Commissioner Of Income-Tax, Chennai v. M/S.viswapriya Financial Services & Securities Ltd

IN THE HIGH COURT OF JUDICATURE AT MADRAS DATED : 22.06.2007 Coram : THE HONOURABLE MR.JUSTICE P.D.DINAKARAN AND THE HONOURABLE MR.JUSTICE P.P.S.JANARTHANA RAJA Tax Case (Appeal) Nos.821 and 822 of 2007 Commissioner of Income-tax,Chennai. Vs.M/s.Viswapriya Financial Services & Securities Ltd.,124, L.B.Road, "Viswapriya",Kasturiba Nagar, Adyar,Chennai-600 020. ..Appellant in both the T.C.(A)s. ..Respondent in both the T.C.(A)s. Appeals under Section 260A of the Income-tax Act, 1961 against theorder of the Income Tax Appellate Tribunal, Chennai Bench 'B', Chennai inI.T.A. Nos.177 & 178(Mds)/98 dated 29.12.2004 for the assessment years1994-95 and 1995-96 and order dated 24.4.1997 from the Order of theCommissioner of Income tax [Appeals V] in ITA.No.286, 287/97-98,proceedings dated 21.8.1997 proceedings of the Deputy Commissioner ofIncome Tax, TDS Range, Chennai for the year ending 31.3.95 and proceedingsdated 21.8.1997 of the Deputy Commissioner of Income Tax, TDS Range,Chennai for the year ending 31.3.94. For Appellant :Mrs.Pushya Sitaraman, Sr.Standing Counsel forIncome-tax Department JUDGMENT (Judgment of the Court was delivered byP.P.S.Janarthana Raja, J.) These appeals are filed under Section 260A of the Income Tax Act, 1961by the Revenue, against the order of the Income Tax Appellate Tribunal,Chennai Bench 'B', Chennai in I.T.A. Nos.177 & 178(Mds)/98 dated29.12.2004, raising the following common substantial questions of law:- https://hcservices.ecourts.gov.in/hcservices/ "1. Whether in the facts and circumstances of the case,the Tribunal was right in holding that penalty undersection 271C is not leviable on the assessee company?2. Whether in the facts and circumstances of the case,the Tribunal was right in holding that penalty underSection 271C is not leviable when the assessee hadadvertised in the news paper that the return on theinvestments made with the company will not attract taxdeduction at source, which is against the provisions ofthe section 194A and thereby induced the depositors toinvest?" https://hcservices.ecourts.gov.in/hcservices/ "1. Whether in the facts and circumstances of the case,the Tribunal was right in holding that penalty undersection 271C is not leviable on the assessee company?2. Whether in the facts and circumstances of the case,the Tribunal was right in holding that penalty underSection 271C is not leviable when the assessee hadadvertised in the news paper that the return on theinvestments made with the company will not attract taxdeduction at source, which is against the provisions ofthe section 194A and thereby induced the depositors toinvest?" 2.The facts leading to the above substantial questions of law areas under:-The assessee is a Public Limited Company incorporated under theCompanies Act. The assessee is engaged in retail financial services,corporate advisory services and securities trading. The relevantassessment years are 1994-95 and 1995-96 and the corresponding accountingyears ended on 31.03.1994 and 31.03.1995, respectively. An advertisementwas given in the newspaper in the name of the assessee-company statingthat return on the investments made with the company would not attract thetax deducted at source. Later, the Income-tax Officer investigated thematter and rejected the contention of the assessee that it is only actingas an agent of investors and is merely a trustee for the investors. TheIncome-tax Officer proceeded to treat the assessee as a defaulter as perthe provisions of Section 194A of the Income-tax Act ("Act" in short).Accordingly, the Income-tax Officer passed orders under Section 201(1) ofthe Act holding the assessee as defaulter in deducting and remitting taxat source out of the interest payments made by the company. Aggrieved bythe orders, the assessee filed appeals to the Commissioner of Income-tax(Appeals). The C.I.T.(A) dismissed the appeals and confirmed the ordersof the Assessing Officer. Aggrieved, the assessee filed appeals to theIncome-tax Appellate Tribunal ("Tribunal" in short). The Tribunal heldthat the moneys received by the assessee from the investors create anobligation, and the return on that investment at the guaranteed minimumpayment of 1.5% per month is covered by the definition of Section 2(28A)of the Act and hence, the assessee is liable to deduct tax at source underSection 194A, on the payments made to the investors. The Tribunal hasalso upheld the order that has been made by the authorities under Section201 of the Act. Aggrieved by the order, the assessee filed an appeal tothis Court, and this Court in 258 ITR 496 held as follows:-"The scheme under which the assessee induced investorsto entrust their moneys to the assessee, under the veryterms of