MR. LALIT MODI,NEW DELHI vs. JCIT, NEW DELHI

The facts in brief are that the assessee company is engaged in the business of purchase and sale of shares as well as in the business of real estate. During the course of assessment proceedings ensued u/s 143(3), the AO noticed that assessee has paid interest amounting to Rs. 2,69,85,207/- to M/s. Delhi Brass & Metal Works; Wans Investment and Finance Pvt. Ltd.; and Span Holdings Pvt. Ltd., but had not deducted tax at source on interest paid of the said amount. In response to the show cause notice by the Assessing Officer, assessee submitted that he has taken personal loan from the said companies and the interest amounting to Rs.2,69,85,207/- was paid out of his drawing account and the said amount has not been claimed as business expense in the profit and loss account, hence provisions of TDS were not applicable. AO though accepted that assessee has not claimed the said amount as business expense, but, since the assessee is subject to audit u/s 44AB, therefore, he was required to deduct tax at source on the said interest payment. Accordingly, penalty u/s 271C was initiated.

In the course of penalty proceedings in response to the show cause notice by the Assessing Officer, assessee stated that he is not liable for penalty, because, firstly, tax have already paid the tax by the payees on interest received from the assessee and no loss has been suffered to the revenue; and secondly, assessee has not been treated as ‘assessee in default’ u/s 201(1) and therefore, penalty u/s 271C cannot be levied. In support of such contention, assessee had strongly relied upon the judgment of Hon’ble Delhi High Court in the case of CIT vs. Dewan Chand, 17 DTR 337 and catena of other decisions as incorporated in the impugned orders. Ld. AO however held that penalty u/s 271C is independent from provision of section 201 and there is no condition in the statute that penalty u/s 271C will be levied only when the assessee is treated as ‘assessee in default’ in 2 terms of section 201. Accordingly, after detailed discussion he held that penalty is leviable and assessee’s plea that he was not aware of the law is no excuse.

Ld. CIT (A) too has confirmed the penalty after rejecting the assessee’s submissions and the judgments relied upon by the assessee. He held that the amendment in section 201(1A) as relied upon by the assessee that when the payees have shown the interest as their income and have paid the taxes then assessee is not guilty of contumacious conduct and it is only mechanism for collection of due tax and there is no corresponding amendment in the provision of section 271C.

Before us, Ld. Counsel for the assessee submitted that now this issue, that if the payees have shown the interest income in the return of income and have paid tax thereon, then no penalty u/s 271C can be levied and in support he relied upon the following decisions :- a. CIT v. H P State Electricity Board (HP High Court) (31/05/2017); b. ACIT vs. M/s. Good Health Plan Ltd. (ITAT Hyderabad); c. M/s. Asha Builders Ltd. V. JCIT (ITAT Amritsar); d. ITA v. DLF Southern Homes Pvt. Ltd. (Delhi ITAT) (15/12/17); e. CIT vs. Bank of Nova Scotia (2016) 380 ITR 550 (SC).

On the other hand, Ld. DR strongly relied upon the order of the Ld. CIT (A).

After considering the relevant findings given in the impugned order and the material placed on record, we find that penalty has been levied on the ground that assessee has not deducted tax at source for the interest payment made to the various parties. Assessee’s case has been that, firstly, the interest expense has not been claimed as business expense but debited to capital account, therefore he was not required to deduct tax at source; secondly, the payees have already shown the interest income in their income tax return and have also paid the tax and copy of certificate in Form 26 was filed; and lastly, assessee was never treated as ‘assessee in default’ and therefore, in view of various decisions the penalty could not be levied. We find that now there is catena of judgment including that of Hon’ble Himachal Pradesh in the case of H.P. State Electricity Board (supra) wherein their Lordships have held that if the assessee has not been treated as ‘assessee in default’ in terms of section 201(1), then it could not be held assessee has failed to deduct at source in terms of provision contained in chapter XVIIB and accordingly, there is no question of levy of penalty u/s 271C. Hon’ble Supreme Court also in the case of CIT vs. Bank of Nova Scotia (supra) has upheld the deletion of penalty based on judgments of Hon’ble Delhi High Court in the case of Itochu Corporation 268 ITR 172 (Del) and in the case of CIT vs. Mitsui & Company Ltd. 272 ITR 545, that there could not be contumacious conduct by the assessee. Here in this case also there is no contumacious conduct by the assessee for not deducting the TDS for the reasons given above, that is, interest paid was not claimed as business expense albeit paid from his capital account and payees have paid the taxes on such interest income in their income tax return. Even otherwise also, the penalty u/s 271C is levied when assessee fails to deduct whole or any part of the deduction as required under the provision of chapter XVIIB. If the tax which was required to be deducted has been paid by the payee, then in view of provision contained in section 201(1) read with amendment brought by the Finance Act 2012, assessee cannot be treated as’ assessee in default’ and no tax is recoverable from him. In such a situation it cannot be held that he is to be liable for penalty u/s 271C. Accordingly, we delete the penalty as confirmed by the Ld. CIT (A).

In the result appeal of the assessee is allowed.