Introduction:

The Income-tax Act, 1961 provides for three modes of collecting taxes – Direct levy, Levy by way of deduction at source (for short TDS) or by collection at source (for short TCS). The ordinary method of collection of taxes is a direct collection from the assessee by way of advance tax, self-assessment tax or regular tax whereas the indirect method of recovery consist in recovering tax at source or collection at source. The provisions contained in part-B of Chapter XVII relates to the TDS from various payments such as salary, interest, rent payments to contractors etc. whereas part-C contains the provision relating to TCS. The aforesaid provisions have been enacted for the purpose of easy collection of taxes and avoid tax evasion as well as locate potential assessees liable to tax. Thus, TDS is a crucial component of the Indian tax system, ensuring timely collection of taxes and reporting of taxable transactions. Non-compliance with TDS obligations can have serious ramifications, including prosecution, as stipulated under Section 276B of

the Act as well as the deductee to be treated as an assessee in default in respect of TDS resulting into a liability to pay interest u/s 201 (1A) and penalty u/s 271C rws 273B.

2.0 However, recently Hon’ble Supreme Court’s ruling in the case of US Technologies International (P.) Ltd. v. CIT [2003] (453 ITR 644), (for short  </em >US Technologies) has shed light on a perplexing aspect: while penalty cannot be imposed for delay in deposit of TDS under Section 271C of the Act, prosecution may be launched under Section 276B of the Act. In this article, we explore the implications it has on taxpayers.

2.1 Briefly stated the facts relating to the case of US Technologies where that the assessee was a software company whose premises was subjected to a survey under section 133A wherein it was found that the assessee had remitted only Rs.38.95 lakhs till that date out of Rs.110.42 lakhs being the amount of tax deducted at source for the financial year 2002-03. The balance amount was remitted in May, 2003 and being a delayed remittance, Addl. CIT levied penalty under section 271C.

2.3 In the first appeal, the CIT(A) examine in details the contention of the assessee relating to the paucity of funds advanced as a reason for delayed payment of TDS but he found the default to be chronic and deliberate. Hence the CIT(A) confirmed the penalty levied u/s 271C. Being aggrieved, the assessee carried the matter before the Tribunal challenging the validity of imposing penalty u/s 271C as well as on the ground that the assessee had reasonable cause for the delay in remittance. The Tribunal held that section 271C authorizes penalty not only for failure to deduct tax at source in terms of the provisions of Chapter XVII-B but also for non-payment of TDS in time. The assessee’s claim that there was reasonable cause for failure to pay the recovered tax within time was rejected by the Tribunal.</em >

2.4 On appeal by the assessee, the High Court held that failure to deduct or failure to remit recovered (deducted) tax, both will attract penalty under section 271C of the Act. As regards quantum of penalty the Court directed the Assessing Officer to reconsider the quantum of penalty by giving one or more opportunity to the assessee to furnish facts in the light of its observations.

2.5 Being aggrieved, the impugned judgment and order passed by the High Court was the subject matter of appeals before the Hon’ble Supreme Court. Therefore, the short question before the Apex court was:

2.6 Whether an assessee after having deducting TDS is liable to pay penalty u/s 271C of the Act in case of belated payment of such TDS?</strong >

3.1 Legal provisions

Section 271C of the Act

271C. Penalty for failure to deduct tax at source.—(1) If any person fails to—

1. deduct the whole or any part of the tax as required by or under the provisions of Chapter XVII-B; or</em >
2. pay the whole or any part of the tax as required by or under,—</em >
   1. sub-section (2) of section 115-O; or
   2. 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.</em >

      (2) Any penalty imposable under sub- section (1) shall be imposed by the Joint Commissioner………</em >

3.2 From the perusal of the aforesaid provision it will be noticed that as per section 271C(1)(a), if any person fails to deduct the whole or any part of the tax as required by or under the provisions of Chapter XVIIB then such a 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. So far as failure to pay the whole or any part of the tax is concerned, the same would be with respect to section 271C(1)(b) which is not the case here. Therefore, section 271C(1)(a) shall be applicable in case of a failure on the part of the concerned person/assessee to “deduct” the whole of any part of the tax as required by or under the provisions of Chapter XVIIB. After considering the aforesaid provisions as well as the CBDT Circular No. 551 dated 23-1-1998, the words “fails to deduct” occurring in section 271C(1)(a) cannot be read into “failure to deposit/pay the tax deducted.”

4.1 On going through the aforesaid judgment, it is noticed that the Hon’ble Apex Court has given strict interpretation to the words ‘”fails to deduct” occurring in section 271C(1)(a)”. Therefore, the ratio laid down by the full bench of Hon’ble Kerala High Court in the case of Lakshadweep Development Corporation Ltd. v. Addl. CIT [2019] (411 ITR 213).  </em >The other consequence would be that the default relating to failure to deduct the tax at source may be made liable to levy of penalty, while the default relating to failure to pay the tax deducted to the Government, which is a more serious offence, would attract prosecution but not penalty u/s 271C.The rationale behind such strict provision of prosecution for failure to deposit TDS seems to be the “unjust enrichment” on part of the deductee by withholding the said money with him even after deducting TDS from the payment. The intention of the legislature appears to cause deterrence in the mind of the deductee retaining TDS with themselves. The penal provision cannot be said to be sufficient in comparison to the criminal liability arising on account of non-payment of TDS by the deductee. In other words, when the payer fails to make TDS, the Department is deprived of the whole slice of the amount of TDS and also the action to be taken against the recipients. However, the failure to deposit TDS must attract penalty not only as a measure of deterrent but also for depriving both the Revenue as well as the recipient of the funds which is more serious default. It is not possible both legally and practically to launch prosecution in each and every case of default of non-payment of TDS but penalty will prove sufficient deterrent in such cases subject to establishing sufficient cause u/s 273B. Though, the interpretation advanced by the Hon’ble Supreme Court is in tune with the legislative intent which is also evident from the aforesaid CBDT circular, the cases of default to deposit TDS should be taken seriously. Still the question of attracting penalty u/s 221 rws 201 of the Act deserves to be examined.

4.2 Though the scope of this article is not to consider the scope of sec.273B, it may be pointed out that the scope of Section 271C, in violation to Section 273B had come up for consideration before the Apex Court in CIT v. Eli Lilly Co. (India) (P.) Ltd. (2009) (312 ITR 225 ) (SC). The observation as contained in paragraph 93 is quite relevant, which is reproduced below for convenience of reference:</em >

“Section 271C inter alia states that if any person fails to deduct the whole or any part of the tax as required by the provisions of Chapter XVII-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. In these cases we are concerned with Section 271C(1)(a). Thus Section 271C(1)(a) makes it clear that the penalty leviable shall be equal to the amount of tax which such person failed to deduct. We cannot hold this provision to be mandatory or compensatory or automatic because under Section 273B Parliament has enacted that penalty shall not be imposed in cases falling thereunder. Section 271C falls in the category of such cases.”</em >

4.3 From the above, it is crystal-clear that, once the burden is discharged by the person/assessee as to the existence of good and sufficient reason for not complying with the stipulation under Section 271C, it is for the authorities to consider with proper application of mind, whether the penalty is to be waived or reduced, based on the facts and circumstances.