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        <h1>Penalty under Section 271C deleted as notice issued beyond limitation period despite assessee's knowledge</h1> <h3>M/s Bharat Coking Coal Limited Versus J.C.I.T. (TDS), Dhanbad.</h3> M/s Bharat Coking Coal Limited Versus J.C.I.T. (TDS), Dhanbad. - TMI 1. ISSUES PRESENTED and CONSIDEREDThe core legal questions considered by the Appellate Tribunal in these appeals are:Whether the initiation of penalty proceedings under Section 271C of the Income Tax Act, 1961, after a lapse of approximately nine years from the relevant assessment years, is barred by limitation.Whether the penalty imposed under Section 271C for failure to deduct Tax Deducted at Source (TDS) on notional interest provisions in the books of account is sustainable, given that the interest was a hypothetical entry required by the Board for Industrial and Financial Reconstruction (BIFR) and was subsequently waived.Whether the disallowance under Section 40(a)(ia) of the Act precludes the imposition of penalty under Section 271C for non-deduction of TDS on the same amount.Whether the absence of any order under Section 201 or other provisions holding the assessee as 'assessee in default' for non-deduction of TDS affects the validity of penalty under Section 271C.Whether the assessee's bona fide belief and reasonable cause under Section 273B of the Act can be accepted as a defense against the penalty for non-deduction of TDS on notional interest.2. ISSUE-WISE DETAILED ANALYSISIssue 1: Limitation for Initiation of Penalty Proceedings under Section 271CRelevant legal framework and precedents: The Income Tax Act does not specify a limitation period for initiation of penalty proceedings under Section 271C. However, judicial precedents have established that where no specific limitation is prescribed, the action must be initiated within a reasonable period, generally considered to be four years from the relevant assessment year. The Tribunal relied heavily on the decisions of the Hon'ble Delhi High Court in CIT vs. NHK Japan Broadcasting and Bharti Airtel vs. UOI, as well as the ITAT Delhi Bench ruling in Hindustan Coca Cola Beverages Co. Pvt. Ltd. vs. JCIT.Court's interpretation and reasoning: The Tribunal observed that the penalty notice was issued on 28/02/2018, nearly nine years after the relevant assessment years (2008-09, 2009-10, and 2010-11). The CIT(A) had held that since an order under Section 201(1) was passed on 20/02/2018, the penalty notice issued within eight days thereafter was not time-barred. However, the Tribunal distinguished this reasoning by referring to the above precedents, which clarified that the limitation period starts from the end of the relevant assessment year and not from the date of knowledge or subsequent orders.Key evidence and findings: The assessee's submissions highlighted the delay of nearly nine years in initiating penalty proceedings. The Tribunal noted the absence of any statutory provision extending the limitation period and emphasized the settled legal position that penalty proceedings must be initiated within a reasonable time frame, generally four years.Application of law to facts: Applying the legal principles, the Tribunal held that the initiation of penalty proceedings after such a prolonged delay was barred by limitation and hence invalid.Treatment of competing arguments: The revenue's reliance on the CIT(A) order and the timing of the Section 201(1) order was rejected as inconsistent with judicial pronouncements. The Tribunal underscored that the date of knowledge of default is irrelevant for limitation purposes under the Income Tax Act.Conclusions: The penalty proceedings initiated after nine years were held to be time-barred and therefore void.Issue 2: Applicability of TDS Deduction on Notional Interest and Penalty under Section 271CRelevant legal framework and precedents: Section 194A mandates deduction of TDS on interest payments. However, the legal position is well settled that TDS is not deductible on notional or hypothetical interest entries, particularly when such interest is not actually paid or crystallized as income.Court's interpretation and reasoning: The Tribunal considered the facts that the assessee, a government company and a Public Sector Undertaking (PSU), had made a notional provision of interest in its books as required by BIFR for financial reporting purposes. This interest was subsequently waived by the parent company, Coal India Limited. The Tribunal noted that no actual payment or liability had arisen, and the interest was a mere accounting entry.Key evidence and findings: The assessee's submissions were supported by the fact that the interest provision was made solely for BIFR compliance, was not recognized as income by the parent company, and was waived later. Additionally, the assessee had consistently deducted TDS on all other applicable transactions and had filed all TDS returns timely. Auditors and tax authorities had not previously objected to the non-deduction of TDS on this notional interest.Application