ORDER
P.N. Parashar, J.M.
This appeal, preferred by the assessee, is directed against Commissioner (Appeals)’s order dated 25-9-2002 relating to assessment year 1997-98.
2. The appellant has taken only two grounds in this appeal out of which ground No. 1 is effective ground which challenges the sustenance of penalty of Rs. 1,65,78,889 imposed by the Addl. CIT, Range 49, New Delhi under section 271C of the Income-Tax Act, 1961.
3. Shri Prakash Narain Advocate along with Shri S.K. Chaturvedi FCA appeared for the assessee whereas Shri B.P. Mishra Sr. DEPARTMENTAL REPRESENTATIVE represented the revenue.
4. The assessee, M/s Aeroflot Russian International Airlines, has been operating between India and Russia. It is official and Government airlines of the then USSR and now belongs to the Federation of Russia.
5. A survey operation under section 133A of the Income Tax Act, 1961 was carried out on 12-1-1999 and it was found that the assessee was not deducting TDS on various payments including rent, salary, contractual payments etc., as required by the provisions of Chapter XVII of the Income Tax Act. The assessee had not filed any return of TDS in previous years and in response to notice from the assessing officer, it filed return in Form No. 26J in respect of rental payments on 29-7-1999. The assessing officer passed order under section 201(1A) and required the assessee-company to file proof of payment of taxes before 30-5-2000. While passing order under section 201(1A), the assessing officer appended Annexure A4, detailing therein default in respect of non-deduction of tax totalling to Rs. 1,65,78,899.
6. In view of the non-deduction of tax, a show-cause notice was sent to the assessee to show cause as to why penalty under section 271C be not imposed for default in non-deduction of TDS. In response to this notice, the assessee filed reply dated 10-4-2001, 4-5-2001 and 24-9-2001. In particular the following submissions were made on behalf of the assessee.
7. The assessee was under bona fide and reasonable belief that TDS provisions were not applicable in his case due to operation of DTAA between India and Russia.
8. The Government was already compensated for the period of default by charge of interest under section 201(1A). The tax has already been paid by the recipients.
9. The department never responded to the assessee’s queries regarding non-applicability of TDS provision.
10. Immediately after the survey, the assessee started deducting TDS which shows that the omission on the part of the assessee was not deliberate; and
11. The assessee had a reasonable cause for non-deduction of TDS.
12. In support of the above mentioned submissions, the assessee also placed reliance on certain decisions.
13. The Addl. Commissioner of Income-Tax rejected all these grounds and held that due to non-deduction of TDS the assessee was held to be an assessee in default. He, therefore, imposed penalty of Rs. 1,65,78,899 under section 271C vide order dated 27-9-2001.
14. The assessee challenged the imposition of penalty before the learned Commissioner (Appeals). It was specifically pleaded that the Addl. Commissioner of Income-Tax was not justified in rejecting the explanation of the assessee. In this regard following ground was taken:
“That the action of the Addl. Commissioner of Income-Tax Range-49, New Delhi by rejecting the explanations, evidence etc. to cover the case for not imposition of penalty under section 273B of the Income Tax Act, 1961 is unjust, arbitrary and against the facts and circumstances of the case.”
15. Before the learned Commissioner (Appeals) it was contended that there was bona fide belief regarding non-applicability of TDS provision because the Income-tax department did not respond to the queries of the assessee-company. However, the learned Commissioner (Appeals) could not be convinced with the plea of the assessee and after ejecting the same he confirmed the penalty.
16. Before us, the learned counsel for the assessee Shri Prakash Narain, Advocate made detailed submissions. The learned counsel explained that the assessee-company was converted into a joint stock company with effect from June 1996 with all the entire share capital of the assessee-company. The learned counsel, after making reference to the provisions of section 273B submitted that since there was DTAA agreement between the Governments of India and Russia, the assessee was under the impression that its entire income was exempt from tax. He further pointed out that the assessee-company was operating since 1957 and never in past any notice was sent by the Income-tax department nor the assessee was asked to deduct tax from the payment of rent to the Airport Authority of India. The learned counsel invited our attention to page 29 of the paper book which is order of learned Commissioner (Appeals) dated 8-4-1991 for assessment year 1986-87 in which it has observed that there existed reciprocal arrangement between India and Russia for not taxing the employees of Air India and Aeroflot in respective country under section 10(6)(iv) of the Income Tax Act.
17. The learned counsel also made reference to the no objection certificate issued by the CIT dated 20-7-1994 which is available at page 31 of the paper book. Further, the learned counsel also made reference to the letter dated 22-5-1995 written by the assessee-company to the ACIT in which it was clearly mentioned that no TDS is being deducted because Airport Authority of India is a Government of India organization and secondly Aeroflot is exempt from income-tax as per DTAA between India and Russia.
