2001-VIL-162-ITAT-CHD

Equivalent Citation: TTJ 088, 450,

Income Tax Appellate Tribunal CHANDIGARH

Date: 25.10.2001

PUNJAB STATE ELECTRICITY BOARD.

Vs

INCOME TAX OFFICER.

BENCH

Member(s)  : VIMAL GANDHI., JOGINDER PALL.

JUDGMENT

These eight appeals—five by the Revenue and three by the assessee—for asst. yrs. 1990-91 to 1992-93 involving common points, were heard together and are being disposed of through this consolidated order for the sake of convenience.

2. The assessee, the Punjab State Electricity Board, is an autonomous body, established under the Electricity Supply Act, 1948, and is engaged in the business of generation and distribution of electricity. It is wholly owned by Government of Punjab. It is reported to be running into losses of crores of rupees. For augmenting its financial resources, the Board had issued securities as interest-bearing Bonds guaranteed by the Punjab Government. The Bonds were subscribed by financial institutions, Government Corporations and public sector banks. Interest on Bonds is being paid half yearly and the Board was liable to deduct tax at source on the interest payable/paid under s. 193 of the IT Act. Further, through a provision introduced by Finance Act, 1989, income-tax deductible from interest was to be increased by surcharge levied at specified rate. Thus, the assessee was liable to deduct 21.5 per cent of the interest towards income-tax which was to be increased by surcharge levied at the following rates on the income-tax:

3. The assessee deducted tax at source from the interest paid on Bonds but failed to deduct surcharge at the prescribed rates. This came to the notice of the Revenue authorities somewhere in March, 1993 and first notice was issued to the assessee on 16th March, 1993, for financial year 1991-92 under s. 206 of the IT Act. It was regarding tax deductible at source from interest paid on securities.

4. The assessee pleaded that surcharge could not be deducted as the assessee was unaware of its statutory obligation to deduct surcharge. The assessee further contended that payees, banks and other institutions were directly paying tax on interest including surcharge and, therefore, no loss of revenue was caused to the Department. The mistake in non-deduction of surcharge was claimed to be a bona fide mistake. It was pleaded that the assessee came to know about its obligation to deduct surcharge only after the matter was brought to the notice of the Board by tax authorities. The assessee paid surcharge for the three years under consideration as per details below:

"Asst. yr.	Amount of surcharge	Date and amount of payment	Due	Final due
1990-91	72,23,554	30,95,201.76 dt. 28-7-1993	34,28,353	Nil
1991-92	80,01,394	20,07,594 dt. 30-3-1993	Nil	Nil
1992-93	91,92,967	91,92,967 dt. 30-3-1993	Nil	Nil"

The AO did not find any substance in the claim made by the assessee, treated the assessee as a defaulter and levied interest under s. 201(1A) of the IT Act as per details given below:

The AO also imposed penalties in the two years under s. 271C of the IT Act which was introduced w.e.f. 1st April, 1989, for failure of the assessee to deduct surcharge as under:

5. The assessee challenged the levy of interest under s. 201(1A) of the IT Act as also the penalty levied in appeal before the CIT(A). It was contended that the assessee was liable to deduct "tax" and not "surcharge" under s. 193 of the IT Act. All the returns prescribed on Form No. 25 were filed in time and the Revenue never pointed out the non-payment of surcharge. At any rate, the assessee was a State Government undertaking and should not be charged with any motive for not deducting surcharge from interest paid. The interest paid by the assessee was claimed to be payment on behalf of the State and, therefore, no tax at source was deducted. It was further contended that recipients of interest were nationalised and commercial banks and public undertakings who paid correct tax in time and as such no loss was caused to the Revenue. The assessee also challenged the calculations of interest charged.

6. During the course of hearing of appeals before the CIT(A), the assessee relied on circular of the CBDT No. 4P; dt. 21st July, 1966, and also on Notification No. SO 744, dt. 5th March, 1987. The learned CIT(A) after considering the relevant material available on record, did not find force in the contention of the assessee-Board that it was a limb of the State Government and, therefore, provisions of s. 201(1A) were not applicable in its case. The Board was a regular income-tax assessee under the IT Act and was being assessed in the status of a "company". The assessee may be a wholly owned Government undertaking but it could not be equated with Government itself so long as it is assessable to income-tax. It had all the liabilities cast on an assessee under the IT Act. It has to fulfil its statutory obligations. The mere fact that Bonds were guaranteed by State Government would not become Government securities. The assessee was liable to deduct tax at source as per rates prescribed by the Finance Acts, from year to year. The surcharge was also to be deducted at the rates prescribed. Accordingly, it was held that provisions of s. 193/201(1A) were mandatory in nature and were applicable to the assessee. Accordingly it was held that the assessee was liable to pay interest for its failure to deduct and pay surcharge in time. The CIT(A) however, allowed relief to the assessee on account of payment made by the payees with the following remarks :

