Penalty for Non-Deduction of TDS: Court Rules Against Assessees

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Case Name:

Commissioner of Income Tax (TDS) vs. Thomas Muthoot (High Court of Kerala)

ITA. No. 139 of 2013

Date: 3rd July 2015

Key Takeaways:

- Ignorance of Law: The court reiterated that ignorance of the law is not a reasonable cause for non-compliance.

- Section 271C (of Income Tax Act, 1961) Penalty: Failure to deduct tax at source attracts penalties unless a reasonable cause is proven under Section 273B (of Income Tax Act, 1961).

- Burden of Proof: The onus is on the assessee to demonstrate a reasonable cause for non-compliance.

Issue

Did the partners of M/s Muthoot Estate Investments have a reasonable cause for not deducting tax at source on interest paid to their firm, thereby avoiding penalties under Section 271C (of Income Tax Act, 1961)?

Facts

- The partners of M/s Muthoot Estate Investments paid interest to their firm on overdrawn amounts but did not deduct tax at source as required by Section 194A (of Income Tax Act, 1961).

- The Joint Commissioner of Income Tax imposed penalties under Section 271C (of Income Tax Act, 1961) for this failure.

- The partners argued that they believed they were not required to deduct tax, as the firm had declared a loss and was not liable to pay tax.

Arguments

- Assessees: Claimed they were under the bona fide belief that no tax deduction was required, as the firm was not liable to pay tax due to declared losses.

- Revenue: Argued that the partners were liable to deduct tax at source and that ignorance of the law is not a valid defense.

Key Legal Precedents

- Section 194A (of Income Tax Act, 1961): Requires deduction of tax at source on interest payments, except for certain exemptions.

- Section 271C (of Income Tax Act, 1961): Imposes penalties for failure to deduct tax at source.

- Section 273B (of Income Tax Act, 1961): Provides relief from penalties if a reasonable cause for non-compliance is proven.

- Sitaram Ramcharan v. M.N. Nagrashana [AIR 1960 SC 260]: Ignorance of law is not an excuse.

Judgement

The court ruled in favor of the Revenue, setting aside the Tribunal's order that had canceled the penalties. The court emphasized that the partners' belief was not reasonable, and ignorance of the law could not be considered a reasonable cause under Section 273B (of Income Tax Act, 1961).

FAQs

Q1: What was the main legal issue in this case?

A1: Whether the partners had a reasonable cause for not deducting tax at source, which would exempt them from penalties under Section 271C (of Income Tax Act, 1961).

Q2: Why did the court rule against the partners?

A2: The court found that the partners' belief that they were not required to deduct tax was not reasonable, and ignorance of the law is not a valid excuse.

Q3: What does this case mean for other taxpayers?

A3: It underscores the importance of understanding tax obligations and the limited scope of "reasonable cause" as a defense against penalties for non-compliance.

1.These appeals are filed by the Revenue challenging the common order passed by the Income Tax Appellate Tribunal, Cochin Bench in ITA Nos.385/Coch/2011 and 391/Coch/2011.

2. Briefly stated the relevant facts are that the respondents are Partners of a firm M/s. Muthoot Estate Investments. They had drawn funds from the firm over and above their respective capital and paid interest to the firm on the amounts overdrawn by them. Accordingly, respondent in ITA No.139/13 paid a sum of Rs.1,39,00,000/- and the respondent in ITA No.177/13

paid a sum of Rs.6,28,28,000/- as interest to the firm.

Both of them did not deduct tax at source on the interest paid by them and noticing this as a violation of Section 194A (of Income Tax Act, 1961)

(hereinafter, the 'Act', for short) the Joint Commissioner of Income Tax levied penalty under Section 271C (of Income Tax Act, 1961). Accordingly, Rs.15,69,664/- and Rs.70,49,302/- were levied as penalty on the respondents in ITA Nos.139/13 and 177/13, respectively. The penalty orders were confirmed by the Commissioner (Appeals). The further appeals filed before the Tribunal were allowed and the impugned order was passed holding that the relief entertained by the assessees that they were not liable to deduct tax at source on the interest paid by them to the partnership firm can be considered as a reasonable cause as contemplated under Section 273B (of Income Tax Act, 1961).

The Tribunal also took note of the fact that the firm had included the interest it had received in its return of income and that since the firm had declared loss, it was not liable to pay any tax and hence there was no revenue loss. It was on these grounds the Tribunal set aside the order passed, deleted the penalty levied under Section 271C (of Income Tax Act, 1961) and

allowed the appeals. It is this order, which is challenged by the Revenue in these appeals and the questions of law formulated are:

1. Whether, on the facts and in the circumstances of the case, the tribunal is right in law and fact in cancelling the penalty levied under Sec.271C (of Income Tax Act, 1961)?

