Karnataka H.C : Bonafide belief that tax was not deductible can be reasonable cause for not imposing penalty u/s 271C

High Court Of Karnataka

CIT Vs. Nissin Food Products Co. Ltd.

Assessment Year : 1992-93 to 1998-99

Section : 271C

K.L. Manjunath And Mrs. B.V. Nagarathna, JJ.

IT Appeal Nos. 555 To 559 And 561 To 569 Of 2007

February 24, 2010

JUDGMENT

K.L. Manjunath, J.—All these appeals are pertaining to the same assessee for the different assessment years. IT Appeal Nos. 568 of 2007 and 558 of 2007 pertain to the asst. yr. 1992-93, IT Appeal Nos. 567 of 2007 and 565 of 2007 pertain to the asst. yr. 1993-94, IT Appeal Nos. 566 of 2007 and 562 of 2007 pertain to the asst. yr. 1994-95, IT Appeal Nos. 564 of 2007 and 555 of 2007 pertain to the asst. yr. 1995-96, IT Appeal Nos. 556 of 2007 and 563 of 2007 pertain to the asst. yr. 1996-97, IT Appeal Nos. 559 of 2007 and 557 of 2007 pertain to the asst. yr. 1997-98 and IT Appeal Nos. 569 of 2007 and 561 of 2007 pertain to the asst. yr. 1998-99.

2. For the sake of convenience all these appeals are taken up together and common order is passed.

3. The facts leading to the filing of these appeals are as under :

The Revenue has come up in these appeals being aggrieved by the order passed by the Tribunal, Bangalore. The respondent company is incorporated in Japan. It had entered into an agreement with the Indian company Indo Nissan Foods Ltd. Pursuant to the agreement of collaboration, the respondent company had deputed its employees who were experts in food processing to work in the Indian company. The Indian company was paying the salary payable to the employees of the respondent company who were on deputation in the Indian company.

4. It is the case of the Revenue that in addition to the salary and perks payable by the Indian company, the respondent was also paying certain amounts in Japan on the ground that the Indian company has failed to deduct tax at source, initiated proceedings against the Indian company under s. 271(1)(c) [ sic-s. 271C] of the Act. Accordingly, an order was passed. Much later the proceedings are also initiated against the respondent/assessee on the ground that it has failed to deduct the tax at source in respect of the payment made by it to its employees in Japan. The respondent/assessee contended that it was not within the knowledge of the assessee and that it was not required for it to deduct the tax at source. Accordingly, the tax was not deducted. However, on coming to know of the legal position, the taxes were paid by the respondent company and explaining the reasons for not deducting the tax at source that it was not liable to deduct the tax, sought for closure of the proceedings and explanation offered by the respondent company was not accepted by the AO, accordingly, passed an order to levy penalty. Being aggrieved by the same, the assessee filed an appeal before the CIT(A), which came to be dismissed.

5. As against the same the assessee filed an appeal before the Tribunal, Bangalore which allowed the appeal granting relief to the assessee. Simultaneously, proceedings were also initiated under s. 272A(2)(c) of the Act on the ground that the return of income was not furnished in due time, accordingly, an order was also passed. Being aggrieved by the said two orders, the appeal was also preferred which was ended in dismissal, against which the appeal was preferred by the respondent assessee before the Tribunal wherein the Tribunal granted relief to the respondent/assessee. Being aggrieved by the same, these appeals were preferred by the Revenue.

6. Though these appeals are admitted, substantial questions of law are not framed. Therefore, after hearing the learned counsel for the parties we frame the following substantial questions of law to consider in these appeals :

“1.Whether there is failure on the part of the respondent/assessee in not filing the returns in time and committed a default under s. 272A(2)(c) ?

2.Whether the cause shown by the assessee to levy penalty under s. 271(1)(c) [sic -s. 271C] of the Act had been properly considered by the AO or not ?”

7. We have heard the learned counsel on both sides.

8. The main contention of the Revenue before us is that the Tribunal has committed serious error in granting relief to the assessee on the ground that the assessee was in confusion state in regard to understanding the position of law and it was under a bona fide belief that it was not required to deduct the tax at source and file the returns. Therefore, he contends that the AO was justified in proceeding against the assessee under s. 271(1)(c) [sic -s. 271C] and also s. 272A(2)(c) of the Act. According to him the Tribunal has failed to consider the cause shown by the respondent properly. On account of non-consideration of the facts by the Tribunal, he contends that it was not justified to set aside the order passed by the AO and CIT(A).

