I did not collect TCS because I did not think what I sold was 'scrap'. The officer has levied penalty at a hundred per cent. Is a wrong but honest view a defence?
Yes, where the belief is honest and founded on reasonable grounds. The Tribunal upheld the deletion of a penalty of Rs.12,80,988 under s.271CA, holding that a dealer who honestly believed the goods he sold were not 'scrap' within Explanation (b) to s.206C had reasonable cause, even though the Commissioner (Appeals) had rejected that belief on merits. It also weighed that the buyers had returned the income and paid the tax, so no demand for the tax itself had been raised and no loss was caused to the Revenue.
Decided by the ITAT (Bhavnesh Saini, Judicial Member and Annapurna Gupta, Accountant Member) on 2016-12-30, reported as ITA No. 559/Chd/2016, assessment year 2011-12 (ITAT Chandigarh Division Bench). It bears on section 271CA, section 206C, section 206C(1), section 206C(7), section 273B, section 274 of the Income Tax Act 1961, in TDS Defaults, Penalty and Evidence & Burden of Proof matters.
Penalty under s.271CA for failure to collect is not automatic; s.273B lets reasonable cause displace it, and this order shows what reasonable cause looks like in the commonest TCS dispute of all. The distinction the assessee drew is the one that decides these cases: Explanation (b) to s.206C defines scrap as waste and scrap from the manufacture or mechanical working of materials which is definitely not usable as such, and goods bought from a power utility or a railway workshop that never manufactured them, and which are reusable as they are, arguably fall outside it. Note the shape of the win — the Commissioner (Appeals) rejected the merits and the Tribunal did not disturb that; what survived was the penalty defence.
Binding on the AO and CIT(A) within the Tribunal's jurisdiction. Persuasive elsewhere.
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The assessee dealt in the purchase and sale of old iron scrap. He had paid tax collected at source when buying the goods but did not collect tax at source when selling them on to traders. In the order under s.206C(1) and s.206C(7) the Assessing Officer held that because the buyers had paid their taxes the assessee could not be treated as in default for non-collection, but charged interest of Rs.1,48,930 from the date collection was due to the date the buyers filed their returns, and initiated penalty proceedings. Penalty of Rs.12,80,988 was levied under s.271CA at a hundred per cent of the tax not collected. The assessee's case was that the goods sold were not 'scrap' within Explanation (b) to s.206C: he had bought aluminium cables, ACSR conductors, transformers and their parts and electric and electronic meters from Punjab State Power Corporation Limited, which generates and distributes electricity and manufactures nothing, and traction generator motors and copper parts of diesel generator motors from the Diesel Locomotive Modernisation Workshop, which does not manufacture those goods at Patiala; the goods had not arisen from any manufacturing or mechanical working of materials in the sellers' hands and were reusable as they were. The Commissioner (Appeals) rejected that contention on merits and also rejected the plea of bona fide belief, but deleted the penalty for reasonable cause, relying on the Bangalore bench in Wipro GE Medical Systems Ltd on the footing that the buyers had paid the taxes so no loss was caused to the exchequer. The Revenue appealed. The Bench was told that on identical facts the coordinate bench had deleted a s.271CA penalty in ITO (TDS), Patiala v Shri O.P. Gupta (HUF) on 20 June 2016.
The Revenue's appeal was dismissed and the deletion of the s.271CA penalty upheld (paragraphs 11 and 12). The Tribunal held that on the facts narrated the assessee harboured an honest belief founded on reasonable grounds that the goods sold were not scrap, and that this constituted reasonable cause for not collecting tax at source even though the Commissioner (Appeals) had not accepted the contention on merits (paragraph 10). It recorded that the assessee had not been found liable to collect because the goods were categorically established to be scrap, but because he had accepted them as such when paying tax on purchase and had not categorically established the contrary, and that the facts he narrated were not controverted by the Revenue (paragraph 10). Reasonable cause being essential to a penalty, as Woodward Governor holds, the penalty could not stand (paragraph 11).
