Penalty for failure to deduct tax quashed as NOIDA is exempt from TDS payments- Allahabad HC

Penalty for failure to deduct tax quashed as NOIDA is exempt from TDS. Assessee was under bonafide belief that tax was not liable to be deducted – Allahabad High Court

ABCAUS Case Law Citation:
ABCAUS 2001 (2017) (07) HC

The Question of Law for determination:
Whether the tribunal was justified in reversing the order of the CIT (Appeals) confirming the levy of penalty imposed under Section 271C of the Income Tax Act, 1961 (‘the Act’) upon the assessee for the failure to deduct tax at source. 

Important Case Laws Cited/relied upon:
Commissioner of Income Tax (TDS) Vs. G.M. (Telecom) BSNL Income Tax
Idea Cellular Ltd. Vs. DCIT (2009) 121 TTJ (Del) 352
Commissioner of Income Tax (TDS) and another Vs. Canara Bank

Brief Facts of the Case:
The respondent assessee was a Public Sector Bank. It was having fixed deposits of the New Okhla Industrial Development Authority (NOIDA). However, the bank did not make deduction of tax at source (TDS) on the interest earned on those fixed deposits.

Consequently, a penalty was imposed on the bank for failure to deduct tax at source under Section 271C of the Income Tax Act, 1961. The defence of the respondent assessee was that NOIDA is an Authority under the State Act and is exempt from deduction of tax at source under Section 194-A(1) of the Act. 

Observations made by the High Court:

NOIDA is exempt from payment of tax at source.

The Hon’ble Allahabad High Court observed that a Division Bench of the Court in the case of Canara Bankhad held that NOIDA is a corporation established by the U.P. Industrial Development Act, 1976 therefore is exempt from payment of tax at source.

In view of the above decision, the Court opined that the bank was not supposed to deduct any tax at source on the deposits made by the NOIDA and when no such tax was deductable at source, the question of its payment and imposition of penalty did not arise. 

Further, it was observed that as per section 273 B of the Act provides that no penalty shall be imposable on the assessee for the failure referred to in Section 271 C of the Act if it is proved that there was reasonable cause for the failure.Therefore, if the assessee proves that there was reasonable cause for not deducting the tax at source, he is not liable for penalty under Section 271 C of the Act. 

Thus, in view of the dispute as to whether NOIDA is a Corporation exempt from liability of deduction of tax at source there was a reasonable cause for the bank not to deduct the tax at source. 

It was noted that in a case where assessee was under a bonafide belief that tax was not liable to be deducted on commission/trade discount the Division Bench of the Court held that it was a reasonable cause for failure to deduct tax. This exactly was the position in the case at hand. 

Accordingly, even in the light of the provisions of Section 273 B of the Act no penalty could have been imposed upon the respondent assessee under Section 271C of the Act. 

Held:
It was held that penalty was not justified as the assessee not only had a reasonable cause for not deducting tax at source but also NOIDA was exempt for payment of tax at source. The appeal was dismissed.