The Commissioner of Income Tax (TDS), Cochin v. Muthoot Bankers

IN THE HIGH COURT OF KERALA AT ERNAKULAM PRESENT: THE HONOURABLE MR.JUSTICE ANTONY DOMINIC & THE HONOURABLE MRS. JUSTICE ANU SIVARAMAN WEDNESDAY, THE 30TH DAY OF AUGUST 2017/8TH BHADRA, 1939 ITA.No. 27 of 2012 () ---------------------- AGAINST THE ORDER/JUDGMENT IN ITA 280/2011 of I.T.A.TRIBUNAL,COCHIN BENCH DATED 13-09-2011 APPELLANT(S)/RESPONDENT: ----------------------- THE COMMISSIONER OF INCOME TAX (TDS), COCHIN. BY ADV. SRI.JOSE JOSEPH, SC, FOR INCOME TAX RESPONDENT(S)/APPELLANT: ------------------------ M/S.MUTHOOT BANKERS, M.G.ROAD, ERNAKULAM-682011. BY ADV. SRI.T.M.SREEDHARAN (SR.) BY ADV. SRI.V.P.NARAYANAN BY ADV. SMT.BOBY M.SEKHAR THIS INCOME TAX APPEAL HAVING BEEN FINALLY HEARD ON 30-08-2017, THE COURT ON THE SAME DAY DELIVERED THE FOLLOWING: ## **ANTONY DOMINIC & ANU SIVARAMAN, JJ.** ## **----------------------------------------------ITA.No. 27 of 2012 ----------------------------------------------Dated this the 30[th] day of August, 2017** ## **JUDGMENT** ## _**Anu Sivaraman, J.**_ This appeal is preferred by the Revenue against the order of Income Tax Appellate Tribnunal, Cochin Bench dated 28.2.2011 in ITA.No.280/Coch/2011. The matter arises from an order of penalty under Section 271C of the Income Tax Act (for short, 'the Act') for non deduction of TDS on interest paid to sister concerns in terms of Section 194A of the Act. The assessment year in question was 2014-2015. The Income Tax Officer, by order dated 25.2.2009, had found that the assessee firm had not deducted tax as required under Section 194A of the Act on Rs.9,50,05,000/-, which was interest paid to its sister concerns. The tax to be deducted was Rs.95,00,500/-. The Joint Commissioner of Income Tax (TDS) imposed penalty of Rs.95,00,500/- under Section 271C of the Act by Annexure A order dated 30.7.2009 and raised a demand. The assessee had stated before the authority that non deduction of tax was not deliberate and there was a bona fide omission on its part in not 2 _**ITA.27/12**_ deducting tax. It was further contended that since the recipient sister concerns had already included the interest amount in their returns and paid tax thereon, there is no loss of revenue to the Government. On the ground that there was deliberate attempt to evade any payment of tax and since similar penalties in respect of a sister concern had already been deleted by the Appellate Authority, it was contended that the penalty could not be imposed in the absence of a finding of a deliberate defiance of law or dishonest intent and in conscious disregard of the obligation. 2. The order of the Joint Commissioner was taken in appeal by the assessee. By Annexure-B order dated 28.2.2011, after considering the contentions and the precedents relied on by the assessee, the Appellate Authority came to the conclusion that the plea of bona fide omission could not be countenanced in view of the repeated findings that there is no exemption from deduction of tax in case of interest paid to a sister concern. It was found that though the penalty levied earlier on one of the sister concerns for the year 1998-99 was deleted by the Income Tax Appellate Tribunal (ITAT) and confirmed by this Court, this Court had in it's judgment held that for repeated offences, the department is free to levy _**ITA.27/12**_ 3 penalty as the assessee cannot take a stand in relying on payment of advance tax by recipients as a ground for failure to deduct tax. It was therefore found that the assessee committed default by not deducing TDS without any reasonable cause and the order of the assessing officer was therefore confirmed. However, in further appeal, relying on the decision of the Apex Court in _**Hindustan Steel Ltd. v. State of Orissa**_ [83 ITR 26(SC)] and the decision in respect of the sister concern in _**ITO V. Muthoot Financiers**_ [(2006) 286 ITR (AT) 71 (Cochin)] and of this Court in ITA.17 of 2008, ITAT set aside the orders imposing penalty and the appellate order confirming the same. 3. The Revenue is in appeal raising the following substantial questions of law: - _“1. Whether, on the facts and in the circumstances of the case and penalty being a civil liability (306 ITR 277) the Tribunal is right in law in deleting the penalty for the inconsistent and militating reasons stated in the order?