M/S Us Technologies International Pvt. Ltd. vs The Commissioner Of Income Tax

M/s US Technologies ...Appellant(s) International Pvt. Ltd.

Versus

The Commissioner ...Respondent(s) of Income Tax

With Civil Appeal Nos. 1258­1260 of 2019

JUDGMENT

M.R. SHAH, J.

1. Feeling aggrieved and dissatisfied with the

impugned judgment(s) and order(s) passed by Signature Not Verified Digitally signed by R Natarajan Date: 2023.04.10 the High Court of Kerala at Ernakulam in 16:38:22 IST Reason: Page 1 of 31 confirming the levy of interest/penalty under

Section 271C of the Income Tax Act, 1961

(hereinafter referred to as the Act) on failure

of the respective assessees to deposit the tax

deducted at source (TDS) (or belated

remittance of the TDS), the respective

assessees have preferred the present appeals.

CIVIL APPEAL NO. 7934/2011

2. The facts leading the present appeal in a

nutshell are as under: ­

2.1 From 01.04.2002 to February, 2003, the

appellant – assessee, engaged in a software

development business at Techno Park,

Trivandrum which employed about 700

employees, deducted tax at source (TDS) in

respect of salaries, contract payments, etc.,

totalling Rs. 1,10,41,898/­ for the

Page 2 of 31 assessment year (AY) 2003­04. In March, the

assessee remitted part of the TDS being Rs.

38,94,687/­ and balance of Rs. 71,47,211/­

was remitted later. Thus, the period of delay

ranged from 05 days to 10 months. On

10.03.2003, a survey was conducted by the

Revenue at assessee’s premises and it was

noted that TDS was not deposited within the

prescribed dates under Income Tax Rules (IT

Rules). On 02.06.2003, Income Tax Officer

(ITO) vide order under Section 201(1A) of the

Act, 1961 levied penal interest of Rs.

4,97,920/­ for the period of delay in

remittance of TDS. On 09.10.2003, the

Additional Commissioner of Income Tax

issued a show cause notice proposing to levy

penalty under Section 271C of the amount

equal to TDS. That the assessee replied to the

Page 3 of 31 said show cause notice vide reply dated

28.10.2003. That on 06.11.2003, another

order under Section 201(1A) was passed

levying the penal interest of Rs. 22,015/­. On

10.11.2003, the Additional Commissioner of

Income Tax (ACIT) vide order under Section

271C levied a penalty of Rs. 1,10,41,898/­

equivalent to the amount of TDS deducted for

AY 2003­04. That order of Additional CIT

levying the penalty under Section 271C came

to be confirmed by the High Court by the

impugned judgment and order. The High

Court vide impugned judgment and order has

dismissed the appeal preferred by the

assessee by holding that failure to

deduct/remit the TDS would attract penalty

under Section 271C of the Act, 1961.

Page 4 of 31 2.2 Feeling aggrieved and dissatisfied with the

levy of interest/penalty under Section 271C

of the Income Tax Act, 1961 on late

remittance of TDS is the subject matter of

preferred appeal(s).

CIVIL APPEAL NOS. 1258­1260/2019

3. The facts leading to the present appeals in a

nutshell are under: ­

3.1 By order(s) dated 26.09.2013, the ACIT by

way of orders under Section 271C levied

penalty equivalent to the amount of TDS

deducted for AYs 2010­11, 2011­12 and

2012­13 on the ground that there was no

good and sufficient reason for not levying

penalty.

3.2 The CIT (Appeals) dismissed the assessees’

appeals. By common order dated 01.06.2016,

Page 5 of 31 the Income Tax Appellate Tribunal (ITAT)

allowed the assessees’ appeals by holding

that imposition of penalty under Section

271C was unjustified and reasonable causes

were established by the assessee for remitting

the TDS belatedly. By the impugned common

judgment and order the High Court has

allowed the Revenue’s appeals relying upon

its earlier judgment (which is the subject

matter of Civil Appeal No. 7934/2011 as

above). The impugned judgment and order

passed by the High Court is the subject

matter of present appeals being Civil Appeals

Nos. 1258­1260/2019.

