Mitsui and Company Ltd. Vs. Deputy Commissioner of Income Tax - Court Judgment

Excerpt:

.....outside india, on the basis of legal advice of its integral legal -cell and the same constitutes reasonable cause for not deducting tax at source under section 192 and, thereforee, penalty cannot of tax at source and payment thereof in government account. the issue relating to extra-territorial operations of such provisions of the income tax act is presently pending with the hon'ble supreme court. the matter, thereforee, not being free from doubt the bona fide belief entertained by the assessee-company that the provision of chapter xvh-b is not applicable to the payments made in japan is not without merit. the legal opinion tendered by the internal legal cell of the assessee-company iassumes credibility and the same cannot be brushed aside simply for the reason that it is not supported by any independent evidence especially when such legal advice was given by the internal legal cell of tokyo office of the company and which was not tendered by any outside experts.there existed a reasonable cause for not deducting the tax at source from the payments made to expatriates in japan within the meaning of section 273b and accordingly no penalty under section 271c is..........the general manager of liaison office made such a compliance for the liaison office as well. the reasons are manifold :'(a) even details for anpara were under collection. attention, thereforee, did not go to liaison office.(b) moreover, as has already been stated, the two are separate entities. different sets of books of accounts are maintained and there is no intermingling of funds.(c) by that time the appellant had not given up its argument of non-applicability of the provisions of indian income tax act to the facts under consideration.even as on date, as is evident from the written submissions, though taxes and interest have been paid, the same are stated to have been paid voluntarily without any legal obligation on it to do so.'4.12. despite, it is being pointed out that the commissioner (appeals) also unfortunately had fallen into the same error as the deputy commissioner.4.13. the learned counsel referred to the correspondence from 28-3-1995 to 9-2-1996, between the tax deductor and the department and submitted that the same clearly establish that :'(i) at no point of time department confronted any material by the fear of which the appellant came forward with.....

Judgment:

ORDER

Nathu Ram, A.M.

These are the appeals preferred by the assessees against the common order of the Commissioner (Appeals) for the financial years 1989-90 to 1994-95 confirming the penalties levied under section 271C of the Income Tax Act, 1961. Since the facts are common, these appeals have been heard together and are decided by this consolidated order.

2. The assessees involved have raised the common grounds and the same are reproduced hereunder :

'1. That, on the facts and circumstances of the case and in law, the learned Commissioner (Appeals) has grossly erred in holding that the appellant company was liable to deduct tax at source under the Income Tax Act (of India) from salary paid outside India from the funds available outside India.

2. That, on the facts and circumstances of the case and in law, the learned Commissioner (Appeals) has grossly erred in holding that the alleged default of not deducting the tax at source was without reasonable cause.

3. That, on the facts and circumstances of the case and in law, the learned Commissioner (Appeals) grossly erred in confirming the penalty levied by the Deputy Commissioner under section 271C of the Income Tax Act for the alleged default of non-deduction of tax at source under section 192 of the Income Tax Act.

4. That the appellant company craves leave to amend, add, delete or withdraw any of the foregoing grounds of appeal either before or at the time of the hearing of this appeal.'

3. The facts, in brief, as stated are that the assessee- company is a non-resident company incorporated in Japan having its head office in Tokyo. The assessee-company set up Anpara 'B' Thermal Power Project Office in India for execution of the contract for construction of two 500 MW. Thermal Power Plants at Anpara, in U.P. This project was completed in 1994 and the power plant was handed over to the Government of U.P. Its project office was located at 5th Floor, Hotel Le Meridian, New Delhi. The company had brought a number of Japanese technicians with expertise of construction of power plant in India and they were paid monthly salary in Indian currency and there from tax was deducted at source and deposited to the credit of the Government of India as per the requirement of section 192 of the Income Tax Act.

3.1. The company also maintained an office in India at 2nd Floor, Hotel Le Meridian, New Delhi, for liaison and coordinating its trading, export and import activities. The Reserve Bank of India (RBI) permitted the company to maintain such office in India with the condition that except for evasion work, the company shall not be entitled to carry on any activity of trading, commercial or industrial nature through its liaison office. The liaison office so set up has both Japanese and Indian employees. The Japanese expatriate employees were paid monthly salary in India in Indian currency and there from tax was deducted at source and deposited to the credit of the Government of India as per provisions of section 192 of the Income Tax Act. Both project office as well as liaison office obtained TAN number from the department for the purpose. The general managers of both the offices, acting as disbursing officers submitted annual returns of salary in Form No. 24 as required under section 206 of the Income Tax Act, each year.

3.2. During the course of processing of such annual returns in Form No. 24 in the case of Anpara Power Project Office it was noticed by the Assistant Commissioner concerned that the deductor had been disclosing a small amount of salary paid to its expatriate employees. The Assistant Commissioner issued a letter on 28th March, 1995, calling for information under section 133(6) of the Income Tax Act about the salary, etc., paid to expatriate employees in India and abroad for the financial years 1986-87 to 1993-94. On the appointed date on 14th April, 1995, none attended. On 18-4-1995, the deductor requested for adjournment till 24-5-1995, and the same was granted. However, in the intervening period the company filed a letter dt. 8-5-1995, wherein, according to the Assistant Commissioner, it denied having paid any salary or any other income to the expatriates abroad. Since the said letter did not contain the information asked for fully, the Assistant Commissioner asked the authorised representative of the deductor on 25-5-1995, to furnish the remaining details by 30-5-1995. However, the deductor filed the required details in his letter dt. 12th June, 1995. According to the assessing officer. the company repeated its denial made in the earlier letter about payments made to expatriates abroad. Consequently, the Assistant Commisisoner issued summons under section 131 to 16 expatriate employees on 27th Oct., 1995, requiring them to furnish particulars of their salary and other income received from the company. There being no positive response the Assistant Commissioner carried out survey at its premises on 6-11-1995, and in the course of survey, according to the Assistant Commissioner, incriminating documents evidencing undisclosed salary payments to expatriates were found and copies thereof were obtained. According to the Assistant Commissioner, no official of the company was available at the time of survey. Consequently general manager of project office attended in response to summons issued earlier and in the course of examination he admitted to have received payment in Japan over and above what was shown to have been received in India. Thereafter the company in its letter dt. 13-11-1995, intimated that the details required are being collected from the head office in Japan and the same would be furnished as soon as received from head office. The Assistant Commissioner pursued the matter and as a result the project office finally submitted complete particulars of payments made to expatriates abroad in its letter dt. 31st Jan., 1996, and also agreed to pay the short tax deducted. The tax deductor finally in its letter dt. 21-3-1996, and 29-3-1996, stated that the company has paid additional tax of Rs. 6,91,92,288 on the salary of its employees and interest Rs. 3,25,72,356 thereon for delayed payment as per details given below :

Financial year

Amount of short deduction of tax deposited later

Interest under section 201(1A) of the Act

Rs.

Rs.

1989-90

7,33,636

6,64,099

1990-91

47,17,597

37,11,590

1991-92

1,46,70,228

93,72,310

1992-93

2,02,83,770

1,00,27,809

1993-94

2,00,24,999

69,64,102

1994-95

87,32,058

18,32,446

6,91,62,288

3,25,72,356

3.3. These facts were reported by the Assistant Commissioner to the Deputy Commissioner concerned in his letter dt. 4th April, 1996. Having received such report from the Assistant Commissioner, the Deputy Commissioner concerned issued notice dt. 6th/7th Jan., 1997, to the assessee-company for the financial year 1989-90 to 1994-95 requiring to show cause why penalty under section 271C be not imposed. Necessary reply thereto was filed by the assessee- company in its letter dt. 25th July, 1997. The Deputy Commissioner noted that sequence of events revealed that collection of short tax deducted and interest by the company was after detection by the Revenue and the payments were obtained after persistent efforts of the Assistant Commissioner. The tax deductor had been resisting in furnishing the details as is obvious from the false denial made by the company.

3.4. The argument of the tax deductor advanced in the course of penalty proceedings that the project office was making efforts to get all the relevant details asked for by the tax officer is not borne out from the facts. He also noted that as per the argument of the tax deductor the tax on payment to expatriate employees made abroad was not deducted earlier due to improper understanding of the Indian Income Tax Act and as soon as the tax deductor realised the default, the exercise to calculate the tax correctly was taken but before the process could be completed, survey was carried out by the department on 6-11-1995. On these facts the tax deductor claimed exemption from penalty on the ground that the disclosure of additional income in the hands of expatriate employees was made voluntarily without any order under section 201 and there was no mala fide intention to defraud the Government. The arguments so advanced were not found tenable by the Deputy Commissioner for the following reasons :

As is evident from the sequence of events narrated earlier, M/s Mitsui & Co. had denied making any payment to expatriates abroad, other than what was disclosed in India. These repeated denials disprove the company's claim that TDS was not deducted fully earlier because the deductor was not certain about the taxability of such payments abroad;

As is clear from the correspondence between the Assistant Commissioner and M/s Mitsui & Co. the disclosure was far from voluntary. In fact, the company had come out with the full facts only after the General Manager of the Power Project Office was examined on oath.

the fact that no order under section 201 was passed before payment of short tax deducted and interest thereon by the deductor, is not relevant because the Assistant Commissioner had already established by his investigations that the deductor had defaulted in deducting tax at source.

3.5. The Deputy Commissioner noted that penalty proceedings under section 271C are independent of default within the meaning of section 201 of the Income Tax Act. Section 271C provides for penalty as a consequence of failure to deduct tax at source. Whether such default is determined by an order under section 201 or by enquiry and investigation is extraneous to the issue. However, the fact of the matter is that the tax deductor defaulted in complying with the provisions of section 192 of the Income Tax Act. The deliberate intention of defrauding Revenue and the guilty intention of the tax deductor is established beyond reasonable doubt by its initial denials and subsequent conduct. The Deputy Commissioner, thereforee, levied a penalty of Rs. 6,99,82,708 for the financial years 1989-90 to 1994-95 being equal to the amount of tax which the tax deductor had failed to deduct.

3.6. In the case of liaison office also the concerned Assistant Commissioner in his letter dt. 12th Dec., 1995, sought information about the names and addresses of the expatriate employees and details of salary paid to them in India and abroad for the financial years 1986-87 to 1995-96 and in reply the liaison office expressed its willingness to furnish the requisite details but sought time for complying the requisite information. Consequently the liaison office furnished the particulars with an undertaking that the short tax deducted from the salary of expatriate employees is being worked out and will be deposited soon. Finally in its letter dt. 12-3-1996, the tax deductor furnished complete particulars including the working of the short deduction of tax. It was also confirmed in the same letter that a sum of Rs. 2,65,85,336 being the total short deduction of tax and interest thereon under section 201(1A) had been deposited. A report based on such facts was submitted by the Assistant Commissioner to the Deputy Commissioner on 4-4-1996, for initiation of penalty proceedings under section 271C of the Income Tax Act.

3.7. The Deputy Commissioner initiated penalty proceedings on 6th Jan., 1997, requiring the company to show cause why penalty under section 271C be not levied for the default committed for the financial years 1989-90 to 1994-95. The tax deductor made submissions similar to that given in Anpara Thermal Power Project and the same was not found tenable for similar reasons by the Deputy Commissioner. The Deputy Commissioner, thereforee, held the company in default within the meaning of section 192 of the Income Tax Act with deliberate intention and levied a penalty of Rs. 1,76,99,112 for the financial years 1989-90 to 1994-95 being equal to the amount of tax which the tax deductor had failed to deduct.

3.8. The company challenged the penalty so levied both in respect of Anpara Thermal Power Project office and liaison office before the Commissioner (Appeals). The Commissioner (Appeals) disposed of all the appeals preferred for the financial years 1989-90 to 1994-95 by his consolidated order dt. 25th October 1997. Not satisfied with the Explanationn offered, the Commissioner (Appeals) confirmed the penalties levied under section 271C in the cases of project office as well as the liaison office for the financial years 1989-90 to 199495 with the following observations :

'37. I have considered the facts and circumstances and the submissions of the authorised representative and views of the department in respect of these 12 appeals. The main contention of the appellant's authorised representative is that the appellant is not liable to deduct tax at source from the payment of that part of salary which is paid overseas to its expatriate employees deputed to India, though, admittedly such salary is taxable in India, on the ground that jurisdiction of the Income Tax Act does not extend beyond India to foreign countries. It is, however, to be noted that this may be true in a case where the employer foreign company has no presence in India. However, in the appellant's case it has a presence in India by way of its liaison office as well as its project office.

The appellant company is operating in India through these offices, part of the salary is being paid to its expatriate employees in India and tax is being deducted thereon. As regards the balance salary paid overseas, the appellant did not deduct tax at source on the same nor was it disclosed in the return of TDS of the local office, nor have the employee disclosed the same in their return. The appellant also did not bother to seek a clarification from CBDT as to its liability despite a well advertised voluntary disclosure scheme announced by the CBDT for foreign companies operating in India who as employers, had defaulted in deducting tax at source as required under section 192 on salaries and allowances paid overseas or perquisites provided abroad, to their employees for services rendered in India. The scheme was as per Circular No. 685 of 20-6-1994 and gave immunity from penalty under ss. 271 and 271C and prosecution under section 276B. The scheme was announced in the newspapers on 17th June, 1994, and July 1994. The scheme was initially valid upon 31-7-1994, and later extended up to 28-2-1995, as advertised again on 25-2-1995. Such action on the part of a multinational company well advised by its counsel in India and overseas thereforee, speaks for itself. As appellant company has a presence in India, it had to disclose full payments made to its employees in India and employees deputed to India whether such payments are made in India to them or overseas and also deduct tax thereon and arrange to deposit the same into the Government account as stipulated in the Act. This has not been done. In fact, there was even denials by the appellant company of any such payments overseas having been made and it was only the consistent follow-up by the Assistant Commissioner that the appellant company came out with the details of payments overseas to its expatriate employees deputed to India. Thereafter by his letters dt. 9-2-1996 addressed to Anpara 'B' Thermal Power Project office as well as liaison office, Assistant Commissioner intimated to appellant that tax was required to be deducted at source on overseas payments to expatriates and the appellant was also required to make up the shortfall by 15th Feb., 1996. The authorised representative referred to DTAA between India and Japan but could not specifically show that any action of the Assistant Commissioner or Deputy Commissioner was in conflict with the DTA agreement. There is no merit in the contention that the Assistant Commissioner is required to pass an order under section 201 before a penalty under section 271C can be levied as once there is a failure to deduct tax or any part of the tax as required to be deducted by or under the provisions of Chapter XVII-B, the liability to penalty arises unless such failure is proved to be for a reasonable cause as required under section 273B of the Income Tax Act. It may be stated that the appellant could have availed of the voluntary disclosure scheme also for foreign employers but the appellant neither availed of the benefit of declaration under the scheme nor did it seek any clarification despite announcement of the scheme, nor did it disclose particulars of salary paid overseas in its return of TDS. For so many years, the appellant has not been able to prove a reasonable cause for its failure as required under section 273 of the Income Tax Act.

In this view of the matter, all the 12 penalties imposed are confirmed and all the 12 appeals are dismissed.'

