Penalty under s 271C — No penalty can be levied on the assessee for breach in deduction of TDS as no “mala fide intention” or “deliberate defiance” of law was committed by the assessee

Penalty under s 271C — No penalty can be levied on the assessee for breach in deduction of TDS as no “mala fide intention” or “deliberate defiance” of law was committed by the assessee — as held by DelHC in CIT v Cadbury India Limited; ITA Nos. 1397, 1398/2008 and 429/2009, 14 April 2011

Decided on: 28 March 2011 — In favour of: The Assessee.

The fact that the assessee has not disputed the quantum is not a good ground for imposition of penalty since the findings in the assessment proceedings are not conclusive.

The assessee entered into composite agreement with Clearing and Forwarding Agents (CFA) for storage, leading, unloading, clearing, forwarding and supply of manpower for the jobs as per the requirement of the assessee, and paid rent for use of space in the warehouse. The assessee had been consistently following the practice of deducting TDS under s 194C whereas the deductions were required to be made by the assessee under s 194-I and s 194J for the payments being made by the assessee under different heads to the CFAs. The AO passed an order under s 201 holding that the assessee was wrongly deducting tax at source under s 194C on payment of rent and CFAs remuneration whereas the assessee was liable to deduct TDS under s 194-I and 194J and also levied a penalty under s 271C. In the proceedings conducted under s 201, the assessee accepted that it was liable to deduct tax under 194-I and 194J though it disputed the levy of a penalty under s 271C on the ground that the failure was due to “misconceived professional advice”. The CIT(A) dismissed the appeal filed by the assessee. However, the Tribunal allowed the appeal filed by the assessee. Being aggrieved, the revenue has filed the present appeal. The counsel for the assessee submitted that deductions were being made by the assessee in a consolidated form under s 194C on the professional advice of the Chartered Accountant, etc.

The issue is whether the Tribunal was justified in deleting the penalty for TDS breach as no “mala fide intention” or “deliberate defiance” of law was committed by the assessee and whether the imposition of a penalty is justified merely because the assessee has not disputed the quantum proceedings.

The fact that the assessee has not disputed the quantum is not a good ground for the imposition of a penalty since the findings in the assessment proceedings are not conclusive. It is not a good ground for the imposition of a penalty unless and until any material is brought on record by the Revenue to the effect that the assessee deliberately defied the provision of the law.

The levy of a penalty under s 271C is not automatic. Before levying a penalty, the concerned officer is required to find out that even if there was any failure referred to in the concerned provision, the same was without a reasonable cause. The initial burden is on the assessee to show that there existed reasonable cause which was the reason for the failure referred to in the concerned provision. Thereafter, the officer dealing with the matter has to consider whether the Explanation offered by the assessee or the person, as the case may be, as regards the reason for failure, was on account of reasonable cause. “Reasonable cause” means an honest belief, founded upon reasonable grounds, of the existence of a state of circumstances, which assuming them to be true, would reasonably lead any ordinary prudent and cautious man, placed in the position of the person concerned, to come to the conclusion that same was the right thing to do. It is also a settled law that what would constitute reasonable cause cannot be laid down with precision and that the question as to whether there was reasonable cause or not for the assessee not to deduct tax at source at all or under some particular provision than prescribed was a question of fact which had to be seen in the facts and circumstances of each case.

In the instant case, the assessee had been deducting tax from the payments payable to CFA under s 194C on a consolidated basis towards different heads. There is no reason to disbelieve the assessee that the same was being done by its employees on misconceived professional advice given by the Chartered Accountants. Since the payments were to be deducted from CFA, no benefit was to be derived by the assessee for making lesser or inaccurate deductions. No mala fide intention of any kind can be attributed to the assessee for deducting tax under one provision of law instead of other. This was neither the case of mala fide intention nor that of negligent intention or want of bona fide, but a case of misconceived belief of applicability of one provision of the law. It cannot be said judiciously that the assessee has failed to comply with the provision of s 194-I and s 194J without reasonable cause.