Commissioner Of Income Tax (Tds) vs M/S Ikea Trading Hong Kong Ltd
2009 Latest Caselaw 103 Del

            THE HIGH COURT OF DELHI AT NEW DELHI

%                                           Judgment delivered on: 16.01.2009

+ ITA 138/06, 130/06, 135/06, 140/06, 143/06, 150/06 & 152/06

COMMISSIONER OF INCOME TAX (TDS)                                     ... Appellant

                                           - versus -

M/S IKEA TRADING HONG KONG LTD                                       ... Respondent

Advocates who appeared in this case:

For the Appellant : Ms Prem Lata Bansal with Mr Sanjeev Rajpal and Ms Anshul Sharma For the Respondent : Mr M. S. Syali, Sr Advocate with Mr Aseem Mowar and Ms Mahua C. Kalra

CORAM:-

HON'BLE MR JUSTICE BADAR DURREZ AHMED HON'BLE MR JUSTICE RAJIV SHAKDHER

1. Whether Reporters of local papers may be allowed to see the judgment ? YES

2. To be referred to the Reporter or not ? YES

3. Whether the judgment should be reported in Digest ? YES

BADAR DURREZ AHMED, J

1. These seven appeals arise out of the common order passed

by the Income Tax Appellate Tribunal (hereinafter referred to as ―the

Tribunal‖) on 24.04.2005 in ITA Nos. 35 to 41/Del/2003 pertaining to

the financial years 1987-88 to 1993-94. The substantial question of

law which arises for our consideration is as follows:-

Whether, in the facts and circumstances of the present appeals, the Income-tax Appellate Tribunal was correct in law in deleting the penalty imposed by the assessing officer under section 271C of the Income Tax Act, 1961, on the ground that the penalty order dated 16.03.2000 was passed

ITA Nos. 138/2006, 130/06, 135/06, 140/06, 143/06, 150/06 & 152/06 Page No.1 of 18 beyond the time prescribed by section 275(1)(c), the same having been passed more than six months from the end of the month in which the show cause notices were issued?

2. The assessee/respondent is a company incorporated in Japan

and has a liaison office in India. A survey operation under section

133A of the Income Tax Act, 1961 (hereinafter referred to as ―the said

act‖) was carried out in the assessee's premises at 8, Balaji Estate, Guru

Ravidas Marg, Kalkaji, New Delhi, on 4.12.1998. In the course of the

survey, statements of various expatriates working for the assessee were

recorded and they admitted that a part of their salary was being paid to

them in India and some part was being received by them in their native

country. Consequent upon the said survey, the assessee sent a letter

dated 18.01.1999 to the income-tax officer and enclosed therewith in

respect of each of the individual expatriates the following documents:-

1. Income-tax computations for the financial years 1987-88 to 1993-94

2. Salary certificates from the employer, stating the salary paid to the individual employees

3. Form-16's issued to the individual employees by the employers in India.

A summary statement of the total amount which was required to be

deposited towards tax and interest thereon in respect of the financial

year 1987-88 to 1993-94 was, as indicated in the letter, enclosed

therewith. The total additional tax liability was indicated at

Rs 49,91,290/-. The amount towards interest was indicated at

ITA Nos. 138/2006, 130/06, 135/06, 140/06, 143/06, 150/06 & 152/06 Page No.2 of 18 Rs 49,93,957/-. Thus the total additional liability towards tax and

interest was shown as Rs 99,85,247/-. It is pertinent to note that earlier,

on 08.01.1999, the assessee had, on estimate basis, deposited a total

sum of Rs 1,52,00,000/- towards tax and interest. This amount was

deposited through seven separate challans for each of the financial

years 1988-89 to 1994-95. The estimated amount of Rs 1,52,00,000/-

was far in excess of the amount payable by the assessee towards tax

and interest as indicated in the letter dated 18.01.1999. Consequently,

the assessee claimed a refund of Rs 52,14,753/-from the Department.