4. The assessees involved are now in appeal before us against the above finding given by the Commissioner (Appeals) confirming the penalties levied under section 271C of the Income Tax Act. The learned counsel representing the tax deductors Shri M. S. Syali reiterated the submissions made before the lower authorities and has submitted further that the business activities of Mitsui & Co. Ltd. comprised of besides imports and exports of goods, provision of technical know-how and technical services in setting up industrial plants, construction of infrastructural facilities incidental to trading activities. The company was granted permission by the Reserve Bank of India under the Foreign Exchange Regulation Act to set up a liaison office allowing to undertake only liaison work and not any activity of trading, commercial or industrial nature without a separate permission from the Reserve Bank of India. The liaison office was not to earn any income in India rather its entire expenses were to be incurred out of the remittances received from abroad through normal banking channels. On receiving permission from Reserve Bank of India, the company entered into a contract with U.P. State Electricity Board for setting up and commissioning of two 500 MW thermal power plants at Anpara in U.P. in consonance with the principle that each venture of the company is to be taken as a separate business venture for which separate accounting is to be done. The Anpara Project was treated as an independent and separate activity. Intra venture debits and credits were not permitted. Rather they constituted independent permanent establishments within the meaning of the said term under the double tax avoidance agreement between India and Japan. Thus, three entities are involved which were separate having separate controls in India and Japan i.e., Anpara Project office, liaison office in India and head office in Japan. Since ventures were manned by senior employees, the top boss in Tokyo, all decisions were either effectively taken and implemented from Japan or after having taken due approval from head office in Japan. For effective implementation of Anpara Project and manning the liaison office personnel were deputed from Japan which included technicians for Anpara Project for rendering services in India for the stipulated period depending upon the exigency of the situation. The technicians or the personnel in liaison office were paid salary and other perquisites in accordance with the terms of their contract as follows :

Income chargeable under the head 'salaries' rendered in India; and retention/ continuation pay in Japan.

4.1. As regards the payments made for service rendered in India tax was duly deducted at source and paid into India an treasury. All compliances to the Indian tax laws were made and separate tax account number (TAN) obtained. As regards the retention/continuation pay in Japan, since the technicians were being paid separately for services rendered in India the amount was advisedly not treated as taxable in India and apropos no tax was deducted at source there from as the provisions governing deduction of tax at source did not apply in such a situation as machinery provisions governing deduction of tax at source did not have any extra territorial operation. The amount was paid in Japan out of accruals which had no link whatsoever with the Indian venture.

The amount paid were also at no time debited to the accounts of the Indian ventures.

4.2. The learned counsel has further submitted that separate accounts were being maintained for each venture in India and that each constitutes a separate employer having obtained separate tax deduction account number and accepted by the department.

4.3. Mr. Syali has further submitted that section 271C inter alia, provides for penalty where there is failure on the part of a person to deduct the whole or any part of tax as required under the provisions of Chapter XVII-B. Notwithstanding the provisions of section 271C r/w section 273B which stipulate no penalty if a person proves that there was reasonable cause for failure to deduct tax at source. The section unlike the provisions of section 271(1)(c) does not contain any artificial deeming provisions. The only inroad created is the onus to show reasonable cause rests on the shoulders of the assessees. However, the discharge of the onus is by preponderance and when reasonable cause is pleaded its analysis should be within the settled precincts of law. Prima facie, thereforee, at the time when deduction was required to be made it is to be seen if there existed a reasonable cause. Latter events conducive or subservient may be looked into but otherwise subsequent events are irrelevant. Once a cause is pleaded as reasonable in terms of section 273B r/w section 271C it becomes the mandatory duty of the concerned officials to consider as to whether the onus placed on the assessed under section 273B has or has not been discharged. Where the officer levying the penalty does not advert to the cause pleaded nor comments thereupon a presumption arises that nothing wrong was found with the cause and accordingly penalty cannot be levied. Moreover, where the basis of default is erroneous or a wrong criteria is invoked to levy penalty, the decision being based upon a matter which on a true interpretation of construction of powers it had no right to do, becomes a jurisdictional error resulting in an illegality.

4.4. The learned counsel of the assessed had pointed out that the Deputy Commissioner has levied penalty mainly on the following allegations in respect of the project office:

'(a) When asked there were repeated denials by the power project of having paid any salary abroad.

(b) The investigation of Assistant Commissioner were sought to be thwarted/lack of cooperation.

(c) That incriminating documents were found evidencing undisclosed salary in the course of survey conducted under section 133A of 6-11-1995, on the office of Anpara Project.

(d) That the Anpara Project furnished details of payments made abroad. Penalty of Rs. 6,99,82,708 was imposed under section 271C on Anpara-B Thermal Power Project office for the financial years 1989-90 to 1994-95.

(e) The fact that the appellant had not been treated as an assessed in default contemporaneously is extraneous to the levy of penalty under section 271C.

4.5. While in the case of the liaison office, penalties were levied on the following allegations :

'(a) Payment of short tax deducted was made after being confronted-as investigation on Anpara was in progress.

(b) Payment of taxes were obtained after persistent efforts of the department.

(c) There were false denials by Anpara Power Project of not having paid.

(d) There was marked disinclination on part of Anpara Power Project to part with true and full particulars.

(e) The fact that no order has been passed under section 201 is not relevant.'

4.6. According to the learned counsel in both the orders, the reasonable cause pleaded that the non-deduction was because of the advice given to the appellant to the effect that TDS provisions did not apply and the amounts paid in Japan unconnected with Indian funds/amounts did not attract tax, was not adjudicated upon by the Deputy Commissioner Further, detailed submissions were made before the Commissioner (Appeals) pointing out factual and legal fallacies in the orders of the Deputy Commissioner and Commissioner (Appeals) repeated the factual inaccuracies in the orders of the Deputy Commissioner as per details below :

'(a) Although in a case where a foreign employer has no presence in India, the machinery provisions for deduction of tax at source may not apply, but, because in this case the employer had a presence by way of its liaison office and power project, the plea that section 192 has no extra-territorial operation, was not acceptable.

(b) The amounts claimed as not liable to tax in India were not shown in the returns of TDS of the local office nor have the employees disclosed the same in their returns.

(c) The appellant did not bother to seek a clarification from CBDT as to its liability despite a well advised Voluntary Disclosure Scheme which prevailed from 7-6-1994 up to 28-2-1995, the appellant could have availed the Voluntary Disclosure Scheme.

(d) There were denials by the appellant of having made such payments. It was only because of consistent follow-up by the department that the appellant came out with details.

(e) The fact that no order had been passed under section 201 treating the appellant to be an assessed in default had no nexus to levy of penalty under section 271C.

(f) The appellant has not been able to prove a reasonable cause for its failure. But for stating this in one sentence, no discussion is there on the reasonable cause pleaded before him and so recorded as an argument.'

4.7. The learned counsel has, thereforee, submitted that the orders passed by the Deputy Commissioner and the Commissioner (Appeals) contained, in principle, misstatement of facts upon which the imposition and upholding of penalty is based. The learned counsel has tried to put the facts straight by explaining the position as under :

Anpara project :

The Deputy Commissioner in the order has noted that penalty proceedings were initiated vide notice dt. 6th Jan., 1997. It is wrong because notice dt. 6-1-1997, has been issued by the Deputy Commissioner himself. The correct date of initiation is the date the Assistant Commissioner thought fit that proceedings under section 271C can be taken and forwarded the records to the Deputy Commissioner for action. Since penalty was to be levied by the Deputy Commissioner under provisions of section 271C(2) notice was issued by the Deputy Commissioner. Moreover, despite repeated efforts records were not made available by the lower authorities the appellant had not been provided either details on this aspect nor a copy of the order-sheet was given to rebut the allegations of compliance not being involuntary. The attitude of the lower authorities violated natural justice vitiating penalty levied.

(2) It is noted in the order that head office of the company is located at 5th floor, Le Meridian Hotel, Janpath, and site office is at Anpara near Varanasi. It is on record that Mitsui & Co. Ltd. as such does not have its head office in India. It rather maintains separate offices for its different projects with permission of the RBI. The office referred to is the head office of Anpara Power Project and not that of Mitsui & Co.

(3) It is also noted that Mitusi & Co. have not paid any salary or any income to the expatriates abroad. This is also incorrect because the denial was by Anpara Project office in reply to notice of Assistant Commissioner dt. 28-3-1995, and it was for and on behalf of Anpara only. This is also clear from later events which indicate beyond doubt that all the information had to be gathered from Japan for furnishing to the Assistant Commissioner.

(4) It is noted that Assistant Commissioner in his letter of 8th Aug. 1995, asked for further details and documentary evidence. It is important to note that the requirements of the letter dt. 8-8-1995, were not the same as requirements of earlier requisitions dt. 28th March, 1995. Although in reply to letter dt. 8-8-1995 (which was served on the assessed only on 17-8-1995, and for that reason nobody could attend on 16-8-1995) due response was made on 17-8-1995, and time taken for compliance. These facts have been purposely missed out by the Deputy Commissioner.

(5) It is noted that in the course of survey on 6-11-1995, incriminating documents evidencing undisclosed salary payments to expatriates were found and copies thereof were obtained. This is wrong because no such documents were found nor photocopies thereof obtained for the following reasons :

'(a) We have repeatedly asked the assessing officer to furnish copies of the said documents after passing of his order under section 271C. He has not been able to furnish any such documents.

(b) In our written submissions grievance has been made out before the Commissioner (Appeals) also at p. 53 of the paper book in which it is stated that the Deputy Commissioner did not confront the company with the facts stated in his order.

(c) Nowhere the Deputy Commissioner or the Assistant Commissioner have referred to this material or the contents thereof but for the sake of mention only.

(d) Last but not the least, the only documents found in the course of search have been the subject of specific enquiry by the then Assistant Commissioner. While recording the statement of the General Manager, specific questions were raised on those documents as is evident from p. 74B and 74C of the paper book (question No. 9 and question No. 13). Further in letter dt. 17-11-1995, again with reference to these documents, a query has been raised (refer p. 70C of the paper book). After reply thereto, no adverse inference was drawn and the amounts as shown voluntarily by the appellant were accepted as depicting the amounts paid in Japan and the short deduction of tax.'

(6) It is again mentioned that it was only after the survey that the general manager of Anpara Project office attended to summons under section 131. This is belied from preceding paragraphs wherein it is mentioned that summons were issued under the covering letter dt. 27-10-1995, for compliance on 9-11-1995, the appellant thereforee, was not pursuant to the survey but as required by the summons. Further, letter dt. 27-10-1995, was received only on 7-11-1995. It is again not correct to say that it was only after the confessional statement of the general manager that the company filed the letter on 13-11-1995, giving undertaking about the collection of necessary information.

4.9. Para 7 of the order showing aftermath of the recording of the statement gives an impression as if the appellant did not want to furnish the details. The contents of the letter referred to in the said paragraph thus belie the assertion looking to the correspondence the conclusion reached in para 9 of the order that the collection of short tax deducted was after detection is not correct. The Deputy Commissioner has confused the entire issue by comparing alleged voluntary compliance with existence of a reasonable cause. It had been consistent submission of the appellant that they were advised that :

the amount paid outside India was not taxable in India;

without prejudice the provisions governing deduction of tax at source did not apply.

4.10. These submissions were well submitted and have not been adversely commented upon by either the Deputy Commissioner or the CIT. The causes given are reasonable and its deemed acceptance vitiates penalty levied.

Liaison office

4.11. As regards the liaison office, only one notice was issued on 12th Dec., 1995, in response to which after taking due extension complete details were filed. Even the allegation of alleged initial denials does not survive. It has been alleged that when Mitsui Anpara knew that this amount was liable to tax why did not the general manager of liaison office made such a compliance for the liaison office as well. The reasons are manifold :

'(a) Even details for Anpara were under collection. Attention, thereforee, did not go to liaison office.

(b) Moreover, as has already been stated, the two are separate entities. Different sets of books of accounts are maintained and there is no intermingling of funds.

(c) By that time the appellant had not given up its argument of non-applicability of the provisions of Indian Income Tax Act to the facts under consideration.

Even as on date, as is evident from the written submissions, though taxes and interest have been paid, the same are stated to have been paid voluntarily without any legal obligation on it to do so.'

4.12. Despite, it is being pointed out that the Commissioner (Appeals) also unfortunately had fallen into the same error as the Deputy Commissioner.

4.13. The learned counsel referred to the correspondence from 28-3-1995 to 9-2-1996, between the tax deductor and the department and submitted that the same clearly establish that :

'(i) At no point of time department confronted any material by the fear of which the appellant came forward with disclosures.

(ii) No investigations other than that asking the appellant to hurry the furnishing of details were made. Rather, the appellant suo motu furnished all the details in a congenial and co-operative atmosphere which is evident from the exchange of letters and replies thereto.

(iii) Further, letter dt. 8-5-1995, was in response to query raised on Anpara Project. It was replied to by the Chief of Anpara Project obviously with reference to Anpara Project. That difference exists between Anpara Project Liaison office and the head office in Japan, even the department is alive to. Different letters are addressed to different branches and in the letter of 8th Aug., 1995, a specific query is raised as to whether any payment was made to the expatriates by Mitsui & Co. Japan, or its sister concerns. The penalty notices are separate.

(iv) Because there was total cooperation by the appellant the then Assistant Commissioner did not feel the need for passing any order under section 201 deeming the assessed to be in default. This is an acid pointer to the fact that at no point of time the Assistant Commissioner considered the assessed as non-cooperative and having an acceptable cause-Sequoia Construction Co. (P) Ltd. & Sons. v. P.P. Suri, : [1986]158ITR496(Delhi) , Detecon Indian Project Office v. Income Tax Officer & Ors. : [1994]210ITR260(Delhi) .

(v) The person, who, admitted having received certain amounts in Japan, namely, the general manager was the person who signed the letter of 8th May, 1995, denying Anpara Project having made any payment. One must give credence to Japanese English and also the fact that at the point of time the direct/relevant question was asked, lie did not hesitate in giving the true particulars.

Contemporarily this verifies the stand of the appellant. A post facto analysis cannot lead to any other conclusion.

It was voluntary-Sujatha Rubbers v. Income Tax Officer : [1992]194ITR355(AP) , Lawman v. CIT : [1988]174ITR465(Bom) , A.N. Sarvaria v. CWT : [1986]158ITR803(Delhi) , S.R. Jadav Desai v. Wealth Tax Officer & Anr. : [1980]121ITR531(KAR) .

(vi) There was time gap in furnishing details and agreeing to pay taxes as well thought out decision had to be taken on whether to litigate or buy peace.'

4.14. The learned counsel has further submitted that no reasons have been given as to why the reasonable cause pleaded and accorded has not been accepted. Submissions were placed on record in brief before the Deputy Commissioner and in detail before the Commissioner (Appeals). It was pleaded before them that the assessed was advised by its legal cell in Japan that tax was not deductible at source on payments in foreign currency made in Japan out of resources unconnected with the Indian ventures because they were not for rendering services in India although they animated from the employment contract. The provisions of deductions of tax at source did not have any extra-territorial operation, more so when the payment did not have any nexus to rendering of service in India. The learned counsel has further emphasised that existence of reasonable cause is not in issue. It is not accepted on merits. It is stated to be not reasonable within the meaning of section 273B. No reasons are forthcoming as to why the Commissioner (Appeals) so holds. In the absence of effective reasoning justifying this conclusion that stand of the appellant deserves acceptance. Both the issues of liability to deduct or taxability of such payments was not settled beyond doubt and the cause pleaded was bona fide and not devoid of merit.

4.15. The learned counsel has further submitted that section 192 requires an employer to estimate taxable salary. The estimate should be bona fide. So long as the estimate is bona fide, the provisions of section 192 cannot be said to have been violated and in support he placed reliance on 61 ITD 442 (Del-Trib). If in such circumstances there is no default vis-a-vis section 192, the question of penalty under section 271C does not arise.

4.16 The learned counsel has further argued that the cause was reasonable is supported by the following :

'(i) the fact that the amounts paid in Japan claimed as not taxable in India were duly submitted for consideration of the Japanese tax authorities. This fact is being stated on instructions pursuant to a query raised by the Hon'ble Court in the course of hearing.

