The Income-tax Act, 1961 (IT Act) provides for various obligations which are to be carried out by a taxpayer. One such obligation is to withhold tax from specified payment(s). In order to ensure its compliance, the IT Act also provides for penal and interest implications if tax withholding is not done or not paid within due time. The provision relating to interest is contained in section 201 of the IT Act and that pertaining to penalty is covered in section 271C of the IT Act. As per section 201 of the IT Act, in case a taxpayer, who is required to withhold any sum as per the provisions of the IT Act, fails to withhold or pay the tax, then the taxpayer would be deemed to have defaulted in respect of such tax. Further, section 271C of the IT Act provides that if any person fails to withhold the whole or part of the tax as required in terms of the IT Act, 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. A question was raised before the judiciary as to whether section 271C of the IT Act is attracted where the tax is withheld but there is a delay in remitting to the Government Treasury.
In this regard, recently, the Supreme Court1 analysed whether a delay in remitting tax withheld at source (TDS) can attract rigours of Section 271C(1)(a) of the IT Act. We, at BDO in India, have summarised the ruling of the Supreme Court and provided our comments on the impact of this decision.
FACTS OF THE CASE
Taxpayer, an Indian company, is into the business of software development. For the relevant fiscal year under consideration, it withheld taxes in respect of salaries, contract payments etc. The Taxpayer remitted TDS in two tranches with a period of delay ranging from 5 days to 10 months. Revenue Authorities conducted a survey at the taxpayer’s premises wherein it was observed that TDS was not deposited within the prescribed dates under the Income-tax Rules, 1962 (IT Rules). Accordingly, the tax officer levied interest under section 201 of the IT Act for the period of delay in the remittance of TDS. Further, the Additional Commissioner of Income Tax (ACIT) levied a penalty under section 271C of the IT Act equivalent to the amount of TDS for the relevant year. While Tax Tribunal granted relief to the taxpayer, Kerala High Court upheld the penalty order. Aggrieved, the taxpayer filed an appeal before the Supreme Court.
SUPREME COURT RULING
The question for consideration before the Supreme Court was:
- In case of belated remittance of the TDS after deduction, whether the taxpayer is liable to pay a penalty under section 271C of the IT Act?
- What is the meaning and scope of the words ‘fails to deduct’ occurring in section 271C(1)(a) of the IT Act and whether a taxpayer who caused a delay in remittance of TDS deducted, can be said a person who ‘fails to deduct tax’?
While ruling in favour of the taxpayer, the Supreme Court made the following observations:
- It is a case of belated remittance of the TDS though deducted by the taxpayer and not a case of non-deduction of tax.
- As per section 271C(1)(a) of the IT Act, if any person fails to deduct the whole or part of the tax as required by or under the provisions of Chapter XVIIB of the IT Act, 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 the failure to pay the whole or any of the tax is concerned, the same would be with respect to section 271C(1)(b)2 of the IT Act which is not the case here.
- The words used in section 271C(1)(a) of the IT Act are very clear and the relevant words used are ‘fails to deduct’. It does not speak about the belated remittance of the TDS.
- As per the settled position of law, the penal provisions are required to be construed strictly and literally. Nothing is to be added or nothing is to be taken out of the penal provision. Therefore, on a plain reading of section 271C of the IT Act, there shall not be a penalty leviable on belated remittance of the TDS after the same is withheld by the taxpayer.
- Section 271C of the IT Act is quite categoric. Its scope and application are discernible from the provision itself, in unambiguous terms. It is not for the Court to read something more into it, contrary to the intent and legislative wisdom.
- It is required to be noted that wherever the Parliament wanted to have the consequences of non-payment and/ or belated remittance/payment of the TDS, the same has been provided in section 201(1A) and section 276B3 of the IT Act. It is pertinent to note that section 276B of the IT Act provides for prosecution in case of failure to ‘pay’ tax to the credit of the Central Government. The word ‘pay’ is missing in section 271C(1)(a) of the IT Act.
- Circular No. 551 dated 23 January 1998 deals with the circumstances under which section 271C of the IT Act was introduced in the Statute. On a fair reading of the Circular, it talks about the levy of penalty on failure to deduct tax at source. It also takes note of the fact that if there is any delay in remitting the tax, it will attract payment of interest under section 201(1A) of the IT Act and because of the gravity of the mischief involved, it may involve prosecution proceedings as well under section 276B of the IT Act.
This is a welcome ruling as it reiterates the settled principle that penal provisions are to be construed strictly and literally. Since this ruling also throws some light on interpreting section 276B of the IT Act, it needs to be analysed whether concerned taxpayers can refer to this ruling in case any interpretation issue arises under section 276B of the IT Act.
1 M/s US Technologies International Pvt. Ltd. vs. CIT (Civil Appeal No. 7934 of 2011 with Civil Appeal Nos. 1258-1260 of 2019) (SC)
2 As per section 271C(1)(b) of the IT Act, if any person fails to pay the whole or any part of tax as required under section 115O(2) or second proviso to section 194B of the IT Act; then, such person shall be liable to pay penalty equal to the amount of tax which such person failed to deduct or pay.
3 Section 276B of the IT Act talks about the prosecution on failure to pay the TDS after deducting the same.