Ita/3/2009 Of M/S.us Technologies International Pvt.lt v. The Commissioner Of Income Tax,Trivandr

IN THE HIGH COURT OF KERALA AT ERNAKULAM PRESENT : THE HONOURABLE MR. JUSTICE C.N.RAMACHANDRAN NAIR & THE HONOURABLE MR. JUSTICE C.K.ABDUL REHIM TUESDAY, THE 16TH JUNE 2009 / 26TH JYAISHTA 1931 ITA.No. 3 of 2009() ------------------- ITA.276/COCH/2004 of I.T.A.TRIBUNAL,COCHIN BENCH .................... APPELLANT: ----------------------------- M/S.US TECHNOLOGIES INTERNATIONAL PVT ' LTD, 721, NILA, TECHNOPARK, TRIVANDRUM 695 581, REPRESENTED BY ITS DIRECTOR, SHRI ALEXANDER VARGHESE. BY ADV. SRI.T.M.SREEDHARAN SRI.V.P.NARAYANAN RESPONDENT(S): --------------- THE COMMISSIONER OF INCOME TAX AAYAKAR BHAVAN, KAWDIAR, THIRUVANANTHAPURAM. ADV. SRI.JOSE JOSEPH, SC, FOR INCOME TAX THIS INCOME TAX APPEAL HAVING COME UP FOR ADMISSION ON 16/06/2009, THE COURT ON THE SAME DAY DELIVERED THE FOLLOWING: C.N.RAMACHANDRAN NAIR &C.K.ABDUL REHIM, JJ.....................................................................I.T. Appeal No.3 of 2009....................................................................Dated this the 16th day of June, 2009. C.R. JUDGMENT Ramachandran Nair, J. Appeal is filed against order of the Income Tax AppellateTribunal rejecting appeal filed by the assessee against the order of theC.I.T. (Appeals) confirming penalty levied under Section 271C of theIncome Tax Act (hereinafter called "the Act"), on the assessee forfailure to deduct and for the failure to pay deducted tax in terms of theprovisions contained in Chapter XVIIB of the Act during the financialyear 2002-2003. The assessee is a Software Company which has it'sunit in Techno Park, Trivandrum. On 10.3.2003 the Survey Team ofthe Income Tax Department conducted a survey in the premises of theassessee under Section 133A of the Act. It was noticed that massiveamount of tax deducted at source for payment under the heads salaries,payment to contractors, professional fees for technical services, rent,etc. have been retained by the assessee without making remittance to the department. It was found that out of Rs.1,10,41,898/- being theTDS recovered from various payments for the financial year 2002-2003relevant for the assessment year 2003-2004, the assessee had remittedonly Rs.38,94,687/- as on the date of search. The balance amount wasremitted after survey in May 2003. The Additional Commissioner ofIncome Tax noticed that during the preceding financial year i.e. 2001-2002, also the assessee made belated payment of tax deducted atsource. Therefore, penalty was proposed under Section 271C for thenon-payment of recovered tax. Even though assessee raised objectionagainst the proposal for penalty on the ground that Section 271C doesnot authorise levy of penalty for non-payment of deducted tax butauthorises penalty only for failure to deduct the tax, the AssessingOfficer turned down the objection and levied penalty equal to theamount of tax recovered at source and withheld by the companywithout remittance to the department on due dates. In first appeal, theassessee raised the question of jurisdiction of the AdditionalCommissioner as well as claimed paucity of funds as the reason fordelayed payment of tax deducted at source. The C.I.T.(Appeals) considered the question in detail, verified the cash flow statement andnoticed that assessee was deliberately delaying payment and it's fundsduring the relevant financial year were utilised for investment in newcompany, re-investment in the sister concern, payment of arrears etc.In other words, it was the finding of the Commissioner(Appeals) thatthe assessee deliberately ignored payment of tax and the deducted taxwas paid conveniently. Since the default was found to be chronic anddeliberate, the C.I.T. (Appeals) did not grant reduction in penalty. Thechallenge against jurisdiction was rejected by C.I.T.(Appeals) for thereason that Section 271C authorises penalty not only for failure todeduct or short deduction, but for non-payment as well. It is againstthis order the assessee filed appeal before the Tribunal challenging thejurisdiction of the officer as well as against quantum on the groundthat they have reasonable cause for the delay in remittance. TheTribunal found that Section 271C authorises penalty not only forfailure to deduct tax at source in terms of the provisions of ChapterXVIIB, but it authorises penalty for non-payment of tax deducted atsource in time. Assessee's claim that there was reasonable cause for their failure to deduct or pay the recovered tax was also rejected by theTribunal. The assessee is, therefore, before us in appeal under Section260A of the Income Tax Act raising both the issues i.e. whether penaltycould be levied under Section 271C for failure to pay deducted tax andalternately whether assessee has reasonable cause for the non-paymentor belated payment of tax deducted at source. We have heard counselfor the appellant and Standing Counsel appearing for the Income TaxDepartment. 