Since assessee had a reasonable cause for non-deduction of TDS, penalty u/s 271C not leviable in terms of section 273B.
Demand of INR 7,70,720 was confirmed on the assessee on account of non-deduction of TDS on reimbursement of leave fare concession which included travel outside India. A notice was issued to the assessee for initiation of penalty proceedings u/s 271C.
Assessee stated that they were under the bona fide belief that LTC claim for travel within India cannot be denied just because the same includes visit outside India. Assessee believed that since exemption under section 10 (5) is available they are not required to deduct TDS on the LTC.
Assessee submitted that as per section 273B if the payer proves that there was reasonable cause for the failure to deduct tax, penalty u/s 271C can be waived.
The assessee is aware of the fact that LTC claim of the specific employee includes travelling to foreign country, however, there was an error in understanding and applying the provisions of section 10 (5) and hence no malafide intention can be assumed on the part of the assessee.
The matter was first time taken up during the course of survey, which shows that assessee has not wilfully defaulted / intentionally not deducted TDS. After settlement of dispute, the original demand was deposited by the assessee and the assessee has taken corrective steps in the subsequent years
FULL TEXT OF THE ITAT JUDGEMENT
This is an appeal filed by the assessee against the order of ld. CIT(A)-3, Jaipur dated 27.08.2018 for Assessment Year 2012-13 wherein the assessee bank has challenged the sustenance of penalty levied by the AO U/s 271C of the I.T. Act.
2. Briefly, the facts of the case are that an order u/s 201 & 201(1A) of the Act was passed by the ACIT (TDS) dated 29.03.2014 raising demand of Rs. 7,70,720/- u/s 201(1) on account of non-deduction of tax u/s 192 of the Act on reimbursement of Leave Fare Concession (LFC) claim, to the extent of foreign leg of travel of 12 employees of the assessee bank, during the financial year relevant to the impugned assessment year. For initiation of penalty proceedings u/s 271C of the Act, the AO referred the matter to the JCIT (TDS), Jaipur vide his letter dated 18.07.2014 and thereafter, a show cause was issued to the assessee and the submissions of the assessee were considered, however, the same were not found acceptable by the JCIT (TDS) and his findings are reproduced as under:-
“5.3 In view ofthe facts mentioned above and considering the decisions of the Hon Dble ITAT, Chandigarh & Lucknow benches I am of the considered view that the assessee bank has not deducted the tax intentionally, fully knowing that the LFC is applicable for travel in India only and no foreign travel is allowable, still the assessee bank allowed the claims ofthe employees and made re-imbursement to them without making TDS under section 192 ofthe ITAct, 1961. It is, therefore, a fit case for imposition of penalty U/s 271C of the I.T. Act, 1961. Accordingly, I Impose penalty of Rs. 7,70,720/-, being equal to the amount oftax which the assessee failedto deduct.”
3. Being aggrieved, the assessee carried the matter in appeal before the ld. CIT(A) who has stated that the assessee has failed to bring any material against the observation made by the JCIT (TDS) at the time of appellate proceedings and he accordingly confirmed the levy of penalty U/s 271C of the IT Act. Now, the assessee bank is in appeal against the said order.
4. The ld AR submitted that penalty of Rs. 7,70,720/- has been imposed on the Bank for the Assessment Year 2012-13 in relation to non-deduction of tax on LTC paid by Bank to its 12 employees involving amount used to travel out of India. The original tax demand of Rs. 10,29,002/- has already been paid by the Bank (Rs. 8,36,322/- on 24.10.2017 and Rs. 1,92,680/- on 28.03.2017).
4.1 The ld. AR submitted that without prejudice to the position that the Bank has correctly granted exemption under section 10(5) to its employees at the time of deduction of tax at source, it is submitted that the Bank was under a bona fide belief that even where the journey undertaken by an employee involves a foreign leg, the employee is entitled to exemption under section 10(5) when the employee’s designated place is in India and he actually visits the place as designated.
