Income Tax Appellate Tribunal - Cochin
The Income-Tax Officer vs Muthoot Financiers on 28 October, 2005
Equivalent citations: [2006]103ITD108(COCH), [2006]286ITR71(COCH), (2007)107TTJ(COCH)141
ORDER
R.S. Padvekar, Judicial Member
1. This appeal by the Revenue is directed against the order of the CIT(Appeals) dated 24.3.2004 relevant to the assessment year 1999-2000, challenging the penalty deleted by the CIT(Appeals) under Section 271C, levied by the A.O.
2. The revenue has raised as many as six grounds in this appeal, but the only issue for our adjudication is whether on the facts and circumstances of this case, the CIT(Appeals) was justified in canceling the penalty levied by the AO on the assessee under Section 271C of the Act by accepting its explanation as a reasonable cause.
3. The facts in brief are that the assessee is one of the sister concerns in a group consisting or 150 separate concerns. The assessee filed its return of income for the AY 1999-00 along with the Audit Report on 31.12.1999. The AO, on verification of the audit report, noticed that the assessee has made short deduction of tax at source in respect of the payments made by it on account of interest to its other sister concerns. The AO initiated penalty proceedings under Section 271C of the Act against the assessee and a show cause notice was issued to the assessee. The assessee filed its reply to the "AO incorporating a statement of interest paid, tax deductible, deducted and short deduction in respect of the interest payments to its associate concerns. The assessee admitted that there was a short deduction of tax amounting to Rs. 3,30,000. The AO sent draft penalty order to the assessee and the assessee was finally heard on 24.1.2002. It was the contention of the assessee that there was no loss to the Revenue due to the non-deduction/short deduction of tax in respect of the payment of interest made to its associate/sister concerns. It was the further contention of the assessee before the AO that whatever interest is paid to its sister concerns, the same have been included by them in computing their total income and all the sister concerns have filed their returns of income. The explanation given by the assessee was rejected by the AO and it appears that only on the admission made by the assessee the AO concluded that for non-deduction of tax penal provisions of Section 271C are aITRacted. In the opinion of he AO, the assessee's explanation was not a reasonable cause, because the same was not supported by any evidence. The AO therefore levied penalty of Rs. 3,30,000 under Section 271C of the Act on the assessee. Being aggrieved by the order of the AO, the assessee took the matter in appeal to the CIT(A).
4. It was the contention of the assessee before the CIT(A) that there was short deduction/non-deduction of tax by the assessee in respect of the interest payments made to the sister concerns because the assessee was under the bonafide belief that those sister concerns will not have any taxable income. It was further contended that the respective payee-associates were regularly assessed to tax and they had filed their returns of income including the said interest which was paid by the assessee and hence there was no loss of revenue to the Exchequer. It was further contended that the penal provisions cannot be compared with the provisions relating to charging of interest, as the penal provisions are totally different than the interest provisions, which are compensatory in nature. The Assessee further contended that the AO has already recovered interest on the amount of short deduction under Section 201(lA) for the delay in depositing the same to the Government. The assessee-filed details regarding the short deduction of tax before the CIT(A) stating the name of the sister concern, amount of interest paid, tax deductible and short deduction, etc. The assessee also filed the information of the recipient sister concerns giving the details in respect of their tax liability and advance tax paid etc. The CIT(A) deleted the penalty by giving his findings as under:
3. I have carefully gone through the facts of the case. The appellant belongs to a large conglomerate of business entities involved in money lending business. There are about 150 separate concerns of this group at various places and a large number of intra group transactions take place involving huge sums. When such a large volume of transactions take place, certain omissions can happen and it is necessary to see if these omissions had taken place with a view to avoid payment of tax. The contention that the omission was of a bonafide nature is acceptable since the omission to deduct the tax has been faithfully-reported by the appellant's Auditors in the tax audit report. Only from this report, the AO has found out the omission and initiated the action. As such, I am of the view that the omission had taken place in the appellant's case in a bonafide manner. In the case of Woodward Governor India P. Ltd. 253 ITR 745, the Delhi High Court has held that penalty for failure to deduct tax at source was not automatic and absence of reasonable cause is necessary for the levy. The Court further observed that the initial burden is on the assessee to show that there existed reasonable cause which was the reason for the failure. Thereafter the Officer has to consider whether the explanation offered by the assessee or other person as regards the reason for failure was on account of reasonable cause. In the present case the appellant has neither concealed the matter of non deduction of tax nor has dragged the case into an orbit of litigation. The appellant has straight away admitted the omission and has given explanation for it and further pointed out that there was no loss to the revenue despite the unintentional omission by the appellant. The officer has merely brushed aside the explanation of the appellant and also the fact of payment of tax dues by the recipients of the interest. Since the Assessing Officer has not established the absence of reasonable cause in this case, I am of the view that the penalty cannot be sustained legally. Considering all these aspects, I hereby hold that the appellant's case deserves a lenient treatment in respect of the bonafide mistake committed by it. The penalty levied Section 271C is accordingly cancelled." Being aggrieved by the order of the CIT(Appeals), the Re venue is in appeal before us challenging the impugned order.
