TaxTMI 
TaxTMI 
2008 (3) TMI 385
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....terest amount payable to Larsen & Toubro Ltd. The AO treated the assessee as an assessee in default. The AO also initiated penalty proceedings under s. 271C for assessee's failure to deduct tax at source. During the penalty proceedings, the assessee submitted its explanation as under: (1) That the assessee was under a bona fide and reasonable belief that the tax was not liable to be deducted from the payment of interest credited in the account of M/s Larsen & Toubro Ltd. (2) That there was no obligation on the assessee to deduct tax at source in respect of the impugned interest which was claimed to be not chargeable to tax by the deductee. (3) That there was no requirement of deducting tax at source if the income has already been taxed and the payment has already been paid by the payee/recipient, and the same cannot be again recovered from the payer. 3. In support of the explanation, the assessee relied upon a legal opinion given by M/s C.C. Choksi & Co. on the issue involved as to whether any tax was required to be deducted at source from the provisions of interest credited to the amount of Larsen & Toubro Ltd. The assessee has further relied upon the fact that the deducte....
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....07 1,17,02,193 7-04-2006 ------------------------------------------------------- 8,45,74,097 ------------------------------------------------------- (2) The AO has also rejected the assessee's contention that the interest income has already been taxed in the hands of L&T Ltd, in asst. yr. 2001-02, hence, there was no necessity to deduct tax at source in the financial years 2001-02 to 2005-06. The AO stated that since these amounts were debited in the assessee's books of accounts (sic) amounts should have been included as income by the L&T Ltd. in the relevant years and cannot be said that income has already been included in the interest income of Rs. 51.61 crores shown in the asst. yr. 2000-01 by M/s L&T Ltd. (3) The assessee's bona fide belief that the amounts which were credited to the account of L&T Ltd. during various financial years were not in the nature of income, and therefore, no TDS was deductible, holds no water, inasmuch as these amounts were claimed by the assessee as deductible revenue expenditure....
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....a total liability in the P&L a/c and the moment it was debited in the P&L a/c and claimed it as subsequent action either of the assessee or the Department in not accepting/rejecting the claim of the assessee in the course of assessment cannot be considered to be reasonable cause for the default for not deducting the tax at source from the interest liability. The CIT(A) further observed that the assessee cannot be allowed to take advantage of an uncertain future event and if the assessee's defence in pleading non-acceptance of its claim of deductibility of interest for income-tax assessment is accepted, it precisely amounts to taking advantage of an uncertain event; (4) The CIT(A) further observed that the assessee's contention that L&T has already paid tax is also not correct; (5) The CIT(A) further made an observation that the assessee has taken a contrary stand with regard to its liability of deducting tax at source vis-a-vis its claim of deduction of interest debited in the P&L a/c. In other words, the CIT(A) has stated that on one hand, the assessee is claiming the amount of interest as deductible expenditure in its income-tax assessment and, on the other hand, the as....
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.... 1006/Pn/2006 to 1010/Pn/2006 pertaining to the asst. yrs. 2001-02 to 2005-06 has set aside the AO's order and cancelled the impugned demand raised by the AO under s. 201(1) of the Act in respect of the amount of tax allowed to be deducted at source by the assessee from the interest liability credited to the account of L&T Ltd. He has invited our attention to the copy of this order which is placed at pp. 56 to 60 of the paper book. The operative portion of the order reads as under: "The law is well-settled that tax deduction at source liability is only a vicarious liability and when primary liability itself is extinguished, vicarious liability cannot be invoked. There are a series of judgments by the Hon'ble High Courts on this line of reasoning and now, the recent case of Hindustan Coca Cola Beverage (P) Ltd. vs. CIT [Civil Appeal No. 3765 of 2007, dt. 16th Aug., 2007]. Hon'ble Supreme Court has approved the same proposition. Those were the cases in which primary liability was discharged by the recipient. The case before us is also that there are no taxes due from the recipients in those assessment years. As a matter of fact. in the present case, the primary liability....
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....espect of such tax." 12. Now, the question arises as to whether the penalty under s. 271C for the default in not deducting the tax at source should not be levied merely because the tax liability in the meantime has been discharged by the deductee. In this connection, a reference to a decision of the Hon'ble Supreme Court in the case of Hindustan Coca Cola Beverage (P) Ltd. vs. CIT (2007) 211 CTR (SC) 545 : (2007) 293 ITR 226 (SC) may be made. In support of the contention that when the primary liability of the tax on the part of the deductee has been discharged, the vicarious liability of tax on the part of the deductor does not survive, the assessee has derived strength from the said decision of the Hon'ble Supreme Court in the case of Hindustan Coca Cola Beverage (P) Ltd. In this case, the Hon'ble Supreme Court has held that in view of Circular No. 275/201/95-IT(B), dt. 29th Jan., 1997 and since the assessee has paid the interest under s. 201(1A) and there was no dispute that the tax due had been paid by the deductee, the Tribunal came to the right conclusion that the tax could not be recovered once again from the assessee. The relevant portion of the decision of the ....
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....ource since the tax liability has already been discharged by the assessee deductee is rejected. 14. The assessee has also taken a plea that the assessee did not deduct the tax at source on the interest liability credited to L&T Ltd. as per the legal advice given by M/s C.C. Chokshi & Co. This explanation of the assessee has been rejected by the CIT(A) by saying that this submission of the assessee that no TDS was deducted by the assessee under a legal advice of M/s C.C. Chokshi & Co., lacks merit because this advice is not obtained by the appellant but by L&T Ltd. The CIT(A) further observed that since this advice was neither given to L&T Finance from whom the assessee had taken over the liability nor to the assessee, the case law relied upon by the assessee in this regard is not applicable to the facts of the present case. This stand of the CIT(A) in our considered opinion, is not justified because of the reason that what is material is the nature of the advice connected to the issue in hand and not the person who has obtained the legal advice from a legal expert. The CIT(A) has not disputed the fact that the legal advice was obtained by L&T Ltd. in respect of the issue as to whe....
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.... expert. It was further observed that the explanation offered by the assessee, if any, has to be proved to be false to attract the penalty under s. 271(1)(c) of the Act. Though this decision was rendered in the context of penalty imposable under s. 271(1)(c), the principle that if the assessee had acted on a bona fide belief and there was no conscious and deliberate default on the part of the assessee, the penalty should not be imposed, is still applicable in the case of the penalty imposable for failure to deduct tax at source. In this connection, we may also refer to a decision of Hon'ble Delhi High Court in the case of CIT vs. Fourways International, in IT Appeal No. 382 of 2007, decided on 25th Sept., 2007, where it has been held that s. 273B does not make liable for penalty under s. 271C mandatory and the assessee would not be liable to penalty if he was able to prove that there was a reasonable cause for failure to deduct tax. In this case, the assessee had given an explanation that based on the wrong advice given by its chartered accountant, the assessee made certain payments for fabrication charges but had not deducted tax at source. The explanation of the assessee foun....