Absence of reasonable cause must for Section 271C penalty imposition: Delhi HC

Woodward Governors India (P) Ltd. Vs CIT & Ors. (Delhi High Court)

Delhi High Court reviewed the case of Woodward Governors India (P) Ltd. vs. CIT & Ors., wherein the company challenged the penalty imposed under Section 271C of the Income Tax Act, 1961. The dispute arose from the company’s failure to properly deduct TDS on the salary of an expatriate employee, leading to a penalty of ₹27,68,844. The petitioner contended that the payment was made by a non-resident company and that the deeming provision of Section 9(1)(ii) of the Act should not automatically establish an obligation under Section 192 to deduct TDS. The Commissioner of Income Tax rejected the company’s appeal, upholding the penalty.

The petitioner argued that under Section 273B of the Act, the penalty should not be imposed if a reasonable cause for non-compliance existed. The company’s legal counsel asserted that the Commissioner failed to assess the existence of reasonable cause before confirming the penalty. The revenue department maintained that the petitioner was given the opportunity to present its case and that liability under Section 192 was applicable, making the penalty justified.

The High Court analyzed Sections 271C and 273B, emphasizing that penalty imposition is not automatic. It held that the provision under Section 273B provides relief if an assessee proves the existence of a reasonable cause. Citing judicial precedents such as Orient Paper & Industries Ltd. v. State of Orissa (AIR 1991 SC 672) and T.R. Thandar v. Union of India (AIR 1996 SC 1643), the Court reiterated that a “non-obstante” clause gives overriding effect to the specific provision it precedes. Consequently, the absence of reasonable cause is a prerequisite for penalty imposition under Section 271C.

The Court determined that the Commissioner had erred by not examining the petitioner’s claim of reasonable cause, thereby vitiating the penalty order. It set aside the impugned order and remanded the matter for fresh consideration. However, the Court refrained from making any conclusive observations on whether Section 192 liability applied in this case, leaving that question open for reconsideration. The petition was allowed to the extent of requiring a fresh evaluation, with no order as to costs.

This is an application under Articles 226 and 227 of the Constitution of India, 1950 (hereinafter referred to as “the Constitution”), questioning correctness of an order passed under section 264 of the Income Tax Act, 1961 (hereinafter referred to as the “Act”), by the Commissioner of Income Tax, Delhi XI (hereinafter referred to as the “Commissioner”). By the said impugned order dated 3-11-2000, penalty imposed under section 271C of the Act by Additional Commissioner, TDS Range 28 (hereinafter referred to as “assessing officer”) was upheld.

2. Brief reference to the factual aspect would be necessary before we deal with the petitioners main stand that no penalty was imposable. Petitioner filed its salary tax deducted at source (hereinafter referred to as “TDS”) return in Form No. 24. On verification of the same, the assessing officer found that TDS in respect of one expatriate employee was not deducted properly. Orders under section 201/201(1A) of the Act were passed working out short-deduction of tax at Rs. 27,68,844. Proceedings under section 271C for short-deduction were initiated and penalty amounting to Rs. 27,68,844 was imposed same was assailed before Commissioner under section 264 of the Act. Petitioners stand was that deeming provision contained in section 9(1)(ii) of the Act cannot be extended to have any nexus with an obligation for deduction of tax at source as contained in section 192 of the Act. It was further pleaded that payment of remuneration was made by a non-resident company and, therefore, proceedings under section 271C of the Act were not available to be taken. In any event. it was pleaded that it was prevented by reasonable cause for non-deduction of tax at source. The Commissioner by the impugned order held that the petitioner had failed in its liability to deduct tax at source under section 192 on salaries paid to its expatriate employee for services rendered in India.

3. Learned counsel for the petitioner submitted that the analysis of the legal position as done by the Commissioner is not proper. In any event, in view of the specific language of section 273B, Commissioner was obliged to consider petitioners plea about existence of reasonable cause. That having not been done the order passed by the Commissioner cannot be maintained. Learned counsel for the revenue, on the other hand, submitted that levy of penalty under section 271C becomes warranted if the existing conditions are not satisfied and what section 273B postulates is grant of an opportunity, which undoubtedly has been granted to the petitioner to have its say in the matter. The question of existence of reasonable cause or otherwise is linked with the main question, as to whether there was a liability to deduct tax at source.

4. We feel that the stand of the petitioner is on terra firma. So far as the consideration of the question of existence of reasonable cause is concerned, the two pivotal provisions i.e., section 271C and section 273B read as follows :

“271C Penalty for failure to deduct tax at source. If any person fails to deduct the whole or any part of the tax as required by or under the provisions of Chapter XVII-B, he shall be liable to pay, by way of penalty, a sum equal to the amount of the tax which he failed to deduct as aforesaid.”

“273B. Penalty not to be imposed in certain cases. Notwithstanding anything contained in the provisions of clause (b) of sub-section (1) of section 271, section 271A, section 271B, section 271C, section 271D, section 271E, clause (c) or clause (d) of sub-section (1) or sub-section (2) of section 272A, sub-section (1) of section 272AA or sub-section (1) of section 272BB or clause (b) of sub-section (1) or clause (b) or clause (c) of sub-section (2) of section 273, no penalty shall be imposable on the person or the assessed, 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.”

5. Section 273B starts with a non obstante clause and provides that notwithstanding anything contained in several provisions enumerated therein including section 271C, no penalty shall be imposable on the person or the assessed, 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. A clause beginning with “notwithstanding anything” is sometimes appended to a section in the beginning with a view to give the enacting part of the section in case of conflict an overriding effect over the provision or Act mentioned in the non obstante clause. (See Orient Paper & Industries Ltd. v. State of Orissa AIR 1991 SC 672). A non obstante clause may be used as a legislative device, to modify the ambit of the provision or law mentioned in the non obstante clause, or to override it in specified circumstances (See T.R. Thandar v. Union of India AIR 1996 SC 1643). The true effect of the non obstante clause is that in spite of the provision or Act mentioned in the non obstante clause, the enactment following it will have its full operation or that the provisions embraced in the non obstante clause will not be an impediment for the operation of the enactment (See Smt. P.F.K. Kalliani Amma v. K. Devi AIR 1996 SC 1963). Therefore, in order to bring in application of section 271C in the backdrop of section 273B, absence of reasonable cause, existence of which has to be established by the assessed, is the sine qua non.

6. Levy of penalty under section 271C is not automatic. Before levying penalty, the concerned officer is required to find out that even if there was any failure referred to in the concerned provision the same was without a reasonable cause. The initial burden is on the assessed to show that there existed reasonable cause which was the reason for the failure referred to in the concerned provision. Thereafter the officer dealing with the matter has to consider whether the explanation offered by the assessed or the person, as the case may be, as regards the reason for failure, was on account of reasonable cause. “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 a 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 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 or foundation, the prescribed consequences follow.

7. Above being the position, the Commissioners non-consideration of the plea raised by the assessed about the existence of reasonable cause vitiated the order. On that score, we find the order passed by the Commissioner to be non-maintainable. The residual question is whether the Commissioners conclusion regarding liability under section 192 of the Act to deduct tax at source is in order. We feel that the matter may be examined afresh by the Commissioner while dealing with the question of existence of reasonable cause or otherwise. To that extent it shall not be construed as if we have expressed any opinion on the merits of the case. Impugned order of the Commissioner dated 3-11-2000, is set aside. The writ petition is allowed to the extent indicated.

No costs.