Ita.27/12 v. The Revenue Is In Appeal Raising The Following

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,COCHINBENCH 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 ON30-08-2017, 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, 2017JUDGMENT Anu Sivaraman, J. This appeal is preferred by the Revenue against the orderof Income Tax Appellate Tribnunal, Cochin Bench dated28.2.2011 in ITA.No.280/Coch/2011. The matter arises from anorder of penalty under Section 271C of the Income Tax Act (forshort, 'the Act') for non deduction of TDS on interest paid tosister concerns in terms of Section 194A of the Act. Theassessment year in question was 2014-2015. The Income TaxOfficer, by order dated 25.2.2009, had found that the assesseefirm had not deducted tax as required under Section 194A ofthe Act on Rs.9,50,05,000/-, which was interest paid to its sisterconcerns. The tax to be deducted was Rs.95,00,500/-. The JointCommissioner of Income Tax (TDS) imposed penalty ofRs.95,00,500/- under Section 271C of the Act by Annexure Aorder dated 30.7.2009 and raised a demand. The assessee hadstated before the authority that non deduction of tax was notdeliberate and there was a bona fide omission on its part in not ITA.27/12 deducting tax. It was further contended that since the recipientsister concerns had already included the interest amount intheir returns and paid tax thereon, there is no loss of revenueto the Government. On the ground that there was deliberateattempt to evade any payment of tax and since similarpenalties in respect of a sister concern had already beendeleted by the Appellate Authority, it was contended that thepenalty could not be imposed in the absence of a finding of adeliberate defiance of law or dishonest intent and in consciousdisregard of the obligation. 2. The order of the Joint Commissioner was taken inappeal by the assessee. By Annexure-B order dated 28.2.2011,after considering the contentions and the precedents relied onby the assessee, the Appellate Authority came to theconclusion that the plea of bona fide omission could not becountenanced in view of the repeated findings that there is noexemption from deduction of tax in case of interest paid to asister concern. It was found that though the penalty leviedearlier on one of the sister concerns for the year 1998-99 wasdeleted by the Income Tax Appellate Tribunal (ITAT) andconfirmed by this Court, this Court had in it's judgment heldthat for repeated offences, the department is free to levy ITA.27/12 2. The order of the Joint Commissioner was taken inappeal by the assessee. By Annexure-B order dated 28.2.2011,after considering the contentions and the precedents relied onby the assessee, the Appellate Authority came to theconclusion that the plea of bona fide omission could not becountenanced in view of the repeated findings that there is noexemption from deduction of tax in case of interest paid to asister concern. It was found that though the penalty leviedearlier on one of the sister concerns for the year 1998-99 wasdeleted by the Income Tax Appellate Tribunal (ITAT) andconfirmed by this Court, this Court had in it's judgment heldthat for repeated offences, the department is free to levy ITA.27/12 penalty as the assessee cannot take a stand in relying onpayment of advance tax by recipients as a ground for failure todeduct tax. It was therefore found that the assesseecommitted default by not deducing TDS without any reasonablecause and the order of the assessing officer was thereforeconfirmed. However, in further appeal, relying on the decisionof the Apex Court in Hindustan Steel Ltd. v. State ofOrissa [83 ITR 26(SC)] and the decision in respect of the sisterconcern in ITO V. Muthoot Financiers [(2006) 286 ITR (AT)71 (Cochin)] and of this Court in ITA.17 of 2008, ITAT set asidethe orders imposing penalty and the appellate order confirmingthe same. 3. The Revenue is in appeal raising the following substantial questions of law: “1. Whether, on the facts and in the circumstances ofthe case and penalty being a civil liability (306ITR 277) the Tribunal is right in law in deletingthe penalty for the inconsistent and militatingreasons stated in the order?the case and penalty being a civil liability (306ITR 277) the Tribunal is right in law in deletingthe penalty for the inconsistent and militatingreasons stated in the order? 2. Whether, on the facts and in the circumstances ofthe case is not the submission before or the ITAT(Annexure D) “the recipient concerns havealready included this interest amount and paidtax on the same” militating and inconsistent withthe submission: “we were aware that thethe case is not the submission before or the ITAT(Annexure D) “the recipient concerns havealready included this interest amount and paidtax on the same” militating and inconsistent withthe submission: “we were aware that the recipient sister concern will be declaring suchinterest income in their return of income” and isnot the conclusion of reasonableness based onsuch and other surmises and baseless factsperverse and unbecoming of a quasi judicial factfinding authority? Whether on the facts and in thecircumstances of the case- (i)Are not the above inconsistentexplanations including “no loss ofrevenue” against the statute and thedecision of the Supreme Court in 261 ITR367 wherein Supreme Court observed thatfailure to comply with the provisionsattracts the penal provisions against theperson responsible for making thepayment;explanations including “no loss ofrevenue” against the statute and thedecision of the Supreme Court in 261 ITR367 wherein Supreme Court observed thatfailure to comply with the provisionsattracts the penal provisions