Penalty u/s 271C is leviable only in case of non-payment of TDS, but not delayed payment of TDS

While hearing a matter involving imposition of penalty under Section 271F of the Income Tax Act 1961, on account of failure to deduct TDS, the Supreme Court of India held that penalty under Section 271C was to be levied only in case of non-payment of TDS, and not in case of delayed payment of TDS.

A Division Bench of Justice MR Shah and Justice CT Ravikumar further clarified that the phrase ‘fails to deduct’ occurring in Section 271C(1)(a) would not include the payer who caused delay in remittance of TDS deducted.

The Appellant-Assessee was represented by Mr. Arijit Prasad, Senior Advocate, whereas the Respondent-Revenue was represented by Mr. Balbir Singh, Additional Solicitor General.

Briefly, the Assessee-company, engaged in a software development business at Techno Park at Trivandrum, was penalised under Section 271C(1)(a) of the Act, for delay ranging from 5 days to 10 months in depositing TDS pertaining to the salary of about seven hundred employees, contract payments, etc. totalling to Rs.1.10 Cr. On appeal, the High Court of Kerala sustained the imposition of penalty.

On hearing the contentions of both parties, the Bench observed that while adopting literal and strict interpretation for the penal provision i.e., Section 271C(1)(a), it could be noted that the phrase “fails to deduct” occurring in Section 271C(1)(a) cannot be read into “failure to deposit/pay the tax deducted.”

The Bench referred to the Central Board of Direct Taxes Circular No 551 dated 23.01.1998, and then noted that no penalty is envisaged under Section 271C for belated remittance/payment/deposit of the TDS.

Touching upon the aspect of Legislative intent, the Bench noted that wherever the Parliament wanted to have the consequences of non-payment and/or belated remittance/payment of the TDS, the Parliament/Legislature has provided the same like in Section 201(1A) and Section 276B of the Income Tax Act.

The Bench emphasized that failure to pay whole or any part of the tax would attract penalty under Section 271C(1)(b) and the term used used between 271C(1)(a) and 271C(1)(b) is ‘or’ and scope of Section 271C(1)(b) is limited to failure in paying whole or part of tax as required under Section 115-O(2) and Section 194B.

Referring to Section 276B of the Act, the Bench noted that it provided for prosecution in case of ‘failure to pay’ tax to the credit of Central Government which is missing in Section 271C(1)(a) as it talks of only ‘failure to deduct’. It further observed that the phrase ‘fails to deduct’ occurring in Section 271C(1)(a) would not include the payer who caused delay in remittance of TDS deducted by him. (Para 8-8.2)

With these observations, the Bench set aside the order passed by the High Court and the question of law on interpretation of Section 271C of the Income Tax Act was answered in favour of the Assessee.

Cause Title: M/s US Technologies Pvt Ltd vs. CIT [Civil Appeal No. 7934 of 2011 / 2023-Enterslice-9-SC-IT]

Click here to read/download the Judgment

US-Technologies-International-verses-CIT