Full Judgment
2. Facts in brief are these. The previous year for the relevant asst.
yr. 1989-90 is of 21 months, i.e. 1st July, 1987 to 31st March, 1989.
To enable transitional previous year to take effect the appellant closed its accounts once on 30th June, 1988, and then on 31st March, 1989. In the audit report furnished with the return filed on 9th October, 1990, it was mentioned that there is delay in deduction and deposit of tax by the appellant. The details in the audit report were noted as under :----------------------------------------------------------------------Particulars Amount Date of Due Date of Date of Deduction Deposit Deposit---------------------------------------------------------------------Interest 8,911 30-4-88 31-8-88 14-6-89Salary 1,470 7-3-88 14-3-88 17-3-88Interest 7,769 31-3-89 31-5-89 14-6-89Contract Payment 694 31-3-89 31-5-89 14-6-89Contract Payment 3,803 31-3-89 31-5-89 14-6-89Salary 2,035 2-2-89 9-2-89 13-2-89Salary 5,382 31-3-89 7-4-89 1-5-89Royalty 7,98,304 30-6-88 7-7-88 5-9-88Technicalknow-how Fee 7,00,000 31-3-89 7-4-89 15-9-89Royalty 7,89,001 31-3-89 7-4-89 21-10-89--------------------------------------------------------------------- 3. The appellant was issued a show-cause notice by the AO. There was no reply from the assessee even though it had stated on 19th August, 1991, that a reply would be given by 27th September, 1991. The AO accordingly levied interest at Rs. 1,30,631 under s. 201(1A). Simultaneously proceedings under s. 221 had also been taken identical to the dates of which proceedings under s. 201(1A) were taken. Here also, there being no reply the AO held that the appellant has failed to pay the tax without good and sufficient cause. He levied penalty @ 10 per cent of the amount of tax worked out at Rs. 2,31,730.
4. The assessee went in appeal before the CIT(A) before whom two main submissions were made i.e., (a) since the appellant had paid a tax before issue of show-cause notice both under ss. 201(1A) and 221 the default did not exist on the dates of notices; and (b) that there existed a reasonable cause in delayed deduction and deposit of tax, inasmuch as there was delay in finalising of accounts. The CIT(A) rejected both the submissions. The assessee is in appeal before us.
5. The learned authorised representative for the assessee, Syali submitted that CIT(A) may have been right in rejecting the plea of the assessee that the default did not exist as on date of show-cause notice but he has certainly erred in summarily rejecting the plea of the appellant based upon the material on record. The following facts, which are stated to be before the CIT(A) on the record, have been highlighted before us.
(i) That since there were two closing of accounts, one on 30th June, 1988 and the other on 31st March, 1989, the time granted for payment of tax deducted at source in respect of credit entries based on the above dates should be two months from the end of the month in which the credit is made and not 7 days of the date of deduction as per r.
30(1)(b)(i). So construed in respect of TDS on royalty of Rs. 7,98,304 wherein an entry was made on 30th June, 1988, the time available was upto 31st August, 1988, and not 7th July, 1988, as noted by the auditors. Since the amount stood tendered by cheque on 30th August, 1988, which was encashed only on 5th September, 1988, there is no delay in respect thereof. It is submitted that the auditor himself has taken into account the time of two months from the end of the month in which the credit is made, where the tax was deducted vis-a-vis the credit entry as on 30th June, 1988, and 31st March, 1989. Therefore, there was no rationale to restrict the time available to seven days vis-a-vis royalty for the period ending 30th June, 1988.
(ii) Vis-a-vis technical know-how it was submitted that a lump sum of Rs. 7 lakhs was deducted at source and paid as on 15th September, 1989. There was no dispute as regards this item because the CIT(A) in rejecting the reasonable cause furnished referred in specie, to "interest", "salary" and "royalty" but did not refer to technical know-how fee. Reason being that technical know-how fee is accepted to be incapable of calculation in the absence of ascertainment from accounts of its effective implementation.
5.1 As regards royalty for the period ending 31st March, 1989 it was submitted that as per agreement with ACME Magnetic Tapes, Hong Kong (copy furnished) 3 per cent of net ex-factory selling price of the product was to be paid as royalty. Clause 4C, 5A and 5B indicate that without going into the accounts it is not possible to ascertain the amount of royalty. By way of illustration it was pointed out that the net ex-factory sale price of the product has to be exclusive of the excise duty minus the cost of standard bought out components and landed cost of imported components irrespective of procurement including freight, insurance, customs duty, etc. It was submitted that since without finalisation of accounts the amount of technical know-how/royalty were not capable of being ascertained and, therefore, CIT(A) was wrong to reject this submission without giving any reason especially when no adverse remarks is made in his conclusion vis-a-vis technical know-how.
