generally it is presumed that penalty u/s 271C is levied failure to deduct the tax at sources and not for deducting and not paying , for that there is provision of prosecution. However following decision of Kerala High court is a big surprise 195 Taxman 323
HIGH COURT OF KERALA
US Technologies International (P.) Ltd.
v.
Commissioner of Income-tax *
C.N. RAMACHANDRAN NAIR AND C.K. ABDUL REHIM, JJ.
INCOME TAX APPEAL NO. 3 OF 2009†
JUNE 16, 2009
Section 271C of the Income-tax Act, 1961 - Penalty - For failure to deduct tax at source - Assessment year 2003-04 - Whether failure to deduct tax at source or failure to remit recovered tax, both will attract penalty under section 271C - Held, yes
Section 271C, read with section 273B, of the Income-tax Act, 1961 - Penalty - For failure to deduct tax at source -Assessment year 2003-04 - Whether defence available under section 273B covers failure in payment of recovered tax - Held, no - Whether, however, if there is failure to remit on account of failure to recover for any reason whatsoever, or remittance of tax with interest is made before detection, or full amount of tax with interest has been paid before levy of penalty, case calls for reduction or waiver of penalty - Held, yes
FACTS
The assessee was a software company. During a survey conducted in its premises, it was noticed that massive amount of tax deducted at source from payment under the heads salaries, payment to contractors, professional fees for technical services, rent, etc., had been retained by the assessee without making remittance to the department. Therefore, the Assessing Officer levied the penalty under section 271C upon the assessee equal to the amount of tax recovered at source and withheld by the assessee without remittance to the department on due dates. He turned down the objection raised by the assessee that section 271C does not authorise levy of penalty for non-payment of deducted tax but authorizes penalty only for failure to deduct the tax. On appeal, both, the Commissioner (Appeals) and the Tribunal, upheld the action of the Assessing Officer.
On appeal to the High Court :
HELD
The assessee sought to draw a distinction between clauses (a) and (b) of section 271C(1) stating that penalty under clause (a) was only for failure to deduct tax as required under any of the provisions of Chapter XVII-B. It was argued that in the survey conducted by the department what was noticed was that deductions had been made and the violation was only delayed remittance of the part of the deducted amount and non-remittance of the balance amount. The contention of the assessee was that since there was no provision for penalty for non-remittance of tax deducted at source under the provisions of Chapter XVII-B, the levy of penalty was unauthorised. The assessee also contended that penalty under section 271C(1) for non-remittance was only of tax, whether recovered or not, under sub-section (2) of section 115-O or second proviso to section 194B. There was no merit in the contention of the assessee because the first part of clause (b) of section 271C(1), i.e., failure to pay whole or any part of tax as required, takes in the tax deducted under clause (a) under any of the provisions of Chapter XVII-B. Therefore, failure to deduct or failure to remit recovered tax, both will attract penalty under section 271C. Hence, the finding of the Tribunal dismissing the challenge against levy of penalty was to be upheld. [Para 3]
However, the Tribunal had not considered challenge against quantum of penalty in so much details, probably because in the penalty order it was stated that only minimum penalty was levied. So far as failure on the part of the assessee to remit the tax recovered at source was concerned, there could not be any justifying circumstance for the delay in remittance because the assessee could not divert tax recovered for the Government towards working capital or any other purpose. So much so, defence available under section 273B does not cover failure in payment of recovered tax. However, if there is failure to remit on account of failure to recover for any reason whatsoever, then the case calls for reduction of penalty, if not its waiver. Similarly, recovery and remittance of tax, though with delay but with interest, before detection is certainly a mitigating circumstance for waiver or reduction of penalty. Further, if full amount of tax with interest is paid before levy of penalty, quantum reduction is called for by the Assessing Officer. Therefore, the Assessing Officer was to be directed to reconsider the quantum of penalty and to grant further reduction in penalty, if any new fact or circumstance was brought to his notice based on the observations made above or otherwise in terms of section 273B. [Para 4]
T.M. Sreedharan and V.P. Narayanan for the Applicant. Jose Joseph for the Respondent.