The Tribunal first found the facts identical to the coordinate bench decision in O.P. Gupta (HUF) and set that order out (paragraphs 6 and 8). It then applied the test itself. The Explanation to s.206C defines scrap as waste and scrap from the manufacture or mechanical working of materials which is definitely not usable as such because of breakage, cutting up, wear and other reasons; the assessee's contention, set out at length from his letter of 29 May 2013, was that 'waste and scrap' is a single item that must arise from manufacture or mechanical working, and that goods bought from a power utility and a locomotive workshop which manufacture nothing, and which are reusable as they are, do not answer that description (paragraph 9). The Tribunal held that a belief so founded is one an ordinary person in the prevailing circumstances would have harboured, that the Revenue had not controverted the underlying facts, and that the liability had been fastened not on a categorical finding that the goods were scrap but on the assessee's own conduct in paying tax on purchase and his failure to establish the contrary (paragraph 10). It applied the Delhi High Court's definition of reasonable cause in Woodward Governor India Private Limited v CIT 253 ITR 745, which requires an honest belief founded upon reasonable grounds and holds that a cause shown fails only if frivolous or without substance or foundation (paragraphs 10 and 11).
the assessee harboured an honest belief based on reasonable grounds that the goods sold were not scrap. The same constituted reasonable cause for not collecting tax at source even though the Ld. CIT( appeal) did not accept this contention of the assessee on merit.
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Handle my notice → Ask a CA on WhatsAppYes, where the belief is honest and founded on reasonable grounds. The Tribunal upheld the deletion of a penalty of Rs.12,80,988 under s.271CA, holding that a dealer who honestly believed the goods he sold were not 'scrap' within Explanation (b) to s.206C had reasonable cause, even though the Commissioner (Appeals) had rejected that belief on merits. It also weighed that the buyers had returned the income and paid the tax, so no demand for the tax itself had been raised and no loss was caused to the Revenue. This was decided by the ITAT (Bhavnesh Saini, Judicial Member and Annapurna Gupta, Accountant Member) and bears on section 271CA, section 206C, section 206C(1), section 206C(7), section 273B, section 274 of the Income Tax Act 1961. It is reported as ITA No. 559/Chd/2016, assessment year 2011-12 (ITAT Chandigarh Division Bench). Penalty under s.271CA for failure to collect is not automatic; s.273B lets reasonable cause displace it, and this order shows what reasonable cause looks like in the commonest TCS dispute of all. The distinction the assessee drew is the one that decides these cases: Explanation (b) to s.206C defines scrap as waste and scrap from the manufacture or mechanical working of materials which is definitely not usable as such, and goods bought from a power utility or a railway workshop that never manufactured them, and which are reusable as they are, arguably fall outside it. Note the shape of the win — the Commissioner (Appeals) rejected the merits and the Tribunal did not disturb that; what survived was the penalty defence. If it applies to you, the first step is this: Plead reasonable cause under s.273B expressly and separately from the merits; the assessee here lost on whether the goods were scrap and still defeated the penalty.
The assessee dealt in the purchase and sale of old iron scrap. He had paid tax collected at source when buying the goods but did not collect tax at source when selling them on to traders. In the order under s.206C(1) and s.206C(7) the Assessing Officer held that because the buyers had paid their taxes the assessee could not be treated as in default for non-collection, but charged interest of Rs.1,48,930 from the date collection was due to the date the buyers filed their returns, and initiated penalty proceedings. Penalty of Rs.12,80,988 was levied under s.271CA at a hundred per cent of the tax not collected. The assessee's case was that the goods sold were not 'scrap' within Explanation (b) to s.206C: he had bought aluminium cables, ACSR conductors, transformers and their parts and electric and electronic meters from Punjab State Power Corporation Limited, which generates and distributes electricity and manufactures nothing, and traction generator motors and copper parts of diesel generator motors from the Diesel Locomotive Modernisation Workshop, which does not manufacture those goods at Patiala; the goods had not arisen from any manufacturing or mechanical working of materials in the sellers' hands and were reusable as they were. The Commissioner (Appeals) rejected that contention on merits and also rejected the plea of bona fide belief, but deleted the penalty for reasonable cause, relying on the Bangalore bench in Wipro GE Medical Systems Ltd on the footing that the buyers had paid the taxes so no loss was caused to the exchequer. The Revenue appealed. The Bench was told that on identical facts the coordinate bench had deleted a s.271CA penalty in ITO (TDS), Patiala v Shri O.P. Gupta (HUF) on 20 June 2016. The matter was decided on 2016-12-30 by the ITAT (Bhavnesh Saini, Judicial Member and Annapurna Gupta, Accountant Member). On those facts the ITAT held as follows. The Revenue's appeal was dismissed and the deletion of the s.271CA penalty upheld (paragraphs 11 and 12). The Tribunal held that on the facts narrated the assessee harboured an honest belief founded on reasonable grounds that the goods sold were not scrap, and that this constituted reasonable cause for not collecting tax at source even though the Commissioner (Appeals) had not accepted the contention on merits (paragraph 10). It recorded that the assessee had not been found liable to collect because the goods were categorically established to be scrap, but because he had accepted them as such when paying tax on purchase and had not categorically established the contrary, and that the facts he narrated were not controverted by the Revenue (paragraph 10). Reasonable cause being essential to a penalty, as Woodward Governor holds, the penalty could not stand (paragraph 11).