(ii) in May 1989, the question of extra-territorial operation of the deeming provisions of section 9 was considered by the Hon'ble Supreme Court in the case of Electronics Corporation of India v. CIT (1989) 183 ITR 43 , wherein the Hon'ble Supreme Court was pleased to refer the matter to a larger Bench looking to the importance of the question. The issue has not been adjudicated upon to the knowledge of the appellant to date. Thus there is no finality to the issue as submitted by the department. The case law relied upon by the department viz : [1990]183ITR43(SC) , to submit otherwise thus looses significance.

(iii) that although by inserting an Explanationn in section 9(ii) of the Income Tax Act, 1961, with effect from 1st April, 1979 by the Finance Act, 1983, it is clarified and declared that the income which falls under the head 'salaries' payable for services rendered in India, shall be regarded as income earned in India, yet all kinds of payments arising under a contract of employment are not liable to tax in India. Despite the insertion of the Explanationn, in the case of G. Winpenny v. Income Tax Officer and in the case of N. Beaman v. Income Tax Officer , it is held (distinguishing the contra case laws on the subject some of which have been cited by the department viz. John Patterson & Co. (India) Ltd. v. Income Tax Officer & Ors. : [1959]36ITR449(Cal) , Income Tax Officer v. S.A. Hareford , Performing Right Society Ltd. & Anr. v. CIT (1976) 106 ITR 11 , Grindlays Bank Ltd. v. CIT : [1992]193ITR457(Cal) , British Airways v. CIT : [1992]193ITR439(Cal) , that amounts received which were not for services rendered in India were not liable to tax in India. The appellant was, as stated earlier, under a belief that the payments made abroad did not have adequate nexus to the rendering of services in India so as to make it taxable here. Thus even as regards taxation of receipts it is factual and the Explanationn inserted with effect from 1-4-1979 does not bring to tax all receipts de hors the facts.

The issues thus of section 9/192 having extra territorial operation or taxation in India of retention pay/continuation pay paid in Japan were not settled beyond dispute or beyond the pale of reasonable belief.

The department's stand that they were settled beyond reasonable doubt do not merit acceptance. M(sic) that the original belief that provisions of deduction of tax at source would have extra-territorial operation were duly supported by the decision of the Court of Appeal (equivalent to our High Court), a copy of which has been annexed with the paper book at pp. 75, 84. The Court in that case was directly concerned with this issue on interpretation of analogous provisions. In that case, the submission that 'anyone, whatever his nationality and wherever he may be, who makes a payment of income to a person assessable to income-tax under Schedule E (head 'Salary'), has a duty to deduct the income-tax' within the stipulated time and deposit the same was held to be an incorrect assertion (p. 78 PB). In this connection judgment delivered by Lawton L.J. and Brightman L.J. are of specific importance (P 78-84). thus the submission was duly supported by case law and did not merit on bona fides.

Although the decision of the Court of Appeal was later reversed by the House of Lords, its reversal did not affect the stand of the appellant, inasmuch as, their Lordships reversed the decision only as admittedly the amounts were liable to tax in the hands of the employees in U.K. whereas in the case of the appellant a stand was also being taken that the amounts paid were not liable to tax in India inasmuch as it was not for services rendered in India. In that case, taxation in U.K. was admitted (refer speech of Lord Scarman). Its taxability was' held to constitute sufficient nexus against the extra territorial argument. Since that was not the case vis-a-vis the appellant, its non-taxability made all the difference and took away the nexus because of which the House of Lords reversed the decision of the Court of Appeal. Thus, the appellant continued to have a reasonable belief based on legal advice that the amounts paid outside India were not liable to tax in India.

(v) Having acting on legal advice which was bona fide and which carried merit, it cannot be said that the appellant lacked reasonable cause in not deducting the tax at source (refer Concord of India Insurance Co. Ltd. v. Smt. Nirmala Devi & Ors. : [1979]118ITR507(SC) , CWT v. Ramnik Lal D. Mehta : [1982]136ITR729(Orissa) , Econ Furnances (P) Ltd. v. Assistant Commissioner ). In the ultimate conclusion, for a reasonable cause to exist it is irrelevant whether the stand taken by the appellant is ultimately acceptable in its entirety to the department. Even whether House of Lords reversed the decision of the Court of Appeal, they did so by a majority of 3 to 2. In other words, two learned law lords of the House of Lords uphold the decision of the Court of Appeal. The basis, thereforee, cannot be said to be absurd or lacking reasonableness so as to deprive the appellant the basis of its legal stand. '

4.17. The learned counsel has, thereforee, strongly pleaded that there did exist a reasonable cause for the short deduction of tax at source in view of the above position explained.

4.18. The learned counsel has further submitted that the lower authorities have applied irrelevant criteria in imposing and upholding the penalty under section 271C. The only criteria relevant for examining levy of penalty under section 271C is to ascertain from material on record whether or not at the time when the deduction of tax at source was to be made the appellant had a reasonable cause for not doing so (CIT v. Birla Cotton Spng. & Wvg. Mills Ltd. : [1986]157ITR516(Cal) . Sec. 271C provides for penalty for failure to deduct tax at source as required by or under section 192. The alleged default and Explanationn thereforee necessary should relate to the point of time when the tax was to be deducted. At a later point of time when proceedings are taken up the investigation whether there was a default, if any, to arrive at the amount which should have been deducted and paid in lack of cooperation or volition is neither determinative nor relevant to the levy of penalty. The learned counsel has further pointed out that both the Deputy Commissioner and the Commissioner (Appeals) have relied upon the alleged conduct of the appellant during these proceedings to draw a conclusion that penalty was to be levied and upheld. Thus, the authorities below have erred in applying a wrong, irrelevant and extraneous criteria to levy and uphold the penalty under section 271C. To introduce a concept of volition or cooperation in proceedings for investigation of tax which was to be but has not been deducted, will amount to rewriting the section on a basis akin to section 273A which provides for waiver of penalty imposed or imposable provided there is volition and cooperation on the part of the assessee. Such violation of the language of the section is unwarranted not permissible and outside the jurisdiction of the concerned authorities. Accordingly, a penalty based upon a wrong criteria not prescribed by statute has to be quashed. Moreover, for lack of cooperation/non-volition, separate penalty is envisaged in section 272A. No such action was proposed or taken by the Revenue.

4.19. The learned counsel has further submitted that according to the department means read need not be established-Gujarat Travancore Agency v. CIT : [1989]177ITR455(SC) and that conduct in the course of later proceedings is indicative of the existence or non-existence of the reasonable cause. The learned counsel submitted that as regards the establishment of means read the proposition is not disputed. However, the law only requires that a reasonable cause be shown by the assessee. When a reasonable cause is pleaded, the department cannot remain silent spectator. Its adjudication and acceptance or rejection on cogent grounds is required to be made essentiallyCWT v. Jagadish Prasad Choudhary : [1995]211ITR472(Patna) .

4.20. As regards the conduct and reasonable cause, the learned counsel further submitted that it was an effort to justify a basis which did not weigh with the lower authorities while levying and upholding the penalty. The lower authorities have not relied upon non-cooperation or alleged lack of volition to hold that there is no reasonable cause. The alleged lack of cooperation and volition by themselves have been held to constitute a ground for penalty. Moreover, this stand is incorrect inasmuch as existence of reasonable cause has never been pointed out by the authorities below. That the appellant acted on legal advice is not in doubt and cannot be negated by later non-cooperation or lack of volition. The existence of a reasonable cause and reaction to latter proceedings are two distinct and unconnected events which do not dove-tail into one another and nor are determinative of the existence or non-existence of the other. Without prejudice and in the alternative, the learned counsel pleaded that even if volition and cooperation be deemed to be a relevant criteria there was complete cooperation and volition in the proceedings for investigation of default, if any, and the payment of dues to the department. This is evident from the following :

(a) No denial

It is factually incorrect to allege that there were denials by the appellant in the initial stages of investigation during which questions were raised as regards payments made abroad. It has to be appreciated that the first questionnaire dt. 28th March, 1995, was addressed, to the person in charge (managing director) Mitsui & Co. Anpara Project (department's paper book, p. 1)). They were asked to furnish details of all allowances, payments, reimbursements, perquisites paid to 'your employees' (para 3, p. 1 of paper book of department). At that stage, the department was even unsure of the status of Anpara Project.

Question No. 1 in that letter seeks the date of incorporation of Mitsui & Co. Ltd. in India, further, it was also being asked (para 2) as to whether any TDS returns under section 206 of the Income Tax Act were being filed, and, if yes, where

The questionnaire, to submit the least, was a general questionnaire addressed to Anpara Project seeking details of personnel, having no experience of finance/tax matters entrusted with disbursement of specific amounts to the expatriates employed in India, duly furnished details vide reply dt. 8th May, 1995. It was stated that Anpara Power Project is only a venture of the main company incorporated under the laws of Japan. It was also indicated that returns were being filed with the Income Tax Officer/TDS 22(5), New Delhi. Vide the same letter the perquisites, allowances, payments being made by Anpara were duly furnished. It was also clarified that besides these payments no other payments were made by Anpara. It is important to note that the initial letter dt. 28-3-1995 has been issued by Shri S.M.J. Abidi, whose designation, as indicated, in Assistant Commissioner, TDS Circle 22(1), New Delhi. The reply of 8th May, 1995 (department paper book P 4 and assessed paper book pp. 1-2) is also addressed to the Assistant Commissioner, TDS Circle 22(1), New Delhi, whereas the returns were being filed with the TDS Officer, Circle 22(5), New Delhi.

Thus TDS Officer, Circle 22(1), was obviously not aware of the affairs of the company at that stage and thus there was no question of any allegation at that stage, nor, detection or any confrontation with facts known to or established by the department. The proceedings were being taken by a TDS Officer different than the TDS Officer before whom the various compliance were being made.

The understanding of the appellant that details from Anpara only were being sought (letter of 28-3-1995) is also clear from a letter issued directly by consultants of the appellant to the same officer dt. 12th June, 1995 (p. 3 of the paper book), wherein vide para. 3 it was confirmed 'the project office has not made any other payment to non-residents'. There is thus no denial vide either reply of 8-5-1995 (pp. 1-2 of the paper book), nor by the reply of the Chartered Accountants dt. 12th June, 1995.

Further, Realizing that the wording of the requisition dt. 28-3-1995, may be not up to the mark, a pin-pointed specific second letter was issued to Anpara Project dt. 8-8-1995, wherein, for the first time, vide para 2 thereof a direct question was raised seeking confirmation whether the expatriates have been paid any amount abroad by Mitsui & Co. Ltd., Japan or any of its sister concerns.

The said letter fixing the date for compliance for 16th Aug., 1995, was actually received by the appellant on 17th Aug., 1995. However, in response thereto the assessing officer was requested to extend the deadline for response as most of the employees had left India and that information was being collected. The request for extension was accepted. Even as per the department's stand the denial is alleged only with reference to the two replies dt. 8-5-1995, written by general manager of Anpara and dt. 12-6-1995, written suo motu by the Chartered Accountants of the appellant. No other denial is alleged. In the context of the above facts, it will be appreciated that there was no denial, rather, the moment the question was raised and comprehended, time was only sought to furnish details, there being no denial, thereforee, levy of penalty on this premise is factually not sustainable.

(b)(c) Summons, survey or later events do not show non-cooperation/lack of volition

While the details were in the process of being collected, the TDS officer issued summons dt. 27-10- 1995 to 16 expatriates, seeking their attendance on 9-11-1995. The notices are attached in the department's paper book at pp. 33 to 48. Before the said compliance could be made on 6-11-1995, i.e., three days prior to the day fixed for compliance, a survey was conducted on the premises of the appellant in which, contrary to the assertion of the department, no incriminating documents were found. It is explained at length in the written propositions filed in the Court that

(i) Deputy Commissioner and the Commissioner (Appeals) merely referred to some documents found in the course of survey but did not give any details thereof while levying and upholding penalty.

(ii) The appellant time and again requested for furnishing the said documents but to no avail. The grievance has been made before the Commissioner (Appeals) as well in its written submissions.

(iii) Some letters written in Japanese are now sought to be furnished before the Hon'ble Tribunal for the first time.

(a) Validity of any order is to be judged in the context of the material on which the order is passed and not on the basis of the material which did not exist or was not within the knowledge of the authority which took the decision, and

(b) That it is additional evidence not the basis of the penalty and not on record of the Commissioner (Appeals).

Despite categoric assertion in the course of hearing as to when the said letters have been translated into English, no reply is forthcoming from the department, because, the fact of the matter is that the said letters have only now been translated and that too in a slipshod manner only to impute motive and unwarranted mala fide to the appellant. The contents of the letter are not what is purported to be (correct translation having been placed on record and again attached hereto as Annexure D) and their having only now in the course of proceedings before the Tribunal been translated, reliance thereupon cannot be made.

(c) Without prejudice, the letters do not indicate any lack of bona fide or non-existence of reasonable cause. The correct translation supports the stand that at the time VDS was in vogue, its applicability to the assessed amongst others was itself being doubted. The objective was that if at all the view is to prevail it should only be for future avoiding penalty, if any.

(d) Further whatever documents were found in the course of survey, were subjected to specific questioning. The general manager, Anpara Project office who had attended the office of assessing officer gone in response to the summons dt. 27th Oct., 1995, was asked the questions and his reply having been found satisfactory no adverse inference were drawn. The statement of the general manager is at pp. 74A to 74C and the documents taken in the course of survey figure in question No. 13 at p. 74C as also in subsequent letters dt. 17-11-1995, at p. 70C and reply thereto at pp. 70D-70E, dt. 5th Dec., 1995. Thus, the allegation that penalty was warranted because of documents found in the course of survey is also factually incorrect.

(iv) When the general manager of Anpara Project attended in response to the notice issued under section 131, without any hesitation or beating around the bush, reply was given as regards the amount received by him abroad in Japan. From a perusal of the questions No. 3 and 4, it is evident that there cannot be any factual allegation of non- cooperation. No questions have been avoided, no vague answers are given. There is absolutely no effort to mislead the officer concerned. Further, in response to the notice issued to other expatriates, vide letter of 10-11-1995, it was duly placed on record that out of the sixteen persons called, only 3 persons are present in India. Out of those three, the general manager of Anpara's statement has already been recorded, and, the other two are working at project site in U.P. If the learned officer so requires, those persons can also be summoned for deposition. The department did not feel fit to make any further investigation.

(v) Thus, the argument of the department that later events indicate non-cooperation, lack of volition or denials or detection are factually incorrect. Besides correspondence attached in paper book evidencing due compliance and co-operation, the acid test which supports the submission of the appellant is that contemporaneously the appellant has not been found to be an assessed in default, if there was any non- cooperation, or side tracking, or lack of volition to either come forth or to pay the taxes/interest, the department would certainly have treated the assessed to be in default with reference to the tax/interest and also initiated action under section 221 for this matter. If the submission of the department that volition, cooperation indicated existence of the reasonable cause is accepted to be correct, without prejudice then, even these factors are proven as a default is not made out under section 201 or section 221.

Passing of an order, or taking action under section 201 or section 221 may not be, strictly speaking, a condition preceding to levy of penalty under section 271C but, it certainly, beyond doubt, indicate that there was no lack of cooperation or absence of volition on the part of the appellant. If there was any non-cooperation/lack of volition vis-a-vis tax, action under section 201 was imminent. No such action testifies cooperation and volition.

(vi) Where an assessed is deemed to be in default, but, the action is not upheld by the appellate authorities, prosecution under section 276B does not lie. This is because section 201 which treats the assessed to be in default envisages a milder default of an assessed who 'does not deduct tax' as required by the provisions of section 192. On the other hand, section 271C penalises a person 'who fails to deduct' such tax. Default envisaged by section 271C also uses identical terminology and stands on the same pedestal as prosecution. The dictum thereforee that where no action is taken when a person 'does not deduct' tax (under section 201) there cannot be any imputation of 'failure' to deduct tax at source (s. 271C) holds good here as well (Sequoia Construction Co. (P) Ltd. & Sons v. P.P. Suri, Income Tax Officer : [1986]158ITR496(Delhi) .