against theperson responsible for making thepayment; (ii) are not the explanations notcontemplated or cannot be contemplatedas a reasonable cause by the statute andthe Supreme Court;contemplated or cannot be contemplatedas a reasonable cause by the statute andthe Supreme Court; (iii)will not the explanations (apart frombeing not coming within the ambit ofreasonable cause) and acceptance of thesame amount to annulling Sec.271C of theI.T. Act and also against Supreme Court'sunderstanding of the provision?being not coming within the ambit ofreasonable cause) and acceptance of thesame amount to annulling Sec.271C of theI.T. Act and also against Supreme Court'sunderstanding of the provision? (ii) are not the explanations notcontemplated or cannot be contemplatedas a reasonable cause by the statute andthe Supreme Court;contemplated or cannot be contemplatedas a reasonable cause by the statute andthe Supreme Court; (iii)will not the explanations (apart frombeing not coming within the ambit ofreasonable cause) and acceptance of thesame amount to annulling Sec.271C of theI.T. Act and also against Supreme Court'sunderstanding of the provision?being not coming within the ambit ofreasonable cause) and acceptance of thesame amount to annulling Sec.271C of theI.T. Act and also against Supreme Court'sunderstanding of the provision? 3. Whether, on the facts and in the circumstances ofthe case -the case - (a) did the assessee establish reasonable causefor non deduction of tax at source?for non deduction of tax at source? ITA.27/12 (b) are not the reasoning and finding of thetribunal favouring reasonable cause,absolutelyperverse,uncommonunreasonable, against ordinary prudenceand an affront to commonsense and logic?tribunal favouring reasonable cause,absolutelyperverse,uncommonunreasonable, against ordinary prudenceand an affront to commonsense and logic? (c) Are not the findings and excuses favouringreasonableness and acceptance of thesame by the ITAT flimsy, againstcommonsense and unbecoming?reasonableness and acceptance of thesame by the ITAT flimsy, againstcommonsense and unbecoming? 4. Whether, on the facts and in the circumstances ofthe case are not the reasonings in support of theso-called reasonable cause flimsy, untenable,against facts and militating against one another,and is not the order of the ITAT relying oninconsistent, varying and militating reasonsfaulty, unsound, illegal and perverse?the case are not the reasonings in support of theso-called reasonable cause flimsy, untenable,against facts and militating against one another,and is not the order of the ITAT relying oninconsistent, varying and militating reasonsfaulty, unsound, illegal and perverse? 5. Whether on the facts and in the circumstances ofthe case the ITAT is right in law and fact ininterfering with the order of penalty levied underSec.271C of the Income Tax Act?”the case the ITAT is right in law and fact ininterfering with the order of penalty levied underSec.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, SeniorCounsel 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 todeduct tax as provided in Section 194A of the Act is a strictliability. No exemption is available in respect of interest paid to ITA.27/12 5. Whether on the facts and in the circumstances ofthe case the ITAT is right in law and fact ininterfering with the order of penalty levied underSec.271C of the Income Tax Act?”the case the ITAT is right in law and fact ininterfering with the order of penalty levied underSec.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, SeniorCounsel 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 todeduct tax as provided in Section 194A of the Act is a strictliability. No exemption is available in respect of interest paid to ITA.27/12 sister concerns. It is an admitted fact that the assessee had notdeducted tax at source as provided in the Act. The contentionof the assessee was that it was only due to a bona fideomission that tax was not deducted and further that theinterest had been accounted for in the books of accounts of thepayee concerns. It was therefore contended that there was noloss to the Revenue. The learned Senior Counsel for Income TaxDepartment would contend that the question of loss to theRevenue would not arise for consideration in a case of thisnature, since the liability to deduct tax under Section 194A ofthe Act is a strict liability. A reading of the wordings of Section271C would make it clear that there is no discretion vested inthe Assessing Officer when a finding that tax has not beendeducted at source as provided in Section 194A of the Act isentered. The only way out available to the assessee in the caseof an admitted failure to deduct tax at source would be toprove a reasonable cause for such failure under Section 273Bof the Act. Unless the assessee had pleaded and proven areasonable cause for not deducting tax at source, the liabilityfor penalty would be the inescapable consequence, it iscontended. The learned Senior Counsel places reliance on thejudgments 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 SCC361] and Union of India v. Dharamendra TextilesProcessors and others [(2008) 13 SCC 369] in support of hiscontention. It is contended that the decision of the Apex Courtin Hindustan Steel's case (supra), where it was held that anorder imposing penalty being a quasi-criminal proceeding, andpenalty will not ordinarily be imposed unless the party eitheracted deliberately in defiance of law or was guilty of conduct,contumacious or dishonest, or acted in conscious disregard ofhis obligation, has been distinguished by the Apex Court inChairman, SEBI v. Shriram Mutual Fund [(2006) 5 SCC361]. It