Supreme Court clarifies penalty for late TDS remittance: US Technologies vs. Commissioner of Income Tax (2023)

Introduction

Date of the Judgment: April 10, 2023

Citation: Not Available

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

Can a company be penalized for the delayed deposit of Tax Deducted at Source (TDS), even if the tax was initially deducted correctly? The Supreme Court of India recently addressed this crucial question, clarifying the scope of penalties under the Income Tax Act, 1961. This judgment revolves around whether Section 271C of the Act, which deals with penalties for failure to deduct tax at source, also applies to cases where the tax is deducted but remitted late. The bench, comprising Justices M.R. Shah and C.T. Ravikumar, delivered the judgment.

Case Background

The case involves M/s US Technologies International Pvt. Ltd., a software development company in Trivandrum, which deducted TDS on salaries and contract payments totaling Rs. 1,10,41,898 for the assessment year 2003-04. While a portion of the TDS (Rs. 38,94,687) was remitted in March 2003, the remaining amount (Rs. 71,47,211) was remitted later, with delays ranging from 5 days to 10 months. A survey by the Income Tax Department on March 10, 2003, revealed the delayed TDS deposits. Consequently, the Income Tax Officer (ITO) levied a penal interest of Rs. 4,97,920 on June 2, 2003, under Section 201(1A) of the Income Tax Act, 1961. Subsequently, the Additional Commissioner of Income Tax (ACIT) issued a show cause notice on October 9, 2003, proposing a penalty under Section 271C, which was followed by a penalty of Rs. 1,10,41,898, equivalent to the total TDS amount, on November 10, 2003.

This penalty was confirmed by the High Court, leading to the appeal before the Supreme Court. Similar issues were raised in Civil Appeals Nos. 1258-1260/2019, where the ACIT levied penalties for delayed TDS remittances for assessment years 2010-11, 2011-12, and 2012-13. The Income Tax Appellate Tribunal (ITAT) initially ruled in favor of the assessees, but the High Court reversed this decision, relying on its earlier judgment, which is the subject of Civil Appeal No. 7934/2011.

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 upheld this order. In the connected appeals (Civil Appeal Nos. 1258-1260/2019), the ACIT levied penalties equivalent to the TDS amount for the assessment years 2010-11, 2011-12, and 2012-13. The Commissioner of Income Tax (Appeals) dismissed the assessees’ appeals. However, the Income Tax Appellate Tribunal (ITAT) allowed the assessees’ appeals, holding that the penalty under Section 271C was unjustified due to reasonable causes for the delayed remittance. The High Court reversed the ITAT’s decision, relying on its earlier judgment which is the subject matter of Civil Appeal No. 7934/2011.

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 consequences of failing to deduct tax at source or, after deducting, failing to pay the tax. It mandates the payment of simple interest on the amount of tax not deducted or paid. The interest rate is 1% per month from the date the tax was deductible to the date of deduction, and 1.5% per month from the date of deduction to the date of actual payment.
• Section 271C: This section imposes a penalty for failing to deduct tax at source as required by Chapter XVII-B of the Act. It states:

  “271-C. 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 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.”

• Section 273B: This section provides that no penalty shall be imposed if the assessee proves there was a reasonable cause for the failure to comply with certain provisions, including Section 271C.

  “273-B. Penalty not to be imposed in certain cases.—Notwithstanding anything contained in the provisions of clause (b) of sub-section (1) of Section 271, Section 271-A [Section 271-AA], Section 271-B [Section 271-BA], [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.”

• Section 276B: This section deals with the prosecution for failure to pay the tax deducted at source to the Central Government.

  “276-B. Failure to pay tax to the credit of Central Government under Chapter XII-D or XVII-B.—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.”

Arguments

Arguments by the Assessees:

• The assessees argued that Section 271C of the Income Tax Act, 1961, is applicable only in cases of non-deduction of TDS and not for mere late remittance of TDS after it has been deducted.
• It was contended that Section 271C(1)(a) applies only when there is a failure to deduct the whole or any part of the tax as required by Chapter XVIIB of the Act.
• The assessees submitted that penal provisions should be construed strictly and literally, and nothing should be added to the section.
• They argued that the Income Tax Act, 1961, already provides for penal interest under Section 201(1A) for late remittance of TDS, which is compensatory in nature. Therefore, no penalty under Section 271C should be levied for the same.
• The assessees highlighted the difference in language between Section 271C, which uses the phrase “fails to deduct,” and Section 276B, which uses the phrase “fails to pay.” They argued that if the legislature intended to penalize late payment under Section 271C, it would have used similar language.
• They relied on 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 overruled the High Court’s earlier view.
• The assessees also contended that under Section 273B, no penalty should be imposed if there is a reasonable cause for the failure, citing the Supreme Court’s decision in CIT Vs. Bank of Nova Scotia (2016) 15 SCC 81.

