Supreme Court Clarifies Penalty for Late TDS Remittance Under Section 271C of the Income Tax Act

Date of the Judgment: April 10, 2023

Citation: 2023 INSC 329

Judges: M.R. Shah, J. and C.T. Ravikumar, J.

Can a penalty be imposed under Section 271C of the Income Tax Act, 1961, for the late remittance of Tax Deducted at Source (TDS)? The Supreme Court recently addressed this question, clarifying that a penalty under Section 271C is not applicable for the mere delay in remitting TDS if the tax was indeed deducted. The court emphasized that the penalty under this section applies only to cases of non-deduction of tax at source, not to delays in payment after deduction. This judgment provides significant relief to taxpayers who may have inadvertently delayed TDS remittances.

Case Background

The case involves appeals from multiple assessees who were penalized for delays in remitting Tax Deducted at Source (TDS). The primary appellant, M/s US Technologies International Pvt. Ltd., a software development company, had deducted TDS of Rs. 1,10,41,898 for the assessment year 2003-04. While a portion of this amount (Rs. 38,94,687) was remitted in March, the balance (Rs. 71,47,211) was remitted later, with delays ranging from 5 days to 10 months. A survey conducted by the Revenue on 10.03.2003 revealed the late deposits. Consequently, the Income Tax Officer (ITO) levied penal interest of Rs. 4,97,920 on 02.06.2003 under Section 201(1A) of the Income Tax Act, 1961. Subsequently, on 10.11.2003, the Additional Commissioner of Income Tax (ACIT) imposed a penalty of Rs. 1,10,41,898 under Section 271C, equivalent to the total TDS amount. This penalty was upheld by the High Court.

Other appeals (Civil Appeal Nos. 1258-1260/2019) involved similar issues of late TDS remittances for the assessment years 2010-11, 2011-12, and 2012-13. The ACIT levied penalties under Section 271C, which were initially dismissed by the Income Tax Appellate Tribunal (ITAT) but later upheld by the High Court. All the assessees sought relief from the penalty imposed under Section 271C of the Income Tax Act, 1961.

Timeline:

Course of Proceedings

The Additional Commissioner of Income Tax (ACIT) levied a penalty of Rs. 1,10,41,898 under Section 271C of the Income Tax Act, 1961, which was equivalent to the amount of TDS deducted for the assessment year 2003-04. The High Court of Kerala at Ernakulam confirmed this penalty, dismissing the assessee’s appeal. The High Court held that the failure to remit TDS would attract a penalty under Section 271C of the Act. In Civil Appeal Nos. 1258-1260/2019, the Income Tax Appellate Tribunal (ITAT) initially allowed the assessees’ appeals, holding that the imposition of penalty under Section 271C was unjustified. However, the High Court reversed the ITAT’s decision, relying on its earlier judgment, which is the subject matter of Civil Appeal No. 7934/2011. The High Court ruled that late remittance of TDS would attract a penalty under Section 271C of the Act.

Legal Framework

The judgment primarily revolves around the interpretation of several key sections of the Income Tax Act, 1961:

• Section 201(1A): This section deals with the interest payable on failure to deduct or pay tax at source. It states:

  “Without prejudice to the provisions of sub-section (1), if any such person, principal officer or company as is referred to in that sub-section does not deduct the whole or any part of the tax or after deducting fails to pay the tax as required by or under this Act, he or it shall be liable to pay simple interest…”

  This section specifies the interest rates for delays in deduction and payment of TDS.

• Section 271C: This section outlines the penalty for failure to deduct tax at source. It states:

  “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 194-B; 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.”

  This section imposes a penalty equal to the amount of tax not deducted or paid.

• Section 273B: This section provides relief from penalties if there is a reasonable cause for the failure. It states:

  “Notwithstanding anything contained in the provisions of clause (b) of sub-section (1) of Section 271, Section 271-A, Section 271-B, Section 271-BB, Section 271-C, Section 271-CA, Section 271-D, Section 271-E, Section 271-F, Section 271-FA, Section 271-FAB, Section 271-FB, Section 271-G, Section 271-GA, Section 271-GB, Section 271-H, Section 271-I, Section 271-J, clause (c) or clause (d) of sub-section (1) or sub-section (2) of Section 272-A, sub-section (1) of Section 272-AA or Section 272-B or sub-section (1) or sub-section (1-A) of Section 272-BB or sub-section (1) of Section 272-BBB or clause (b) of sub-section (1) or clause (b) or clause (c) of sub-section (2) of Section 273, no penalty shall be imposable on the person or the assessee, as the case may be, for any failure referred to in the said provisions if he proves that there was reasonable cause for the said failure.”