"I, however, find merit in the contentions of the appellant that if tax that is required to be paid by the payer, is already paid by the payee and since no double taxation of tax is provided for under the Act it must be presumed that the tax paid by the payee is the tax paid not only on his behalf but also in discharge of the obligation cast upon the payer. This view finds support in the decision of Tribunal Delhi Bench 'E' in ITO vs. Sood Enterprises (1997) 41 ITD 234 (Del). Similar views have been expressed by some other Benches of the Tribunal and by Hon'ble M.P. High Court in CIT vs. Divisional Manager, New India Assurance Co. Ltd. (1983) 33 CTR (MP) 248 : (1983) 140 ITR 818 (MP) and CIT vs. Life Insurance Corpn. (1986) 52 CTR (MP) 278 : (1987) 166 ITR 191 (MP). The calculation of interest on surcharge therefore, does not appear to be correct. The appellant could only be liable for payment of interest upto the date of which the payees deposited their tax by way of advance-tax or TDS and this date in no case could go beyond the end of the financial year i.e. 31st March in each case and each year. This is especially so in view of the fact that all the payees are nationalised banks and had duly paid their taxes by this date and their assessment orders subsequently resulted only in refunds. This fact however, may be verified by the AO for financial years 1991-92 and 1992-93 and in case the facts mentioned above are found to be correct, interest and surcharge may be charged upto 31st March of each financial year and not upto the date of recovery made by the Department from the appellant.

2.4. As far as financial year 1990-91 is concerned, the facts are slightly different. Order under s. 201(1A) itself mentions that out of total amount of surcharge of Rs. 72,23,554 only a sum of Rs. 37,95,206.76 was recovered by the Department from the appellant on 28th July, 1993. The balance amount of Rs. 34,28,352 was not collected due to the fact that the assessments of different banks from whom the amount of surcharge was to be recovered had since been completed and refunds had also been determined. Photocopies of these assessment orders were filed before the AO and the plea of the appellant for not depositing the balance amount was accepted. AO, however, calculated the interest on the entire amount due for the three years upto the date of payment and even levied interest on the balance amount of Rs. 34.28 lacs which was not even deposited by the appellant. This is apparently wrong. There is no question of interest being levied on the amount of surcharge which itself has not been collected for reasons discussed in the order of the AO. As decided in respect of financial years 1991-92 and 1992-93 interest on non-payment of surcharge should be re-calculated upto the end of the financial year i.e., 31st March,1991, after verification of the fact that all the payees had duly paid their taxes either by way of advance-tax or by way of TDS."

7. The question of penalty imposed was separately considered by the CIT(A) vide his order dt. 6th Sept., 1994. Here again, it was pleaded that surcharge was not deducted by the assessee under a bona fide belief that it was not part of income-tax. The other contentions advanced regarding interest charged were also advanced against the orders imposing penalties. The learned CIT(A) during the course of hearing of the appeals obtained the comments from the AO on the submissions made on behalf of the assessee. The AO vide his letter dt. 8th Aug., 1994, justified the imposition of penalty under s. 271C of the IT Act.

8. The learned CIT(A) cancelled the penalty imposed in asst. yr. 1990-91 with the following observations:

"6. I have gone through the facts of the case and submissions made both the Dy. CIT, Patiala Range, Patiala and the appellant. There is no dispute that there was failure on the part of the appellant to deduct surcharge on income-tax but it was an unintentional omission. At no stage, the IT authorities, security holder or the banks pointed out this omission to the appellant and as soon as it has pointed out, the appellant took its steps to rectify the situation. The observations of the Dy. CIT that ignorance of law cannot be accepted as reasonable is not wholly correct. In fact, these observations run contrary to the decision of Supreme Court in Motilal Padampat Sugar Mills Co. Ltd. vs. State of U.P. & Ors. (1979) 118 ITR 326 (SC). The Hon'ble Supreme Court in that case pointed out that there is no presumption that every person knows the law. It is often said that everyone is presumed to know law, but that is not correct statement. There is no such maxim known to the law. This becomes specially true in the case of the appellant in view of the fact that in so far as interest on securities is concerned, the Finance Act, 1986, and Finance Act, 1987, did not provide for deduction of any surcharge on tax deducted at source in respect of interest on securities. The appellant and the officer in-charge were under bona fide belief thereafter that the surcharge had been dispensed with. There cannot be any other reason for the appellant not to deduct surcharge as no individual stands to gain for such non-deduction. The appellant had no vested interest in non-deduction of tax on surcharge as it had only to pay this amount to the Department and lesser amount to the payees. In these circumstances, observations of the Supreme Court in the case of Hindustan Steel Ltd. vs. State of Orissa (1972) 83 ITR 26 (SC) become relevant. Of and on quoted observations deserve to be quoted again as under:

