The words “fails to deduct” occurring in Section 271C(1)(a) cannot be read into “failure to deposit/pay the tax deducted”

Facts of the Case:

• M/s US Technologies International Pvt. Ltd. (“the Assessee”) was engaged in the business of software development. For F.Y. 2002-03, the Assessee deducted the TDS on certain payments as per the provisions of Chapter XVIIB of the Income Tax Act, 1961 (“the Act”) but deposited only the partial amount of TDS with the Government.
• A survey was conducted by the department at the premises of the Assessee and it was noted that the Assessee had not deposited the TDS amount to the Government and subsequently order was passed by the Income Tax Officer (ITO) u/s 201(1A) of the Act levying interest for non-depositing the TDS. Further, penalty proceedings were also initiated u/s 271C of the Act i.e. penalty for failure to deduct tax at source and subsequently order was passed levying a penalty equivalent to the amount of TDS.
• Aggrieved by such penalty order, the Assessee preferred an appeal before CIT(A) however, the same was dismissed by CIT(A). The Assessee further appealed before ITAT wherein ITAT allowed the Assessee’s appeal reason being that there was reasonable cause for the Assessee for depositing the TDS amount belatedly and case was falling within the ambit of provisions of Section 273B of the Act i.e. penalty not to be imposed where there is reasonable cause.
• Aggrieved by the order of ITAT, department appealed before the Hon’ble High Court and it allowed the appeal of the department by relying upon its earlier judgments in the case of the Assessee. The Assessee challenged the decision of High Court before the Hon’ble Supreme Court.
• The question of law before the Hon’ble Supreme Court was to determine the meaning and scope of the words “fails to deduct” as occurring in Section 271C(1)(a) and whether an assessee who caused delay in remittance of TDS deducted by him, can be said a person who “fails to deduct TDS” or in other words, whether the penalty provisions as given u/s 271C of the Act gets triggered when the Assessee has deducted the TDS but fails to deposit the same to the credit of the government?

Observation And Conclusion:

Hon’ble Supreme Court held that:

• The present case of the Assessee was a case of belated deposition of TDS post deduction and not the case of nondeduction at all. Further, as per the cardinal principle of interpretation of statute the penal provisions are required to be construed strictly and literally and to be read as they are. The words used in Section 271C(1)(a), which was applicable in the given case, are “fails to deduct” and it nowhere talks about the ‘fails to remit/deposit/pay’. Therefore, Section 271C(1)(a) shall be applicable where the concerned person “fails to deduct” the whole or any part of the TDS and hence penalty shall not be leviable when the concerned person ‘fails to deposit’ the TDS amount.
• Even if the legislature wanted to have penalty provisions for non-payment and/or belated remittance/payment of the TDS, then it would have specifically provided the same under the provisions of Section 271C of the Act as provided u/s 201(1A) & 276B of the Act. Further, CBDT’s circular no. 551 dated 23.01.1998 clearly mentioned that no penalty is leviable u/s 271C for belated remittance/payment/deposit of the TDS.
• Hence, in the present case, for all the above reasons, no penalty shall be levied on the Assessee u/s 271C for belated remittance/payment/deposit of the TDS with the government and impugned orders passed by the High Court were set-aside.

SW Point of View:

The penal provisions of any legislation have to be construed strictly & literally, they have to be read as they are and nothing can be added into such provisions. Basis this cardinal rule of interpretation, Hon’ble Supreme Court held that the words “fails to deduct” occurring in Section 271C(1)(a) cannot be read into “failure to deposit/pay the tax deducted” as the words “failure to pay” is missing from the provisions of Section 271C. Hence, one can say that penal provisions have limited application and cannot be extended to situations not envisaged. 

Lakshay Prakash Jonwal, Direct Tax Associate, SW India