the scheme, imposed an obligation on theassessee to repay the investor at the end of the periodof 36 months, and also to ensure a monthly payment of1.5 per cent to the investor during that period. Themere fact that the assessee did not choose tocharacterise such payment as interest will not take https://hcservices.ecourts.gov.in/hcservices/ such payment out of the ambit of the definition of"interest". The payment made by the assessee being apayment made in respect of an obligation incurred underthe terms of the offer/memorandum, is an amount whichwe have to regard as interest falling within the scopeof section 2(28A). So far as the investor isconcerned, the investor is to look to the assessee forrepayment of the moneys. The obligation to repay isclearly an obligation which is akin to a claim or adeposit to which reference is made in the definition ofinterest. The amount paid to the investors thereforewas clearly in the nature of interest and the assesseewas required to comply with section 194A of the Act.Section 201 would clearly apply by reason of theassessee's admitted failure to comply with section such payment out of the ambit of the definition of"interest". The payment made by the assessee being apayment made in respect of an obligation incurred underthe terms of the offer/memorandum, is an amount whichwe have to regard as interest falling within the scopeof section 2(28A). So far as the investor isconcerned, the investor is to look to the assessee forrepayment of the moneys. The obligation to repay isclearly an obligation which is akin to a claim or adeposit to which reference is made in the definition ofinterest. The amount paid to the investors thereforewas clearly in the nature of interest and the assesseewas required to comply with section 194A of the Act.Section 201 would clearly apply by reason of theassessee's admitted failure to comply with section 194A. Section 201(1A) being mandatory, that provisionalso would apply."As the assessee failed to deduct tax at source as provided under Section194A of the Act, the Income-tax Officer issued a Show Cause Noticerequiring the assessee to explain as to why penalty under Section 271C ofthe Act could not be imposed for non-deduction of tax at source for boththe years. The assessee also replied to the Show Cause Notice statingthat it had acted under the bona fide belief that the income received fromthe investments did not attract the liability for deduction at source andtherefore, when the amounts were distributed among the investors, no taxwas deducted at source. Also, an opinion was also obtained from theSenior Counsel before devising the scheme to the effect that no tax needbe deducted at source on the payments made to the investors who hadinvested the money in the fund organised by the assessee. The AssessingOfficer rejected the contention of the assessee and levied penalty ofRs.2,20,811/- and Rs.2,72,393/- for the assessment years 1994-95 and 1995-96, respectively. Aggrieved by the orders, the assessee filed appeals tothe Commissioner of Income-tax (Appeals). The C.I.T.(A) allowed theappeals and deleted the penalty levied by the Officer. Aggrieved, theRevenue filed appeals to the Income-tax Appellate Tribunal ("Tribunal" inshort). The Tribunal dismissed the Revenue's appeals and confirmed theorders of the C.I.T.(A). Hence the present tax cases by the Revenue. 3.Learned Sr.Standing Counsel appearing for the Revenue submittedthat the assessee-company had consciously attempted to avoid theapplicability of provisions of Section 194A of the Act. Further it issubmitted that merely giving advertisement that no tax need be deductedout of the payments made by the assessee, will not be sufficient enough totake away the obligation imposed under Section 194A of the Act. Hence,the assessee had consciously and deliberately followed the provisions ofthe Act. Hence, the Assessing Officer is right in levying penalty underSection 271C of the Act. 4.Heard the counsel. The mere fact that the bona fide claim standsdisallowed does not by itself leads to the inference that the companyconsciously and deliberately flouted the provisions of the Act. Also, an https://hcservices.ecourts.gov.in/hcservices/ opinion was also obtained from the Senior Counsel before devising thescheme to the effect that no tax need be deducted at source on thepayments made to the investors who had invested the money in the fundorganised by the assessee. Hence there is a bona fide action by theassessee and its bona fides have also been accepted by the lowerauthorities. Further the assessee thought that there is no relationshipof debtor and creditor or borrower and lender and therefore, Sections194A, 201(1), 201(1A) r/w Section 2(28A) of the Act are not attracted.These explanations were considered by the authorities below and both theauthorities had taken a view that there is a reasonable cause for non-deduction of tax at source. Section 271C deals with penalty for failure todeduct tax at source, which reads as under:- "271C. (1) If any person fails to-(a) deduct the whole or any part of the tax asrequired by or under the provisions of Chapter XVII-B;or (b) pay the whole or any part of the tax asrequired by or under- (i) sub-section (2) of section115-O; or(ii) the second proviso to section 194B, then, such person shall be liable to pay, by way ofpenalty a sum equal to the amount of tax which suchperson failed to deduct or pay as aforesaid.