(2011) TIOL 209 ITAT-Mum. ACIT v. American School of Bombay Education Trust ITA No. 136 to 138/Mum./2010 A.Ys.: 2000-01 to 2002-03. Dated: 4-2-2011

Facts:
The assessee was running a school popularly known as ‘American School of Bombay’. In the course of survey u/s.133A of the Act, conducted on 24-1-2006 it was found that the assessee had failed to deduct tax at source from the salaries paid to expatriate teachers by South Asia International Educations Services (SAIESF) outside India. The Assessing Officer, upon issuing show-cause notice and considering the explanations offered by the assessee, in an order passed an order u/s.201(1) and 201(1A) held the assessee to be in default for not deducting tax at source u/s.194C. He also levied interest u/s.201(1A) and initiated penalty proceedings, after obtaining approval from the Add. CIT(TDS), by issuing notice to the assessee. Not being satisfied with the explanation offered by the assessee, the AO levied penalty u/s.271C of the Act.

Aggrieved, the assessee preferred an appeal to CIT(A) who noted that the Tribunal has quashed the order passed by the DCIT(TDS) u/s.201(1) and 201(1A) on the ground that initiation of proceedings was beyond a period of six years and hence was barred by limitation. He deleted the penalty levied u/s.271C.

Aggrieved, the Revenue preferred an appeal to the Tribunal.

Held:
The Tribunal noted that in the case of the assessee for the A.Y. 1997-98 to 1999-2000, the Tribunal has held that — a bare perusal of section 271C(1) indicates that penalty u/s.271C can be imposed only when there is a failure on the part of the assessee to deduct or pay the whole or any part of tax and, then, the quantum of penalty is equal to the amount of tax which such person failed to deduct or pay. From here, it emerges that there must be some sum which such person failed to deduct or pay. Such amount constitutes the basis for imposition of penalty u/s.271C. In other words, the liability of the assessee u/s.201(1) is a pre-condition for imposition of penalty u/s 271C. If the very order passed u/s.201(1) creating liability has been set aside on account of limitation and there is no possibility of any fresh order being likely to be passed u/s.201(1), there remains no question of the assessee being deemed to be an assessee in default in respect of such tax. The natural corollary which, therefore, follows is that if the order u/s.201(1) ceases to be operative, it will have the effect of the assessee not being in default. Once the assessee is not in default for failure to deduct or pay tax at source, naturally, there cannot be any question of imposing penalty u/s.271C for the reason that the very basis of such penalty is the amount of tax which such person failed to deduct or pay as per law and when there is no such amount in existence, the possibility of imposing penalty will automatically be ruled out.

The Tribunal noted that the effect of the Tribunal’s order quashing the order passed u/s.201(1) and 201(1A) on account of limitation is that the assessee is not deemed to be in default in respect of any failure to deduct or pay tax at source. It held that in such circumstances the question of penalty u/s.271C cannot arise.

The appeal filed by the Revenue was dismissed.