The Karnataka High Court has quashed the penalty for non-deduction of TDS on professional advice.
The bench of Justice Krishna S Dixit and Justice G Basavaraja has observed that the non-deduction of tax was due to the bona fide belief formed on the basis of the legal opinion obtained at the hands of M/s.Singhania & Co., a Law Firm of repute; and the opinion of a Chartered Accountant’s Firm namely Lovelock & Lewis.
The respondent/assessee, company did not effect TDS from the monies payable to M/s.Raython Ebaseo Overseas Ltd., presumably a foreign entity (USA), under the contract relating to supply & services of off-shore equipment. This it did on the professional advice that no tax is required to be deducted by way of TDS inasmuch as no income is deemed to accrue or arise in India pursuant to subject off-shore contract.
In fact, the foreign entity REOL ie., the regular Assessee had applied for advance ruling seeking a final opinion in this regard. For a particular period such a TDS was effected & remitted to the department, is also a fact borne out by record.
The order under section 201(1) of the Income Tax Act was passed by the ACIT (TDS) for the two Assessment Years on the ground that the Assessee failed to deduct and pay taxes on time in respect of payments made to REOL on account of the contract in question.
The interest under section 201(A) was also levied for the default. The DCIT (TDS) initiated penalty proceedings under section 271(C) for failure to deduct tax.
Disregarding the explanation offered by the company, penalty came to be levied under section 271(C) for the subject years and that was confirmed on appeal. However, the ITAT agreed with the explanation offered by the respondent and granted relief to it observing that the non-deduction of TDS was not tainted with mala fide. There is reasonable cause shown for not deducting.
The department justified the order of the CIT(A) before the Tribunal contending that initially TDS having been deducted was remitted and only subsequent deduction has not been done. There is absolutely no justification whatsoever for not affecting deduction. The explanation offered by the entity does not constitute a reasonable cause in terms of Section 273(B) of the Income Tax Act and therefore the penalty ought to have been sustained in terms of Section 271(C) of the Income Tax Act. The contention of the department was not accepted by the ITAT.
The appeal by the department questioning the order of ITAT to the extent of levy of penalty u/s.271C of the Income Tax Act, 1961, was set aside.
The court held that the regular Assessee had applied on 11.09.1997 seeking advance ruling and that the Chairman of the Advance Ruling Authority did not process the same for personal reasons. Added, what benefit the respondent could derive by not deducting the tax at source, is also a factor. All these certainly constitute a reasonable cause for not affecting TDS and therefore the orders being consistent with the same are not vulnerable for challenge.
Case Details
Case Title: The Commissioner Of Income Tax Versus M/S Jindal Tractebel Power Co. Ltd.
Case No.: Income Tax Appeal No. 1184 Of 2006
Date: 3/02/2025
Counsel For Petitioner: E.I. Sanmathi
Counsel For Respondent: T.S. Venkatesh