3. On 26.06.1999 the additional Commissioner of income tax

issued a common show cause notice for imposition of penalty under

section 271C of the said act. The relevant portion of the said show

cause notice is as under:-

― Sir,

Sub: show cause notice for imposition of penalty u/s 271C of the income-tax act

Whereas it is seen that you had failed to deduct the taxes as per provisions laid down under section 192 of the income- tax act on the various amounts paid as detailed in your letter dated 18.12.991 and as listed below:

                    Fin.                                        Amount of additional
                    Year                                        tax deposited
                    1987-88                                     1, 56, 5552
                    1988-89                                     2, 26, 970
                    1989-90                                     3, 91, 254

Wrongly indicated as 18.12.99, the date of the letter was 18.01.99.

Wrongly shown as Rs 1,56,555/-, the correct figure as per the assessee's letter is Rs 1,59,555/-.

ITA Nos. 138/2006, 130/06, 135/06, 140/06, 143/06, 150/06 & 152/06 Page No.3 of 18 1990-91 4, 51, 510 1991-92 11, 99, 364 1992-93 14, 08, 121 1993-94 11, 54, 515

The above-mentioned amount had not been disclosed in the original return by you. In view of above, you are hereby given an opportunity to explain as to why a penalty u/s 271C of the income-tax act be not levied on you, as described therein, on your such failure to deduct the tax. You can appear personally or through your authorised representative or file written submission in this regard at 11.00 a.m. on 22.7.99. Your failure to represent the case will lead to the presumption that you have nothing to state in the matter and the case will be decided on merits.‖

4. Apparently, the Joint Commissioner of income-tax had in the

meanwhile requested the assessee to file a statement indicating the

reconciliation of additional tax and interest deposited by it and the

other companies of the IKEA group on account of their expatriate

employees. Consequent upon such a request, the chartered accountants

of the assessee sent a letter dated 12.07.1999 to the Joint Commissioner

of income-tax enclosing therewith the reconciliation statement in

respect of the additional tax and interest deposited by the IKEA group

on account of their expatriate employees. Insofar as the assessee was

concerned, the additional tax liability was shown as Rs 49,91,289/-,

which was the same as indicated in the earlier letter dated 18.01.1999

and as mentioned in the said show cause notice. The said

reconciliation statement also indicated the interest liability to be

Rs 49,93,958/-. Consequently, inasmuch as an additional amount of

ITA Nos. 138/2006, 130/06, 135/06, 140/06, 143/06, 150/06 & 152/06 Page No.4 of 18 Rs 1,52,00,000/-had been deposited on 08.01.1999, the amount of

refund due from the tax department was shown as Rs 52,14,753/-.

5. In response to the show cause notice, the assessee sent a

written reply on 26.07.1999 to the Additional Commissioner of

income-tax. In the said reply, the assessee took the position that the

assessee had been under a genuine belief that as the payments were

made outside India by a company incorporated outside India and

located outside India, the provisions of the Income Tax Act, 1961

relating to deduction of tax at source on payment of such salaries were

not applicable. However, we need not go into the question of merits

inasmuch as we are only concerned with the question of limitation.

6. On 24.01.2000 the Joint Commissioner of income-tax issued

a letter to the assessee granting the assessee a further opportunity of

being heard in respect of the penalty sought to be imposed on the

assessee. In response to the said letter dated 24.01.2000, the assessee

submitted its reply by a letter dated 09.02.2000 wherein the assessee

took the plea that more than six months had already elapsed since the

issuance of the show cause notice and consequently no order imposing

a penalty could now be passed inasmuch as the period of limitation set

down in section 275(1)(c) of the said act had already expired.