JUDGMENT
C.N. Ramachandran Nair, J. - Appeal is filed against order of the Income-tax Appellate Tribunal rejecting appeal filed by the assessee against the order of the CIT (Appeals) confirming penalty levied under section 271C of the Income-tax Act (hereinafter called "the Act"), on the assessee for failure to deduct and for the failure to pay deducted tax in terms of the provisions contained in Chapter XVII-B of the Act during the financial year 2002-03. The assessee is a Software Company which has its unit in Techno Park, Trivandrum. On 10-3-2003 the Survey Team of the Income-tax Department conducted a survey in the premises of the assessee under section 133A of the Act. It was noticed that massive amount of tax deducted at source for payment under the heads salaries, payment to contractors, professional fees for technical services, rent, etc. have been retained by the assessee without making remittance to the department. It was found that out of Rs. 1,10,41,898 being the TDS recovered from various payments for the financial year 2002-03 relevant for the assessment year 2003-04, the assessee had remitted only Rs. 38,94,687 as on the date of search. The balance amount was remitted after survey in May 2003. The Additional Commissioner of Income-tax noticed that during the preceding financial year, i.e., 2001-02, also the assessee made belated payment of tax deducted at source. Therefore, penalty was proposed under section 271C for the non-payment of recovered tax. Even though assessee raised objection against the proposal for penalty on the ground that section 271C does not authorise levy of penalty for non-payment of deducted tax but authorises penalty only for failure to deduct the tax, the Assessing Officer turned down the objection and levied penalty equal to the amount of tax recovered at source and withheld by the company without remittance to the department on due dates. In first appeal, the assessee raised the question of jurisdiction of the Additional Commissioner as well as claimed paucity of funds as the reason for delayed payment of tax deducted at source. The CIT (Appeals) considered the question in detail, verified the cash flow statement and noticed that assessee was deliberately delaying payment and its funds during the relevant financial year were utilised for investment in new company, re-investment in the sister concern, payment of arrears etc. In other words, it was the finding of the Commissioner (Appeals) that the assessee deliberately ignored payment of tax and the deducted tax was paid conveniently. Since the default was found to be chronic and deliberate, the CIT (Appeals) did not grant reduction in penalty. The challenge against jurisdiction was rejected by CIT (Appeals) for the reason that section 271C authorises penalty not only for failure to deduct or short deduction, but for non-payment as well. It is against this order the assessee filed appeal before the Tribunal challenging the jurisdiction of the officer as well as against quantum on the ground that they have reasonable cause for the delay in remittance. The Tribunal found that section 271C authorises penalty not only for failure to deduct tax at source in terms of the provisions of Chapter XVII-B, but it authorises penalty for non-payment of tax deducted at source in time. Assessee's claim that there was reasonable cause for their failure to deduct or pay the recovered tax was also rejected by the Tribunal. The assessee is, therefore, before us in appeal under section 260A of the Income-tax Act raising both the issues, i.e., whether penalty could be levied under section 271C for failure to pay deducted tax and alternately whether assessee has reasonable cause for the non-payment or belated payment of tax deducted at source. We have heard counsel for the appellant and Standing Counsel appearing for the Income-tax Department.
2. The first question raised is whether penalty could be levied under section 271C of the Act for non-payment of tax deducted at source. The contention of counsel for the appellant is that section 271C provides for penalty only for failure to deduct tax as required under Chapter XVII-B and for non-payment of tax, penalty provided is only for violation of sub-section (2) of section 115-O or section 194B of the Act. In other words, according to him if the assessee has made deduction from source on payments like salary, payment to contractors, payment on rent, etc. under various provisions of Chapter XVII-B, then no penalty could be levied if the assessee failed to remit the recovered tax. According to him failure to remit tax attracts penalty under section 271C only in respect of tax payable under sub-section (2) of section 115-O or section 194B of the Act. Standing counsel for the revenue contended that section 271C provides for penalty both for failure to deduct or to remit recovered tax and for both. In other words, according to him, penalty provided under section 271C also covers the situation where the assessee after deduction at source retains the recovered amount without payment to the department. In our view, the Tribunal while considering the appeal recast the section in its own way completely distorting its meaning. Originally there was no provision for penalty for failure to deduct tax or remit the deducted tax and the provision under section 276B only authorised prosecution for violation. However, section 271C was introduced by the Direct Laws (Amendment) Act, 1987 with effect from 1-4-1989 providing for penalty for failure to deduct or remit tax under Chapter XVII-B, sub-section (2) of section 115-O and section 194B of the Act. For easy reference we extract hereunder section 271C.
"271C. 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 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."
