ORDER
Krishna Swarup, A.M.
1. In these two appeals against the consolidated order of the CIT(A)-I, Varanasi, dt. 29th February, 1993, the assessee is objecting to the sustenance of penalty of Rs. 3,64,608 and Rs. 8,77,296 imposed under s. 271C of the IT Act, 1961 for the asst. yrs. 1990-91 and 1991-92 respectively. As many as six identical grounds have been taken in each of the appeals which are argumentative in nature.
2. Briefly stated, the facts concerning the matter are that the assessee, a Senior Accounts Officer in B-Thermal Power Project of U.P. State Electricity Board, Anpara, was a person responsible for deduction of tax at source under s. 194-C of the Act from payments made to contractors and sub-contractors. During the financial years 1989-90 and 1990-91 and 1991-92, payments of Rs. 1,68,80,000 and Rs. 3,91,65,000 were made to M/s Indian Railway Construction Co. (IRCON in short). On scrutiny of the returns in Form No. 26C filed by the aforesaid person, the ITO (TDS) noticed that deduction of the prescribed amount of tax, which worked out to Rs. 3,64,608 and Rs. 8,77,296 for the asst. yrs. 1990-91 and 1991-92 respectively had not been made. He, therefore, issued a show-cause notice under s. 271C of the Act. In reply, the assessee submitted that M/s IRCON were not a contractor but were doing work on behalf of B-Thermal Power Project, Anapra, for which they were reimbursed at certain percentage for the expenditure incurred by them and for their profit. Not being satisfied with the assessee’s explanation, the ITO(TDS) referred the matter to the Dy. CIT for imposition of penalty under s. 271C of the Act. The Dy. CIT also issued a show-cause notice in response to which the contentions made before the ITO were reiterated. On the contention that in view of the nature of agreement made with M/s IRCON there was no liability to deduct tax at source, the Dy. CIT observed that the various clauses of the agreement clearly indicated that M/s IRCON were carrying out work of a contractor, which fact was evident from their own return in Form No. 26C showing deduction of tax from payment to the sub-contractors. He further observed that the person responsible for making payments to M/s IRCON had himself started deduction of tax at source in subsequent years. It was pointed out that the circumstances under which the fault was committed were not explained. Accordingly, it was held that the person responsible for payment to contractor was liable for penalty under s. 271C of the Act. Penalties of Rs. 3,64,608 and Rs. 8,77,296 were imposed for the asst. yr. 1990-91 and 1991-92 respectively.
2.1. In appeal before the learned CIT(A), besides reiterating the facts stated before the ITO (TDS) and Dy. CIT it was submitted that the payments to M/s IRCON were made right from the year 1980 but the person responsible for making the payment was held to be in default only for asst. yrs. 1990-91 and 1991-92. It was also pointed out that by order under s. 201 demand was created for the tax to be deducted at source but in appeal it was vacated. The learned CIT(A) did not find merit in assessee’s plea and by observing as under, he upheld the imposition of penalty.
“9. I do not agree with the contention of the appellant that M/s. IRCON was not a contractor. The terms of the agreement were referred by the Dy. CIT. He also referred to the fact that M/s. IRCON considering itself as a contractor deducted tax at source 1 per cent from payment to its own sub-contractors. I agree with his finding that M/s. IRCON was a contractor to complete a particular part of the project, namely, construction of railway line to provide transport facilities. Thus, the appellant was liable to deduct the tax under s. 194C of the Act. There was no reasonable cause for not doing so. The penalty is rightly levied, it is confirmed.”
3. Before us, the submission of the learned counsel for the assessee was that the assessee was under a bona fide belief that the agreement with M/s. IRCON was an agency agreement by which they were being reimbursed for the expenditure and services rendered by them. It was reiterated that the assessee never treated M/s. IRCON as a contractor and it was because of this bona fide understanding that no tax was deducted at source under s. 194C of the Act. In this connection, it was stressed that the payments to M/s IRCON were being made by B-Thermal Power Project and another unit since 1980 but the assessee was never called upon to deduct tax on such payment. Relying on certain decisions of the Tribunal Benches, it was pleaded that the bona fide belief of the assessee constituted a reasonable cause for the failure to deduct tax at source and, therefore, no penalty was exigible. It was also submitted that as soon as the liability of the assessee was pointed out, tax was deducted from payments to M/s IRCON and deposited in the Government account. The learned counsel also submitted that there was no loss to the IT Department because M/s IRCON had duly shown the receipts in their own case.