ITA Nos. 138/2006, 130/06, 135/06, 140/06, 143/06, 150/06 & 152/06 Page No.5 of 18 However, the Joint Commissioner of income-tax went ahead and

passed the order dated 16.03.2000 imposing a penalty of

Rs 49,91,289/- under section 271C of the said act in respect of the

financial years 1987-88 to 1993-94 being the sum equal to the total

amount of short deduction of tax which the assessee had failed to

deduct and pay to the credit of the central government in time as per the

provisions of chapter XVII-B of the said act. The Joint Commissioner

of income-tax repelled the plea of the assessee on the point of

limitation by holding that the penalty proceedings were initiated in the

course of verification proceedings in respect of various TDS returns

filed under section 206 of the said act. The joint Commissioner

observed that the verification proceedings had not yet been completed

and that the orders under sections 201(1)/201(1A) had also not yet been

passed. According to the Joint Commissioner, this meant that the

proceedings in the course of which the penalty proceedings were

initiated had not yet been completed and therefore the period of

limitation which would begin on the culmination or completion of the

former proceedings had not yet begin to run. After rejecting the plea of

limitation raised by the assessee, the Joint Commissioner of income-tax

by virtue of the penalty order dated 16.03.2000 held against the

assessee on merits and imposed the said amount of penalty.

ITA Nos. 138/2006, 130/06, 135/06, 140/06, 143/06, 150/06 & 152/06 Page No.6 of 18

7. Being aggrieved by the penalty order dated 16.03.2000

passed by the Joint Commissioner of income-tax, the assessee preferred

appeals before the Commissioner of income-tax (appeals), who, by an

order dated 04.12.2002 accepted the plea of the petitioner on the point

of limitation and set aside the penalty order dated 16.03.2000. Since

the Commissioner of income-tax (appeals) had accepted the plea of

limitation, he did not examine the question of penalty on merits

inasmuch as it had become academic. The Commissioner of income-

tax (appeals) followed the decision of the Tribunal in the case of Lurgi

India company Ltd wherein the Tribunal had observed that for the

purpose of section 271C, the time available for passing an order

imposing penalty is six months from the end of the month in which

action for imposition of penalties initiated. The Commissioner of

income-tax (appeals) also referred to the decision of the Tribunal in the

case of Mitsui & Co Ltd versus CIT (1999) 65 TTJ 1 in order to

emphasize the distinction between the provisions of section 271C and

the provisions of section 271(1)(c) where the penalty proceedings have

to be initiated during the course of assessment proceedings. He held

that penalty proceedings under section 271C were independent of

verification proceedings. He also took note of the fact that in several

cases the department had taken the stand that proceedings under section

271C could not be linked with verification proceedings.

ITA Nos. 138/2006, 130/06, 135/06, 140/06, 143/06, 150/06 & 152/06 Page No.7 of 18

8. The revenue's appeals before the Tribunal were dismissed by

virtue of the impugned order dated 24.04.2005. The Tribunal upheld

the order passed by the Commissioner of income-tax (appeals).

Aggrieved by the impugned order, the revenue has preferred the

present appeals. It was contended on behalf of the revenue/appellant

that both the Commissioner of income-tax (appeals) and the Tribunal

had erred in law in accepting the plea of limitation raised by the

assessee/respondent. The learned counsel appearing on behalf of the

revenue/appellant submitted that since the penalty proceedings, which

had been initiated by the issuance of the show cause notice dated

26.06.1999, had been so initiated in the course of verification

proceedings, there was no question of the period of limitation having

expired in view of the provisions of section 275(1)(c) of the said act. It

was contended that the verification proceedings began with the survey

on 04.12.1998 and ended on 12.07.1999 when the assessee sent the

information regarding the additional tax liability of the assessee on

account of the short deduction/ short payment of tax deducted at

source. Therefore, according to the learned counsel for the

revenue/appellant, the period of limitation would run out only after the

end of the financial year, that is, on 31.03.2000. The learned counsel

submitted that the period of six months from the end of the month in

which the show cause notice dated 26.06.1999 would undoubtedly

expire on 31.12.1999 but, as the financial year in which the verification

ITA Nos. 138/2006, 130/06, 135/06, 140/06, 143/06, 150/06 & 152/06 Page No.8 of 18 proceedings were completed would end on 31.03.2000 and as that

would expire later, the end-point of limitation would be 31.03.2000. It

was submitted that the penalty order, having been passed on

16.03.2000, was clearly within time.