4. Shri Arijit Prasad and Shri C.N. Sreekumar,

learned Senior Advocates have appeared on

behalf of the respective assessees and Shri

Balbir Singh, learned ASG assisted by Ms.

Page 6 of 31 Monica Benjamin, learned counsel has

appeared on behalf of the Revenue.

5. Shri Arijit Prasad, learned Senior Advocate

appearing on behalf of the assessee in Civil

Appeal No. 7934/2011 has vehemently

submitted that in the facts and

circumstances of the case, the levy of penalty

under Section 271C of the Act, 1961 is not

justifiable at all. It is submitted that in the

facts and circumstances of the case there

shall not be any penalty leviable under

Section 271C of the Act, 1961.

5.1 It is further submitted by Shri Arijit Prasad,

learned Senior Advocate appearing on behalf

of the assessee that here is the case of late

remittance of the TDS and not a case of non­

deduction of TDS at all. It is submitted that

therefore, at the most, the assessee shall be

Page 7 of 31 liable to pay the penal interest leviable under

Section 201(1A) of the Act, 1961. It is

submitted that however, there shall not be

any levy of penalty under Section 271C of the

Act, 1961 on mere late remittance of the TDS

though deducted.

5.2 It is further submitted by Shri Arijit Prasad,

learned Senior Advocate appearing on behalf

of the assessee that Section 271C would be

applicable only in case of non­deduction of

whole or any part of the tax [Section 271C(1)

(a)]. It is submitted that Section 271C(1)(a)

shall be applicable in case of non­deduction

of whole or any part of the tax as required by

or under the provisions of Chapter XVIIB. It is

submitted that in the present case Section

271C(1)(b) shall not be applicable. It is

submitted that therefore taking into

Page 8 of 31 consideration the words employed in Section

271C(1)(a), there shall be levy of penalty of a

sum equal to the amount of tax in case of

failure on the part of the concerned person

who fails to deduct the whole or any part of

the tax as required by or under the provisions

of Chapter XVIIB. It is submitted that in case

of belated remittance of the TDS, there shall

not be any levy of interest under Section

271C of the Act, 1961.

5.3 It is submitted that as per the cardinal

principle of law, a penal provision is required

to be construed strictly and literally and

nothing is to be added in the Section and the

penalty provisions are required to be read as

they are.

5.4 It is submitted that so far as the belated

remittance of the TDS is concerned, the

Page 9 of 31 Statute provides for penal interest under

Section 201(1A) of the Act, 1961. It is

submitted that the penal interest levied under

Section 201(1A) is compensatory in nature. It

is submitted that therefore, when the

Parliament thought it fit to levy the penal

interest on late remittance of the TDS for the

belated period, there shall not be any levy of

the penalty under Section 271C for belated

remittance of the TDS.

5.5 It is submitted that if the stand taken by the

Revenue and the views taken by the High

Court that even on belated remittance of the

TDS there shall be penalty levied under

Section 271C of the Act, is accepted, in that

case it would tantamount to adding

something more than which is not provided in

the Section. It is submitted that words used

Page 10 of 31 in Section 271C are “fails to deduct the whole

or any part of the tax.” It is submitted that it

does not speak “fails to deduct and remitted

belatedly.”

5.6 Shri Arijit Prasad, learned Senior Advocate

appearing on behalf of the assessee has

drawn our attention to Section 276B of the

Act, 1961. It is submitted that as per Section

276B of the Act “if a person fails to pay to

the credit of the Central Government the

tax deducted at source by him as required

by or under the provisions of Chapter

XVIIB, he shall be liable to be prosecuted

and 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.” It is

Page 11 of 31 submitted that therefore, Section 276B talks

about “fails to pay,” the words which are

missing in Section 271C of the Act. It is

submitted that therefore, wherever, the

Parliament wanted to provide for the

consequences on non­payment of the TDS,

the same is provided like Section 276B of the

Act. It is submitted that therefore, thus the

words in Section 271C and Section 276B are

different and distinct.

5.7 It is further submitted by Shri Arijit Prasad,

learned Senior Advocate appearing on behalf

of the assessee that even otherwise, the

impugned judgment and order passed by the

High Court has been subsequently overruled

by the Full Bench of the Kerala High Court in

the case of Lakshadweep Development

Page 12 of 31 Corporation Ltd. Vs. Additional

Commissioner of Income Tax (TDS) and

Anr. (2019) 411 ITR 213 (FB).

