M/S US TECHNOLOGIES INTERNATIONAL PVT. LTD. vs. THE COMMISSIONER OF INCOME TAX

REPORTABLE IN THE SUPREME COURT OF INDIA CIVIL APPELLATE JURISDICTION Civil Appeal No.  7934 of 2011 M/s US Technologies

...Appellant(s) International Pvt. Ltd. Versus The Commissioner ...Respondent(s) of Income Tax With Civil Appeal Nos. 1258­1260 of 2019 J U D G M E N T M.R. SHAH, J. 1. Feeling   aggrieved   and   dissatisfied   with   the impugned judgment(s) and order(s) passed by the   High   Court   of   Kerala   at   Ernakulam   in Page 1 of 31 Digitally signed by R Natarajan Date: 2023.04.10 16:38:22 IST Reason: Signature Not Verified

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.

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

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