Annexure D: Kerala High Court's Order In I.t.appeal v. Muthootbankers Andfinancers, Trivandrum, Copy Of The Judgment Of Thekerala High Court.26/02/2009 In Commissioner Of Income Tax, Trivandrum Vs Muthootbankers And

IN THE HIGH COURT OF KERALA AT ERNAKULAM PRESENT: THE HONOURABLE MR.JUSTICE ANTONY DOMINIC &THE HONOURABLE MR. JUSTICE SHAJI P.CHALY FRIDAY, THE 3RD DAY OF JULY 2015/12TH ASHADHA, 1937 ITA.No. 139 of 2013 () -----------------------AGAINST THE ORDER IN ITA 385/Coch/2011 of I.T.A.TRIBUNAL,COCHIN BENCH DATED 11-01-2013 APPELLANT(S)/RESPONDENT: ------------------------------------------- THE COMMISSIONER OF INCOME TAX (TDS), COCHIN. BY ADVS.SRI.P.K.R.MENON,SR.COUNSEL, GOI(TAXES) SRI.JOSE JOSEPH, SC, FOR INCOME TAX RESPONDENT(S)/APPELLANT: ---------------------------- MR.THOMAS MUTHOOT, MUTHOOT HOUSE, KOZHENCHERRY, 689 303. R1 BY ADV. SRI.T.M.SREEDHARAN (SR.) R1 BY ADV. SRI.V.P.NARAYANAN R1 BY ADV. SMT.DIVYA RAVINDRAN THIS INCOME TAX APPEAL HAVING BEEN FINALLY HEARD ON 29-06-2015 ,ALONG WITH ITA. 177/2013, THE COURT ON 03-07-2015 DELIVERED THEFOLLOWING: APPENDIX IN ITA.139/13 APPELLANTS' EXHIBITS: ANNEXURE A: COPY OF ORDER U/S 271C (JT.C.I.T.) DATED 23/07/2009 FOR THEASSESSMENT YEAR 2006-07.ASSESSMENT YEAR 2006-07. ANNEXURE B: COPY OF THE ORDER DATED 28/12/2011 OF THE COMMISSIONER OFINCOME TAX (APPEALS).INCOME TAX (APPEALS). ANNEXURE C: COPY OF THE ORDER DATED 11/01/2013 OF THE INCOME TAXAPPELLATE TRIBUNAL, COCHIN BENCH ITA NO.385/COCH/2011.APPELLATE TRIBUNAL, COCHIN BENCH ITA NO.385/COCH/2011. ANNEXURE D: KERALA HIGH COURT'S ORDER IN I.T.APPEAL NO.17/2008 DATED26/02/2009 IN COMMISSIONER OF INCOME TAX, TRIVANDRUM VS MUTHOOTBANKERS ANDFINANCERS, TRIVANDRUM, COPY OF THE JUDGMENT OF THEKERALA HIGH COURT.26/02/2009 IN COMMISSIONER OF INCOME TAX, TRIVANDRUM VS MUTHOOTBANKERS ANDFINANCERS, TRIVANDRUM, COPY OF THE JUDGMENT OF THEKERALA HIGH COURT. /TRUE COPY/ ANTONY DOMINIC & SHAJI P. CHALY, JJ.-----------------------------------I.T.A.Nos.139 & 177 of 2013----------------------------------- Dated this the 3[rd] day of July, 2015JUDGMENT C.R. Antony Dominic, J. 1.These appeals are filed by the Revenue challengingthe common order passed by the Income Tax AppellateTribunal, Cochin Bench in ITA Nos.385/Coch/2011 and391/Coch/2011. 2.Briefly stated the relevant facts are that therespondents are Partners of a firm M/s.Muthoot EstateInvestments. They had drawn funds from the firm overand above their respective capital and paid interestto the firm on the amounts overdrawn by them.Accordingly, respondent in ITA No.139/13 paid a sumof `1,39,00,000/- and the respondent in ITA No.177/13paid a sum of `6,28,28,000/- as interest to the firm.Both of them did not deduct tax at source on theinterest paid by them and noticing this as aviolation of Section 194A of the Income Tax Act, 1961(hereinafter, the 'Act', for short) the JointCommissioner of Income Tax levied penalty under Section 271C. Accordingly,`15,69,664/- and `70,49,302/- were levied as penalty on therespondents in ITA Nos.139/13 and 177/13,respectively. The penalty orders were confirmed bythe Commissioner (Appeals). The further appeals filedbefore the Tribunal were allowed and the impugnedorder was passed holding that the relief entertainedby the assessees that they were not liable to deducttax at source on the interest paid by them to thepartnership firm can be considered as a reasonablecause as contemplated under Section 273B of the Act.The Tribunal also took note of the fact that the firmhad included the interest it had received in itsreturn of income and that since the firm had declaredloss, it was not liable to pay any tax and hencethere was no revenue loss. It was on these groundsthe Tribunal set aside the order passed, deleted thepenalty levied under Section 271C of the Act andallowed the appeals. It is this order, which ischallenged by the Revenue in these appeals and thequestions of law formulated are: 1. Whether, on the facts and in the 1. Whether, on the facts and in the circumstances of the case, the tribunal is right inlaw and fact in cancelling the penalty levied underSec.271C? 2. Whether, on the facts and in thecircumstances of the case and also in the light ofthe specific exemption provided in section 194A(3)(iv) to such income credited or paid by a firmto a partner of the firm, the assessee isreasonably entitled to entertain the belief thatpayment of interest by the partners to the firmis similar or similarly placed? 