In absence of contumacious conduct penalty U/s. 271C not leviable

CA Prarthana Jalan

Hon’ble AGRA ITAT has in the case of Pushpanjali Constructions has held that In the absence of contumacious conduct of the assessee, penalty under section 271C is not leviable

Brief facts relating to the case are that a survey 133A of the Act was conducted in the premises of the assessee on 15/10/2009 during the course of which it was found that the assessee had deducted tax amounting to Rs.15,76,219/- under various section of the Income Tax Act but had not deposited the same to the Government account. Thereafter order under section 201(1)/201(1A) of the Act was passed on 26/02/2009 raising gross demand of Rs. 16,39,448/- comprising of tax under section 201 of Rs. 15,76,219/- and interest under section 201(1A)of Rs. 63,229/- and further penalty proceedings under  section 271C were initiated. During the course of penalty proceeding the assessee pleaded that the tax deducted had not been deposited because the concerned person who was looking into the taxation matter had left the job.

However the AO rejected the submission of the assessee observing that the assesse had not deposited the tax deliberately. Ld. AO held that If the survey had not been conducted, the assessee would have embezzled the amount of tax deducted and levied penalty under section 271C of the Act amounting to Rs. 15,76,219/-. The Ld CIT(Appeals) had deleted the penalty. The order of the Ld CIT(A) was upheld by the department by observing as under:-

12. We find that It is not in dispute that the assessee had deducted tax amounting to Rs. 15,76,219/-. The only default committed by the assessee was failure to deposit the same to the Government.

13. The Ld. AR has pleaded that there was reasonable cause for the default committed by it. Ld. AR has stated that since the manager handling its taxation matters had resigned during the year it had failed to deposit the tax deducted at source. Ld. AR pointed out that no such default had occurred in earlier years and it was only in this year, when the manager handling taxation matter left the assessee, the default occurred. Ld. AR substantiated his argument with the affidavit of the manager in this regard. Ld. AR further pointed that the same reason had been accepted to constitute reasonable cause by the Ld. JCIT for not levying penalty under section 272(A)(2)(k) of the Act, for late deposit of TDS Returns. Ld. AR therefore pleaded that the same reason cannot now be held to not constitute reasonable cause.

14. Before adjudicating on the issue, it is pertinent to understand what is meant by reasonable cause. “Reasonable cause” for the purpose of application of Section 271C in the backdrop of Section 273B has been explained by the Hon’ble Delhi High Court in the case of Woodward Governors India (F) Ltd. Vs. CIT (2002) 253 ITR 0745 to mean a probable cause, an honest belief founded on 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 same was the right thing to do. The cause should not be found to be frivolous, without substance or foundation.

Measured on the touchstone of the definition of reasonable cause as stated above we find the Ld. CIT(A) has rightly held that the explanation offered by the assessee that the resignation of the manager handling the taxation matter of the assessee, supported by the affidavit of the manager, constituted reasonable cause for committing the default. We also agree with the Ld. CIT(A) that when the same reason was found to constitute reasonable cause for not levying penalty u/s 272(A)(2)(k)of the Act by the Ld. JCIT(TDS) it could not be held otherwise for the purpose of levying penalty under section 271 C.

We therefore hold that in view of the reasonable cause adduced by the assessee no contumacious conduct can be attributed to the assessee and therefore no penalty under section 271C is leviable. We find support for this proposition in the decision of the Hon’ble Supreme Court in the case of CIT Vs. Bank of Nova Scotia Civil Appeal No. 1704 of 2008 dt. 07/01/2016.