No Penalty for Honest Mistake in Tax Deduction

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Case Name:

Commissioner of Income Tax vs. Filtrex Technologies (P.) Ltd. (High Court of Karnataka)

ITA Nos. 398 of 2014 & 55 of 2015

Date: 1st June 2015

Key Takeaways:

• Penalty Proceedings vs. Assessment Proceedings: The court emphasized that penalty proceedings are distinct from assessment proceedings. Just because an addition or disallowance is upheld does not automatically justify a penalty.
• Bona Fide Mistake: The court found that the failure to deduct tax was a genuine mistake, supported by a Chartered Accountant’s certificate, and not an attempt to conceal income.
• No Inaccurate Particulars: The court concluded that the company did not furnish inaccurate particulars of income.

Issue

Was the failure to deduct tax at source by Filtrex Technologies a case of concealment of income under Section 271(1) (of Income Tax Act, 1961)© of the Income Tax Act, warranting a penalty?

Facts

Filtrex Technologies, a company manufacturing carbon blocks for water filters, made payments to foreign parties. One such payment to M/s Filtrex Holdings Pte. Ltd., Singapore, was deemed liable for tax deduction at source. The company did not deduct this tax, relying on a Chartered Accountant’s certificate. The Assessing Officer initially treated this as concealment of income and imposed a penalty.

Arguments

• For the Revenue: The Revenue argued that the non-deduction of tax amounted to concealment of income and furnishing inaccurate particulars, justifying a penalty under Section 271(1) (of Income Tax Act, 1961)©.
• For Filtrex Technologies: The company contended that the non-deduction was a bona fide mistake, supported by expert advice, and not an attempt to conceal income.

Key Legal Precedents

• Section 271(1) (of Income Tax Act, 1961)© of the Income Tax Act: This section deals with penalties for concealment of income or furnishing inaccurate particulars. The court reiterated that penalties are not automatic and require specific conditions to be met.
• Dilip N. Shroff vs. Joint Commissioner of Income Tax: The court referenced this case to highlight that reliance on expert opinion, even if later found incorrect, does not constitute furnishing inaccurate particulars.

Judgement

The court ruled in favor of Filtrex Technologies, stating that the failure to deduct tax was a bona fide mistake. The company neither concealed income nor furnished inaccurate particulars. Consequently, the penalty imposed by the Assessing Officer was not justified.

FAQs

Q1: Why was the penalty not imposed on Filtrex Technologies?

A1: The court found that the failure to deduct tax was a genuine mistake, supported by a Chartered Accountant’s certificate, and not an attempt to conceal income.

Q2: What is the significance of Section 271(1) (of Income Tax Act, 1961)© in this case?

A2: This section outlines the conditions under which penalties for concealment of income can be imposed. The court emphasized that these conditions were not met in this case.

Q3: How does this case impact future tax penalty cases?

A3: It reinforces the principle that penalties are not automatic and require clear evidence of concealment or inaccurate particulars, especially when expert advice is involved.

1. These appeals are filed questioning the order dated 25.4.2014 passed by the Income Tax Appellate Tribunal, Bangalore in ITA.No.1628/Bang/2012, confirming the order of the Commissioner of Income Tax (Appeals), Bangalore.

2. The respondent-assessee is a company engaged in the manufacture of carbon blocks used in water purifying filters at residential buildings. It filed its return of income for the assessment year 2006-07 declaring the income at Rs.40,22,030/-. However, the total income determined by the concerned Assessing Officer in the assessment order, dated 22.12.2008 was Rs.1,77,14,890/-, including the fees of Rs.79,98,870/- paid for technical services to M/s.Filtres Holding Pte. Ltd., Singapore. The enhancement of income by the Assessing Officer was due to three disallowances made under

Section 40(a)(ia) (of Income Tax Act, 1961) (‘Act’ for short). Out of three disallowances made by the Assessing Officer, two disallowances were deleted by the Commissioner of Income Tax (Appeals), Bangalore by the order dated 28.4.2008. However, disallowance of Rs.79,98,870/- was sustained by the erstwhile Commissioner. The Assessing Officer treated the sum of

Rs.79,98,870/- both as concealment of income and furnishing of inaccurate particulars of income by the respondent-assessee and therefore initiated proceedings for levy of penalty under Section 271(1)(c) (of Income Tax Act, 1961).After hearing, the Assessing Officer imposed penalty of Rs.26,92,419/- being the penalty attributable to the concealment of income of Rs.79,98,870/-. The

Commissioner of Income Tax (Appeals) allowed the appeal filed by the respondent-assessee concluding that the respondent has neither concealed the income nor furnished inaccurate particulars of income. The said order of the Commissioner of Income Tax (Appeals) is confirmed by the Income Tax Appellate Tribunal, Bangalore. The order passed by the Income Tax Appellate Tribunal, Bangalore, is called in question in these appeals by the revenue contending that it involved substantial question of law and same has to be adjudicated.