'An order imposing penalty for failure to carry out a statutory obligation is the result of a quasi-criminal proceedings, and penalty will not ordinarily be imposed unless the party obliged either acted deliberately in defiance of law or was guilty of conduct contumacious or dishonest, or acted in conscious disregard of its obligation. Penalty will not also be imposed merely because it is lawful to do so. Whether penalty should be imposed for failure to perform a statutory obligation, is a matter of discretion of the authority to be exercised judicially and on a consideration of all the relevant circumstances. Even if a minimum penalty is prescribed, the authority competent to impose the penalty will be justified in refusing to impose penalty, when there is a technical or venial breach of the provisions of the Act or where the breach flows from a bona fide belief that the offender is not liable to act in the manner prescribed by the statute."

7. The Dy. CIT has highlighted the fact about the loss of revenue and has relied upon the decision of Tribunal Amritsar Bench in the case of Canara Bank and the decision of Calcutta High Court in Grindlays Bank Ltd. vs. CIT (1992) 101 CTR (Cal) 164 : (1993) 200 ITR 441 (Cal). It is, however, seen that the above quoted cases as well as observations therein relate to levy of interest under s. 201(1A) and are not relevant for the imposition of penalty. Insofar as loss of revenue is concerned, the same has duly been compensated by levy of interest in the appellant's case under s. 201(1A) and imposition of such interest has largedly been upheld earlier by me. It is also observed that the appellant had made payments on account of tax deducted at source before the due dates and because of this, Government has gained substantially."

Similar order was passed in other assessment year.

9. The Revenue has approached the Tribunal in five appeals—two against the cancellation of penalty under s. 271C and three against reduction in interest charged under s. 201(1A) of the Act. The assessee has come up with three appeals on the question of interest retained upto 31st March of the corresponding year.

10. We have heard Shri P.C. Jain for the assessee and Smt. Renu Jauhri for the Revenue. It was contended on behalf of the Revenue that provisions of s. 193 are mandatory and the assessee was obliged to deduct tax at source along with surcharge out of interest paid or credited to the account of the payees on Bonds. Surcharge is part of the tax and bears the same character. The fact that recipients might have paid tax was not material as the assessee under s. 201(1A) was liable to pay interest on the amount not deducted at source till the date of the payment of such amount. The obligation of the assessee to deduct amount and deposit tax and surcharge was independent of the obligation of the recipients to pay them on their income. It was further, submitted that the assessee had failed to prove that its failure to deduct surcharge at source flowed from any bona fide. It is a case of gross negligence and, therefore, could not be treated as bona fide. At any rate, question of bona fide belief or absence of any motive not to deposit surcharge is immaterial as far as charging of interest under s. 201(1A) is concerned. The section is mandatory and interest has to be paid on account of loss caused to the Revenue. In this connection, the learned Departmental Representative placed reliance on the following authorities:

(i) CIT vs. Rathi Gum Industries (1995) 127 CTR (Raj) 413 : (1995) 213 ITR 98 (Raj) wherein it has been held as under:

"Sec. 201 of the IT Act, 1961, provides not only for collection of tax which has not been deducted but for levy and charge of interest also. Sub-s. (1A) of the said section provides for liability to pay simple interest at the rate of 12 per cent per annum on the amount of tax from the date on which the tax was deductible till the date the tax was actually paid. The provisions for payment of interest are mandatory and automatic and interest has to be paid from the date on which the tax was deductible till the date on which the tax is actually paid. If the tax has already been paid by the recipient on such income the IT Department may not be justified to recover the said amount of tax, but so far as the liability of interest is concerned, that cannot be considered to be non-existent on account of deposit of tax by the recipient at a subsequent or later stage."

(ii) Pentagone Engineering (P) Ltd. vs. CIT (1996) 131 CTR (Bom) 78 : (1995) 212 ITR 92 (Bom) wherein the Bombay High Court has observed as under:

"that the use of the word "shall" in s. 201(1A) made the liability to pay interest, in the circumstances mentioned, mandatory and there was no precondition of consideration of "reasonable cause" for non-payment in time of tax deducted under s. 192. Therefore, the ITO was not required to take into consideration the "reasonable cause" for non-payment of taxes deducted under s. 192."