4.2 The ld. AR further submitted that the Bank had honestly and fairly formed an opinion and arrived at the estimated income of the employees. The Bank was under the bona fide belief that LTC claim for travel cannot be denied just because the journey also includes visit outside India. The bank was under a genuine and bonafide belief that it was not under any obligation to deduct tax at source on LTC payments. While calculating the tax liability of Employees, the figure of LTC was always exempted and this rule was being followed since many years. TDS Exemption of LFC was in a nature of thumb rule and should be considered as a reasonable cause for non deduction of TDS. It was only after the survey by the Income tax Department that an issue regarding its taxability arose and after judgments of CIT and this Bench the matter got clarified. thus, in other words the Bank has not willfully defaulted! intentionally not deducted TDS. After the settlement of dispute, the original demand has been deposited which shows the genuineness of above claim.
4.3 The ld. AR submitted that without prejudice to the position adopted by the Bank that it has correctly granted exemption under section 10(5) to its employees at the time of deduction of tax at source, it is submitted that in the present circumstances and facts of the case, the Bank cannot be treated as an assessee in default in terms of section 271C.
4.4 The ld. AR reiterated that it was the bona fide belief of the Bank that it was not liable to deduct tax at source in respect of LTC provided to employees. In other words, the Bank had deducted appropriate tax at source on the basis of the prevalent law and there was no default on the part of the Bank in deducting tax at source. Accordingly, the Bank cannot be held to be an assessee in default within the meaning of section 271C.
4.5 It was further submitted by the ld AR that tax deduction at source (TDS) is a system for collection of direct taxes in India. The Income Tax Act, 1961 mandates that a specified percentage of tax is required to be deducted by the payer at the time of making certain payments to the payee. The requirement to deduct tax is there for payments such as payment of Commission, interest, salary, royalty, contract payment, brokerage etc. The Tax deducted has to be deposited by the payer to the revenue department on behalf of the payee. In case the payer doesn’t deduct the tax at source, the payer is liable to pay penalty u/s 271C of the ITA. The provisions of Section 271C which provides for penalty for failure to deduct tax at source reads as follows:-
“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 XVIIB; or
b)pay the whole or any part of the tax as required by or under-
i. sub-section (2) of Section 115-0; or
ii. the second proviso to section 194B,
then, such persons shall be liable to pay, by way of penalty, a sum equal to the amount oftax which such persons failed to deduct or pay as aforesaid.”
4.6 It was further submitted that at the same time, Section 273B of the IT Act provides that in case the payer proves to the Revenue department that there was some reasonable cause for the failure to deduct tax, then the penalty under section 271C is waived off. The provisions of Section 273B which provides that penalty not to be imposed in certain cases read as under:
‘273B. Notwithstanding anything contained in the provisions of clause (b) of sub-section (1) of section 271, section 271A, section 271AA, section 271B, section 271BA, section 271BB, section 271C, section 271CA, section 271D, section 271E, section 271F, section 271FA, section 271FB, section 271G, section 271H, clause (c) or clause (d) of sub-section (1) or sub-section (2) of section 272A, sub-section (1) of section 272AA or section 272B 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 impossible 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. “
4.7 There is no definition of the term “reasonable cause” and it has to be decided upon the facts of each case. Some of the judicial pronouncements with regards to waiver of penalty u/s 271C for bonafide mistake on the part of the payor are as follows:
4.8 The Hon’ble Supreme Court made the following observations in the case of Commissioner of Income Tax, New Delhi Vs. M/s Eli Lilly & Company (India) Pvt. Ltd. & Ors with regards to reasonable cause for failure to deduct TDS:
“On the Scope ofSection 271C read with Section 273B:
Section 271C inter alia states that if any person fails to deduct the whole or any part ofthe tax as required by the provisions ofChapter XVII-B 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. In these cases we are concerned with Section 271C(1)(a). Thus Section 271C(1)(a) makes it clear that the penalty leviable shall be equal to the amount of tax which such person failed to deduct. We cannot hold this provision to be mandatory or compensatory or automatic because under Section 273B Parliament has enacted that penalty shall not be imposed in cases falling there under. Section 271C falls in the category of such cases. Section 273B states that notwithstanding anything contained in Section 271C, no penalty shall be imposed on the person or the assessee for failure to deduct tax at source if such person or the assessee proves that there was a reasonable cause for the said failure. Therefore, the liability to levy of penalty can be fastened only on the person who do not have good and sufficient reason for not deducting tax at source. Only those persons will be liable to penalty who do not have good and sufficient reason for not deducting the tax.”
