Income Tax Appellate Tribunal - Delhi
Kanha Vanaspati Ltd. vs Additional Cit, Range-50 on 29 June, 2007
ORDER
K.D. Ranjan, Accountant Member.
1. These appeals by the assessee for assessment years 2000-01 and 2001-02 arise out of common order of Commissioner (Appeals)-XXX, New Delhi. These appeals were heard together and for sake of convenience, the same are disposed of by this consolidated order.
2. The only issue for consideration which is common in both the appeals relates to confirming of penalty under Section 271C of the Act for failure to deduct tax at source on discounting charges incurred. The facts of the case stated in brief are that a survey under Section 133A was conducted in the business premises of the assessee on 24-2-2003. During the course of survey it was found that the assessee had been debiting, "financial charges" under the head "Discounting charges". For financial year 1999- 2000 the assessee debited the account by Rs. 45,96,349 and for financial year 2000-01 by Rs. 49,40,715. On verification it was found that the financiers were maintaining regular accounts with the assessee and funds were lent to the assessee-company on regular basis whenever it needed to make the payment to the suppliers during the course of business activities. The assessee paid the "financial charges" to the financiers and debited under the head "Discount charges". On the basis of these facts the assessing officer in proceedings under Sections 201(1) and 201(1A) observed that assessee had debited the interest payment under the head 'Discounting charges' in the books of account with the intention to avoid deduction at source under Section 194A of the Act. When this fact was confronted, Shri Amitabh Agarwal the director of the assessee-company, in his statement recorded during the survey under Section 133A admitted that the payments were in nature of interest which attracted the provisions of Section 194A of the Act. In his statement the director of company admitted the mistake and agreed to discharge their responsibility as tax deductor. However, during the course of proceedings under Sections 201(1) and 201(1 A), it was pleaded by the assessee that the mistake was committed because of their ignorance without intention to evade tax. This contention of assessee was not accepted by the assessing officer and treated the assessee in default and accordingly charged interest under Section 201(1A) of the Act. The matter was carried in appeal against the order passed under Sections 201 (1) and 201 (1 A) up to the level of ITAT. The ITAT Delhi Bench T New Delhi vide order dated 31-1-2007 upheld the levy of interest under Section 201(1 A) from the date of deductibility of tax till the payment of tax by the deductees.
3. During the course of penalty proceedings, the assessee stated that the company did not deduct tax at source from impugned payments because it honestly believed that the payments were in nature of "discounting charges" being different from "interest" in nature and were not covered under the provisions of Section 194A and that the assessee company had no intention to avoid the provisions of law for evading of tax. It was also submitted that there is a thin line of distinction between interest and discounting charges and that the company honestly believed that it was paying discounting charges and not the interest and accordingly no TDS was deductible. It was further submitted that when during the course of survey it was pointed out that the discounting charges incurred by the assessee-company were covered under provisions of Section 194A and the tax should have been deducted at source, the assessee-company admitted his default and paid the entire amount of tax during the course of survey itself. The assessing officer did not agree with the contention of the assessee on the ground that the funds so lent by the financiers to the assessee were nothing but short-term finances in the nature of loans and in consideration thereof the financial charges paid by the assessee to the financiers for the said short-term loan arrangements logically fell under the definition of interest under Section 2(28A) of the Act. The cost of finance which is certainly in the nature of interest had been debited under the head 'Discounting charges' by the deductors in the books of account with the intention to avoid deduction of tax at source under Section 194.When the fact was confronted to the assessee Shri Amitabh Agarwal, the Director of the company, during the course of survey in his sworn statement admitted that the payments were in the nature of interest which attracted the provisions of Section 194A of the Act. Learned assessing officer further observed that the assessee was assisted by the qualified persons and therefore the contention of assessee that tax was not deducted at source due to ignorance of law was not tenable. The assessing officer further examined the applicability of Section 273B under which the onus is cast on the deductor to establish that there was a reasonable cause for the default. The assessee has to discharge the initial onus and thereafter the assessing officer has to consider the explanation offered by theassessee. However, since asses see failed to discharge the onus he held that there was no reasonable cause: for non-deduction of tax at source. In view of these facts the assessing officer held that the assessee had without any reasonable cause failed to comply with the provisions of Section 194A of the Act and therefore made liable to penalty under Section 271C of the Act. Accordingly, the penalty of Rs. 6,65,091 and Rs. 10,44,582 was imposed for financial years 1999-2000 and 2000-01 respectively.