9. The learned counsel for the respondent/assessee supported

the impugned order passed by the Tribunal and urged that the same

does not call for any interference. He made two-fold submissions. In

the first place, it was contended that penalty proceedings under section

271C are independent of any other proceeding and do not arise out of

any other proceeding. The existence of, continuation, or culmination of

any other proceeding is not a requirement for initiating penalty

proceedings under section 271C of the said Act and no such pre-

condition ought to be read into the statute. Secondly, it was contended,

even if it be assumed that penalty proceedings were initiated in the

course of verification proceedings, the said proceedings stood

completed on 18.01.1999 when the assessee submitted all the details of

additional tax and interest payable after having paid the same and that,

too, in excess on 08.01.1999. The show cause notice dated 26.06.1999

itself only referred to the letter dated 18.01.1999 (wrongly mentioned

as 18.12.1999). There is no mention of any pending proceeding. It

was, therefore, submitted that the revenue's reliance on the letter of

12.07.1999 is a mere pretence of showing that some verification

ITA Nos. 138/2006, 130/06, 135/06, 140/06, 143/06, 150/06 & 152/06 Page No.9 of 18 proceeding was pending and that the same was completed only on

12.07.1999. The learned counsel for the respondent submitted that the

information given in the letter of 12.07.1999 was nothing but a

repetition of the information already supplied through the letter dated

18.01.1999. Moreover, the letter of 12.07.1999 was more for the

purposes of the refund claim of the assessee than for the purposes of

indicating the extent of the default. The deficient tax and interest stood

paid in excess on 08.01.1999 itself. It was submitted that the order

dated 16.03.2000 was clearly beyond time and that the Commissioner

of Income Tax (appeals) as well as the Tribunal had correctly accepted

the assessee's plea of time bar and had cancelled the penalty.

10. Before we proceed further, we need to notice the relevant

provisions of the said Act. Sections 271C and 275(1)(c), so much as

are relevant, read as under:-

"271C Penalty for failure to deduct tax at source.

(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-O; or

                         (ii)    the second proviso to section 194B,



ITA Nos. 138/2006, 130/06, 135/06, 140/06, 143/06, 150/06 & 152/06     Page No.10 of 18

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

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

"275. Bar of limitation for imposing penalties.--(1) No order imposing a penalty under this Chapter shall be passed -

                (a)          xxx                                     xxx
                             xxx                                     xxx ;

                (b)          xxx                                     xxx
                             xxx                                     xxx ;

                (c)          In any other case, after the expiry of the

financial year in which the proceedings, in the course of which action for the imposition of penalty has been initiated, are completed, or six months from the end of the month in which action for imposition of penalty is initiated, whichever period expires later.

xxx xxx xxx xxx‖

11. Recently, in ITA 243/2008 (Subodh Kumar Bhargava v.

Commissioner of Income-tax) decided on 26.11.2008, we had

examined the provisions of section 275. We had noted that section 275

fell within Chapter XXI which dealt with ―Penalties Imposable‖. We

had observed that sub-clauses (a) and (b) of Section 275(1), which have

not been extracted above and are not attracted in the present case,

related to cases where the assessment to which the proceedings for

imposition of penalty relate were the subject matter of an appeal before

ITA Nos. 138/2006, 130/06, 135/06, 140/06, 143/06, 150/06 & 152/06 Page No.11 of 18 higher authorities or were the subject matter of a revision under Section

263 of the said Act, respectively. It was noticed that sub-clause (c) of

Section 275(1) covers all other cases not falling within sub-clauses (a)

or (b) and, in that sense, section 275(1)(c) is a residuary provision.

12. There are two periods of limitation prescribed under sub-

clause (c), the first period relates to those category of cases where

action for the imposition of penalty has been initiated in the course of

―some‖ proceedings. In such a situation, the period of limitation

prescribed is upto the end and including the financial year in which

such proceedings are completed.