3. Whether, on the facts and in thecircumstances of the case and in the absence ofan issue of debate being raised by the assessee,the Tribunal is right in law and fact in introducingthe concept of debate in the order and is not theorder based on a “debatable issue” extraneousand perverse?” 3.We heard the senior Standing Counsel for the Revenueand also the learned senior counsel for therespondent assessees.and also the learned senior counsel for therespondent assessees. 4.Section 194A of the Act requires any person, notbeing an individual who is exempted, and responsiblefor paying to a resident any income by way ofbeing an individual who is exempted, and responsiblefor paying to a resident any income by way of ITA.139/13 & 177/13 interest other than income by way of interest onsecurities, shall deduct income tax thereon at therates in force, at the time of credit of such incometo the account of the payee or at the time of paymentthereof in cash or by cheque or draft or by any othermode. Section 271C of the Act provides that if anyperson fails to deduct the whole or any part of thetax as required to be deducted by or under theprovisions of Chapter XVII-B, then such person shallbe liable to pay, by way of penalty, a sum equal tothe amount of tax which such person failed to deductor pay as aforesaid. Section 271C(2) provides thatany penalty imposable under sub section (1) shall beimposed by the Joint Commissioner of Income Tax. Asper Section 273B, notwithstanding anything containedin the provisions of Section 271C, no penalty shallbe imposable on the person or the assessee, as thecase may be, for any failure referred to in theSection, if he proves that there was reasonable causefor such failure. 5.A survey of the above statutory provisions show thatif an individual who is liable to deduct tax atif an individual who is liable to deduct tax at ITA.139/13 & 177/13 source under Section 194A commits default in doingso, automatically, Section 271C is attracted and heis liable to be levied penalty as provided therein.However, that absolute liability to be penalised issoftened by section 273B by providing such person anopportunity to prove that his failure to comply withSection 194A was for a reasonable cause. It istherefore evident that in order to escape from thelevy of penalty, it is for the assessee to prove thathe had reasonable cause for his non-compliance withsection 194A and the burden of proving the reasonablecause is entirely on the assessee. The Act does notdefine the term 'reasonable cause'. It is a standardof proof which is applied to a set of facts oractions to prove whether a reasonable person havecome to the same conclusion or acted in the same waygiven the totality of the circumstances. 6.In this context, it is also relevant to note that inCommissioner of Income Taxv. Sri Jagdish PrasadChoudhary[(211) ITR 472], a Full Bench of the PatnaHigh Court has interpreted the expression “reasonablecause”, as follows: Commissioner of Income Taxv. Sri Jagdish PrasadChoudhary[(211) ITR 472], a Full Bench of the PatnaHigh Court has interpreted the expression “reasonablecause”, as follows: 6.In this context, it is also relevant to note that inCommissioner of Income Taxv. Sri Jagdish PrasadChoudhary[(211) ITR 472], a Full Bench of the PatnaHigh Court has interpreted the expression “reasonablecause”, as follows: Commissioner of Income Taxv. Sri Jagdish PrasadChoudhary[(211) ITR 472], a Full Bench of the PatnaHigh Court has interpreted the expression “reasonablecause”, as follows: “The word “reasonable cause” has not beendefined under the Act but it could receive thesame interpretation which is given to theexpression “sufficient cause”. Therefore, in thecontext of the penalty provisions, the word“reasonable cause” would mean a cause which isbeyond the control of the assessee. “Reasonablecause” obviously means a cause which prevents areasonable man of ordinary prudence acting undernormal circumstances, without negligence orinaction or want of bona fides, from furnishingthe return in time”. 