4.9 It was submitted that the Bank had honestly and fairly formed an opinion and arrived at the estimated income of the employees. As discussed above, the Bank was under the bona fide belief that LTC claim for travel within India cannot be denied just because the journey also includes visit outside India. The tax deductor assessee was under a genuine and bona fide belief that it was not under any obligation to deduct tax at source consequently, penalty was not leviable under Section 271C as the respondent in the case has discharged its burden of showing reasonable cause for failure to deduct tax at source.
4.10 In case of Sukhdev Singh Vs. The J.C.I.T. (TDS, Chandigarh), the Chandigarh Bench of the Tribunal made the following observation with regard to reasonable cause for failure to deposit TDS:-
“It is well settled law that the penalty need not to be imposed in each and every case and discretionary in nature and the facts and circumstances of the case shall have to be taken into consideration. Section 273B of the Income Tax Act provides that no penalty under section 271C 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. The circumstances explained by the learned counsel for the assessee clearly reveal that the assessee paid interest to non-banking financial institution and did not deduct tax because the assessee was under the bonafide beliefthat no TDS was to be deducted on the payments made to non-banking financial institution. The Assessing Officer made disallowance under section 40(a)(ia) of the Income Tax Act and other additions were also made in the assessment order, which are accepted by the assessee and the demand raised as per assessment order has been paid. Therefore, these circumstances would clearly reveal that the assessee has reasonable cause for failure to comply with the provisions of section. Therefore, in view it being a beginning of the assessee for failure to deduct tax and then the assessee in future has starting deducting TDS would suggest that the penalty may not be imposed in the aforesaid case.
Considering the above discussion, we are of the view that the levy of penalty in the facts and circumstances ofthe case is not warranted. We accordingly set aside the orders ofthe authorities below and cancel the penalty. ~
4.11 In the case of IDBI Bank Ltd., Surat vs. JCIT(TDS) (ITA No. 2094 to 2097/Ahd/2011 dated 26.02.2015), it was held as under:
“After going through rival submissions and material on record, we find that the word “reasonable cause” can be interpreted as applied to a person having an ordinary prudence. The expression “reasonable”gives an impression that prima facie, if a person of average intelligence has acted and under those circumstances the said action was at that point oftime not infringed the settled law then it can be reasonably held that assessee was prevented by a “reasonable cause” under those circumstances not to act as prescribed or determined by a case law. We are aware that ignorance of law is not an excuse but at the same time, it is not practical that every tax payer should be aware about the latest development of tax law; which are otherwise fast changing. We find that issue at hand was debatable at relevant point oftime and assessee was prevented by a reasonable cause not to deduct TDS under the relevant provisions of Income Tax Act. In view of this, assessee is entitled for relieffrom penalty levied under the provision of 271C ofthe Act. Accordingly, same is directedto be deleted.”
5. The ld DR is heard who has submitted that the provisions of Section 10(5) of the Act are clear and only the reimbursement of expenses which were incurred on travel of employees and his family to any place in India subject to certain conditions are exempt. Since the employees of the assesse bank had travelled to foreign countries, the benefit of exemption available u/s. 10(5) of the Act has rightly been denied. He submitted that the assessee bank may not have been aware of the details of the employees’ places or destination of visits at the time of advancement of LFC amounts. However, at the time of final settlement of the claims of the employees, the assessee bank should have obtained all the relevant details such as the places of visits (destinations) etc. When the assessee bank was aware of the fact that its employees had visited foreign countries by availing LFC concession, the assessee Bank was under obligation to deduct tax at source treating such an amount as not exempt. Since the assessee-Bank had failed to enforce its duty to deduct tax at source as envisaged in section 192 of the Act, it is a clear case of levy of penalty under section 271C of the Act. He further submitted that the Tribunal has already confirmed the order of the AO passed under section 201(1) & 201(IA) of the Act holding the assessee bank to be in default for not deducting tax on the LFC claims of its employees. He further relied on the findings of the lower authorities which we have discussed above.