3. Counsel for the appellant has drawn a distinction between clauses (a) and (b) of section 271C(1) of the Act. According to him penalty under clause (a) is only for failure to deduct tax as required under any of the provisions of Chapter XVII-B. It is argued that in the survey conducted by the department what was noticed was that deductions have been made and the violation was only delayed remittance of part of the deducted amount and non-remittance of balance amount. However, the contention of counsel for the assessee is that since there is no provision for penalty for non-remittance of tax deducted at source under the provisions of Chapter XVII-B, the levy of penalty is unauthorised. Counsel contended that penalty under section 271C(1) for non-remittance is only of tax, whether recovered or not, under sub-section (2) of section 115-O or second proviso to section 194B of the Act. We are unable to accept this contention because the first part of clause (b) of section 271C(1), i.e., failure to pay whole or any part of tax as required, takes in the tax deducted under clause (a) under any of the provisions of Chapter XVII-B. So much so, in our view, failure to deduct or failure to remit recovered tax, both will attract penalty under section 271C of the Act. So much so, the contention of the appellant fails and we uphold the finding of the Tribunal dismissing the challenge against levy of penalty.
4. The next question to be considered is the quantum of penalty which in this case is above Rs. 1.1 crore. Counsel for the appellant referred to section 273B of the Act authorising the officer to waive or reduce the penalty if the defaulted assessee proves that there was reasonable cause for such failure which attracts penalty. Standing Counsel has referred to the findings on cash flow and the application of funds by assessee for other purposes and contended that there was no reasonable cause justifying the failure on the part of the assessee. He has further contended that even for earlier year assessee had remitted recovered tax with delay. In our view, the Tribunal has not considered challenge against quantum of penalty in so much details probably because in the penalty order it is stated that only minimum penalty is levied. So far as failure on the part of the assessee to remit the tax recovered at source is concerned, we do not think there can be any justifying circumstance for delay in remittance because assessee cannot divert tax recovered for the Government towards working capital or any other purpose. So much so, in our view, defence available under section 273B does not cover failure in payment of recovered tax. However, if there is failure to remit on account of failure to recover for any reason whatsoever, then the case calls for reduction of penalty, if not waiver. Similarly, we feel recovery and remittance of tax, though with delay but with interest, before detection is certainly a mitigating circumstance for waiver or reduction of penalty. Further, if full amount of tax with interest was paid before levy of penalty, we feel quantum reduction is called for by the Assessing Officer. Therefore, we direct the Assessing Officer to reconsider the quantum of penalty by giving one more opportunity to the assessee to furnish facts in the light of our observations above. The appeal is accordingly, disposed of upholding the order of the Tribunal on the levy of penalty, but with direction to the Assessing Officer to grant further reduction in penalty, if any, new fact or circumstance is brought to the notice of the Assessing Officer based on observations above or otherwise in terms of section 273B of the Act.
HIGH COURT OF KERALA
US Technologies International (P.) Ltd.
v.
Commissioner of Income-tax *
C.N. RAMACHANDRAN NAIR AND C.K. ABDUL REHIM, JJ.
INCOME TAX APPEAL NO. 3 OF 2009†
JUNE 16, 2009
Section 271C of the Income-tax Act, 1961 - Penalty - For failure to deduct tax at source - Assessment year 2003-04 - Whether failure to deduct tax at source or failure to remit recovered tax, both will attract penalty under section 271C - Held, yes
Section 271C, read with section 273B, of the Income-tax Act, 1961 - Penalty - For failure to deduct tax at source -Assessment year 2003-04 - Whether defence available under section 273B covers failure in payment of recovered tax - Held, no - Whether, however, if there is failure to remit on account of failure to recover for any reason whatsoever, or remittance of tax with interest is made before detection, or full amount of tax with interest has been paid before levy of penalty, case calls for reduction or waiver of penalty - Held, yes
FACTS
The assessee was a software company. During a survey conducted in its premises, it was noticed that massive amount of tax deducted at source from payment under the heads salaries, payment to contractors, professional fees for technical services, rent, etc., had been retained by the assessee without making remittance to the department. Therefore, the Assessing Officer levied the penalty under section 271C upon the assessee equal to the amount of tax recovered at source and withheld by the assessee without remittance to the department on due dates. He turned down the objection raised by the assessee that section 271C does not authorise levy of penalty for non-payment of deducted tax but authorizes penalty only for failure to deduct the tax. On appeal, both, the Commissioner (Appeals) and the Tribunal, upheld the action of the Assessing Officer.