18. He further pointed out that letter dated 23-3-1996 was written by the assessee to the ACIT for seeking specific instructions of the department whether to deduct tax on the payments made to International Airport Authority of India or not. But despite this request, no instruction was given to the assessee by the department. In this regard the learned counsel invited our attention to pages 38 & 39 of the paper book also to the observations of the learned Commissioner (Appeals) to the effect that he could not locate the letter of the assessee and the reply of the department, In support of his arguments, the learned counsel placed reliance on the ratio of decisions in the following cases :
-276 ITR 53 (sic)
-CIT v. Mitsui & Co. Ltd. (2004) 272 ITR 545 (Delhi);
-Rajkot Engg. Association v. Union of India (1986) 162 ITR 28 (Guj.).
-Motilal Padampat Sugar Mills Co. Ltd. v. State of U.P. (1979) 118 ITR 326 (SC).
19. The learned Departmental Representative, on the other hand, placed reliance on the order of learned Commissioner (Appeals).
20. We have carefully considered the facts and circumstances relating to this matter and find force in the contentions raised on behalf of the assessee before us. On going through the material it is found that the revenue has never required the assessee to deduct tax on rentals paid by it. As the assessee was a Russian Government company and further since there was Double Taxation Avoidance Agreement between the two countries, the assessee had a genuine belief that it was not required to deduct tax. This faith was also based on the ‘no objection certificate’ dared 20-7-1994 which is as under :
“No objection certificate
It is certified that as per the agreement between the Government of the Republic of India and the Government of USSR for the avoidance of double taxation and prevention of Fiscal Evasion with respect to taxes on income, Aeroflot Airlines is exempt from payment of income-tax in India.
This is subject to M/s. Aeroflot Airlines obtaining necessary permission from the Reserve Bank of India.
This certificate shall remain valid for the financial year 1994-95.
Sd/-
(R.K. Tanwar)
Asstt. Commissioner of Income-Tax
Non-Resident Ward, New Delhi.”
21. Not only this the assessee had himself made a request to the department to know about its liability. Hence, a query was made by the assessee through letter dated 23-3-1996. Paras 4 & 5 of this letter are as under :
“4. We are also enclosing herewith statement for payment of RNFC and other Navigational charges paid to Government Deptt. National Airport Authority, IGI Airport, New Delhi for the period from 1-6-1994 to 31-3-1995.
In this connection, we would like to inform you that we have been informed by the General Director of both IAAI and NAA that these are Government payments and no TDS is to be deducted on these payments. Further, they have referred the matter to their Ministry as well as Ministry of Finance and they are awaiting official reply from them in this regard at which time they will inform us accordingly.
5. A detailed statement of payment of amount to Hotel Maurya Sheraton for the period from 17-6-1994 to 31-3-1995 is enclosed herewith.
In this connection, we would like to bring it to your kind notice that as per bilateral agreement between the two Governments, Aeroflot is exempt for payment of Income-tax under the double taxation avoidance treaty, as such No TDS was deducted by us.
In view of the above, we seek your specific instructions whether to deduct the TDS on the above mentioned payments or not. On receipt of your instructions, we will proceed further in this matter.”
22. It is to be pointed out that even before the learned Commissioner (Appeals) it was submitted that there was no fault on the part of the assessee because the assessee wanted to seek instruction from the department but the same was not given. As the assessee had made the query in the year 1996, it was obligatory on the part of the department to have issued required instructions and as the department could not supply any instruction to the assessee it was very natural and reasonable that the assessee might be under the impression that it was not required to deduct any tax at source. Thus, in view of these circumstances it can be safely inferred that the assessee was prevented by reasonable cause in not deducting TDS from the payments made by it. It may be pointed out that as soon as the assessee came to know about his liability, it started to comply with the provisions of Chapter XVII and deducted tax. The information in this regard was conveyed to the department through letter dated 25-2-1999, which is available at page 49 of the paper book. It was intimated that TDS of Rs. 91,60,140 had been deducted.
23. On going through the correspondence on record, it is found that the assessee had advanced a plea of reasonable cause. it is to be pointed out that in the instant case the assessee also deposited the entire tax as well as interest and no action under section 221 was taken against the assessee.
24. In the case of Mitsui & Co. Ltd. (supra), the Hon’ble Delhi High Court has held that payment of amount of short tax deduction and interest thereon was a mitigating factor for not taking action under section 221 and when no action was taken by the revenue for levy of penalty under section 221 and delay in payment of tax had been fully compensated by payment of interest, no further action was justified under section 271C. In that case also a non-resident company incorporated in Japan was charged with the liability for non-deduction of TDS. The company had paid interest as required under section 201 (1A) for the delayed payment. On this basis it was inferred by the ITAT that there existed good and sufficient reason for non-deduction of tax at source from the amount paid in Japan. The finding of the Tribunal was upheld by the Hon’ble Delhi High Court.