6. We have heard the rival contentions and perused the material available on record. Undisputedly, the Coordinate Bench has confirmed the order of the ACIT(TDS) passed under section 201(1) & 201(IA) of the Act holding the assessee bank to be in default for not deducting tax on the LFC claims of its employees which were found not eligible for exemption under section 10(5) of the Act. The assessee bank has since deposited tax demand towards such short deduction of TDS and consequent interest thereon amounting to Rs 10,29,002. The JCIT CIT(TDS) has subsequently levied penalty under section 271C for failure on part of the assessee bank to deduct tax on the LFC claims of its employees not eligible for exemption under section 10(5) of the Act. The limited question for consideration therefore is whether there was reasonable cause for such failure on part of the assessee bank in terms of Section 273B of the Act and whether the assessee bank can be absolved from the levy of penalty under section 271C of the Act.
7. For the purposes, it would be relevant to understand the obligation cast upon the assessee bank at the first place. Section 192(1) provides that any person responsible for paying any income chargeable under the head “Salaries” shall, at the time of payment, deduct income-tax on the amount payable at the average rate of income-tax computed on the basis of the rates in force for the financial year in which the payment is made, on the estimated income of the assessee under this head for that financial year. Therefore, the assessee bank is required to estimate the income in respect of its employees for the relevant financial year. In the context of an employee who has availed Leave Fare Concession, as in the instant case, it is for the employee to submit to his employer, the declaration in support of his LFC claim along with the evidence of expenditure having been incurred towards the travel so undertaken by him and/or his family to the assessee bank. The concerned employee thus submits to the employer that his claim for reimbursement of LFC should be considered while estimating his taxable income but at the same time, the exemption should be provided by the assessee bank under section 10(5) and tax should not be estimated/determined and consequently, there should not be an deduction of tax at source by the assessee bank while making the payment. The primary onus is therefore on the employee who submits such LFC claim and self-declaration to the employer that he is eligible for exemption under section 10(5) of the Act while estimating his salary income.
8. Once the employee submits such LFC claim and self-declaration, the employer i.e., the assessee bank is required to take the same into consideration while estimating his salary income. The question for consideration is what is the obligation cast on the assessee bank while considering such LFC which is claimed by the assessee as exempt under section 10(5) of the Act. In other words, whether the assessee bank should take such self-declaration on face value or it should do some reasonable verification and due-diligence before allowing such claim while estimating the salary income.
9. In this regard, we refer to CBDT Circular No. 05/2011 [F.NO. 275/192/2011-IT(B)], dated 16-8-2011 which contains instructions for income tax deduction under section 192 from Salaries during the financial year 2011-12 which interalia provides as under.-
“5.2 Incomes not included under the Head ‘Salaries ‘(Exemptions)
Any income falling within any of the following clauses shall not be included in computing the income from salaries for the purpose of Section 192 ofthe Act .–
(1) The value of any travel concession or assistance received by or due to an employee from his employer or former employer for himself and his family, in connection with his proceeding (a) on leave to any place in India or (b) on retirement from service, or, after termination of service to any place in India is exempt under clause (5) of Section 10 subject, however, to the conditions prescribed in rule 2B of the Income-tax Rules, 1962.
For the purpose of this clause, “family” in relation to an individual means:
(i) The spouse and children ofthe individual; and
(ii) the parents, brothers and sisters of the individual or any of them, wholly or mainly dependent on the individual.
It may also be noted that the amount exempt under this clause shall in no case exceed the amount of expenses actually incurred for the purpose of such travel.”