5. We have heard the ld.DR for the Revenue and the ld.CA, Shri R.Sreenivasan, for the Assessee. The ld.DR vehemently submitted that the CIT(A) is not justified in canceling the penalty under Section 271C on the ground that the AO has merely brushed aside the assessee's explanation that the mistake committed by the assessee is bonafide one. She further submitted that it was an admitted fact by the assessee himself that there was omission on its part to comply with the statutory provisions and that does not constitute a reasonable cause, as envisaged in Section 273B of the I.T. Act. She further submitted that if at all the assessee's explanation is accepted that the recipient sister concerns were not liable to pay any income-tax, then they should have obtained no TDS certificate under Section 197 of the Act and could have produced the same before the assessee. She further submitted that the omission to deduct tax is not in respect of a single case and that the quantum of tax deductible in each case has exceeded the limit prescribed. The ld. DR further submitted that it was deliberate omission on the part of the assessee. Merely because there is no loss of revenue, that cannot be a reasonable cause for deleting the penalty. She further submitted that Section 271C has been introduced to discourage non-deduction of tax at source and if the assessee wanted no deduction, then the assessee could have insisted the recipient or payee sister concern to produce a certificate under Section 197. The ld. DR relied on the judgment of the Hon'ble Kerala High Court in the case of CIT v. Sree Krishna Trading Co. (253-ITR-645) and she submitted that the order of the CIT(A) may be set aside and that of the AO may be restored.
6. The ld.CA for the Assessee reiterated the same arguments which were made before the CIT(Appeals). He submitted that there are about 150 separate concerns of this group at various places and large number of intra-group transactions take place, involving huge. sums. He further contended that when such large volume of transaction take place, certain omissions can happen and it is necessary to see whether these omissions are deliberate on the part of the assessee to dodge the legitimate payment of tax. He further contended that it is not disputed by the revenue that the assessee itself and other payee sister concerns are assessed to tax and they are regularly filing their returns of income. It was further contended that in respect of the payee-sister concerns, most of the concerns have no tax liability at all as per returns filed by them and in some cases there was some minor tax liability, but at the same time the respective sister concerns in respect of which there is short deduction of tax on the interest payments made to them, have paid substantial advance tax and in many cases there is refund due to the payee sister concerns. It was further submitted that the short deduction of tax has been faithfully reported in the tax audit report and only on this reporting the AO came to know that there was such omission and he initiated action. The CA further contended that all the payments of interest are relating to only the sister concerns of the assessee and no outside concern is involved in it. In most of the cases interest is paid on the close of the accounting year. The ld.CA further submitted that what is reasonable cause has been interpreted in a plethora of judgments of different High Courts, but the judgment of the Hon'ble Delhi High Court is relevant, where the Hon'ble High Court has explained the meaning of "reasonable cause" in CIT v. Woodward Governor India P. Ltd. v. CIT 253-ITR-745. "Reasonable cause" as applied to human action, is that which would constrain a person of average intelligence and ordinary prudence, and it cannot be described as a probable cause. It 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 an ordinary, prudent