Tax deduction by bank before close of financial year would not absolve penalty u/s 271C for non deduction of TDS if there was no reasonable cause to permit exemption u/s 273 B – High Court
ABCAUS Case Law Citation:
ABCAUS 2642 (2018) (11) HC
The appellant bank had various fixed deposits of the a Development Authority under different IDs for many years. The Bank had not deducted tax at source (TDS) and deposit the same with the Central Government for two continuous financial years.
Accordingly, a penalty under Section 271 C of the Income Tax Act, 1961 (the Act) was imposed. Which was affirmed by the Tribunal.
The case of the bank was that the said Development Authority had furnished certificates of exemption under Section 197 of the Act for earlier years and therefore since the bank had not been deducting tax at source on the interest income on its FDRs, it bonafidely due to technical fault or error in programming of the computer system, could not deduct tax for the relevant years in time.
It was submitted that the tax at source was deducted was however deposited with the financial year. Thus, no penalty was leviable in view of Section 273 B of the Act.
The Hon’ble High Court observed that provisions of section 194A of the Act do not envisage any shifting or change of time for making deduction of tax at source on the income of interest payable by the person concerned provided under Subsection (1) of Section 194 A of the Act . The time for deduction of tax on interest income remains the same as contemplated under Section 194 (1) of the Act, ie, when the interest income is to be credited in the account of the payee or at the time of payment in cash/cheque or draft. Therefore, even if the assessee Bank made any deduction in the financial year concerned by adjustment as provided under Sub-section (4) of Section 194 A (1) of the Act, it in no way legitimize the failure or shortage of not deducting the tax at source at the time it ought to have been deducted in accordance with Section 194 A (1) of the Act.
The Hon’ble High Court further observed that a bare reading of the section 271C reveals that the penalty is imposable where there is failure to deduct tax as required to be deducted under section 194 (1) of the Act on interest income.
The Hon’ble High Court noted it was not disputed that tax at source was not deducted by the Bank at the time interest income was credited to the income of the payee ie., Development Authority but was deducted and deposited subsequently though before the close of the financial year. Thus, apparently on account of non deduction of the tax at source at the time stipulated under Section 194 (1) of the Act, the assessee Bank became liable for penalty under Section 271 C of the Act.
Referring to section 273 B , the Hon’ble High Court pointed out that the Bank could be exempted from penalty by applying the provision of Section 273-B of the Act provided the Bank was able to satisfy that there was a reasonable cause for failure to deduct tax at source on the interest income.
The explanation offered by the bank was that the failure to deduct tax at source on interest income in time was due to the fact that the Development Authority had obtained certificates under Section 197 of the Act permitting the assessee Bank not to deduct tax at source on its interest income. It was in view of the above and the improper feeding in the computer system or updation of the software the Bank could not deduct tax at source on interest income in the relevant period.
The Hon’ble High Court noted that the tribunal had not found the aforesaid cause to be reasonable as in the earlier year no certificate under Section 197 of the Act was submitted by the said Development Authority and in earlier year also necessary feeding was done in the computer system and the deduction of tax at source was made on the interest income. Thus, there was no occasion to commit the mistake of not deducting tax at source on interest income in time in the relevant years.
The Hon’ble High Court opined that the aforesaid finding of the tribunal was a finding of fact and when the cause shown had not been found to be reasonable by the tribunal, there was no occasion for the High Court to take a contrary view and to accord the benefit of Section 273 B of the Act.
Accordingly, the Hon’ble High Court answered the questions raised against the assessee Bank and held that deduction of tax at source on interest income before close of the financial year concerned as provided under Section 194 A (4) of the Act would not absolve the assessee Bank from penalty for not deducting the tax at source from the interest income of the Development Authority at the time of credit of the said income.
It was also held that there was no reasonable cause on part of the assesee Bank for not deducting tax at source on the interest income so as to permit any benefit of exemption from penalty as envisaged under Section 273 B of the Act.