When Is Action For Imposition Of Penalty 'Initiated' U/S 271C Of Income Tax Act For Failure To Deduct Tax At Source: Delhi HC Explains

The Delhi High Court recently explained when an action for imposition of penalty under Section 271C of the Income Tax Act, 1961 can be said to have been “initiated”. Section 217 states that if any person fails to deduct the whole or any part of the tax at source (TDS), he shall be liable to pay a penalty equal to the amount of the tax which he failed to deduct as aforesaid. The date of “initiation of action” for such failure is necessary to be determined since, Section 275(1)(c) imposes a limitation on passing of penalty order. It states that no order imposing penalty could be passed after expiry of six months from the end of the month in which the action for imposition of penalties was initiated. In other words, Section 275(1)(c) prescribes the period of limitation within which the proceedings under Section 271C are to be completed. In the case at hand, Assessee had admittedly not deducted ₹5,00,40,103/- as tax at source. Accordingly, the Assessing Officer made a reference to the Joint Commissioner of Income Tax. The concerned JCIT however issued a show cause notice to the assessee only on 04.08.2015, i.e. after the lapse of almost one year from receipt of the reference from the AO. The JCIT thereafter passed an order levying penalty under Section 271C. The CIT allowed the assessee's appeal on noting that the JCIT order is time barred. ITAT also upheld CIT's order. Aggrieved, Revenue approached the High Court. It was the assessee's case that penalty proceedings were initiated on receipt of the reference from AO on 25.09.2014. Revenue on the other hand contended that the date of initiation of penalty proceedings is required to be considered as the date of issuance of the show cause notice; that is, 04.08.2015. At the outset, the High Court noted that when a penalty proceeding can be stated to be initiated is squarely covered in favour of the assessee by Principal Commissioner of Income Tax-5 v. JKD Capital & Finlease Ltd. (2015). A coordinate bench of the High Court had held therein that when proceedings stand initiated with an order passed by the AO, the CIT by delaying the issuance of notice under defeats the very object of Section 275(1)(c). Though Revenue sought to distinguish the above case on the ground that the delay therein was over five years, however, the Court rejected this argument. It observed, “Although, the delay in the case of Principal Commissioner of Income Tax5 v. JKD Capital & Finlease Ltd. (supra) was more than five years and there was no explanation to the said delay, the said decision also rests on the principle that the initiation of penalty proceedings cannot be delayed in an arbitrary manner. And, the initiation of proceedings must be considered as on date on which a reference was made to the concerned officer if not earlier.” Court held that the expression 'action for imposition of penalty is initiated' clearly refers to the date on which the first introductory step for such action is taken. “...it must necessarily mean the start of such action. It must mean the commencement of action for imposition of penalty. The reference, thus, clearly marked the first step for initiation of action for imposition of penalty. The Show Cause Notice issued subsequently was to provide the assessee an opportunity to show cause why penalty not be imposed.” In view of the above, the High Court was of the view that JCIT order was time barred and dismissed Revenue's appeal. Appearance: Advocate Sanjay Kumar for Revenue; Manuj Sabharwal, Advocates Drona Negi and Devrat Tiwari for Respondent Case title: Commissioner Of Income Tax (Tds)-2 Delhi v. Turner General Entertainment Networks India Pvt. Ltd. Case no.: ITA 547/2024 Click Here To Read/Download The Order

When Is Action For Imposition Of Penalty 'Initiated' U/S 271C Of Income Tax Act For Failure To Deduct Tax At Source: Delhi HC Explains

Kapil Dhyani

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