Thomas Muthoot, Kozhencherry V. JTCIT, Trivandrum

ITA 385/COCH/2011

• Counselvise Citation: [2013] 120 COUNSELVISE.COM (IT) 1023 (ITAT-COCHIN)
• Duration Of Justice: 1 year(s) 7 month(s) 23 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 11-01-2013
• Appeal Filed By: Assessee
• Bench Allotted: DB
• Next Hearing Date: 19-11-2012
• Assessment Year: 2006-2007
• Appeal Filed On: 18-05-2011
• Court: TRIBUNAL
• Department Lawyers: SUSAN GEORGE VARGHESE
• Keywords: Bonafide belief; Non-deduction of tax; Reasonable cause; Ignorance of law
• Section: 273B; 27

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL COCHIN BENCH, COCHIN BEFORE S/SHRI N.R.S.GANESAN, JM AND B.R.BASKAR AN, AM I.T.A NO. 385/COCH/2011 ASSESSMENT YEAR : 2006-07 MR. THOMAS MUTHOOT, MUTHOOT HOUSE, KOZHENCHERRY. [PAN: AEAPM 04243L] VS. THE JOINT COMMISSIONER OF INCOME-TAX(TDS), TRIVANDRUM. (ASSESSEE-APPELLANT) (REVENUE- RESPONDENT) I.T.A NO. 391/COCH/2011 ASSESSMENT YEAR : 2006-07 MR. THOMAS JOHN MUTHOOT, MUTHOOT HOUSE, KOZHENCHERRY. [PAN: ABNPT 4694B] VS. THE JOINT COMMISSIONER OF INCOME-TAX(TDS), TRIVANDRUM. (ASSESSEE-APPELLANT) (REVENUE- RESPONDENT) ASSESSEE BY SHRI R. SREENIVASAN, FCA REVENUE BY SMT. SUSAN GEORGE VARGHESE. SR. DR DATE OF HEARING 19/11/2012 DATE OF PRONOUNCEMENT 11/01/2013 O R D E R PER B.R.BASKARAN, ACCOUNTANT MEMBER: THE APPEALS OF THE ASSESSEES ARE DIRECTED AGAINST THE ORDERS PASSED BY LD CIT(A)-III, KOCHI IN THEIR RESPECTIVE HANDS AND THE Y RELATE TO THE ASSESSMENT YEAR 2006- 07. BOTH THE ASSESSEES ARE ASSAILING THE DECISION OF LD CIT(A) IN CONFIRMING THE PENALTY LEVIED IN THEIR RESPECTIVE HANDS U/S 271C OF THE AC T. SINCE BOTH THE APPEALS ARE ARISING OUT OF COMMON SET OF FACTS, THEY WERE HEARD TOGETHE R AND ARE BEING DISPOSED OF BY THIS COMMON ORDER. I.T.A. NOS. 385 & 391/COCH/2011 2 2. THE FACTS RELATING TO THE ISSUE, WHICH ARE COMMO N IN BOTH THE APPEALS, ARE STATED IN BRIEF. BOTH THE ASSESSEES ARE PARTNERS IN A FIR M CALLED M/S MUTHOOT ESTATE INVESTMENTS. THEY HAVE DRAWN FUNDS FROM THE SAID F IRM OVER AND ABOVE THEIR RESPECTIVE CAPITAL AND HENCE BOTH THE ASSESSEES WER E CONSTRAINED TO PAY INTEREST TO THE FIRM ON THEIR AMOUNT OF OVER DRAWINGS. THE ASSESSE E NAMED SHRI THOMAS MUTHOOT PAID A SUM OF RS.1.39 CRORES AND THE OTHER ASSESSEE NAME D SHRI THOMAS JOHN MUTHOOT PAID A SUM OF RS.6,28,28,000/- AS INTEREST TO THE ABOVE SAID PARTNERSHIP FIRM. BOTH