5.8 It is further submitted by learned counsel

appearing on behalf of the respective

assessees in respective appeals that even

otherwise in exercise of powers under Section

273B, no penalty shall be imposed on the

person or the assessee, for any failure, if he

proves that there was a reasonable cause for

the said failure. Reliance is placed on the

decision of this Court in the case of CIT Vs.

Bank of Nova Scotia (2016) 15 SCC 81.

5.9 It is submitted that in the case of Civil

Appeals Nos. 1258­60/2019, the ITAT found

in favour of the assessee that there was a

reasonable cause for the assessee for the

Page 13 of 31 failure to remit the TDS belatedly. It is

submitted that once the ITAT found the case

falling under Section 273B, the same was not

required to be interfered with by the High

Court as the same cannot be said to a

substantial question of law.

5.10 Making the above submissions, it is prayed to

allow the present appeals and to hold that for

late remittance of the TDS, there shall not be

any penalty leviable under Section 271C of

the Act, 1961.

6. All these appeals are vehemently opposed by

Shri Balbir Singh, learned ASG assisted by

Ms. Monica Benjamin, learned counsel,

appearing on behalf of the Revenue.

6.1 Shri Balbir Singh, learned ASG appearing on

behalf of the Revenue has vehemently

submitted that Section 271C of the Act has

Page 14 of 31 been inserted in the year 1987. It is

submitted that the object and purpose of

inserting Section 271C is to levy the penalty

for failure to deduct tax at source. It is

submitted that under the old provision of

Chapter XXI of the Income Tax Act, no

penalty was provided for failure to deduct tax

at source though, this default, however,

attracted prosecution under the provisions of

Section 276B, which prescribed punishment

for failure to deduct tax at source or after

deducting failure to remit the same to the

Government and therefore, Section 271C

came to be inserted to provide for levy of

penalty for failure to deduct tax at source. It

is submitted that therefore, in a case where

though the assessee has deducted the tax

(TDS), but does not remit the same to the

Page 15 of 31 Government and/or belatedly remits the TDS

after deducting, such an assessee is liable to

pay the penalty under Section 271C of the

Act.

6.2 It is submitted that any other view will

frustrate the object and purpose of insertion

of Section 271C of the Act. Then, Shri Balbir

Singh, learned ASG has taken us to the

CBDT Circular No. 551 dated 23.01.1998,

explaining the amendment and insertion of

Section 271C. It is submitted that the object

and purpose of insertion of Section 271C

seems to be that over and above the

prosecution, the person who has deducted

tax at source but not remitted the same to

the Government shall also be liable to pay

penalty and that is why Section 271C has

been inserted.

Page 16 of 31 6.3 Making the above submissions, it is prayed to

dismiss the present appeals.

7. Heard learned counsel appearing on behalf of

the respective parties at length.

7.1 The short question which is posed for the

consideration of this Court is in case of

belated remittance of the TDS after deducting

the TDS whether such an assessee is liable to

pay penalty under Section 271C of the Act,

1961?

7.2 The question which is also posed for the

consideration of this Court is what is the

meaning and scope of the words “fails to

deduct” 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”?

Page 17 of 31 7.3 In order to appreciate the rival contentions

and to answer the aforesaid questions, it is

necessary to have analysis of Statutory

provisions.

7.4 The relevant provisions are as under: ­

“Section 201(1A) of the Act Without prejudice to the provisions of sub­section (1), if any such person, principal officer or company as is referred to in that sub­section 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, —

(i) at one per cent for every month or part of a month on the amount of such tax from the date on which such tax was deductible to the date on which such tax is deducted; and

(ii) at one and one­half per cent for every month or part of a month on the amount of such tax from the date on which such tax was deducted to the date on which such tax is actually paid, and such interest shall be paid before furnishing the statement in accordance with the provisions of sub­ section (3) of Section 200:]

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

Page 18 of 31

(a) deduct the whole or any part of the tax as required by or under the provisions of Chapter XVII­B; or

(b) pay the whole or any part of the tax as required by or under,—

(i) sub­section (2) of Section 115­O; or

(ii) the second proviso to Section 194­B; 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.] (2) Any penalty imposable under sub­ section (1) shall be imposed by the Joint Commissioner.