7.Subsequently, A Division Bench of the Delhi HighCourt in its judgment in Deputy Commissioner ofIncome-Taxv. Adinath Industries[(252) ITR 471] heldthus:Court in its judgment in Deputy Commissioner ofIncome-Taxv. Adinath Industries[(252) ITR 471] heldthus: “Reasonable cause, as applied to human actions isthat which would constrain a person of averageintelligence and ordinary prudence. Theexpression “reasonable” is not susceptible of aclear and precise definition; for an attempt togive a specific mean ing to the word “reasonable”is trying to count what is not number and measurewhat is not space. It can be described as rationalaccording to the dictates of reason and is notexcessive or immoderate. The word “reasonable”has in law the prima facie meaning of reasonable with regard to those circumstances of which theactor, called on to act reasonably, knows or oughtto know see In re, A Soilicitor [1945] KB 368(CA)). Reasonable cause can be reasonably said tobe a cause which prevents a man of averageintelligence and ordinary prudence, acting undernormal circumstances, without negligence orinaction or want of bona fides.” 8.The same Division Bench of the Delhi High Court inits judgment in Woodward Governor India P. Ltd.v.-its judgment in Woodward Governor India P. Ltd.v.-Commissioner of IncomeTax and Others[(253) ITR745] held thus:745] held thus: “Reasonable cause” as applied to human action isthat which would constrain a person of averageintelligence and ordinary prudence. It can bedescribed as probable cause. It means an honestbelief founded upon reasonable grounds, of theexistence of a state of circumstances, whichassuming them to be true, would reasonably leadany ordinarily prudent and cautions man, placed inthe position of the person concerned, to come tothe conclusion that the same was the right thingto do. The cause shown has to be considered andonly if it is found to be frivolous, withoutsubstance or foundation, the prescribedconsequences follow.” ITA.139/13 & 177/13 “Reasonable cause” as applied to human action isthat which would constrain a person of averageintelligence and ordinary prudence. It can bedescribed as probable cause. It means an honestbelief founded upon reasonable grounds, of theexistence of a state of circumstances, whichassuming them to be true, would reasonably leadany ordinarily prudent and cautions man, placed inthe position of the person concerned, to come tothe conclusion that the same was the right thingto do. The cause shown has to be considered andonly if it is found to be frivolous, withoutsubstance or foundation, the prescribedconsequences follow.” ITA.139/13 & 177/13 9.Bearing in mind the above provisions of the Act andprinciples, the facts of the case are to be seen.The case pleaded by the assessees was that they wereunder the bonafide belief that under Section 194A,they were not liable to deduct tax at source on theinterest paid by a partner to the firm. In otherwords, the substance of the plea of the assessees wasthat they were ignorant of their statutory liabilityto deduct tax at source on the interest paid by themto the firm of which they are partners. WhileSection 194A provided for deduction of tax oninterest, by virtue of the provisions contained insub section (3), only such income credited or paidby a firm to a partner of the firm is exemptedfrom deduction. The language of the provision doesnot leave scope for any ambiguity on the liability ofa partner to deduct tax on interest paid by himto the firm and there is absolutely no warrantfor a belief to the contrary. That being thelegal position, we do not know how the assessees,who admittedly are persons having the servicesof experienced chartered accountants at theirdisposal, could entertain a belief that they ITA.139/13 & 177/13 9 were not liable to deduct tax at source on theinterest paid to the firm. This, therefore, meansthat the alleged belief of the assessees is certainlynot one a reasonable person would have entertainednor such persons would have acted in the same waygiven the totality of circumstances. 10.Therefore, we cannot accept the plea that the beliefallegedly entertained by the assessees was a bonafideone or could be accepted as a reasonable cause asprovided under Section 273B.allegedly entertained by the assessees was a bonafideone or could be accepted as a reasonable cause asprovided under Section 273B. 11.In effect, the defence put forward by the assesseesis one of ignorance of law. Ignorance of law, it istrite, is no excuse in law and if that be so,ignorance of law cannot also be a reasonable cause ascontemplated under Section 273B. This view has beentaken by the Apex Court in Sitaram Ramcharanv.M.N.Nagrashana .is one of ignorance of law. Ignorance of law, it istrite, is no excuse in law and if that be so,ignorance of law cannot also be a reasonable cause ascontemplated under Section 273B. This view has beentaken by the Apex Court in Sitaram Ramcharanv.M.N.Nagrashana . 