_ _2. Whether, on the facts and in the circumstances of the case is not the submission before or the ITAT (Annexure D) “the recipient concerns have already included this interest amount and paid tax on the same” militating and inconsistent with the submission: “we were aware that the_ 4 _**ITA.27/12**_ _recipient sister concern will be declaring such interest income in their return of income” and is not the conclusion of reasonableness based on such and other surmises and baseless facts perverse and unbecoming of a quasi judicial fact finding authority? Whether on the facts and in the circumstances of the case-_ - _(i)Are not the above inconsistent explanations including “no loss of revenue” against the statute and the decision of the Supreme Court in 261 ITR 367 wherein Supreme Court observed that failure to comply with the provisions attracts the penal provisions against the person responsible for making the payment;_ - _(ii) are not the explanations not contemplated or cannot be contemplated as a reasonable cause by the statute and the Supreme Court;_ - _(iii)will not the explanations (apart from being not coming within the ambit of reasonable cause) and acceptance of the same amount to annulling Sec.271C of the I.T. Act and also against Supreme Court's understanding of the provision?_ _3. Whether, on the facts and in the circumstances of the case -_ - _(a) did the assessee establish reasonable cause for non deduction of tax at source?_ 5 _**ITA.27/12**_ - _(b) are not the reasoning and finding of the tribunal favouring reasonable cause, absolutely perverse, uncommon unreasonable, against ordinary prudence and an affront to commonsense and logic?_ - _(c) Are not the findings and excuses favouring reasonableness and acceptance of the same by the ITAT flimsy, against commonsense and unbecoming?_ _4. Whether, on the facts and in the circumstances of the case are not the reasonings in support of the so-called reasonable cause flimsy, untenable, against facts and militating against one another, and is not the order of the ITAT relying on inconsistent, varying and militating reasons faulty, unsound, illegal and perverse?_ _5. Whether on the facts and in the circumstances of the case the ITAT is right in law and fact in interfering with the order of penalty levied under Sec.271C of the Income Tax Act?”_ 4. Heard Sri.P.K.R.Menon, learned Senior Counsel for Income Tax Department and Sri.T.M.Sreedharan, Senior Counsel appearing for the respondent/assessee. 5. The contention raised by the learned Senior Counsel for Income Tax Department is to the effect that the liability to deduct tax as provided in Section 194A of the Act is a strict liability. No exemption is available in respect of interest paid to 6 _**ITA.27/12**_ sister concerns. It is an admitted fact that the assessee had not deducted tax at source as provided in the Act. The contention of the assessee was that it was only due to a bona fide omission that tax was not deducted and further that the interest had been accounted for in the books of accounts of the payee concerns. It was therefore contended that there was no loss to the Revenue. The learned Senior Counsel for Income Tax Department would contend that the question of loss to the Revenue would not arise for consideration in a case of this nature, since the liability to deduct tax under Section 194A of the Act is a strict liability. A reading of the wordings of Section 271C would make it clear that there is no discretion vested in the Assessing Officer when a finding that tax has not been deducted at source as provided in Section 194A of the Act is entered. The only way out available to the assessee in the case of an admitted failure to deduct tax at source would be to prove a reasonable cause for such failure under Section 273B of the Act. Unless the assessee had pleaded and proven a reasonable cause for not deducting tax at source, the liability for penalty would be the inescapable consequence, it is contended. The learned Senior Counsel places reliance on the judgments of this Court in ITA 51 of 2013 and ITA.Nos.139 and _**ITA.27/12**_ 7 177 of 2013 and the decisions of the Apex Court in _**Chairman, SEBI v. Shriram Mutual Fund and another**_ [(2006) 5 SCC 361] and _**Union of India v. Dharamendra Textiles Processors and others**_ [(2008) 13 SCC 369] in support of his contention. It is contended that the decision of the Apex Court in _**Hindustan Steel's case (supra),**_ where it was held that an order imposing penalty being a quasi-criminal proceeding, and penalty will not ordinarily be imposed unless the party either acted deliberately in defiance of law or was guilty of conduct, contumacious or dishonest, or acted in conscious disregard of his obligation, has been distinguished by the Apex Court in _**Chairman, SEBI v. Shriram Mutual Fund**_ [(2006) 5 SCC 361]. It was held that the judgment in _**Hindustan Steel's case (supra),**_ having been rendered in the context of quasi criminal proceedings, the principles laid down cannot be relied on in proceedings for penalty for breach of civil obligations. In _**Union of India and Ors. v. Dharamendra Textile Processors and Ors.