Section 273B of the Act 273­B. Penalty not to be imposed in certain cases.—Notwithstanding anything contained in the provisions of clause (b) of sub­section (1) of Section 271, Section 271­A 4203[Section 271­ AA], Section 271­B 4204[Section 271­ BA], 4205[Section 271­ BB, 4206[Section 271­C, Section 271­ CA], Section 271­D, Section 271­ E, 4207[Section 271­F,] 4208[Section 271­FA 4209[, 4210[Section 271­FAB, Section 271­FB, Section 271­G, Section 271­GA, 4211[Section 271­ GB,]]] 4212[Section 271­ H,] 4213[Section 271­I,] 4214[Section 271­J,] clause (c) or clause (d) of sub­ section (1) or sub­section (2) of Section 272­A, sub­section (1) of Section 272­ AA] or 4215[Section 272­B or] 4216[sub­section (1) or sub­section (1­A) of Section 272­BB] or sub­section (1) of Section 272­BBB or] clause (b) of sub­section (1) or clause (b) or clause

(c) of sub­section (2) of Section 273, no

Page 19 of 31 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 of the Act 276­B. Failure to pay tax to the credit of Central Government under Chapter XII­D or XVII­B.—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 XVII­B; or

(b) the tax payable by him, as required by or under,—

(i) sub­section (2) of Section 115­O; or

(ii) the second proviso to Section 194­B, 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.”

7.5 At the outset, it is required to be noted that

all these cases are with respect to the belated

remittance of the TDS though deducted by

the assessee and therefore, Section 271C(1)(a)

shall be applicable. At the cost of repetition, it

is observed that it is a case of belated

Page 20 of 31 remittance of the TDS though deducted by

the assessee and not a case of non­deduction

of TDS at all.

7.6 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

Page 21 of 31 or under the provisions of Chapter XVIIB. The

words used in Section 271C(1)(a) are very

clear and the relevant words used are “fails to

deduct.” It does not speak about belated

remittance of the TDS. As per settled position

of law, the penal provisions are required to be

construed strictly and literally. As per the

cardinal principle of interpretation of statute

and more particularly, the penal provision,

the penal provisions are required to be read

as they are. Nothing is to be added or nothing

is to be taken out of the penal provision.

Therefore, on plain reading of Section 271C of

the Act, 1961, there shall not be penalty

leviable on belated remittance of the TDS

after the same is deducted by the assessee.

Section 271C of the Income Tax Act is quite

categoric. Its scope and extent of application

Page 22 of 31 is discernible from the provision itself, in

unambiguous terms. When the non­

deduction of the whole or any part of the tax,

as required by or under the various

instances/provisions of Chapter XVIIB would

invite penalty under Clause 271C(1)(a); only a

limited text, involving sub­section (2) of

Section 115O or covered by the second

proviso to Section 194B alone would

constitute an instance where penalty can be

imposed in terms of Section 271C(1)(b) of the

Act, namely, on non­payment. It is not for the

Court to read something more into it,

contrary to the intent and legislative wisdom.

7.7 At this stage, it is required to be noted that

wherever the Parliament wanted to have the

consequences of non­payment and/or belated

remittance/payment of the TDS, the

Page 23 of 31 Parliament/Legislature has provided the

same like in Section 201(1A) and Section

276B of the Act.

7.8 Section 201(1A) provides that in case a tax

has been deducted at source but the same is

subsequently remitted may be belatedly or

after some days, such a person is liable to

pay the interest as provided under Section

201(1A) of the Act. The levy of interest under

Section 201(1A) thus can be said to be

compensatory in nature on belated

remittance of the TDS after deducting the

same. Therefore, consequences of non­

payment/belated remittance/payment of the

TDS are specifically provided under Section

201(1A).

7.9 Similarly, Section 276B talks about the

prosecution on failure to pay the TDS after

Page 24 of 31 deducting the same. At this stage, it is

required to be noted that Section 271C has

been amended subsequently in the year 1997

providing Sections 271C(1)(a) and 271C(1)(b).

