Facts of the Case

Denso India Limited engaged expatriate technicians deputed by its parent company in Japan for its manufacturing operations in India. The Indian entity paid salary in India and provided accommodation, while a substantial part of salary and allowances was paid in Japan.

A survey conducted by the Income Tax Department revealed that tax had allegedly not been deducted at source on the foreign salary component paid outside India. The Department alleged violation of Section 192 and computed TDS default of Rs. 5.74 crores.

The assessee explained that based on prevailing legal understanding and professional advice, salary paid outside India was considered not taxable in India, and after discussions with authorities, revised tax and interest under Section 201(1A) were voluntarily deposited.

The Assessing Officer imposed penalty under Section 271C. The CIT(A), in the first appellate order, deleted the penalty after accepting existence of reasonable cause. Subsequently, the CIT(A), by invoking Section 154, rectified its earlier order and restored the penalty. The ITAT set aside the rectification order holding that it amounted to review. Revenue challenged the ITAT’s order before the Delhi High Court.

Issues Involved

  1. Whether the CIT(A) could invoke Section 154 to alter its earlier order deleting penalty under Section 271C?
  2. Whether such rectification under Section 154 amounted to review of its own order?
  3. Whether penalty under Section 271C was sustainable where the assessee established reasonable cause under Section 273B?

Petitioner’s Arguments (Revenue Department)

  • The Revenue argued that the earlier appellate order contained factual and legal mistakes apparent on record.
  • It contended that Section 154 empowered the CIT(A) to rectify such mistakes.
  • The Department submitted that the assessee failed to correctly disclose tax liability relating to expatriate salaries paid abroad.
  • It argued that the penalty imposed under Section 271C was valid and justified.
  • Revenue claimed the rectification merely corrected errors and did not amount to review.

Respondent’s Arguments (Assessee – Denso India Limited)

  • The assessee argued that Section 154 allows only rectification of apparent mistakes and not reconsideration of the entire matter.
  • It was submitted that the CIT(A), through the rectification order, effectively reviewed and reversed its own earlier findings.
  • The assessee contended that there existed bona fide belief regarding non-taxability of foreign salary components.
  • It relied on judicial precedents recognizing reasonable cause under Section 273B.
  • It also pointed out that tax and interest had already been voluntarily deposited.

Court Findings / Court Order

The Delhi High Court dismissed the Revenue’s appeals and upheld the ITAT’s decision.

The Court observed that:

  • Section 154 is confined to rectification of mistakes apparent from the record and cannot be used for review or reappreciation of facts.
  • The CIT(A), by changing the substantive conclusions of the earlier order, exceeded its rectification jurisdiction.
  • The Supreme Court in CIT v. Eli Lilly & Co. (India) Pvt. Ltd. had already held in identical circumstances that no penalty under Section 271C was leviable where reasonable cause existed.
  • Since the Supreme Court had affirmed that the assessee had discharged the burden of proving reasonable cause, the High Court could not take a contrary view.

Accordingly, the appeals were dismissed.

Important Clarification

This judgment clarifies that:

  • Section 154 is not a power of review.
  • Rectification is permissible only for obvious and patent mistakes.
  • Reconsideration of evidence or change in reasoning is outside the scope of Section 154.
  • Penalty under Section 271C is not automatic and must be tested against Section 273B.
  • Bona fide belief and legal uncertainty can constitute reasonable cause.

Sections Involved

  • Section 154 – Rectification of mistake apparent from record
  • Section 192 – Deduction of tax at source from salary
  • Section 201(1) & 201(1A) – Consequences of failure to deduct TDS
  • Section 271C – Penalty for failure to deduct tax at source
  • Section 273B – No penalty where reasonable cause is established
  • Section 260A – Appeal to High Court

Link to download the order - https://delhihighcourt.nic.in/app/case_number_pdf/2017:DHC:4992-DB/SMD31082017ITA3712005.pdf

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