By TIOL News Service

CHANDIGARH, OCT 27, 2017: THE issue before the Bench is - Whether when the assessee discharges the onus to prove that there was good and sufficient reason for failure to deposit TDS deducted, it does not warrant penalty u/s 221. YES is the answer.

Facts of the case

The Assessee-company, registered under the laws of Japan, sent its employees on secondment to India during the FY 2008-09. The Assessee deducted TDS amounting to Rs. 2,08,74,770/- on the salaries paid to its employees on secondment to India during the FY in question and was under a statutory obligation to deposit the amount of TDS within the prescribed time limit as laid down under Rule 30 of the Income Tax Rules but failed to deposit the same. It was submitted by the Assessee that the delay in depositing the TDS to the credit of the Central Government account was on account of lack of proper understanding of Indian Tax Laws and the compliance required thereunder. It was further submitted by the Assessee that the TDS had been deposited alongwith interest even before the issuance of SCN u/s 201 r/w section 221(1) of the Act. Therefore, the AO held that the Assessee was deemed to be an 'assessee in default' u/s 201 of the Act and imposed penalty of Rs. 25,00,000/- u/s 221 of the Act. On appeal, the CIT(A) allowed the appeal. On further appeal, the Tribunal upheld the order of the CIT(A) and dismissed the appeal.

On appeal, the High Court held that,

++ section 221 of the Act deals with penalty payable when tax payment is in default. According to the said provision, when an assessee is in default or is deemed to be in default in making payment of tax, he shall in addition to the amount of the arrears and the amount of interest payable under Section 220(2) be liable, by way of penalty for such an amount as the Assessing Officer may direct and where there is continuing default such further amount or amounts as the Assessing Officer may direct from time to time but the total amount of penalty shall not exceed the amount of tax in arrears. Explanation to Section 221 of the Act provides that penalty may be imposed even if the assessee makes payment of tax before the levy of penalty. However, according to the first proviso to Section 221(1) of the Act, the assessee shall be provided an opportunity of hearing being levy of penalty whereas second proviso to Section 221(1) of the Act states that where assessee proves to the satisfaction of the Assessing Officer that the default was for good and sufficient reasons, no penalty shall be levied under this Section. Thus, the levy of penalty under Section 221(1) of the Act is subject to the satisfaction of the Assessing Officer and reasonable cause for non compliance

++ after examining the matter on the basis of the relevant case law on the point, it was concluded by the CIT(A) that there was just, sufficient and reasonable cause before the assessee in not making compliance to the provisions of the TDS as the issue of deduction of tax involved complexity and uncertainty. The CIT(A) also referred to the judgment in Eli Lilly and Co. (India) Private Limited's case wherein it was held that the liability to penalty under Section 271C can be fastened only on the person who does not have good and sufficient reason for not deducting tax at source. The burden, of course will be on that person to prove such good and sufficient reason. In the present case, the assessee had shown good and sufficient reasons for not deducting tax at source within the prescribed time. Thus, the CIT(A) rightly allowed the appeal filed by the assessee and set aside the order passed by the Assessing Officer.

(See 2017-TIOL-2250-HC-P&H-IT)