13. The second part of Section 275(1)(c) pertains to all cases

falling under clause (c). This is so because the action for imposition of

penalty is contemplated in both parts. Penalty can only be imposed

under Chapter XXI by following the procedure prescribed in Section

274 of the said Act which stipulates that no order imposing a penalty

can be made unless the assessee has been heard or has been given a

reasonable opportunity of being heard. Thus, in any eventuality, before

an order imposing a penalty can be passed, the assessee has to be heard

or has to be given a reasonable opportunity of being heard. This can

only happen when action for imposition of penalty is initiated and the

assessee is put to notice with regard to such action so that he may

ITA Nos. 138/2006, 130/06, 135/06, 140/06, 143/06, 150/06 & 152/06 Page No.12 of 18 present his point of view in opposition to such action. The only

difference between the first part and the second part is that while in the

first part, the action for imposition of penalty is initiated in the course

of some other proceedings, under the second part, the ―other‖

proceedings are of no relevance and the only thing to be considered is

the point of time as to when the action for imposition of penalty was

initiated. In this background, in Subodh Kumar Bhargava (supra) we

had observed that:-

―13. There may be cases which fall under Section 275(1)(c) in which action for the imposition of penalty is initiated in the course of some other proceedings. There may also be cases under Section 275(1)(c) in which the action for imposition of penalty is initiated, but not in the course of some proceedings. In the former category of cases, both the periods of limitation may be applicable, whereas in the latter category, only the second period of limitation of six months from the end of the month in which action for imposition of penalty is initiated, would apply. To illustrate this, let us take the first category of cases. This is that category where the action for imposition of penalty is initiated in the course of some other proceeding. In such a situation, it is obvious that both the periods of limitation would come into play. One would be reckoned from the date on which the other proceedings are completed upto and including the end of the financial year in which that date occurs. The other period of limitation would be that which applies irrespective of the date of completion of the ―other proceedings‖ and which is relatable simply to the date on which action for imposition of penalty is initiated.

The period of limitation in such a case would be six months from the end of the month in which the action for imposition of penalty is initiated. It is clear that where penalty proceedings are initiated in the course of some other proceedings, the legislature has provided for two different periods of limitation. However, so that there is no confusion with regard to which of the two would apply, the

ITA Nos. 138/2006, 130/06, 135/06, 140/06, 143/06, 150/06 & 152/06 Page No.13 of 18 legislature has added the expression ―whichever period expires later‖ at the end.‖

―......But there is a third / residuary category of cases where the initiation of action for imposition of penalty is not in the course of some proceedings. In such cases, the first part of Section 275(1)(c) would have no application and it is only the period of limitation prescribed in the second part which would apply. Since only one period of limitation would be applicable, the expression ―whichever period expires later‖ would have to be read as that very period of limitation.‖

From the above observations in Subodh Kumar Bharagava (supra), it

is clear that that every penalty order under section 275(1)(c) emanates

from a notice/show cause notice. However, such notice may or may

not arise in the course of some other proceeding. Where it does arise in

the course of some other proceeding, two periods of limitation would

be available. One starting from the completion of the other proceeding

and ending with the end of the financial year. The second, starting

from the end of the month in which the penalty proceeding is initiated

and ending six months therefrom. In such a situation, the later of the

two end-points of limitation would apply. But, where the penalty

proceeding does not emanate from any other proceeding, then only the

six month period from the end of the month of initiation of the penalty

proceeding would be available. We have to examine as to in which

category the present case falls.

ITA Nos. 138/2006, 130/06, 135/06, 140/06, 143/06, 150/06 & 152/06 Page No.14 of 18