Prior to insertion of section 271C by Direct Tax Laws (Amendment) Act, 1987, with effect from 1-4-1989, failure to deduct or pay tax constituted an offence under provisions of section 276B of the Act. Sec. 276B as it then stood, applied both in cases of 'failure to deduct' or 'after deducting failure to pay' to the credit of the Central Government. After insertion of section 271C, 'failure to deduct' is not prosecutable but liable to penalty, however, the language of the two sections i.e. erstwhile 276B and 271C is pari materia. Both section 271C as well as 276B apply to cases where there is 'failure' on the part of a person to do the needful. In both cases, because of ss. 273B and 278E the person to be penalised or the person being prosecuted have to prove that he had a reasonable cause or no such mental state with respect to the charged offence, respectively. thereforee, cases considered by various Courts holding that a person cannot be prosecuted if he is not an assessed in default under section 201 apply with equal vigour and force to cases where there is no action taken under section 201 and default is imputed under section 271C.

(d) It is wrong to allege that the appellant did not seek advice from CBDT although there is no such procedure which can be availed as of right. Rather when taxes and interest were paid, due deliberations as to its legal position were had with CBDT. Rather on advice of CBDT, that, if taxes and interest are paid, there will not be any penalty, instigated the appellant to accept the view of the department. Since section 119 does not permit individual instructions, no specific instructions were issued and that is why despite an assurance to the contrary penalty is being levied. The fact that CBDT was approached is evident from reply to penalty notice dt. 25th July, 1997, at pp. 16-18 of paper book. In para 3 these facts are noted and copy of letter is duly marked to Chairman, CBDT and the Chief Commissioner.'

4.21. The learned counsel has further argued that the penalty order passed has violated the rules of natural justice. He has pointed out that throughout the proceedings before the lower authorities the assessed had made a grievance that it has not been afforded a proper and reasonable opportunity of being heard inasmuch as the material upon which the penalty order is passed has not been given to it. The documents found in the course of survey which has been relied upon to levy/uphold the penalty have at no stage been confronted to the appellant. Further, to substantiate that there is no lack of cooperation/volition copy of order-sheet for the proceedings before the TDS Officer 22(1) was sought. The inspection sought has been denied and it is on that account that the assessed went into a writ before the Hon'ble Delhi High Court. Where rules of natural justice are violated in penalty proceedings the penalty order is bad in law and has to be quashed. Reliance was placed on 11 SCC 276; CIT v. Eminent Enterprises : [1993]201ITR766(Ker) , CIT v. Rameshwar Das Ram Narain : [1977]107ITR710(All) .

4.22. The learned counsel argued further that a clue may be taken from provisions of section 251 of the Income Tax Act which empowers the Commissioner (Appeals) to set aside the cases of assessment but in the case of penalty he can only quash or uphold the order. Since the subject-matter of appeal before the Tribunal is the correctness of the order of the Commissioner (Appeals), natural justice having been violated the order deserves to be quashed. The learned counsel has also pointed out that the Hon'ble Delhi High Court in its order dt. 23-11-1998, on the writ filed has held that the action of the lower authorities was improper. Thus, in view of the admitted position of having improperly denial of facts on record for having imposed the penalty in vacuum the violation of rules of natural justice is independent and annulment of the penalty order should follow.

4.23. The learned counsel has further submitted that as per the clarification given by the department the file was referred by the Assistant Commissioner to the Deputy Commissioner for penalty under section 271C on 4th April, 1996. Be that so, the culmination of penalty proceedings has necessarily to be within six months from the end of month of reference under section 275 of the Income Tax Act. Penalty orders are dated July, 1997, whereas they could have been passed by October, 1996, at the latest. The penalty levied has thus been barred by limitation.

4.24. The learned counsel in the conclusion pleaded that looking to the submissions made the penalty levied is neither justified nor valid and the same deserves to be cancelled.

5. Shri B. B. Ahuja, Senior Advocate, represented the Revenue and advanced extensive arguments in support of the penalty levied. He has also filed the synopsis of his agreements. The learned departmental Representative has pointed out that the following three issues mainly arise for consideration by the Tribunal in these appeals :

'(1) Whether a part of the salaries paid to the expatriate employees in Japan (in addition to the salaries paid in India) which is admittedly paid for the work done by them for Anpara-B Project and the liaison office in India are taxable under the Indian Income Tax Act, 1961

(2) If the amount of salaries so paid are taxable under the Indian Income Tax Act, whether the provisions of Chapter XVII-B (s. 192) relating to deduction of tax at source from the salaries paid are applicable to the salaries paid by the appellant to expatriate employees abroad for work done in India

(3) Whether the appellant has been able to prove that there was a reasonable cause for its failure to deduct tax at source in respect of amount of salaries paid to the expatriate employees abroad?'

5.1. The learned departmental Representative has submitted that it is clear from the admitted facts on records that the appellant had paid a part of the salaries for services rendered in India relating to its Anpara Project and liaison office in Japan to its expatriate employees and not deducted tax at source as per provisions of section 192 of the Act. It is the case of the appellant that provisions of Chapter XVII-B relating to deduction of tax at source are not applicable to the salaries paid outside India for work/service rendered in India. This view is contrary to the statute. Section 9(1)(ii), Explanationn, provides that income chargeable under the head 'Salaries', if it is earned in India, shall be deemed to accrue or arise in India. This Explanationn was inserted by the Finance Act, 1983, with effect from 1st April, 1979, for removal of doubts. After the insertion of Explanationn to section 9(1)(ii) there could be no doubt or dispute in this regard. The need to insert the above Explanationn arose because of judgment of the Hon'ble Gujarat High Court in CIT v. S. G. Pgnatale : [1980]124ITR391(Guj) wherein it was held that the amount received outside India as retention remuneration by employees of the French company which had entered into an agreement with an Indian company for rendering certain services in Europe and in India was not assessable in India under section 9(1)(ii) as salary earned in India. This judgment is dt. 25-2-1980, and Explanationn to section 9(1)(ii) was added thereafter by Finance Act, 1983. If the salary is paid to expatriate employees outside India are taxable in India as admitted by the appellant the provisions of section 192 which provide for deduction of tax at source in respect of income chargeable to tax under section 4(1) r/w section 5 will squarely apply to such salaries. The learned counsel placed reliance upon the following judgments in support of its contention that salaries paid outside India to non-residents in respect of the work rendered in India has to be held to be taxable and there is an absolute liability to deduct tax in respect of the payment of income chargeable under the head 'Salaries' on the part of the persons responsible for making payments : [1959]36ITR449(Cal) , judgment dt. 23rd April, 1959 (supra),. , judgment dt. 28-7-1984 (supra), : [1977]106ITR11(SC) , judgment dt. 10-8-1976 (supra); (1987) 20 ITD 76 (DelHI), judgment dt. 8-10-1976 (supra); (1992 ) 193 ITR 459 , judgment dt. 5th September 1989 (supra); (1989) 183 ITR 43 , judgment dt. 2nd May, 1989 (supra).

5.2. The learned departmental Representative in view of the judgments cited submitted that there could not be any dispute that provisions of section 192 of Chapter XVII-B are applicable to the salaries paid to expatriate employees outside India for services rendered in India and the appellant having failed to deduct tax at source from such salaries so rendered it is liable to penalties and prosecution provided under the Income Tax Act for such failure.

5.3. The learned departmental Representative has further pointed out that the appellant has relied upon two decisions of the Delhi Tribunal i.e. G. Winpenny v. Income Tax Officer and N. Beaman v. Income Tax Officer in support of its contention that the taxability of the salaries paid outside India to expatriate employees for services rendered in India was debatable. According to the learned departmental Representative in the case of (supra), the scope of total income under section 5(2) in the case of foreign technicians deputed by their employer to work on rigs situated off Indian coasts pursuant to a contract with ONGC came up for consideration. In respect of salary paid to the employees for off period (when they were off the rigs and physically present outside India), which was paid outside India, the Tribunal analysed the contract of employment in detail and came to a finding of fact that the services continued not in India but abroad subject to the discretion of the head office of the appellant company whereas in the case of Grindlays Bank Employees (supra) it was a case of leave from official duty altogether. This is how the Tribunal distinguished the decision of Calcutta High Court in the case of Grindlays Bank (supra) on the basis of the terms of employment of the employees.

5.4. The other case reported in (supra) was also concerned with foreign technicians employed by the same company for maintenance and operation of offshore rigs under a contract between the foreign company and the ONGC and the employees under their contract of employment were entitled to 28 days off for every 28 days of duty on rigs but they were liable to make themselves available to foreign company for training and services anywhere in the world during off period. The employees physically remained outside India during off period and the salary for that period was paid outside India. The Tribunal analysed the terms of service contract between the employees and their employer and came to a factual finding that the employees were not paid 28 days of salary for lay off period because of their services rendered in India for 28 days. The Tribunal also held that in the case of Grindlays Bank (supra), the employees were entitled to proceed on furlough for completion of specific period of service in India. While on furlough they were entitled to furlough pay payable outside India whereas in the case cited the technicians were bound to go anywhere they got posted throughout the world wherever the company had got offshore contract even during the off period of 28 days whereas no such right was given to Grindlays Bank employees when they were on furlough. The learned counsel has, thereforee, submitted that in the affricated two cases the Tribunal came to the conclusion that their cases were distinguishable on facts from the cases of Grindlays Bank.

5.5. The learned departmental Representative has pointed out that in the present case the contract of employment of expatriate employees has not been placed on record despite repeated requests/requisitions by the Assistant Commissioner and thereforee, adverse inference arises under section 114 of the Finance Act (sic). That apart, it is not the case of the appellant that a part of the salaries paid to expatriate employees was anything other than salary for services rendered for the project in India. He also pointed out that the general manager of project office in the statement recorded on 9-11-1995, admitted that while working for the Indian project in India he was getting Rs. 25,000 per month in India and for the same period he was additionally getting a salary of 3 lacs Yen per month in Japan. This clearly shows that expatriate employees of the appellant were paid salaries outside India in respect of the work in India and not for any off period under any contract of employment as was the case in the two cases cited supra.

5.6. The learned departmental Representative further invited our attention to the decision of the Hon'ble Supreme Court (1989) 183 ITR 43 (supra) which has clinched the issue in so far as the applicability of Chapter XVII-B relating to deduction of tax at source from salary arising or accruing to non-residents under section 5(2) r/w section 9(1)(ii) is concerned.

5.7. The learned departmental Representative has further pointed out that the learned counsel for the appellant initially referred to the decision of Court of 'Appeal in U.K. in the case of Oceanic Contractors Inc.. (1982) Simons Tax Cases 66 wherein it was held that U.K. Parliament intended section 204 of U.K. Act which dealt with payee scheme workable and, thereforee, a foreign employer even if he were willing to deduct tax would find administrative difficulties in applying regulations and accordingly it may-not have intended section 204 to have worldwide operation. Accordingly, the Court of Appeal opined that it should be restricted to its territorial operation in U.K. This was the case of employees working in North Sea outside territorial waters of U.K. but within the area designated in the convention on high seas in 1958. The appeal was concerned with the employees who were paid income and worked for oceanic of derrick barges, etc. and other vessels in both the U.K. and Norvegains sectors of North Sea. It was held that the Continental Shelf Act, 1964, and Finance Act, 1973, contained a clear recognition of the fact that a designated area is not part of U.K. and in particulars. 38(6) of Finance Act, 1973, does not deem it so for income-tax purposes. It was finally held by the Court of Appeal that since Oceanic is not a resident and as no resident paying agent in respect of employees concerned and such employees did not perform duties in UK, thereforee, section 204 was not applicable and as such section 204 cannot have a worldwide application for Sch. 'E'. The Court of Appeal, however, did not consider the case of the foreign non-resident company which was making payments abroad to employees working in U.K. as according to the Court, the question did not arise.

5.8. It has been pointed out by the learned counsel of the appellant that the above decision has since been reversed by the House of Lords in the judgment dt. 16th Dec., 1982, in (1983) 1 All ER 133 . The House of Lords have held that emoluments earned in U.K. sector of North Sea ought to be treated as earned in U.K. for all purposes of income-tax including the collection of tax under payee scheme and the oceanic had sufficient tax persons in U.K. by virtue of its operations and address to justify the imposition of liability under section 204 and was subject to liability to deduct and account for payee tax under Sch. 'E'.

5.9. The learned departmental Representative has further pointed out that the cases decided by the English Court cannot be treated as binding precedent as statutory provisions are differently worded in U.K. Act as has been held by the Hon'ble Supreme Court in CIT v. A. Gajapathy Naidu : [1964]53ITR114(SC) . Even if the above decision has some persuasive value it is directly against the contention raised by the appellant that the provisions related to tax deduction at source are not applicable to the salaries paid to the expatriate employees abroad.

5.10. As regards the limitation the learned departmental Representative has submitted that provisions of section 271C are different from the provisions of section 271(1)(c) where the penalty proceedings have to be initiated during the course of assessment proceedings under section 271C. However, the proceedings were initiated by the Deputy Commissioner and the order was required to be passed within six months from the end of the month in which the proceedings were initiated by the Deputy Commissioner, The proceedings were initiated on 6th Jan., 1997, and the penalty orders were passed on 31st July,1997. The penalty order was within the period of six months from the end of the month in which action for imposition of penalty was initiated as required under section 275 of the Act. The question, thereforee, of the date on which the Assistant Commissioner made reference to the Deputy Commissioner as contended by the appellant is totally irrelevant. In fact, no reference was required. The statute itself being clear in this respect and no authority having been cited by the appellant, the plea that the penalty order is barred by limitation is misconceived and erroneous.

5.11. As regards the plea that penalty levied under section 271C should have preceded by action under section 201, the learned departmental Representative argued that the mere fact that no order was passed under section 201 will not in any manner affect the power of the Deputy Commissioner to initiate penalty proceedings for failure to deduct whole or any part of the tax as required by the provisions of Chapter XVII-B. The language of section 271C is clear. Action under section 271C is not dependent on any order which may or may not be passed under section 201. The liability to deduct tax is absolute and the levy of penalty for failure to do so is also made absolute by the legislature in this section itself, subject to the right of the person concerned under section 273B to prove that there was reasonable cause for its failure to deduct tax in which case only the penalty will not be levied. These provisions were made by the legislature to nullify the effect of some of the judgments like that in the case of CIT & Anr. v. Anwar Ali : [1970]76ITR696(SC) where the Hon'ble Supreme Court held that penalty proceedings are quasi-criminal proceedings and burden to prove the necessary ingredients lies upon the Revenue. It is to nullify the effect of such judgments that amendments were made to penalty and prosecution provisions for shifting the burden of proof on the assessee. The plea of the appellant that before a levy of penalty it is to be treated as an assessed in default is also misconceived and erroneous. The penalty under section 271C is livable on a person who fails to deduct tax at source which means the person responsible for making payment of salaries. It is not livable on an assessed but on a person who may or may not be an assessee. thereforee, the contention of the appellant in this behalf has no basis either in the statute or in any case law.