3. By the impugned orders, the Commissioner of Income Tax (Appeals) and the Income Tax Appellate Tribunal, Bangalore, have concluded that the assessee-

respondent herein has not indulged in furnishing of inaccurate particulars of income; the assessee- respondent herein has made payments to three different foreign parties out of which two payments were held not

liable for deduction of tax; it is only the payment in

respect of M/s.Filtrex Holdings Pte. Ltd., Singaore was

held to be liable for deduction of tax; the respondent

herein remitted the payments based on the certificate

given by the Chartered Accountant; and no violations

were reported in Form No.3CD. On facts, both the

authorities have concluded that failure to deduct tax by

the respondent herein was a bona fide mistake and

hence, this is not a case to levy penalty. It is also held

by both the authorities that assessee has neither

concealed the income nor furnished inaccurate particulars

of income.

4. The question as to whether disallowance made

by the Assessing Officer of Rs.79,98,870/- would amount

to concealment of income under Section 271(1)(c) (of Income Tax Act, 1961) of the

Act? The very question was decided in the impugned

orders passed by the Commissioner of Income Tax

(Appeals) as well as the Income Tax Appellate Tribunal in

favour of the assessee.

5. We do not find any ground to interfere with the

impugned orders inasmuch as the Commissioner of

Income Tax (Appeals) and the appellate Tribunal, on

facts, have rightly concluded that the genuineness of the

payment was never in doubt; the explanation of the

assessee is acceptable and that the assessee has neither

concealed the income nor furnished inaccurate particulars

of income. In the matter on hand, the genuineness of

the payment was never in doubt and the dispute as to

whether the payment was made to foreign party was

liable for tax in India or not.

In the matter on hand, we find that there is no

material available on record to arrive at a conclusion that

conditions laid down in Section 271(1)(c) (of Income Tax Act, 1961) are

satisfied for levying penalty. It is well settled principle

that penalty proceedings are quite different from the

assessment proceedings. It is by now well settled that

levy of penalty is not automatic if the

addition/disallowance is sustained by the appellate

authorities. The ingredients of the provisions of Section

271(1)(c) are to be satisfied for levying the penalty. It is

no doubt true that the payment made by the respondent-

assessee to M/s.Filtrex Holdings Pte. Ltd., Singapore, was

liable for deduction of tax at source. It is also not in

dispute that such amount of tax was not deducted at

source in respect of the payment made to M/s.Filtrex

Holdings Pte. Ltd., Singapore. It appears that there was

genuine confusion on the question as to whether the

payment made to a foreign party was liable for levying

tax in India or not. It is also not in dispute that

disallowance as made by the Assessing Officer was

upheld by the appellate authorities. However, the

respondent-assessee has filed detailed statement,

explaining as to why it is not liable to be imposed with

penalty. After hearing the assessee and after considering

the material on record, the Commissioner of Income Tax

(Appeals) and the Income Tax Appellate Tribunal have

concurrently concluded that it is difficult to say that the

respondent has either concealed the income or furnished

inaccurate particulars of the income.

As has been held by the Apex Court in the case of

Dilip N.Shroff vs. Joint Commissioner of Income

Tax & another (291 ITR 590) where the assessee had

relied on the opinion of an expert and subsequently the

opinion of the expert is not accepted or another expert

had given a different opinion, it could not be held that

the assessee had furnished inaccurate particulars within

the meaning of the provisions of Section 271(1)(c) (of Income Tax Act, 1961) of the

Income Tax Act (‘Act’ for short).

In the matter on hand, as aforementioned, the

Chartered Accountant has given a certificate to the effect

that the assessee is not required to deduct tax at source

while making the payment to M/s.Filtrex Holding Pte.

Ltd., Singapore. Thus, the assessee acted on the basis

of the certificate issued by the expert and hence the

Commissioner of Income Tax (Appeals) and the Income

Tax Appellate Tribunal have rightly concluded that this is

not a fit case to conclude that the assessee has

deliberately concealed the income or furnished inaccurate

particulars of the income. The assessee has filed Form

3CD along with the return of income in which the

Chartered Accountant has not reported any violation by

the assessee under Chapter XVII B which would attract

disallowance under Section 40(a)(ia) (of Income Tax Act, 1961).

On reconsidering the entire material on record, we

do not find any ground to interfere with the impugned

order passed by the Income Tax Appellate Tribunal. No

substantial question is involved in these appeals.

Hence, appeals fail and accordingly the same stand

dismissed.

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JUDGE

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JUDGE