The Tribunal first found the facts identical to the coordinate bench decision in O.P. Gupta (HUF) and set that order out (paragraphs 6 and 8). It then applied the test itself. The Explanation to s.206C defines scrap as waste and scrap from the manufacture or mechanical working of materials which is definitely not usable as such because of breakage, cutting up, wear and other reasons; the assessee's contention, set out at length from his letter of 29 May 2013, was that 'waste and scrap' is a single item that must arise from manufacture or mechanical working, and that goods bought from a power utility and a locomotive workshop which manufacture nothing, and which are reusable as they are, do not answer that description (paragraph 9). The Tribunal held that a belief so founded is one an ordinary person in the prevailing circumstances would have harboured, that the Revenue had not controverted the underlying facts, and that the liability had been fastened not on a categorical finding that the goods were scrap but on the assessee's own conduct in paying tax on purchase and his failure to establish the contrary (paragraph 10). It applied the Delhi High Court's definition of reasonable cause in Woodward Governor India Private Limited v CIT 253 ITR 745, which requires an honest belief founded upon reasonable grounds and holds that a cause shown fails only if frivolous or without substance or foundation (paragraphs 10 and 11). In the words reproduced by the source cited on this page: "the assessee harboured an honest belief based on reasonable grounds that the goods sold were not scrap. The same constituted reasonable cause for not collecting tax at source even though the Ld. CIT( appeal) did not accept this contention of the assessee on merit." The decision followed or applied ITO (TDS), Patiala v. Shri O.P. Gupta (HUF), ITA Nos. 341 and 342/Chd/2016 dated 20 June 2016 (ITAT Chandigarh) — followed; Woodward Governor India Private Limited v. CIT [253 ITR 745] (Delhi High Court) — applied; Wipro GE Medical Systems Ltd. (2005) 24 CCH 001 (ITAT Bangalore) — relied on below and not disturbed.
It was decided by the ITAT on 2016-12-30 and is reported as ITA No. 559/Chd/2016, assessment year 2011-12 (ITAT Chandigarh Division Bench). Binding on the AO and CIT(A) within the Tribunal's jurisdiction. Persuasive elsewhere. A Tribunal decision binds the assessing officer and the Commissioner (Appeals) within that Tribunal's jurisdiction, and is persuasive before other benches. It is not binding on a High Court, and a contrary co-ordinate bench decision will be argued against you, so check whether the point has been taken the other way before you build a reply around it. On section 271CA, section 206C, section 206C(1), section 206C(7), section 273B, section 274, the practical question is whether the facts of your own notice match the facts of this case closely enough for the same rule to apply.