5.12. The learned departmental Representative has further advanced arguments on the question whether there was reasonable cause for not deducting the tax at source from the salary paid abroad as pleaded by the appellant. The learned departmental Representative submitted that plea of the assessed that it was under a bona fide impression that provisions of Chapter XVII-B relating to TDS were not applicable to amounts paid to Japan which plea was taken up to the stage of replies to the Deputy Commissioner in response to show cause notice is not supported by any material. According to the learned departmental Representative the plea taken is obviously misconceived and erroneous and is an afterthought. The law on the subject is very clear since after the insertion of Explanationn to section 9(1)(ii) by the Finance Act, 1983, after the judgment of the Hon'ble Gujarat High Court in : [1980]124ITR391(Guj) . There could, thereforee be no such bona fide impression. The matter has also been deliberated upon by the Hon'ble Calcutta High Court and has also been considered by the Honble Supreme Court in 1989. As early as in 1959 the Calcutta High Court ruled that any private agreement between an employer and employee will not alter or affect the liability of an employer to deduct tax at source which liability is an absolute liability. The plea taken before the Commissioner (Appeals) at the stage of arguments and before the Tribunal is that the appellant was advised that provisions relating to tax deducted at source was not applicable in respect of salaries paid to expatriate employees abroad for services rendered in India. No material whatsoever has been produced in this respect except oral assertions and one certificate filed during proceedings for stay before the Tribunal. The said certificate filed before the Tribunal for the first time is dt. 9th March, 1998, and it is signed by the Chief Representative of the company in India. There is no opinion filed of any legal counsel of the year 1989 or any later years before the question arose on an enquiry by the Assistant Commissioner. The appellant has eminent counsel in India as well as in Japan who could not be unaware of the amendment made by the Finance Act, 1983, in section 9(1)(ii).This plea is definitely an afterthought and ought to be rejected.

5.13. According to the learned departmental Representative the plea of bona fide belief also needs to be examined. He submitted that Form No. 24 of annual return of salaries was admittedly filed every year and it was verified to be correct. There was no note appended in any of the returns filed stating that in addition to the salaries shown in the return the appellant was paying to the expatriate employees abroad some amounts by way of salary for the work rendered in India which according to the appellant was not taxable and as such was not shown. It was only after the persistent enquiry of the Assistant Commissioner and survey operations conducted that the appellant came out with the facts regarding payment of salaries to expatriate employees abroad. Initially the appellant had flatly denied having made any such payments. In the survey operations conducted certain incriminating documents were found. According to these documents it is clear that the appellant was aware of the payment made to expatriate employees abroad in respect of services rendered in India and the short deduction of tax made to the tune of Rs. 72 million per year and was also aware of the Government Press Release asking the foreign companies to make payment of such short deductions before the specified dates to avoid penalty and prosecution. It is, however, seen from the documents that the appellant decided not to file any revised returns for the earlier years.

5.14. The learned departmental Representative has also pointed out that the general manager in the statement recorded admitted having received 3 lacs Yen per month in Japan in addition to salary of Rs. 25,000 per month in India. But when asked about details of other expatriate employees he showed ignorance. The information was only furnished by the appellant after consistent efforts made by the department and after the statement of the general manager. Thus, in the face of complete denial of the fact of payment abroad the question of any reasonable cause or bona fide does not arise. The reasonable cause has to be tested on the touchstone of bona fide. If the facts had been given by the assessed of his own accord and legal plea is only taken one * could go into the question of reasonable cause. But in the face of complete denial in the first instance the question of any reasonable cause on the part of the appellant is totally inconceivable. There is absolutely no suo motu information given and that the information had to be obtained by persistent efforts of the Assistant Commissioner.

5.15. The learned departmental Representative has referred to the decision of the Hon'ble Supreme Court in Concord of India Insurance Co. Ltd. v. Smt. Nirmala Devi & Ors. : [1979]118ITR507(SC) on which reliance is placed by the appellant. According to the learned departmental Representative the Hon'ble apex Court has clearly held that it is only if there are no laches on the part of the litigants and there is no taint of mala fide or any element of recklessness that a reasonable cause based on legal advice can be entertained. There is clearly lack of bona fide and an effort to conceal the facts. Reliance placed on the decision of the Hon'ble Delhi High Court in Sequoia Construction Co. (P) Ltd. & Ors. v. P.P. Suri, Income Tax Officer : [1986]158ITR496(Delhi) and Detecon Indian Project Office v. Income Tax Officer & Ors. : [1994]210ITR260(Delhi) is equally misplaced.

5.16. The learned departmental Representative further submitted that efforts of the appellant to state that the officers of the department had given any assurance for non-levy of penalty is totally misconceived and erroneous. No evidence has been placed on record in this respect. In fact, that admission made before the Commissioner (Appeals) is very clear. Further, despite notices and requisitions by the Assistant Commissioner to place letters of appointment of expatriate employees on record, the appellant failed to do so. The plea of legal opinion taken in arguments before the Commissioner (Appeals) is also not supported by any evidence. What has been pleaded before the Commissioner (Appeals) is that although the payments are liable to tax in India but since these were paid outside India out of funds in Japan these are not liable to deduction of tax at source.

5.17. The learned departmental Representative has further argued that the question of reasonable cause is only relevant if the facts are clearly and correctly given by the appellant. At the first instance, the appellant failed to do so. Rather, an effort has been made to conceal the facts and mislead the department. The term 'reasonable cause' has been interpreted by the Hon'ble Patna High Court recently in a Full Bench decision in AIR 1996 Pat FB 58 wherein the Court defined 'reasonable cause' as a cause which prevents a reasonable man of ordinary prudence acting under normal circumstances without negligence or inaction or want of bona fide from doing an act. thereforee, the moment it is found that there is lack of bona fide or inaction or negligence the question of reasonable cause will not arise.

5.18. The appellant did not comply despite the wide publicity given by the Government to the legal position in its circular issued in 1994 and of which also no advantage was taken. A reference has been invited to the judgment of the Hon'ble Supreme Court in (supra) where the Hon'ble Court dealing with penalty livable under section 271(1)(a) for late filing of return held that no means read is involved in the penalty proceedings and the department need not prove the means read before levy of penalty. Moreover, the department has not proved that existence of any reasonable cause for its failure to deduct tax at source out of salaries paid abroad to expatriate employees and thereforee the penalty has been rightly levied. The learned departmental Representative has also argued that an effort has been made by the learned counsel of the appellant to state that although there was a denial by the project office initially of having made any payment abroad there was no such denial by the liaison office and two being separate entities should not be equated. The learned departmental Representative has submitted that the appellant company with head office in Japan have two offices in the same building in India-one for Anpara project and the other for liaison office. The company has the same auditors, same legal counsel and it is inconceivable to comprehend that when details were being asked in respect of Anpara project of salaries being paid outside India the liaison office was not confronted or was not aware at all. Even to get details for liaison office notices were issued on 12-12-1995, and only thereafter on 31-1-1996, the details were given after taking time and no suo motu information was furnished.

5.19. As regards the contention of the appellant that subsequent events and acts cannot be taken into account while judging the existence of reasonable cause for non-deduction of tax at source, the learned departmental Representative has pointed out that the only thing according to the appellant that should be considered is the alleged understanding of legal position by the appellant in 1989. Such proposition is wholly misconceived. Apart from the fact that no evidence of such legal opinion has been filed and the legal position was clear right from 1983 when Finance Act, 1983, added Explanationn to section 9(1)(ii), subsequent events and acts of the appellant in this regard throw light on the intention of the appellant in respect of the acts done or omitted to be done earlier.

5.20. The learned departmental Representative finally concluded that the observation that on given facts the penalty levied is fully justified and valid and if the penalty provisions of section 271C are not held to be attracted in the present case then possibly these provisions cannot be applied in any other case at all and will practically become redundant.

5.21. While departing the learned departmental Representative also submitted that the appeals in question are to be decided on the basis of facts admitted/proved on record and the law applicable. Any oral assertion stated to be of facts made by the learned counsel during arguments with reference to any supportive material on record ought not to be taken into consideration.

6. The learned counsel of the appellant in the rejoinder submitted arguments extensively to repeal the pleadings of the learned departmental Representative made on various counts. He further made the following submissions :

(i) That the fact that the amounts paid in Japan claimed as not taxable in India were duly submitted for consideration of the Japanese tax authorities. This fact has been stated to meet the query raised by the Bench during the course of hearing. -

(ii) That in May 1989 the question of extra-territorial operation of the deeming provisions of section 9 was considered by the Hon'ble Supreme Court in the case of Electronics Corporation of India v. CIT, (supra) wherein the Hon'ble Court was pleased to refer the matter to a larger Bench looking, to the importance of the question. The issue has not been adjudicated upon till date as per the knowledge of the appellant. Thus, there is no finality to the issue.

(iii) That although by inserting an Explanationn in section 9(1)(ii) with effect from 1st April, 1979, by the Finance Act, 1983, it is clarified and declared that the income which falls under the head 'salaries' payable for services rendered in India shall be regarded as income earned in India, yet all kinds of payments arising under a contract of employment are not liable to tax in India despite the insertion of the Explanationn. In the case of G. Winpenny v. Income Tax Officer (supra) and N. Beaman v. Income Tax Officer (supra) it is held (distinguishing the contra case laws on the subject some of which have been cited by the department viz. : [1959]36ITR449(Cal) and (1992) 193 ITR 4 (sic) (supra) that amounts received which were not for services rendered in India were not liable to tax in India.

(iv) That the original belief that provisions of deduction of tax at source would have extra-territorial operations was duly supported by the decision of the Court of Appeal, equivalent to our High Court (cited supra), The stand taken is that the amounts paid were not liable to tax in India inasmuch as it was not for services rendered in India. Thus, the appellant continued to have a reasonable belief based on legal advice that the amounts paid outside India were not liable to tax in India. Having acted on legal advice which was bona fide and which carried merit it could not be said that the appellant lacked reasonable cause in not deducting the tax at source.

(v) That the acid test which support the appellant about the cooperation is that contemporaneously the appellant has not been found to be an assessor-in-default. If there was any non-cooperation the department would have certainly treated the assessed to be in default with reference to the short deduction tax and would have also initiated proceedings under section 221 of the Income Tax Act for recovery of the amount short deducted. If the stand of the Revenue about non-cooperation is accepted to be correct, without prejudice then these factors proved as a default is not made out under sections 201 or 221 of the Income Tax Act. Moreover, passing of an order under section 201 or section 221 may not be strictly speaking a condition precedent to levy of penalty under section 271C but it certainly indicates beyond doubt no lack of cooperation on the part of the appellant. If there was any non-cooperation, action under section 201 was eminent. Not taking any such action by the Revenue testifies cooperation and volition.

(vi) That where an assessed is deemed to be in default but action is not upheld by the appellate authorities action under section 276B does not lie. Reliance was placed on : [1986]158ITR496(Delhi)

(vii) That it is factually wrong to allege that the appellant did not seek advice from CBDT. Rather on advice of CBDT, that, if tax and interest are paid there will not be any penalty, instigated the appellant to accept the view of the department.

(viii) That the stand of the department is quite acceptable that the matter has to be decided only on the basis of facts admitted/proved on record. The department, however, itself referred to certain letters allegedly taken in the course of survey. These letters have, however, been referred to by the lower authorities but not confronted to the assessed in the course of proceedings.

Further, the CBDT had been approached and it was for this reason that it had intervened over the matter by way of writing a letter to the Deputy Commissioner in the course of penalty proceedings to drop proceedings. Despite specific assertion that a letter had been sent by the Chairman, CBDT, to the Deputy Commissioner, the department's counsel refused to show those records on the ground that the Bench had no jurisdiction to go into it.

(ix) That emphasis laid by the department in the entire written submissions is on the premise :

(a) that the assessed had admittedly denied payments in the beginning; and

(b) that the taxability of amounts paid in Japan and India was not in doubt.

Both these facts have been forcefully denied in the written submissions and the cases relied upon by the learned departmental Representative are distinguishable and that the plea of existence of a reasonable cause was not an afterthought.

(x) That the facts have been mischievously misconstrued by the Revenue so as to bring the assessed within default. It is too late in the day to submit that there is no reasonable cause as that was specifically pleaded before the lower authorities and not dealt with or improperly rejected. In fact, the lower authorities did not think it proper to examine at length whether a reasonable cause existed. They merely went by the alleged conduct at a much later point of time to hold that penalty is leviable. The cause having been pleaded the onus thereafter shifted to the Revenue. The onus not having been discharged by the Revenue no penalty was exigible. Rather than analysing the cause pleaded it is now being submitted by the department that no material is shown to exist in support. The existence of cause was never doubted. Criteria not relevant to the levy of penalty was invoked and when at the second appellate stage the approach was pointed out to be erroneous to hide their own error, lack of material is now being pleaded by the Revenue. The onus cast on the assessed of showing reasonable cause for not deducting tax at source has been duly discharged. Rather than being an afterthought it is a contemporaneous plea which deserves to be accepted and penalty levied be annulled.

7. We have carefully considered the facts, material available on records and the submissions made by the learned representatives of the assessed as well as the Revenue. We have also gone through the orders of the lower authorities and perused the various judgments cited. The undisputed facts are that Mitsui & Co. Ltd. is incorporated under the laws of Japan and its registered office/principal place of business is in Tokyo. The company was engaged in business activities comprising of import and export of goods, provision of know-how and technical services in setting up industrial plants, construction of infrastructure facilities incidental to trading activities. The company opened a liaison office in India with the permission of the Reserve Bank of India as required under the Foreign Exchange Regulation Act and it is located on 2nd Floor, i.e. Meridien, New Delhi. The company is, however, restrained in the liaison office from carrying on any activities of trading, commercial or industrial nature. The company deputed certain personnel to the liaison office to carry on its activities.

7.1. The company also set up a project office at 5th Floor, i.e., Meridien, New Delhi, for execution of contract for construction of two 500 MW thermal power plants at Anpara in U.P. with the prior approval of the Reserve Bank of India as required under Foreign Exchange Regulation Act. The company also deputed certain Japanese personnel to the project office for execution of the contract work.

7.2. Both the establishments namely, project office and liaison office were separate and independent of each other having different fields of their operation. Both the offices maintained separate books of account and also maintained separate bank accounts. Each office was headed by a general manager. The general managers acting as disbursing officers paid salaries to its employees as per the terms of their appointment in India. Both obtained tax deduction account number separately and they also filed annual returns in Form No. 24 to the Income Tax Officer, TDS Circle 22(5), New Delhi, giving details about the salary paid and tax deducted at source to the employees working in their offices.

7.3. The sequence of the events as borne out from the records are as under :

28-3-1995 : Assistant Commissioner, TDS Circle 22(1), New Delhi wrote to the general manager, Anpara project, treating him the principal officer of the company to furnish information among others on the following :

(3) The details of all allowances, payments, reimbursements, perquisites made to your employees during the financial years 1988-89 to 1993-94 employee-wise and year-wise whether treated as taxable or exempt

(4) The total amount received by each expatriates in India during financial years 1986-87 to 1993-94.

The letter issued was in terms of section 133(6) and the compliance was fixed for 14th April, 1995.

18-4-1995 : S.R. Bathboi & Co., Chartered Accountants sought extension for supply of the required details on behalf of the project office.

8th May, 1995 : The project office gave information among others as under :

'2. Mitsui is filing TDS returns as required by the Income Tax Act, 1961. The returns are being filed under the jurisdiction of the Income Tax Officer, TDS 22(5), New Delhi.

3. The employees have been provided with some or all of the following payments, allowances and perquisites :

(a)

Basic salary

Taxable

(b)

Spl. allowance

Taxable

(c)

Rent-free furnished accommodation

Taxable as per valuation rule.

(d)

Car for official and personal use

Taxable as per valuation rule

(e)

Security guards hired by the company

Taxable as per valuation rule

The employee-wise and year-wise details are enclosed herewith (Annexure B).

5. The company has not paid salary or free or allowances or perquisites or any other sort of income to the expatriates abroad during these financial years.