4. On appeal before Learned Commissioner (Appeals), it was arrived that the assessee could not be treated as an assessee in default because the deductees had paid the taxes on their respective income that included the aforesaid income on account of bill discounting charges. Also in the cases where tax was not deducted at source, in view of provision of Section 191 of the Act, the tax was payable by the payees and not by payer. If the department was to recover the tax from the payer, it would result in an absurd situation where tax would be recovered twice i.e. from the payer and the payee. The copies of the P&L Account of the payers were filed to support the contention that tax was paid by them on discounting charges received by them. This contention of assessee was rejected by Learned Commissioner (Appeals) on the ground that the argument of the assessee smacks of collusion between the deductor and deductee so as to thwart the provisions of the Act. He placed reliance on the reasoning given in penalty order wherein it had been stated that the deductor could not absolve itself from the responsibility of tax deduction on the ground the deductee has paid the tax. Section 197 of the Act provides for issue of certificate for non-deduction of tax or deduction of tax at lower rates. The assessing officer issues certificate in appropriate cases to this extent. If the contention of assessee was accepted, it would make the provision of Section 197 redundant.
5. Another contention of the assessee was that the discounting charges could not be treated interest under Section 2(28A) of the Act. Learned Commissioner (Appeals) examined the contention of the assessee and observed that discounting charges were paid in regard to an obligation incurred in relation to money borrowed. Therefore, the assessing officer was justified in treating such charges as interest and liable for tax deduction at source under Section 194A of the Act. He placed reliance on the decision of Hon'ble Madras High court in the case of Viswapriya Financial Services & Securities Ltd. v. CIT for the definition of interest as defined under Section 2(28A) of the Act.
6. For reasonable cause Learned Commissioner (Appeals) referring to reliance placed by the assessee on the decision of Hon'ble Delhi High Court in the case of Woodward Governor India (P.) Ltd v. CIT held that the initial burden was on the assessee to show that there existed a reasonable cause for failure to deduct tax at source. Thereafter, the assessing officer has to consider whether the explanation offered by the assessee was on account of reasonable cause. He further observed that there was no requirement to establish the element of mens rea with regard to "reasonable cause". He placed reliance on the decision of Hon'ble Supreme Court in the case of Gujarat Travancore Agency v. CIT to support his contention.
7. The reliance was also placed by the Learned AR of the assessee on the decision of Hon'ble Delhi High Court in the case of Azadi Bachao Andolan v. Union of India (2001) 252 ITR 4714 for the proposition that the test laid down by the Hon'ble Delhi High Court are fully satisfied in the case of the assessee. This contention of assessee was rejected by Learned Commissioner (Appeals) on the ground that the finding regarding acceptance of reasonable cause was a finding of fact in view of decision of Hon'ble Delhi High Court in the case of CIT v. Freewheels India Ltd (2001 ) 248 ITR 689. He held that acceptance of reasonable cause in other cases was not relevant inasmuch as the position in the case of the assessee had to be evaluated with reference to its grounds asserting the existence of reasonable cause.