THE ASSESSEES DID NOT DEDUCT TAX AT SOURCE ON THE INTER EST PAID BY THEM TO THE ABOVE SAID PARTNERSHIP FIRM. THE JOINT COMMISSIONER OF INCOME TAX, ON NOTICING THE FAILURE TO DEDUCT TAX AT SOURCE AS PER THE PROVISIONS OF SEC. 194A OF THE ACT, IMPOSED PENALTY U/S 271C OF THE ACT IN THE HANDS OF BOTH THE ASSESSEES AS DETAILED BELOW:- SHRI THOMAS MUTHOOT - RS.15,69,664/- SHRI THOMAS JOHN MUTHOOT - RS.70,49,302/- THE JOINT COMMISSIONER REJECTED THE SUBMISSIONS OF THE ASSESSEES THAT THEY WERE UNDER BONAFIDE BELIEF THAT THEY ARE NOT LIABLE TO DEDUCT TAX AT SOURCE ON THE INTEREST PAID BY THEM TO THE PARTNERSHIP FIRM, IN WHICH THEY ARE PAR TNERS. THE JOINT COMMISSIONER REJECTED THE SAID SUBMISSIONS ON THE REASONING THAT THE ASSESSEES ARE ASSISTED BY A LEADING CHARTERED ACCOUNTANT AND FURTHER THEY WERE AWARE OF THE FACT THAT THE PENALTY U/S 271C OF THE ACT HAS BEEN LEVIED IN THE HANDS OF OTHER GROUP CONCERNS FOR SIMILAR FAILURES TO DEDUCT TAX AT SOURCE. THE ASSESSEE SUB MITTED THAT THE PENALTY LEVIED U/S 271C IN THE HANDS OF THE SISTER CONCERN WAS CANCELL ED AND THE JOINT COMMISSIONER REJECTED THE SAID CONTENTION ON THE GROUND THAT EVE RY CASE IS DISTINCT AND DIFFERENT. 3. BOTH THE ASSESSEES CHALLENGED THE PENALTY OR DERS BY FILING APPEAL BEFORE LD CIT(A). THE FIRST APPELLATE AUTHORITY HELD THAT TH E PARTNERS AND THE FIRM ARE DIFFERENT PERSON AND THE INCOME TAX ACT IMPOSES LIABILITY T O DEDUCT TAX ONLY ON ANY PERSON. FURTHER HE HELD THAT THE PLEA OF IGNORANCE OF LAW I S NOT ACCEPTABLE. THE LD CIT(A) UPHELD THE DECISION OF THE JOINT COMMISSIONER THAT THERE WAS NO REASONABLE CAUSE FOR THE FAILURE TO DEDUCT TAX AT SOURCE. WITH REGARD TO THE CANCELLATION OF PENALTY THAT WAS LEVIED IN THE HANDS OF THE SISTER CONCERNS, THE LD CIT(A) OBSERVED THAT THE ASSESSEE HAS I.T.A. NOS. 385 & 391/COCH/2011 3 FAILED TO GIVE ANY EXPLANATION AS TO WHY THE ASSESS EES DID NOT FOLLOW THE OBSERVATIONS MADE BY THE APPELLATE AUTHORITIES THAT SUCH DEFAULT SHOULD NOT BE REPEATED. ACCORDINGLY, THE LD CIT(A) UPHELD THE PENALTY LEVIE D IN THE HANDS OF BOTH THE ASSESSEES. AGGRIEVED BY THE ORDERS PASSED BY LD CI T(A), BOTH THE PARTIES ARE IN APPEAL BEFORE US. 4. THE LD COUNSEL FOR THE ASSESSEE SUBMITTED TH AT THE PARTNERS AND THE PARTNERSHIP FIRM ARE NOT TWO DISTINCT OR DIFFERENT ENTITIES IN THE EYES OF GENERAL LAW. THE PARTNERSHIP FIRM IS ONLY A COMPENDIUM OF PARTNERS. THIS LEGAL POSITION