of law to facts: The Tribunal applied the principle that TDS cannot be imposed on hypothetical or notional interest which does not constitute actual income or payment. The penalty under Section 271C, which presupposes a failure to deduct TDS on a real transaction, was therefore not sustainable.Treatment of competing arguments: The revenue's contention that the notional interest was liable for TDS was rejected. The Tribunal accepted the assessee's bona fide belief and the absence of any malafide intent or loss to revenue.Conclusions: The penalty imposed for non-deduction of TDS on notional interest was held to be unjustified and liable to be deleted.Issue 3: Effect of Disallowance under Section 40(a)(ia) on Penalty under Section 271CRelevant legal framework and precedents: Section 40(a)(ia) provides for disallowance of expenditure where TDS is not deducted or paid. However, this disallowance does not automatically trigger penalty under Section 271C unless the assessee is held to be an 'assessee in default' under Section 201.Court's interpretation and reasoning: The Tribunal noted that the Assessing Officer had made disallowance under Section 40(a)(ia) but had not passed any order under Section 201 or any other provision declaring the assessee as an assessee in default for non-deduction of TDS. In the absence of such an order, penalty under Section 271C could not be imposed.Key evidence and findings: The absence of any order under Section 201 was a critical fact. The Tribunal emphasized that the penalty under Section 271C is contingent upon the assessee being held in default under Section 201.Application of law to facts: Since no such order was passed, the penalty was not maintainable.Treatment of competing arguments: The revenue's failure to produce any order under Section 201 was fatal to its case on penalty.Conclusions: Penalty under Section 271C could not be sustained without an order holding the assessee in default under Section 201.Issue 4: Bona Fide Belief and Reasonable Cause under Section 273BRelevant legal framework and precedents: Section 273B provides that no penalty shall be imposed if the assessee can prove that the failure to deduct or pay TDS was due to reasonable cause and not due to willful neglect.Court's interpretation and reasoning: The Tribunal accepted the assessee's submission that it acted under bona fide belief that no TDS was deductible on the notional interest provision. The assessee's accounts were audited by internal auditors, tax auditors, and the Comptroller and Auditor General (CAG), none of whom had raised objections. The assessee had also filed all TDS returns timely for other transactions.Key evidence and findings: The absence of any prior objection or notice regarding TDS on the notional interest, and the fact that the interest was a hypothetical entry required by BIFR, supported the assessee's claim of reasonable cause.Application of law to facts: The Tribunal found that the assessee had exercised due diligence and had reasonable cause for non-deduction of TDS.Treatment of competing arguments: The revenue's argument of default was negated by the assessee's credible explanation and absence of malafide intent.Conclusions: The penalty could not be imposed in presence of reasonable cause and bona fide belief.3. SIGNIFICANT HOLDINGS'We are not inclined to disturb the lime-limit of four years prescribed by the Tribunal and are of the view that in terms of the decision of the Supreme Court in Bhatinda District Co-op. Mil (P.) Union Ltd's case action must be initiated by the competent authority under the Income-tax Act where no limitation is prescribed as in section 201 of the Act within that period of four years.''The date of knowledge is not relevant for the purposes of exercising jurisdiction insofar as the provisions of the Income-tax Act are concerned. If it were so, the limitation period, as for example prescribed under section 147/148 of the Act would become meaningless if the concept of knowledge is imported into the scheme of the Act.''It is a settled position of law that TDS cannot be deducted on notional interest provision in the books of account.''Penalty under Section 271C cannot be imposed unless the assessee is held to be an 'assessee in default' under Section 201 of the Act.''Where the assessee has bona fide belief and reasonable cause for non-deduction of TDS, penalty under Section 271C is not imposable.'Final determinations:The penalty proceedings initiated after nine years were barred by limitation and thus invalid.The penalty imposed under Section 271C for non-deduction of TDS on notional interest was unsustainable.The absence of any order under Section 201 declaring the assessee as an assessee in default negated the basis for penalty under Section 271C.The assessee's bona fide belief and reasonable cause defense under Section 273B was accepted, further negating the penalty.Accordingly, all penalties imposed under Section 271C for AY 2008-09, 2009-10, and 2010-11 were deleted and the appeals allowed.

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