8. Referring to CBDT Circular No. 202, dated 5-7-1976, he observed that the circular clarified that Section 2(28A) was inserted to remove the doubt about the true character of the fee or other charges paid in respect of moneys borrowed and aimed to alert the public in general and the taxpayer in particular about the enlarged scope of the word "interest" under the Income Tax Act. Therefore, any doubt lingering in the minds of assessees about the definition of the "interest" was allayed by the public circular issued in 1976. He, further observed that "reasonable cause" would not include an error or misconception of law, much less a camouflage, as in the case of assessee which could never been discovered but for the survey conducted under Section 133A of the Act. He placed reliance on the decision Hon'ble Bombay High Court in the case of R.M. Donde, ITO v. Mukundrai Kuberdas Katakia ". The contention of the assessee that professionally qualified persons were not employed and assessee relied on the opinion of statutory amendment was rejected on the ground that such an argument was neither taken before any of the authorities nor was such opinion filed before him. This plea was rejected relying on the decision of Hon'ble Supreme Court in the case of Motilal Padampat Sugar Mills Co. Ltd.-v. State of Uttar Pradesh . Accordingly, he upheld the order passed by the assessing officer imposing the penalty under Section 271C of the Act.
9. Before us Learned AR of the assessee Shri K. Sampat, Advocate submitted discounting charges have been treated as interest under Section 2(28 A) ofthe Act by the authorities below. The assessee honestly believed that no tax was deductible on discounting charges paid to various parties. The assessee was of the view that it was paying discounting charges for the discounting of the bills of suppliers. Since Section 194A of the Act requires for deduction tax at source on the payment of interest, the assessee did not deduct tax at source on payment of discounting charges. Learned Commissioner (Appeals) had relied on the decision of Hon'ble Madras High Court in the case of Viswapriya Financial Services & Securities Ltd. (supra) for the definition of word "interest". No other authority has defined interest by saying discounting charges could be treated as interest. Therefore discounting charges do not fall in the definition of word "interest" defined under Section 2(28A) of the Act.
10. He further submitted that there was no conscious act or mens rea on the part of the assessee for not deducting tax at source. He placed reliance on the decision of Hon'ble Supreme Court in the case of Hindustan Steel Ltd. v. State of Orissa . He also submitted that the assessee did not have any knowledge that bill discounting charges were in nature of interest. There was confusion as to the nature of discounting charges. The moment the assessee came to know that tax at source was deductible, the entire tax was paid. Therefore the assessee cannot be penalized for non-deduction of tax at source. He placed reliance on the decision of Hon'ble Madhya Pradesh High Court in the case of CIT v. Senior Accounts Officer, Madhya Pradesh Electricity Board and the decision of Hon'ble Delhi High Court in the case of CIT v. Itochu Corpn. '. It has been further submitted that there was a reasonable cause for non-deduction of tax at source and therefore penalty under Section 276C was imposable. He placed reliance on Woodward Governor India (P.) Ltd. 's case (supra) and decision of IT AT Delhi Bench 'E' in the case of Asstt. CIT v. Air Canada (2004) 88 ITD 545.
11. He further submitted that taxes paid by the payees and therefore revenue had not lost anything. There was no default for non-deduction of tax at source and therefore penalty is not imposable.
12. He further submitted that the authorities below have relied on the statement of the Director of the assessee-company admitting that discounting charges were in nature of interest. During the course of penalty proceedings no other material was brought on record to prove that there was a wilful failure on part of the assessee not to deduct tax at source. Therefore, the findings in the assessment proceedings are not conclusive. The entire material should have been considered afresh by the authorities below for imposing the penalty. He placed reliance on the decisions in the case of Sir Shadi Lai Sugar & General Mills Ltd. v. CIT (1987) 168 ITR 7052 (SC); CIT v. Saraf Trading Corpn. (1987) 167 ITR 909 (Ker.) and Cement Marketing Co. of lndia Ltd. v. Asstt. CIT .
13. The Learned AR of the assessee in the paper book filed during the course of hearing has also relied on the following decisions:
(i) CITv. NHK Japan Broadcasting Corpn. (2005) 150 Taxman 69 (Delhi).
