SHORE DWELLINGS PRIVATE LIMITED,BENGALURU vs. JCIT, TDS RANGE-2, BENGALURU, BENGALURU

Both appeals concern the penalty imposed under section 271C of the Income-tax Act. The assessee credited interest on inter-corporate deposits to its group concerns and deducted tax at source but neither paid the interest nor remitted the tax to the Central Government. It later obtained Forms 26A from all recipients, confirming that they had offered the interest income to tax. Nevertheless, the Joint Commissioner imposed the penalty, which was subsequently upheld.

ITA No. 551/Bangalore/2026 arises from the appellate order dated 4 February 2026 passed by the National Faceless Appeal Centre, Delhi (the learned CIT(A)), for Assessment Year 2019–20. By that order, the learned CIT(A) dismissed the assessee’s appeal against the penalty order dated 31 December 2024 passed under section 271C of the Income-tax Act, 1961, by the Additional Commissioner of Income-tax, TDS Range-2, Bangalore (the learned Assessing Officer).

ITA No. 556/Bangalore/2026 is against the appellate order passed by the National Faceless Appeal Centre, Delhi, for Assessment Year 2018–19, dated 4 February 2026, wherein the penalty order passed under section 271C of the Act, dated 31 December 2024, passed by the Joint Commissioner of Income Tax (TDS), Range–2, Bangalore (the learned Assessing Officer), was dismissed.

The Assessee has raised the following grounds of appeal: ITA No. 551-Bang-2026:

The parties confirmed that, except for the amounts involved, the facts, arguments, and orders in both appeals are identical.

We first consider the facts for Assessment Year 2018–19. The assessee is engaged in the real estate business and was required to deduct tax at source under Chapter XVII-B of the Income-tax Act, 1961. During a survey on 31 July 2018, verification of its books revealed defaults in tax deducted at source for Financial Year 2018–19. Consequently, by order dated 16 January 2020 under sections 201(1) and 201(1A), the Assistant Commissioner of Income-tax, TDS Circle-2(1), Bangalore, treated the assessee as an assessee in default in respect of tax deducted at source of ₹5,49,86,065, together with applicable interest.

During the year, the assessee had obtained inter-corporate deposits from sister concerns or group companies. The SSE has provided for the interest payment to the sister concern and has also deducted tax at source. However, the SAC has nearly created a provision for the interest payable to the sister concern, which was not paid, and the amount of tax deducted at source, which was also recorded in the books of accounts, was not deposited to the credit of the Government of India.

Thus, the assessee deducted tax under section 194A on the interest credited to those deposits. My sister's concerns produced Forms 26A, supported by certificates from chartered accountants, showing that the recipient companies offered the interest income to tax and paid the tax due on this income.

The assessee furnished party-wise details of the interest credited and tax deducted at source. In aggregate, the group companies received interest of ₹32,34,34,603, and the assessee deducted tax of ₹3,23,44,461. However, the assessee did not remit the deducted tax to the Central Government. Instead, the assessee produced Forms 26A from the recipient companies, confirming that they had included the corresponding interest income in their returns and paid tax thereon. Based on the Forms 26A accepted by the Assessing Officer, the assessee’s outstanding default was reduced to ₹1,83,63,199. Nevertheless, the tax of ₹3,23,44,461 deducted from interest credited to the recipient companies had not been deposited with the Central Government.

The Joint Commissioner of Income-tax issued a notice under section 271C, calling upon the assessee to explain the default in respect of tax deducted under section 194A. In its reply dated 10 December 2024, the assessee stated that it had credited interest at 13% per annum on the inter-corporate deposits but, due to severe financial constraints, could neither pay the interest to the group companies nor deposit the tax deducted at source with the Central Government. The recipient companies, however, furnished Forms 26A confirming that they had offered the credited interest to tax and paid the tax due. The assessee contended that section 271C did not apply because tax had been deducted, though not deposited, and that the Forms 26A had, in any event, extinguished its liability as an assessee in default. It also pleaded reasonable cause, citing continuing losses, lack of liquidity, the classification of its loans as non-performing assets, possession of its immovable properties by lenders, insolvency and recovery proceedings, and proceedings initiated by creditors under section 138 of the Negotiable Instruments Act. It further stated that, during Financial Year 2024–25, it reversed the entries relating to tax deducted at source payable upon receipt of the Forms 26A. On these grounds, the assessee requested that the penalty proceedings be dropped.

By order dated 31 December 2024, the Joint Commissioner of Income-tax, TDS Range-2, Bengaluru, imposed a penalty of ₹3,23,44,461 under section 271C. He held that the assessee failed to comply with its obligation under section 194A and failed to establish reasonable cause under section 273B. The claim of financial hardship was rejected because the assessee’s financial statements showed positive net cash flows from operating and investing activities and substantial cash and cash equivalents as at 31 March 2019. By order dated 4 February 2026, the CIT (A) dismissed the assessee’s appeal, holding that the plea of financial hardship did not constitute reasonable cause, given the assessee’s positive cash flow, tax advances, and substantial borrowings during the year.