HAS BEEN EXPLAINED IN CIRCULAR NO. 6P DATED 06-09-1968 ISSUED BY THE CBDT . THE SAME VIEW HAS BEEN REITERATED BY THE HONBLE SUPREME COURT IN THE CASE OF M/S MALABAR FISHERIES CO VS. CIT (120 ITR 49)(SC). ACCORDINGLY, THE PAYMENT OF INTEREST BY A FIRM TO ITS PARTNERS IS A PAYMENT TO SELF. HENCE, IT IS PROVIDED IN THE PR OVISIONS OF SEC. 194A THAT THE TDS NEED NOT BE DEDUCTED ON THE INTEREST PAID/PAYABLE B Y A PARTNERSHIP FIRM TO ITS PARTNERS. CONSIDERING THESE LEGAL POSITION, THESE ASSESSEES W ERE UNDER BONAFIDE BELIEF THAT THEY NEED NOT DEDUCT TAX AT SOURCE U/S 194A OF THE ACT O N THE INTEREST PAID BY THEM ON THE OVER DRAWINGS MADE FROM THE FIRM, IN WHICH THEY ARE PARTNERS. THE LD A.R SUBMITTED THAT THE SAID BELIEF ENTERTAINED BY THE ASSESSEES W OULD CONSTITUTE A REASONABLE CAUSE IN TERMS OF SEC. 273B OF THE ACT. THE LD A.R FURTHER SUBMITTED THAT THE PENALTY LEVIED U/S 271C OF THE ACT IN THE HANDS OF THE SISTER CONCERNS , VIZ., M/S MUTHOOT FINANCIERS AND M/S MUTHOOT BANKERS HAVE BEEN CANCELLED BY THE HON BLE TRIBUNAL. FURTHER THE DECISION RENDERED BY THE HONBLE TRIBUNAL IN THE CASE OF M/S MUTHOOT FINANCIERS HAS BEEN UPHELD BY HONBLE KERALA HIGH COURT. 5. ON THE CONTRARY, THE LD D.R SUBMITTED THAT, AS PER THE PROVISIONS OF SEC. 194A OF THE ACT, EXEMPTION FROM DEDUCTION OF TAX AT SOURCE IS GIVEN ONLY TO THE INTEREST CREDITED OR PAID BY A PARTNERSHIP FIRM TO ITS PARTNERS. NO SUCH EXEMPTION IS PROVIDED FOR THE INTEREST PAID BY A PARTNER TO THE PARTNERSHIP FIRM IN WHICH HE IS A PARTNER. THE ASSESSEES HEREIN ARE ASSISTED BY A CHARTERED ACCOUN TANT AND FURTHER, THEY WERE AWARE OF THE LIABILITY TO DEDUCT TAX AT SOURCE, SINCE THE DEPARTMENT HAD ALREADY IMPOSED SIMILAR PENALTIES IN THE HANDS OF THE SISTER CONCER NS. HENCE, THE ASSESSEE CANNOT PLEAD I.T.A. NOS. 385 & 391/COCH/2011 4 IGNORANCE OF LAW. SHE FURTHER SUBMITTED THAT THE P ARTNERSHIP FIRM AND THE PARTNERS ARE TWO DIFFERENT PERSONS UNDER THE INCOME TAX ACT. HENCE THE EXPLANATIONS GIVEN BY THE ASSESSEE CANNOT BE CONSIDERED AS A REASONABLE CAUS E IN TERMS OF SEC. 273B OF THE ACT. 6. WE HAVE HEARD THE RIVAL CONTENTIONS AND CARE FULLY PERUSED THE RECORD. THE PENALTY U/S 271C OF THE ACT SHALL BE LEVIED IF THER E IS FAILURE ON THE PART OF A PERSON TO DEDUCT THE WHOLE OR ANY PART OF THE TAX AS REQUIRED BY OR UNDER THE PROVISIONS OF CHAPTER XVII-B OF THE ACT. APPARENTLY, THE ASSESSE ES HEREIN HAVE NOT DEDUCTED