ITAT Remands Penalty u/s 271C for Non-Deduction of TDS on Interest for Verification of Factual Claim

An appeal was preferred against an order dated 30 April 2025 passed by the Commissioner of Income Tax (Appeals), National Faceless Appeal Centre, affirming a penalty of Rs.  4,25,157 as under Section 271C of the Income Tax Act, 1961. The penalty was incurred by the Joint Commissioner of Income Tax (TDS Range) for not deducting tax at source in respect of interest payments totalling Rs. 42,51,571 in the relevant financial year under Section 194A. An order under Sections 201(1)/201(1A) was already passed on 04 August 2021, holding the assessee as assessee-in-default for the same default. Notice under Section 274 r.w.s. 271C were issued on 25 August 2022, 25 November 2022, and 20 December 2022, but the assessee submitted no reply, and the penalty was imposed for the whole amount of tax not deducted.

CIT (A) Held: Before the CIT(A), the assessee submitted that it was under severe financial difficulty and that the interest payment pertained to Techtonic Motors Pvt. Ltd.; it claimed that the TDS together with interest had subsequently been paid. The CIT(A) found that no documentary evidence was produced to support this and that no reasonable cause was shown for failure to deduct tax, and therefore confirmed the penalty.

Issue Raised: Whether penalty u/s 271C is invoked when the assessee alleges that TDS was deducted and remitted subsequently with interest because of financial difficulties.

ITAT’s Decision: The Tribunal held that a penalty was levied on the presumption of non-deduction of tax, whereas the assessee had claimed that tax was deducted and paid late. It found that no cross-checking had been carried out by the AO or CIT(A) to determine the nature of the default. The Tribunal cited the Supreme Court judgment in U.S. Technologies International Pvt. Ltd. v. CIT, wherein it was held that a penalty under Section 271C cannot be imposed for late remittance of already deducted TDS.

The Tribunal reserved the orders of the lower authorities and sent the case back to the file of the AO for limited verification. The AO was asked to scrutinise original documents like challans, Form 26Q and ledger accounts to check whether tax was deducted and paid with interest. If so, the penalty was to be deleted in line with the law laid down by the Apex Court; if it was a case of non-deduction, the penalty was to be re-adjudicated in accordance with law after granting a reasonable opportunity to the assessee. The appeal was thus allowed for statistical purposes.

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