and cautious man, placed in the position of the person concerned, to come to the conclusion that the same was the right thing to do. The ld. CA further submitted that it is also well settled principle of law, as held by the Hon'ble Supreme Court in the case of Hindustan Steel Ltd. v. State of Orissa ( that "an order imposing penalty for failure o carry out a statutory obligation is the result of a quasi-criminal proceeding, and penalty will not be imposed unless the party obliged either acted deliberately in defiance of law or was guilty of conduct contumacious or dishonest, or acted in conscious disregard of its obligation. Penalty will not also be imposed merely because it is lawful to do so. Whether penalty hould be imposed for failure to perform a statutory obligation is a matter of discretion of the authority to be exercised judicially and on a consideration of all the relevant circumstances." The ld.CA therefore submitted that there was no willful defiance of law. There is an omission on the part of the assessee as there is a short deduction in some cases or in some cases there is no deduction, but it was not a deliberate one as the assessee was aware that the payee-sister concerns will be declaring its interest income in their returns of income and there will not be a tax liability. He further contended that from the data available on record it is crystal clear that in many cases the recipient sister concerns have paid substantial amount of advance tax and there are refunds due in may cases. The ld.CA relied on the following precedents:
l. Woodwad Governor India P.Ltd. v. CIT
2.CIT v. Mitsui & Co. Ltd.
3. CIT v. Itochu Corporation
4. Hindustan Steel Ltd. v. State of Orissa ((1972) 83-ITR-27 (SC)
5. Indo Nissin FoodsLtd. (2004) 83-TJ(Bang)-440.
6.Wipro GE Medical Systems Ltd. (2005) 3-SOT-627.(Bang).
7. We have heard the rival submissions of the parties. We have also are fully considered the facts of this case as per record before us. We have carefully perused the orders of the AO as well as the CIT(Appeals). Now, we will have to examine the facts of this case in the background of the legal principles laid down in the different precedents relied on by the parties.
8. It is not disputed that the assessee is one of the companies in the group in which there are 150 sister concerns. It is also not disputed that there is a short deduction of tax on the part of the assessee in respect of the interest payments made by the assessee to the recipient concerns, who are also sister concerns of the assessee. It is also not disputed that the revenue has recovered the interest under Section 201(1A) of the Act only because there is short deduction/non deduction of tax by the assessee. The question is, whether on the facts of this particular case, the AO was justified in levying penalty under Section 271C, which was subsequently deleted by the CIT(Appeals). As far as the ld.DR is concerned, his argument is that once there is a failure or omission on the part of the assessee to comply with the provisions of law and that omission or failure is admitted, then automatically the penal provisions are put in motion. That is not correct. As far as the nature of the proceedings are concerned, that depends on the nature of the levy. As far as the Income-tax Act is concerned, the nature of the levy is different in respect of the tax, interest and penalty. As far as the nature of the interest is concerned, it is compensatory in nature. But in spite of the fact that it is compensatory in nature, still the Legislature has made a provision giving some right to the assessee to seek waiver of the same. If the levy is penalty, then certainly the nature of the proceeding is quasi-criminal proceedings. The argument of the ld. DR that once there is a failure on the part of the assessee to make compliance of law, then penalty proceedings are aITRacted, is not acceptable.
