By TIOL News Service

NEW DELHI, AUG 04, 2016: THE issue is - Whether when the assessee accepts the finality of order in the context of quantum proceedings, it is not open to the assessee to agitate the same issue in Sec 271C proceedings. YES is the answer.

The Assessee is engaged in the business of manufacture and sale of soft drinks. On 11th November 1998 it entered into an agreement with M/s Pradeep Oil Corporation ('POC') for warehousing services and the licensee constructed a warehouse of constructed area of 47000 sq. ft. The agreement was for a period of three years with a renewal clause at the option. During the period of agreement the Assessee's trucks not less than 300 trucks per day were to be handled by POC, for which the Assessee was to pay warehousing service charges to POC at a minimum rate of Rs. 37,000 per day irrespective of the actual number of trucks carrying the products for handling products up to 300 trucks a day.

The Assessee treated the payments made to the POC as payments made, in terms of Section 194-C, for carrying out work in pursuance of the contract, and deducted 2% from such payment, as tax deducted at source ('TDS.). The Assessing Officer ('AO') passed an order under Section 201(1) read with Section 201(1A) of the Act on 31st March 2001 holding that the payments made to POC were in the nature of rent from which TDS ought to have been deducted @ 20% under Section 194-I of the Act. A demand was accordingly raised on the Appellant for the alleged short deduction together with interest thereon.

In the appeal, the Commissioner of Income Tax (Appeals) directed the assessee to provide necessary evidence to the AO to ascertain whether the POC had paid taxes on the payments received from the Assessee. Thereafter credit for the said payments was to be given to the Assessee. The Tribunal dismissed the appeal filed by the assessee. The ITAT held that in terms of Circular No 718 dated 22nd August, 1995 the Assessee ought to have deducted TDS under Section 194-I of the Act and that there was no bona fide plea/reasonable cause for the Assessee to deduct TDS under Section 194-C of the Act.

On appeal, the HC affirmed the Tribunal's order. The Court was of the view that no substantial question of law arose from the impugned order. However, the Court clarified that the ITAT was not required to give findings on the issue relating to bonafide belief/reasonable cause and therefore the said observations were of no consequence. With this order, the litigation concerning the quantum proceedings came to an end.

On 17th August 2004, the Assessee filed an application under Section 254(2) of the Act before the ITAT. The application was purportedly for "rectification of mistake apparent from the record" in the ITAT's order. The Appellant contended that the ITAT had in its order failed to consider its alternative plea that POC had already paid taxes on the payment received from the Assessee, and had in fact received refunds from the Revenue, and therefore the Revenue could not once again seek to recover the tax from the Assessee. The Tribunal recalled its order for adjudicating the ground argued.

On Revenue's appeal, the High Court ruled againt the assessee by observing that in the first round itself the ITAT considered the above plea of the Assessee raised in Ground No.7 and gave a decision thereon. The Court held that "the conclusion reached by the subsequent Bench of the Tribunal, different from the one that passed the first order, to the effect that the Tribunal had failed to deal with this aspect was based on an incorrect reading of the first order and set aside the same.

The assessee preferred to file an appeal before the Apex Court in 2007. In the meanwhile, on 18th January 2005, the ITAT modified its order dated 12th July 2002, as regards Ground No.7 and held that since POC had already paid taxes on the amounts received from the Assessee, no tax could be recovered from the Assessee under Section 201(1) of the Act.

The Apex Court allowed the assessee's appeal by holding that no demand under Section 201(1) of the Act should be enforced after the tax deductor has satisfied the officer-in-charge of TDS that taxes due have been paid by the deductee-assessee. However, this did not alter the liability to charge interest under Section 201(1A) till the date of payment of taxes by the deductee/assessee or the liability for penalty under Section 271C. The Supreme Court held that since the Assessee had paid interest under Section 201(1A) and that there was no dispute that the tax had been paid by POC, the CBDT circular applied to the facts on hand.

In coming to the above conclusion, the Supreme Court proceeded on the basis that the Revenue had not challenged the order dated 13th September 2004 of the ITAT recalling the earlier order dated 12th July 2002 to the extent of not considering the ground No. 7. In fact, the Revenue did challenge the order dated 13th September 2004 of the ITAT. But the order passed by the High Court was set aside by the Supreme Court.

With regard to the penalty, a Show Cause Notice was issued u/s 271C, imposing a penalty of Rs. 48,86,450 being 100% of the short deduction of tax. The CIT(A) and the ITAT dismissed the appeal. Against the Tribunal's order the assessee filed the present appeal.

