2025 (8) TMI 903 - AT - Income Tax

Assessment and penalty orders set aside for lack of hearing; matters restored for fresh AO consideration; penalty u/s 271C remanded

State Bank of India Versus DCIT (TDS), and Addl. CIT (TDS), Kanpur Nagar

State Bank of India Versus DCIT (TDS), and Addl. CIT (TDS), Kanpur Nagar - TMI 1. ISSUES PRESENTED and CONSIDERED Whether the order under sections 201(1)/201(1A) of the Income Tax Act, 1961, for non-deduction of tax at source on Leave Travel Concession (LTC)/Leave Fare Concession (LFC) involving foreign travel, is barred by limitation and hence void ab initio. Whether the retrospective application of amended section 201(3) of the Income Tax Act, 1961, as introduced by the Finance Act, 2014, to the relevant assessment year is valid. Whether the assessee can be held as an assessee in default for non-deduction of tax at source on LFC payments where the employee's designated place is in India but the journey includes foreign travel. Whether exemption under section 10(5) of the Income Tax Act, 1961, applies to LFC payments when the designated place is in India and the employee actually visits the designated place, including cases where foreign travel is part of the itinerary. Whether the exemption under section 10(5) is restricted only to the travel expenses incurred within India when the journey includes foreign travel. Whether the assessee's bona fide belief regarding non-liability to deduct tax at source on LFC payments negates the status of assessee in default under sections 201 and 201(1A) of the Act. Whether the penalty under section 271C of the Income Tax Act, 1961, for failure to deduct tax at source is valid when initiated after a significant delay (approximately six years) from the end of the financial year. Whether the impugned appellate order lacking digital or physical signature is valid and enforceable. Whether the penalty under section 271C can be sustained when there is reasonable cause for failure to deduct tax at source as per section 273 of the Income Tax Act, 1961. Whether the principles of natural justice were complied with in the proceedings before the Assessing Officer and the first appellate authority. 2. ISSUE-WISE DETAILED ANALYSIS Issue 1: Limitation on order under sections 201(1)/201(1A) for non-deduction of TDS on LFC involving foreign travel Legal Framework and Precedents: The limitation period for issuing orders under section 201(1)/201(1A) is governed by the provisions of the Income Tax Act and related rules. The principle of limitation protects assessees from belated assessments or demands. Court's Reasoning: The Tribunal noted the assessee's contention that the order was barred by limitation. However, the Assessing Officer issued the show cause notice after receiving information regarding non-deduction of tax on LFC payments involving foreign travel. Findings: The Tribunal observed that the assessee did not comply with the show cause notice and did not represent before the authorities, leading to the order. The Tribunal emphasized that the assessee was not given adequate opportunity to represent its case. Application of Law to Facts: The Tribunal held that principles of natural justice were not observed, and the assessee must be given an opportunity to present evidence and submissions. The issue was restored to the Assessing Officer for fresh adjudication. Conclusion: The order was not quashed on limitation grounds but was set aside for non-compliance with natural justice, directing fresh consideration. Issue 2: Retrospective application of amended section 201(3) of the Income Tax Act Legal Framework: Section 201(3) as amended by the Finance Act, 2014, deals with the liability of an assessee in default. The question was whether this amendment applies retrospectively to the assessment year under consideration. Court's Reasoning: The lower authorities held that the amendment is retrospective. The assessee challenged this view. Findings and Application: The Tribunal did not expressly rule on the retrospective nature but restored the matter for fresh consideration, implicitly requiring the Assessing Officer to examine applicability in light of the amendment. Conclusion: The issue remains open for fresh adjudication with due opportunity. Issue 3, 4, 5 & 6: Liability as assessee in default and applicability of exemption under section 10(5) on LFC payments involving foreign travel Legal Framework: Section 10(5) of the Income Tax Act exempts LTC/LFC payments for travel within India to the employee's designated place. Rules 2B prescribe conditions for such exemption. The question arises whether exemption applies when foreign travel is part of the itinerary. Court's Interpretation and Reasoning: The assessee contended that exemption applies to the extent of travel within India and where the designated place is in India. The Assessing Officer treated the entire LFC involving foreign travel as taxable and held the assessee in default for non-deduction of tax. Findings: The Tribunal noted the assessee's submission that exemption applies to the Indian leg of the journey only and that all conditions under section 10(5) and Rules 2B were fulfilled. However, as the matter was restored for fresh adjudication, the Tribunal did not conclusively decide the issue. Application of Law to Facts: The Tribunal directed the Assessing Officer to consider the exemption claim afresh with evidence and submissions from the assessee. Treatment of Competing Arguments: The Revenue relied on non-compliance and non-deduction of tax on full LFC amount, while the assessee emphasized partial exemption and bona fide belief of non-liability. Conclusion: The issue requires fresh adjudication with opportunity to the assessee to establish exemption and bona fide belief. Issue 7: Bona fide belief negating status as assessee in default under sections 201 and 201(1A) Legal Framework: The status of 'assessee in default' under sections 201 and 201(1A) requires failure to deduct tax without reasonable cause or justification. Court's Reasoning: The assessee argued bona fide belief of non-liability to deduct tax on LFC payments. The Assessing Officer did not consider this due to non-response by the assessee. Findings and Application: The Tribunal emphasized the need to consider bona fide belief and directed fresh adjudication with opportunity to the assessee to present evidence. Conclusion: The issue remains open for fresh consideration by the Assessing Officer. Issue 8: Validity of penalty under section 271C initiated after delay of approximately six years Legal Framework: Section 271C penalizes failure to deduct tax at source. The initiation of penalty proceedings must be within a reasonable time as per general principles and judicial precedents. Court's Reasoning: The assessee contended that penalty proceedings initiated after six years are not within reasonable time and hence void. Findings: The Tribunal noted that the issue was not raised before lower authorities and emphasized the need for natural justice and fresh consideration. Application: The penalty issue was restored to the Assessing Officer for fresh adjudication considering submissions including delay and reasonableness. Conclusion: The penalty order was set aside for fresh consideration with opportunity to the assessee. Issue 9: Validity of impugned appellate order lacking digital or physical signature Legal Framework: Validity of orders requires proper authentication, including signature, whether digital or physical, especially in faceless proceedings. Court's Reasoning: The assessee challenged the unsigned appellate order. Findings: The Tribunal did not directly quash the order on this ground but restored the matter for fresh adjudication, implicitly requiring compliance with procedural formalities. Conclusion: The procedural irregularity is to be addressed in the fresh proceedings. Issue 10: Reasonable cause under section 273 for failure to deduct tax at source Legal Framework: Section 273 provides for waiver of penalty if reasonable cause is shown for failure to deduct tax. Court's Reasoning: The assessee contended that there was reasonable cause for non-deduction. Findings and Application: Since the assessee did not present submissions before lower authorities, the Tribunal directed fresh consideration allowing the assessee to submit evidence and arguments regarding reasonable cause. Conclusion: The issue is remanded for fresh adjudication. Issue 11: Compliance with principles of natural justice Legal Framework: Natural justice mandates that an assessee must be given adequate opportunity of hearing and to present evidence before adverse orders are passed. Court's Reasoning: The Tribunal found that both the Assessing Officer and first appellate authority passed orders in the absence of any representation from the assessee, partly due to non-receipt of notices. Findings: The Tribunal held that principles of natural justice were not complied with and that the assessee must be given opportunity to effectively represent its case. Conclusion: Orders were set aside and matters restored for fresh adjudication with directions to provide opportunity to the assessee.