  This section allows for the waiver of penalties if a reasonable cause for the failure is demonstrated.

• Section 276B: This section deals with the prosecution for failure to pay tax to the credit of the Central Government. It states:

  “If a person fails to pay to the credit of the Central Government,— (a) the tax deducted at source by him as required by or under the provisions of Chapter XVII-B; or (b) the tax payable by him, as required by or under,— (i) sub-section (2) of Section 115-O; or (ii) the second proviso to Section 194-B, he shall be punishable with rigorous imprisonment for a term which shall not be less than three months but which may extend to seven years and with fine.”

  This section outlines the penalties for failing to deposit TDS with the government, including imprisonment.

Arguments

Assessees’ Arguments:

• The assessees argued that Section 271C of the Income Tax Act, 1961, is only applicable in cases of non-deduction of TDS and not for late remittance of TDS. They contended that since the tax was deducted, the penalty under Section 271C should not apply.
• They submitted that the penal interest under Section 201(1A) of the Act is compensatory in nature and should be the only consequence for late remittance of TDS.
• The assessees argued that Section 271C(1)(a) specifically uses the words “fails to deduct” and does not include “fails to pay” or “remit belatedly.” They emphasized that penal provisions must be construed strictly and literally.
• They highlighted that Section 276B of the Act, which deals with prosecution, uses the words “fails to pay,” which are absent in Section 271C, indicating that the legislature intended different consequences for non-deduction and non-payment.
• The assessees pointed out that the Full Bench of the Kerala High Court in Lakshadweep Development Corporation Ltd. Vs. Additional Commissioner of Income Tax (TDS) and Anr. (2019) 411 ITR 213 (FB) had overruled the High Court’s previous judgment, which was against them.
• They also argued that under Section 273B of the Act, no penalty should be imposed if there is a reasonable cause for the failure, citing the decision of the Supreme Court in CIT Vs. Bank of Nova Scotia (2016) 15 SCC 81.
• In the case of Civil Appeals Nos. 1258-60/2019, the ITAT had found that there was a reasonable cause for the delay in remitting TDS, and the High Court should not have interfered with this finding.

Revenue’s Arguments:

• The Revenue contended that Section 271C was inserted in 1987 to levy penalties for failure to deduct tax at source. They argued that the purpose of this section is to ensure compliance with TDS provisions.
• The Revenue argued that Section 271C applies not only to non-deduction but also to cases where the assessee deducts the tax but fails to remit it to the government or remits it belatedly.
• They submitted that any other interpretation would frustrate the object and purpose of inserting Section 271C. They referred to CBDT Circular No. 551 dated 23.01.1998 to support their argument.
• The Revenue argued that the penalty under Section 271C is essential to ensure that the tax deducted at source is promptly remitted to the government.

Arguments: Submissions

Issues Framed by the Supreme Court

The Supreme Court framed the following issues for consideration:

1. Whether an assessee is liable to pay a penalty under Section 271C of the Income Tax Act, 1961, in case of belated remittance of TDS after deducting the TDS?
2. What is the meaning and scope of the words “fails to deduct” occurring in Section 271C(1)(a), and whether an assessee who caused a delay in remittance of TDS deducted by him can be said to be a person who “fails to deduct TDS”?

Treatment of the Issue by the Court

The following table demonstrates as to how the Court decided the issues:

Authorities

The Supreme Court considered the following authorities:

Cases:

• Lakshadweep Development Corporation Ltd. Vs. Additional Commissioner of Income Tax (TDS) and Anr. (2019) 411 ITR 213 (FB) – Full Bench of the Kerala High Court: Overruled the previous judgment of the High Court and held that penalty under Section 271C is not applicable for late remittance of TDS.
• CIT Vs. Bank of Nova Scotia (2016) 15 SCC 81 – Supreme Court of India: This case was cited to support the argument that no penalty should be imposed if there is a reasonable cause for the failure under Section 273B of the Income Tax Act, 1961.

Legal Provisions:

• Section 201(1A) of the Income Tax Act, 1961: This section was considered to understand the provision for interest on delayed remittance of TDS. The Court noted that this section provides for compensatory interest on belated remittance of TDS.
• Section 271C of the Income Tax Act, 1961: This section was the main focus of the judgment. The Court analyzed the words “fails to deduct” and concluded that it does not include belated remittance of TDS.
• Section 273B of the Income Tax Act, 1961: This section was considered to understand the provision for waiver of penalties if there is a reasonable cause for the failure.
• Section 276B of the Income Tax Act, 1961: This section was considered to understand the provision for prosecution in case of failure to pay TDS. The Court noted that this section uses the words “fails to pay,” which are absent in Section 271C(1)(a).