As observed hereinabove, fails to pay the

whole or any part of the tax would be falling

under Section 271C(1)(b) and the word used

between 271C(1)(a) and 271C(1)(b) is “or”. At

this stage, it is required to be noted that

Section 276B provides for prosecution in case

of failure to “pay” tax to the credit of Central

Government. The word “pay” is missing in

Section 271C(1)(a).

8. Now so far as the reliance placed upon the

CBDT’s Circular No. 551 dated 23.01.1998 by

learned ASG is concerned, at the outset, it is

required to be noted that the said circular as

such favours the assessee. Circular No. 551 Page 25 of 31 deals with the circumstances under which

Section 271C was introduced in the Statute,

for levy of penalty. Paragraph 16.5 of the

above Circular reads as follows:

“16.5: Insertion of a new section 271C to provide for levy of penalty for failure to deduct tax at source­ under the old provisions of Chapter XXI of the Income Tax Act no penalty was provided for failure to deduct tax at source. This default, however, attracted prosecution under the provisions of Section 276B, which prescribed punishment for failure to deduct tax at source or after deducting failure to pay the same to the Government. It was decided that the first part of the default, i.e., failure to deduct tax at source should be made liable to levy of penalty, while the second part of the default, i.e., failure to pay the tax deducted at source to the Government which is a more serious offence, should continue to attract prosecution. The Amending Act, 1987 has accordingly inserted a new Section 271C to provide for imposition of penalty on any person who fails to deduct tax at source as required under the provisions of Chapter XVIIB of the Act. The penalty is of a sum equal to the

Page 26 of 31 amount of tax which should have been deducted at source.

On fair reading of said CBDT’s 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 Act and because of the

gravity of the mischief involved, it may involve

prosecution proceedings as well, under

Section 276B of the Act. If there is any

omission to deduct the tax at source, it may

lead to loss of Revenue and hence remedial

measures have been provided by

incorporating the provision to ensure that tax

liability to the said extent would stand shifted

to the shoulders of the party who failed to

effect deduction, in the form of penalty. On

Page 27 of 31 deduction of tax, if there is delay in remitting

the amount to Revenue, it has to be satisfied

with interest as payable under

Section 201(1A) of the Act, besides the

liability to face the prosecution proceedings, if

launched in appropriate cases, in terms of

Section 276B of the Act.

Even the CBDT has taken note of the fact

that no penalty is envisaged under Section

271C of the Income Tax Act for non­

deduction TDS and no penalty is envisaged

under Section 271C for belated

remittance/payment/deposit of the TDS.

8.1 Even otherwise, the words “fails to deduct”

occurring in Section 271C(1)(a) cannot be

read into “failure to deposit/pay the tax

deducted.”

Page 28 of 31 8.2 Therefore, on true interpretation of Section

271C, there shall not be any penalty leviable

under Section 271C on mere delay in

remittance of the TDS after deducting the

same by the concerned assessee. As observed

hereinabove, the consequences on non­

payment/belated remittance of the TDS

would be under Section 201(1A) and Section

276B of the Act, 1961.

9. In view of the above in all these cases as the

respective assessees remitted the TDS though

belatedly and it is not case of non­deduction

of the TDS at all they are no liable to pay the

penalty under Section 271C of the Income

Tax Act. Therefore, any question on

Page 29 of 31 applicability of Section 273B of the Act is not

required to be considered any further.

10. In view of the above and for the reasons

stated above, all these appeals succeed.

Impugned judgment(s) and order(s) passed by

the High Court are hereby quashed and set

aside and the question of law on

interpretation of Section 271C of the Income

Tax Act is answered in favour of the

assessee(s) and against the Revenue and it is

specifically observed and held that on mere

belated remitting the TDS after deducting the

same by the concerned person/assessee, no

penalty shall be leviable under Section 271C

Page 30 of 31 of the Income Tax Act. Present appeals are

accordingly allowed. No costs.

………………………………….J. [M.R. SHAH]

………………………………….J. [C.T. RAVIKUMAR] NEW DELHI;

APRIL 10, 2023

Page 31 of 31