[Bennet Coleman & Co. Ltd. vs. V.P. Damle, ITO (1985) 47 CTR (Bom) 342 : (1986) 157 ITR 812 (Bom) followed].

(iii) Bennet Coleman & Co. Ltd. vs. ITO where it has been held as under:

"Sec. 201(1A) makes the payment of simple interest mandatory. The payment of interest thereunder is not a penal provision. There is, therefore, no question of the waiver of such payment on the basis that the default was not intentional or on any other basis."

11. In respect of penalty imposed under s. 271C for the asst. yrs. 1991-92 and 1992-93, the learned Departmental Representative relied on the order of the AO. It was further contended that the assessee did not show any reasonable cause for its failure to deduct surcharge at source. The onus that lay upon the assessee to show reasonable cause was not discharged. The learned Departmental Representative placed reliance on Full Bench decision of the Patna High Court in the case of CWT vs. Sri Jagdish Prasad Choudhary (1995) 125 CTR (Pat)(FB) 277 : (1995) 211 ITR 472 (Pat)(FB). It was further submitted that a reasonable cause ordinarily is a cause which would prevent a reasonable person of ordinary prudence acting under normal circumstances from carrying on a statutory duty. A case of gross negligence or inaction could not be a bona fide act. In the present case, the assessee was negligent in not deducting surcharge at source. It is not a case of ignorance of law. In this connection reference was invited to written submissions filed on behalf of the assessee before the Dy. CIT Spl. Range, Patiala, available at p. 21 of the paper book. From the reply, it was clear that the assessee did deduct surcharge from the salaries of the employees and, therefore, could not plead ignorance in respect of surcharge deducted on interest on securities. Otherwise it is a case of gross negligence, the learned Departmental Representative further argued. Further, it was submitted that the assessee did deduct part of surcharge in the financial year 1990-91 which clearly negates the plea of ignorance. It was further emphasised that the assessee is an organised organisation managed by professionals. Further, services of highly competent chartered accountants and lawyers were available to the assessee. It is, therefore, not possible to equate the assessee with an ordinary man to plead ignorance of law as a valid defence. The learned Departmental Representative accordingly argued that levy of interest under s. 201(1A) and penalty under s. 271C was justified in these cases. She prayed that the orders of the AO be restored.

12. The learned counsel for the assessee, on the other hand, submitted that surcharge for asst. yr. 1990-91 was imposed at 8 per cent but the AO recovered the same at the rate of 15 per cent the rate which was applicable only from asst. yr. 1991-92 onwards. Thus even the AO committed an error and collected 7 per cent in excess of what was leviable as per the statutory provisions. The AO also imposed interest and penalty taking surcharge imposable at 15 per cent in asst. yr. 1990-91. Thus, even the AO committed a mistake and imposed and recovered huge amount of interest, surcharge and penalty in excess of what was legally due.

13. Shri Jain further submitted that the assessee had all along been cooperative with the Department. It paid tax in advance to accommodate the Revenue although no tax was due from it. He invited our attention to advance-tax paid in past six years on which the assessee lost interest to the tune of Rs. 17.17 lacs. It was submitted that payments were made as and when called upon by the AO even on telephone. The above circumstances clearly showed that non-deduction of surcharge was not to save any tax, but under a bona fide erroneous belief that the assessee was not liable to deduct surcharge, the same was not deducted. Only in March, 1993, the assessee came to know about its obligation to deduct surcharge when the matter was discussed with the Revenue authorities relating to financial year 1991-92. Having come to know about its obligation to deduct surcharge, the assessee deducted and paid full amount of Rs. 91,92,947 on 30th March, 1993, for financial year 1992-93. It further paid Rs. 20,07,594 for financial year 1991-92. The amount payable for asst. yr. 1990-91 was also cleared by July, 1993. In other words, entire tax and surcharge was paid for all the years under dispute by July,1993. This way the assessee paid more than a crore of rupees before 31st March, 1993, the balance amount was paid before 31st July, 1993. The aforesaid facts clearly showed the bona fides of the assessee and its co-operative attitude. There was no intention on its part to withhold the money of the Department.

14. Shri Jain further pointed out that the Department had issued summons to various payees under s. 131 asking for details of payment of tax by them, to verify the plea that payees had paid tax and surcharge on the interest paid to them. The contention of the assessee was found to be correct. In this connection our attention was drawn to p. 2 of the order passed by the AO observing as under:

"The assessee has filed photocopies of the assessment orders. The plea of the assessee is correct. Since the assessee committed default by not deducting the amount, the assessee's default is established."