On appeal to the High Court :
HELD
The assessee sought to draw a distinction between clauses (a) and (b) of section 271C(1) stating that penalty under clause (a) was only for failure to deduct tax as required under any of the provisions of Chapter XVII-B. It was argued that in the survey conducted by the department what was noticed was that deductions had been made and the violation was only delayed remittance of the part of the deducted amount and non-remittance of the balance amount. The contention of the assessee was that since there was no provision for penalty for non-remittance of tax deducted at source under the provisions of Chapter XVII-B, the levy of penalty was unauthorised. The assessee also contended that penalty under section 271C(1) for non-remittance was only of tax, whether recovered or not, under sub-section (2) of section 115-O or second proviso to section 194B. There was no merit in the contention of the assessee because the first part of clause (b) of section 271C(1), i.e., failure to pay whole or any part of tax as required, takes in the tax deducted under clause (a) under any of the provisions of Chapter XVII-B. Therefore, failure to deduct or failure to remit recovered tax, both will attract penalty under section 271C. Hence, the finding of the Tribunal dismissing the challenge against levy of penalty was to be upheld. [Para 3]
However, the Tribunal had not considered challenge against quantum of penalty in so much details, probably because in the penalty order it was stated that only minimum penalty was levied. So far as failure on the part of the assessee to remit the tax recovered at source was concerned, there could not be any justifying circumstance for the delay in remittance because the assessee could not divert tax recovered for the Government towards working capital or any other purpose. So much so, defence available under section 273B does not cover failure in payment of recovered tax. However, if there is failure to remit on account of failure to recover for any reason whatsoever, then the case calls for reduction of penalty, if not its waiver. Similarly, recovery and remittance of tax, though with delay but with interest, before detection is certainly a mitigating circumstance for waiver or reduction of penalty. Further, if full amount of tax with interest is paid before levy of penalty, quantum reduction is called for by the Assessing Officer. Therefore, the Assessing Officer was to be directed to reconsider the quantum of penalty and to grant further reduction in penalty, if any new fact or circumstance was brought to his notice based on the observations made above or otherwise in terms of section 273B. [Para 4]
T.M. Sreedharan and V.P. Narayanan for the Applicant. Jose Joseph for the Respondent.
JUDGMENT
C.N. Ramachandran Nair, J. - Appeal is filed against order of the Income-tax Appellate Tribunal rejecting appeal filed by the assessee against the order of the CIT (Appeals) confirming penalty levied under section 271C of the Income-tax Act (hereinafter called "the Act"), on the assessee for failure to deduct and for the failure to pay deducted tax in terms of the provisions contained in Chapter XVII-B of the Act during the financial year 2002-03. The assessee is a Software Company which has its unit in Techno Park, Trivandrum. On 10-3-2003 the Survey Team of the Income-tax Department conducted a survey in the premises of the assessee under section 133A of the Act. It was noticed that massive amount of tax deducted at source for payment under the heads salaries, payment to contractors, professional fees for technical services, rent, etc. have been retained by the assessee without making remittance to the department. It was found that out of Rs. 1,10,41,898 being the TDS recovered from various payments for the financial year 2002-03 relevant for the assessment year 2003-04, the assessee had remitted only Rs. 38,94,687 as on the date of search. The balance amount was remitted after survey in May 2003. The Additional Commissioner of Income-tax noticed that during the preceding financial year, i.e., 2001-02, also the assessee made belated payment of tax deducted at source. Therefore, penalty was proposed under section 271C for the non-payment of recovered tax. Even though assessee raised objection against the proposal for penalty on the ground that section 271C does not authorise levy of penalty for non-payment of deducted tax but authorises penalty only for failure to deduct the tax, the Assessing Officer turned down the objection and levied penalty equal to the amount of tax recovered at source and withheld by the company without remittance to the department on due dates. In first appeal, the assessee raised the question of jurisdiction of the Additional Commissioner as well as claimed paucity of funds as the reason for delayed payment of tax deducted at source. The CIT (Appeals) considered the question in detail, verified the cash flow statement and noticed that assessee was deliberately delaying payment and its funds during the relevant financial year were utilised for investment in new company, re-investment in the sister concern, payment of arrears etc. In other words, it was the finding of the Commissioner (Appeals) that the assessee deliberately ignored payment of tax and the deducted tax was paid conveniently. Since the default was found to be chronic and deliberate, the CIT (Appeals) did not grant reduction in penalty. The challenge against jurisdiction was rejected by CIT (Appeals) for the reason that section 271C authorises penalty not only for failure to deduct or short deduction, but for non-payment as well. It is against this order the assessee filed appeal before the Tribunal challenging the jurisdiction of the officer as well as against quantum on the ground that they have reasonable cause for the delay in remittance. The Tribunal found that section 271C authorises penalty not only for failure to deduct tax at source in terms of the provisions of Chapter XVII-B, but it authorises penalty for non-payment of tax deducted at source in time. Assessee's claim that there was reasonable cause for their failure to deduct or pay the recovered tax was also rejected by the Tribunal. The assessee is, therefore, before us in appeal under section 260A of the Income-tax Act raising both the issues, i.e., whether penalty could be levied under section 271C for failure to pay deducted tax and alternately whether assessee has reasonable cause for the non-payment or belated payment of tax deducted at source. We have heard counsel for the appellant and Standing Counsel appearing for the Income-tax Department.