5.2 It was further pointed out that delay in finalisation of accounts was not deliberate. During the middle of the financial year i.e., on 21st July, 1988 operations under s. 132(1) were carried out by the Revenue against the assessee when all books of accounts, vouchers, correspondence with parties from the period 1985 to date, were seized.
Syali invited our attention to the Panchnama at pp. 14 to 19 of the paper-book on record. He submitted that the seized material was made available for inspection (photocopies) only in October/November, 1989.
He drew our attention to the correspondence with the AO at pp. 20 to 28 of the paper-book. The correspondence highlights that the concerned Dy.
CIT had informed the assessee that due to lack of space, the seized material have not been received from the Investigation Wing as in June, 1989. On being reminded in September, 1989, the AO informed the assessee receipt of records on 7th November, 1989. Only after this date copies could be taken and audit progressed. It is for this reason that the audit was finalised on 25th July, 1990, and return filed on 9th October, 1990. Special emphasis was laid on letter, dt. 5th September, 1989, at p. 24 of the PB, in which the assessee pointed out before the AO that without copies of these records it was not possible to carry forward balances of the previous year to the current year and, therefore, finalisation of accounts was not possible. It was, thus, submitted that finalisation of accounts for reasons beyond the control of the assessee and, thus, constituted a reasonable/sufficient cause.
It was for this reason that tax was deducted and paid on royalty for the period ending 30th June, 1988, in time, but for the period ending 31st March, 1989, there was delay till finalisation of accounts.
According to the learned authorised representative the concern and diligence of the appellant could be ascertained from the fact that despite having been given the papers only in November, 1989, as soon as it was within its powers, the assessee estimated, deducted and deposited the tax on the royalty due on 31st March, 1989, in October, 1989.
5.3. It is submitted that barring the three major instances of tax on royalty as on 30th June, 1988, amounting to Rs. 7,98,304 for which there was no default, tax on technical know-how fee of Rs. 7 lakhs and tax on royalty as on 31st March, 1989, to the tune of Rs. 7,89,031, the other are three minor items with minor delay and also pertaining to the period ending 31st March, 1989. They were credit entries and as such could be made only at the end of the year. Only two items of tax on salary of Rs. 1,470 was due as on 14th March, 1988, and Rs. 2,035 was due on 9th February, 1989, but was deposited on 17th March, 1988, and 13th February, 1989, respectively. The delay was marginal and explainable with reference to the facts already placed on record.
5.4 Syali also addressed us at length on the approach to the levy of penalty under s. 221 of the IT Act with reference to non-deduction or deduction but non-payment of tax under TDS provision. It is submitted that the approach to penalty for an assessee deemed to be in default under s. 201(1) r/w s. 221 has to be understood in its correct perspective. Under sub-s. (1) of s. 201 a person responsible for deducting tax at source in the event of non-deducting or, after deducting, failing to pay; "may be" deemed to be an assessee in default. The emphasis is on the word "may". Therefore, according to Syali, it is not as if in every case where there is a failure to deduct or pay the tax, as required, the provisions become automatically applicable.
5.5 Syali submitted that the wording may be compared with the wording of sub-s. (4) of s. 220 which provides that where the amount is not paid within the prescribed time, the assessee "shall" be deemed to be in default.
5.6 Syali submitted that proviso to s. 201(1) expressly stipulates that although the assessee is deemed to be in default, no penalty shall be charged under s. 221 unless the AO is satisfied that such person had without good and sufficient cause failed to deduct and pay the taxes.
According to Syali, the wording of the proviso clearly indicate that the initial onus is on the Revenue. He submitted that no doubt onus can be discharged by preponderance of probabilities which may even cover a circumstance where no reply is given to a show cause. However, where a reply is given, be it before the AO or the first appellate authority, whose powers are co-terminous, there is an obligation to make an objective analysis and to individually examine each and every default with reference to facts/explanation on record, and, only then, arrive at a conclusion discharging the onus that no good and sufficient cause existed.