Held that,

++ with the Assessee having accepted the finality of the order of this Court in the quantum proceedings as regards the Appellant's obligation to deduct TDS under Section 194-I, as against Section 194-C of the Act, it was not open to the Assessee to re-agitate that issue in the penalty proceedings. However, the question framed by the Court gives the Appellant a second shot at the same question with reference to Clauses 11 and 12 of the warehousing agreement entered into between the Appellant and POC. This was perhaps premised on the decision of the Supreme Court in CIT v. Anwar Ali 2002-TIOL-190-SC-IT-LB, where it was held that the finding given in the assessment proceedings for determining or computing tax could not said to be conclusive as far as the penalty proceedings were concerned. However, it was good evidence. It was observed that before penalty could be imposed, the entirety of circumstances must reasonably point to the conclusion that the disputed amount represented income and that the assessee had consciously concealed the particulars of his income or had deliberately furnished inaccurate particulars;

++ as far as the Assessee was concerned, it had accepted the order dated 21st May 2004 of this Court in the quantum proceedings which imparted finality to the decision of the ITAT. The Assessee again went before the ITAT with an application in which the above order dated 13th September 2004 was passed recording the above categorical stand of the Assessee. The only issue that remained was regarding the extent of tax if any the Assessee should be asked to pay under Section 201 (1) of the Act. No further opportunity could thereafter had been given to the Assessee to re-agitate the issue whether it was justified in deducting TDS under Section 194-C of the Act. In other words, this Court could not have permitted the Assessee to invite it to again examine whether in terms of Clauses 11 and 12 of the warehousing agreement, the payments attracted TDS under Section 194-C and not Section 194-I of the Act;

++ another important point is that there is a distinction in the wording of Section 271(1) (c) of the Act and Section 271-C of the Act. The penalty imposed in the present case is under Section 271-C of the Act and not Section 271(1)(c) of the Act. When the Court in CIT v. Anwar Ali (supra) talked of the findings in the assessment proceedings not being conclusive for the purposes of penalty, it was dealing with Section 28 (1) (c) of the Income Tax Act 1922, which corresponded to Section 271 (1) (c) of the Act. Indeed, Section 271 (1) (c) of the Act provides that the Commissioner may direct payment of penalty by a person who has "concealed the particular of income or furnished inaccurate particulars of such income". This is usually after the assessment is complete. As far as Section 271-C is concerned, the penalty is attracted when there is a failure to deduct TDS or deposit TDS that has been deducted;

++ the order passed under Section 201 (1) is not an assessment order. The order is directed against a person who fails to deduct TDS and is deemed to be an 'Assessee in default'. Correspondingly, the penalty under Section 271-C of the Act is attracted where the person has failed to deduct the whole or any part of the TDS "as required by or under the provisions of Chapter XVII-B". It is like a no-fault liability. The AO is not in such event required to examine, as he would under Section 271(1)(c) of the Act, whether the Assessee had concealed the particulars of income or furnished inaccurate particulars. The nature and scope of the Section 271-C is such that the question of permitting an assessee to again agitate in the penalty proceedings the question that arose in the quantum proceedings, viz., whether TDS ought to have been deducted under a particular provision cannot arise particularly where an assessee, as in this case, accepts the finality of the order passed in that regard in the quantum proceedings;

++ the penalty under Section 271-C of the Act is attracted where a person fails to deduct the whole or any part of the tax as required by or under the provisions of Act. Here it has been conclusively established that TDS ought to have been deducted only under Section 194-I of the Act and not under Section 194-C of the Act. TDS was deducted by the Assessee @20% under Section 194-I of the Act was on the erroneous premise that Section 194C stood attracted. Therefore, the Assessee failed to deduct a substantial portion of the tax that ought to have been deducted under Section 194-I of the Act. Therefore, Section 271-C stood straightway attracted;

++ under Section 273-B of the Act, no penalty under Section 271-C of the Act "shall be imposable on the person or the assessee, as the case may be, for any failure referred to in the said provision if he proves that there was reasonable cause for the said failure." A perusal of the orders of the CIT(A) and the ITAT in the penalty proceedings reveals that neither of the said authorities considered the issue whether in fact there was reasonable cause for the Assessee to not have deducted TDS under Section 194-I of the Act. The ITAT on its part appears to have relied on the order passed by it on 12th July 2002 in the quantum proceedings, where it commented on the lack of bona fide plea/reasonable cause for the Assessee to deduct TDS under Section 194-C of the Act. This part of the order of the ITAT was in fact commented upon by this Court in its order dated 21st May 2004 while declining to frame a question of law in the appeal filed by the Assessee. The Court, however, clarified that the observations of the ITAT relating to bona fide belief/reasonable cause was of no consequence;

++ the Court is unable to agree with the submission that the Assessee could not plead ignorance of law in view of the CBDT Circulars dated 8th August and 22nd August 1995. The CBDT's circulars were at best the opinion of the CBDT and to the extent they were adverse to the Assessee, they were not binding on the Assessee. However, they were binding on the Revenue. As far as the Assessee was concerned, it was entitled to challenge the CBDT's circulars which did not support its case. In fact that is what the Assessee did in the present case. It questioned the order of the AO under Section 201(1) and 201(1A) of the Act before the CIT(A), then before the ITAT and ultimately this Court. Therefore, it cannot be said that there was a deliberate failure on the part of the Assessee to deduct the TDS under Section 194-I of the Act;

++ at the stage when the TDS had to be deducted the question whether TDS had to be deducted under Section 194-C or 194-I of the Act was not a settled one. This explains why the CBDT itself had to issue circulars clarifying the position. Even this Court was persuaded to again frame a question on the issue in its order dated 5th September 2005. The Court is inclined to accept the plea of the Assessee that since the issue whether the TDS was to be deducted from warehouse charges under Section 194-C or 194-I of the Act was a debatable one, there was a reasonable cause for the failure of the Assessee to deduct TDS under Section 194-I of the Act at the time such deduction had to be made.

(See 2016-TIOL-1639-HC-DEL-IT)