CIT vs. JAPAN AIRLINES INTERNATIONAL CO LTD

o/o T5.AV "?@LL Present: Mr. 'Abhishek . Revenue. . 12to 19# Sr. Standing Counsel for the Maratha, trrA 296/20!.1 trfu 297l?@nn trA 298/20nn trA 30L/2011X. trA302/203. n rrA 303/20n 1 rTA 3()4/20n X. ITA 305/2()nn (common orders) In a.ll these appea.ls which pertain to the same assessee, the issue pertains to the levy of penalty under Section 27I (C) of the Income Tax Act (hereinafter referred to as 'the Act') for different assessment years. The factual background is that the assessee is a company incorporated in Japan and is engaged in ttre operation of aircrafts in international traffic.. Some expatriate employees of this company had served in India from 1't April, 2001. A survey was conducted by the income tax authorities on the premises of the assessee on 24th February, 2005 wherein it was noticed that the assessee had failed to deduct tax on the part of amount paid by the assessee to the said expatriate employees. We may note here itself that on the salaries paid to these expatriates in India as well as in Japan, tax 'at source was duly deducted by the assessee. and deposited with the income tax authorities. However, the assessee had not deducted the tax at source, One com'ponent part that is the J , \ 2011:DHC:14652-DB

J amount paid to these e><patriates in Japan towards social security, insurance pension etc. lt was also found that though tax at source was not deducted on the aforesaid component in India, but tax was duly deducted in Japan'and paid to the income taN authorities in Japan. According to the income tax departmbnt, the aforesaid component also form part of salaries within the meaning of Indian lncome-Tax Act and, therefore, the assessee was required to deduct tax at source thereupon as well. lt is further a matter of record that after this objection was raised, the assessee, deposited the tax on that amount as well. However, failure on the part of assessee in not deduc.ting the tax at source at the time of disbursement of salary led to initiation of penalty proceeding under Section 277 (c) of the Act and ultitnately the Assessing Officer passed orders under the atbresaid provisions levying different amounts as penalties for the assessment year 1999-2000 to 2005-06. These penalties were deleted by the clr (A) and the order of the ctr (A) has been confirmed by the ITAT. A perusal of the order of the Tribunal would demonstrate that the concept of application of entire income charged under the head "salary" was a nura"n, issue at the relevant time. Law on this aspect was in fluid situation.and there was no clea'r cut authority/ pronouncements on this aspect. This is observed by the Apex court itself in clr Vs. Eli Lilly & co. (tndia) (P) Ltd. 312 tTR 22s. tn that r 2011:DHC:14652-DB

)" \ t1 case also, on identical circumstances, in this very ground, the t supreme court upheld the. deletion of penalty imposed under Section 27I (c) of .Act. The relevant observations of the Supreme Court discussing this aspect is as follows:- "(iv) On the Scope'of Section 271C read with Section 2738: Section 27LC inter alia states that if any person fails to deduct the whole or any part of the tax as required by the provisions of Chapter XVll-B then such person shall bl liable to pay, by way of penalty, a sum equal to the amount of tax which such person failed to deduct. ln these cases we are concerned with Section 2tIC(1)(q). Thus Section 27LC(1)(a) makes it clear that the penalty leviable shall be equal to the amount of tax which such person failed to deduct. We c'annot hold this provision to be mandato ry or compensatory or automatic because under Section 2738 Parliament has enacted that 'penalty shall not be imposed in cases falling thereunder. Section 2lIC falls in the category of such cases. Section 2738 states that notwithstanding anything contained in Section 27LC, no penalty shall be imposed on the person or the assessee for failure to deduct tax at source if such person or the assessee proves that there was a reasonable cause for the said failure. Therefore, the 2011:DHC:14652-DB

I liability to levy of penalty can be fastened only on the person who do not have good and sufficient reason for not dedu'cting tax at source. Only those persons will be liable to pgnalty who do not have good and sufficient reason for not deducting the tax. The burden, of course, is on. the person to prove such good and sufficient reason. In each of the L04 cases before us, we find that non- deduction of tax at source took place on account of controversial aOOiiion. The concept of aggregation or consolidation of the entire incom'e chargeable under the head "Salaries" being exigible to deduction of tax at source under Section 192 was a nascent issue. lt has not be considered by this Court before. Further, in most of these cases, the tax- deductor-assessee has not claimed deduction under Section 40(a )(iii) in computation of its business income. This is one more reason for not imposing penalty under Section 27IC because by not claiming deduction under Section 40(a)(iii), in some cases, higher corporate tax has been paid to the extent of Rs. 906,52 lacs (see Civil Appeal No. 1778i06 enti.tled CIT v. The Banl< .of Tol<yo-Mitsubishi Ltd.). In some of the cases, it is undisputed that each of the expatriate employees have paid direcily the tejies due on the foreign salary by way of advance tax/self-assessment tax. The tax- r 2011:DHC:14652-DB

(? -t deductor-assessee was under a genuine and bona fide belief that it was not under any . obligation to deduct tax. at source from the home salary paid by the foreign company/HO and, consequently, we are of the view that in none of the 104 cases penalty was leviable . under Section 27IC as the respondent in each case ' has discharged its burden of showing reasonable cause for failure to deduct tax at source." The Tribunal has followed the aforesaid judgment and rightly so has observed that above facts of the present case are identical to the facts in the'aforesaid judgment. In these circumstances, . we are of the opinion that no substantial question of law arises in these appeals and the same are dismissed accordi n gly. r M.[-,ME['f,T'/q, j. July L5, 20n"n skb s[[(R[, J. 2011:DHC:14652-DB