2. Whether, on the facts and in the circumstances of the case and also in the light of the specific exemption provided in section 194A(3)(iv) (of Income Tax Act, 1961) to such income credited or paid by a firm to a partner of the firm, the assessee is

reasonably entitled to entertain the belief that payment of interest by the partners to the firm is similar or similarly placed?

3. Whether, on the facts and in the circumstances of the case and in the absence of an issue of debate being raised by the assessee, the Tribunal is right in law and fact in introducing the concept of debate in the order and is not the order based on a “debatable issue” extraneous and perverse?”

3.We heard the senior Standing Counsel for the Revenue

and also the learned senior counsel for the

respondent assessees.

4.Section 194A (of Income Tax Act, 1961) requires any person, not

being an individual who is exempted, and responsible

for paying to a resident any income by way of

interest other than income by way of interest on

securities, shall deduct income tax thereon at the

rates in force, at the time of credit of such income

to the account of the payee or at the time of payment

thereof in cash or by cheque or draft or by any other

mode. Section 271C (of Income Tax Act, 1961) provides that if any

person fails to deduct the whole or any part of the

tax as required to be deducted by or under 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

or pay as aforesaid. Section 271C(2) (of Income Tax Act, 1961) provides that

any penalty imposable under sub section (1) shall be

imposed by the Joint Commissioner of Income Tax. As

per Section 273B (of Income Tax Act, 1961), notwithstanding anything contained

in the provisions of Section 271C (of Income Tax Act, 1961), no penalty shall

be imposable on the person or the assessee, as the

case may be, for any failure referred to in the

Section, if he proves that there was reasonable cause

for such failure.

5.A survey of the above statutory provisions show that

if an individual who is liable to deduct tax at

source under Section 194A (of Income Tax Act, 1961) commits default in doing

so, automatically, Section 271C (of Income Tax Act, 1961) is attracted and he

is liable to be levied penalty as provided therein.

However, that absolute liability to be penalised is

softened by section 273B (of Income Tax Act, 1961) by providing such person an

opportunity to prove that his failure to comply with

Section 194A (of Income Tax Act, 1961) was for a reasonable cause. It is

therefore evident that in order to escape from the

levy of penalty, it is for the assessee to prove that

he had reasonable cause for his non-compliance with

section 194A (of Income Tax Act, 1961) and the burden of proving the reasonable

cause is entirely on the assessee. The Act does not

define the term 'reasonable cause'. It is a standard

of proof which is applied to a set of facts or

actions to prove whether a reasonable person have

come to the same conclusion or acted in the same way

given the totality of the circumstances.

6.In this context, it is also relevant to note that in

Commissioner of Income Tax v. Sri Jagdish Prasad

Choudhary [(211) ITR 472], a Full Bench of the Patna

High Court has interpreted the expression “reasonable

cause”, as follows:

“The word “reasonable cause” has not been

defined under the Act but it could receive the

same interpretation which is given to the

expression “sufficient cause”. Therefore, in the

context of the penalty provisions, the word

“reasonable cause” would mean a cause which is

beyond the control of the assessee. “Reasonable

cause” obviously means a cause which prevents a

reasonable man of ordinary prudence acting under

normal circumstances, without negligence or

inaction or want of bona fides, from furnishing

the return in time”.

7.Subsequently, A Division Bench of the Delhi High

Court in its judgment in Deputy Commissioner of

Income-Tax v. Adinath Industries [(252) ITR 471] held

thus:

“Reasonable cause, as applied to human actions is

that which would constrain a person of average

intelligence and ordinary prudence. The

expression “reasonable” is not susceptible of a

clear and precise definition; for an attempt to

give a specific mean ing to the word “reasonable”

is trying to count what is not number and measure

what is not space. It can be described as rational

according to the dictates of reason and is not

excessive or immoderate. The word “reasonable”

has in law the prima facie meaning of reasonable

with regard to those circumstances of which the

actor, called on to act reasonably, knows or ought

to know see In re, A Soilicitor [1945] KB 368

(CA)). Reasonable cause can be reasonably said to

be a cause which prevents a man of average

intelligence and ordinary prudence, acting under

normal circumstances, without negligence or

inaction or want of bona fides.”

8.The same Division Bench of the Delhi High Court in

its judgment in Woodward Governor India P. Ltd. v.

Commissioner of Income-Tax and Others [(253) ITR

745] held thus:

“Reasonable cause” as applied to human action is

that which would constrain a person of average

intelligence and ordinary prudence. It can be

described as 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

any ordinarily prudent and cautions man, placed in

the position of the person concerned, to come 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 or foundation, the prescribed

consequences follow.”

9.Bearing in mind the above provisions of the Act and

principles, the facts of the case are to be seen.