was held that the judgment in Hindustan Steel'scase (supra), having been rendered in the context of quasicriminal proceedings, the principles laid down cannot be reliedon in proceedings for penalty for breach of civil obligations. InUnion of India and Ors. v. Dharamendra TextileProcessors and Ors. [(2008) 306 ITR 277 (SC)], construingthe provision of Section 11AC of the Central Excise Act, theApex Court held that the imposition of penalty for refusal tocomply with statutory obligations is clearly a civil proceedingand that mens rea is not an essential element for imposing ITA.27/12 ITA.27/12 penalty for breach of civil obligations or liabilities. The learnedcounsel also contends that the issue raised is squarely coveredby a decision of this Court in the case of a sister concern of theassessee in ITA.No. 57 of 2007, where it has been held that theburden under Section 273B is entirely with the assessee andthat a cause which is beyond the control of the assessee andwhich prevents a reasonable man of ordinary prudence actingunder normal circumstances, without negligence or inaction orwant of bona fides, alone make out a “reasonable cause”. It istherefore contended that apart from pleading an inadvertentomission and claiming that there was no loss to the Revenue,the assessee had not attempted to plead or prove anyreasonable cause for the refusal to deduct the tax at source inrespect of the interest paid to the sister concern. It is thereforecontended that the order of the ITAT was totally misconceivedand is liable to be set aside. 6. The learned Senior Counsel appearing for therespondent/assessee contended that after the decision of thisCourt in ITA.No. 57 of 2007, the Apex Court in Commissionerof Income Tax v. Bank of Nova Scotia [(2016) 380 ITR 550(SC)] had occasion to consider the very same question withregard to the deletion of penalty under Section 271(1)(c) of the ITA.27/12 9 Act. In the said case, the ITAT had allowed the assessee'sappeal and cancelled the penalty levied under Section 271C onthe specific finding that it is necessary to establish that therewas contumacious conduct on the part of the assessee for theimposition of penalty under Section 271(1)(c) of the Act.Referring to the decisions reported inIncome TaxCommissioner v. Itochu Corporation [268 ITR 172 (Del)]and CIT v. Mitsui & Company Ltd. [272 ITR 545] and adecision of the ITAT, Delhi Bench, the appeal was allowed andthe penalty was cancelled. The further appeal by the Revenuewas rejected by the High Court on the ground that nosubstantial question of law was raised. The Apex Court alsodismissed the Civil Appeal finding that there is no substantialquestion of law and that the facts and law had been properlyassessed by the Commissioner of Income Tax. This decision ofthe Apex Court is relied upon to contend that the position thatcontumacious conduct is necessary before a penalty can beimposed has been upheld by the Apex Court referring to theself same provision of law. 7. Having considered the contentions advanced in depth, we are of the opinion that the issue raised has been held infavour of the Revenue in ITA.No.57 of 2007. With respect of the ITA.27/12 contentions raised as regards the finding that contumaciousconduct is necessary before a penalty can be imposed, we areof the opinion that the position has been clarified by the Benchdecision of the Apex Court in Dharamendra TextileProcessors's case (supra). At paragraph 33 of the judgment,the Apex Court held, relying on precedents that mens rea is notan essential element for imposing penalty for breach of civilobligations. Considering the nature of penalty under thescheme of the Act, it was held that the penalty leviable in casesof default or failure of statutory obligation or in other words forbreach of civil obligation is not a criminal offence and there isno question of proof of intention or mens rea by the assesseefor imposing penalty. 8. In the decision cited by the learned Senior Counselappearing for the Assessee it is apparent that no specificquestion of law had been raised as to the nature of the penaltywhich is imposed under Section 271C of the Act. It is clear thatno substantial questions of law had been raised in that appealand therefore, there was no occasion for the Apex Court toconsider such question of strict liability or the nature of thepenalty imposed under the provisions of law. We are of theopinion that in view of the clear language of Section 271C of ITA.27/12 8. In the decision cited by the learned Senior Counselappearing for the Assessee it is apparent that no specificquestion of law had been raised as to the nature of the penaltywhich is imposed under Section 271C of the Act. It is clear thatno substantial questions of law had been raised in that appealand therefore, there was no occasion for the Apex Court toconsider such question of strict liability or the nature of thepenalty imposed under the provisions of law. We are of theopinion that in view of the clear language of Section 271C of ITA.27/12 the Act, the assessee was liable to pay the penalty unless hecould plead and prove that he was prevented from deductingthe tax at source with reasonable cause. In the absence of anysuch pleading of proof, the penalty under Section 271C is liableto be imposed on the assessee. We find that the order of the Tribunal cancelling thepenalty imposed on the assessee is unsustainable. Thequestions of law are answered in favour of the Revenue and theappeal is allowed setting aside the order of the Tribunal andrestoring the order of the appellate authority and the assessingauthority. The parties shall bear their own respective costs. ANTONY DOMINIC JUDGE ANU SIVARAMAN JUDGE