It was accordingly submitted that when tax was already paid and collected from the payees, no further tax or surcharge could be collected from the Board as tax on the same income cannot be paid twice. It was emphasised that tax deducted at source is one of the modes of collection of tax falling under Chapter XVII-B of the IT Act and procedural in nature. Even when tax is required to be deducted at source, the obligation of the assessee to make direct payment of tax on his or her income is not obviated and this is made more than clear in s. 191 of the IT Act. The interest charged by the Revenue under various provisions of the IT Act is compensatory in character. For the above proposition, the learned counsel for the assessee relied on the decision of the Hon'ble Supreme Court in the case of Central Provinces Manganese Ore Co. Ltd. vs. CIT (1986) 58 CTR (SC) 112 : (1986) 160 ITR 961 (SC). It was explained that the assessee was to deduct tax on half-yearly basis on interest paid and credited, the payees were to pay tax in advance on 15th Sept., 15th Dec., and 15th March, of each financial year. Thus by 15th of September, tax was paid by payees including surcharge on interest receivable from assessee in the first quarter. By 15th March of next year, similar payment was made by the payees on interest payable in the second quarter. Therefore, no loss of revenue was caused on account of non-deduction of surcharge at source. The payment of surcharge was in fact made by the payees much in advance.

15. For the proposition that where the payees have already paid the taxes, no tax is deductible from the payer and, therefore, no interest should be levied under s. 201(1A), the learned counsel for the assessee relied on the following authorities:

(i) CIT vs. Divisional Manager, New India Assurance Co. Ltd. (1983) 33 CTR (MP) 248 : (1983) 140 ITR 818 (MP);

(ii) CIT vs. Life Insurance Corporation (1986) 52 CTR (MP) 278 : (1987) 166 ITR 191 (MP);

(iii) ITO vs. Owen D' Souza Hubert (2001) 116 Taxman 128 (Bom)(Mag);

(iv) N.K. Patel & Co. vs. ITO (1993) 69 Taxman 39 (Ahd);

(v) Munak Investment (P) Ltd. vs. ITO (1997) 58 TTJ (Chd) 33 : (1995) 55 ITD 429 (Chd);

(vi) Amulakh Bhai R. Patel vs. Asstt. CIT (1999) 63 TTJ (Ahd) 506 : (1999) 68 ITD 434 (Ahd); and

(vii) ITO vs. Sood Enterprises (1992) 41 ITD 234 (Del).

16. On the question that the assessee had a bona fide belief that no surcharge was chargeable for want of proper knowledge of law or statutory provisions, the learned counsel for the assessee relied on the decision of the Hon'ble Supreme Court in the case of Motilal Padampat Sugar Mills Co. Ltd. vs. State of Uttar Pradesh & Ors. wherein their Lordships held that there is no such maxim known to law that everybody is presumed to know the law. Shri Jain further submitted that the assessee is a Government company and there was no mala fide or motive to withhold the tax. Further, it is a public utility organisation which has already suffered losses of several crores on account of its service-oriented approach.

17. In respect of penalty levied under s. 271C, the learned counsel for the assessee relied on the observations of Hon'ble A.M. (as he then was) Shri B.K. Bali in the case of Sangrur Vanaspati Ltd. for the proposition that penalty is not the same thing as income-tax as penalty is leviable for unlawful acts whereas tax is lawful act. Penalty is vice whereas the tax is virtue. He further argued that there was no contumacious or deliberate act on the part of the assessee in not paying surcharge. He further submitted that default in the present case was merely a technical default and, therefore, should not be visited with penalty. Shri Jain relied on the following decisions:

(i) Hindustan Steel Ltd. vs. State of Orissa (1972) 83 ITR 26 (SC);

(ii) CIT vs. K.P.V. Shaik Mohammed Rowther & Co. (P) Ltd. (1998) 145 CTR (Mad) 396 : (1998) 232 ITR 176 (Mad);

(iii) Mahavir Agency vs. ITO (1996) 58 ITD 386 (Ahd);

(iv) Senior Accounts Officer, Thermal Power Project vs. Asstt. CIT (2000) 66 TTJ (All) 529;

(v) Asstt. CIT vs. U.P. National Mfg. Ltd. (2000) 69 TTJ (All) 503; and

(vi) Mitsui & Co. vs. Dy. CIT (1999) 65 TTJ (Del) 1.