Authorities: Court’s View

Judgment

How each submission made by the Parties was treated by the Court?

How each authority was viewed by the Court?

• The court followed the Full Bench decision of the Kerala High Court in Lakshadweep Development Corporation Ltd. Vs. Additional Commissioner of Income Tax (TDS) and Anr. (2019) 411 ITR 213 (FB), which had overruled the High Court’s previous view and held that penalty under Section 271C is not applicable for late remittance of TDS.
• The court cited CIT Vs. Bank of Nova Scotia (2016) 15 SCC 81 to support the argument that no penalty should be imposed if there is a reasonable cause for the failure under Section 273B of the Income Tax Act, 1961, although it did not specifically address the applicability of Section 273B in this case.
• The court considered Section 201(1A) of the Income Tax Act, 1961 to understand the provision for interest on delayed remittance of TDS, noting that it provides for compensatory interest.
• The court analyzed Section 271C of the Income Tax Act, 1961 and concluded that the words “fails to deduct” do not include belated remittance of TDS.
• The court also considered Section 276B of the Income Tax Act, 1961 and noted that it uses the words “fails to pay,” which are absent in Section 271C(1)(a), indicating different consequences for non-deduction and non-payment.

What weighed in the mind of the Court?

The Supreme Court’s decision was primarily influenced by the principle of strict interpretation of penal provisions. The Court emphasized that Section 271C of the Income Tax Act, 1961, being a penal provision, must be construed literally and nothing should be added or taken away from it. The Court noted that the words “fails to deduct” in Section 271C(1)(a) cannot be interpreted to include “fails to pay” or “remit belatedly.” The Court also highlighted that the legislature has specifically provided for consequences of non-payment or late remittance of TDS in Sections 201(1A) and 276B of the Act, indicating that the penalty under Section 271C is only for non-deduction. The Court was also influenced by the fact that the Full Bench of the Kerala High Court in Lakshadweep Development Corporation Ltd. Vs. Additional Commissioner of Income Tax (TDS) and Anr. (2019) 411 ITR 213 (FB) had overruled the High Court’s previous view on this issue.

Ratio of Fact to Law: The Court’s decision was primarily based on the interpretation of law. The facts of the case were straightforward, involving late remittance of TDS after deduction. The Court focused on the correct interpretation of Section 271C and other related provisions of the Income Tax Act, 1961. Therefore, the ratio of law to fact in the decision is approximately 80:20.

Final Order of the Court

The Supreme Court passed the following final orders:

1. The appeals were allowed.
2. The orders passed by the High Court, which upheld the levy of penalty under Section 271C of the Income Tax Act, 1961, were quashed and set aside.
3. The penalty imposed under Section 271C of the Act was set aside.
4. The Court clarified that the Revenue was at liberty to take action against the assessees under any other provision of the Income Tax Act, 1961, if permissible in law.

Implications

The Supreme Court’s judgment has significant implications for taxpayers and tax authorities:

• Relief for Taxpayers: The judgment provides significant relief to taxpayers who may have inadvertently delayed the remittance of TDS after deducting it. It clarifies that a penalty under Section 271C cannot be imposed for the mere delay in remitting TDS if the tax was indeed deducted.
• Strict Interpretation of Penal Provisions: The judgment reinforces the principle that penal provisions must be interpreted strictly and literally. The court emphasized that the words “fails to deduct” in Section 271C(1)(a) cannot be interpreted to include “fails to pay” or “remit belatedly.”
• Distinction between Non-Deduction and Late Remittance: The judgment clearly distinguishes between non-deduction of TDS and late remittance of TDS. While non-deduction attracts a penalty under Section 271C, late remittance is subject to interest under Section 201(1A) and may attract prosecution under Section 276B.
• Clarity for Tax Authorities: The judgment provides clarity for tax authorities on the application of Section 271C. It clarifies that the penalty under this section is applicable only in cases of non-deduction of TDS and not for late remittance of TDS.
• Impact on Future Cases: The judgment will serve as a precedent for future cases involving the interpretation of Section 271C of the Income Tax Act, 1961. It will ensure that penalties are imposed only in cases of actual non-deduction and not for mere delays in remittance.

Flowchart: TDS Deduction and Remittance