6. The names of the expatriates together with their passport number and period of service in India is enclosed an Annexure C.'

25-5-1995 Further details were asked for from the project office.

12-6-1995 S.R. Bathboi & Co., Chartered Accountants, intimated to the Assistant Commissioner, TDS Circle 22(1), among others 'other than payment of salaries the project office has not made any other payment to non-residents. '

8-8-1995 : The Assistant Commissioner, TDS Circle wrote to the general manager to furnish information among others on the following :

'Kindly confirm that the expatriates were not paid any amount abroad by M/s Mitsui & Co. Ltd., Japan or any of its sister concerns.'

The compliance was required on 16th Aug., 1995. Since the assessed received the letter on 17-8-1995, time was asked for as the details sought were to come from Japan.

27-10-1995 : Summons issued to 16 expatriate employees under section 131 of the Income Tax Act for compliance on 8-11-1995. The summons were received on 7-11-1995.

6-11-1995 : The office premises were surveyed by the Assistant Commissioner, TDS Circle 22(1), New Delhi, and certain documents were taken into possession.

9-11-1995 : General manager appeared in response to the summons issued and the statement was recorded. The general manager in his statement admitted that he was in charge of Anpara Project being seniormost. He deposed that before coming to India he was drawing 5 lacs Japanese Yen per month. Apart from salary and perquisite paid in India he had been receiving approximately 3 lacs Japanese Yen per month in Japan. As regards the payments received by other expatriates abroad, he replied that he had no idea. He also admitted that he received cash salary of Rs. 25,000 per month in India and also availed the perquisite of a house, furniture, car supplied by the company.

10-11-1995 : The Chartered Accountant informed the Assistant Commissioner that the details required about payments made abroad to expatriates have been called from the head office in Japan and the same will be furnished as soon as received. It was also intimated that out of 16 summons issued to expatriates only three out of them were working at present in India.

31-1-1996 : Complete details were furnished as required.

9-2- 1996 : The Assistant Commissioner sought details of short deduction of tax.

21st/29th March, 1996 : The company informed the Assistant Commissioner that a sum of Rs. 10,38,94,465 comprising of short deducted tax of Rs. 7,17,07,935 and interest thereon of Rs. 3,28,66,701 for the financial years 1989-90 to 1995-96 has been paid.

7.4. As regards the liaison office the Assistant Commissioner sought similar information vide his letter dt. 12-12-1995, for the financial years 1986-87 to 1995-96 and in its reply dt, 21-12-1995, the liaison office expressed its willingness to furnish the requisite details but sought time as the same was to be collected from head office in Japan. Finally the liaison office in its letter dt. 12th March, 1996, furnished complete information about the payments made to its expatriates abroad and the working of the amount of short deduction of tax. It was also intimated that a sum of Rs. 2,65,336 being the short deduction of tax and interest thereon has been *deposited on 28th Feb., 1996.

7.5. The Assistant Commissioner, TDS Circle 22(1), New Delhi referred the case records to the Deputy Commissioner on 4-4-1996, relating to both the offices for imposition of.penalty under section 271C of the Income Tax Act. On such reference the Deputy Commissioner initiated penalty proceedings under section 271C against the project office as well as the liaison office on 6-1-1997, for the financial years 1989-90 to 1994-95 and for the detailed reasons recorded, he levied the impugned penalty under section 271C in the cases of project office and liaison office in composite orders dt. 31st July, 1997, for the financial years 1989-90 to 1994-95. The Commissioner (Appeals) in the common appellate order passed on 21-10-1997, has upheld the penalty levied.

8. Before we go into the merits of the penalty levied, it would be advantageous to look at the relevant provisions relating to deduction of tax at source. We extract hereunder the relevant sections of the Income Tax Act :

192 (1) : 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 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 assessed under this head for that financial year.

201(1) : If any such person and in the cases referred to in section 194, the principal officer and the company of which he is the principal officer does not deduct or after deducting fails to pay the tax as required by or under this Act, he or it shll, without prejudice to any other consequences which he or it may incur, be deemed to be an assessor-in-default in respect of the tax :

201(1A) : Without prejudice to the provisions of sub-section (1), if any such person, principal officer or company as is referred to in that sub-section does not deduct or after deducting fails to pay the tax as required by or under this Act, he or it shall be liable to pay simple interest at fifteen per cent per annum on the amount of such tax from the date on which such tax was deductible to the date on which such tax is actually paid.

201(2) : Where the tax has not been paid as aforesaid after it is deducted, the amount of the tax together with the amount of simple interest thereon referred to in sub-section (1A) shall be a charge upon all the assets of the person, or the company, as the case may be, referred to in sub-section (1).

206(1) : The prescribed person in the case of every office of Government, the principal officer in the case of every company, the prescribed person in the case of every local authority or other public body or association, every private employer and every other person responsible for deducting tax under the foregoing provisions of this Chapter shall, within the prescribed time after the end of each financial year, prepare and deliver or cause to be delivered to the prescribed Income Tax Authority, such returns in such form and verified in such manner and setting forth such particulars as may be prescribed.

221(1) : When an assessed is in default or is deemed to be in default in making a payment of tax, he shah, in addition to the amount of the arrears and the amount of interest payable under sub-section (2) of section 220, be liable, by way of penalty, to pay such amount as the assessing officer may direct, and in the case of a continuing default, such further amount or amounts as the assessing officer may, from time to time, direct, so, however, that the total amount of penalty does not exceeds the amount of tax in arrears :

Provided that before levying any such penalty, the assessed shall be given a reasonable opportunity of being heard :

Provided further that where the assessed proves to the satisfaction of the assessing officer that the default was for good and sufficient reasons, no penalty shall be levied under this section.'

271C : (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 XVII-B; or

(b) pay the whole or any part of the tax as required by or under,

(i) sub-section (2) of section 115-Q; or

(ii) the second proviso to section 194B,

then such person shall be liable to pay by way of penalty, a sum equal to the amount of tax which such person faded to deduct or pay as aforesaid.

(2) Any penalty imposable under sub-section (1) shall be imposed by the Deputy Commissioner.

273B : Notwithstanding anything contained in the provisions of clause (b) of sub-section (1) of section 271, section 271A, section 271B, section 271BB, 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 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.

8.1 It is seen from the above provisions that section 192 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 on the estimated income of the assessed under this head for the financial year. Having deducted tax, the same is required to be paid to the Central Government's account within the periods specified under section 200 of the Income Tax Act. The tax deductor as per section 206 is required to furnish annual return in the prescribed Form No. 24 giving the requisite details within the period prescribed. If the person responsible fails to deduct tax at source he is deemed to be an assessor-in-default under section 201 and the department thereon could proceed to recover the amount due by way of following modes

Attachment of Bank a/c;

Attachment of income receivable/debts.

Attachment of immovable property and their auction through the TRO; to realise the tax amount.

Arrest of the person responsible by the TRO.

8.2. Failure to deduct tax at source also attract penalty under section 221 of the Income Tax Act unless the assessed proves to the satisfaction of the assessing officer that the default was for good and sufficient reasons. Besides, penalty under section 271C is also livable for such default if the assessed fails to prove that there was reasonable cause for the default for non-deduction of tax at source within the meaning of section 273B of the Income Tax Act. The person responsible is also liable to pay interest for the delayed payment of tax as per provisions of section 201(1A) of the Income Tax Act.

8.3. One of the main grounds taken by the Revenue for levy of penalty is that the assessee-company did not cooperate in furnishing information about the salary paid to expatriate employees in Japan and the short tax deduced was paid as a result of investigation and efforts made by the concerned Assistant Commissioner. The conduct of the assessed in this respect would be borne out from the following facts :

(a) That the general managers of project office and liaison office had been filing the annual returns with Assistant Commissioner, TDS Circle 22(5), New Delhi. However, the sequence of the events would show that the Assistant Commissioner, TDS Circle 22(1), New Delhi, wrote various letters to the general managers, project office as well as liaison office soliciting information and details about salary paid to expatriate employees in Japan and both the offices duly complied with all the terms of the queries made without challenging his jurisdiction to make such enquiries when apparently the jurisdiction lay with the Assistant Commissioner, TDS Circle 22(5), New Delhi; where they had been filing the annual returns regularly in Form No. 24 as per provisions of section 206 of the Income Tax Act.

(b) That the company had all along maintained during penalty proceedings that as per terms of employment of expatriate employees on deputation to India, part of their salary had been paid to them in Japan as retention/continuation pay and the provisions of Chapter XVII-B of the Income Tax Act did not apply to payment of salary in Japan. The assessee-company foregoing such claim worked out the short deduction of TDS on the salary paid to the expatriate employees in Japan and paid the same in the Government account totalling to more than Rs. 12 crore for the financial years 1989-90 to 1994-95. The payment of short deduction of tax as well as interest thereon for delayed payment could be to avoid long-term litigation looking to its trade interest in India. This speaks of volumes about the spirit of cooperation extended by the assessee-company to the department.

(c) That the concerned Assistant Commissioner took no action as per provisions of section 201 deeming the assessee-company in default for non-payment of amount of short deducted tax nor any proceedings were initiated for recovery of the said amount by means of any mode of recovery such as attachment of bank account, property, etc., of the assessee-company. Payment of amount of short deducted tax in respect of both the offices for the years under consideration along with interest, thereforee, without taking any coercive action by the department, could be only out of spirit of cooperation.

(d) That the department has not taken any action for charge of interest for the delay in payment of the amount of short tax deduction as per the provisions of section 201(1A) of the Income Tax Act and the assessee- company paid the interest amount along with the amount of short tax deduction suo motu.

(e) It so appears from the letter of assessee-company dt. 25-7-1997, addressed to the Deputy Commissioner in response to the show-cause notice issued under section 271C that the company during the process of supplying the requisite information and details of the payment of short tax deduction and interest thereon was given assurance by the officers of the CBDT and the Ministry of Finance, department of Revenue, that no penalty proceedings would be launched on its payment. A copy of this letter is endorsed to the Chairman, CBDT, and the Chief Commissioner, New Delhi. The assurance given by the department of the type mentioned might have prompted the assessee- company to make the payment of amount of short deducted tax and interest on such amount for delayed payment but that does not weaken the claim of the assessee- company that if fully cooperated for supply of requisite information about the salary paid in Japan to its expatriate employees and the amount of tax deductible there from and payment thereof in Government account along with interest thereon but rather in strengthens its claim.

8.4. Considering the above facts and sequence of events we see no merit in the arguments of the Revenue that the assessee-company did not extend necessary cooperation during investigation and in payment of amount of short tax deduction and interest thereon.

8.5. Another ground taken by the Revenue is that the assessee-company initially denied payment of any salary to its expatriate employees in Japan deliberately and it disclosed the same only when it was caught. In support, the Revenue has placed reliance on two letters, one given by the project office and another by its Chartered Accountants in response to the query made in that behalf.

8.6 We find that the Assistant Commissioner, TDS Circle 22(1), in his letter dt. 28-3-1995, addressed to the general manager, Anpara Project office, sought details of all allowances, payments, perquisites, etc., paid to the employee during the financial years 1988-89 to 1993-94 employee-wise and year-wise and whether treated the same as taxable or exempt and the total amount received by each expatriate in India during the financial year 1986-87 to 1993-94 and in reply to it the general manager, Anpara Project office, in his letter dt. 8th May, 1995, supplied the requisite information as extracted earlier. The general manager stated among others that the company has not paid salary or fees or allowance or perquisite or any other sort of income to the expatriate abroad during these financial years. Further, S. R. Bathboi & Co., as representative of general manager, project office, in its letter dt. 12-6-1995, addressed to the Assistant Commissioner, TDS Circle 22(1), further intimated that other than payments of salary, project office has not made any payment to non-residents. It is evident from above that the Assistant Commissioner asked for requisite information about the project office and the information supplied also related to the payments made by the project office to the expatriate employees. The project office denied having made any payment abroad to them as the project office had never made such payment abroad. Further, it is appears that the Assistant Commissioner Realizing the deficiency in his requisition dt. 28-3-1995, issued another letter of enquiry on 8-8-1995, wherein a direct question was raised seeking confirmation whether the expatriates have been paid any amount abroad by Mitsui & Co., Japan, or any of its sister concerns and in response to that the project office sought time for collecting necessary information from head office in Japan. Emphasis of the Revenue is that the assessee-company made the denial of such payment in Japan in their letter dt. 8-5-1995, and 12-6-1995, but looking to the pinpointed query subsequently made by the Assistant Commissioner in his letter dt. 8-8-1995, it appears that the query made in the department's letter dt. 28-3-1995, was not pinpointed or specific about the payment made by Mitsui & Co. in Japan to the expatriates deputed to India and it is for this reason that the Assistant Commissioner sought requisite information in the letter written subsequently on 8th Aug., 1995. Moreover, neither Mitsui & Co. as such nor the expatriates involved denied payment abroad and the information earlier given was in the context of Anpara Project and not head office of the company in Japan. It is, thereforee, evident from the queries made and the reply given that the said denial made was under misunderstanding of the intended purpose of the enquiry. There otherwise appears no mala fide denial particularly when the assessee-company had fully cooperated and complied to enquiry made and ultimate payment of amount of short tax deduction from the salary paid to expatriates in Japan. Moreover, such denial cannot be the basis for levy of penalty under section 271C and it is totally irrelevant insofar as the merits of the levy is concerned.

8.7. We find that the main plank of arguments of the learned departmental Representative is that the salaries paid to expatriate employees in Japan in addition to the salary paid in India for work done on Anpara Power Project and also for liaison office in India was taxable in light of the Explanationn to section 9(1)(ii) of the Income Tax Act and in support he has cited various decisions. He has also contended that provisions of Chapter XVII-B related to TDS applied to the salary paid in Japan. We find that though the assessee-company contended before the Deputy Commissioner as well as the Commissioner (Appeals) that apart from the salary paid in India the expatriates were paid retention/continuation pay to them in Japan and provisions of Chapter XVII-B did not apply to such payment made by the company in Japan, the Deputy Commissioner as well as the Commissioner (Appeals) have not discussed and considered the claim so made before them on merits and no finding in regard thereto * has been recorded by them. The learned departmental Representative has advanced extensive arguments on merits thereon. We, however, find that though according to the assessee-company, the amount paid in Japan was not salary but retention/continuation pay, and provisions of Chapter XVII-B did not apply thereto but the company to avoid litigation and to extend necessary cooperation to the Government of India looking to their long-term business interest in India did not pursue such legal claim and ultimately made the payment of the amount of short tax deduction and also interest thereon. In other words, *the assessee-company accepted the department's view as per the circular issued in 1994 and subjected itself to the Indian Income Tax Act in respect to the payment made in Japan to expatriate employees deputed to India. The issue thus raised by the learned departmental Representative in this behalf requires no finding at our level as at this stage it is only academic as the company has accepted the liability to deduct and pay tax on the salary paid in Japan to expatriates deputed in India.

8.8. The learned counsel of the assessee-company has challenged the validity of the penalty orders on the ground that the same were barred by limitation. We find that the file relating to the TDS was referred by the Assistant Commissioner to the Deputy Commissioner vide his letter dt. 4th April, 1996. The Deputy Commissioner initiated penalty proceedings under section 271C on 6-1-1997, and completed the proceedings on 31-7-1997. As per section 275, penalty proceedings were required to be completed within six months from the end of the month in which such proceedings were initiated.

8.9. We note that provisions of section 271C are different from the provisions of section 271(1)(c) where penalty proceedings have to be initiated during the course of assessment proceedings. Under section 271C, the proceedings are to be initiated by the Deputy Commissioner and order is to be passed within six months from the end of the month in which the proceedings were initiated by the Deputy Commissioner. The Deputy Commissioner initiated the penalty proceedings vide show-cause notice dt. 6th Jan., 1997, and penalty orders were passed on 31st July, 1997. The orders passed were, thereforee, within the period of six months from the end of the month in which penalty proceedings were initiated. The penalty orders passed are, thereforee, valid and legal and the challenge made in this behalf is misconceived.