TAX AT SOURCE U/S 194A OF THE ACT ON THE INTEREST PAID BY THEM TO THE PARTNERSHIP FIRM IN WHICH THEY ARE PARTNERS. THEY PAID THE INTEREST TO THE P ARTNERSHIP FIRM, SINCE THEY HAVE DRAWN FUNDS FROM THE PARTNERSHIP FIRM OVER AND ABOV E THEIR RESPECTIVE CAPITAL. THERE IS NO DISPUTE WITH REGARD TO THE FACT THAT THE PROVISI ONS OF SEC. 194A HAS PROVIDED EXEMPTION FROM DEDUCTION OF TAX AT SOURCE ONLY IN R ESPECT OF INTEREST CREDITED OR PAID BY A PARTNERSHIP FIRM TO ITS PARTNERS. THE PROVISIONS OF SEC. 194A DO NOT PROVIDE SUCH KIND OF EXEMPTION TO THE INTEREST PAID BY A PARTNER TO T HE PARTNERSHIP FIRM IN WHICH HE IS A PARTNER. 7. THE RIGOURS OF PROVISIONS OF SEC. 271C IS SO FTENED BY THE PROVISIONS OF SEC. 273B, WHICH PROVIDE THAT THE PENALTY UNDER THAT SECTION S HALL NOT BE IMPOSABLE OF THE PERSON, IF HE PROVES THAT THERE WAS REASONABLE CAUSE FOR TH E SAID FAILURE. NOW, THE QUESTION THAT ARISES IS WHETHER THE EXPLANATION GIVEN BY THE ASSESSEE CAN BE CONSIDERED AS A REASONABLE CAUSE IN TERMS OF SEC. 273B OF THE ACT. THE EXPLANATION OF THE ASSESSEES WAS THAT THEY WERE UNDER THE BONAFIDE BELIEF THAT T HEY NEED NOT DEDUCT TAX AT SOURCE ON THE INTEREST PAID BY THEM TO THE PARTNERSHIP FIR M, AS THE FIRM IS ONLY A COMPENDIOUS EXPRESSION FOR ITS PARTNERS AND IS NOT A LEGAL ENTI TY THOUGH IT IS A SEPARATE TAXABLE ENTITY. 8. THE TAX AUTHORITIES HAVE DISMISSED THE SAID EXPLANATION ON THE GROUND THAT THESE ASSESSEES WERE AWARE OF THE FACT THAT SIMILAR PENAL TIES WERE LEVIED ON THE SISTER CONCERNS AND FURTHER THEY WERE ASSISTED BY A CHARTE RED ACCOUNTANT. APPARENTLY, THE I.T.A. NOS. 385 & 391/COCH/2011 5 TAX AUTHORITIES HAVE REFERRED TO THE PENALTY U/S 27 1C LEVIED ON THE SISTER CONCERNS VIZ., M/S MUTHOOT FINANCIERS AND M/S MUTHOOT BANKERS. BO TH THE CASES CAME UP BEFORE THE TRIBUNAL AND THE TRIBUNAL HAS DELETED THE PENALTY L EVIED U/S 271C OF THE ACT IN BOTH THE HANDS. THE CASE OF M/S MUTHOOT FINANCIERS IS REPOR TED IN (2006)(286 ITR (AT) 71). THE ASSESSEE HAS FILED A COPY OF ORDER DATED 13-09- 2011 PASSED IN THE CASE OF M/S MUTHOOT BANKERS IN ITA NO.280/COCH/2011. IN BOTH T HE CASES, THE ASSESSEES THEREIN, WHICH ARE PARTNERSHIP FIRMS, HAD PAID INTEREST TO T HEIR SISTER CONCERNS. THERE WAS NO DISPUTE WITH REGARD TO THE FACTS THAT THESE TWO ASS ESSEES WERE LIABLE TO DEDUCT TAX AT SOURCE FROM THE INTEREST SO PAID BY THEM. 9. HOWEVER, IN THE INSTANT CASES, THE FACT