18. Shri Jain placed strong reliance on the decision of Delhi High Court in the case of Woodward Governors India (P) Ltd. vs. CIT (2001) 168 CTR (Del) 394 : (2001) 118 Taxman 433 (Del) wherein their Lordships emphasised that s. 273B starts with a non obstante clause and provides that notwithstanding conditions in several provisions enumerated therein including s. 271C, no penalty shall be imposed if there is a reasonable cause for the failure. The levy of penalty is not obligatory.

19. In reply to argument of the Revenue that levy of interest under s. 201(1A) and that of penalty under s. 271C was mandatory and automatic, even if taxes have been collected from the payees, Shri Jain submitted that decisions relied on by the Revenue were not applicable to the facts of the case. The case of Sri Jagdish Prasad Choudhary related to late filing of return where no cause for delay was shown. Likewise other case of Bennett Colleman vs. V.P. Damle, related to levy of interest under s. 201(1A) and is to the effect that interest levied cannot be waived. In that case, tax at source was deducted but not deposited under prescribed r. 30. In the present case, the tax has already been collected and deposited by the payees/recipients. Hence this judgment is not applicable to the facts of the case. Likewise, in the case of Rathi Gum Industries, their Lordships of the Rajasthan High Court have held that interest is to compensate the Revenue for losses which it suffers on account of late receipt of tax and it has also been held that amount of interest is payable from the date it is deductible till the date tax was actually paid. It has further been held in that case that in case the recipients have paid the tax, then tax should not be collected again. In the present case, according to Shri Jain, the Department received the payment on account of tax due on amount of interest much in advance. Likewise, the payees had already deposited the tax due when it was liable to be deducted from the second instalment. In the above case, their Lordships of the Rajasthan High Court has observed that it was not stated in that case that the recipients deposited the tax within the time the assessee was required to deduct and deposit. The facts in the present case are otherwise. Shri Jain accordingly submitted that on facts and in the circumstances of the case, no interest under s. 201(1A) was leviable. He also supported the order of the CIT(A) cancelling the penalty.

20. We have given careful thought to the rival submissions of the parties. The assessee-Board had issued Bonds on which interest was payable half-yearly. According to the information placed, these were subscribed mainly by public institutions and banks who were all separate assessees under the IT Act. The tax at source was liable to be deducted from the interest paid by the assessee on actual payment or when interest was credited in the accounts. In order to decide the controversy, it will be appropriate to consider the provisions of ss. 191, 193, 200, 201(1A), 271C and 273B. These are reproduced below:

"191.—In the case of income in respect of which provision is not made under this Chapter for deducting income-tax at the time of payment, and in any case where income-tax has not been deducted in accordance with the provisions of this Chapter, income-tax shall be payable by the assessee direct."

"193.—The person responsible for paying any income by way of interest on securities shall, at the time of credit of such income to the account of the payee or at the time of payment thereof in cash or by issue of a cheque or draft or by any other mode, whichever is earlier, deduct income-tax at the rates in force on the amount of the interest payable."

"200.—Any person deducting any sum in accordance with the provisions of ss. 192 to 194, s. 194A, s. 194B, s. 194BB, s. 194C, s. 194D, s. 194E, s. 194EE, s.194F, s. 194G, s. 194H, s. 194-I, s. 194J, s. 194K, s. 194L, s. 195, s. 196A, s. 196B, s. 196C and s. 196D, shall pay within the prescribed time, the sum so deducted to the credit of the Central Government or as the Board directs.

201.—(1) If any such person and in the cases referred to in s. 194, the principal officer and the company of which he is the principal officer does not deduct or after deducting fails to pay the tax as required by or under this Act, he or it shall, without prejudice to any other consequences which he or it may incur, be deemed to be an assessee in default in respect of the tax:

Provided that no penalty shall be charged under s. 221 from such person, principal officer or company unless the AO is satisfied that such person or principal officer or company, as the case may be, has without good and sufficient reasons failed to deduct and pay the tax.

(1A)—Without prejudice to the provisions of sub-s. (1), if any such person, principal officer or company as is referred to in that sub-section does not deduct or after deducting fails to pay the tax as required by or under this Act, he or it shall be liable to pay simple interest at eighteen per cent per annum on the amount of such tax from the date on which such tax was deductible to the date on which such tax is actually paid."

"271C.—(1) If any person fails to—

(a) deduct the whole or any part of the tax as required by or under the provisions of Chapter XVII-B; or

(b) pay the whole or any part of the tax as required by or under:

(i) sub-s. (2) of s. 115-O; or

(ii) the second proviso to s. 194B, then, such person shall be liable to pay, by way of penalty, a sum equal to the amount of tax which such person failed to deduct or pay as aforesaid."