3.1. The submission of the learned Departmental Representative was that no case has been made out to prove that the failure to deduct tax at source was attributable to any reasonable cause. The Patna High Court (FB) decision in the case of CWT vs. Shri Jagdish Prasad Choudhary (1995) 211 ITR 472 (Pat) (FB) was referred to and while admitting that the decision in this case was on facts against the Department, the learned Departmental Representative, submitted that the said decision laid down a proposition that “reasonable cause” means a cause which was beyond the control of the assessee and which prevented a reasonable man of ordinary prudence acting under normal circumstances, without negligence or inaction or want of bona fides from complying with the statutory requirements, which test was not satisfied in the assessee’s case. It was submitted that well-qualified persons having knowledge of taxation matter were employed by UPSEB and it cannot be accepted on face value that the assessee was not aware of the relevant provisions. The learned Departmental Representative also submitted that the decisions referred to by the learned counsel were distinguishable on facts.
4. We have carefully considered the whole gamut of the facts and circumstances of the case, the material to which our attention was invited and the rival submissions. Sec. 271C provides for imposition of penalty for failure to deduct tax at source under the provisions of Chapter XVII-B of the IT Act. However, the imposition of penalty is not automatic because of s. 273B which lays down that no penalty shall be imposable for any failure referred to in various provisions, including s. 271C, if the person concerned proves that there was a reasonable cause for the failure. As to what would constitute a “reasonable cause”, has not been defined in the Act but this aspect has been a subject-matter of consideration in various judicial decisions. It is held that as to what is reasonable cause is a question of fact to be decided on consideration of all relevant facts and circumstances. The facts and circumstances being within the special knowledge of the assessee the burden of proving the existence and reasonability of the cause is on the assessee. When the assessee offered some explanation, it is the duty of the authorities concerned, to consider it objectively and to find out as a fact whether the particular cause stated by the assessee could operate upon his mind to prevent him from acting in the manner prescribed by the statute. Normally, the explanation is expected to be furnished before the authority imposing the penalty but if, by inadvertence or mistake, it could not be offered before the said authority, it could be offered before the first appellate authority who has co-terminus power with the authority imposing the penalty.
4.1. Advertising to the facts of the present case, from the very beginning the explanation of the person responsible for making payment was that he did not consider the agreement with M/s IRCON to be in the nature of a contract agreement requiring deduction of tax at source from the payment made to them. In this connection, it has been repeatedly submitted that payments to M/s IRCON were made right from the year 1980 but no default on the part of the assessee was pointed out by the IT Department. This fact has not been rebutted in any manner by any of the authorities below. It can, therefore, be held that the breach flew from a bona fide belief that the assessee was not liable to act in the manner prescribed by the statute. The law does not prescribe any particular mode by which the burden placed on the assessee for showing the existence of a reasonable cause could be discharged by him. It all depends on the facts and circumstances of each case. It is open to an assessee to give a positive explanation and to adduce evidence to substantiate it or without producing any evidence to establish it from the facts on record. It cannot be accepted as a good proposition of law that the statement of an assessee should never be accepted as a good explanation. Even at the cost of repetition, we would point out that the assessee in this case had offered an explanation and that explanation could not be said not to be bona fide. It has to be borne in mind that penalty proceedings are quasi-criminal proceedings and as has been elaborated by the Hon’ble Supreme Court in the case of Hindustan Steel Ltd. vs. State of Orissa (1972) 83 ITR 26 (SC) penalty will not be imposed merely because it is lawful to do so. Whether penalty should be imposed for failure to perform a statutory obligation is a matter of discretion of the authority concerned to be exercised judiciously and on a consideration of all the relevant circumstances.
4.2. On a careful consideration of the facts and circumstances of the case in its entirety and in view of the foregoing, we are of the considered opinion that the failure of the assessee in this case to deduct tax at source from the payments made to M/s IRCON could not be said to be without any reasonable cause. Therefore, no penalty is exigible under s. 271C of the Act. The orders of the authorities below are set aside.
5. In the result, the appeals are allowed.