8.10. We accordingly see no infirmity in the order of the Deputy Commissioner on this count.

8.11. The learned counsel of the assessee- company has also challenged the validity of the penalty levied on account of the violation of the principles of natural justice. According to the learned counsel the documents found and impounded in the course of survey have been relied upon to levy and uphold the penalty by the lower authorities, but at no stage the assessee-company had been confronted with the said documents. Further, to substantiate that there was no lack of cooperation/volition and certain instructions were issued by the Board against the levy of penalty, inspection of order-sheet in the proceedings before the Assistant Commissioner, TDS Circle, was sought but the required inspection was not allowed and that too without assigning any reasons. According to the learned counsel this amounted to violation of natural justice and the penalty levied deserves to be quashed on this count alone. In support reliance is placed on : [1993]201ITR766(Ker) (supra) and : [1977]107ITR710(All) (supra).

8.12. The learned departmental Representative, on the other hand, has strongly disputed such claim and has submitted that there is no violation of natural justice and the assessed was given sufficient opportunity of being heard on every point.

8.13. We have carefully considered the facts and material available on record in this behalf. We find that during the course of survey on 6-11-1995, at the project office certain incriminating documents were claimed to have been taken into possession and both the lower authorities have placed reliance thereon while levying/upholding the penalty. Admittedly, copies of such documents were not supplied to the assessee-company during the course of penalty proceedings even on request before using the same adversely against the assessee-company. Further, the inspection of the penalty records was also not allowed. Copy of the statement of the general manager recorded during the course of survey was also not supplied though specific request was made by the assessee-company to the Assistant Commissioner in its letter dt. 17th Sept., 1997, 8th July, 1998, and 20th July, 1998. The position being so, the learned counsel of the assessee-company raised such grievance before the Tribunal during the course of hearing and when the learned departmental Representative was confronted in this regard he agreed to do the needful outside the Court so as not to disturb the proceedings. Meanwhile, the assessee-company moved the Delhi High Court in the matter and the Hon'ble Delhi High Court finally disposed of the petition of the assessee-company in its order dt. 23-11-1998, in CW No. 4024/98 observing as under :

'The grievance raised in this petition is very limited. Penalty proceedings under section 271C of the Income Tax Act, 1961 were initiated and finalised by the Deputy Commissioner, Range 23, New Delhi, against the petitioner resulting into a penalty of Rs. 6,99,82,700 being imposed on the petitioner by order dt. 31st July, 1997. The penalty order is subject-matter of appeal before the Tribunal.

The petitioner sought for inspection of the records so as to defend himself. The inspection is not being allowed to the petitioner as the same is being resisted by the department. This petition has been filed during the pendency of the appeal before the Tribunal by the petitioner assessed submitting that even before the Tribunal, the petitioner would not be in a position to defend itself and argue the appeal effectively unless the inspection is allowed.

Today it is stated at the Bar that the hearing before the Tribunal is concluded, but the petitioner has made a request to the Tribunal to await the decision of this court in this petition before deciding the appeal.

The learned counsel for the petitioner has submitted that the documents which are to be inspected by the petitioner can be classified into four categories namely : (i) the order sheets; (ii) the notices issued by the department to the petitioner and the petitioner's replies thereto; (iii) the statement of Mr. H. Matsuzawa, the general manager of the company recorded by the Assistant Commissioner; and (iv) certain letters written by the CBDT to Deputy Commissioner touching the impugned penalty.

So far as the statement of Mr. H. Matsuzawa is concerned, the learned senior standing counsel for the department has stated that the copy thereof shall be made available to the petitioner within three days.

As to the order sheets and the notice issued by the department to the petitioner and replies given by the petitioner, we do not see any possible objection excluding the petitioner's right to inspect the same or for copies thereof. It is thereforee directed that the respondents shall within three days afford the petitioner an opportunity for inspecting the order-sheets, the notices issued by the department to the petitioner and the replies given by the petitioner to the department.

As to the correspondence between the CBDT and the Deputy Commissioner touching the penalty, we cannot express any opinion unless we have seen the papers. As the matter is already before the Tribunal, we deem it proper to leave this issue to be adjudicated upon by the Tribunal. The Tribunal may, if it be so inclined, call for such correspondence which shall be made available to the Tribunal by the department and the Tribunal may after inspecting the same for itself form an opinion whether it is relevant to the defense of the petitioner/assesses and whether there can be any objection to the same being made available for the inspection by the assessee.

The petition stands disposed of in terms of the above said directions. The Tribunal may decide the appeal after the above said directions have been complied with.'

8.14. Thereupon the department has supplied copy of statement of general manager and copies of documents impounded during survey with their English translation. The revenue, however, neither denied nor admitted any correspondence on the issue between the CBDT and the Deputy Commissioner nor inspection of the penalty records have been allowed even at this stage.

8.15. The assessee-company has filed authentic translation of the two circulars impounded from the assessee-company and the same read as under :

Confidential 25th July, 1999

Re : Income-tax in India /New tax measures

With reference to the mentioned above according to Newspaper all corporate including foreign companies should file tax return properly by 31st July has been announced by tax authority. And regarding this internal notice within tax authority has been delivered to all foreign banks which are operating in India.

Regarding this issue on the 8th of July JCCI in Delhi has held emergent committee but since they could not understand the applicability of this letter and hence they decided to just keep a watch and not to do anything for the present.

But after the committee since the Bank of Tokyo and Sakura Bank have expressed their opinion that they wanted to revise their returns according to the intention from tax authority. thereforee, we have had committee again on 19th of July.

At the above both the banks decided to revise their return but it was reported to be impossible to finalise all procedures to revise their return in time.

We thought above actions might include all Japanese companies to revise their return. Mitusi may also have to consider a fresh look at its present policy and follow the trend as other general trading companies do.

According to the working based on view of the Income Tax department (present understanding) if we calculated tax return for 16 Japanese expatriates we have expected rough increment of tax as follows :

Yen 196 Million x 40% = Yen 78 million

At Present tax amount = Yen 6 million

Additional amount to be paid =Yen 72 million

Time bar on this issue is 10 years.

If we have to revise our return for last ten years time it may be calculated Yen 1 billion. (income-tax rate is now 40 per cent from this April but previous year it was approximately 50 per cent).

And tax authority may impose 100 per cent on above as additional tax and delayed interest by 15 per cent p.a.

Considering all total amount to be paid shall be Yen 3.5 billion. (These may be applied for Japanese Expatriates who are working in Anpara Desu Cable Project)

Issue requires serious consideration and careful handling. As a Mitsui proper study of this issue is required. We think we had better propose an action plan to a committee for five major companies.'

SC Circular

26th July, 1994

Mitsui & Co. Ltd.

New Delhi Liaison Office

Sub : Indian personal income-tax system being made strict Business concern reg.

Please refer to our letter on 25th July, on the subject. Yesterday, consultations were held on the subject among Mitsubishi Sumitomo, Itochen, Marubeni, Nissho Corporation and us. It was decided just to keep watch and in the meantime Mitsubishi Corporation representative is proposing to study the legality of the stand taken by the department. Following five points are decided:

1. Revised return filing is not possible in present conditions however if we can understand the way of thinking of tax authority we should follows it.

2. Examine legality of taxation in India of overseas salaries.

3. To avoid any application to the earlier years.

4. To avoid penalty to be imposed.

5. All the companies mentioned above to cooperate.

It is also decided to close ties with Bank of Tokyo and other foreign banks in the matter. The meeting took stock of restrictions on payments abroad to foreign company personnel in China and South Asian countries. Due to economic and financial conditions there, the scope of disclosure have been widened there. Such conditions need study from point of view of laws of other countries in which Mitsui operate.'

8.16. It so appears from the affricated circulars that the group of Japanese companies had meeting on the question of deduction-of tax at source from the salary paid to expatriate employees in Japan might of the Board's circulars urging payment to TDS amount together with interest thereon before 31-7-1994, so as to avoid penalty and prosecution. These circulars in our view are in no way incriminating insofar as the penalty proceedings under section 271C were concerned. It rather shows their seriousness to break with the past and to comply with the Indian tax laws relating to TDS.

8.17. We have also noted above that the assessee-company in its reply submitted to the Assistant Commissioner in penalty proceedings made a reference to the discussions at the level of Board where the assessed claimed to have been assured against levy of penalty and prosecution of payment of amount of short tax deduction and interest thereon and copies of these letters written have been endorsed to the Chairman, CBDT, and Chief Commissioner, New Delhi. This indicates that there was certain discussion at the highest level before the payment of the amount of short tax deduction and the interest thereon and the department has also neither denied nor admitted this fact. An inference thereforee could be safely drawn that the CBDT/Chief Commissioner did give assurance to the assessee-company against levy of penalty on payment of requisite tax amount and interest and during penalty proceedings, CBDT wrote about it to Deputy Commissioner. The department did not allow inspection of penalty records particularly correspondence between CBDT and Deputy Commissioner though the same was material to the question of levy of penalty under section 271C maintained by the Assistant Commissioner.

8.18. According to the learned counsel for the assessed the Deputy Commissioner did not confront the assessed to the statement of the general manager, seized documents nor he allowed inspection of the penalty records during penalty proceedings and the situation could not be remedied by restoring the matter to the assessing officer for read-judicator after doing the needful. In support of this proposition he has placed reliance on the following decisions :

8.19. CIT v. Rameshwar Das Ram Narain (supra). In this case the assessing officer imposed penalty of Rs. 15,000 under section 28(1)(c) of the 1922 Act for the assessment year 1951-52 on 1st May, 1964. Penalty order stated that the previous approval of the Inspecting Assistant Commissioner for imposing the penalty had been obtained but on appeal before the Appellate Assistant Commissioner it was established that the assessing officer sent his letter to the Inspecting Assistant Commissioner seeking approval after the order of penalty was passed. The Appellate Assistant Commissioner held that the order imposing penalty was without jurisdiction because it was in fact passed without the requisite approval. However, at the end of the order the Appellate Assistant Commissioner observed that the Income Tax Officer should take such action according to law, as he deems necessary in this case. The Tribunal held that under section 31(3)(f) of 1922 Act the Appellate Assistant Commissioner had power in the case of order under section 28 to either confirm or cancel or vary it so as either to enhance or reduce the penalty and the section did not confer and jurisdiction in the Appellate Assistant Commissioner to give the direction of the type that he made in the appellate order. The sentence giving the above direction was, thereforee, deleted and assessor's appeal was allowed. The Hon'ble High Court upheld the finding given by the Tribunal.

8.20. CIT v. Eminent Enterprises (supra). In this case the Income Tax Officer levied a penalty of Rs. 39,480 under section 271(1)(a) for the assessment year 1976-77 on 18-3-1981. The Appellate Assistant Commissioner set aside the order of penalty with a direction to the Income Tax Officer to pass a fresh order after giving an opportunity of being heard to the assessee. The Tribunal set aside the order of the Appellate Assistant Commissioner and deleted the penalty levied holding that while exercising powers under section 251(1)(b) of the Act, the Appellate Assistant Commissioner had no power to remit the issue to the assessing officer as in appeal against an order imposing a penalty the Appellate Assistant Commissioner could confirm or cancel such order or vary it so as either to enhance or to reduce the penalty. The finding given by the Tribunal was confirmed by the Hon'ble High Court.

8.21. In the present case, it is evident from the facts discussed that though specific request was made, the Deputy Commissioner did not supply the copy of the statement of the general manager recorded during survey, documents impounded and inspection of the penalty records and even on the intervention of the Hon'ble High Court and by the Tribunal the Revenue though has supplied copies of the impounded documents and the statement recorded of the general manager but inspection of the penalty records has not been allowed. Since these documents are materially relevant to the levy/non-levy of penalty, denial of their copies/inspection has obviously violated the principles of natural justice and accordingly, the penalty levied stands vitiated.

8.22. Looking to the facts and ratio of the decisions cited and discussed above, the penalty orders passed deserves to be quashed on this count alone.

Now we would examine whether there existed a reasonable cause in the relevant period for non-deduction of tax at source from the salary paid in Japan to expatriates within the meaning of section 273B of the Income Tax Act. The expression 'reasonable cause' has come up for consideration before various Courts in connection with the penalty levied under section 18(1)(a) of the Wealth Tax Act/under section 271(1)(a) of the Income Tax Act. In the case of CWT v. Jagdish Prashad Chaudhary : [1995]211ITR472(Patna) the Hon'ble Patna High Court while dealing with the question of levy of penalty under section 18(1)(a) of the Wealth Tax Act has observed that the expression 'reasonable cause' has not been defined under the Act but it could receive the same interpretation which is given to the expression 'sufficient cause'. thereforee, in the context of penalty provision the expression 'reasonable cause' would mean a cause which is beyond the control of the assessee. Reasonable cause obviously means a cause which prevents a reasonable man of ordinary prudence acting under normal circumstances without negligence or inaction or want of bona fide.

8.23. Before a cause can be said to the reasonable or not it must be found as a fact that a particular cause operated upon the mind of the assessed has prevented him from filing the return in time.Addl. CIT v. Mohammed & Sons .

8.24. The assessing officer must be satisfied not arbitrarily but judicially that the assessed without reasonable cause failed to furnish the return in time. There must be the absence of a reasonable cause and this fact has to be objectively found by the authorities concerned in the light of the Explanationn offered by the assessee. The assessed has to prove the existence of a reasonable cause by preponderance of probability as in a civil case and not necessarily by proof beyond reasonable doubt. An order or penalty cannot be passed without considering the Explanationn of the assessee-Sunder Das Thakersay & Bros. v. CIT : [1982]137ITR646(Cal) .

8.25. If either on the records or materials available to the authorities or on an Explanationn given by the assessed sufficient cause is found, no penalty is imposable-Taraknath Paul v. CWT : [1983]142ITR468(Cal) .

8.26. From the language of section 271(1)(a) it is clear that the authorities determining the question of imposing the penalty has to precisely address itself to the question whether the delay in filing the return has been or has not been without reasonable cause and in determining this question, all relevant facts appearing on the record of the case shall have to be taken into consideration.CIT v. Mangat Ram Hazarimal Kuthiala .

8.27. The question whether or not the assessed failed without reasonable cause to furnish return within the time allowed is primarily and essentially a question of fact to be decided in each case on a consideration of all the relevant circumstances-Shiv Shankarlal v. CGT : [1974]94ITR269(Delhi) .

8.28. Bona fide belief of the assessed that his income has below taxable limit was held to be reasonable cause and the mere fact that the assessed agreed to a settlement does not necessarily militate against the bona fide belief.Rajendra Nathu v. CIT (1992) 188 ITR 653 .

8.29. We have already noted that expatriate employees had been working in the project office as well as liaison office in India and during their posting in India they were paid salary and were also provided with free accommodation and transport. During the course of hearing, with a view to comply with the query raised by the Bench, the learned counsel for the assessed filed copies of sample appointment orders of expatriates deputed to India and the same read as under :

MITSUI & CO. LTD.

ANPARA 'B' THERMAL POWER PROJECT

ASSOCIATE CONSULTANT GROUP DIVISION OFFICE

1st April, 1990

To

Mr. Y. Nakanishe

Dear sir,

It is our pleasure to inform you that you have been appointed in our office from 1st April, 1990. Your place of employment will be New Delhi, though you may be transferred to our project site at Anpara, Uttar Pradesh at the discretion of the management.