12.The learned counsel for the assessees contended thatSection 194A excludes ‘person’ from the liability todeduct tax at source. Therefore, according to theSection 194A excludes ‘person’ from the liability todeduct tax at source. Therefore, according to the learned counsel, the very proceedings against theassessees is untenable. We are unable to acceptthis contention. First of all, this contention wasnot raised before any one of the authorities,including the Tribunal and the parties proceeded thusfar, on the conceded basis that the assesees had theliability under Section 194A. That apart, unless theassessees establish by evidence that they areentitled to the coverage of the proviso to Section194A(1), they cannot claim the benefit of exclusion.This proviso reads thus: 12.The learned counsel for the assessees contended thatSection 194A excludes ‘person’ from the liability todeduct tax at source. Therefore, according to theSection 194A excludes ‘person’ from the liability todeduct tax at source. Therefore, according to the learned counsel, the very proceedings against theassessees is untenable. We are unable to acceptthis contention. First of all, this contention wasnot raised before any one of the authorities,including the Tribunal and the parties proceeded thusfar, on the conceded basis that the assesees had theliability under Section 194A. That apart, unless theassessees establish by evidence that they areentitled to the coverage of the proviso to Section194A(1), they cannot claim the benefit of exclusion.This proviso reads thus: “Provided that an individual or a Hindu undividedfamily, whose total sales, gross receipts orturnover from the business or profession carriedon by him exceed the monetary limits specifiedunder clause (a) or clause (b) of section 44ABduring the financial year immediately precedingthe financial year in which such interests iscredited or paid, shall be liable to deduct incometax under this Section.” 13.Reading of the proviso shows that unless the factswhich are required to be established to attract theproviso are made out, such a claim of exclusionwhich are required to be established to attract theproviso are made out, such a claim of exclusion cannot be entertained. In this case, such facts arenot established and therefore, we are not in aposition to entertain this plea raised for the firsttime before us. True the counsel contended that thequestion raised being one of the law can be raisedbefore this Court, in our view, the question raisedis not a pure question of law but is a mixed questionof law and facts. 14.Learned counsel for the assessee relied on thejudgment 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 isuntenable. In our view, a reading of this judgmentitself would show that even in cases where default iscommitted, though tax cannot be recovered again,penalty and interest can be recovered. 15.As contended by the learned counsel, it may be truethat penalty levied under section 201 read withSection 221 has been set aside by the Tribunalaccepting the plea of “good and sufficient” reasonsurged by the assessees. However, the object of these provisions being different from section 194A readwith Section 271C, such an order passed by theTribunal cannot come to the rescue of the assessees.In any case, principles of res-judicata and estoppelare alien to tax jurisprudence and therefore, thiscontention also cannot improve the case of theassessees. One another reason which has weighed withthe Tribunal is that the firm had declared theinterest received in its return and that since thefirm had returned loss and was not liable to any tax,no loss was caused to the revenue. In our view, evenif the findings are factually correct, statutoryprovisions do not recognize this as a defence in aproceeding under Section 271C. As we have alreadyfound, the only way out is by establishing“reasonable cause” as provided in Section 273B of theAct. When default in deducting tax at sourceattracts proceedings for penalty under Section 271Cand when 273B is the only escape route, thedeclaration of receipt of income by the firm or thatit did not have liability to pay tax are, to say theleast, irrelevant and immaterial. ITA.139/13 & 177/13 For all the aforesaid reasons, the orders of theTribunal are unsustainable and are accordingly setaside. Answering the questions of law raised infavour of the revenue, these appeals are allowed. Sd/- ANTONY DOMINIC, Judge. Sd/- SHAJI P. CHALY, Judge. kkb.