"273B.—Notwithstanding anything contained in the provisions of cl. (b) of sub-s. (1) of s. 271, s. 271A, s. 271B, s. 271BB, s. 271C, s. 271D, s. 271E, s. 271F, cl. (c) or cl. (d) of sub-s. (1) or sub-s. (2) of s. 272A, sub-s (1) of s. 272AA or sub-s. (1) of s. 272BB or cl. (b) of sub-s. (1) or cl. (b) or cl. (c) of sub-s. 273, no penalty shall be imposable on the person or the assessee, as the case may be, for any failure referred to in the said provisions if he proves that there was reasonable cause for the said failure."

21. The meaning of words "The rates in force" stated in s. 193 is to be found in the charging s. 4 r/w the Finance Act of the relevant previous year. In every Finance Act, "rates of income-tax" are provided as per Part II of the First Schedule to the Finance Act under the title "rates for deduction of tax at source in certain cases". The said part provides that in every case in which under provisions of ss. 193, 194 etc. etc. of the IT Act, the tax is to be deducted at the rates in force, the deduction shall be made from the income subject to the following rates. Then the category of persons and rates are provided. We may straightaway go to the provisions of Finance Act, 1989 applicable in financial year Rs. 1989-90 wherein rate is first provided for "person other than a domestic company". Thereafter, it is stated as under:

"II. In the case of a company:

(i) where the company is a domestic company, on income by way of interest on securities (excluding interest payable on a tax free security)	21.5 %
(ii) where the company is not a domestic company :
A. On interest payable on a tax-free security	44 %
B. On interest on other securities	65 %

Note:

Surcharge on income-tax

The amount of tax deducted as per the rates given above shall be increased:

(i) by a surcharge for purposes of the Union at 8 per cent of such income-tax in the case of resident person;

(ii) by a surcharge at 8 per cent of such income-tax in the case of a domestic company."

For the accounting years 1990-91 and 1991-92 the rate of surcharge was increased to 15 per cent of income-tax.

22. The assessee deducted income-tax at the prescribed rate of 21.5 per cent but did not deduct surcharge on the interest paid or credited by it on Bonds. It was contended that above deduction was not made under a bona fide belief that surcharge was not to be deducted. It was contended that the payees were directly paying the surcharge by including the same in the advance-tax paid/payable by them. In this connection, the assessee had placed strong reliance on its co-operative conduct. It has been emphasised how immediately after statutory obligation was brought to the notice of the assessee, it lost no time in making payment of surcharge. It has also been contended that assessee had always cooperated and paid taxes on demand from the authorities even on telephone and, therefore, no inference that the assessee was withholding the deduction and payment of surcharge intentionally can be drawn in this case. The assessee had relied on several decisions supporting its case. In order to highlight that even the AO was not fully aware of the provisions applicable in the relevant year, the assessee has placed on record that for the financial year 1989-90, surcharge was recovered from the assessee at the rate of 15 per cent on tax when it was actually recoverable at 8 per cent. Even interest and penalties were levied at the wrong rate.

23. The learned CIT(A) while cancelling penalty under s. 271C has held that the assessee bona fidely believed that it was not liable to deduct surcharge from the interest paid on Bonds. It has further been held that the assessee could have derived no benefit by not deducting surcharge at source as the amount was to be deducted and paid out of interest paid to the third party. Whether a belief of a person is bona fide or not is a question of fact. The CIT(A) having regard to material available on record has accepted the plea of the assessee. The Revenue has not brought any material on record to show that the belief of the assessee was not a bona fide one or that failure to deduct surcharge was attributable to gross and wilful neglect on the part of the assessee. On the facts and in the circumstances of the case, we are unable to hold that the learned CIT(A) committed any error in cancelling the penalties levied on the assessee under s. 271C of the IT Act. A reasonable belief that one is not obliged to deduct tax or surcharge at source can be treated as good and sufficient cause for not deducting tax/surcharge at source there is nothing on record to show that belief in the present case was not bona fidely held or that it was mala fide. Accordingly, we hold that the CIT(A) was fully justified in cancelling penalty levied on the assessee.

24. In the following cases, almost on identical facts and circumstances, the Courts took the view that no penalty under s. 271C was exigible for failure to deduct tax at source. The belief of the assessee that it was not liable to deduct tax at source was held to be reasonable cause for not deducting tax at source in terms of s. 273B of the IT Act:

(i) Tribunal A Bench Allahabad in the case of Asstt. CIT vs. J.P. National Mfg. Ltd.;

(ii) ITAT C Bench Delhi in the case of Mitsui Co. Ltd. vs. Dy. CIT and

(iii) Mahendra Kumar vs. Union of India (1974) 94 ITR 65 (Mad).