2. The first question raised is whether penalty could be leviedunder Section 271C of the Act for non-payment of tax deducted atsource. The contention of counsel for the appellant is that Section271C provides for penalty only for failure to deduct tax as requiredunder Chapter XVIIB and for non-payment of tax, penalty provided isonly for violation of subsection (2) of Section 115(O) or Section 194Bof the Act. In other words, according to him if the assessee has madededuction from source on payments like salary, payment to contractors,payment on rent, etc. under various provisions of Chapter XVIIB, thenno penalty could be levied if the assessee failed to remit the recovered tax. According to him failure to remit tax attracts penalty underSection 271C only in respect of tax payable under subsection (2) ofSection 115(O) or Section 194B of the Act. Standing counsel for therevenue contended that Section 271C provides for penalty both forfailure to deduct or to remit recovered tax and for both. In other words,according to him, penalty provided under Section 271C also covers thesituation where the assessee after deduction at source retains therecovered amount without payment to the department. In our view, theTribunal while considering the appeal recast the Section in it's own waycompletely distorting it's meaning. Originally there was no provisionfor penalty for failure to deduct tax or remit the deducted tax and theprovision under Section 276B only authorised prosecution forviolation. However, Section 271C was introduced by the Direct Laws(Amendment) Act, 1987 with effect from 1.4.1989 providing forpenalty for failure to deduct or remit tax under Chapter XVIIB,subsection (2) of Section 115(O) and Section 194B of the Act. Foreasy reference we extract hereunder Section 271C. "Penalty for failure to deduct tax at source. 271C. (1) If any person fails to -- (a) deduct the whole or any part of the tax as required by orunder the provisions of Chapter XVII-B; or (b) pay the whole or any part of the tax as required by orunder-- (i) sub-section (2) of section 115-O; or (ii) the second proviso to section 194B, "Penalty for failure to deduct tax at source. 271C. (1) If any person fails to -- (a) deduct the whole or any part of the tax as required by orunder the provisions of Chapter XVII-B; or (b) pay the whole or any part of the tax as required by orunder-- (i) sub-section (2) of section 115-O; or (ii) the second proviso to section 194B, then, such person shall be liable to pay, by way of penalty, asum equal to the amount of tax which such person failed todeduct or pay as aforesaid. (2) Any penalty imposable under sub-section (1)shall beimposed by the Joint Commissioner. 3. Counsel for the appellant has drawn a distinction between clauses (a) and (b) of Section 271C (1) of the Act. According to himpenalty under clause (a) is only for failure to deduct tax as requiredunder any of the provisions of Chapter XVIIB. It is argued that in thesurvey conducted by the department what was noticed was thatdeductions have been made and the violation was only delayedremittance of part of the deducted amount and non-remittance ofbalance amount. However, the contention of counsel for the assessee is that since there is no provision for penalty for non-remittance of taxdeducted at source under the provisions of Chapter XVIIB, the levy ofpenalty is unauthorised. Counsel contended that penalty under Section271C(1) for non-remittance is only of tax, whether recovered or not,under sub-section (2) of Section 115(O) or second proviso to Section194B of the Act. We are unable to accept this contention because thefirst part of clause (b) of Section 271C(1) i.e. failure to pay whole orany part of tax as required, takes in the tax deducted under clause (a)under any of the provisions of Chapter XVIIB. So much so, in ourview, failure to deduct or failure to remit recovered tax, both willattract penalty under Section 271C of the Act. So much so, thecontention of the appellant fails and we uphold the finding of theTribunal dismissing the challenge against levy of penalty. 4. The next question to be considered is the quantum of penaltywhich in this case is above Rs.1.1 crore. Counsel for the appellantreferred to Section 273B of the Act authorising the officer to waive orreduce the penalty if the defaulted assessee proves that there wasreasonable cause for such failure which attracts penalty. Standing Counsel has referred to the findings on cash flow and the application offunds by assessee for other purposes and contended that there was noreasonable cause justifying the failure on the part of the assessee. Hehas further contended that even for earlier year assessee had remittedrecovered tax with delay. In our view, the Tribunal has not consideredchallenge against quantum of penalty in so much details probablybecause in the penalty order it is stated that only minimum penalty islevied. So far as failure on the part of the assessee to remit the taxrecovered at source is concerned, we do not think there can be anyjustifying circumstance for delay in remittance because assessee cannotdivert tax recovered for the Government towards working capital orany other purpose. So much so, in our view, defence available underSection 273B does not cover failure in payment of recovered tax.However, if there is failure to remit on account of failure to recover forany reason whatsoever, then the case calls for reduction of penalty, ifnot waiver. Similarly, we feel recovery and remittance of tax, thoughwith delay but with interest, before detection is certainly a mitigatingcircumstance for waiver or reduction of penalty. Further, if full amount of tax with interest was paid before levy of penalty, we feelquantum reduction is called for by the Assessing Officer. Therefore,we direct the Assessing Officer to reconsider the quantum of penalty bygiving one more opportunity to the assessee to furnish facts in the lightof our observations above. The appeal is accordingly disposed ofupholding the order of the Tribunal on the levy of penalty, but withdirection to the Assessing Officer to grant further reduction in penalty,if any new fact or circumstance is brought to the notice of theAssessing Officer based on observations above or otherwise in terms ofSection 273B of the Act. C.N.RAMACHANDRAN NAIR Judge pms C.K.ABDUL REHIM Judge