**_ [(2008) 306 ITR 277 (SC)], construing the provision of Section 11AC of the Central Excise Act, the Apex Court held that the imposition of penalty for refusal to comply with statutory obligations is clearly a civil proceeding and that _mens rea_ is not an essential element for imposing 8 _**ITA.27/12**_ penalty for breach of civil obligations or liabilities. The learned counsel also contends that the issue raised is squarely covered by a decision of this Court in the case of a sister concern of the assessee in ITA.No. 57 of 2007, where it has been held that the burden under Section 273B is entirely with the assessee and that a cause which is beyond the control of the assessee and which prevents a reasonable man of ordinary prudence acting under normal circumstances, without negligence or inaction or want of bona fides, alone make out a “reasonable cause”. It is therefore contended that apart from pleading an inadvertent omission and claiming that there was no loss to the Revenue, the assessee had not attempted to plead or prove any reasonable cause for the refusal to deduct the tax at source in respect of the interest paid to the sister concern. It is therefore contended that the order of the ITAT was totally misconceived and is liable to be set aside. 6. The learned Senior Counsel appearing for the respondent/assessee contended that after the decision of this Court in ITA.No. 57 of 2007, the Apex Court in _**Commissioner of Income Tax v. Bank of Nova Scotia**_ [(2016) 380 ITR 550 (SC)] had occasion to consider the very same question with regard to the deletion of penalty under Section 271(1)(c) of the 9 _**ITA.27/12**_ Act. In the said case, the ITAT had allowed the assessee's appeal and cancelled the penalty levied under Section 271C on the specific finding that it is necessary to establish that there was contumacious conduct on the part of the assessee for the imposition of penalty under Section 271(1)(c) of the Act. Referring to the decisions reported in _**Income Tax Commissioner v. Itochu Corporation**_ [268 ITR 172 (Del)] and _**CIT v. Mitsui & Company Ltd.**_ [272 ITR 545] and a decision of the ITAT, Delhi Bench, the appeal was allowed and the penalty was cancelled. The further appeal by the Revenue was rejected by the High Court on the ground that no substantial question of law was raised. The Apex Court also dismissed the Civil Appeal finding that there is no substantial question of law and that the facts and law had been properly assessed by the Commissioner of Income Tax. This decision of the Apex Court is relied upon to contend that the position that contumacious conduct is necessary before a penalty can be imposed has been upheld by the Apex Court referring to the self same provision of law. 7. Having considered the contentions advanced in depth, we are of the opinion that the issue raised has been held in favour of the Revenue in ITA.No.57 of 2007. With respect of the _**ITA.27/12**_ 10 contentions raised as regards the finding that contumacious conduct is necessary before a penalty can be imposed, we are of the opinion that the position has been clarified by the Bench decision of the Apex Court in _**Dharamendra Textile Processors's case (supra)**_ . At paragraph 33 of the judgment, the Apex Court held, relying on precedents that _mens rea_ is not an essential element for imposing penalty for breach of civil obligations. Considering the nature of penalty under the scheme of the Act, it was held that the penalty leviable in cases of default or failure of statutory obligation or in other words for breach of civil obligation is not a criminal offence and there is no question of proof of intention or _mens rea_ by the assessee for imposing penalty. 8. In the decision cited by the learned Senior Counsel appearing for the Assessee it is apparent that no specific question of law had been raised as to the nature of the penalty which is imposed under Section 271C of the Act. It is clear that no substantial questions of law had been raised in that appeal and therefore, there was no occasion for the Apex Court to consider such question of strict liability or the nature of the penalty imposed under the provisions of law. We are of the opinion that in view of the clear language of Section 271C of 11 _**ITA.27/12**_ the Act, the assessee was liable to pay the penalty unless he could plead and prove that he was prevented from deducting the tax at source with reasonable cause. In the absence of any such pleading of proof, the penalty under Section 271C is liable to be imposed on the assessee. We find that the order of the Tribunal cancelling the penalty imposed on the assessee is unsustainable. The questions of law are answered in favour of the Revenue and the appeal is allowed setting aside the order of the Tribunal and restoring the order of the appellate authority and the assessing authority. The parties shall bear their own respective costs. **ANTONY DOMINIC JUDGE** **ANU SIVARAMAN JUDGE** _vgs_