14. The show cause notice dated 26.06.1999 provides us with the

clues to this question. The show cause notice does not mention any

pending proceeding in the course of which it was issued. In fact, the

show cause notice is based entirely upon the assessee's letter dated

18.01.1999. The amounts are also identical (except for the

typographical error where the amount in respect of the financial year

1987-88 has been wrongly indicated as Rs 1,56,555/- instead of the

correct figure of Rs 1,59,555/-). The argument that verification was

under way also does not stand to reason. The show cause notice issued

on 26.06.1999 is definitive of the stand of the department that the

assessee had failed to deduct the taxes as per the provisions laid down

under section 192 of the income-tax act on the various amounts paid as

detailed in the assessee's letter dated 18.01.19991 and as listed in the

said notice. On their part, the department was sure of the exact amount

of default. The sending of the letter dated 12.07.1999 enclosing the

reconciliation statement of the entire IKEA group would not enable the

revenue to submit that it was only then that they came to know of the

exact extent of the default. Such a stand on the part of the revenue is

belied by the issuance of the show cause notice itself prior to the

receipt of the said letter of 12.07.1999. So, the penalty proceeding

which was initiated by the issuance of the show cause notice on

Wrongly indicated in the show cause notice as 18.12.99; the date of the letter was 18.01.99.

ITA Nos. 138/2006, 130/06, 135/06, 140/06, 143/06, 150/06 & 152/06 Page No.15 of 18 26.06.1999 was not in the course of any other proceeding but, was

independent of any proceeding.

15. We may also make it clear that the penalty proceeding under

section 271C is independent of any other proceeding. If there is a

failure to deduct or pay the tax deducted at source, penalty proceedings

can be initiated. This is irrespective of any order being passed under

section 201(1)/201(1A) of the said act. In fact, this is easily

demonstrated by the very case at hand. No order under section

201(1)/201(1A) has been passed, yet the penalty order under section

271C has been passed all the same. Moreover, the ―other‖ proceeding

mentioned in section 271(1)(c) must be a legitimate proceeding having

due recognition under the said act such as an assessment proceeding. If

it were to be contended that the survey proceeding was pending, it

would be contrary to the scope and ambit of the provisions of section

133A of the act. The survey operation commenced and concluded on

04.12.1998. As regards the submission that verification proceedings

were pending, we note that under the said act there is no proceeding

which goes by the name of verification proceedings. It is true that in

the course of some proceedings such as assessment proceedings, the

assessing officer may undertake verification of certain facts but, there

is no provision for an independent and formalized verification

proceeding under the said Act. Thus, apart from the fact that no

ITA Nos. 138/2006, 130/06, 135/06, 140/06, 143/06, 150/06 & 152/06 Page No.16 of 18 verification was underway when the show cause notice was issued, the

plea of pendency of verification proceedings cannot be accepted even

in law.

16. Clearly, the present case falls in the third category of cases

referred to in Subodh Kumar Bhargava (supra) where the initiation of

action for imposition of penalty is not in the course of some

proceedings. Thus, the first part of Section 275(1)(c) would have no

application and it is only the period of limitation prescribed in the

second part which would apply. And, as held in Subodh Kumar

Bhargava (supra), since only one period of limitation would be

applicable, the expression ―whichever period expires later‖ would have

to be read as that very period of limitation. This being the position, the

period of limitation for passing the penalty order expired on

31.12.1999 being six months from the end of the month in which the

penalty proceeding was initiated by issuance of the show cause notice

dated 26.06.1999. The penalty order was passed on 16.03.2000. This

was clearly beyond the time prescribed under section 275(1)(c) of the

said Act.

17. Consequently, we answer the question against the

revenue/appellant and in favour of the assessee by holding that, in the

facts and circumstances of the present appeals, the Income-tax

ITA Nos. 138/2006, 130/06, 135/06, 140/06, 143/06, 150/06 & 152/06 Page No.17 of 18 Appellate Tribunal was correct in law in deleting the penalty imposed

by the assessing officer under section 271C of the Income Tax Act,

1961, on the ground that the penalty order dated 16.03.2000 was passed

beyond the time prescribed by section 275(1)(c), the same having been

passed after the lapse of six months from the end of the month in which

the show cause notices were issued. The appeals are dismissed. The

parties are left to bear their own costs.

BADAR DURREZ AHMED, J

RAJIV SHAKDHER, J January 16, 2009 HJ/SR

ITA Nos. 138/2006, 130/06, 135/06, 140/06, 143/06, 150/06 & 152/06 Page No.18 of 18