REMA INS THAT THE ASSESSEES HEREIN, BEING INDIVIDUALS, HAVE PAID INTEREST TO THE PARTNERSHIP FIRM, IN WHICH THEY ARE PARTNERS. IN VIEW OF THE LEGAL POSITION THAT THE PARTNER AND FIR MS ARE NOT TWO LEGAL ENTITIES AND FURTHER IN VIEW OF THE EXEMPTION PROVIDED IN SEC. 1 94A IN RESPECT OF INTEREST CREDITED OR PAID BY A PARTNERSHIP FIRM TO ITS PARTNERS, THE ASS ESSEES HEREIN WERE UNDER THE BELIEF THAT THEY ARE NOT LIABLE TO DEDUCT TAX AT SOURCE. HENCE, IN OUR VIEW, THE SAID VIEW ENTERTAINED BY THE ASSESSEES HEREIN CANNOT BE ALTOG ETHER BE DISCOUNTED WITH AS UNTENABLE, SINCE THE ISSUE THAT THE TDS PROVISIONS SHALL NOT APPLY TO THE PAYMENT MADE BY A PARTNER TO THE PARTNERSHIP FIRM IS A DEBATABLE ONE. HENCE THE FACTS PREVAILING IN THE CASE OF M/S MUTHOOT BANKERS AND M/S MUTHOOT FIN ANCIERS BEING DIFFERENT, IT CANNOT BE SAID THAT THE ASSESSEES WERE AWARE OF THE TDS LI ABILITY, IN THE CONTEXT OF FACTS PREVAILING IN THE INSTANT CASES. 10. THE FULL BENCH OF HONBLE ANDHRA PRADESH HIG H COURT HAD AN OCCASION TO INTERPRET THE TERM REASONABLE CAUSE IN THE CONTEXT OF THE T HEN EXISTING PROVISIONS OF SEC. 271 IN THE CASE OF ADDL. CIT VS. DARGAPANDARINATH TULJAYYA 7 CO. (107 ITR 850). AT PAGE 890, THE HONBLE HIGH COURT HAS OBSERVED AS UNDER:- IT MAY ALSO BE EMPHASISED THAT, HAVING REGARD TO T HE PENAL CONSEQUENCES, THE EXPRESSION REASONABLE CAUSE HAS TO BE LIBERALLY C ONSTRUED IN FAVOUR OF THE ASSESSEE. IDENTICAL VIEWS HAVE BEEN EXPRESSED BY OTHER HIGH C OURTS ALSO IN THE FOLLOWING CASES:- I.T.A. NOS. 385 & 391/COCH/2011 6 (A) SAURASHTRA CEMENT & CHEMICAL INDUSTRIES LTD (115 I TR 27) (GUJ) (B) NEMICHAND GANESHMAL VS. CIT (124 ITR 438)(MP) (C) CIT VS. PATRAM DASS RAJA RAM BERI (1981)(132 ITR 67 1)(P&H) 11. THE HONBLE DELHI HIGH COURT HAS EXPLAINED THE TERM REASONABLE CAUSE AS UNDER IN THE CASE OF WOODWARD GOVERNOR INDIA P LTD VS. CI T (253 ITR 745) AS UNDER:- REASONABLE CAUSE AS APPLIED TO HUMAN ACTION IS TH AT WHICH WOULD CONSTRAIN A PERSON OF AVERAGE INTELLIGENCE AND ORDINARY PRUDENC E. 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 AS SUMING THEM TO BE TRUE, WOULD REASONABLY LEAD ANY ORDINARILY PRUDENT AND CA UTIOUS MAN, PLACED IN THE POSITION OF THE PERSON CONCERNED, TO COME TO THE CO NCLUSION THAT THE SAME WAS THE RIGHT THING TO DO. THE CAUSE SHOWN HAS TO BE C ONSIDERED AND ONLY IF IT IS FOUND TO BE FRIVOLOUS, WITHOUT SUBSTANCE OR FOUNDAT ION, THE PRESCRIBED CONSEQUENCES FOLLOW. 