COMMISSIONER OF INCOME TAX (TDS) vs. INDIAN PETROCHEMICALS CORPORATION LTD

Facts

The assessee, Indian Petrochemicals Corporation Ltd., a Public Sector Undertaking, filed its return of income for AY 1996-97. During assessment scrutiny, it was observed that the assessee had distributed gift coupons to its employees which were not disclosed, leading to short deduction of tax. The Assessing Officer passed an order under Section 201(1). Subsequently, penalty under Section 271C was levied. The assessee appealed against these orders. The CIT(A) dismissed the assessee's appeals. The assessee then appealed to the ITAT against the penalties under Section 271C, while the Revenue appealed against the deletion of penalty under Section 271(1)(c). The ITAT, by a common order dated April 25, 2008, allowed the assessee's appeal, leading to the Revenue filing the present appeals before the High Court.

Held

The High Court held that the assessee acted under a bona fide belief that the gift coupons, being in the nature of mementos to commemorate awards, were not payments of salary. The Court noted that the assessee is a Central Government PSU bound by audits and regulatory checks, and it is unlikely for such an entity to deliberately treat a minor payment as non-taxable when it is believed to be a taxable perquisite. The fact that safety awards were conferred and the gift coupons were linked to these awards supported the assessee's bona fide belief. The Revenue had not controverted the fact of the grant of these awards and coupons being displayed publicly. Following the principle laid down in Commissioner of Income-tax v. Eli Lilly and Co. (I) P. Ltd., where penalty was not leviable due to a genuine and bona fide belief that there was no obligation to deduct tax at source, the High Court found no reason to fasten penalty on the assessee. The question of law was answered in the affirmative in favour of the assessee and against the Revenue.

Key Issues

1. Whether the Appellate Tribunal is right in law and on facts in reversing the order passed by the CIT(A) and thereby cancelling the penalty of Rs.1,25,58,513/- levied under Section 271C of the Act for short deduction of tax in respect of gift coupons issued by the assessee to its employees? Assessee's contentions: The assessee argued that it is a large PSU paying substantial taxes and would not have a malafide intention to avoid TDS on a small sum like gift coupons. It contended that it was under a bona fide impression that the gift coupons were mementos and not in lieu of salary, hence not liable for TDS. The assessee relied on the Supreme Court decision in Commissioner of Income-tax v. Eli Lilly and Co. (I) P. Ltd. Revenue's contentions: The Revenue argued that the gift coupons were given for performance of duty, not as mementos, and therefore constituted perquisites in the hands of employees. It contended that Sections 17(2)(iii) and 17(2)(iv) were applicable, and the Tribunal erred in allowing the assessee's appeal.