Aggrieved by the appellate order, the assessee is in appeal before us. The learned authorised representative, Shri V. Srinivasan, Advocate, filed a paper book of 166 pages, which, inter alia, contains the original order under sections 201(1) and 201(1A), subsequently rectified on 30 September 2022; Forms 26A; the ledger accounts of the parties to whom interest was credited; and the assessee’s explanation dated 10 December 2024, placed at pages 65–72. He relied on the decisions in Hindustan Coca-Cola Beverages Private Limited, 293 ITR 226 (SC); CIT v. Kannan Devan Hill Produce Co. Ltd., 183 ITR 471 (Ker.); CIT v. Jaipur Electro Private Limited, 183 ITR 476 (Raj.); and CIT v. K. Ramachandra, 183 ITR 478 (Bom.). He also relied on the written submissions filed before the CIT(A) on 3 December 2025, placed at page 155 of the paper book. A further paper book was filed, containing ledger accounts showing the reversal of entries relating to tax deducted at source payable for Assessment Years 2018–19 and 2019–20. According to the learned authorised representative, the assessee had reversed the entire amount of tax deducted at source in its books.

He reiterated the following submissions:

Shri Pradeep S, the Additional Commissioner of Income Tax, and the learned senior Departmental Representative strongly supported the orders of the lower authorities. He submitted that the assessee had failed to establish reasonable cause for not depositing the tax deducted at source with the Government within the prescribed time and was therefore liable to penalty under section 271C of the Act, a penalty the Joint Commissioner of Income-tax had rightly imposed. He further contended that the subsequent procurement of Forms 26A from the sister concerns did not absolve the assessee of its obligation to deposit the tax deducted at source. Regarding the order of the learned CIT(A), he submitted that the assessee’s positive cash flow disproved its claim of financial hardship and showed that no reasonable cause existed. He therefore urged that the orders of the lower authorities be upheld.

We have carefully considered the rival contentions and examined the orders of the authorities below.

The Income-tax Act 1961 (IT Act) outlines several responsibilities for taxpayers, including the requirement to withhold tax from certain payments. To promote compliance, the Act also specifies penalties and interest for non-compliance, such as failing to withhold or pay tax on time. Section 201 of the IT Act covers interest provisions, while penalties are addressed in various sections, and one amongst them is section 271C.

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. This section provides as it then stood as under :-

In this case, the issue is that the assessee deducted tax at source on interest payments to its sister concerns. Neither the interest was paid to the parties nor was the tax deposited with the Government Treasury. Subsequently, those recipients included this interest income in their taxable income and filed for no 26A, along with a CA's certificate, as provided under the law. In 2024-25, the assessee also reversed the TDS provision, as the ACIT passed a rectification order under TDS u/s 201 and 201(1A) of the Act, holding that the assessee was not an assessee in default. A question arose as to whether section 271C of the IT Act is attracted where the tax is withheld but there is a delay in remitting it to the Government Treasury or it is not remitted at all.

In this context, the Honourable Supreme Court examined whether a delay in remitting tax withheld at source (TDS) could invoke the provisions of Section 271C(1)(a) of the IT Act in US Technologies International (P.) Ltd. vs. Commissioner of Income-tax [2023] 149 taxmann.com 144 (SC)/[2023] 293 Taxman 27 (SC)/[2023] 453 ITR 644 (SC)[10-04-2023]. The case involved an Indian software development company that had withheld taxes on salaries and contract payments during a fiscal year. The TDS was remitted in two instalments, with delays varying from 5 days to 10 months. During a survey at the company’s premises, the tax officer observed that the company did not deposit TDS within the deadlines prescribed under the Income-tax Rules, 1962 (IT Rules). As a result, the tax officer levied interest under Section 201 of the IT Act for the delay period. Additionally, the Additional Commissioner of Income Tax (ACIT) imposed a penalty under Section 271C, equal to the TDS amount for that year. While the Income Tax Appellate Tribunal (ITAT) granted relief to the taxpayer, the Kerala High Court upheld the penalty order in US Technologies International (P.) Ltd. vs. Commissioner of Income-tax [2010] 195 Taxman 323 (Kerala)[16-06-2009].

The taxpayer challenged this decision in the Supreme Court. The Honourable Supreme Court held as under: -

Although the issue before the Honourable Supreme Court concerned belated remittance of TDS, whereas the assessee in the present case was subsequently held not to be an assessee in default, the question of penalty under section 271C is, in our view, the same.

As a sound proposition of law, penal provisions must be construed strictly and literally. Nothing is to be added to or taken from a penal provision. Therefore, on a plain reading of section 271C of the IT Act, no penalty is leviable for belated remittance of TDS after the taxpayer has withheld it. Section 271C of the IT Act is categorical. Its scope and application are discernible from the provision itself, in unambiguous terms. The Court cannot read more into it than the text permits, contrary to the intent and legislative wisdom. It must be noted that wherever Parliament intended consequences for non-payment and/or belated remittance/payment of TDS, it provided for the same in section 201(1A) and section 276B of the IT Act.

Further, as per Circular No. 551 dated 23 January 1998, the circumstances under which section 271C of the IT Act was introduced into the Statute are addressed. On a fair reading of the Circular, it discusses the levy of penalty for failure to deduct tax at source. It also notes that any delay in remitting the tax will attract interest under section 201(1A) of the IT Act, and, given the gravity of the mischief involved, prosecution proceedings may also be initiated under section 276B of the IT Act.

Thus, in this case, the failure to deduct tax at source penalty u/s 271C for both the years is not sustainable. The orders of the lower authorities are reversed, and the Ld. AO is directed to delete the penalty levied u/s 271C of the Act for both the AYs.

In the result, the appeal filed by the Assessee for both the AYs is allowed. Order pronounced in the open court on 15th October, 2026. Sd/- Sd/- SOUNDRARAJAN K. PRASHANT MAHARISHI JUDICIAL MEMBER VICE PRESIDENT Bangalore Dated: 15.10.2026 *TNTS* Copy to: