Failure to deduct TDS - No mens rea required for penalty - what is reasonable cause? - Payment of tax ultimately does not absolve the deductor : ITAT
November, 27th 2007
THE issue is penalty under section 271C of the Act for failure to deduct tax at source on discounting charges incurred.
A survey under section 133A was conducted in the business premises of the assessee on 24.02.2003 and it was found that the assessee had been debiting "financial charges" under the head "discounting charges'- For financial year 1999-2000 the assessee debited" the account by Rs.45,96,349/- and for financial year 2000-01 by Rs. 49,40,715/-. On verification it was found that the financiers were maintaining regular accounts with the assessee and funds were lent to the assessee company on regular basis whenever it needed to make the payment to the suppliers during the course of business activities. The assessee paid the "financial charges" to the financiers and debited under the head "discount charges".
On the basis of these facts the Assessing Officer in proceedings under section 201(1) and 201(1A) observed that assessee had debited the interest payment under the head discounting charges in the books of accounts with the intention to avoid deduction at source u/s 194A of the Act. When this fact was confronted, Shri Amitabh Agarwal the director of the assessee company, in his statement recorded during the survey under section 133A admitted that the payments were in nature of interest which attracted the provisions of section 194A of the Act. In his statement the director of company admitted the mistake and agreed to discharge their responsibility as tax deductor. However, during the course of proceedings u/s 201(1) and 201(1A), it was pleaded by the assessee that the mistake was committed because of their ignorance without intention to evade tax. This contention of assessee was not accepted by the Assessing Officer and treated the assessee in default and accordingly charged interest u/s 201(1A) of the Act. The matter was carried in appeal up to the level of ITAT. The ITAT upheld the levy of interest under section 201(1A) from the date of deductibility of tax till the payment of tax by the deductees.
During the course of penalty proceedings, the assessee stated that the company did not deduct tax at source from impugned payments because it honestly believed that the payments were in nature of "discounting charges" being different from "interest" in nature and were not covered under the provisions of section 194A and that the assessee company had no intention to avoid the provisions of law for evading of tax.
The Assessing Officer held that the assessee had without any reasonable cause failed to comply with the provisions of section 194A of the Act and therefore made liable to penalty under section 271C of the Act. Accordingly, the penalty of Rs.6,65,091/- and Rs. 10,44,582/- was imposed for financial year 1999-2000 and 2000-01 respectively.
And the matter is before the Tribunal.
The ITAT observed,
1. the transactions with the financiers were of simple loan arrangement and remain uncontroverted by the assessee. The Director of the assessee company during the course of survey had also admitted that so called bill discounting charges were in nature of interest.
2. Under section 58 of the Indian Evidence Act,1872, admitted facts need not be proved.
3. The assessee has not brought on record any material to prove that he was under a bona fide belief that on payment of interest tax at source was not deductible. The assessee is assisted by professionals on tax matters. The assessee has been deducting tax at source in respect of other payments. The contention of assessee that he relied on opinion of statutory auditors is devoid of any merits.
4. Moreover, the ignorance of the law is no excuse as held by Hon'ble Supreme Court in the case of MotilalPadampat Sugar Mills. Also as held by the Hon'ble Supreme Court in the case of R.M.Donde (TO v. MukandrajKuberdas (supra) the word "reasonable cause" would not take in its sweep an error or misconception of law.
What is reasonable cause? The Delhi High Court in the case of Woodword Governors India (P) Ltd had explained this as, "Reasonable cause' as applied to human action is that which would constrain a person of average intelligence and ordinary prudence. It can be described as probable cause. It means an honest belief founded upon reasonable grounds of the existence of a state of circumstances, which assuming them to be true, would reasonably lead any ordinarily prudent and cautious man, placed in the position of the person concerned, to come to the conclusion that the same was the right thing to do. The cause shown has to be considered and only if it is found to be frivolous without substance of foundation, the prescribed consequences follow."
Delhi High in this case has also held that initial burden is on assessee to show that there existed a reasonable cause which was a reason for non deduction of tax. Thereafter, the officer dealing with the matter has to consider whether the explanation offered by the assessee may be regarded as a reasonable cause.
The Tribunal observed that in the present case, the assessee has not discharged even the initial onus that there existed a reasonable cause for failure to deduct tax at source.
Is mens rea essential for penalty? The tribunal observed 1. The Supreme Court in the case of Gujarat Travancore Agencies, had held that "unless there is something in the language of the statute indicating the need to establish, the element of mens rea it is generally sufficient to prove that a default in complying with the statute has accrued; in our opinion there is nothing in section 271 (1)(a) which requires that mens rea must be proved before penalty can be levied under that provision".
2. In another case, the Supreme Court had held, "it is no longer open to argument whether any mens rea is required to be established u/s271(1)(a)".
3. Therefore for the levy of penalty u/s 271C existence of mens rea is not necessary as nothing has been provided in the language of the section to this effect.
4. Thus the only requirement before levy of penalty u/s 271C is to see whether there existed a reasonable cause as required u/s 273B of the Act.
5. The fact as held by the authorities below that the assessee had camouflaged the Transaction of loan and payment of interest as transaction of bill discounting not been controverted by bringing material on record.
6. Thus the failure to deduct tax at source cannot be treated as bonafide or having a reasonable cause for non deduction of tax.
7. It is a case of deliberately camouflaging of interest by discounting charges.
8. The payment of taxes by the payees will not absolve the assessee from the responsibility of deducting tax at source. Acceptance of this argument would make the provisions relating to collection of taxes by way of TDS redundant.