(ii) Senior Accounts Officer, Thermal Power Project, Anpara v. ACIT ITAT Allahabad A' Bench.
(iii) CIT v. Sencma Sa France (2006) 156 Taxman 403 (Delhi).
(iv) CITv. Hitachi Ltd. (2006) 154 Taxman 271 (Delhi).
(v) CIT v. Mitsui & Co. Ltd. (2004) 140 Taxman 430 (Delhi).
(vi) Wipro GE Medical System Ltd. v. ITO (2005) 3 SOT 627 (Bang.).
14. On the other hand Learned DR submitted that ignorance of law is not an excuse. The assessee has to show that there existed a reasonable cause for non-deduction of tax. This onus has not been discharged by the assessee. The assessee was well aware of the fact that the financial charges were in nature of interest. To call financial charges as discounting charges is not the correct argument. The assessee was guided by experts on taxation matters. When payment of interest was made, it was the duty of the assessee to deduct tax at source. The assessee was not ignorant but deliberately did not deduct tax at source and therefore penalty was rightly imposed. Replying to the submissions made by Learned departmental Representative, Shri Sampath submitted that the contention of the Learned DR that the assessee was well aware about the nature of payment is not based on any material brought on record. Even the experts cannot visualize as to how the law is going to take place. Therefore, there existed confusion about the nature of bill discounting and hence penalty is not exigible.
15. We have heard both the parties and perused the material available on record. Before we deliberate on the issue whether the assessee was prevented by reasonable cause or not to deduct tax at source, the facts of the case are to be understood first. During the course of survey under Section 133A, from the copies of trial balances, the assessing officer found that assessee debited amount of Rs. 45,96,349 and Rs. 49,40,717 for financial years 1999-2000 and 2000-01 respectively under the head 'Discounting charges'. From the copies of accounts of financiers to whom so called discount charges were paid, the assessing officer found that they were maintaining running accounts with the assessee and lending funds to it on regular basis whenever any need for funds arose to meet the payment obligations towards suppliers in ordinary course of business. This fact is evident from order passed under Sections 201(1) and 201(1A) of the Act and relevant extract is reproduced as under:
Before proceedings, it is necessary to discuss the nature of the transactions as emerges from the copies of accounts of these parties (financiers) to whom these discounting charges were paid/credited. The financiers are maintaining running accounts with the assessee-company and lend the funds to the company on regular basis whenever the company needs to make the payments to the suppliers in normal course of business. This is nothing but short-term finance in the nature of loan given by the financiers to the assessee company and in turns the company paid financial charges in nature of interest to the finances for the said short-term loan arrangements.
This finding of fact has been upheld by the ITAT in order dated 31-1 -2007 in I.T.A. Nos. 75 & 90/Delhi/2004. The assessee has not controverted this fact neither during the course of appeal against order passed under Sections 201(1) and 201 (1 A) nor in the course of penalty proceedings under Section 271C of the Act. The assessee has treated the finance charges or interest as discount charges.