(2) Any penalty imposable under sub-section (1)shall be imposed by the Joint Commissioner." Section 273B deals with penalty not to be imposed in certain cases, whichreads as under:-"273B. Notwithstanding anything contained in theprovisions of clause (b) of sub-section (1) of section271, section 271A, section 271AA, section 271B, section271BA, section 271BB, section 271C, section 271D,section 271E, section 271F, section 271FA, section271FB, section 271G, clause (c) or clause (d) of sub-section (1) or sub-section (2) of section 272A, sub-section (1) of section 272AA or section 272B or sub-section (1) of section 272BB or sub-section (1) ofsection 272BBB or clause (b) of sub-section (1) orclause (b) or clause (c) of sub-section (2) of section273, no penalty shall be imposable on the person or theassessee, as the case may be, for any failure referredto in the said provisions if he proves that there wasreasonable cause for the said failure."From a reading of the above, it is clear that no penalty shall beimposable on the person or the assessee, for any failure referred to inthe said provisions if he proves that there is reasonable cause for thesaid failure. The reasonable cause involved in the present case is thatthe assessee acted in a bona fide manner on the basis of the opinionobtained from Senior Counsel before devising the scheme that the assessee https://hcservices.ecourts.gov.in/hcservices/ need not deduct tax at source. On this consideration, the Tribunal heldthat it is not a fit case for levying penalty. The Tribunal, in itsorder, held as follows:- "Rival contentions in regard to the above have beenvery carefully considered. The issue in regard to levyof interest for non-deduction of tax at source came upbefore the Tribunal in the case of the assessee forassessment years 1993-94 and 1994-95. The order of theTribunal so considered is reported in (1997) 60 ITD401. In that case it was held that assessee was liableto deduct tax and that interest could also be levied.The practice of the assessee not to deduct tax wasstated to be continuing. On the stated facts, in ouropinion the orders of the authorities levying interestis reasonable. We uphold the same. In so far as levyof penalty is concerned, the appeals by the Departmentwas considered by the CIT(A) with reference to thequestion as was raised before the Madras High Court.On this basis he concluded that the issue is not freefrom doubt. It was on this consideration that he cameto the conclusion that penalty should not have beenlevied. In our opinion this is a reasonable approachto the problem and we uphold the same."From a reading of the above, it is clear that the Tribunal has acceptedthe explanation and given a finding that there is a reasonable cause fornot deducting the tax at source. The finding that there is a reasonablecause is a only a question of fact and also it is not perverse. Hence theTribunal is justified in deleting the penalty levied under Section 271C ofthe Act. The concurrent finding given by both the authorities below arebased on valid materials and evidence. In the case of Commissioner ofIncome-tax Vs. P.Mohanakala [2007] 291 ITR 278 (SC), the Supreme Courtheld that whenever there is a concurrent finding by the authorities below,no interference should be called for by the High Court. Under thesecircumstances, we do not find any error or legal infirmity in the order ofthe Tribunal so as to warrant interference. 5.In view of the foregoing reasons, no substantial questions of lawarise for consideration of this Court and accordingly, the tax cases aredismissed. Consequently, M.P.No.1 of 2007 in T.C.(A) No.822 of 2007 isclosed. No costs. Sd/-Asst. Registrar. /true copy/ km Sub Asst. Registrar. To 1. The Assistant Registrar, Income-tax Appellate Tribunal, Chennai Bench 'B', Chennai. Chennai. 2. The Secretary, Central Board of Direct Taxes, New Delhi. New Delhi. 3. The Commissioner of Income-tax (Appeals) V, Chennai-34. Chennai-34. 4. The Deputy Commissioner of Income-tax, TDS Range, Chennai-600 006. TDS Range, Chennai-600 006. + 1 CC To M/s.Pushya Sitaraman, Advocate SR NO.37304 T.C.(A) Nos.821 and 822 of 2007 ssv[co]gp/17.7.