Your monthly salary would be Rs. 14,000. You will also be provided accommodation at your place of work. As per the Indian tax laws, your salary is liable for tax deduction at source and the same will be deducted every month.

Yours faithfully,

Sd/-

Mitsui & Co. Ltd.'

MITSUI & CO. LTD.

ANPARA 'B' THERMAL POWER PROJECT

ASSOCIATE CONSULTANT GROUP DIVISION OFFICE

20th Dec., 1989

To

Mr. Tomohiko Okada

Dear Sir,

It is our pleasure to inform you that you have been appointed as manager in our office from 20th Dec., 1989. Your place of employment will be New Delhi, though you may be transferred to our project site at Anpara, Uttar Pradesh at the discretion of the management.

Your monthly salary would be Rs. 12,000 per month. You will also be provided accommodation at your place of work. As per the Indian tax laws, your salary is liable for tax deduction at source and the same will be deducted every month.

Yours faithfully

Sd/--

Mitsui & Co. Ltd.'

8.30. The general managers of both project office and liaison office having separate tax deduction account members deducted tax from salary paid and perquisite value of free accommodation and transportation provided and the same was paid in the Government account. They were also filing annual returns about the TDS as per provisions of section 206 in Form No. 24.

8.31. We also find that the expatriate employees deputed to India and working on project or in liaison office were liable to tax for the salary paid to them. We note that the Revenue in the individual cases of expatriate employees had neither made any investigation about the salary, if any, paid to them in Japan nor the question of subjecting the salary paid to them in Japan was considered and decided on merits for taxation in India in their individual cases and the position being so the general managers acting as disbursing officers in both offices neither had details about the salary paid to each of the expatriate employees in Japan nor aware about its taxability in India and their responsibility for deduction of tax as per provisions of Chapter XVII-B. There is no material available on record to prove the facts otherwise. The general managers were, thereforee, under the bona fide belief that the salary and perquisites paid to expatriate employees in India as per the terms of their deputation, only were taxable in India and tax thereon was to be deducted as per provisions of Chapter XVII-B. There is no material brought on record by the Revenue to establish and prove that the general managers were in the knowledge about details of payments made in Japan to expatriate employees and their taxability in India and in the absence of any such material there was a good and sufficient reason available for not deducting the tax at source from the salary and perquisite paid in India over and above that already deducted and paid in Government account.

8.32. Admittedly the assessee-company paid retention/continuation pay to expatriate employees in Japan in addition to the salary and perquisite paid in India. It has been claimed on behalf of the company before the lower authorities that retention/continuation pay said to expatriate employees in Japan is not taxable in India and the provisions of Chapter XVII-B relating to TDS is not applicable to such payments. Such claim was made as per the legal opinion obtained from their internal legal cell. The authorities below sought independent evidence in support of such claim but nothing could be filed. According to the learned counsel for the assessee-company since the legal opinion was given by their internal legal cell and it was not obtained from any outside expert, there could be no independent evidence in support of such claim made as insisted by the lower authorities. Based on such legal opinion the assessee-company had a bona fide belief that retention/continuation pay paid in Japan to expatriate employees deputed to India is not taxable in India and accordingly the provisions of Chapter XVII-B are not applicable. According to the learned counsel for the assessed this constituted a reasonable cause and the cause so shown should have been objectively considered on merits by the lower authorities in light of the Explanationn offered. The assessee-company was required to prove the existence of a reasonable cause by preponderance of probability only and not by way of adducing any proof beyond reasonable doubt. We find that the 'reasonable cause' so shown and the Explanationn offered has been considered on merits by the lower authorities while levying/upholding the penalty under section 271C. We, however, find that the lower authorities were rather highly influenced in levying/upholding the penalty by the alleged non-cooperation in furnishing details of payment of salary in Japan and the ultimate payment of tax and interest was not suo motu but was a result of investigations and efforts made by the Assistant Commissioner. In our considered view these facts no doubt adversely affected the waiver of interest/penalty under section 273A but so far as the levy of penalty under section 271C is concerned these are extraneous considerations as what the Revenue authorities are required to consider while levying such penalty is existence or reasonable cause for non-deduction of tax at source and the reasonable cause as shown by the assessee-company has not been properly appreciated and deliberated by the lower authorities.

8.33. We shall now discuss whether there existed such reasonable cause at the relevant time. The following facts are material to the issue under consideration:

(a) The learned counsel for the assessee-company has invited our attention to a decision of December, 1982 in the case of Oceanic Contractors Inc.. (supra). In this case Oceanic Contractors Inc. a non-resident overseas company, engaged in pipe laying and platform construction in the North Sea employed about 400 workers on its barges and other vessels. The company carried on its operation in various locations throughout the world some of which were in the U.K. sector of the North sea and were designated area under the Continental Shelf Act, 1994. The company also maintained establishment in U.K. and deducted payee tax in respect of employees employed at those establishments. However, employees who were employed in the U.K. sector of the North Sea were paid in US dollars free of United Kingdom tax by cheques sent by post from the company's administrative headquarters in Brussels. The employees were liable to tax on such earnings in that sector. The crown claimed that company was required to deduct payee tax from wages and salaries paid to its employees working in U.K. sector of North Sea and also held the view that section 204 of the Income and Corporation Taxes Act contained no territorial limitation on the duty arising on making any payment of income assessable to tax as salary. The Court of Appeal held that although section 204 was in general terms the Parliament could not have intended to cast on a foreigner who was not resident in the U.K. the role of tax collector for the Revenue and thereforee, section 204 was to be presumed not to have extra-territorial effect. This decision of Court of Appeal has since been reversed by the House of Lords by a majority view of three to two. According to the learned counsel, looking to the ratio of the decision of the Court of Appeal and the dissenting orders of two Law Lords greatly influenced the internal legal cell of the company in advising against the taxability of payment made in Japan and applicability of provisions of Chapter XVII-B in respect of the payments made to expatriates deputed to India.

(b) The learned counsel for the assessed has also referred to the decision of the Hon'ble Supreme Court in the case of Electronics Corporation of India Ltd. v. CIT (supra). In this case the assessee-company entered into a memorandum of understanding with the Norwegian company at Paris and this was followed by an agreement dt. 2-5-1986, executed at Hyderabad under which the Norwegian company was to provide technical know-how and technical services including facilities for the training of personnel of the assessed in connection with the manufacturing of computers. The consideration for technical know how and technical service was represented by Norwegian currency NOK 32 millions equivalent to about Rs. 5.75 crores. 85 per cent of the consideration was to be paid from credit provided by the Norwegian authorities and the balance 15 per cent was to be paid out of free foreign exchange made available by the State Bank of India, London Branch. The assessee-company approached the Income Tax Officer for grant of 'No objection certificate' as contemplated under section 195(2) of the Income Tax Act to enable it to remit the installments due without any obligation to deduct any income-tax at source but the request was denied. When approached the CIT took the view that having regard to section 9(1)(vii) and section 195 of the Income Tax Act the payment constituted income which deemed to accrue or arise in India and was liable to deduction of tax at source and accordingly he declined to intervene. The writ petition filed by the assessee-company was rejected by the Andhra Pradesh High Court. The Honble Supreme Court noted that the Revenue seemed to be proceeding on the basis that the foreign company was liable to tax and that, thereforee, the assessee-company was obliged to deduct at source the tax payable by the foreign company. The services were rendered by the foreign company in the nature of training abroad to personnel belonging to the assessee-company and the payment to the foreign company was also effected abroad. The Hon'ble Supreme Court going into the relevant constitutional provisions considering the question involved of great public importance referred the case involved to the Constitutional Bench with the following observations :

'But the question is whether a nexus with something in India is necessary. It seems to us that, unless such nexus exists, Parliament will have no competence to make the law. It will be noted that article 245(1) empowers Parliament to enact laws for the whole or any part of the territory of India. The provocation for the law must be found within India itself. Such a law may have extra-territorial operation in order to subserve the object and that object must be related to something in India. It is inconceivable that a law should be made by Parliament in India which has no relationship with anything in India. The only question then is whether the ingredients, in terms of the impugned provision, indicate a nexus. The question is one of substantial importance, especially as it concerns collaboration agreements with foreign companies and other such arrangements for the better development of industry and commerce in India. In view of the great public importance of the question, we think it desirable to refer these cases to a Constitution Bench, and we do so order.'

The learned counsel for the assessee-company has submitted that as far as his knowledge goes the matter is still pending for decision in the Supreme Court.

The learned counsel for the assessees submitted that the payment in the present case was also made to expatriates in Japan and even if the said amount is taxable as salary in India the question that arises is whether Chapter XVII-B would have extra-territorial operation in Japan for the purpose of deduction of tax at source and payment thereof in Government account. The issue relating to extra-territorial operations of such provisions of the Income Tax Act is presently pending with the Hon'ble Supreme Court. The matter, thereforee, not being free from doubt the bona fide belief entertained by the assessee-company that the provisions of Chapter XVII-B is not applicable to the payments made in Japan is not without merit.

(c) According to the assessee-company legal opinion as obtained at the relevant time for the internal legal cell. The assessee-company during the stay proceedings filed a copy of certificate dt. 9th. March, 1998, to the following effect :

Date : 9th. March, 1998

'To whomsoever it may concern

This is to certify and confirm that in the year 1989 at the initial stage of Anpara 'B' Project the issue of taxability of payment made to compensate deputed personnel for their absence from home country/other dues paid in Japan was examined. At that time it was advised to be not taxable in India by our legal cell of our Tokyo office. But as a result of subsequent clarification like Amnesty circulars issued by CBDT in mid 1994 and part of 1995 (Circular Nos. 685 & 696) as well as discussion with various tax authorities our company changed its stance and decided to harmonise with the above and Indian income-tax law. We thus calculated the taxes for 6 years from 1989-90 to 1994-95 and deposited the same along with interest. '

The legal opinion tendered by the internal legal cell of the assessee-company in the backdrop of the aforesaid decisions assumes credibility and the same cannot be brushed aside simply for the reason that it is not supported by any independent evidence especially when such legal advice was given by the internal legal cell of Tokyo office of the company and which was not tendered by any outside experts.

(d) On going through the copies of said circulars seized from the project office on survey by the Assistant Commissioner, as extracted above, we find that when the Government of India came out with the scheme for foreign company to pay the short deduction amount from salary paid to its expatriate employees including that paid in foreign country to avoid penalty and prosecution, various Japanese companies having their business interest in India such as, Mitsubishi, Sumitomo, Itochen, Marubeni, Nissho Corporation, Mitsui, Bank of Tokyo; and Sakura Bank held consultations among themselves and in the meeting held the Bank of Tokyo and Sakura Bank expressed their opinion that they wanted to revise their returns according to the intention of the tax authorities in India but looking to several financial years involved it was found impossible to do so before the target date. It so appears that other Japanese companies including the assessee-company fell in line with the Bank of Tokyo and Sakura Bank and ultimately paid the short deduction amount as well as interest thereon. This indicates that most of the Japanese companies having business interest in India including the assessee- company were not deducting tax on payment made to their expatriate employees in Japan. Thus, the bona fide belief entertained by the assessed that Chapter XVII-B has no extra-territorial operation with regard to the payments made in Japan to its expatriate employees based on legal advice cannot be said to be an afterthought but such view or opinion prevailed at the relevant time during the financial years involved, among Japanese companies.

(e) On a query made by the Bench during the course of hearing the learned counsel of the assessee-company made a statement at Bar and also stated in the written submissions that the payments made in Japan have been subjected for consideration to the Japanese authorities and this could be only if the assessee-company had bona fide belief that the payment made in Japan is not taxable in India.

8.34. Considering all the facts and circumstances discussed above we are of the considered view that there existed a reasonable cause for not deducting the tax at source from the payments made to expatriates in Japan within the meaning of section 273B and accordingly no penalty under section 271C is exigible.

8.35. We have already perused the scheme of Chapter XVII-B. If the principal officer fails to deduct tax at source as per provisions of section 192 and after deduction fails to pay in Government account he is deemed to be an assessor-in-default before the department proceed to recover the amount of short tax deduction as per provisions of section 201. In the present case such an eventuality has not arisen as the assessee-company cooperated and paid the amount of short tax deduction. The assessee-company also compensated the revenue by way of paying interest for such late payment as required under section 201(1A). There was thus no occasion for the revenue to levy penalty under section 221 for non-payment of tax due after it was deemed to be in default.

8.36. It is pointed out here that section 271C brought on the statute with effect from 1st April, 1989. Prior to its insertion there existed section 276B which read as under :

'Failure to pay the tax deducted at source.If a person fails to pay to the credit of the Central Government, the tax deducted at source by him as required by or under the provisions of Chapter XVII-B, he shall be punishable with rigorous imprisonment for a term which shall not be less than three months but which may extend to seven years and with fine.'

8.37. Thus, prosecution was provided for such default prior to 1st April, 1989, in addition to the charge of interest under section 201(1A) and penalty under section 221. After insertion of section 271C failure to deduct and pay is not prosecutable but liable to penalty though the language of erstwhile section 276B and present section 271C is pari materia. Under both the sections the person to be prosecuted or the person to be penalised has to prove that the default was not intentional or he had a reasonable cause.

8.38. In the case of Sequoia Construction Company (P) Ltd. & Ors. v. P.P. Suri Income Tax Officer (supra), the Hon'ble Delhi High Court observed that section 276B speaks of 'without reasonable cause or excuse' whereas the provisions of section 201(1) are rather somewhat stringent when they speak of 'without good and sufficient reasons'. A cause may appear to be 'reasonable' though it still may not be 'good and sufficient'. Sufficient goes farther than mere reasonableness. The standard of proof, Explanationn and onus of proof to be discharged by the assessed in penalty proceedings under section 201(1) is much higher and heavy whereas in criminal prosecution for an offence under section 276B the dictates of law merely demand the requirement of reasonable cause i.e., what appears ex facie to reason, which is much more milder.

8.39. In this case the assessing officer imposed penalty under section 201(1) r/w section 221 and the same was cancelled by the Commissioner (Appeals) on the ground that there was good and sufficient reason for non-payment of tax within time because there was financial stringency; the company did not pay cash to the creditors but had only credited their accounts with the amounts reduced by the tax that would have been deductible there from and the assessing officer had charged interest in respect of the delay in depositing the tax deducted at source. The Hon'ble Delhi High Court held that the prosecution launched under section 276B based on the same default had to be quashed.

8.40. Similar view was taken by the Hon'ble Delhi High Court in the case of Detecon Indian Project Office v. Income Tax Officer & Ors. (supra).

8.41. In the present case admittedly the department has neither treated the assessee-company in default under section 201(1) nor it levied any penalty for non-deduction and payment of tax under proviso to section 201(1) r/s section 221 of the Income Tax Act. The assessee-company also paid interest sou, motu as required under section 201(1A) for the delayed payment. It is, thereforee, inferred that there rested good and sufficient reasons for non-deduction of tax at source from the said amount in Japan. Had there been no good and sufficient reasons for non-deduction of such tax and payment thereof, the Revenue would have treated the assessee-company in default and levied penalty under section 221 of the Income Tax Act. Moreover, the payment of the amount of short tax deduction and interest thereon was a mitigating factor for the taking action under section 221. When no action has been taken by the Revenue for levy of penalty under section 221 and delay in payment of tax has been fully compensated by payment of interest no further action is justified under section 271C of the Income Tax Act, looking to the ratio of the affricated decision of the Hon'ble jurisdictional Delhi High Court.

8.42. Having regard to all the facts, circumstances discussed and ratio of the decisions cited and considered, the penalty levied under section 271C for the financial years 1989-90 to 1994-95 in respect of both project office and liaison office is held neither valid nor justified and the same is directed to be cancelled.

9. In the result, assessees' appeals stand allowed.