2018 (11) TMI 1126 - HC - Income Tax

Waiver of penalty u/s 234B - Penalty u/s 271C - failure to deduct tds as contemplated by Section 194 A (1) and to deposit the same with the Central Government by assessee bank - eligibility of exemption from penalty by applying the provision of Section 273-B - Held that - In the present case it is not disputed that tax at source was not deducted by the assessee Bank at the time interest income was credited to the income of the payee ie., Agra 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) the assessee Bank became liable for penalty under Section 271C of the Act. Exemption from penalty by applying the provision of Section 273-B provided the assessee Bank is able to satisfy that there was a reasonable cause for failure to deduct tax at source on the interest income - assessee Bank contends that the failure to deduct TDS was due to the fact that the Agra 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 - Held that - Found no aforesaid cause to be reasonable as in the earlier year no certificate under Section 197 of the Act was submitted by the Agra Development Authority and in that year 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. It is pertinent to point out that due to certificates under Section 197 of the Act furnished by the Agra Development Authority no tax was deducted at source on the interest income in the Financial Year 2010-11 . The software was updated in the subsequent year with the result tax at source on interest income was deducted in the year 2011-12. Once the software was updated, there was no reason for any error in the subsequent year ie. 2012-13 and 2013-14. The finding of the tribunal on the above aspect is a finding of fact and when the cause shown has not been found to be reasonable by the tribunal, it does not inhers this Court to take a contrary view and to accord the benefit of Section 273 B of the Act - Decided against assessee.

Issues Involved:
1. Penalty under Section 271C of the Income Tax Act for non-deduction of TDS.
2. Applicability of Section 273B for reasonable cause exemption from penalty.
3. Interpretation of Section 194A(1) and 194A(4) regarding TDS deduction timing.
4. Impact of previous exemption certificates under Section 197 on current TDS obligations.

Detailed Analysis:

1. Penalty under Section 271C of the Income Tax Act for non-deduction of TDS:
The Union Bank of India, ADA Branch, Agra, failed to deduct and deposit TDS on fixed deposits of the Agra Development Authority for the financial years 2012-13 and 2013-14. This led to the imposition of penalties amounting to ?6,84,167/- and ?13,23,794/- for the respective years under Section 271C of the Income Tax Act. The CIT (Appeals) affirmed the penalty for 2012-13 but deleted it for 2013-14. However, the Income Tax Appellate Tribunal (ITAT) upheld the penalty for both years, leading to the current appeals by the assessee Bank.

2. Applicability of Section 273B for reasonable cause exemption from penalty:
The assessee Bank argued that the delay in TDS deduction was due to a bona fide error and previous exemption certificates under Section 197 provided by the Agra Development Authority. They contended that this constituted a reasonable cause under Section 273B, which should exempt them from the penalty. However, the tribunal found this cause unreasonable, noting that no exemption certificates were provided for the relevant years and that the Bank had updated its software to reflect the need for TDS deduction in the previous year.

3. Interpretation of Section 194A(1) and 194A(4) regarding TDS deduction timing:
Section 194A(1) mandates TDS deduction at the time of crediting interest income to the payee's account or at the time of payment, whichever is earlier. The Bank failed to deduct TDS at the time of crediting the interest income but did so before the financial year's end, invoking Section 194A(4) for adjustments. The court clarified that Section 194A(4) allows adjustments for discrepancies within the financial year but does not alter the timing requirement set by Section 194A(1). Thus, the Bank's failure to deduct TDS at the correct time made them liable for penalties under Section 271C.

4. Impact of previous exemption certificates under Section 197 on current TDS obligations:
The Bank cited previous exemption certificates under Section 197 from the Agra Development Authority as a reason for not deducting TDS. However, the tribunal noted that these certificates were only valid up to the financial year 2010-11 and were not applicable for the years in question. The court agreed with the tribunal's finding that once the software was updated in 2011-12 to reflect the need for TDS deduction, there was no reasonable cause for the Bank's failure to deduct TDS in the subsequent years.

Conclusion:
The court held that the deduction of TDS before the financial year's end under Section 194A(4) does not absolve the Bank from penalties for not deducting TDS at the time specified under Section 194A(1). Additionally, the court found no reasonable cause for the Bank's failure to deduct TDS, thus denying the benefit of Section 273B. Consequently, the appeals were dismissed, and the penalties under Section 271C for both assessment years were upheld.

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