TMI Blog2008 (3) TMI 385X X X X Extracts X X X X X X X X Extracts X X X X ..... mount payable to Larsen Toubro Ltd. The AO treated the assessee as an assessee in default. The AO also initiated penalty proceedings under s. 271C for assessee's failure to deduct tax at source. During the penalty proceedings, the assessee submitted its explanation as under: (1) That the assessee was under a bona fide and reasonable belief that the tax was not liable to be deducted from the payment of interest credited in the account of M/s Larsen Toubro Ltd. (2) That there was no obligation on the assessee to deduct tax at source in respect of the impugned interest which was claimed to be not chargeable to tax by the deductee. (3) That there was no requirement of deducting tax at source if the income has already been taxed and the payment has already been paid by the payee/recipient, and the same cannot be again recovered from the payer. 3. In support of the explanation, the assessee relied upon a legal opinion given by M/s C.C. Choksi Co. on the issue involved as to whether any tax was required to be deducted at source from the provisions of interest credited to the amount of Larsen Toubro Ltd. The assessee has further relied upon the fact that the deducte ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ce in the financial years 2001-02 to 2005-06. The AO stated that since these amounts were debited in the assessee's books of accounts (sic) amounts should have been included as income by the L T Ltd. in the relevant years and cannot be said that income has already been included in the interest income of ₹ 51.61 crores shown in the asst. yr. 2000-01 by M/s L T Ltd. (3) The assessee's bona fide belief that the amounts which were credited to the account of L T Ltd. during various financial years were not in the nature of income, and therefore, no TDS was deductible, holds no water, inasmuch as these amounts were claimed by the assessee as deductible revenue expenditure in its P L a/c, and therefore, assessee's belief cannot be said to be bona fide, and honest one. The various case law were also deliberated upon by the AO who held that these decisions are not applicable to the facts and circumstances of the assessee's case, inasmuch as the assessee has failed to prove that there was any bona fide belief for not deducting the tax at source or there was any other sufficient and reasonable cause for not deducting tax at source. The AO also observed that the assess ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ence in pleading non-acceptance of its claim of deductibility of interest for income-tax assessment is accepted, it precisely amounts to taking advantage of an uncertain event; (4) The CIT(A) further observed that the assessee's contention that L T has already paid tax is also not correct; (5) The CIT(A) further made an observation that the assessee has taken a contrary stand with regard to its liability of deducting tax at source vis-a-vis its claim of deduction of interest debited in the P L a/c. In other words, the CIT(A) has stated that on one hand, the assessee is claiming the amount of interest as deductible expenditure in its income-tax assessment and, on the other hand, the assessee has taken a view that this amount is not deductible in the hands of the deductee and the assessee was not liable to deduct tax at source; (6) Since the assessee did not fulfil the obligation cast on it by law, the assessee had to face consequences as per law by not deducting the tax at source, and in this view, the penalty levied by the AO was justified. 7. Still aggrieved, the assessee preferred this appeal before us. 8. We have heard both the parties and have gone through th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rative portion of the order reads as under: The law is well-settled that tax deduction at source liability is only a vicarious liability and when primary liability itself is extinguished, vicarious liability cannot be invoked. There are a series of judgments by the Hon'ble High Courts on this line of reasoning and now, the recent case of Hindustan Coca Cola Beverage (P) Ltd. vs. CIT [Civil Appeal No. 3765 of 2007, dt. 16th Aug., 2007]. Hon'ble Supreme Court has approved the same proposition. Those were the cases in which primary liability was discharged by the recipient. The case before us is also that there are no taxes due from the recipients in those assessment years. As a matter of fact. in the present case, the primary liability is non-existent inasmuch as in these assessment years, there was no tax demand in respect of the receipts in question. The TDS liability is a proxy or vicarious liability and when the primary liability does not exist, this vicarious liability also does not survive. We, therefore, direct the AO to cancel these impugned demands. 5. In view of the above discussions, we see no need to address ourselves to very elaborate and very crudite cont ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... SC) may be made. In support of the contention that when the primary liability of the tax on the part of the deductee has been discharged, the vicarious liability of tax on the part of the deductor does not survive, the assessee has derived strength from the said decision of the Hon'ble Supreme Court in the case of Hindustan Coca Cola Beverage (P) Ltd. In this case, the Hon'ble Supreme Court has held that in view of Circular No. 275/201/95-IT(B), dt. 29th Jan., 1997 and since the assessee has paid the interest under s. 201(1A) and there was no dispute that the tax due had been paid by the deductee, the Tribunal came to the right conclusion that the tax could not be recovered once again from the assessee. The relevant portion of the decision of the Hon'ble Supreme Court in this case reads as under: Be that as it may, Circular No. 275/201/95-IT(B). dt. 29th Jan., 1997, issued by the CBDT, in our considered opinion, should put an end to the controversy. The circular declares 'no demand visualized under s. 201(1) of the IT Act should be enforced after the tax deductor has satisfied the officer-in-charge of TDS, that taxes due have been paid by the deductee assessee. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... by the assessee under a legal advice of M/s C.C. Chokshi Co., lacks merit because this advice is not obtained by the appellant but by L T Ltd. The CIT(A) further observed that since this advice was neither given to L T Finance from whom the assessee had taken over the liability nor to the assessee, the case law relied upon by the assessee in this regard is not applicable to the facts of the present case. This stand of the CIT(A) in our considered opinion, is not justified because of the reason that what is material is the nature of the advice connected to the issue in hand and not the person who has obtained the legal advice from a legal expert. The CIT(A) has not disputed the fact that the legal advice was obtained by L T Ltd. in respect of the issue as to whether the payment made to L T Ltd. was taxable in their hand and/or whether the same was subjected to the deduction of tax at source by the payer. The learned CIT(A) has not doubted the bona fideness and genuineness of the legal advice given by M/s C.C. Chokshi Co. The CIT(A) has rejected the assessee's contention also by saying that M/s L T Ltd. had a control over the L T Finance Ltd. as well as upon the assessee and ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t be imposed, is still applicable in the case of the penalty imposable for failure to deduct tax at source. In this connection, we may also refer to a decision of Hon'ble Delhi High Court in the case of CIT vs. Fourways International, in IT Appeal No. 382 of 2007, decided on 25th Sept., 2007, where it has been held that s. 273B does not make liable for penalty under s. 271C mandatory and the assessee would not be liable to penalty if he was able to prove that there was a reasonable cause for failure to deduct tax. In this case, the assessee had given an explanation that based on the wrong advice given by its chartered accountant, the assessee made certain payments for fabrication charges but had not deducted tax at source. The explanation of the assessee found favour with the Tribunal. This was not found to be non-bona fide. 15. In this regard that a bona fide belief can be considered to be a reasonable and sufficient cause for any failure to comply with the provisions of the IT Act, the following decisions may also be referred to: (1) CIT vs. Mitsui Co. Ltd. (2004) 190 CTR (Del) 38: It was held in this case that a bona fide belief of the company based on legal opini ..... X X X X Extracts X X X X X X X X Extracts X X X X
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