16. In the case finance charges/interest a person simply pays the interest for the period on agreed rate on the amount borrowed by him but in the case of bill discounting the procedure is different. To explain with an example let us assume that A makes a bill of exchange in favour of B for a sum of Rs. 500 to be paid after one month. B goes to C, the financier for discounting the bill who pays B a sum of Rs. 480. On the due date, C presents the bill to A for payment that makes payment of Rs. 500 to C. In this example Rs. 20 (500 - 480) represents bill discounting charges. In this example bill discounting charges have been collected from B by C. In the case before us, the authorities below have given a categorical finding that assessee has raised funds from financiers as when required for payments made to suppliers and paid interest on such short-term loans. This fact, for the sake repetition, has not been denied by the assessee neither at the time of quantum appeal nor during the penalty proceedings before any authority. The assessee would have paid bill discounting charges, if the purchasers of goods have issued post dated cheques (Bills of exchange) to the assessee and the same were exchanged for cash on discount by the assessee from financiers. This is not the case of the assessee. Therefore, the story of bill discounting charges has been advocated to confuse the whole issue. A simple short-term loan arrangement with financiers has been presented as bill discounting arrangement. We may like further say that even the bill discounting charges are also in nature of interest falling in the definition of Section 2(28A) of the Act. In view of the above, we are of the view that the transactions with the financiers were of simple loan arrangement and remain uncontroverted by the assessee. The Director of the assessee-company during the course of survey had also admitted that so-called bill discounting charges were in nature of interest. Under Section 58 of the Indian Evidence Act, 1872, admitted facts need not be proved. We find support from the decision of Hon'ble Madras High Court in the case of P. Govindaswamy v. CIT wherein it has been held as under (Head Notes):
Held, that in the instant case, an addition of 2 lakh rupees was made, asincome from undisclosed sources and a further addition of Rs. 1,11,000was made on interest income. The assessee admitted before the Tribunalthat the amount of rupees two lakhs belonged to him. The revenueconceded before the Tribunal that out of a sum of Rs. 1,11,000 only a sum of Rs. 64,042 being the interest income was traceable in the hands of the assessee. The assessee also accepted such a position. Under Section 58 of the Evidence Act, 1872, admitted facts need not be proved. On such admitted facts, the Tribunal acted and consequently passed orders imposing penalty on concealment of an income of Rs. 2,64,042. The order was valid.
16.1 Coming to the argument of Learned AR that there was a confusion about nature of bill discounting charges whether the same was in the nature of interest. As observed above, the transactions involved were of short-term loan, no question of deciding the nature of impugned bill discounting charges arises. However, CBDT by Circular No. 202, dated 5-7-1976, had clarified the issue long back in 1976. Therefore there remains no confusion about the nature of bill discounting though as held above issue of bill discounting is not involved at all in this case. Therefore, the assessee fails on this count.
17. The next contention of the Learned AR of the assessee is that there existed a case reasonable cause. The assessee has not brought on record any material to prove that he was under a bona fide belief that on payment of interest tax at source was not deductible. The assessee is assisted by professionals on tax matters. The assessee has been deducting tax at source in respect of other payments. The contention of assessee that he relied on opinion of statutory auditors is devoid of any merits. Moreover, the ignorance of the law is no excuse as held by Hon'ble Supreme Court in the case of Motilal Padampat Sugar Mills Co. Ltd. (supra). Also as held by the Hon'ble Supreme Court in the case of Mukundrai Kuberdas Katakia (supra) the words "reasonable cause" would not take in its sweep an error or misconception of law. Therefore, the contention of Learned AR of the assessee that there was a confusion about the nature of so called bill discounting charges cannot be treated as reasonable cause that the assessee was under bona fide belief that tax at source was not deductible. This cannot be a reasonable cause also for non-deduction of tax at source. The assessee fails on this count also.
18. Learned AR of the assessee had relied on various decisions of Hon'ble jurisdictional High Court on non-deduction of tax at source; in respect of the payments made outside India to expatriates working in India are distinguishable on facts from the facts of the case before us. In the cases of NHK Japan Broadcasting Corpn. (supra); Sencma Sa France (supra); Hitachi Ltd. (supra); Itochu Corpn. (supra) and Mitsui & Co. Ltd. (supra) Hon'ble Delhi High Court considered the issue relating to payment of salary outside India to expatriate working in India. In these cases, the Tribunal recorded a finding of the fact that there was a reasonable cause for not making deduction under Section 192 as there was confusion as to whether the payment made outside India was to be taken into account ford eduction of tax at source under Section 192 of the Act. It was after issue of circular the assessee started deducting tax at source and therefore there was a bona fide belief on the part of the assessee that payments made abroad were not taxable in India. The facts of the case before us are entirely different from the facts decided by Hon'ble jurisdictional High Court and therefore the decision rendered in these cases will not be of any help to the assessee.