Arguments by the Revenue:

• The Revenue argued that Section 271C was introduced in 1987 to levy penalties for failure to deduct tax at source.
• The Revenue contended that the purpose of Section 271C is to penalize not only non-deduction of TDS but also cases where TDS is deducted but not remitted to the government or remitted belatedly.
• It was submitted that any other interpretation would frustrate the purpose of Section 271C.
• The Revenue relied on CBDT Circular No. 551 dated January 23, 1998, to support the argument that Section 271C is intended to penalize those who deduct tax but fail to remit it to the government.

Issues Framed by the Supreme Court

The Supreme Court framed the following key issues for consideration:

1. In case of belated remittance of TDS after deducting the TDS, whether such an assessee is liable to pay a penalty under Section 271C of the Income Tax Act, 1961?
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 the 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:

Authorities

The Supreme Court considered the following authorities:

Judgment

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

How each authority was viewed by the Court?

The Court’s reasoning was supported by the following:

• 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 overruled the earlier view of the High Court, was approved.
• The Court considered 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, but did not delve into it as it decided the case on the interpretation of Section 271C.
• The Court interpreted Section 201(1A) of the Income Tax Act, 1961 as providing for compensatory interest for late remittance of TDS.
• The Court interpreted Section 271C of the Income Tax Act, 1961 strictly, holding that it applies only to non-deduction of TDS and not to late remittance.
• The Court considered Section 273B of the Income Tax Act, 1961 but did not delve into it as it decided the case on the interpretation of Section 271C.
• The Court distinguished Section 276B of the Income Tax Act, 1961 from Section 271C, highlighting the difference between “fails to deduct” and “fails to pay.”
• The Court interpreted CBDT Circular No. 551 dated 23.01.1998 to favor the assessee, stating that it talks about levy of penalty on failure to deduct tax at source.

What weighed in the mind of the Court?

The Supreme Court’s decision was primarily influenced by a strict and literal interpretation of the penal provision in Section 271C of the Income Tax Act, 1961. The Court emphasized that the words “fails to deduct” in Section 271C(1)(a) do not encompass the act of belated remittance of TDS. The Court also noted that the legislature has specifically provided for the consequences of non-payment or belated remittance of TDS under Section 201(1A) and Section 276B of the Act. The Court also considered the CBDT’s circular which favored the assessee.

The Court’s reasoning was driven by the principle that penal provisions should be construed strictly and literally, and that nothing should be added to or taken away from the plain language of the statute. The Court also considered the Full Bench decision of the Kerala High Court which had already interpreted Section 271C in a similar manner.

Sentiment Analysis of Reasons Given by the Supreme Court:

Fact:Law Ratio

The court’s decision was predominantly influenced by legal considerations (80%) such as statutory interpretation and legislative intent, with a smaller emphasis on the factual aspects (20%) of the case.

Logical Reasoning

Key Takeaways

• No Penalty for Late Remittance: The Supreme Court has clarified that a penalty under Section 271C of the Income Tax Act, 1961, cannot be imposed for the mere delay in remitting TDS after it has been deducted.
• Strict Interpretation: Penal provisions must be interpreted strictly and literally. The court emphasized that the words used in the statute should be given their plain meaning.
• Distinction between Deduction and Payment: The court highlighted the difference between failing to deduct tax at source and failing to remit the deducted tax. Section 271C applies only to the former.
• Remedies for Late Payment: The Income Tax Act already provides for penal interest under Section 201(1A) for late remittance of TDS. Additionally, there can be prosecution under Section 276B for failure to pay the tax to the government.
• Impact on Assessees: This judgment provides relief to assessees who have deducted TDS but have remitted it late. They will not be liable for a penalty under Section 271C, although they will still be liable to pay interest under Section 201(1A).
• Future Implications: The judgment sets a precedent for interpreting penal provisions in tax laws. It emphasizes the need for clear and unambiguous language in statutes and the importance of adhering to the literal meaning of the words used.