12. IN THE CASE OF MUTHOOT FINANCIERS (SUPRA), T HE TRIBUNAL HAD TAKEN A VIEW THAT THE PENALTY SHOULD BE AVOIDED, IF THERE IS NO LOSS TO R EVENUE. IN THE INSTANT CASE ALSO, IT IS REPRESENTED THAT THE PARTNERSHIP FIRMS HAS DECLARED THE INTEREST PAID BY THE ASSESSEES HEREIN AS ITS INCOME AND THEY WERE NOT LIABLE TO PA Y ANY TAX, SINCE THE SAID PARTNERSHIP FIRM ENDED UP WITH A LOSS. 13. IF WE CONSIDER THE EXPLANATION FURNISHED BY T HE ASSESSEES, IN THE CONTEXT OF THE LEGAL DECISIONS REFERRED ABOVE, WE ARE OF THE CONSI DERED VIEW THAT THE BELIEF ENTERTAINED BY THE ASSESSEES THAT THEY WERE NOT LIABLE TO DEDUC T TAX AT SOURCE ON THE INTEREST PAID BY THEM TO THE PARTNERSHIP FIRM IN WHICH THEY ARE P ARTNERS, CAN BE CONSIDERED AS A REASONABLE CAUSE IN VIEW OF THE LEGAL POSITION EX ISTING BETWEEN A PARTNER AND THE PARTNERSHIP FIRM. AS STATED EARLIER THE PARTNERS A ND PARTNERSHIP FIRM ARE NOT TWO DIFFERENT LEGAL ENTITIES, THOUGH THEY ARE TWO DIFFE RENT TAXABLE ENTITIES. FURTHER, IT IS STATED THAT THE PARTNERSHIP FIRM, WHICH RECEIVED IN TEREST FROM THE ASSESSEES HEREIN HAVE DULY INCLUDED THE SAME IN ITS RETURN OF INCOME FILE D BEFORE THE DEPARTMENT AND THE SAID PARTNERSHIP FIRM WAS NOT LIABLE TO PAY ANY TAX, SIN CE IT DECLARED LOSS. HENCE, AS OBSERVED IN THE CASE OF M/S MUTHOOT FINANCIERS, NO LOSS IS CAUSED TO THE REVENUE. I.T.A. NOS. 385 & 391/COCH/2011 7 14. IN VIEW OF THE FOREGOING DISCUSSIONS, WE AR E OF THE VIEW THE EXPLANATION OFFERED BY THE ASSESSEE FITS IN THE CATEGORY OF REASONABLE CAUSE IN TERMS OF SEC. 273B OF THE ACT. ACCORDINGLY, WE SET ASIDE THE ORDERS PASSED B Y LD CIT(A) IN THE HANDS OF BOTH THE ASSESSEES AND DIRECT THE ASSESSING OFFICER TO DELET E THE PENALTY LEVIED U/S 271C OF THE ACT IN THE HANDS OF BOTH THE ASSESSEES. 15. IN THE RESULT, THE APPEALS FILED BY THE ASS ESSEES ARE ALLOWED. PRONOUNCED ACCORDINGLY ON 11-01-2013 SD/- SD/- (N.R.S.GANESAN) (B.R.BASKARAN) JUDICIAL MEMBER ACCOUNTANT MEMBER PLACE: KOCHI DATED: 11TH JANUARY, 2013 GJ COPY TO: 1. MR. THOMAS MUTHOOT, MUTHOOT HOUSE, KOZHENCHERRY . 2. MR. THOMAS JOHN MUTHOOT, MUTHOOT HOUSE,KOZHENCH ERRY. 3. THE JOINT COMMISSIONER OF INCOME-TAX(TDS), TRIVA NDRUM 4. THE COMMISSIONER OF INCOME-TAX (APPEALS)-III, KO CHI. 5. THE COMMISSIONER OF INCOME-TAX, TRIVANDRUM. 6. D.R., I.T.A.T., COCHIN BENCH, COCHIN. 7. GUARD FILE. BY ORDER (ASSIST ANT REGISTRAR) I. T.A.T. COCHIN