In the case of Senior Accounts Officer, Thermal Power Project Anpara (supra) the person responsible for making payment explained that he did not consider the agreement with the payee to be in the nature of contract agreement requiring deduction of tax at source. Therefore, the facts of this case are also entirely different from the facts of the case before us.
In the case of Wipro GE Medical System Ltd. (supra) the assessee did not deduct tax under Section 194-1 on the ground that whatever payments were made to W. Ltd. towards sharing office and for utilizing services and facilities of W. Ltd., were not rent within the meaning of Section 194-1. The facts of this case are also different from the facts of the case before us.
19. On reasonable cause Learned Commissioner (Appeals) has relied on the decision of Hon'ble jurisdictional High Court in the case of Woodward Governor India (P.) Ltd (supra) wherein the words 'reasonable cause' have been explained as under:
Reasonable cause' as applied to human action is that which wouldconstrain a person of average intelligence and ordinary prudence. It canbe described as probable cause. It means an honest belief founded uponreasonable grounds of the existence of a state of circumstances, whichassuming them to be true, would reasonably lead any ordinarily prudentand cautious man, placed in the position of the person concerned, tocome to the conclusion that the same was the right thing to do. The cause shown has to be considered and only if it is found to be frivolous without substance of foundation, the prescribed consequences follow.
Hon'ble Delhi High in this case has also held that initial burden is on assessee to show that there existed a reasonable cause which was a reason for non-deduction of tax. Thereafter, the officer dealing with the matter has to consider whether the explanation offered by the assessee may be regarded as a reasonable cause. In the case before us the assessee has not discharged even the initial onus that there existed a reasonable cause for failure to deduct tax at source.
20. The next contention of the Learned AR of the assessee is that there was no wilful or deliberate action on part of the assessee. Hon'ble Supreme Court in the case of Gujarat Travancore Agency (supra) has held that "unless there is something in the language of the statute indicating the need to establish, the element of mens rea, it is generally sufficient to prove that a default in complying with the statute has accrued. In our opinion there is nothing in Section 271(l)(a) which requires that mens rea must be proved before penalty can be levied under that provision". Hon'ble Supreme Court in the case of Addl CIT v. I.M. Patel & Co. following the decision in the case of Gujarat Travancore Agency (supra) held that:
it is no longer open to argument whether any mens rea is required to be established under Section 271(1)(a).
Like provisions of Section 271(1)(a), provisions of Section 271C also do not have any requirement of mens rea to be proved before levy of penalty under Section 271C of the Act. Therefore for the levy of penalty under Section 271C existence of mens reals not necessary as nothing has been provided in the language of the Section to this effect.
21. Thus the only requirement before levy of penalty under Section 271C is to see whether there existed a reasonable cause as required under Section 273B of the Act. The fact as held by the authorities below that: the assessee had camouflaged the transaction of loan and payment of interest as transaction of bill discounting not been controverted by bringing material on record. Thus the failure to deduct tax at source cannot be treated as bona fide or having a reasonable cause for non-deduction of tax. ITAT I Bench, New Delhi in order dated 31-1 -2007 (ITA Nos. 75 & 90/Delhi/ 2004) for the years under consideration have held that the assessee was liable to deduct at source and confirmed the action of authorities below under Sections 201(1) and 201 (1 A) of the Act. From above discussion clear that in the case before us the assessee has not shown that non-deduction of tax was due to a reasonable cause. It is a case of deliberately camouflaging of interest by discounting charges. The payment of taxes by the payees will not absolve the assessee from the responsibility of deducting tax at source. Acceptance of this argument would make the provisions relating to collection of taxes by way of TDS redundant. In view of above discussion, we hold that the authorities below were justified in confirming the penalties under Section 271C of the Act for both the years.
22. In the result, the appeals by the assessee for both the years are dismissed.