9. Per contra, learned counsel for the respondent submits that the amount paid by the assessee in Japan to its employees was not the salary. Therefore, the said amount could not have been considered as a salary as required under s. 192(1) of the Act and that, it was not required for the respondent to deduct the tax at source. It is also contended by the respondent that the respondent company being a foreign company was of the opinion that it was not required to deduct the tax at source and having come to the conclusion that the tax was required to be paid and the same was paid by the respondent. Therefore, the cause accepted by the Tribunal has to be confirmed by the Court. In the circumstances she requests the Court to dismiss these appeals.

10. Having heard the counsel for both the parties, we have to consider the questions that arise for our consideration.

11. At the first instance, we are of the opinion that the AO has failed to consider the cause shown by the assessee in his order. On perusal of the order of the AO, we are of the opinion that the cause shown by the assessee has not been considered by the AO. When a reply has been sent, it was for the AO to consider the cause shown by the assessee. Similarly, a similar mistake has been committed by the CIT(A). Though relief has been granted by the respondent, the Tribunal mainly considering the various judgments cited by both the parties has granted relief without considering the cause shown by the assessee, could be acceptable or not. Therefore, we are of the view, on facts, all the authorities have failed to consider the case of the respondent in detail. Having not considered the facts of the case by all the authorities, we arc of the view that the matter is required to be reconsidered by the AO afresh considering the causes shown by the respondent/assessee. It would be useful to refer to a judgment of the Supreme Court in the case of CIT v . Eli Lilly & Co. (India) (P.) Ltd. [2009] 223 CTR (SC) 20 : [2009] 21 DTR (SC) 74 : [2009] 312 ITR 225 (SC); their Lordships at para 35 of the judgment have held as hereunder :

“Sec. 271C inter alia states that if any person fails to deduct the whole or any part of the tax as required by the provisions of Chapter XVII-B then such person shall be liable to pay, by way of penalty, a sum equal to the amount of tax which such person failed to deduct. In these cases we are concerned with s. 271C(1)(a). Thus s. 271C(1)(a) makes it clear that the penalty leviable shall be equal to the amount of tax which such person failed to deduct. We cannot hold this provision to be mandatory or compensatory or automatic because under s. 273B Parliament has enacted that penalty shall not be imposed in cases falling thereunder. Sec. 271C falls in the category of such cases. Sec. 273B states that notwithstanding anything contained in s. 271C, no penalty shall be imposed on the person or the assessee for failure to deduct tax at source if such person or the assessee proves that there was a reasonable cause for the said failure. Therefore, the liability to levy of penalty can be fastened only on the person who do not have good and sufficient reason for not deducting tax at source. Only those persons will be liable to penalty who do not have good and sufficient reason for not deducting the tax. The burden, of course, is on the person to prove such good and sufficient reason. In each of the 104 cases before us, we find that non-deduction of tax at source took place on account of controversial addition. The concept of aggregation or consolidation of the entire income chargeable under the head ‘Salaries’ being exigible to deduction of tax at source under s. 192 was nascent issue. It has not been considered by this Court before. Further, in most of these cases, the tax deductor-assessee has not claimed deduction under s. 40(a)( iii) in computation of its business income. This is one more reason for not imposing penalty under s. 271C because by not claiming deduction under s. 40(a)( iii), in some cases, higher corporate tax has been paid to the extent of Rs. 906.52 lakhs (see Civil Appeal No. 1778 of 2006 entitled CIT v . The Bank of Tokyo Mitsubishi Ltd.). In some of the cases, it is undisputed that each of the expatriate employees have paid directly the taxes due on the foreign salary by way of advance tax/self-assessment tax. The tax deductor-assessee was under a genuine and bona fide belief that it was not under any obligation to deduct tax at source from the home salary paid by the foreign company/head office and, consequently, we are of the view that in none of the 104 cases penalty was leviable under s. 271C as the respondent in each case has discharged its burden of showing reasonable cause for failure to deduct tax at source.”

12. As we have come to the conclusion that the AO has failed to consider the cause shown by the assessee, we are of the opinion that the matter requires to be reconsidered by the AO keeping open all the contentions raised by the assessee. In the circumstances without answering the questions of law, the matter is remanded to the AO by setting aside the orders to consider the case in the background of the cause shown by the assessee. Liberty is also granted to the respondent to file additional reply/cause, if any to support the case of the assessee. Thereafter keeping in mind about para 35 of the aforesaid cited judgment of the apex Court, the AO shall consider the case of the respondent in accordance with law in the context of substantial questions of law framed by us in this appeal.

13. Accordingly, these appeals are disposed of.

[Citation : 334 ITR 1]

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