Section 271C of the Income Tax Act

What is Section 271C of the Income Tax Act?

Section 271C of the Income Tax Act, 1961, deals with the penalty for failure to deduct tax at source (TDS). If a person or entity responsible for deducting TDS fails to do so, they may face a penalty under this section. The penalty amount can be equal to the amount of TDS that should have been deducted but wasn't. This provision ensures compliance with tax deduction requirements and aims to prevent tax evasion. It is important for businesses and individuals to adhere to TDS obligations to avoid penalties under this section.

Key Features of Section 271C

Consider the following key concepts under the Section 271C of the Income Tax Act, 1961:

• Concealment of Income: This means intentionally hiding income from the tax authorities. It can involve not reporting some income, showing less income than actually earned, or doing things to hide income.

• Furnishing Inaccurate Particulars: This means giving wrong or misleading information in the tax return, even if there is no intention to avoid paying taxes. It can include claiming deductions or exemptions that don't apply, or providing wrong details about income or expenses.

• Mens Rea (Guilty Intention): While not directly mentioned, penalties under Section 271C are often decided based on whether there was an intentional attempt to hide income or provide wrong details. However, even without guilty intention, penalties can still be imposed for incorrect details.

• Burden of Proof: The Income Tax Department has to prove that income was hidden or wrong details were provided. They need to show evidence to back up their claim.

Cases Where Section 271C is Applicable

Section 271C applies when a deductor fails to deduct TDS or doesn't remit it by the due date. TDS involves the payer (deductor) deducting tax at the source of income and remitting the balance to the payee (deductee). The deducted TDS must be deposited with the government within specified time limits.

Penalty Under Section 271C is Imposed in Instances Such As:

• Failure to Deduct Tax at Source (TDS): When an employer or person fails to deduct TDS as required under the Income Tax Act.

• Non-Deposit of TDS: If the deducted tax is not deposited with the government within the specified time.

• Incorrect Deduction of TDS: When TDS is deducted at a lower rate than prescribed or deducted incorrectly.

• TDS Non-Compliance on Payments to Contractors: If TDS is not deducted on payments made to contractors or professionals.

• Penalties: Section 271C imposes penalties on taxpayers for non-compliance related to TDS obligations.

• TDS on Salary or Interest: Applies if TDS is not deducted from salary payments or interest income as required.

Finance Bill 2025 Amendment

As of the Finance Bill 2025, penalties under sections 271C, 271CA, 271D, 271DA, 271DB, and 271E of the Income-tax Act will be imposed by the Assessing Officer (AO), replacing the Joint Commissioner. However, the Joint Commissioner’s approval is still needed if the penalty exceeds certain limits as per Section 274(2).

Penalty for Failure to Deduct TDS Under Section 271C

The penalty under this section is imposed when there is a default in TDS deduction. The penalty can be equal to the amount of tax that should have been deducted but was not:

Penalty Amount:

The penalty under Section 271C can be up to the full amount of tax that should have been deducted but was not. The penalty is applicable even if the tax is eventually paid, emphasizing the need for timely deduction.

No Penalty if Reasonable Cause Exists:

A taxpayer can avoid this penalty if they can demonstrate that there was a "reasonable cause" for the failure to deduct or deposit the TDS. For example, if there was a genuine oversight or an unforeseen circumstance, the penalty might be waived.

Illustration for Applicability of the Section 271C

1. Use Case:

   A corporation, XYZ Ltd., has a large number of payments made to various contractors. XYZ Ltd. missed deducting TDS on some payments under Section 194C, which results in a total shortfall of ₹5,00,000 in deducted TDS. Under Section 271C, XYZ Ltd. could face a penalty of ₹5,00,000 unless they can prove a reasonable cause for non-deduction.

2. Reasonable Cause to Avoid Penalty:

   In some cases, the taxpayer might be able to argue that they were unaware of the new TDS amendments or there was a software error that led to the failure to deduct. In such cases, if the Assessing Officer accepts this as a reasonable cause, the penalty may be waived.

How to Avoid Penalty Under Section 271C

You can avoid paying penalties under Section 271C of the Income Tax Act under the following circumstances:

• Timely TDS Deduction: Ensure that tax is deducted at source on all payments as per the provisions of the Income Tax Act.

• Timely Remittance of TDS to Government: Deducted TDS should be remitted to the government within the prescribed due date to avoid penalties and interest.

• Maintain Proper Documentation: Keep proper records of TDS deductions, including invoices, contracts, and proof of remittance, to show that all payments were made in compliance.

Conclusion

Section 271C of the Income Tax Act ensures that individuals and businesses adhere to TDS rules and regulations. By imposing a penalty for failure to deduct or remit TDS, the government encourages tax compliance and reduces tax evasion. Taxpayers should be diligent in complying with TDS provisions and seek legal advice if they face any challenges in fulfilling their obligations.