25. Similarly, the Tribunal in the case of Marubeni Corpn. (Liaison Office) v. Jt. CIT (2002) 83 ITD 577 (Delhi), has accepted the plea of bona fide belief and reasonable cause. In that case of a non-resident company, the fault was for non-deduction of tax at source on certain amount of emoluments paid by the assessee-company to expatriate Japanese company.
26. In the case of CIT v. Itochu Corpn. (2004) 268 ITR 172 (Del) the Hon’ble Delhi High Court has upheld the finding of the Tribunal wherein it was held that the assessee had paid the tax along with interest voluntarily and thus there existed a bona fide belief that tax was not deductible at source.
27. So far as the plea of reasonable cause is concerned, the same is to be examined in the context of the circumstances of each case. In the case of Woodward Governor India (P) Ltd. v. CIT (2002) 253 ITR 745 (Del) the Hon’ble Delhi High Court in that case considered the plea of reasonable cause and has observed as under :
“Levy of penalty under section 271C of the Income Tax Act, 1961, for failure to deduct tax at source, is not automatic. In order to bring an application of section 271C, in the backdrop of the overriding non obstante clause in section 273B, absence of reasonable cause, existence of which has to be established, is a sine qua non. Before levying penalty, the concerned officer is required to find out that even if there was any failure to deduct tax at source, the same was without reasonable cause. The initial burden is on the assessee to show that there exists reasonable cause which was the reason for the failure. Thereafter, the officer has to consider whether the explanation offered by the assessee or other person as regards the reason for failure, was on account of reasonable cause.
A clause beginning with “notwithstanding anything” is sometimes appended to a section in the beginning with a view to give the enacting part of the section, in case of conflict, an overriding effect over the provisions of the Act mentioned in the non obstante clause. A non obstante clause may be used as a Legislature device to modify the ambit of the provision of law mentioned in the non obstante clause or to override it in specified circumstances. The true effect of the non obstante clause is that in spite of the provision or Act mentioned therein the enactment following it will have full operation or that the provisions embraced in the non obstante clause will not be an impediment for the operation of the enactment.”
28. In the instant case, from the circumstances narrated by the assessee in its explanations submitted to the assessing officer, it is clear that the assessee was having no idea that it was required to deduct tax at source. The belief of the assessee in not deducting tax was, therefore, a bona fide belief particularly in absence of any specific direction in this regard by the assessing officer.
29. Under the circumstances, it cannot be said that the conduct of the assessee was mala fide and the payment made without deduction of tax at source was with ulterior motive. The plea of the learned Departmental Representative that the assessee was expected to know the liability and provisions of Income Tax Act applicable in India, cannot be accepted because the assessee was a foreign company and was not aware of the Indian laws. This aspect is further substantiated by the fact that the assessee itself sought instructions from the department on this issue.
30. In the case of Motilal Padampat Sugar Mills Co. Ltd. (supra), the Hon’ble Supreme Court has observed that there is no presumption that every person knows the law. It has been further observed that it is often said that every one is presumed to know the law, but that is not a correct statement and there is no such maxim known to the law. This observation of the Hon’ble Supreme Court is fully applicable to the assessee’s case.
31. In any case, and particularly in absence of any formal legal advice it cannot be assumed that the assessee was aware about, its legal obligation cast upon it under the Income Tax Act relating to deduction of tax and therefore, it cannot be held that the assessee consciously disregarded its obligation. In the instant case the department has also failed to discharge its obligation in property instructing the assessee at the time when the instructions were sought by the assessee from it.
32. In view of the above and in the totality of the circumstances pertaining to this matter we are of the considered opinion that the assessee had fully established a reasonable cause on its part for not being able to discharge its legal obligation. The plea of the assessee, in our opinion, justifies a reasonable cause which is available in view of the provisions contained in section 273B of the Income Tax Act. This plea has been fully substantiated by the assessee and the explanation of the assessee deserved to have been accepted. The departmental authorities were, therefore, not justified in rejecting such plea, in imposing the penalty under section 271C. It may be observed that the imposition of penalty is not mandatory and in the cases, like the present case, there is no justification for imposing penalty particularly when the entire tax had been deposited and interest has also been paid by the assessee for delay in deducting the tax.
33. Thus, on consideration of totality of the circumstances and the relevant material on record, we set aside the finding of learned Commissioner (Appeals) and cancel the penalty imposed by the assessing officer under section 271C and so sustained by the learned Commissioner (Appeals). Consequently, the penalty stands cancelled.
34. In the result, assessee’s appeal is allowed.