5.7 In support of the submission that the onus is on the Revenue, Syali referred to the provisions of s. 221 wherein prior to its substitution by Tax Laws (Amendment & Miscellaneous Provisions) Act, 1986 w.e.f. 1st October, 1986, the second proviso stood as under : "Provided further that where the ITO is satisfied that the default was for good and sufficient reasons, no penalty shall be levied under this section." He submitted that this proviso has now been substituted by another which stipulates that penalty under s. 221 will be levied unless the assessee proves to the satisfaction of the AO that the default was for good and sufficient reasons.
Syali submitted that the object behind the change in wording is evident from Circular No. 469, dt. 23rd September, 1986, issued by the CBDT to the Taxation Laws (Amendment & Miscellaneous Provisions) Act, 1986. It is explained [162 ITR (st) 22 at p. 36] that since the section as it then stood, placed onus on the Department to bring on record the existence of the ingredients of penalty and that onus was almost impossible to discharge, a change in the language was warranted. The object is now embedded in the present proviso.
5.8 Since the language of the proviso to s. 221, as it then stood, admittedly places onus on the Department, the wording of proviso to s.
201 being pari-materia there is no escapement from the conclusion that the onus is on the Department. He submitted that the Revenue has not discharged the onus cast upon it.
6. In reply, the learned Departmental Representative placed reliance on the decision of the lower authorities and submitted that a reasonable opportunity has been given by the AO and in the circumstances the assessee was wrong in submitting that good and sufficient cause existed.
7. We have heard the learned representative and have also gone through the relevant record. In the present case the fact/explanation on record have not been examined in their proper perspective. It is settled law that mere delay is not sufficient to attract provisions of s. 221, CIT vs. Chambara Peak Estates Ltd. (1990) 183 ITR 471 (Ker). It becomes essential to analyse with reference to material on record and give a finding to discharge the onus. It is evident that there being no default with reference to royalty as on 30th June, 1988, and, there being a good and sufficient cause i.e., the delay in finalisation of accounts on account of seizure of books of accounts by the Department the appellant was left with no choice but to pass the entries only after receipt of copies of seized documents. Having passed the entries at that time though as of date, on which accounts are being made i.e., 31st March, 1989, the delay is duly explainable being for good and sufficient cause.
8. We further note that the assessee acted bona fide and diligently, inasmuch as though the books of accounts were finalised as on 25th July, 1990, at the earliest possible time when the details were known, the appropriate entries were made in the books and tax deposited. The tax vis-a-vis technical know-how and royalty as on 31st March, 1989, have been deposited on 15th September, 1989 and 21st October, 1989, respectively (p. 5 of the paper-book). Even though the account books were not finalised on 30th June, 1988, based upon the record that it could manage, the tax was paid in time. Therefore, the assessee did not lack in bona fides and acted diligently as is apparent from material on record. There is, therefore, no cause for levy of penalty. The CIT(A) has not given any separate reasoning for upholding the levy of interest under s. 201(1A) but has merely referred to his order passed in respect of order under s. 221. As regards royalty for the period 30th June, 1988, we find that the cheque was deposited in time and there is no default once the provisions of r. 30 are invoked.
9. The question as to whether in the given circumstances there is good and sufficient reason or not, was considered by their Lordships of the Bombay High Court in the case of Gupta Builders (P.) Ltd. vs. CIT (1991) 191 ITR 114 (Bom). In that case at p. 120 identical argument was considered by their Lordships, inasmuch as, the assessee's books of accounts and documents were seized by the Department on 9th August, 1976, and were returned in 1985 only. It was observed that in the case of a limited company, it is necessary to have its accounts audited and, therefore, there was nothing wrong in the petitioner taking the view that it should file its return only after the accounts were audited.
The ground was held as sufficient to enable waiver of interest under s.
139(8) of the IT Act.
10. Be as it may, the onus placed by the law on the Revenue has not been discharged but for making a mechanical order rejecting the explanation in a single sentence. This is not sufficient to uphold the levy of penalty. Onus for levy of penalty under s. 221 r/w s. 201(1) proviso of the IT Act continues to be on the Revenue. The explanation has been furnished before the CIT(A) based on the material, which is on record both of the AO as also of the CIT(A), the explanation is summarily rejected without even discussing the pros and cons of each default separately. No reference is made by the CIT(A) to the material fact of search leading to delay in finalisation of accounts, thereby resulting in delay of furnishing copies of seized records. In the circumstances it cannot be said that on facts the onus has been discharged and, therefore, penalty under s. 221 is exigible. On the totality of facts and circumstances, therefore, we find that penalty under s. 221 cannot be upheld. It is cancelled.
10.1 Since interest under s. 201(1A) is on the same ground as the levy of penalty, levy of interest is also quashed.