It helps the taxpayer. The Revenue's appeal was dismissed and the deletion of the s.271CA penalty upheld (paragraphs 11 and 12). The Tribunal held that on the facts narrated the assessee harboured an honest belief founded on reasonable grounds that the goods sold were not scrap, and that this constituted reasonable cause for not collecting tax at source even though the Commissioner (Appeals) had not accepted the contention on merits (paragraph 10). It recorded that the assessee had not been found liable to collect because the goods were categorically established to be scrap, but because he had accepted them as such when paying tax on purchase and had not categorically established the contrary, and that the facts he narrated were not controverted by the Revenue (paragraph 10). Reasonable cause being essential to a penalty, as Woodward Governor holds, the penalty could not stand (paragraph 11). It arises in TDS Defaults, Penalty and Evidence & Burden of Proof matters, on section 271CA, section 206C, section 206C(1), section 206C(7), section 273B, section 274 of the Income Tax Act 1961, and was decided by Bhavnesh Saini, Judicial Member and Annapurna Gupta, Accountant Member. Before relying on it, read the source linked on this page and check whether it has since been distinguished, overruled or overtaken by an amendment to the Income Tax Act. In practice the steps that follow from it are these. Build the factual case for the belief: who the seller was, whether the seller manufactures anything, and whether the goods are reusable as they are — this order sets out that material in detail for aluminium cables, ACSR conductors, transformers, meters and traction generator motors. Get the buyers' returns of income on record to show the tax has been paid; the absence of any demand for the tax itself, and the charging of interest alone, was treated as showing the Revenue had not treated the seller as in default. Cite Woodward Governor India P. Ltd v CIT 253 ITR 745 on what 'reasonable cause' means and on the initial burden lying on the assessee to show it. Do not read this as a holding that such goods are not scrap; it is a penalty decision and the merits went against the assessee below.
Validity check could not be completed. Validity check could not be completed. I did not search for any appeal from this order or for later Tribunal or High Court treatment of it. Nothing in the order suggests that s.271CA or s.273B has been amended in a way that affects the reasoning, but that has not been checked either. No source could be cited for that finding. Checking whether an authority still stands matters as much as knowing what it held: a decision may be overruled on one point and survive on another, or the provision it interprets may have been amended since. Read the source and the editor's note on this page before relying on it in a reply to an Assessing Officer or in an appeal.
The order was read in full from the plain indiankanoon /doc/ URL in two passes and runs from an unnumbered opening paragraph through paragraphs 2 to 12, ending with the disposal at paragraph 12 and the members' signatures. A trap must be flagged. Paragraph 8 reproduces the coordinate bench order in ITO (TDS), Patiala v Shri O.P. Gupta (HUF), ITA Nos. 341 and 342/Chd/2016 dated 20 June 2016, and that reproduced order carries its own paragraph numbers 5 and 6. Those are the quoted order's paragraphs, not this order's, and citing them as paragraphs of this order would be a fabricated locator; the quote used here comes from paragraph 10, which is this Tribunal speaking. Paragraph 2 is headed 'the grounds of appeal raised by the assessee' although the grounds set out are plainly the Revenue's, this being the Revenue's appeal. Paragraph 3 records that the order under s.206C(1) and s.206C(7) held the assessee not to be in default 'as per the provisions of section 206C(1D)', which does not correspond to what sub-section (1D) provides; the substance recorded is that the buyers had paid the tax, so only interest of Rs.1,48,930 was charged. The sentence quoted here was re-fetched through /docfragment/ and matched word for word. This library shows the verification state of every entry openly. This entry has not yet been read in full by a chartered accountant. The summary reflects the sources listed on this page. Read the source before you rely on it in a reply to an Assessing Officer or in an appeal before the Commissioner (Appeals) or the Income Tax Appellate Tribunal.
The Revenue's appeal was dismissed and the deletion of the s.271CA penalty upheld (paragraphs 11 and 12). The Tribunal held that on the facts narrated the assessee harboured an honest belief founded on reasonable grounds that the goods sold were not scrap, and that this constituted reasonable cause for not collecting tax at source even though the Commissioner (Appeals) had not accepted the contention on merits (paragraph 10). It recorded that the assessee had not been found liable to collect because the goods were categorically established to be scrap, but because he had accepted them as such when paying tax on purchase and had not categorically established the contrary, and that the facts he narrated were not controverted by the Revenue (paragraph 10). Reasonable cause being essential to a penalty, as Woodward Governor holds, the penalty could not stand (paragraph 11).
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