2. The first question raised is whether penalty could be levied under section 271C of the Act for non-payment of tax deducted at source. The contention of counsel for the appellant is that section 271C provides for penalty only for failure to deduct tax as required under Chapter XVII-B and for non-payment of tax, penalty provided is only for violation of sub-section (2) of section 115-O or section 194B of the Act. In other words, according to him if the assessee has made deduction from source on payments like salary, payment to contractors, payment on rent, etc. under various provisions of Chapter XVII-B, then no penalty could be levied if the assessee failed to remit the recovered tax. According to him failure to remit tax attracts penalty under section 271C only in respect of tax payable under sub-section (2) of section 115-O or section 194B of the Act. Standing counsel for the revenue contended that section 271C provides for penalty both for failure to deduct or to remit recovered tax and for both. In other words, according to him, penalty provided under section 271C also covers the situation where the assessee after deduction at source retains the recovered amount without payment to the department. In our view, the Tribunal while considering the appeal recast the section in its own way completely distorting its meaning. Originally there was no provision for penalty for failure to deduct tax or remit the deducted tax and the provision under section 276B only authorised prosecution for violation. However, section 271C was introduced by the Direct Laws (Amendment) Act, 1987 with effect from 1-4-1989 providing for penalty for failure to deduct or remit tax under Chapter XVII-B, sub-section (2) of section 115-O and section 194B of the Act. For easy reference we extract hereunder section 271C.
"271C. 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 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."
3. Counsel for the appellant has drawn a distinction between clauses (a) and (b) of section 271C(1) of the Act. According to him penalty under clause (a) is only for failure to deduct tax as required under any of the provisions of Chapter XVII-B. It is argued that in the survey conducted by the department what was noticed was that deductions have been made and the violation was only delayed remittance of part of the deducted amount and non-remittance of balance amount. However, the contention of counsel for the assessee is that since there is no provision for penalty for non-remittance of tax deducted at source under the provisions of Chapter XVII-B, the levy of penalty is unauthorised. Counsel contended that penalty under section 271C(1) for non-remittance is only of tax, whether recovered or not, under sub-section (2) of section 115-O or second proviso to section 194B of the Act. We are unable to accept this contention because the first part of clause (b) of section 271C(1), i.e., failure to pay whole or any part of tax as required, takes in the tax deducted under clause (a) under any of the provisions of Chapter XVII-B. So much so, in our view, failure to deduct or failure to remit recovered tax, both will attract penalty under section 271C of the Act. So much so, the contention of the appellant fails and we uphold the finding of the Tribunal dismissing the challenge against levy of penalty.
4. The next question to be considered is the quantum of penalty which in this case is above Rs. 1.1 crore. Counsel for the appellant referred to section 273B of the Act authorising the officer to waive or reduce the penalty if the defaulted assessee proves that there was reasonable cause for such failure which attracts penalty. Standing Counsel has referred to the findings on cash flow and the application of funds by assessee for other purposes and contended that there was no reasonable cause justifying the failure on the part of the assessee. He has further contended that even for earlier year assessee had remitted recovered tax with delay. In our view, the Tribunal has not considered challenge against quantum of penalty in so much details probably because in the penalty order it is stated that only minimum penalty is levied. So far as failure on the part of the assessee to remit the tax recovered at source is concerned, we do not think there can be any justifying circumstance for delay in remittance because assessee cannot divert tax recovered for the Government towards working capital or any other purpose. So much so, in our view, defence available under section 273B does not cover failure in payment of recovered tax. However, if there is failure to remit on account of failure to recover for any reason whatsoever, then the case calls for reduction of penalty, if not waiver. Similarly, we feel recovery and remittance of tax, though with delay but with interest, before detection is certainly a mitigating circumstance for waiver or reduction of penalty. Further, if full amount of tax with interest was paid before levy of penalty, we feel quantum reduction is called for by the Assessing Officer. Therefore, we direct the Assessing Officer to reconsider the quantum of penalty by giving one more opportunity to the assessee to furnish facts in the light of our observations above. The appeal is accordingly, disposed of upholding the order of the Tribunal on the levy of penalty, but with direction to the Assessing Officer to grant further reduction in penalty, if any, new fact or circumstance is brought to the notice of the Assessing Officer based on observations above or otherwise in terms of section 273B of the Act.