9. In the case of Hindustan Steel Ltd. (supra),the Hon'ble Supreme Court has laid down the legal proposition that an order imposing penalty for failure to carry out the statutory obligation is a result quasi-criminal proceeding and penalty will not ordinarily be imposed unless the party obliged, either acted deliberately in defiance of law or was guilty of conduct contumacious or dishonest or acted in conscious disregard of his obligation. It is true that mens-rea has no role to lay as far as penalty provisions under taxing statute are concerned, but at the same time the nature of the proceedings cannot be neglected that it is a quasi-criminal proceeding. As far as Section 273B is ' concerned,' which is introduced by Taxation Laws (Amendment) Act, 1986, which start with a non-obstante clause, the Hon'ble High Court of Delhi had an occasion to interpret Section 273B in the case of Woodward Governor India Ltd. (supra) and it is held that the clause beginning with "notwithstanding anything" is sometimes appended to a section in the beginning with a view to give the enacting part of the section, in case of conflict, an overriding effect over the provisions of the Act mentioned in the non-obstante clause....The true effect of the non-obstante clause is that in spite of the provision of Act mentioned therein the enactment following it will have full operation of that the provisions embraced in the non-obstante clause will not be an impediment for the operation of the enactment. The Hon'ble High Court further held that levy of penalty under Section 271C is not automatic. Before levying 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 exists 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 other persons, as the case may be, as regards the reason for failure, was on account of reasonable cause. The Hon'ble High Court has further explained, the meaning of the term "reasonable cause", which means that if it is applied to human action, is that which would constrain a person of average intelligence and ordinary prudence, and it can not be described as a probable cause. It means that an honest belief founded upon reasonable grounds, of the existence of a stage of circumstances, which assuming them to be true, would reasonably lead an ordinary, prudent and cautious man, placed in the position of the person concerned, to come to the conclusion that the same was the right thing to do. The Hon'ble High Court has further held that the cause shown has to be considered and only if it is found to be frivolous, without substance or foundation, would the prescribed consequences follow.
10. In the case of Itochu Corporation (supra), there was a short deduction of tax by the assessee and the proceedings under Section 271C of the Act were initiated. The Tribunal found that the assessee had paid the tax along with the interest voluntarily and there existed a bonafide belief that tax was not deductible at source. It was held by the Hon'ble High Court of Delhi that the Tribunal was justified in deleting the penalty on the fact that the assesses had extended co-operation in respect of TDS matters to the department. The assessee had paid also the tax with interest voluntarily 'and there existed a bonafide belief.
11. In the case of Sree Krishna Trading Co. (supra),the issue before the Hon'ble High Court of Kerala was the penalty levied under Section 271(1)(c) of the Act, which was deleted by the Tribunal. The Hon'ble High Court had interpreted the scope of Explanation 1 to Section 271(1)(c) and held that the finding of the Tribunal that Explanation 1 has no application to the case on hand is clearly unsustainable in law. In that case the levy of penalty Section 271C was not in question.
12. Considering the facts of this case and the explanation given by the assessee, in our opinion, it cannot be said that the omission on the part of the assessee was deliberate in defiance of law. The assessee cannot be held to be guilty of conduct contumacious or dishonest, nor the assessee can be said to have acted in conscious disregard of its obligation. In this case, the Revenue has already recovered interest under Section 201(1A). Moreover; as per the facts available on record, in most of the cases refund was due and taxable income was also nil. Another aspect to be considered here is that there are voluminous transactions involved in the business of the assessee and the assessee and the payees are having interlinking relationship as sister concerns. After examining the facts of the case in the backdrop of the legal principles laid down in the precedents relied on by the assessee, in our considered opinion, assessee's explanation cannot be brushed aside as not a reasonable cause. In our considered opinion, the CIT(A) has rightly held that there existed reasonable cause for the assessee for the non-compliance of the provisions of the TDS. Hence, the CIT(A) has rightly deleted the penalty levied by the AO on the assessee under sec271C.
13. The ld. DR-has relied on the judgment of the Hon'ble Kerala High Court in the case of Sree Krishna Trading Co. (supra). The facts of that case are totally different and there the issue before the Hon'ble High Court was in respect of the applicability of Explanation 1 to Section 271(1)(c). Hence, the decision relied on by the revenue is not helpful to it.
14. In our considered opinion, we find no infirmity in the order of the CIT(Appeals) and we confirm his order. The Revenue's appeal stand dismissed. Order accordingly.