Challenge Penalties for TDS Failure if Not Initiated Within Statutory Time Frame Under Section 271C

Challenge Penalties for TDS Failure: The Delhi High Court recently provided crucial clarity on the timing of “initiation” of penalty proceedings under Section 271C of the Income Tax Act, 1961. In this case, the court examined when the action for imposition of penalties should be considered as having commenced, and how it impacts the limitation period prescribed under Section 275(1)(c).

Key Points on Section 271C and Section 275(1)(c)

Under Section 271C, if a person fails to deduct tax at source (TDS) or fails to deduct the full amount of TDS, a penalty equal to the amount of tax not deducted may be imposed. Section 275(1)(c) places a limitation on the time frame within which such penalty proceedings must be completed. Specifically, it mandates that no penalty order can be passed after six months from the end of the month in which the “action” for imposition of the penalty was initiated.

Therefore, understanding the exact point that Challenge Penalties for TDS Failure if Not Initiated Within Statutory Time Frame Under Section 271C

Case Background

In the case before the Delhi High Court, the Assessee failed to deduct a substantial amount of tax at source (₹5,00,40,103). Consequently, the Assessing Officer (AO) made a reference to the Joint Commissioner of Income Tax (JCIT) for penalty proceedings. However, the JCIT issued a show-cause notice almost a year later, on 04.08.2015, well past the expected time frame for initiating such proceedings.

The Commissioner of Income Tax (CIT) concluded that the penalty proceedings were time-barred and allowed the Assessee’s appeal. The Income Tax Appellate Tribunal (ITAT) also upheld the CIT’s decision. In response, the Revenue Department approached the Delhi High Court, arguing that penalty proceedings are only considered to have been initiated when the show-cause notice is issued, and not when the reference is made by the AO.

Delhi High Court’s Ruling

The Delhi High Court ruled in favor of the Assessee, drawing upon the earlier judgment in Principal Commissioner of Income Tax-5 v. JKD Capital & Finlease Ltd. (2015), where the court had held that the initiation of penalty proceedings is marked by the first formal step, which is typically the reference made by the AO to the concerned officer.

The High Court emphasized that the phrase “action for imposition of penalty is initiated” should be interpreted as the commencement of penalty proceedings, not the issuance of a show-cause notice. The Court also dismissed Revenue’s argument that the delay in the current case was less significant than in the JKD Capital case. The court noted that regardless of the delay, the fundamental principle is that penalty proceedings should not be arbitrarily delayed, and that the initiation is clearly marked by the reference made by the AO.

Conclusion

The Delhi High Court’s decision in Commissioner of Income Tax (TDS)-2 Delhi v. Turner General Entertainment Networks India Pvt. Ltd. highlights the importance of timely action in initiating penalty proceedings under Section 271C of the Income Tax Act. It confirms that the reference made by the AO is the point at which the penalty proceedings are considered to have been initiated, thus setting a clear timeline for such actions.

This judgment serves as an important reminder for both taxpayers and tax authorities about the limitations imposed by law on the timing of penalty proceedings. Businesses should be aware that penalties for failure to deduct TDS can be challenged if not initiated within the statutory time frame.

Case Details:

• Case Title: Commissioner of Income Tax (TDS)-2 Delhi v. Turner General Entertainment Networks India Pvt. Ltd.

• Case No.: ITA 547/2024

• Counsel for Revenue: Advocate Sanjay Kumar
• Counsel for Respondent: Manuj Sabharwal, Drona Negi, Devrat Tiwari

Challenge Penalties for TDS Failure