10. We also refer to Hon’ble Supreme Court decisions in case of CIT v. I.T.I. Ltd.  183 Taxman 219 (SC) and CIT v. Larsen & Toubro Ltd.  181 Taxman 71 (SC) wherein it was held that the beneficiary of exemption under section 10(5) is an individual There is no circular of Central Board of Direct Taxes (CBDT) requiring the employer under section 192 to collect and examine the supporting evidence to the declaration to be submitted by an employee(s). Therefore, it was held that an assessee-employer is under no statutory obligation under the Income-tax Act, 1961, and/or the Rules to collect evidence to show that its employee(s) had actually utilized the amount(s) paid towards leave travel concession(s)/conveyance allowance.
11. We thus find that there is nothing specific which has been provided by CBDT in its circular issued under section 192 for the relevant financial year. What has been reiterated is adherence to the provisions as contained in section 10(5) read with Rule 2B. Similarly, the Hon’ble Supreme Court has also held that an assessee employer is under no statutory obligation under the Income-tax Act, 1961, and/or the Rules to collect evidence to show that its employees had actually utilized the amount paid towards leave travel concession. Even though the same is not required as per decision referred supra, in the instant case, the assessee bank has been diligent, and has collected and brought on record evidence to show that its employees had actually utilized the amount paid towards leave travel concession.
12. At the same time, in terms of adherence to the provisions as contained in section 10(5) read with Rule 2B, we find that the assessee bank has allowed exemption to all its employees who have submitted LFC claim. The Revenue has not disputed the LFC claim in respect of these employees except in respect of 12 employees. These 12 employees, who have travelled to foreign countries as part of their travel itinerary with designated place of travel in India, and in respect of which they have submitted their LFC claim, has been disputed by the Revenue as not eligible for exemption under section 10(5) in respect of amount reimbursed towards foreign leg of their travel. The explanation of the assessee bank is that while calculating the tax liability of its employees, the figure of LFC was always exempted and this rule was being followed since many years, being in a nature of thumb rule and TDS exemption of LFC was thus allowed almost mechanically year after year. To our mind, it is important to be consistent but at the same time, one needs to be mindful of what been submitted by the employees towards their LFC claims. It appears that the assessee bank has looked at these 12 employees’s claim broadly, as in other cases, in terms of actual travel being undertaken, the designated place being in India and the amount of claim not exceeding the economy fare of the national carrier by the shortest route to the place of destination. However, the Revenue’s case is that what the assessee bank has failed to consider is that the travel plan includes the foreign leg of travel and corresponding travel expenses which is not eligible for exemption under section 10(5) of the Act. However, the assessee’s bank explanation to this effect is that section 10(5) and Rule 2B doesn’t place a bar on travel to a foreign destination during the course of travel to a place in India and there is nothing explicit provided therein to prohibit such travel in order to deny the exemption. Having considered the rival submissions and facts on record, we are of the opinion that the assessee bank has undertaken reasonable steps in terms of verifying the assessee’s claim towards their LFC claims and is aware of employees travelling to foreign countries as part of their travel itinerary but at the same time, there is an error of judgment on part of the assessee bank in understanding and applying the provisions of section 10(5) of the Act. Therefore, we are unable to accept the Revenue’s contention that the assessee bank has not deducted the tax intentionally, fully knowing that the LFC is applicable for travel in India only and no foreign travel is allowable as it is a case of error of judgment and no malafide can be assumed on part of the bank. Further, nothing has been brought on record which in any ways suggest connivance on part of the assessee bank or forged claims submitted by the employees and which has been discovered by the Revenue during the course of its examination. As fairly submitted by the assessee bank, while calculating the estimated tax liability of its employees, it always consider LFC claim as exempt under section 10(5) and the same position, being followed and accepted consistently in the past years, was followed in the current financial year as well. However, for the first time, after the survey by the tax department, this issue arose for consideration and after the judgment of the Tribunal, the matter got clarified and the assessee bank has duly complied and deposited the outstanding demand along with interest and has taken corrective steps in subsequent years as well.
13. In light of above discussions and in the entirety of facts and circumstances of the case, we are of the considered view that there was reasonable cause in terms of section 273B of the Act for not deducting tax by the assessee Bank. In the result, the penalty so levied under section 271C is hereby directed to be deleted.
In the result, the appeal of the assessee is allowed.