The case pleaded by the assessees was that they were

under the bonafide belief that under Section 194A (of Income Tax Act, 1961),

they were not liable to deduct tax at source on the

interest paid by a partner to the firm. In other

words, the substance of the plea of the assessees was

that they were ignorant of their statutory liability

to deduct tax at source on the interest paid by them

to the firm of which they are partners. While

Section 194A (of Income Tax Act, 1961) provided for deduction of tax on

interest, by virtue of the provisions contained in

sub section (3), only such income credited or paid

by a firm to a partner of the firm is exempted

from deduction. The language of the provision does

not leave scope for any ambiguity on the liability of

a partner to deduct tax on interest paid by him

to the firm and there is absolutely no warrant

for a belief to the contrary. That being the

legal position, we do not know how the assessees,

who admittedly are persons having the services

of experienced chartered accountants at their

disposal, could entertain a belief that they

were not liable to deduct tax at source on the

interest paid to the firm. This, therefore, means

that the alleged belief of the assessees is certainly

not one a reasonable person would have entertained

nor such persons would have acted in the same way

given the totality of circumstances.

10.Therefore, we cannot accept the plea that the belief

allegedly entertained by the assessees was a bonafide

one or could be accepted as a reasonable cause as

provided under Section 273B (of Income Tax Act, 1961).

11.In effect, the defence put forward by the assessees

is one of ignorance of law. Ignorance of law, it is

trite, is no excuse in law and if that be so,

ignorance of law cannot also be a reasonable cause as

contemplated under Section 273B (of Income Tax Act, 1961). This view has been

taken by the Apex Court in Sitaram Ramcharan v.

M.N.Nagrashana [AIR 1960 SC 260].

12.The learned counsel for the assessees contended that

Section 194A (of Income Tax Act, 1961) excludes ‘person’ from the liability to

deduct tax at source. Therefore, according to the

learned counsel, the very proceedings against the

assessees is untenable. We are unable to accept

this contention. First of all, this contention was

not raised before any one of the authorities,

including the Tribunal and the parties proceeded thus

far, on the conceded basis that the assesees had the

liability under Section 194A (of Income Tax Act, 1961). That apart, unless the

assessees establish by evidence that they are

entitled to the coverage of the proviso to Section

194A(1), they cannot claim the benefit of exclusion.

This proviso reads thus:

“Provided that an individual or a Hindu undivided

family, whose total sales, gross receipts or

turnover from the business or profession carried

on by him exceed the monetary limits specified

under clause (a) or clause (b) of section 44AB (of Income Tax Act, 1961)

during the financial year immediately preceding

the financial year in which such interests is

credited or paid, shall be liable to deduct income

tax under this Section.”

13.Reading of the proviso shows that unless the facts

which are required to be established to attract the

proviso are made out, such a claim of exclusion

cannot be entertained. In this case, such facts are

not established and therefore, we are not in a

position to entertain this plea raised for the first

time before us. True the counsel contended that the

question raised being one of the law can be raised

before this Court, in our view, the question raised

is not a pure question of law but is a mixed question

of law and facts.

14.Learned counsel for the assessee relied on the

judgment in Hindustan Coca Cola Beverage (P) Ltd. v.

Commissioner of Income Tax [(2007) 293 ITR 226 (SC)]

to support his contention that the penalty levied is

untenable. In our view, a reading of this judgment

itself would show that even in cases where default is

committed, though tax cannot be recovered again,

penalty and interest can be recovered.

15.As contended by the learned counsel, it may be true

that penalty levied under section 201 (of Income Tax Act, 1961) read with

Section 221 (of Income Tax Act, 1961) has been set aside by the Tribunal

accepting the plea of “good and sufficient” reasons

urged by the assessees. However, the object of these

provisions being different from section 194A (of Income Tax Act, 1961) read

with Section 271C (of Income Tax Act, 1961), such an order passed by the

Tribunal cannot come to the rescue of the assessees.

In any case, principles of res-judicata and estoppel

are alien to tax jurisprudence and therefore, this

contention also cannot improve the case of the

assessees. One another reason which has weighed with

the Tribunal is that the firm had declared the

interest received in its return and that since the

firm had returned loss and was not liable to any tax,

no loss was caused to the revenue. In our view, even

if the findings are factually correct, statutory

provisions do not recognize this as a defence in a

proceeding under Section 271C (of Income Tax Act, 1961). As we have already

found, the only way out is by establishing

“reasonable cause” as provided in Section 273B (of Income Tax Act, 1961) of the

Act. When default in deducting tax at source

attracts proceedings for penalty under Section 271C (of Income Tax Act, 1961)

and when 273B is the only escape route, the

declaration of receipt of income by the firm or that

it did not have liability to pay tax are, to say the

least, irrelevant and immaterial.

For all the aforesaid reasons, the orders of the

Tribunal are unsustainable and are accordingly set

aside. Answering the questions of law raised in

favour of the revenue, these appeals are allowed.

Sd/-

ANTONY DOMINIC, Judge.

Sd/-

SHAJI P. CHALY, Judge.