271C of the IT Act. The penalty was canceled ... Failure To Deduct Tax At Source Issues:- Imposition of penalty under section 271C of the IT Act for shortfall in deduction of tax at source.- Whether the failure to deduct tax at source was due to a reasonable cause.- Interpretation of discount and rebate as not constituting commission or brokerage.Analysis:1. The appeal by the Revenue challenged the cancellation of a penalty imposed under section 271C of the IT Act for the financial year 2001-02. The assessee, a travel agent company, deducted tax at source on commissions paid to sub-agents but did not deduct tax on discounts and rebates, arguing that these did not constitute commission. The Assessing Officer issued a show-cause notice for short deduction of tax at source, leading to the imposition of a penalty. The Joint Commissioner of Income Tax (Jt. CIT) held the assessee liable for the penalty under section 271C.2. The assessee contended before the CIT(A) that discounts and rebates were not subject to tax deduction at source as they were not considered commission or brokerage under the IT Act. The assessee presented opinions from tax experts, including former CBDT chairman, supporting their belief. The CIT(A) found that the failure to deduct tax was due to a reasonable cause, as the assessee acted in good faith based on expert advice and industry practices.3. The CIT(A) referenced the Woodward Governor India Ltd. case and the Hindustan Steel Ltd. case to support the decision that the penalty was not warranted in this case. The CIT(A) noted that the assessee's belief was reasonable and based on expert opinions. The CIT(A) highlighted that the assessee started deducting tax on discounts once the matter was clarified by the CBDT, showing a willingness to comply with tax regulations.4. The ITAT upheld the CIT(A)'s decision, emphasizing that the failure to deduct tax was not due to any mala fide intent or recklessness. The ITAT referred to similar cases where penalties were canceled due to a reasonable cause for non-deduction of tax at source on discounts. The ITAT found that the Revenue authorities were not justified in imposing the penalty and upheld the CIT(A)'s decision to cancel the penalty.5. The ITAT further questioned the clarity in the penalty order regarding the specific amounts subject to tax deduction, highlighting the lack of clarity on the difference between handling charges and commissions. The ITAT concluded that the penalty imposition was not justified without clear details on the amounts for which tax was allegedly not deducted at source.6. In conclusion, the ITAT dismissed the Revenue's appeal, affirming the cancellation of the penalty by the CIT(A) based on the reasonable cause for the failure to deduct tax at source on discounts and rebates.