In the light of above decisions and facts and circumstances of the case, we are of the view that the CIT(A) was right in cancelling penalty levied on the assessee. We uphold his orders in both the assessment years, i.e. 1991-92 and 1992-93.

25. As regards the levy of interest under s. 201(1A) of the IT Act, we are of the view that statutory provisions in this regard are very clear. We refer to the provisions of sub-s. (1A) of s. 201 providing for payment of interest. The interest is to be paid by the defaulter on the amount of tax not deducted from the date on which such tax was deductible to the date on which such tax is "actually paid". Therefore, the period is prescribed by the statute and the provision is mandatory. It can neither be extended nor shrunk at the discretion of the Revenue authorities. Mandate of sub-s. (1A) is to be given effect to. The interest is to be charged strictly in accordance with the statutory provisions till tax is "actually paid.

26. The Revenue with reference to the words "such tax is actually paid" in the provision referred to above contended that words "such tax is actually paid" to mean that it is paid by the persons who are liable to deduct tax (surcharge) i.e., the assessee. The section deals with consequences of failure to deduct or to pay tax. The learned Departmental Representative in support of the above contention, placed great reliance on the decision of the Hon'ble Rajasthan High Court in the case of CIT vs. Rathi Gum Inds. But as pointed out by Tribunal in (2001) 116 Taxman 128 tax in that case was paid by the recipients after due date and, therefore, interest was directed to be charged. Shri Jain has also rightly distinguished the aforesaid case and his arguments have been noted above in detail. In this connection, we again invite attention to the provisions of s. 191 of the IT Act. The said section casts an obligations on the assessee to directly make payment of tax on income in the following two situations:

(i) in case of income in respect of which provision is not made under this Chapter for deducting tax at source; and

(ii) in any case where tax has not been deducted in accordance with this Chapter.

27. It is, therefore, more than clear that where tax at source is not deducted, in spite of the provisions to deduct under Chapter XVI, the assessee (recipient of income) has an obligation to make payment of tax directly. Therefore, the moment there is a failure on the part of the person liable to deduct tax at source, liability of the person receiving income to pay tax on such income directly arises. The recipient has to discharge the said liability. Once payment of tax (or surcharge) is actually made, the liability is fully discharged. It is, therefore, not possible to accept that for purposes of sub-s. (1A) of s. 201, payment directly made by the recipient is not covered by the words "such tax is actually paid". This scheme of the statutory provisions is more than clear when all the relevant provisions are read together and in an harmonious manner. Thus, for easy, early and convenient recovery of tax, provisions under Chapter XVI for tax deduction at source have been made. But in case no deduction is made, the holder of the income is obliged to pay the tax directly and in that case, interest under s. 201(1A) can be charged only till the date the amount is "actually paid".

28. The AO in the assessment order has recorded that on verification, the contention of the assessee that recipients paid surcharge on interest received by them was correct. The CIT(A) on the basis of material available has held that surcharge must have been paid before 31st of March of the financial years 1991-92 and 1992-93 and, therefore, directed that interest could be charged only upto 31st of the respective financial year. Similar recommendation was made in the period relevant to asst. yr. 1990-91. The aforesaid inference from the facts collected by the AO is possible. But both the parties are aggrieved from the aforesaid finding. In principle, it has to be accepted that interest could be charged only upto the date the surcharge due was actually paid to the credit of the Government. Now what is the actual date of payment, is a question of fact. Each payment will have to be examined in case the interest is to be correctly computed. We see no reason why correct amount should not be determined. After all, interest payable is compensatory in nature and has to be recovered for the period for which the state was deprived of the amount due to it. None of the parties has furnished calculation or details of date of actual payment. But then as per mandate of sub-s. (1A) of s. 201 r/w Art. 265 of the Constitution of India, interest can be recovered only till the amount was actually paid. The date of actual payment has to be determined and interest computed from the date of default to the aforesaid date as envisaged under sub-s. (1A) of s. 201 of the IT Act. The AO has collected material from various recipients regarding surcharge paid by them. Therefore, he should have taken date of actual payment into account. It is possible that the recipients paid tax and surcharge on this income (interest on Bonds) along with other income and bifurcated figures are not available. In that case, the AO should allow benefit of payment on proportionate/rational basis having regard to the fact that the entire liability was cleared in the financial year. We direct accordingly and modify the directions of the CIT(A) on the question of interest payable under s. 201(1A) of the IT Act.

29. In the result, the appeals of the Revenue under s. 271C are dismissed. The other appeals are allowed for statistical purposes.

 

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